Can India Achieve Universal Digital Financial Inclusion?

In our previous post, we described regulations introduced in 2014 which give a major boost to digital financial inclusion in India. The most critical was the introduction of Payments Bank license guidelines.  

In addition, Prime Minister Narendra Modi has launched perhaps the most ambitious financial inclusion program in history, called Pradhan Mantri Jan-Dhan Yojana (Prime Minister’s People’s Wealth Scheme, or PMJDY). PMJDY aims to reach 75 million people with bank accounts and subsequently government transfers, insurance, pensions and credit. The account opening phase must be completed by January 26, 2015, India’s Republic Day. As of January 20, the government reported that banks had far exceeded the PMJDY target, reaching 111 million people. With support from the Bill & Melinda Gates Foundation and MicroSave, the Ministry of Finance has launched a tracking system to determine how many PMJDY customers are first time account holders and to track the quality of the agent networks being set up to service these customers.

PMJDY is receiving unprecedented political backing from the Prime Minister and an “all hands on deck” approach from the Ministry of Finance. The scheme was announced during Prime Minister Modi’s Independence Day speech on August 15 last year where he said that Indians have mobile phones but not bank accounts. PMJDY has a project management unit at the Ministry of Finance and there are weekly three-hour meetings with the public sector banks and other stakeholders assessing the progress. Data on account opening targets is posted on the scheme’s website. Mr. Modi is receiving monthly updates on PMJDY’s progress and has chaired several comprehensive reviews. He has also personally intervened by making phone calls to state and district government officials to accelerate their efforts.

In addition to the program’s unparalleled political backing, it has several first-of-its-kind design features that advance digital financial inclusion:

Universal USSD short code and inter-mobile payments: PMJDY accounts holders can transact via mobile phones using two services run by the National Payments Corporation of India (NPCI), an entity owned by banks and backed by RBI. First, the National Unified USSD Platform (NUUP) enables customers to enter a USSD short-code (*99#) on any handset on any mobile network to launch a basic mobile banking menu to check balances and transfer funds.  Second, the Immediate Payment Service (IMPS) enables mobile account holders to instantly transfer funds from one account to another. IMPS was launched in 2010 and today 73 banks are using the system.

Aadhaar link that enables account portability: Soon after taking office, Prime Minister Modi backed completion of the Aadhaar biometric identification system which will convert a paper-based, 30-day process for opening a bank account into a 30-second digital process. Government departments can now disburse payments using the Aadhaar Payments Bridge (APB) – another NPCI-managed system which maps all Aadhaar numbers to bank account numbers. Government departments can then send payments to a recipient’s Aadhaar number and the APB will route it to her account. The ABP allows consumers to change banks and take their government benefits with them, thus boosting competition among banks vying to disburse government payments.

RuPay cards to all account holders: India’s answer to VISA, Mastercard and China Union Pay, RuPay is a card payment scheme run by NPCI. All PMJDY account holders will be issued RuPay branded cards. More than half of the 111 million account holders reached have already been issued RuPay branded cards.

Accounts come with free insurance and overdraft facilities: To avoid the account dormancy problems that have plagued India’s previous mass account opening drives, PMJDY accounts will include free life and accident insurance coverage and an overdraft credit facility. Customers who open the account before January 26 will receive life insurance and those who use their card within 45 days will receive accident insurance. Card transactions over six months will determine eligibility for the overdraft facility. While it’s not clear how these services will be provided sustainably, they reflect the government’s emphasis on stimulating account usage linked to digital transactions, rather than mere account opening.

Fixed-point transaction-ready agents: India’s previous account opening schemes resulted in banks setting-up “roaming” agents that could travel vast distances to open large numbers of accounts and return to disburse government payments. While great for hitting account opening targets, roaming agents are not ideal for customers who want to frequently access their accounts and transact. By contrast, PMJDY requires banks to establish fixed agent locations that are more conducive to ongoing financial relationships.

While PMJDY will undoubtedly expand account access, we propose three simple additions to ensure it ultimately leads to ongoing account usage among customers:

• Establish targets around account usage: Banks are responsible for account opening targets but aren’t responsible for ensuring that those accounts remain active. Consumers get products like insurance and overdraft if they transact actively, but there are no incentives to make sure banks have active customers. Ministry of Finance should couple its account opening targets with usage targets, perhaps using the metric of one transaction in the previous 90-days.
• Create opportunities to leverage the mobile channel: By requiring banks to issue RuPay debit cards to all PMJDY customers, the government has put its weight behind the card/swipe model which, studies have shown, increases cost per transaction by 30 percent over mobile channels. While the government may want to ensure there are options for consumers who lack phones, it should leave it to providers to select the appropriate approach for a customer base. In addition, NPCI and banks could encourage “card-not-present” transactions and link eligibility for the PMJDY overdraft facility to mobile and not just cards.  
• Ensure that Payments Banks can process government payments. When Payment Banks come online later in 2015, the government should ensure that they can compete with credit-issuing banks to deliver government payments. Payment Banks will be able to offer greater proximity to the end customer. Indeed, we think Payment Banks may be the engine that helps PMJDY get over the finish line.

India is betting that an “all hands on deck” government-led effort can help end its long fight against financial exclusion. PMJDY is perhaps the most ambitious government-led financial inclusion drive in history and could offer a useful template for how governments can boost digital financial inclusion. The question now is whether the Indian government can convert its extraordinary account opening efforts into an engine for meaningful financial inclusion.   

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