Building a Resilient Digital Financial Ecosystem through Meaningful Inclusion

Building a Resilient Digital Financial Ecosystem through Meaningful Inclusion

COVID-19 has left a tangible impact on the financial sector’s key functions by posing several operational challenges—obstruction in physical payments, delayed collections, a dip in customer acquisitions, and other liquidity related stresses. Overcoming these challenges warrants a radical shift in the way financial institutions operate. The pandemic has exposed the urgency of the situation. Against this backdrop, we must consider the importance of this digital transformation in enabling finance-centric companies and lending institutions in their post-COVID recovery and growth.

Athena Infonomics recently conducted a study with the goal of unpacking the impact of the pandemic on the financial services industry. It was observed that immediate digital responses undertaken by financial companies were crucial in mitigating the impact of the crisis. It also revealed the need for investments in efficient digital infrastructure to facilitate post-crisis recovery. Digital strategies adopted by some financial companies—such as setting up digital task forces and educating customers through telephonic modes of communication on the importance of repayment and the impact of the extended moratorium—helped these institutions with timely recovery. In addition, their investments in digital infrastructure such as active mobile applications and online payment gateways enabled their customers with digital repayments during lockdowns.

Setting the Stage for a Digital Transformation

While significant progress has been made by many financial institutions in adopting digital strategies pertaining to their operations, some traditional lenders are limited in this digital transformation, owing to the legacy associated with their operating models. However, with an increasing number of digital lending platforms in the market, these institutions need to dial up their digital strategy and leverage efficient solutions to remain relevant and resilient in the market.

The pandemic has revealed that crippled physical systems now warrant an effective partnership between traditional lenders and other digital players. With newer digital entrants and growing innovation, it is a crucial time for finance-centric companies with traditional models to initiate external partnerships with other fin-techs and digital innovators. This will ensure efficiency in operations and cost-effectiveness for traditional players, as they can significantly improve their service delivery in underserved regions.

The crisis has also induced a push towards the adoption of digital channels, including online and mobile transactions. There has been a sharp increase in digital transactions and contactless payments globally.1 With an increasing demand for swiftness, security, and efficiency, there is a spike in the overall demand for digital banking solutions. This has created a need for financial institutions with traditional models to introduce products and services that cater to these changing customer needs while improving customer experience. The swift global shift towards a digital financial ecosystem, if not correctly leveraged, will result in disproportionate losses, further impacting these companies.

To achieve this, efficient data analytics and digitally backed management capabilities must be leveraged. External data sources (such as customer postal codes, geo-economic data, and event-based triggers from credit risk bureaus) should be used in combination with traditional, internal, and historical payment-cycle data. In addition, analytics-enabled models, machine-learning techniques, and advanced analytics should be explored to predict credit risk and devise appropriate customer segmentation and treatment strategies.

Investments in innovative solutions such as automation, the “Internet of Things” (IoT), and geospatial analysis should be made to identify segment-specific needs and customize services. Solutions such as contactless banking, digital collection channels, and augmented or virtual reality can be explored to facilitate an end-to-end virtual banking experience. In addition, complete cloud migration across all databases and services could enable a remote working environment while addressing risks associated with privacy and cybersecurity.

The Way Forward: Ensuring Digital Inclusion

Digital transformation may be the suggested way forward, but it is crucial to note that digital inclusion lies at the core of digital transformation. In the Indian context, two major roadblocks on this path are low digital penetration and poor digital literacy. Digital deprivation had been a challenge in India even before the country was faced with the pandemic. Despite the increasing affordability of smartphones and several government initiatives, the share of smartphone penetration in rural India is limited. Moreover, internet penetration in the country is capped at 45 percent, as of January 2021.2

Because of these gaps, a significant portion of customers from rural areas—primarily catered to by these traditional lending companies—is still dependent on physical modes of financial operations and transactions. In this case, any attempt at digital transformation at a macro level would not be accessible to a large share of society. It is therefore imperative that the process is gradual and, more importantly, developed in accordance with national policies targeted at digital inclusion. A concurrent movement among traditional financial companies towards digital inclusion and digital transformation will ensure that these organisations remain resilient in the global digital financial ecosystem. When this movement is actualized, everyone in society can have equitable access to the benefits of this transformation.