This interview provides more information on the topics discussed in our report Innovating for the next three billion: the rise of the global middle class — and how to capitalize on it.
The Indian company FINO (Financial Inclusion Network and Operations) was founded in 2006 to provide a technology platform that enables banks, microfinance institutions and government entities to boost financial inclusion among low-income customers. The company’s highly innovative approach has led to rapid growth and it now provides coverage across much of the country through more than 21,000 transaction points. Here, CEO Manish Khera discusses FINO’s innovative approach to targeting low-income customers.
How would you describe the set of services that FINO offers?
Essentially, we are a technology platform that drives financial inclusion among micro-customers. We partner with clients across finance and government, and have our own network of 25,000 agents who conduct transactions on behalf of our customers across savings, loans, insurance and remittances. We currently serve around 43 million customers and carry out 6 million transactions every month.
What was the unmet need that FINO was trying to fulfill for its customers?
If you look at the banking sector in India, it is largely urban, branch-based and focuses on the higher end of the market. Very few banks in India target low-income customers because they see them as small-ticket, unprofitable and expensive to reach.
There are huge unmet needs for financial services in India, particularly in rural areas. When we started conducting our research for FINO, we found that there were between 400 million to 600 million people in India who did not have access to financial services. If you look at the problem globally, there are roughly 2 billion people who are financially excluded. Our aim with FINO was to figure out how to meet the requirements of this customer segment.
Reaching this distributed, low-income customer base must require a highly innovative approach to the business model and cost structure. How did you go about developing this?
This was not something you could do with an incremental change to the banking business model. It had to be completely redefined. If you consider the delivery cost of financial services, a big component is the physical infrastructure, the branches. By taking that out of the equation, you reduce the cost considerably. To give you some idea of the scale of the cost reduction, the cost of a service from a physical branch of a bank is roughly US$1.25. The cost of doing a transaction from a self-service device like an ATM is around US$0.40. But the cost of doing a transaction from an agent-based system like ours is just US$0.10.
But to achieve that meant setting up a delivery chain that was far less supervised and very low skilled. It also meant working in the hostile conditions of low infrastructure of power and connectivity. And most important, we needed a system that was friendly and robust for the customer, while at the same time adapted to their low literacy rates.
We evolved our system after several rounds of iterations and testing. We developed a paperless system for the customer (no deposit/withdrawal slips, no checks, etc.) and worked on fingerprint technology to validate the customer. To take care of the connectivity issues, this fingerprint technology, along with the different products the customer had taken from the bank, were captured on a smart card so that the customer could go anywhere in the country and operate interoperable even offline. The physical delivery chain was replaced by low-skilled, local agents in dispersed locations that were chosen from the customer’s village and were already trusted by him/her. The agents were given small hand-held devices that could read the card and fingerprint and work without power to capture customer transactions. The transactions were pushed to the backend whenever and through whichever form of connectivity was available. The risk was managed by limiting the value and volume of transactions the agent could do with the customer.
Even for this simple and robust technology to be successful, scale was critical. From the very beginning, we had an objective of serving 25 million customers in a five-year timeframe. So when we were developing our technology architecture, we focused on creating a robust platform that could scale up quickly and support a large number of transactions. Then, we developed an agent-based system where the transaction points sit close to the customer in villages and enable them to access the full suite of products.
And once the infrastructure has been set up, you can scale the business with new agents at minimal additional cost. So our focus throughout has been how we can lower both the infrastructure cost and the operational cost. If you use an agent model like ours, then it is very effective because it takes care of both these costs.
Although there is no question that low-income customers in rapid-growth markets represent a huge potential customer base, many companies struggle to reach this demographic. What advice would you have for companies that are trying to capitalize on this market?
You have to treat this customer base with full commitment and see it as a mainstream part of your business. For a company like FINO, this is all we do. We are not trying to run multiple businesses across multiple customer bases. That makes a huge difference in terms of how you see the customer.
In my view, the key issue is not the complexity or the profitability of the customer. Instead, it is the challenges or limitations on the infrastructure side. I think many companies struggle with that and conclude that this is a market that is too difficult to serve. But by getting the infrastructure and the business model right, they can find that this is a profitable market for them.
In servicing low-income customers in rapid-growth markets, there is sometimes a tension between making profits and serving a social purpose. How do you resolve that tension at FINO?
We are a for-profit company, and I think that this objective helps us to make a lot of decisions in a more effective way. We maintain a very tight and honest approach to the business and develop a culture of doing ''good'' for everyone including our own people and the customers with whom we work. If we cannot do ''good'' for our own people, then we will not be able to do good for the society and the customers whom we are trying to serve. A business that does not make money is not able to attract the right set of stakeholders – clients, employees and shareholders. That limits its ability to scale. For any business focused on micro-customers, scale is critical. Hence, it is that much more important for the business focused on micro-customers to aim for profitability.
What are your goals for the future?
I would say there are several different dimensions of growth for us. One is purely in terms of coverage. Our plan is that, by 2015, we will have grown from 41 million customers today to 100 million in India. We also want to go deeper with customers and offer them a broader range of products, including savings, loans, insurance and remittances. And finally, we want to grow our network and cover more geographies. We are now looking at partnering with other entities around the world to replicate this model as we believe it is a highly effective way of increasing financial inclusion.