CGAP CEO Greta Bull's Speech During Inclusive Finance India Summit


Greta Bull, CGAP CEO
Address to Inclusive Finance India Summit
January 19, 2021


Thank you for inviting me to join you at the Inclusive Finance India Summit. It is truly an honor to be with you this evening and I am sorry I can’t be there in person. I have been asked to speak about responsible digital finance. In the next fifteen minutes, I will explore the progress India has made on financial inclusion, some potential gaps we see in that progress, and a few thoughts on how India can protect against consumer risks.

These are without a doubt exciting times for inclusive finance. Digital technology and new business models are completely changing our ability to reach poor and excluded households with financial services. In fact, thanks to Covid-19, they are changing the way we work, study, buy, sell and access services. India has been at the forefront of this fintech revolution with a unique public-private model that has propelled it into the vanguard of finance and technology. Not only has India been a world leader in building digital ID, a world class payment system, a large and successful microfinance industry and a thriving e-commerce sector, it has done this with an eye to inclusion and ensuring a competitive landscape, rather than the winner takes all model that dominates in the rest of the world.

There is much to applaud in what India has done to increase economic and financial inclusion. And this shows in the numbers. As is by now well known, India increased its rate of financial inclusion from 35 percent to 80 percent between 2011 and 2017, roughly the equivalent of adding 470 million new bank accounts in six years. That is an astonishing figure. A gender gap that sat at 9 percent in 2011 was reduced to only 3 percent in 2017, thanks to government intervention to get accounts into the hands of women. We saw transactions over UPI cross the 2 billion mark per month in October of 2020, which is double the rate of just one year earlier. UPI was put to the test in the early months of the Covid-19 crisis, when India sent social payments to 428 million recipients of various Covid relief programs. And it passed with flying colors. I have spent the last ten years working on building interoperable retail payment systems in emerging markets and nothing I have seen compares with what India has achieved with UPI in a few short years. India has reason to be very proud of all these achievements.

But now that I have said all that good stuff, let me tell you where I think India still has more work to do. First, I don’t yet have a good sense of the extent to which technology-enabled finance is reaching poor people in ways that can help them improve their lives. And second, it is not yet clear to me that adequate systems are in place to ensure those systems do no harm. Let me explain what I mean.

While I think we can all acknowledge that UPI played an instrumental role in getting resources to poor families during the crisis, I have nagging concerns about how accessible the banking and payments infrastructure is for poor households more generally. Of course, people will avail themselves to social payments in a crisis; they have few other alternative sources of income. But once the crisis has passed, will they use these high-tech systems for anything else? Despite the rapid growth in accounts, we know that usage rates prior to the crisis were low, with 39 percent of accounts reported as dormant in the 2017 Findex. Since the Findex was not run in 2020, we don’t yet know whether those dormancy rates have come down as a result of the crisis. But to get usage rates up on a more permanent basis, providers will need to offer a range of products that are relevant and accessible to the poor. The crisis offers the opportunity to build upon new levels of comfort with digital. The question is: is there a business case for providers to step in with services that meet those needs?

The scale of the Indian market has the potential to obscure something important – namely, whether these solutions are actually reaching the poorest. If we focus too much on congratulating ourselves for the number of accounts opened, the volume of transactions running over UPI or the profitability of fintechs operating in India, we may miss a very important part of India’s story. Because the fact of the matter is, providers can create very robust businesses reaching the top 20 percent of India’s population. The attractiveness of poorer segments drops off quickly without explicit government intervention, which in all likelihood is the reason a large proportion of those new bank accounts are held in state owned banks. Given that most poor people in India operate in the cash economy and are likely to lack access to the internet, the question of both a digital and a financial divide remains pertinent. In that context, one indicator that causes me concern is the relative lack of cash in cash out agents in India, which in other markets have been a crucial interface for poor people between the cash and digital economies. According to the RBI, India has 1.1 million CICO agents, although CGAP estimates this number is likely to be closer to 5 or 6 hundred thousand, taking into account double counting and inactive agents. Even if we generously assume the larger number and that all of those agents are active, this means there is around one agent for every 1,240 Indians. Compare this with Kenya, where there is an agent for roughly every 230 inhabitants. While it is true that India has more bank branches per capita than Kenya, it is still not clear to me that we have enough viable on-ramps to the digital economy in place to include all of India’s poor. So I think we still have work to do to get a wide range of financial services accessibly into the hands of low income Indians.

Beyond that, I think there are important questions about the potential for harm from digital finance. And Africa provides some useful lessons on this. Like payments, there is another product that loves scale: digital consumer credit. And they often go hand in hand. In Africa, we have seen explosive growth in digital consumer loans that leverage mobile money subscriptions, often targeting low income segments and charging astronomical rates. Zambia is a market where we have very good data on digital credit growth. Over a 3 year period between 2016 and 2019, loans disbursed to households grew 25 times, from tens of thousands a month in early 2016 to nearly 2 million loans a month three years later. I appreciate that these numbers may seem miniscule in the Indian context but bear in mind that the total adult population of Zambia is around 9 million people and that 60 percent of these loans were made to households earning less than $5 a day. We have seen this play out across multiple markets in Africa and regulators have struggled to measure this explosion in subprime debt, much less manage it. And the result in some countries has been a sharp uptick in rates of over-indebtedness and people being blacklisted for taking loans they did not understand. And as finance is increasingly embedded into other digital services like e-commerce and gig work, the opportunities for abuse multiply, making it even harder for regulators to ensure fair treatment.

So how do we make sure that poor people’s welfare is baked into this incredible period of expansion in access to financial services? I think there are four main pillars of an approach.

First, we have to stay attentive to the risks of exclusion. Unless people have smart phones and bank accounts, they are likely to be excluded from the digital economy or at least find it challenging to engage. We need to find ways to link the digital and the analogue, with policies aimed at providing people with access to cash in cash out points, smart phones, affordable data and bank accounts. As increasing parts of the economy move on-line, we have to make sure that the digital divide does not grow.

Second, we have to continually anticipate the risks that digital brings and be prepared to look for them in unexpected places. This covers traditional areas of concern like over-indebtedness, aggressive collection practices, predatory pricing and fraud, but also encompasses entirely new areas of consumer risk like data protection and privacy, identity theft and cyber security. We also have to contend with entirely new categories of providers, most of which don’t do finance as their main activity and aren’t regulated. For too many years, mobile network operators in Africa have ducked responsibility for the lending that passed over their channel, thinking that because they didn’t take credit risk, it wasn’t their concern. Except no one ever thought they were taking a loan from the lender, they thought they were taking a loan from the MNO. From a business perspective, the MNO’s reputation is on the line, and from an ethical perspective they absolutely have a responsibility to their clients for fair treatment. Imagine how much more complex this equation becomes when loans are embedded in e-commerce purchases or are made available to gig workers.

Third, one really good way of anticipating and tracking risks is to listen to customers. But many digital services make this extremely difficult to do, even for digitally savvy people. I recently tried to engage with Paypal to get a payment taken off hold and literally gave up after interacting with their circular chatbot for half an hour and just decided to wait it out. Most poor people don’t have that option. There are many ways to listen to the voice of the customer. Providers should have robust redress mechanisms in place – that could be through a call center, a chatbot or an Interactive Voice Response system – and they should be prepared to react to customer complaints. But beyond this, there is value in channeling the collective voice of the customer through consumer associations that interact with providers and regulators. Forward thinking regulators, like the FCA in the UK, include consumer advocacy groups in regulatory advisory bodies so that their views are represented. Supervisors can also avail themselves of suptech solutions to help surface issues or use mystery shopping, survey instruments and transaction data analysis to identify problem areas.

Finally, the responsibility for consumer protection has for too long sat mainly with consumers. There is a need to ensure a balance of accountability between regulators, providers and consumers. And regulators have an important role in making this happen, because we can’t assume providers will adopt responsible practices on their own. CGAP advocates for regulators to take a proactive customer-centric approach, requiring providers to report on how and whether customers have choice, whether service terms and conditions are clear and that adequate recourse mechanisms are in place. CGAP has written about this outcomes-driven approach and is currently testing it with South Africa’s market conduct authority and several financial services providers. We are aware that Dvara is working with the RBI to help develop consumer rights and I was encouraged to see that the RBI is establishing a working group on digital lending that will, among other objectives, recommend a Fair Practices Code and consider whether the regulatory perimeter should be expanded to include digital lenders. CGAP will follow their deliberations with great interest. But standards don’t just have to come from regulators. Providers and associations can also develop codes of conduct. The GSMA did this for the mobile money industry several years ago and more recently instituted certification standards for compliance with the code. I’d love to see them extend the code to digital credit as the framework evolves.

In closing, I’d like to acknowledge that we are indeed living in a time of remarkable change and dynamism in the delivery of retail finance, and the fintech revolution has seriously expanded our toolkit to bring meaningful financial services to the world’s poor. But it also opens up many new risks for populations that have traditionally been excluded and marginalized, so the burden is on the financial inclusion community to make sure rapid innovation is matched by attentiveness to the accompanying risks. To make this truly inclusive will require a proactive effort to ensure that the poor have both viable on-ramps into the digital economy and, once they are there, are equipped to navigate it and have ample protections against the potential harms that can arise.

Thank you very much.