Pedestrians and cyclists do not need the high quality roads that car owners need. But once a high-quality road is built, to meet the needs of automobiles, the marginal cost of allowing pedestrians to also use the same roads is insignificant, compared to prohibiting pedestrians from using the roads. of high quality and with separate construction of lower roads. quality roads for them.
The same idea applies to the infrastructure of banking and financial services. To serve high and middle income customers, banks need physical branches, ATMs, apps and online banking. These cost money, which comes from fees charged by banks from customers. The average cost of servicing a simple bank account is around Rs 500 per year. Banks are often forced to serve poor customers by regulators, but are reluctant to do so because they do not make money with these customers and in fact incur costs.
Rs 500 is the wrong benchmark to overcome. The marginal marginal cost to also serve an additional basic account customer, with the existing infrastructure already built for repeat customers, is only around Rs 120 per year, or Rs 10 per month. Even this may not be low enough for a private for-profit financial institution to seek out poor clients. But it is low enough that the government, i.e. the taxpayer, bears the cost of accelerating financial inclusion.
It’s like not imposing a road tax on pedestrians. But the use of the same roads (non-highways) by pedestrians as well as car owners creates positive externalities for both. In case of financial and banking services, it would be efficient for you to pay your housekeeper, driver and sabziwali using digital mobile money, if they could also use the same digital mobile money to buy goods and services which they need, and carry simple financial transactions such as wire transfers without paying transaction fees. Yes, no transaction costs for customers for small transactions.
The switch to digital financial services is intimidating for many people. They don’t find them simple. They are also wary of technology. Yes, the âhuman touchâ will cost money, but much less than providing this service in a bank branch using a dedicated teller or ATM.
Estimates suggest that it will only cost around Rs 4,800 crore per year to service 40 crore customers with basic accounts. This works out to around 5,000 rupees per month for each of the 8 lakh commercial correspondents (CB). But we need a lot more BCs, each doing digital transactions for others not as a full-time activity – for example, kirana owners, chaiwalas, etc. To ensure that the incentives for MLs are attractive enough, they should be encouraged to teach people how to conduct digital financial transactions themselves. BC can be paid for every digital transaction made by someone they teach for a period of, say, 1 to 2 years.
The GoI should bear the cost of transactions associated with basic accounts. One way to do this could be for the government to compensate COs and last mile financial service providers for providing government payments and subsidies to the poor. A small proportion of all direct benefit transfers and other government subsidies earmarked for this would energize the already existing and built infrastructure.
Indeed, this would probably be the cheapest way for governments to ensure that these payments reach the vulnerable, as the costs are only marginal and low. Customers would then pay no transaction costs.
It’s like installing a pedestrian crossing at marginal cost on a busy road, a small price to pay to ensure that the common man can be part of the well-built road infrastructure as well.
Ahmed is Leader, Financial Inclusion, Digital Identity Research Initiative (DIRI), and Chowdhry is Professor of Finance, Indian School of Business (ISB), Hyderabad, and Kumar is Partner, Omidyar Network