This post is written by Shital Shah, SBI ADC Consultant and Veena Krishnamoorthy, SBI India Country Representative.
The monsoon season in India brings both joy and disturbance. The downpours promise abundant growth in agriculture, while at the same time, come crashing down on weak infrastructure. Muddiness and chaos is a common scene in urban India during and after the rains, and electricity may become even more intermittent, causing further disturbance to daily life. In a very similar way, the business correspondent (BC) industry is pointing its way to both promise and confusion in the Indian financial inclusion sector.
The BCs, which act as agents, form a network which partner banks can draw on to provide financial services. They represent the emerging market for mobile financial services in India. Despite 30-odd BC aggregator companies and many different partnership structures, however, there has been little evidence of profitability and sustainability. A number of factors are causing the resulting muddiness, including evolving regulations, dependencies on bank processes, and platforms using one or a limited set of products.
However, based on SBI’s experience providing advisory services for this market, we believe that this muddiness and chaos can still catalyze much needed growth for a more inclusive financial sector in India. The following outlines our views on how the BC networks can gain a renewed focus on both the opportunity and market for financial inclusion in India.
The market is massive. First, in the context of the current BC scenario, it is safe to say that considerable opportunities still exist in this market. Only 100 million of the potential 600 million unserved customers in India have so far been mainstreamed into the financial ecosystem.
Many BC aggregators have approached the business with a short term financial goal, based on unrealistic return expectations built on the current regulatory push. The regulatory environment in India will continue to be dynamic and evolving, especially given that upcoming elections in 2013 and 2014 will likely affect the leadership of the two key regulatory players, namely the RBI and the Ministry of Finance. We have seen the regulatory regime evolve significantly and progressively with regard to financial inclusion in the last few years, and we expect that the regulators will continue to adjust their policies in the next 12-18 months to gain further clarity and direction. As supporters of this growing ecosystem, we understand the realities of working within evolving regulatory regimes, and are interested in finding appropriate ways to continue building on the momentum and focus around using alternative delivery channels for expanding access to finance.
Despite the problematic nature of the May 2012 regulatory event, the state-level bidding processes, and BCs’ internal challenges, the aggregators still have an opportunity to be successful given that no aggregator is emerging as dominant even within the currently fairly narrow and restricted inclusive finance market context. This is the particular angle that SBI is currently approaching the market.
Based on SBI’s experience elsewhere, the real opportunity will be for the BC aggregator which is nimble and aggressive, but takes a long view in terms of building on steady performance and outlasting the “flash in the pan” competitors who currently dominate India’s BC market. This is especially relevant for a fragmented market such as India – achieving numbers in a country with a vast population does not necessarily denote success. Real success will come when there are high transaction volumes, active account usage, and instantaneous account activation.
Improvement is possible. Our view is that it is critical for BCs across the board to review their go-to-market strategy and address the following.
- Expand the product suite through data driven product development. Ensuring that the BC aggregator provides a suite of products to drive traffic into the BC agents will build a viable business for both parties. In addition, developing a strong MIS to collect information from field and analysis of data which will inform customer-centric products.
- Consolidate the fragmented market by working not only directly with BC outlets but also with localized aggregators. This will have short-term impact on revenue potential as aggregators will need to share with another layer of businesses. On the other hand, it will allow them to quickly scale agent networks and enhance penetration, which is the banks’ goal in working with the BCs. Some banks have developed this type of relationship, but they can neither sustain it nor have the capacity to manage it themselves.
- Improve operations to strengthen the structure for optimal customer experience first. Then focus on massive uptake. One immediate improvement is to develop a streamlined customer acquisition mechanism for the banks, hence moving towards instantaneous account opening. In general, it is useful to continue work on building a strong network offering continuous and reliable services, instead of focusing on customer acquisition without appropriate customer service.
- Scale “right,” not “fast,” through appropriate focus and pace. Scaling in terms of number of accounts will not endure compared to pacing and rolling out the BC network to align operational costs with the ability to drive business volume and maintain visibility with the BC agent. Sharpening the structure of the BC management function by reducing the various tiers within the channel, and only growing it in line with business growth, will also help manage costs. A common flaw in BC operations is a complicated organizational structure leading to inefficient operations and heavy human resource costs. The new policy of clustering introduced by the regulator will make this an easier proposition to consider.
Improvement requires further innovation on the BC business model. India presents a simultaneously fascinating and complex market by which to build a mobile financial services ecosystem which can have implications even beyond what we see happening with M-PESA in Kenya – at a recent BC conference in Pune, a panelist remarked that if an innovation can be proven successful in the difficult test case of India, then it is likely to be successful anywhere else globally. We see that the need is clear, the right technology is available, and that there is a growing momentum around the possibilities for using BC networks to improve financial inclusion. It’s now time to get creative and make the business model work right – typical partnership structures and narrow thinking around the uses of such platforms will not work. We’re looking forward to working through the muddiness to assist banks, BC aggregators, and service providers in finding clarity and determining new pathways to a ubiquitous, sustainable, mass market financial services platform.