Putting No-Frill Accounts to Work

1. Background

At a remote village, in the heart of Andhra Pradesh, a few hundred villagers are huddled together to receive their pensions using the biometric smart cards, that have been issued as part of the Government's forward-looking initiatives. The pensions are routed through a bank associated with a Technology Service Provider and are ready for disbursement after identifying and verifying individual beneficiaries, through the Smart Cards. Shortly thereafter, the recipients take their entire sums in hand without leaving one paisa as saving in their accounts.

"Huh?" someone says, "what happened to the huge roadshows we ran through these villages to create financial literacy? Don't they yet understand they must save for their future? Why are we investing all this money on their cards and modernizing pensions if not for putting no-frills accounts to work?"

For a villager, using a bank account on a daily basis for savings is cumbersome as the bank is at a distance and it costs him a day's work and wage. For him, savings are either in-kind or through informal channels that have been in use since years. When asked about the high cost of saving through informal channels, one of the villagers said 'I don't mind paying a charge to someone whom I trust and who can keep my money safe in my village under my nose'.

So let us define what is Saving. Saving refers to income not spent or deferred consumption after the basic needs is met. An individual can turn to his/her savings in times of contingencies, for gratification of needs, to meet cash needs for livelihood and social sustenance etc. Any form of saving, be it long term or short term, has a motivation behind it. Saving for the children's education and marriage; saving for buying a tractor for the next harvest season are a few examples of motivations behind Saving.

Rural households save in three basic ways[i]:

1. Saving Up - Putting aside lots of small savings until it turns into a large sum

2. Saving Down - Repaying advance taken through series of savings

3. Saving Through - Continuous and regular basis of saving money

Rural households save despite the absence of formal saving channels. Readily available avenues for Savings include:

1. Informal Savings (Saving at home, relatives, money-lenders etc.)

2. Savings-in-kind

3. Post Offices

Saving at home is the most accessible and convenient (zero transaction costs) and is abundantly used by poor people, especially women in rural areas. However, this form of savings is exposed to risks of theft, fire and natural calamities. And keeping cash at home arouses temptations to spend the amount.

Saving-in-kind involves storing items that constitute land, agricultural produce, assets, gold, animals etc. These items are sold and converted into cash whenever the need arises. Savings-in-kind assets are often held primarily as stores of wealth and are also perceived to yield higher returns. In rural areas, savings is mostly in form of livestock. Though this form of savings has an advantage, the risks involved are also very high. The biggest challenge is low liquidity and predictability of demand for the stored goods.

Having 89% of their infrastructure spread across the country's rural areas and being the oldest channels touching the rural households, the post office has been an impactful savings channel for the rural populace. Saving in post offices is observed among the households that are financially literate and have capability to understand the importance of saving money in a trusted source. However on the availability front, one can only avail the access to their savings during the working hours of post office.

2. Introduction to Financial Inclusion

In a country like India, an economy with stark contrasts and striking disparities; where the regional, social and economic disparity is high; where banking is reflective of an urban and a prosperous society; where the literacy rate is a mere number; and a photograph is the only identity one possesses; the Reserve Bank of India (RBI) has taken a remarkable initiative in introducing 'No-Frills Accounts' - a first step towards attaining true financial inclusion.

Through regional rural branches of banks, the business correspondent (BC) model, and other agent-based models, public sector and private banks have been able to open about 50 million[ii] no-frills accounts across the country. Currently, only 11 percent[iii] of the accounts are active in transactions, thereby, defeating the very purpose of true financial inclusion.

Does having a 'No-Frills Account' make an individual financially included? What makes an individual want to make it work?

"Financial" is easy to understand. But "Inclusiveness" truly means getting the vulnerable groups and weaker sections of the society into the financial fold. This has been the vanguard in the agenda of the regulators, policymakers, and other institutions and the roadmap to bridge the divide predominantly between the urban and the rural classes is to bring the larger strata of the unreached society as contributors to socio-economic growth of the nation.

So the larger question is, why does this socio-economic growth matter to the nation where 75 percent of the income is generated by 25 percent of the society[iv]?

If such a divide is not bridged in appropriate time, the country's GDP and growth will soon saturate. A divide among the rich and the poor will cause an imbalance in the nation's financial eco-system thereby affecting the social and administrative system of the nation as well. And it is through effective financial inclusion that this can be avoided.

3. Transformation of Banking in India

The banking scenario in India has undergone tremendous transformation over the years. To shift the favor from large industrial units to the small business units and rural agriculture, the government in 1969 enabled nationalization of banks. Another turnaround of Indian economy happened in 1991 when liberalization of banks took place. Since then, the nation has shown an upward trend in the average rate of growth. Yet there are certain imperatives in the way forward. As banking the poor households is not considered to be a profitable pursuit for the banks, the sector is left neglected and it barely contributes to the growth of the nation.

Thus, to achieve equitable growth, the Non-Government Organizations (NGOs) and other government funded initiatives organized financial literacy programmes to drive the goal of attaining financial inclusion. As it lacked an incentive, the motivation of the drive was compromised.

That was when the Reserve Bank of India (RBI) introduced the banking through BC model for profit, whereby banking can reach the last mile without bearing additional costs. Presently, as BC deployment has been initiated, banks leverage cutting-edge technology to provide the ambit of financial services to the unreached.

4. Putting No-Frills Accounts to Work

Of the Government of India's sine qua non of its economic policy on inclusive growth, the RBI introduced "No-frills accounts" that caused scores of accounts to get opened. The nation has been able to achieve growth but needs to press more on pedal for inclusion. Current statistics show that 63 percent[v] of the urban population saves in banks whereas this number is a meager 45 percent[vi] in the rural habitats. This shows a striking contrast between the objective of financial inclusion and the implication of having a no-frills account.

No-Frills accounts are not the ends but the means to financial inclusion and rural development. Making the no-frills accounts work and keeping them active in transactions will be indispensable for a just growth and will empower individuals to achieve their own goals by harnessing their financial capabilities. This is further elucidated in the rest of the paper.

4.1 Leveraging the BC Model

Since the initiation of the Business Correspondent (BC) model, there have been attempts to reach out to the large strata of society, to cater to their financial transaction needs, mostly by technology and telecom companies in order to take advantage of their existing outreach. Each one has tried to sell cost-effective technology and extensive use of mobile platform as an opportunity for distribution, yet the impact on the ground seems to be limited and non-uniform. Though this has led to scores of bank accounts getting opened up, the actual usage has been very minimal. Most mobile banking attempts have been started by technology driven non-profit companies as direct BCs to Banks, with little involvement in the transaction process by the BC. While success has been achieved in opening a large number of Bank accounts, there has not been much follow up regarding usage of accounts, leading to 'agents' losing interest due to lack of consistent and continuous income for themselves.

For the 'banks', a no-frills account is an additional responsibility as they are not allowed to charge the customer for the no-frills account and thus, find it intrinsically loss making. Hence, banks are doing little to market their benefits or encourage their use. As a result of this, the workload of the Banks has not reduced compared to brick and mortar banking and the efforts have fallen by the wayside.

4.2 Back to Basics

To understand true financial inclusion, it is important to understand (a) the financial habits of the excluded society and (b) the reason behind their exclusion. Are they excluded because we haven't been able to cater to them efficiently or have they themselves chosen to be excluded from the system?

To inculcate savings through formal financial institutions, it is essential to distinctly define the BC Operations and a spectrum of services that define a holistic product suite which saddles onto No-Frills Accounts to make them work. One such primary responsibility is taken up by Sub-K, a group company to the leading Livelihoods Promotion institution BASIX.

Sub-K aggregates individual BC Outlets at village level for banks to be able to deal with a single entity for branch office processing and front end delivery of services. It has leveraged the initial experiences of BASIX in the field of financial inclusion, to set up the right marketing, financial literacy, transactional ease and compensation structure to make BC based banking usable, scalable and sustainable along with provision for financial education, agent training, and real time processing of transactions. Sub-K is one Business Correspondent that has developed the service-centric working model and demonstrated its viability in several districts with both public and private sector banks.

4.3 The Sub-K BC Model

Sub-K, meaning 'less than 1000', helps people access services within distances of 1000 meters, with transaction values of even under Rs. 1000, by incurring transaction fees less than 1000 paise, through outlets that typically serve 1000 customers in a locality. The parameters, mentioned above address the attributes to true financial inclusion; accessibility, affordability in carrying out small ticket transactions, and carrying out banking activities through a BC outlet located within the village. Sub-K's 'unique' BC model has a two-fold impact:

1. It provides the doorstep platform for the unreached and unbanked citizens of the nation to be part of the financial society

2. It encourages the financial institutions to move out of brick and mortar branches to a branchless form, with zero infrastructure costs and low capital expenditure

The uniqueness in Sub-K's BC model is that it operates, manages, and controls transactions on end-to-end basis through recruiting, training and equipping local retail points as Business Correspondent Outlets (BCOs), which serve as human ATMs at the last mile of connectivity between the financial institutions and the end consumer, through mobile technology.

Innovating solutions in Information & Communication technology has been able to bridge the gap but is the bridge strong enough to last long and have self-sustenance?

Sub-K's holistic model provides sustainability by;

1. providing enough urgency in customers' minds to learn about, try, and use the service (customer)

2. ensuring that Sub-K invests heavily in above-and below-the-line marketing to establish top-of-mind awareness of the service among a large segment of the population (consumer)

3. incurring considerable customer acquisition costs (beyond marketing and promotion) to ensure that transactions are adequately incentivized (BCO)

Besides sustainability, Sub-K´s model defines simplicity as it takes away the need of any card, plastic or purse. Keeping the verification and authentication streamlined with RBI regulations, Sub-K uses a robust platform supporting both voice/fingerprint based, real-time biometric authentication for the customers.

No-frills account cannot work in isolation and a whole spectrum of products and services need to be introduced through the BC, to make it a one-stop shop for the rural households. Introducing financial products and services to meet the intermittent income among the rural populace will increase an individual's reliability in the branchless banking system. This ensures active transactions, as need based financial products and services become a tool to meet the necessary requirements of an individual. The main objective is to make the BC the go-to point in the village for financial, emotional and social dependencies.

For most rural households, where a member of the household works in one part of the nation and sends money to the family in another, it is cumbersome to move cash over distances. However, the BC connects the customer/consumer to an e-payment system. This capability to instantaneously send and receive money from friends and family, store value, pay bills and monthly insurance premiums, receive pension or social welfare payments, receive loan disbursements, and make repayments at a single point in the village will provide ease of availability and security.

In short, when a customer/consumer is connected to an e-payment system, the range of financial possibilities expands dramatically. Thus, a range of financial possibilities for the consumer shall ensure there is; universal appeal, considerable and timely impact on rural livelihoods, and active utilization of bank accounts.

Sub-K understands that financial literacy and savings education is essential at the consumer level and has to precede or go hand in hand with account opening. It therefore ensures that mass education programme is serious and goes on until the citizens do not get into the habit of Savings. Sub-K uses low-cost solutions, such as financial literacy campaigns and mass consumer awareness through NGOs and other training and promotional partners.

Sustained financial literacy campaigns include, printing and distributing the knowledge material, promoting Savings & banking products and services, showing audio-visual materials, using local groups to perform street plays, puppetry, using animators to explain the various concepts of banking in simple terms.

Sub-K's messages through mass-awareness programmes have a bifocal approach; to elucidate the importance of savings through a banking channel and to make the people convert in-kind savings to in-cash savings.

4.4 360-degrees Viability in the Eco-System

Sub-K incentivizes stakeholders in the ecosystem to ensure customers remain active users by meeting their entire financial transactional needs under one roof near their homes and by encouraging regular savings. It also builds partnerships with financial institutions, to use the BCs as a channel for distribution and collection of loans.

There is a Sub-K within every 1000 meters in the district that it works in. This ensures high transactional volumes in the no-frills accounts and adequate compensation for the BC Outlet to cover both fixed and variable cost and earn a surplus. The revenue model is usage-based, making each transaction operationally profitable for the BC through savings for the bank and lowering cost of transactions for customers.

To sustain the eco-system, each proponent needs to be incentivized by keeping the BC at the focal point. Greasing of the BC channel is essential as they perform all important customer facing functions. As, using the e-platform is an intangible service for the BC outlet, already cluttered with other physical goods, the BC has to actively promote marketing activities with partner organizations and banks to attract and educate consumers.

The banks work in tandem in rolling out the banking products and services in order to avoid any delay in delivery to the consumers. For performing these time-consuming and costly functions, Sub-K compensates the BC and the bank branch, both during the initial phase of the operations and on a continuous basis through transactions leading to higher saving volume. Consequently, this provides a consistent customer experience every time he/she walks to the BC outlet anywhere across the nation.

Furthermore, through its BC-based model Sub-K reduces costs and manpower from the bank branch's side. This does not mean that the bank branch becomes obsolete. While BC outlets will deal with rural households carrying out small ticket transactions, these outlets still need the bank branch to deposit excess cash-in-hand.

In this ecosystem, the BC outlets scope is the 'last mile,' but banks still do the 'long-haul.' Footfall at the BC outlets gives an extended customer outreach for the bank branch and higher volumes of low-value cash based transactions and higher deposit mobilization. Bank branches thus, are the nodal points to the non-bank BC outlets located in the catchment area in the village.

Sub-K's innovation in technologies and partnership models with the financial institutions, mobile operators, and retail value chains are creating a channel for effectively delivering financial and other services to the unbanked.

5. Conclusion

Ensuring activity in the no-frills accounts is only a step towards achieving true financial inclusion. True financial inclusion encompasses the development of a social process that embraces a fixture in the remote area known as the BC outlet and makes it a go-to point for a variety of day to day needs.

Doing so ensures that access to financial services will strengthen the rural households and contribute to increased liquidity and thus, consumption. This is secondary earning for the BCO, more so as technology shall enable him to move into cashless transactions.

What Sub-K has cultivated, is a process that builds upon the Financial Inclusion mandate by providing access through a retail point, an anchorage to the villagers for a bouquet of services, thereafter engaging consumers in education programs to create trust.

Leveraging trust with innovative products and services developed in conjunction with banks and other service providers to form habits. Seeding the Need of a village to encompass the basic necessities of a household and generate a portfolio for rural inclusion and equitable growth through a chain of human touch-points (BCs). And currently Sub-K is in the process of converting those habits into growth for all touched by the eco-system.

As more BCs adopt this innovation-based model that creates awareness and builds trust through branding, creates a consistent first-hand user experience while building an extensive channel of BCs offering cash in/cash out services, and provides a customer pricing and agent commission structure that focus on key drivers of customer willingness to pay and incentivize early adoption of community development, rather than just cater to the technology enablement of financial inclusion, putting no-frills accounts to work will be a natural consequence of the effort.

May the country move in this direction.

Bibliography

[i] Savings of the Poor: How they do it... By: Sankar Datta, S L Narayana, S Srinivas

[ii] Credit based and Usage Behavior Analysis of No-Frill Accounts

[iii] Credit based and Usage Behavior Analysis of No-Frill Accounts

[iv] How India Earns, Spends and Saves - Results from the Max New York Life and NCAER India Financial Protection Survey

[v] India Economic Survey - Chapter 2 - Micro-foundations of Macro-economic development

[vi] India Economic Survey - Chapter 2 - Micro-foundations of Macro-economic development

About the author: The author of this article is Ramesh Baswa. He can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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Sunday, 26 May 2013

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