Banks should consider inclusive markets as growth opportunities: PwC

Can achieve profitability by serving more than 500 mn people in India

Banks need to start looking at inclusive markets as a growth opportunity rather than as a 'cost to business' as they can build a profitable business serving a large market of about 500 million people in India. Banks can achieve this objective if they follow the DNA model –  building a Different DNA, creating new organisation structure, products and aligning with new partners, according to PwC’s report titled “DNA model for inclusive financial services; Driving Profitability.”

Banks, till recently, did not focus on the inclusive market segment, as there was no incentive to do so. Growth objectives could be achieved by servicing the urban, economically advantaged segment. Today, with some segments of this market showing signs of saturation, and stringent regulatory requirements, banks need to be more strategic in the way they approach the inclusive markets, the report highlighted.

The inclusive market also called the 'emerging middle' already accounts for 2.3 billion people globally and is expected to represent a combined annual market in excess of Rs 330 lakh crore ($6 trillion) by 2021. Presently, 470 million people in India belong to this group, earning $1 to $5 per day, and about 40 per cent of the households, primarily belonging to this segment are financially excluded, the report added.

Harsh Bisht, executive director - financial services, PwC India said, “For India to be completely financially included, all the other constituents also need to play their part --- government, Reserve Bank of India (RBI), banks, business correspondents (BCs) and small enterprises. The government and RBI, through their policies must protect customers’ interest and also help financial institutions build profitable business models. They have to foster innovation by allowing small and new players to participate, be flexible in allowing more banks to operate in this segment, incentivise banks to create a different operating model for this segment through short term subsidies and allow market forces to operate.”  

Recently, the Indian government has taken many positive initiatives. Transfer of welfare subsidies (overall estimated at Rs 300,000 crore of which Rs 150,000 crore is presently cash based), to bank accounts through ‘Aadhaar’ will provide the much-needed impetus for banks to open accounts and treat this customer base seriously.

Elaborating the DNA concept, the report stated that banks need a Different DNA to address the lower economic segment. Totally new ways of doing things will drive the ‘low cost-high volume’ business, just like the way low-cost airlines and Walmart were created. This may mean carving out a completely new subsidiary as changing the DNA is not a small task. The profile of people has to be different and more local, and customer needs have to be satisfied in completely new ways. Products have to be designed for high volume and each element of cost has to be brought down to a fraction of the original”.

According to the report, new organisation structures will be required to be put in place to get operational leverage as presently the private and public sector banks have dis-aggregated units addressing the loans and savings requirements of the same market through different units.

For the purchase of financial products, there is a ‘price-trust inversion’. In the beginning, trust is critical for adoption, demonstrated by customers who are prepared to pay prohibitive prices. Initially, banks, BCs and Customer Service Points (CSPs) must focus on building trust, as price is not a consideration. Once there is trust in a new product and CSP, usage will increase and price is not critical. Over a period of time the product gets commoditised. This is when price sensitivity starts coming into play. New products have to be designed after understanding the granular needs of the market and learnings from successful traditional products like gold loans and chit funds can be leveraged to develop new products.  
Regarding aligning with new partners, the report said banks find it difficult to reach the last mile due to high costs relative to revenues. They have been partnering with many BCs, about 5-25, which adds to costs. This has to be reviewed and optimised.   

It is only organisations with a strong distribution network and the skills to manage this network that can deliver the last mile. Creating this network takes time and it will do well for banks to piggy-back on those that already have an established network.  

Bisht said, “Banks must have a tiered approach for last mile delivery - partner with telecom and consumer companies with their distribution network, for villages with a higher population, and grassroot organisations such as microfinance, co-operatives and  postal network for villages with lesser population”.  

Telecom operators must seize this second opportunity to drive innovation by providing mobile finance, leveraging on their vast network and proven strengths to manage this network. The report states that mobile financial services will take off more in developing economies rather than developed economies much like the way a large section of the Indian population leapfrogged to mobile phones.

Telecom operators can make a profitable business of financial services for inclusive markets by adopting the following: use their experience and access to data to drive innovative financial products, provide the entire bouquet of bank products, sell the concept of financial services and manage the distribution channel aggressively for financial products.

This is a time to for the government, financial institutions, telecom companies, and grass-root organisations to make history by providing financial services in a sustainable way to the inclusive market segment in India.