The volume of financial transactions have risen substantially after a concerted push towards inclusion, but, interestingly, underbanked customers seem to be insulated from fraudsters, as of now.
This is due to physical transactions with the supervision of new age bankers and an increase in basic financial literacy among users, say executives at small finance banks and payments banks. However, the rise in financial literacy is only so much and there's a wide gap that needs to be filled to make the bottom of pyramid financially educated, as well as accustomed to banking technology, the executives say.
While these microfinance institutions face minimal fraud, the same cannot be said about the banking system as a whole, which is seeing an alarming rise in big-ticket frauds, as is evident from the latest $2 billion fraud at the Punjab National Bank.
According to a Kroll Annual Fraud and Risk Report, published in January this year, 89 per cent of respondents in India experienced a fraud incident in the previous 12 months, compared to 68 per cent in 2016. However, most of the frauds happen through the digital means and the poor people are still doing well because there are bankers to handhold them.
Microfinance institutions said most customers were often unaware of financial services. “I think the bank’s role as an assistant is more for our rural customers, who are not familiar with such functions. It is important to handhold them. Considering their literacy limitation, we have substantially reduced paperwork,” said Mayank Markanday, chief risk officer, AU Small Finance Bank.
Despite reducing paperwork and simplifying processes, most customers require assistance, thereby concentrating transactions at physical branches. “Our target is the under-banked population and we believe that most of our customers require assistance,” said Shailesh Pandey, vice-president, Fino Payments Bank.
Financial experts, however, said that physical transactions are not completely free from frauds either. “There is an equal amount of fraud in hard paper as well. While these organisations may operate in rural and SME pockets and not require a digital front end as their customers visit branches, it does not reduce the need for digitising the backend process and databases, said Reshmi Khurana, Managing Director, South Asia, Kroll.
Payment banks and small finance banks, which function at the frontiers of financial inclusion, said most of their transactions were at branches, minimising external threats. Fino Payments Bank, for example, said 85 per cent of their transactions were at branches and 15 per cent through a mobile app. It said it has seen no cases of fraud for five months now.
This situation cannot continue for long and the customers will have to get online at some point. Sound financial literacy, and scaling it up quickly, would be the key, say experts.
“Not adopting digital is not the solution, either for customers or for an organisation. Eventually, these small banks’ success would depend on how well they are able to transition to digital and onboard and accustomise their customers on digital developments,” said Khurana.