Not every bank is constructed with large Corinthian columns and granite facades. In reality, smaller banks are far more numerous and influential than the big boys in the banking industry. When it comes to making financial inclusion a reality for billions of people around the world, smaller banks, telecommunication providers, and retailers are in a great position. Small Bank’s smaller stature makes them more nimble, and their location primarily within rural communities gives them a level of trust that larger banks simply don’t have. Non-banks like telecommunication providers and retailers have great reach to people who live far from bank branches. Non-banks frequently have a trusted relationships with people who have never had a relationship with a bank.
India’s central bank (RBI) is now seriously considering two new categories of financial service providers in India:”Payment Banks and “Small Banks”. This is being considered a viable solution in India where roughly 45% of the population don’t have checking accounts. These new category of “banks” will offer limited services that include accepting deposits, extending credit and making remittances. Their services will be provided throughout rural areas via branch networks, business correspondents and in conjunction with networks of other payment banks. Altogether, these include:
- Supermarket Chains
- Finance Companies
- Non-Banking Finance Companies
- Corporate Business Correspondents
- Public Sector Entities
- Micro Finance Institutions
- Local Banks
- Mobile Telephone Companies
- Private Businesses
- Pre-Paid Instrument Issuers
As such, their influence in rural communities will be considerable, making it easier for rural Indians to access financial services that have previously been unavailable. You might even say the Indian government is banking on the creation of these payment and small banks to make financial inclusion rates blossom throughout the country.
As can be expected, there are still some obstacles that need to be overcome in order for these smaller payment banks to be effective in their mission. On top of licensing and capital requirements, these new actors need to get established, invest in technology and marketing, and scale their solutions. Even for existing actors – telecommunications companies and retailers, and especially for new actors – this will be a significant investment.
One of my concerns about all this is that to maximize the benefit to the financially underserved, these new providers must be “open” for them to maximize their benefit to their customers. Otherwise, it will be virtually impossible for the payment banks and small banks to operate in a cost-effective manner. India has already invested in a National Payment Switch that is interoperable with all the banks, making this openness easier to achieve. But just basic interoperability is a component of a broader open strategy – I’ll write more about this in a future post.
So, this is a very exciting and promising change happening in India. While there are some obstacles and sticky negotiations that need to take place, I’m confident that once payment banks and small banks open their doors, their convenience and ease of usage will make financial inclusion a reality for millions in India.
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