In our previous blog we looked at an ideal, architectural solution for the community economy from a data cooperatives perspective. That eventually led us to seek out the real world equivalents, and the extent to which the current architecture can be leveraged, and what we can learn from the existing implementations.
When it comes to financial inclusion, we have made massive progress in terms of having people move towards banking. However, much of the discussion around inclusion today fails to explore the behavioural changes of individuals that open these bank accounts. One of the unintended consequences of subsidising bank account opening through policies in the early 2010s, is that in spite of demonetisation much of the informal sector today still relies on cash-based transactions. This means although they have the bank accounts to receive payments, their behaviour has not entirely changed for the era of ‘digital money”. This in turn makes it harder to cater to these users with added services such as insurance or loans. As Tarun Sharma from Serv’d mentioned in his Ted Talk from 2018 — workers in the informal economy are harder to service even when they have the necessary income due to the lack of data on their financial interactions. As we are progressing with our research fellowship and observe the broader trends in financial inclusion and data ownership, we are convinced that a layer for the standardisation, storage and transfer of personal data will be a requisite for the evolution of the Indian startup ecosystem over the next decade.
As of today, the framework for taking individual data online has already begun taking roots. Account aggregators allow individual data to be transferred from one organisation to another for the purpose of verifying credit while Open Credit Enablement Network (OCEN) is creating a framework for startups to plug in with banking facilitators to offer loans. As much as it is pertinent to focus on how to enable data transfers for individuals that are already online: this ignores the fact that much of the nation’s informal sector has no digital trail. This is where we have been looking at the role of networks and cooperatives. More importantly, in order to truly conquer the last mile for financial inclusion, we should look at how data can be generated about individuals whose financial activity does not create any data trails today. In order to be cost effective, these data sources should also be functional at scale. We are increasingly observing the fact that cooperatives in the 21st century, like self help groups in the 20th will be critical to make this transition happen.
Over the course of the last month, we spoke to Trebor Scholz from Platform Cooperativism Consortium, Salonie from Sewa federation and Mohit Dave from International Cooperative Alliance. Our observation was that ‘digital first platforms’ are becoming increasingly pertinent in coordination of labor across organisations. In the absence of data trails, cooperatives are slowly becoming the on-ramps for labor to go digital first. How would this work? To begin with, members of a cooperative could be given identity cards that are Near Field Communication (NFC) enabled. Transactions between members of the cooperatives could occur through the card. Since cooperative members usually have regional hubs, they can be converted to on-ramps for conversion of fiat currency to digital deposits. Once this is done, any individual can use the card to create a record of recurring deposits and interactions within the network of the cooperative. The network effects of large groups of cooperative members using a “phygital” solution for transactions between them could accelerate how they come online. This in turn could accelerate is the creation of credit scores for large sections of the population today that have no access to formal banking.
This translation to ‘digital-first cooperativism’ has already begun. Nilenso for instance is a cooperative organisation from Bangalore that is focused purely on creating software. Platforms like Loomio are creating open-source software to empower communities around the world to have a software layer for decision making within them. Leaving a steady record of financial interactions between members will then empower the creation of credit Unions between members. This idea has already been explored by the United Nations . Unlike standalone cooperative banks, these entities are also data generation units that can scale by linking with other large loan underwriters as the credit worthiness of an individual improves. These cooperatives could then generate revenue by offering access to the data to external financial service providers that are looking to expand their captive base of borrowers. Given the fact that individual identity is linked to the cooperative’s loans, the possibility of a default in these instances should be lower.
In order for financial inclusion to truly occur at scale, we will need technology to bring down costs of servicing end users to a fraction of what it is today (eg: Nokia 1100), distribution models to be drastically changed to optimise for the last mile (eg: LIC plans) and the unit economics to be more inclusive (eg: sachet packaging). Today’s financial inclusion services struggle to scale past a point for the poorest in India due to the lack of data around them. Our observation is that solely opening bank accounts on their own does not translate to “true inclusion” — a case where an individual is able to access the broad spectrum of services typically offered by a bank.
This is where we believe the road to inclusion at scale starts with cooperatives increasing a focus on collecting data about interactions between their members and storing it digitally. The next frontier for banking inclusion in India is not about opening more bank accounts, but rather increasing the count and nature of services such that the poorest in India can access from these services.
We note that the nature of financial services that can be offered can scale up, by working with platform cooperatives as on-boards. Especially in last mile instances where traditional fintech entities cannot cater today. Initially they will be serviced through a cooperative banking model where the platform cooperative that brings these workers together will offer the initial services pertaining to lending and insurances. The reason for this is that the platform cooperative will be able to better collect loans and hold data on the individual. As the cooperative network scales, it can use emergent solutions such as Open Credit Enablement Network to offer more complex services. This encourages workers of the cooperative to leave data trails with the entity (and thereby generating data-sets for other fintech providers to use) and creates a new revenue source for the cooperative. More importantly, knowing the frequency, nature and extent of economic interactions between individuals will help to better the services that are provided to individuals. Mishaps like not possessing data on wage workers could be avoided and we could more frequently track what skill-sets are in demand in the market. This in turn would improve the ability of central planning agencies to better optimise course structures and upskilling programmes in the future. Financial inclusion and financial stability are closely interlinked and in a time when the Indian economy finds itself in shaky grounds, it has become more pertinent than ever before — to focus on how the poorest of the country can go beyond just banking.
References
https://www.moneycontrol.com/news/business/economy/50-bank-accounts-lie-dormant-how-has-modi-govt-fared-in-financial-inclusion-4164061.html
Financial Inclusion of India’s Unorganised Sector | Tarun Sharma | TEDxAssiRd
https://bfsi.economictimes.indiatimes.com/news/fintech/open-credit-enablement-network-to-disrupt-lending-infrastructure/77119687
https://www.itu.int/en/ITU-T/focusgroups/dfs/Documents/10_2016/The%20Role%20of%20Postal%20Networks%20in%20Digital%20Financial%20Services_Formatted.pdf
https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/06SPBUL120312.pdf