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NITI Aayog and Mastercard report on e-Commerce


NITI Aayog and Mastercard released the ‘Connected Commerce: Creating a Roadmap for a Digitally Inclusive Bharat’ report on digital financial inclusion in India.


GS-III: Indian Economy (Growth and Development of Indian Economy, Mobilization of Resources, Financial Inclusion, Banking Sector)

Dimensions of the Article:

  1. What is Digital financial inclusion?
  2. Benefits of Digital Financial Inclusion
  3. Risks of Digital Financial Inclusion
  4. Highlights of the ‘Connected Commerce’ report
  5. Steps taken in India towards Digital Financial Inclusion (DFI)
  6. Way forwards suggested by the report

What is Digital financial inclusion?

  • Digital financial inclusion involves the deployment of the cost-saving digital means to reach currently financially excluded and underserved populations with a range of formal financial services suited to their needs that are responsibly delivered at a cost affordable to customers and sustainable for providers.
  • “Digital financial inclusion (DFI)” can be defined broadly as digital access to and use of formal financial services by excluded and underserved populations. Such services should be suited to customers’ needs, and delivered responsibly, at a cost both affordable to customers and sustainable for providers.

The essential components of digital financial inclusion are:

  1. Digital transactional platforms enable customers to make or receive payments and transfers and to store value electronically through the use of devices that transmit and receive transaction data and connect to a bank or non-bank permitted to store electronic value
  2. Devices used by the customers can either be digital devices (mobile phones, etc) that transmit information or instruments (payment cards, etc) that connect to a digital device such as a point-of-sale (POS) terminal.
  3. Retail agents that have a digital device connected to communications infrastructure to transmit and receive transaction details enable customers to convert cash into electronically stored value (“cash-in”) and to transform stored value back into cash (“cash-out”).
  4. Additional financial services via the digital transactional platform may be offered by banks and non-banks to the financially excluded and underserved — credit, savings, insurance, and even securities — often relying on digital data to target customers and manage risk.

Benefits of Digital Financial Inclusion

  1. Access to formal financial services – payments, transfers, savings, credit, insurance, securities, etc. Migration to account-based services typically expands over time as customers gain familiarity with — and trust in — a digital transactional platform. Government-to-person payments, such as conditional cash transfers, that can enable digital stored-value accounts may provide a path for the financially excluded into the financial system.
  2. Typically lower costs of digital transactional platforms — both to the provider and thereby the customer — allow customers to transact locally in irregular, tiny amounts, helping them to manage their characteristically uneven income and expenses.
  3. Additional financial services tailored to customers’ needs and financial circumstances are made possible by the payment, transfer, and value storage services embedded in the digital transaction platform itself, and the data generated within it.
  4. Reduced risks of loss, theft, and other financial crimes posed by cash-based transactions, as well as the reduced costs associated with transacting in cash and using informal providers.
  5. It can also promote economic empowerment by enabling asset accumulation and, for women in particular, increasing their economic participation.

Risks of Digital Financial Inclusion

  1. Novelty risks for customers due to their lack of familiarity with the products, services, and providers and their resulting vulnerability to exploitation and abuse.
  2. Agent-related risks due to the new providers offering services are not subject to the consumer protection provisions that apply to banks and other traditional financial institutions.
  3. Digital technology-related risks can cause disrupted service and loss of data, including payment instructions (for example, due to dropped messages), as well as the risk of a privacy or security breach resulting from digital transmittal and storage of data.

Highlights of the ‘Connected Commerce’ report

  • The report identifies challenges in accelerating Digital Financial Inclusion (DFI) in India and provides recommendations for making digital services accessible to its 1.3 billion citizens.
  • Lot of effort has been put to attain DFI and much success on the supply side of DFI has been seen (e-governance, the JAM trinity, Goods and Services Tax, Direct Benefit Transfer (DBT) schemes). However, the break in the digital financial flow comes at the last mile, where account holders mostly withdraw cash for their end-use.
  • Agriculture, with its allied sectors, provides livelihood to a large section of the Indian population. Over the years, agriculture’s contribution to national GDP has declined from 34% in 1983-84 to just 16% in 2018-19. Most agri-techs have not succeeded in digitizing financial transactions for farmers or enabling formal credit at lower rates of interest by leveraging transaction data.
  • Micro, Small and Medium Enterprises (MSMEs) have been a key growth driver for the Indian economy. According to a 2020 Report, the category employed some 110 million people, or over 40% of India’s non-farm workforce. The lack of proper documentation, bankable collateral, credit history and non-standard financials force them to access informal credit at interest rates that are double of those from formal lenders.
  • The surge in digital transactions has increased the risk for possible security breaches, both for consumers and businesses.
  • With the onset of the pandemic, there is an increasing need for transit systems to be further integrated with contactless payments in India. Globally, the trend is toward open-loop transit systems, with interoperable payment solutions allowing travelers to switch between different modes of transport with a connected payments network.

Steps taken in India towards Digital Financial Inclusion (DFI)

  1. Jan Dhan-Aadhar-Mobile (JAM) Trinity – a combination of Aadhaar, Pradhan Mantri Jan-Dhan Yojana (PMJDY), and a surge in mobile communication has reshaped the way citizens access government services.
  2. Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development (NABARD) have taken initiatives to promote financial inclusion in rural areas such as Opening of bank branches in remote areas, Issuing Kisan Credit Cards (KCC), Linkage of self-help groups (SHGs) with banks, Payment Infrastructure Development Fund (PIDF) scheme, etc.
  3. The National Payments Corporation of India (NPCI), digital payments have been made secure, compared to the past with the strengthening of the Unified Payment Interface (UPI).
  4. The Aadhar-enabled Payment System (AEPS) enables an Aadhar Enabled Bank Account (AEBA) to be used at any place and at any time, using micro-ATMs.
  5. The Reserve Bank of India has undertaken a project titled “Project Financial Literacy” with the objective to disseminate information regarding the central bank and general banking concepts to various target groups, including, school and college going children, women, rural and urban poor, defence personnel and senior citizens.

Way forwards suggested by the report

  1. For market players, it is critical to address the gap on the demand side by creating user-friendly digital products and services that encourage the behavioral transition from cash to digital.
  2. Strengthening the payment infrastructure to promote a level playing field for Non-Banking Financial Companies (NBFCs) and banks.
  3. Digitizing registration and compliance processes and diversifying credit sources to enable growth opportunities for MSMEs.
  4. Building information sharing systems, including a ‘fraud repository’, and ensuring that online digital commerce platforms carry warnings to alert consumers to the risk of frauds.
  5. Enabling agricultural NBFCs to access low-cost capital and deploy a ‘phygital’ (physical + digital) model for achieving better long-term digital outcomes. Digitizing land records will also provide a major boost to the sector.
  6. To make city transit seamlessly accessible to all with minimal crowding and queues, leveraging existing smartphones and contactless cards, and aim for an inclusive, interoperable, and fully open system.

-Source: PIB

April 2024