By Sendhil Kumar Co-founder & COO, Techurate
Financial inclusion, the accessibility of financial services to all sections of society, is a cornerstone of sustainable economic growth and poverty reduction. In India, with its diverse landscape and large rural population, achieving widespread financial inclusion has been a longstanding challenge. However, the advent of fintech (financial technology) innovations is transforming the landscape, making financial services more accessible than ever before in rural India.
Rural India’s Financial Landscape
Rural India, home to more than 64% of the country’s population as per world bank report 2022, has historically faced significant hurdles in accessing traditional banking services. The geographical remoteness of many villages, coupled with a lack of banking infrastructure, made it difficult for financial institutions to extend their reach to these areas. As a result, millions of people were left without access to essential financial services, such as savings accounts, credit, and insurance.
Bridging the Gap
The rise of fintech startups has revolutionized the Indian financial sector. Leveraging technology and mobile devices, fintech companies have been instrumental in breaking down the barriers to financial inclusion in rural India. Here are some key fintech innovations driving this transformation:
1. Digital Payments and Wallets: Fintech companies have introduced digital payment solutions and mobile wallets that allow rural residents to make transactions, pay bills, and transfer money using their smartphones or basic feature phones. Services like Paytm, PhonePe, and Google Pay have made digital payments a way of life in rural India, reducing the reliance on cash and improving financial efficiency.
According to the data analysed by the SBI research team, semi-urban areas account for 35% of UPI transactions, while rural areas account for 25% of transactions.
2. Digital Banking: Digital banking revolutionizes rural India, fostering financial inclusion through USSD (Unstructured Supplementary Service Data), agency banking, and AEPS (Aadhaar Enabled Payment System). USSD enables mobile-based banking without the internet, vital for areas with limited connectivity, facilitating various transactions. Agency banking partners with local businesses, extending banking services through POS devices. AEPS allows secure payments and cash withdrawals using Aadhaar and fingerprints, ideal for the unbanked. AEPS transactions have seen a significant increase in rural India in recent years. According to a report by NPCI, AEPS transactions in rural India grew by 45% in FY22.
These solutions enhance financial access, savings, and transactions, driving economic growth in rural areas. For instance, farmers track subsidy payments via USSD, and small business owners conduct transactions through agency banking.
3) Microfinance: Fintech platforms have pioneered microfinance initiatives, providing small loans to rural entrepreneurs and individuals who were previously excluded from the formal banking sector. Traditional credit assessment methods, such as credit scores and bank statements, are often not available or relevant to rural borrowers. This can make it difficult for them to access credit from traditional banks and other financial institutions. These digital lending platforms use alternative credit assessment methods, including data from smartphones and payment histories, to extend credit to underserved populations.
Digital lending is making it easier for rural residents to access loans. Digital lending platforms are offering loans to rural residents at competitive interest rates and with flexible eligibility criteria.
4) Financial Literacy Apps: Many fintech companies have developed mobile apps that offer financial education and literacy tools in local languages such as Saksham, an app developed by the National Bank for Agriculture and Rural Development (NABARD), Spice Money app. These apps empower rural users to make informed financial decisions, manage their finances better, and understand the benefits of savings and investments.
5) Insurtech Solutions: Fintech innovations have permeated the insurance sector, introducing digital insurance platforms that provide affordable and accessible insurance products tailored to the specific needs of rural customers. These solutions offer coverage for agriculture, health, life insurance, and motor categories, while also extending protection to rural households in the event of natural disasters
6) Aadhaar Integration: The Aadhaar biometric identification system has been a crucial enabler of fintech initiatives. It allows individuals in remote areas to open bank accounts and access financial services using their unique Aadhaar identity. This integration has streamlined the onboarding process and reduced the need for extensive paperwork.
The transformation is in process, but we still have a long way to go. Here’s why:
While fintech innovations have made significant strides in promoting financial inclusion in rural India, challenges persist. Connectivity and internet infrastructure remain uneven in remote areas, limiting access to digital financial services. Additionally, the challenges of digital transformation in banking include the high cost of modern tech solutions, cultural resistance within organizations, leadership lacking seriousness towards change, inadequate project management and ownership, and a lack of knowledge sharing due to regulatory constraints. Overcoming these hurdles requires substantial investments, a shift in organizational culture, proactive leadership, effective project management strategies, and fostering knowledge sharing. Embracing new age fintech solutions is pivotal for successful digital transformation, aiding in enhanced security, scalability, and cost-effectiveness.
Government Initiatives
Fintech innovations are driving financial inclusion in rural India, amplified by government initiatives like Jan Dhan Yojna and Digital India. Collaboration between fintech, traditional financial institutions, and regulators is key to overcoming challenges and ensuring last-mile delivery of fintech benefits. Micro ATMs (MATMs) and AEPS (Aadhar-Enabled Payment Systems) transactions witnessed a significant surge. According to a report by KPMG, the digital lending market in India is expected to grow from INR 1.2 trillion in 2021 to INR 2.5 trillion by 2025. A significant portion of this growth is expected to come from rural India.
The government of India is pushing for the establishment of DBUs in rural India to improve access to financial services for rural residents. Digital Banking Units (DBUs) are physical branches of banks that offer digital banking services. The government has plan to establish 84 DBUs in each district by September 2023. DBUs offer services such as account opening, cash deposits and withdrawals, fund transfers, and loan applications. This is making it easier for rural residents to manage their finances and access financial services without having to travel to a bank branch.
Conclusion
Over 64% of India’s population resides in rural areas, highlighting the importance of providing basic financial services to these communities. Fintech companies have adapted their products, enabled doorstep delivery of financial services and addressed trust challenges through local agents and partnerships with rural banks and retail stores.
Collaboration between fintech companies, traditional financial institutions, and regulatory bodies is crucial in addressing challenges and ensuring that the benefits of fintech reach the last mile in rural India.