Continuing from where I left of in my previous post let me continue on why the banks need to redefine themselves

I also strongly feel that the Banks should be on alert and planning for the inevitability of multiple, non-bank entrants for a number of reasons.

1. Erosion of branch-based transactions can significantly reduce the natural advantage retail banks have had for decades to blunt the invasion of new bank entrants.

2. Today, several non-bank companies have stronger sales cultures, higher customer service approval ratings, and more formidable brand equity than many private or public sector banks.

3. Each type of non-bank competitor offers customers an individual value proposition that may include, for example, bundled insurance and deposit or savings products, one-stop shopping with a single financial institution, convenient store locations, or innovative products such as mobile payments.

4. Finally, some non-banks such as online retailers or search firms may bring approaches and a set of economics that envelope and overwhelm the traditional economics of the “old retail banking payment systems” making banks little more than commodity vendors of a low-cost banking service within these emerging customer paradigms.

Bank should go the other way around!!

1. Enabling the Retailers/Agents with appropriate technology would enable the banks to go where the customer is present instead of the other way round.
2. Extending traditional mode of banking by targeted branch expansion in identified districts
3. The Business Facilitator/Business Correspondent (BF/BC) models riding on appropriate technology can deliver this outreach and should form the core of the strategy for extending financial inclusion.

Banks should now reach to the Remote Locations
1. Expansion of telecommunication network in the hinterlands of the country have provided the perfect launch pad for extending banking outposts to remote locations without having to open bank branches in the area.
2. The world over, banks are increasingly using outsourcing, as a means of both reducing cost and accessing specialist expertise, not available internally and achieving strategic aims.

In my view the BC/BF led retailer-distributor model, where the customer walks-in to a store and procures the banking services after making an informed choice from the available products, is the new paradigm to stay forever. This will make the chain viable as well as provide it non-linear scalability.

Mobile Operators, FMCG sales & marketing companies etc have already taken the route long back for spreading their roots in the far fetched 600,000 villages of the India through
• mom-n-pop stores
• Dairy owners
• Agriculture input sellers via prepaid and revenue share model.

Thus, dividing the risks and returns between the stakeholders of the distribution channel and also spreading the burden of investment required for circulating inventory.

Banks need to redefine themselves
Now, banks need to re-define the paradigm and spread their roots deep to sustain their foot for long in a country with majority of population living in rural & semi-urban areas.

Past Scenario
In past, regulatory restrictions and control in banking industry kept competition at bay. Customers were satisfied with one branch and restrictive timings. Easy comparison of products & services was not possible hence customers were not able to make informed decisions.

Current Scenario
In present times, the needs and expectations of customers are changing as quickly as the competitive landscape. Customers are demanding seamless, multi-channel sales and service experiences. With the regulator opening new doors to non-traditional players, NBFC and service-providers are looking for opportunities to invade this space or to redefine it through disruptive innovation. The result is forcing banks to examine a more balanced, integrated approach to the customer experience and move beyond simply meeting their profit and growth goals to delivering complete solutions.

Bankers have long envied retailers for their ability to develop and navigate channels and their responsiveness to customer needs. In my view many financial institutions have embraced similar strategies, they often fail to deliver strong results – particularly in terms of cross-sell rates and customer retention. For most banks, the branch presently dominates their distribution approach, while other methods of interaction such as direct channels and alternative face-to-face (F2F)
outlets are less important and not well integrated.

Shift in Customer Expectation

With shift in customer expectation, need-of-the-hour is to rapidly transform the retail distribution landscape for banking services from a branch-dominated paradigm to one of integration and balance among multiple channels. Branches will still play a vital part in this new equilibrium, but they will be very different. As business via other channels evolve, banks will increasingly behave like traditional retailers, focusing more on sales and complex service opportunities. Also, technological advances will improve the ability of various channels to fulfill their potential as a source of banking sales and service with higher convenience at lower costs. Alternative Face-to-Face (Business Correspondent/Facilitator-(BC/BF)) channels will also emerge as strong, viable distribution options in this new landscape because people will still value personal interactions. An integrated customer focus will become critical across all these channels as demographic shifts usher in a new — and highly discriminating — breed of customer.

Banks will face some tough strategic decisions in adapting to this new environment.

Need of the hour for banks: Revitalize their bank branches

1. At a minimum, banks need to determine how and when to revitalize their branch, the existing primary channel for most, How to draw customers in and to address their changing expectations.

2. Consider how to develop and expand non-branch channels to be competitive in attracting, serving and retaining customers.

3. Look for cost-effective ways to make their channels more integrated and customer-focused.
Highly Competitive Scenario: With the competitive door continually ajar, existing banks are constantly under threat.

Several other industries have chosen to enter banking services including, but not limited to, retail brokerage firms; life insurance companies; property and casualty insurance companies; health care insurance companies; and retailers and e-commerce companies forming their own BCs/BFs.

After reaching the 1.5 cr mark as its customer base FINO ltd CEO Mr Manish Khera sent a thank you email to all the FINO employees. Below is the email. It is a very proud moment for all the FINOites and citizens of the country .Below is the excerpts of the email.

“Dear All,
It gives me immense pleasure in sharing with you all that we, TEAM FINO have crossed 15 mn customer base yesterday. Congratulations to all of you for another feather in your cap!!

To put it in perspective, there are an estimated 60 mn BPL households in the country. Since the two large schemes we run (RSBY and NREGS) are both focused on households (infact in RSBY we issue one card per household; even in NREGS the entitlement of 100 days is per household), we have covered 25% of the BPL families in the country.

And we are adding nearly a million customers per month. If you remember, we completed 10 mn customers on January 27, 2010. This year. We are at 15 mn now. In a span of 4.5 months!!! So the day would not be far off when we would have covered the entire BPL families in the country.

We recently got recognition for what we have achieved and the pace at we have achieved and are growing in the form of the FT/IFC award as being the company making the most impact on bottom of pyramid customers, globally.
We all can be proud of our achievement.

We are hosting a function in Delhi on June 15th to celebrate this occasion. The Chief Guest in the function is the Finance Minister, Mr Pranab Mukherjee. The function would also have Deputy Governor RBI, Dr KC Chakraborty and IBA head, Mr M V Nair. It’s a big occasion for us to have such high dignitaries attend our event. A first for us. And while some of us would get the limelight, I wanted to thank each one of you for the hard work that all you have contributed in taking FINO to where it is today.

I am sure in times to come we all would achieve many such milestones and when we look back, this achievement would stand dwarfed. Most important, we all would look back and feel satisfied that not only did we achieve big, we also had fun in the journey and enjoyed each milestone.

Regards
Manish”
CEO FINO Ltd

Progress

Business Correspondent

Network:

• The entities provide a new dimension to the Indian banking system by acting as BCs for regulated financial entities. Surprisingly this did not happen due to some reasons, consequent of which it transformed its role from a technology provider to a BC.
• Today FINO is the largest BC in India with over 5,000 physical points (Bandhus) all across the country. Bandhus are a very critical part of the delivery chain and customer experience. Hence invests aggressively in their training, insurance benefits and having a code of conduct for them to ensure lower risk and better customer experience.

Insurance Segment:
• FINO is working with ICICI-Lombard to enroll Below- Poverty-Line households under the Rashtriya Swasthya Bima Yojana (RSBY), phase two in the states of Uttar Pradesh and Haryana. It has enrolled about 1.8 million households using its solution of managing data in a paperless format & smart-card technology.
• Using this technology, more than 5.4million households, in 26 states of India, have so far been given Smart-cards. Six prominent states (Bihar, Haryana, Jharkhand, Kerala, Punjab and Uttar Pradesh) has already implemented RSBY scheme which was implemented in the year 2008 through different implementation and technology partners.
• Maximum percentage of BPL families was enrolled in to the dairy in states of Maharashtra and Gujarat.

Innovations:

• MDM
o MDM is the equivalent of a low cost machine that enables cash deposits. These MDMs are already working in some prominent areas where banks are not present.
o This model of operation eliminates the need for human agents to serve customers.
o The low cost of MDM make it financially viable and the fact that it is fully automated suits the ‘any-time banking’ requirements of the target population.

• MITRA (Mobile Information and Transaction)
o MITRA a new product is a Mobile enabled banking solution designed especially for rural populations. It is now fully functional and already implemented in few locations. Using this solution agents and customers can both utilize their mobile phones to access banking facilities.

Market Environment and its impact:

With the resilient Indian economy back on an upward trajectory after a brief slowdown period, we are expecting government’s recent initiatives to bring rewarding and sustainable growth in escalating and deepening achievements in the financial-inclusion space. Both the government and the financial institutions in the country have taken steps in formalization of scaling-up process of initiatives like no frills savings accounts, NREGA and RSBY.

Role of Government:
• Government’s proposal, for allocation of Rs.390.0 billion for the year 2009-10 for the flagship NREGA programme, which marks an increase of 144% over 2008-09 and an amount of Rs.3.5 billion for RSBY in 2009-10 – a 40% increase over the previous allocation, clearly demonstrates the success of these schemes in the previous year and also shows the keen interest of government to use these mechanisms for inclusive economic growth.

Technology: Boon or Bane?
• Technology-driven implementation, biometrics-enabled authorization system and successful public-private partnerships have been the key enablers in channelizing the benefits of these schemes to low income households.
• This has also enhanced the absorptive capacity of the actual beneficiary of the scheme in a more transparent and efficient way.
• This has demonstrated the viability of biometrics-enabled smart-cards as the way forward for speedy implementations of future schemes by government and international bodies like the World Bank and the Millennium Challenge Corporation (MCC).

Goals:
• In order to achieve ‘Financial Inclusion’ as a goal, Government of India has set aside Rs. 1.0 billion in the current budget for setting up at least one Point-of-sale (PoS) for banking services in each of the unbanked blocks of the country. This kind of policy support from the government provides strong encouragement for initiatives that are aimed at making the poor, viably and sustainably bankable.
• This support allows to step deeper into unbanked territories increase our reach to provide our technology and services for the mission of achieving universal financial inclusion.

Conclusion:
• Government of India has a vision and strong commitment towards enabling financial inclusion to all unbanked and under banked populations. This is reflected through a series of policy initiatives and incentives.
• On one hand there is a positive environment and government support for financial inclusion, which of’ course is a welcome move but on the other hand new stakeholders particularly BCs who have proven their importance in a short time span of three years are still being debated.
• There is a very large untapped market in the financial inclusion space.
• A rare combination of business acumen and social responsibility allows FINO to stand apart from the others.
• It also plays an even more crucial role in financial inclusion in the coming years.

(4411 beneficiaries, 153 villages, 2 metros and total disbursements of Rs.4, 61, 59,000/-)

Insurance Linkage:

Insurance services have largely remained as the urban phenomena. FINO understands the value of time and gives a lot of importance to insurance while extending credit facility to the poor segment of the society. As a result of this the Bank coupled a micro insurance product with loan under tie-up with LIC.

Motive:

• Insurance Linkage provides protection to the Bank in case of borrower’s untimely death.
• The insurance premium is recovered from the first loan disbursement made against issuance of insurance certificate.
• Borrower gets a life cover of Rs.50000/- at a nominal premium of Rs.200 pa.

‘FINO Saral’

A revolutionary and complete end-to-end Loan Management Solution

Striking Features of Saral:

• Customized to the Bank specific loan product with an integrated rule engine to do first level eligibility checks.
• Capture and validate data provided in respect of guarantors.
• Generate ready to print & sign loan application forms along with basic socio-demographic data, photograph etc. printed.
• Enable online sanction and loan disbursement via online linkage to FINO server and Bank’s Core Banking System.
• Generate repayment schedule and other MIS for effective monitoring of loan accounts.

FINO Portfolio at a glance:

As a Business Correspondent (BC) FINO successfully took up the challenge to do end-to-end loan operations on behalf of the Bank including right customer selection, documentation, disbursement and continuous follow-up for ensuring recoveries
In a very short span a year, FINO has disbursed Rs. 4.61 Crores among 4411 beneficiaries spread across 153 different villages in 5 different states and two metros. Certainly this has been a great achievement and a good learning experience for team FINO. Here is a snapshot.

(Disbursement status as on 02 March 2010)

The Road Ahead:

On 4th Feb, 2010 RBI told to the chiefs of both private and public sector banks that in addition to allowing the underprivileged no-frills accounts without a minimum balance requirement, banks should also provide them credit facilities through an overdraft facility or a short term loan.

Looking at the fast growing MFI segment, doubtlessly there is a huge demand of such small ticket size loans across the country. But the real challenge for Banks and its BC here is to meet this demand in a very cost effective manner. In addition to low cost, scalability and sustainability are two other areas which need thrust & improvisation.

In Indian banking industry, the manner in which goal of financial inclusion is pursued has not been satisfying till date. But, I am confident that similar initiatives by Banks & their BCs would make difference by answering many such questions and very soon the inclusive story wouldn’t be a distant dream.

With UBI-FINO’s ongoing program of small ticket size loans, the borrower is benefited to avail a loan from a Nationalized Bank which he wouldn’t have dreamt before. Today, he is also actively transacting in his ‘No Frill Account’ to ensure timely repayment of loan and to create a bigger deposit portfolio. The insurance linkage to loan proved successful with zero selling cost but with added security to his life and liability.

In Micro finance scenario, the MFI rates are around 30%. However, Bank’s end pricing for these loan products is expected to be 12% to 18 % which is competitive, as Bank is not charging any processing fees or hidden charges. Banks need to work out the end pricing for the beneficiary keeping in view monitoring costs to be paid to BC & very high operational cost incurred in mobilizing and recovering these small ticket size loans.

Today, FINO is partnering with 15 Banks and hopefully all of them will come forward with many more similar initiatives under BC model. So……Our journey has just begun & we’ve a long way to go!

Now, that we have acknowledged that the need of a “Unique ID System” exists (Refer my previous post), we must further acknowledge the purpose of deploying such a system i.e. the application areas and the usage environments.
A) Application Areas:

Civil applications
 
• Availing social benefits (RSBY, NREGS, etc) and
• Exercising citizen rights (Voting, etc)  OR

Law Enforcement

Identifying a person from prints left behind at crime scene

Difference between Civil Applications and Law Enforcement

The difference is in the nature of participation of the subject, which is voluntary in the Civil Applications and involuntary in the law enforcement. Also, in the case of the law enforcement, the print left behind, also known as latent prints can be partial or be from the palm area; thereby making the identification very difficult and complex.

Further, the implications of a “False Acceptance” or “False Reject” are very different among these systems. While a “False Acceptance” in a civil application would result in multiple benefits to an individual under a scheme (which can be rectified subsequently), it would allow a criminal prosecution against a wrong individual, and vice-versa for “False Reject”. It would be imperative to note that the system requirements for Law Enforcement system would be more rigid and complex.

B) Usage:

Unique ID Alone Vs Unique ID

It is also important to asses if

• The output desired from such a system is to be able to identify a new record submitted as already existing in the historical database built over time, alone
OR
• To authorize a transaction request with biometric based authorization data.

The primary difference between the two environments being system uptime and availability requirement; while the “Unique ID” can be established online as a transaction, they are generally done in batches for optimization purposes and service is merely delayed, not denied in case of downtime. On the other hand, for transaction environment needs, the system uptime and efficient response are mandatory for continual service else it is perceived as service denied.

Provision for a Transaction Environment

Further, the transaction environment described above envisages an online environment and assumes communication channel availability at the point of transaction. However, if the need is that transaction be allowed offline as well, then there is a requirement of secure token issuance and lifecycle management – which will require a collection of systems like KMS, SCMS, etc.

FINO has successfully implemented transaction environments around a fingerprints based “Unique ID System” for various civil applications.

My answer to this question is an emphatic Yes. To begin with, I would like to touch upon the current policy scenario in India. The Government of India has a vision and strong commitment towards enabling financial inclusion to all unbanked and under banked populations. This is reflected through a series of policy initiatives and incentives.

Recently, RBI has further eased the Business Correspondent norms by allowing merchant establishments, insurance agents, retired teachers etc to act as BC’s to the banks, thus making the process of financial delivery simpler.

On one hand there is a positive environment and government support for financial inclusion, which of course is a welcome move but on the other hand new stakeholders particularly BCs who have proven their importance in a short time span of three years are still being debated. In my view, the BC model in India has the potential to accelerate financial inclusion but growth incentives for the BC model are not all in place.

One quick example of public investment and policy support which comes to my mind is that of the Pradhan Mantri Gram Sadak Yojana (PMGSY). Under this scheme the Government of India has allocated Rs.120.0 billion in the current budget to develop a surface roads network connecting villages with urban centers, If I take an approximate cost of financial inclusion at Rs 100 per unbanked person, for an unbanked population of 410 million the total amount comes to Rs.41.0 billion, which is just one third of the PMGSY investment allocated by Government of India. We need to consider making available financial services to our people also in the same light as provision of roads and other infrastructural services. I think this is a small investment for a country of our size and which needs to be taken-up urgently.

On a positive note, let me also cite an example of a BC, FINO Fintech Foundation (FFF) which is a section 25 company. FFF started its journey for financial inclusion on 13th July, 2006 and today it stands at different pedestrian with 14 Banks, 6 Government entities, 4 insurance organizations on board. It has covered 21 states, 182 districts with presence in over 26000 locations. Today, FFF has more than 7000 transaction points with more than 2mn monthly transactions (average monthly volume of INR 525 million) and a customer base of 7.95 million.
The number of customer base is increasing day by day. Apart from above, FFF taking initiatives towards educating the end customers under the Financial Literacy/ Economic Empowerment umbrella so that they use their banking accounts with informed decisions.
Looking at above, you can note that we at FINO and FFF do not see any fundamental problem in the BC model in India and I have no doubt in my mind that this ever evolving BC model, both, from the operational and viability angle would go a long way in converging the financial inclusion dreams into reality.