Payments Views


India – A Good Approach for Financial Inclusion

You may have heard about the Reserve Bank of India’s decision to create a new category of “payments banks”. Recently, the Reserve Bank of India approved 11 applicant institutions (out of 41 who had applied) to start the process of becoming licensed. The group includes telcos, non-bank financial institutions, retailers, entrepreneurs and the Department of Posts.

Of course, many countries are moving to change regulatory structures and permissions in the interest of promoting financial inclusion. And that is entirely a good thing. But I am particularly interested in India’s approach, for two reasons:

  • First, in the “if it quacks like a duck” department, I like that they are calling these institutions “banks”. These banks can’t lend – but they can accept deposits and handle payments. After all, that’s what banking is really all about – anyone can lend money, but taking deposits has historically been limited to chartered financial institutions. In the United States (and in many other countries) this is addressed by having prepaid card “sponsors” accept deposits and then escrow them with “real” banks. This is confusing, and seems inferior to India’s more straightforward approach. Call them banks, regulate them appropriately, and then let people move from a “payments only” bank to a full service bank as their financial services needs increase.
  • Secondly, I have an ongoing fascination with India’s Aadhaar program and its connection to payments. Aadhaar is the ​federal government’s ​biometric identification system, which currently has 820 million residents registered – a phenomenal base – somewhere around 2/3 of the population. By all reports, the basic technologies, both the biometrics and the database, are well thought of and functioning well. Various industries – health, elections, etc. and not just finance – are attaching themselves to the database to take advantage of the proof of identity it provides.

For financial services, people are talking about the “JAM Trinity” – this refers to the bank account number (known as Jan Dhan Yojana), the Aadhaar number, and the mobile number. The idea is that linking these three together can provide a solid ​authentication of a consumer and a payments account​.

The National Payments Corporation of India (NPCI) will play a key role here, by enabling the faster payments infrastructure to allow payments to transfer among all banks. (The complexity of India’s banking structure is similar to ours in the U.S. – maybe we can learn from them!) Crucially, this can help to solve the horrendous problem of graft and diverted funds; a staggering amount of government and other aid programs never reach their intended recipients. But it also holds promise for having electronic payment accounts work with minimal fraud, something that will become increasingly important as the use of electronic payments increases.

My progressive friends in the U.S. are appalled by this central, government-controlled identity system. They see only threats to individual control over identity. I recognize this as a challenge, and I doubt that this type of system will find a home any time soon in the developed world.

But in the developing world, the overwhelming need to deliver on the objectives of financial inclusion – by enabling people to have and control a financial account, and to receive payments meant for them into that account – is more important, I think.

I look forward to hearing more about India’s progress in the years to come.

This post was written by Glenbrook’s Carol Coye Benson.

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5 years ago

Just read this eloquent op-ed (by a former chairman of the Unique Identification Authority of India) appealing to the India Supreme Court to not cripple the Aadhar system by severely restricting it’s use:

Ketharaman Swaminathan (GTM360 Marketing Solutions)

“I recognize this as a challenge, and I doubt that this type of system will find a home any time soon in the developed world.” Really? With all this NSA surveillance happening in the USA? Did you know that the UK government attempted a biometric ID system around 10 years ago, blew GBP 850M of taxpayer money and abandoned it for reasons unrelated to privacy concerns? If you really meant the developed world will fail in implementing a system like this, that’s another thing.

Carol Coye Benson
5 years ago

Hi Ketharaman – no, I didn’t mean that the developed world will fail in implementing… I meant that certainly in the U.S., and probably in many other countries, an attempt to have a central government controlled, biometric identity program will fail to gain political approval. That being said, what is happening around the world right now with migration may change the calculus, so it is hard to assess.

Ketharaman Swaminathan (GTM360 Marketing Solutions)

Since I didn’t receive any email alert, I didn’t know you’d replied to my comment until I chanced upon this page today. Unfortunately, I respectfully disagree with your comment!
(1) If I understand the NSA-Snowden story, NSA has been carrying out a lot of surveillance – with or without political approval.
(2) There was political approval for a “central government controlled, biometric identity program” in UK almost 10 years ago. The project was kicked off. Midway through the implementation and after blowing GBP 850M of taxpayer money, the project was terminated due to technical reason. The termination had nothing to do with political approval.