India's efforts to expand access to financial services
through the use of digital technologies have received widespread publicity and
praise both inside and outside India. But how effective are they actually in
expanding the use of digital financial services among the huge population of India?
What limits your future growth?
Putting together the available supply and demand-side data,
we find that 35 percent of the adult population in India has ever made or
received electronic payments (as of the end of 2018, the most recent data
available). That's almost two-thirds of adults who are not yet included in
India's digital finance ecosystem. This inequality exists despite the rapid
expansion of bank accounts and digital payment products, in particular, the
Unified Payment Interface (UPI). Our analysis shows that many of these accounts
remain dormant and that the rise in UPI transactions is due to the increase in
their use by current users, rather than their acceptance by new users. While
the number of digital payments users has likely increased over the past two
years, especially in response to the COVID-19 pandemic, our analysis suggests
that large-scale digital financial alienation persists.
Using decision tree methodology
To try to understand what caused such low usage, we used an
adapted version of the decision tree methodology, which aims to identify
potential binding constraints on the supply and demand side. The starting opinion
of this methodology is the price of digital expenses. If use is low despite low
prices, this indicates demand-side constraints; if usage is low and prices are
high, this indicates that there may be supply-side constraints.
Our analysis shows that in India the theoretical cost of
digital payments (service usage fees) is very low and often zero. However,
taking this price at appearance value can significantly underestimate the
indirect and non-financial costs associated with digital payments, which are
often greatest for the poorest (especially as a percentage of income).
The
marginal charge of payment may be zero, but what if you need a smartphone to
make a payment? What if you need to take the bus to the nearest agent? What if
your village has a poor internet connection and you cannot be sure that your
payment will be processed? What if there are social and gender averages that
limit your ability to use your phone to make payments.
We found that in India, the fixed and variable costs of
accessing and using digital payments can account for a significant portion of
the annual income of the poorest. For a person with a lower middle income
(median annual income of $ 922), the fixed costs are nearly 20 percent of the
annual income. This rises to 49 percent of the extremely poor person's annual
income (who earns less than $ 1.50 a day).
Unsurprisingly, there is a regressive
cost to using digital financial services, and for some, the cost of digital
financial services can be prohibitive. These calculations also do not take into
account the time it takes to access a bank account in India; This is especially
important given the level of temporary poverty faced by low-income groups,
especially women.
The Dvara Trust examined the experiences of the poor when
trying to open a bank account and the problems they face, noting that
researchers posing as poor clients spent an average of seven hours opening an
account. An examination of the pay structure and costs faced by people at
different income levels indicate that binding constraints are likely to exist
on both the supply and demand sides.
