In the last 4-5 years, rural fintech in India is leading the digital disruption. These niche segments are focused on the organisations and are simplifying banking and finance through technology. Their banking models are simpler, smarter, and more secure for their rural customers, shares Badrinarayan Vedanthan, Previously Senior Vice President, Head-Strategy, Transformation & Process Governance with Suryoday Small Finance Bank Ltd, with Shruti Jain of Elets News Network (ENN).
In the year ahead, technology innovation will continue apace, & creating opportunities. What strategies have been taken to measure growth in your organisation?
Firstly, the word growth has multiple connotations. While an organisation’s balance sheet growth and financial profitability (with consistency) are the primary objectives of every management team towards its board and shareholders, the core business strategy of increasing
(i) its customer reach and base,
(ii) delivery of customer delight and
(iii) cross-sell (wider product penetration) must become the core growth metric to focus and measure.
Secondly, cost reduction or cost optimisation measures are an important financial discipline for the CFO to enforce, but it cannot, and must not be the overriding factor if one wants growth. Innovation and transformation come with costs to bear, and an organisation’s ethos must embrace the bold elements of taking such a path, rather than be conservative and inward.
There are many ideas and pathways to look at the measurement of growth within the banking and financial management arena. Three areas that I see gaining larger traction over the coming years are in the field of:
(a) Data science for decision-making
(b) AI or ML adoption by those who can both afford to spend on it and create in-house capabilities to build, test, and utilise the Algo-based models and their outputs.
(c) Structured transparent changes in internal governance mechanisms across the leadership team to have a single truth version to monitor the implementation and results of technological programs, designs, channels, or product innovations put in place.
Data scientists: I must emphasise and clarify that they are not your average data analysts or data miners. They are the true thinkers that manage the end-to-end bridge path between raw data, basic insights, information, and management wisdom for the leadership team. I see organisations investing more in this area, and while I come from a traditional FP&A / Business performance experience, I would be equally honest in saying that this is the way forward for the finance department on decision-enabled collaboration.
AI is a crafted product: It is a tool for improving your ability to evaluate and monitor data, as well as a means for providing finer insights into trends and probabilities when making risk-based decisions or marketing strategies. Investment in this is still in its infancy across many financial institutions, as most are waiting on third-party market players, and AI leaders to deliver niche solutions rather than generating this internally. This is a chicken and egg problem because time does not stand still, and I believe organisations are waiting for the perfect modeled AI tool to use instead of trialing and seeing how modifications and refinements may be made over the next year or so.
Governance: I would be very concerned if organisations rely heavily or solely on their CTOs and CIOs to dictate the transformation agenda. This needs to be well embedded within the business and support functions, as they will be the users managing their processes, customer base, and business operations. As a result, governance of any creative strategy envisioned or implemented must be a collaborative effort including the whole management team. While 100 per cent buy-in is not required across leadership teams, it should not be the case that only a few are aware of the agreed agenda and the outcome/delivery, while the rest of management is left guessing and is asked to catch the falling balls thrown up from above at the end. Such breakthroughs and transformations are likely to lag over time, resulting in a suboptimal return on the substantial investments and efforts involved.
According to you, how did the pandemic accelerate the performance of the BFSI sector & fast digital adoption?
COVID-19 became a unique phenomenon that completely uprooted the core retail banking element of constant physical presence or having direct customer contact. How do you now engage with customers if they are either not willing to see you or are located in remote locations (i.e.), family migrations from urban or semi-urban areas of employment to thier rural ancestral area, this happened either consciously for safety precautions or without any choice.
Suddenly, the primary banking sector as well as the MFIs, SSFB’s and NBFC’s had a scenario where their core segment of micro-retail / low-ticket borrowing customers were no longer easily accessible or responsive. Credit checks or background verification became
a challenge. Door-to-door collection efforts turned into a nightmare and worry for many management teams. Most of the employees of these organisations were on Work from Home basis during the second wave of COVID-19 that hit in the mid of 2020. So it’s not just the commercial angle, but the human resource angle too, that management of most financial institutions had to come to grips with.
One significant financial factor, which I refer to as the unfavourable social lending environment, is the growing NPA portfolio across many financial institutions. This shows a social inability due to the pandemic to repay loans taken. Institutions are now better aware of with lessons learnt on to avoid this lending risk in the short term while India gradually moves into a recovery and growth phase.
Technology functions became the primary channel to ease some of the management problems by providing out of the boX delivery and product solutions or by driving changes to the organisation’s many archaic process with specific transformation projects.
Financial institutions that were earlier cautious or wary of embarking on significant technology upgrades and transformation projects suddenly had no other alternative but to move through this domain, to stay active, focused and to continue operations. The sector as a whole has been moving toward digital adoption on a war footing and that since 2019, there has been an unavoidable drive to remain flexible and agile.
How have digital disruptions enabled SFBs to come out with solutions distributors in rural areas allowing local populations to avail of the products and simplifying the onboarding process?
In the last 4-5 years, rural fintech in India is leading the digital disruption. These organisations are focusing on their niche segments, and are simpler, smarter, and more secure for their rural customers. Small Finance banks being the closest institutions catering to the micro to low-end retail customer segments in such areas have realised that their branch presence say 15-25 kms away from the village areas, will be a geographical challenge for that villager to assess physical banking facilities. Inclusive finance though largely focused on door-to-door lending through the JLG / SHG product offering did not fully cater to the other element of today’s customer needs, which is the payments and remittance space. This is one area that has seen a significant increase over recent years in distribution push mostly with tie-ups and alliances with major payments/ distribution channels.
Mobile as the key armoury of the common citizen especially with entry-level smartphones has created an explosion of new customer expectations even in rural to semi-rural areas that SFBs’ are becoming more conscious of. One development I foresee growing more is the adoption or partnering of SFBs and even MFIs with local villagers; say someone well-known, reputed, or respected who becomes a sort of an agent or self-entrepreneur banking channel. He or she will become the lead point to educate these villagers on basic banking services via the mobile app, or perhaps the SFB-provided tablets to conduct their transactions, especially payments and remittances. I am pretty sure in another 5-10 years most villages will pretty much get to be aware of how to use GPAY/PAYTM/UPI themselves. But, the banking piece of deposits and lending may still necessitate them to put their dependency and trust in such a central point person in their village.
As regards the customer onboarding process, we have already seen an accelerated thrust by most institutions to adopt digital means of KYC and onboarding formalities. The traditional signature of forms is slowly dissipating. A new generation, especially Gen Z and the Digital youth, are clearly not keen on physical banking and personal financing.
On the contrary, self start-up businesses and entrepreneurship as a career is on the rise. So, there is a gradual inevitable shift in conventional banking needs and contact,
including in rural and semi-rural areas of our country. Video KYC is one innovation that has not been fully implemented. If it is sorted out around the risk, compliance, and data integrity parts, it can bring convenience and speed to many financial institutions’ onboarding processes.
How do emerging technologies empower the microfinance industry in transforming its payment methods for under-banked consumers?
Smartphones are being used and adopted widely throughout all facets of Indian culture. Therefore, it makes sense for banks and financial institutions to use this tool as a platform for engaging with customers (retail). As I mentioned earlier, in the other question, our country is seeing a significant generation shift in adopting digital means. Awareness of the smartphone and utilisation of some basic utility features, especially online payments, and remittances, through several user-friendly interfaces and smart innovative applications have transitioned so simply and easily. Today, India is in the top five of global financial digital usage.
There will be further focus and penetration by many SFBs and MFIs to develop their
API space and keep looking for integration opportunities with third-party fintech partners to leverage new capabilities and digital product suites. APIs have enabled service improvements, especially faster payments, and have provided support for easier unbundling of services. They have become the standard for data sharing in so-called open banking applications. Building some stuff internally takes time, effort, focus, and investment as well, which may not be feasible in a rapidly changing competitive environment. Direct online credit (to a bank account) and direct repayment by QR code or UPI payments are on the rise as it is practical, convenient, and quick. I foresee
traditional collection and distribution processes undergoing inevitable disruption.
How are you developing a digital finance strategy and taking the next step toward a better, faster, less expensive finance organisation?
I would like to put some context first. As per one article by the Times of India in Dec 2022, by 2030, India’s fintech industry, with a growing focus on the rural sector is anticipated to have an output of $1 trillion and generate a revenue of $200 billion. This is enormous for a country that was largely agrarian until the early 1990s.
The growing emergence of AI, data science, and API is on the rise in the Indian Banking and Finance Sector. Another potential area of a growing digital finance strategy is how
institutions evolve with their appetite for cloud computing.
There are some genuine concerns on its adaptability, compliance, and data security, but if you look globally, it is on the rise, and at some point, I wouldn’t be surprised if most of the central banks look to see how much of cloud computing can be assimilated or allowed to be run within the primary banking technology space.
This must be a partnership on both sides, but it will provide efficiency in the long term. Collections will use fewer manual physical means and will evolve into a phygital medium. Collections’ in-house headcount for generic portfolios will be reduced. Credit as a function will also become more AI-driven than the evidence-based approval process. To manage expanding transcation volumes, customer TAT expectations, and pragmatic risk tolerance appetite, credit approvers will need to rely on more intelligent tools and data insights than basic historical document proof. I envision more Data Science and AI-driven analysis
being used in an institutions’ HR, Marketing, Finance, and Risk Monitoring verticals.