Digital inclusion will change India’s financial landscape in 2015

Kolkata street vendors

Cash is very much still king in the world’s second most populous state, with just 2% of people using alternative payment methods. This year, that trend will change.

When it comes to payment innovation, tough regulations have slowed the rate of change in India, creating a situation in which a handful banks control most of the nation’s access to finance and cashless payment methods.

This is reflected in the rock-bottom adoption rates for technologies that are revolutionising many other emerging economies. In India, just  0.3% of adults make use of mobile payments – well below the figure in neighbouring Bangladesh, where over a fifth use mobile. This makes the coutnry something of an anomaly in fast-developing nations; in Kenya, for example, 60% of the population are trying out mobile payment methods, often bypassing card-based payments altogether.

As the Consultative Group to Assist the Poor (CGAP) has pointed out, the sluggish pace of change impacts most negatively on the poor, few of whom are eligible to access existing options. Recently, the Indian government has begun to take note of this problem, introducing a swathe of new policies and relaxing current rules, with the aim of dramatically improving digital financial inclusion in the country.

In November, the government launched its Payments Bank scheme, which allows companies and organisations to set up their own mini banks that can offer many digital payment services to India’s unbanked millions. Prime Minister Modi also unveiled the broader Pradhan Mantri Jan-Dhan Yojana project, which aims to nurture digital technology innovation in the payment space.

At the same time, the Reserve Bank of India scrapped the rule that prevented banks from establishing agent more than 30km from a physical branch, and began to allow applicants to open an account without permanent proof of address – a major hurdle for migrant workers or those in less secure accommodation.

The microfinance industry also gained a boost from new rules that allow non-bank finance companies to act as business correspondents, meaning that they can build stronger relationships with banks, while mobile telecoms providers were told to make themselves more open to bank-backed mobile payments systems by opening up USSD channels across their networks.

These trends seem set to continue in 2015, as the RBI weighs up plans that would permit companies such as Airtel Money and M-PESA to offer their customers “cash-out” options. Currently, users have few options for withdrawing their money from the system, making them highly unpopular.

In India, the tide seems to be turning for digital payments, with financial inclusion a top priority for governments and banks alike. For payments innovators, this makes India, with its population of 1.2 billion people, a rich and exciting opportunity for growth.

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