Financial inclusion: Biometric banking and the $600 billion opportunity

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By:
Chris Wright
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An extraordinary revolution is taking place in digital banking in India. Driven by the state, it is anchored on a billion-strong biometric database to finally bring financial inclusion to a country that needs it more than any other. Banks may face a binary outcome: be quick or be dead.


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In the history of computing, only 12 applications have achieved 1 billion users. Windows, and its Office sibling, were the first two; Google search was next; Gmail, YouTube, Facebook and the Android operating system have all followed in time, with WhatsApp the latest. Then there is Aadhaar.

Aadhaar? Few outside India know it, but it is a truly remarkable story. It represents an audacious attempt to get India’s entire 1.25 billion population on to a single biometric card system, from the Buddhists in Himalayan Ladakh to the Tamils in Thoothukudi and the isolated tribespeople of the Andaman and Nicobar Islands, embracing 1,600 languages and almost 300 million adults who cannot read or write. 

Absurdly, it worked, and then some: when it crossed the 1 billion mark in April, it became the fastest of all platforms to do so – in just five and a half years (Facebook took almost nine) – and the only one to have done so entirely domestically and driven not by a private-sector tech leader but a government. 

Nandan Nilekani, co-founder of Infosys, who entered government with the task of spearheading this preposterous conceit, smiles as he recalls it: first the original idea, then building an architecture that could enrol 1.5 million people a day through 75 competing enrolment agencies, despite use of the card never being mandatory. 

“We decided it was scalable,” he says. “But 1 billion people? It was a bit of a surprise to us also.”

But if Aadhaar is itself a great – and, some say, sinister – social achievement, it also has the chance to revolutionise financial services in India: to bank the unbanked, to shake up the landscape for providing banking services, to move swiftly towards a cashless society. “A WhatsApp moment is now upon us in Indian banking,” Nilekani says. 

It’s already happening. Leaving Nilekani’s Bangalore office for the airport, Euromoney asks where best to hail a cab from, paying in cash. He frowns. “You can’t, really,” he says. “It’s all Uber in Bangalore.”

Some will make a fortune from this; others are just not ready. 

Credit Suisse analyst Ashish Gupta divides banks into two camps: the quick and the dead. “As the twin forces of disintermediation and digitization accelerate the pace of change, the quick – banks able to perform – will not only survive but capture increasing market share, while the dead – banks unable to cope with the change – will get marginalized.” 

He believes there is a $600 billion market cap opportunity to play for among the banks, which is some claim, given that all India’s private banks collectively have a market cap of just $127 billion today.

The pace of development and change in Indian financial tech has been bewildering. It is particularly transformative because of the starting point. Only 5% of personal expenditure in India is conducted electronically; 95% is still cash. Credit Suisse says that even now consumer payments are worth $1.3 trillion annually. When magnified by the world’s second-largest national population, the potential is very clear.

It has been a bold evolution, undertaken at breakneck speed. “The stack was not built in a day,” says Nilekani. “We did not conceptualise all of it in the early days. When I began as the chairman of Aadhaar seven years back, the focus was just on putting 1 billion people on the system and using it for authentication.” Everything else followed as various parties realised the benefits. 

Having got there, does he consider India’s process as having been unique? “Totally,” he says. 

There is an equivalent in the US, he adds, when the public sector was involved in the early days of the creation of the world wide web, and when US president Bill Clinton decided to put GPS in the public domain in 2000; but since then digital public infrastructure has been entirely about the private sector, Google and Facebook and Amazon and Alibaba. “But if these things are done as public infrastructure, they create a level playing field, and innovation happens on the top of that infrastructure.

“It was a crazy idea. But what has happened in India is unique.” 



On the top floor of a colonial-era building in Mumbai’s Fort District, there is a bank that doesn’t look much like a bank. Half the space is given over to a funky-industrial coffee shop, in which staff sit and pore over tablets; the area where the staff work is all exposed air-con ducts, dartboards and graffiti-style graphics saying: ‘Tomorrow starts here’.

This, pretty much in its entirety, is the front-office staff of DBS Digibank, a mobile-only bank launched in India in April. It is perhaps the most brazen attempt to make use of India’s new technological infrastructure so far. 

“Our India agenda is to move from thousands to 5 million customers on the back of Digi, and I think we can do it,” says Piyush Gupta, chief executive of DBS in Singapore. 

“It’s a complete game-changer. It’s not just doing an app. We’ve been doing mobile banking for 15 years,” he says. “It’s not about a bank putting out another channel. This is a clean sheet of paper and reimagining banking.

“We reckoned we could do with 19 people what would normally take 300 people to do: that’s the kind of bank we want to create,” he adds. “In the end we might need 60 or 70, but that’s it.” It will never have a single branch, with conversion into a full-fledged bank account happening at Café Coffee Day outlets, where customers only have to provide their Aadhaar details and have their fingerprints scanned on a handheld device.

DBS’s Gupta believes he can pull off this extraordinary trick because of Aadhaar and the opportunities it creates. In the past, when expanding into a country, one needed branches to bring in customers. Aadhaar – and more specifically, the regulation allowing Aadhaar’s electronic know-your-customer (eKYC) mechanism to be used as a way to authenticate new clients – changed that. 


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 “It was a crazy idea. But what has happened in India is unique” - Nandan Nilekani, Infosys

“No Aadhaar, no Digibank,” Gupta says. Aadhaar’s not the whole story – the bank also makes unprecedented use of artificial intelligence in its call centre, using systems developed by the same people who built Apple’s Siri product – but it is the foundation that allows it to be attempted.

“We are the first bank to create a system that utilizes the whole ecosystem of India Stack,” says Shantanu Sengupta, head of consumer banking for DBS in Mumbai. He says the first phase is a simple banking platform, for fund transfers, bill payments and e-commerce; a second stage will add more products, such as lending and perhaps insurance. Interviewed in July, he would not give numbers about clients or assets, except to say that take-up has been positive. 

Clearly the job is not done yet; as one tech-loving foreign bank CEO notes: “The jury is still out on DBS. They will have to convert those accounts into money.” One Indian banker adds: “They still have to provide a proposition, and that to me is the bigger challenge. Cobbling together advances in the marketplace is insufficient. But the direction is right, and if it evolves, it is good for the market. I wish them well.”

Sengupta thinks the bank is well-positioned for the opportunities that come with a changing environment. “The Digital India push is creating a significant differentiation in the market,” he says. “The government is focusing on minimizing cash and driving financial inclusion and making sure payments are electronic as much as possible. It’s all converging, and we are in the right place at the right time. The model of banking is changing enormously: people don’t walk into branches so easily. “

It is striking that DBS was not impeded as a foreign bank from being an early entrant into this market, and indeed both Sengupta and Gupta say the regulator was helpful and encouraging, offering a level playing field.

One could argue that foreign banks have the most to gain from India’s increasingly digital and phone-led society, since it frees them from the need to build a bricks-and-mortar network that will simply never replicate that of the long-established local houses.

“The intent is transformational,” says Kartik Kaushik, country business manager at Citi’s global consumer bank in Mumbai, of UPI (unified payment interface) and similar initiatives. “If they get the scope of what they have done through to execution, it has the potential not only to transform the P2P (peer-to-peer) segment but the entire ecosystem for payments.” What UPI needs, he says, is more use cases, and time: immediate payment service (IMPS) is considered a huge success today but it only became one after several years of existence. 

“It was a five year journey, ahead of its time. UPI will go through the same process and the potential for disruption is much larger.”

What does it mean for Citi? In a nutshell, good news, because its relative lack of on-the-ground presence in India matters less now. 

“The way I see it, I am a smaller physical participant in the Indian financial ecosystem,” says Kaushik. “So we were the first adopters of IMPS. We went headlong into it because we saw it as value, because my business model is digital: even with a smaller percentage of overall accounts we have a very large percentage of IMPS transactions today.” UPI will be the same. “With the lack of a physical presence, the opportunity is much larger. We want to be a part of it, we want to see its whole scope come alive, and we are prepared to invest in our own use cases,” which in his case means things that make life easier for the consumer. 

If that's true, what happens for the banks that today are dominant because of their huge physical networks? Do they lose out? State Bank of India, by far the biggest, is a special case, but for the rest, there is both opportunity and threat. Ashish Gupta at Credit Suisse believes that the larger private banks, specifically HDFC, ICICI and Axis, are best positioned. Firstly, he says, private banks have always tended to be more nimble in capturing share in new segments, such as consumer lending and credit cards; he says that although they have only 22% of India’s deposits, they have 40% of its consumer loans and 77% of its credit cards. They also have a disproportionate share of digital channels. 

The private-sector banks have been busy, and Credit Suisse argues that digital leaders could see their worth expand 10 times over as they corner greater market share. It also argues that the benefits of digitization could improve consumer banks’ profitability by between 30% and 70%, driven by lower costs on branch banking and transactions, and better revenues from acceleration in customer acquisition, higher cross-sell ratios and a rise in fee income.

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“Our India agenda is to move from thousands to 5 million customers on the back of Digi, and I think we can do it”                               - Piyush Gupta, DBS

The flipside, though, is that these banks are facing a more competitive domestic environment than ever. The RBI has given licences to over 20 new banks, some of them designated purely as payments banks, although Euromoney understands that not all of them have chosen to take up their licences. Most of the new payments banks are fintech players, wallet operators and telcos – a whole new competitive wave that will cause existing private banks to swallow hard. 

Paytm started out in life in 2010 as a simple way to recharge mobile prepaid accounts, a role it still performs, and gradually diversified into Uber taxi payments and simple consumer services like cinema tickets. It became a broad-based mobile wallet system and then, in August 2015, was granted a payments bank licence by the Reserve Bank of India, by which time it had welcomed Alibaba as an investor.

How India's banks are setting up for the tech revolution

India’s leading private banks have been busy, with each carving out niches in particular products. ICICI Bank Pockets, for example, has been the most successful mobile wallet to be launched by a bank to date, and has already been downloaded almost 4 million times. Similar products exist at HDFC (called PayZapp), Axis (Axis Lime) and State Bank of India (SBI Buddy). Pockets allow users to send money to any e-mail ID, mobile number, bank account or even a Facebook friend, to pay bills, top up mobile phones, order food or share expenses. 

ICICI has also been quick to launch NFC cards – like the Contactless system in the UK – and more than 70% of its customer transactions now happen through digital channels.

HDFC, meanwhile, can claim a dominant market share in digital channels, with Credit Suisse estimating its share of merchant acquiring business at 40%, credit cards at 24% and point-of-sale terminals at 31%. It was one of the first banks to establish an internal data warehouse integrated with customer-relationship-management solutions, and it has developed strong analytics and digital infrastructure. 

“This should continue to be its source of competitive advantage over its peers as it would be difficult for its peers to replicate a similar information infrastructure quickly,” says Credit Suisse analyst Ashish Gupta. 

Its PayZapp product claims to be the only payment solution where customers can complete a transaction with just one click, which seems to be something of a holy grail for Indian banks and fintechs, though one wonders how many people are put off by the burden of an additional click or two. 

At Axis, Credit Suisse credits digital with the bank’s success in growing its retail business, which now accounts for 65% of the whole bank. “The digital approach has been a key enabler of Axis Bank’s retail strategy with its retail loan book built from scratch with a focus on internal customers,” says Gupta at Credit Suisse. Examples include the Ping Pay system that works on the IMPS platform for instant money transfer.

Kotak Mahindra Bank has a payment app, Kaypay; an e-commerce platform, Kotak Marketplace; and a mobile app.

At the time of writing Paytm has a subscriber base of 125 million, but it is growing so fast that that number will be out of date by the time you read this, and out of date again by the time you’ve Googled it to see what the fuss is about. 

The payments bank arm is due to launch in the second half of 2016, and has appointed a CEO, Shinjini Kumar, a former PricewaterhouseCoopers partner who led the banking and capital markets practice for India there, and who spent 16 years at the RBI. Merchant and agent acquisition will be headed by Saurabh Sharma, a former Airtel executive. Vijay Shekhar Sharma, CEO of Paytm itself, has said that once it is launched, the bank will target 200 million account holders within a year – much of it by use of the Aadhaar KYC system – and Rs100 billion of deposits.

Within the bank channel, “it plans to focus on earning money by monetizing data captured through the payment transactions done through Paytm,” says Credit Suisse’s Gupta, and this is an important point. Banks’ ability to thrive in the digital environment will depend on their ability to collect, understand and monetize the huge amounts of data that will be generated by the India Stack. As Nilekani puts it: “Data will become the new currency, and financial institutions will be willing to forego transaction fees to get rich digital information on their customers.”

So, for example, credit penetration is very weak in India, particularly at the unsecured level. But if a bank is able to use all the new data that is created by these digital streams, then it becomes much easier to assess creditworthiness, and indeed target potential customers based on their preferences. Consequently, Credit Suisse estimates consumer and SME credit will grow from $620 billion today to $3.02 trillion 10 years from now. Banks like HDFC are already building data warehouses to get ahead of this trend.


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The payment banks generally could have a considerable impact, because as Gupta at Credit Suisse points out, no matter how much digital disruption has hit the banking sector in recent years, the ownership of the customer has always remained with the banks. “However, we believe the upcoming wave of smartphone app-based disruption by payments banks could be quite different in its impact on the banking sector, in that for the first time, the ownership of the customer is at risk for banks,” he says. This has implications for margins, fees, and the ownership of this vital transactional data on the customer.


Nilekani expects a shake-out for Indian banking. 


Bangalore embraces the fintech opportunity

It is hard to go far in Bangalore without encountering a fintech. They are everywhere. They congregate on the upper floors of unpromising-looking liftless buildings, working in line upon line of laptop-cluttered benches, coding and marketing and generally disrupting. Their staff are young, cool and extremely smart.

How this disparate field of innovators interacts with the banking industry is an open question, and a very important one. 

“UPI democratizes the IT infrastructure of how payments work, and that is both good and bad,” says Abhijit Bose, CEO and co-founder of Ezetap, a payments platform. “It will lead to expansion and innovation. Banks that are progressive can use it to their advantage; ones that are more hesitant or defensive, that might be problematic.”

Fintechs can help with that or be an agent for disruption, depending on the bank’s perspective. “Everyone is still trying to figure out their role,” Bose says. “Systems are just coming online now, and the ecosystem is taking shape. In theory, fintechs and banks are very complementary: the RBI has been very specific that only banks can handle money, so we are no threat to them in that sense. 

“However, I’m biased: I think there is a whole group of companies that can drive innovation and take the country to a different level, and that may not be bank-driven.”

RV Ramanathan is an alumnus of Amazon and another Indian fintech, BankBazaar, who went on to found Juspay with a mission to bring the Amazon customer-merchant experience to India. Juspay seeks to make the two-step authentication process (that is, usually a texted password sent to your mobile) as seamless as possible, so that merchants do not experience so many drop-outs when customers get to the payment phase of a transaction.

“There has to be a fundamental rethinking of how banking systems are created to acquire customers in a very cost-effective manner,” he says. 

But while Ramanathan wants to be part of that solution, he does not think he is a threat to a bank. “We want to be an infrastructure company,” he says. “We are not into that competition. We want to create systems that will enable banks to take on the next 10 million customers and to be part of that digital revolution.”

There are already many examples of fintechs and banks working together, perhaps most surprisingly State Bank of India’s comprehensive e-commerce tie-up with Flipkart. There is uncertainty on both sides about who is best to combine with, but it is a better alternative than being in opposition. 

“UPI will revolutionise financial services by bringing more people into the financial system,” Ramanathan says. “They can be better served by banks and fintechs using very clear partnerships.”ICICI has also been quick to launch NFC cards – like the Contactless system in the UK – and more than 70% of its customer transactions now happen through digital channels.

“Today, the commanding heights of the economy are controlled by public sector banks: 70% and SBI alone 20%,” he says. “I think they are in for a difficult time. They are already reeling under the impact of bad loans, and tech disruption is hitting them at the worst possible time when they are under massive government scrutiny.

“My view is that the market share of these banks will come down quite dramatically in the next 10 years, from 70% to less than 50%.”

That, he says, is good for the private banks. “They have three levels of opportunity. One is the normal growth of the economy. Then there’s the market-share loss by the public-sector banks, which they can in some sense replace. And finally there is the deepening of the market, because financial inclusion will take you further. So if somebody plays their cards well, they can grow at 30% to 40% for the next 10 years, compounded.” In terms of? “Assets. By using data, and reducing transaction costs. 

“Now, who will take that? Existing private banks will certainly take a lot of it because they are already there, but it is not clear to me how much they are fundamentally ready to reimagine their operations.”

There will be a lot of reimagining required. “Our view is all this stuff is going to drive transaction costs to zero,” says Nilekani. “And if your big balance-sheet contributor is fee income, then you don’t want to cannibalise that income, so they will face a classic dilemma.”

But private banks that are not prepared to make this trade-off – accepting the loss of fee income, knowing that they ought to be able to make money elsewhere through intelligent use of all the extra data they are receiving – may get left behind, letting newer entrants like Paytm take the opportunity. A huge amount of the banking sector – remittances, fixed deposits, current accounts, credit cards, mutual funds – stands to be disrupted. “There is going to be a definite re-ordering of stuff. It’s all up for grabs. Here’s an opportunity. If you want to go for it, go for it. I’m just watching.”

The driver that led to all this was a simple objective: financial inclusion. No matter what else happens in terms of the ability of that average middle-class Indian to be able to conduct e-commerce with one click and no fees, the whole India Stack initiative will ultimately be judged by whether or not it brought the hundreds of millions of unbanked citizens into the financial mainstream.

Of course, a project of this type and on such a scale is not without its critics. When you put 1 billion people on a single biometric ID card, there is inevitably a sense of concern about what it means for privacy. 

When the Aadhaar Bill was pushed through parliament in a week, many commentators – such as Chinmayi Arun, executive director at the Centre for Communication Governance at National Law University in New Delhi – were unhappy. “Aadhaar has had an invasive and controversial presence well before the government’s attempt to legitimise it,” she said in March. “The safeguards contained within the Aadhaar Bill are appalling, even by very outdated Indian standards. By international standards, they are laughable.”

Surveillance is one issue, but also it doesn’t take a genius to wonder if the vast swathes of data that come with financial inclusion might eventually be passed to the tax office. A strengthening of the tax net could potentially transform the entire Indian economy, but it would not be especially popular.

As for the banks, they don’t have access to Aadhaar data; it only works as a method of authentication. “Is it an available marketing database? The answer is no,” says Kaushik at Citi. “And that’s the right way, because opening up that database would create a lot of unintended consequences and risks. To me, Aadhaar is all about the opportunity to validate.”

Nilekani is certain the positives outweigh any drawbacks. “I think it’s a work in progress,” he says. “The direct benefits can be called a success: there are 280 million Aadhaar-linked accounts and billions of dollars of social security and gas subsidies have been transferred through over 1 billion transactions. 

“If you can take subsidies and make them transactions into people’s accounts, it makes them active. That is the first step to financial inclusion. That, we can declare a success.” 

There is more to come, too: he says the government spends as much as $80 billion annually on different subsidies, all of which will gradually be put on this electronic platform. 

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Another important step in progress is what he calls a Micro ATM, which means that instead of a bank opening a branch in a village, it can appoint a grocery store, so that anybody can go into it and access money using the Aadhaar card for verification. Also, there can be more than one shop in the same village offering the same service, creating competition and driving efficiency. “That’s all inclusion,” says Nilekani.

But there’s more to it than that. “Historically, inclusion in India has been seen as something the government is pushing, because there is no money in it: the transaction costs are too high, the values of the transactions are too low and the fees are not there,” he says. “A market player would prefer to stick with customers who they are able to make money from.

“But what India Stack does is it dramatically reduces transaction costs. So inclusion will happen not just because the government says so but because it makes business sense.

“All the pieces are in place. Now we need to see how the next five years pan out.”