The last milers

Manish Khera looks back at his days with ICICI Bank, more than half a decade ago, with just that small touch of nostalgia. Before quitting the country's biggest private bank, Khera used to work with the Major Clients Group of the lender. "The clients were oil and petrochemical majors…. the Navratnas... and a single deal would be worth about Rs 500 crore," recalls Khera of those government-owned clients, while lounging in the 'chill room' of the start-up he heads, FINO.

"But now, with (FINO's) customers, you not just knock off the crores, but also the zeroes," chuckles Khera, 40. The self-deprecatory description of his business can be misleading. Navi Mumbai-headquartered FINO - short for Financial Information Network and Operations Ltd - is the largest so-called banking correspondent in the country.

Some 10,000 bandhus, as FINO's agents are called, in 266 districts across 21 states cover 100,000 villages to reach over 16 million customers - around two-thirds of whom are banking customers and the remaining consumers of insurance and government services.
And by the year-end, FINO's revenues will more than double to Rs 250 crore from Rs 100 crore last year and the number of bandhus will grow to 25,000.

THE FACILITATORS A clutch of small, but fast-growing private players is connecting the proverbial last mile of financial inclusion. FINO Biggest player in the industry Revenues of Rs 100 crore; expects to grow to Rs 250 crore in 2011-12 Reaches out to 16 million people Customers include 10 banks and six insurance companies Facilitates NREGS payments of Rs 150 crore per month to fi ve million people in AP, Karnataka, Haryana, Madhya Pradesh and Rajasthan Over 10,000 bandhus across the country A Little World Over 10,300 outlets in the country, targets 30,000 locations by the end of the year Has 5.7 million customers, plans to touch 10 million by the end of the year Has operations in every state and Union territories Largest customer is SBI NREGS operations in Andhra Pradesh EKO Among the newer players to enter the segment (Feb. 2009) Over 500 outlets (grocers, pharmacies, stationery shops, small cyber cafs, telecom shops, etc.) across Delhi-NCR, four districts of Bihar and one district of Jharkhand Over 70,000 customers transacting between Rs 15 lakh and Rs 20 lakh everyday across 1,500-2,000 transactions Working with the Bihar Government for disbursal of payments to Accredited Social Health Activist (ASHA) workers OTHERS Software major TCS is working on a pilot project using the banking correspondent model in Gujarat for the Bank of Baroda Venture Infotek, among the country's largest transaction processing companies, plans to enter the segment. Venture Infotek has already provided over 100,000 biometric cards for RSBY in Punjab and Maharashtra, and will be covering around 200,000 BPL households in Gujarat shortly

Not many in corporate India can boast of such growth in either headcount or revenues.

But, then, not many can claim to serve as untapped a market as FINO does and that, too, with little by way of competition. FINO extends its services to the unbanked - there are over 400 million such Indians. Even if it doubles the number of people it reaches out to by the year-end, it would still cover but a fraction of the unbanked population.

FINO is not a bank; it's just a last mile connector. It helps big banks like the State Bank of India (SBI), Punjab National Bank (PNB) and HDFC Bank acquire and service customers who are located far into the hinterland or are too small for most banks to service directly. With a console the size of a brick, FINO'S bandhus facilitate cash withdrawals, deposits, and even loans on behalf of the banks.

Outfits like FINO owe their evolution to a January 2006 decision by the Reserve Bank of India that allowed banks to appoint banking correspondents or agents on its behalf to collect deposits and deliver credit in rural and remote areas. A Little World and Eko India Financial Services are some of the other companies that have come up to connect banks with new unbanked customers.

Industry estimates put the bank accounts serviced by these players at about 18 million. Of these, roughly 11 million are serviced by FINO, the biggest player in the segment, followed by A Little World or ALW with 5.7 million and a million-odd customers by a host of new entrants.

The opportunity has attracted some big names, too: Tata Consultancy Services, India's biggest tech services provider, is said to be working on stealth-mode pilot projects with the likes of Bank of Baroda and PNB using a banking correspondent model.

The business has also attracted others such as transaction processing company Venture Infotek. For the last three years, the Mumbai company has been working on financial inclusion projects across the country, not just providing technology, but connecting the last mile for government projects like the Rashtriya Swasthya Bima Yojna (RSBY), a national health insurance programme for poor households.

Venture Infotek has provided over 100,000 biometric cards for RSBY in four districts of Punjab, as also Maharashtra's Amravati district. Next on its radar are Valsad and Navsari districts in Gujarat, where it plans to cover around 200,000 poor households, says Piyush Khaitan, its Managing Director. The company is also looking at disbursal of funds under the National Rural Employment Guarantee Scheme (NREGS) and related banking transactions.

"This is a market we cannot afford to ignore," says Khaitan. Each of these players has a unique model, though, as FINO's Khera says, it is all about delivering banking operations on the ground. "Card companies think this business is about cards. Technology companies enter this space thinking that they can sell their computers or software. The technology people use to achieve this might be different...," he says.

Abhishek Sinha is a prime example. A true blue geek, Sinha approached the problem of financial inclusion with heavy-duty technology. The entrepreneurial bug bit Sinha in 2002 and he quit Satyam Computer Services to co-found Six DEE Telecom Solutions, a telecom value-added services company. He exited that in early 2007 and founded Eko that September as a "low cost distribution and payment infrastructure to extend and enable instant small value financial transactions". After a false start which saw Eko's first customer, Centurion Bank, being taken over by HDFC Bank and that account going nowhere, Eko geared up operations in early 2009.

Today, Eko's banking services on behalf of SBI are available at over 500 outlets such as grocers, pharmacies, stationery shops, small cyber cafs, telecom shops, among others, across the National Capital Region (NCR), four districts of Bihar, and a district in Jharkhand. "As an organisation, Eko made two important choices. One, to use the cellphone as a medium for the transaction. The other was getting the retailer to be a community banker," says Sinha. And, the model is simple: the customer's cellphone works as a debit card, while the retailer's mobile phone doubles up as a point-of-sale device. Using their phones, customers can draw or deposit cash in a manner akin to a 'talk-time recharging' transaction.

"In less than a year and a half, we have over 70,000-plus customers transacting between Rs 15 lakh and Rs 20 lakh everyday over 1,500-2,000 transactions," says Sinha, adding Eko has transacted more than Rs 20 crore in a total of 230,000 transactions to date, including deposits, withdrawals and money transfers.

Despite such success and the obvious potential for growth, is this an easy market waiting for the taking? The answer is no. Just the logistics of reaching out to rural India can be nightmarish and take years to build. It can be particularly daunting when the task at hand means issuing 30 million cards, like at Venture Infotek's card issuance division. "We were struggling to issue 100 cards a day. We needed to go from village to village and there can be no exact way of doing things," says Khaitan, who admits that the company had to use a lot more of on-ground support to make its efforts successful.

Khera jokes that, thanks to long power outages in villages, FINO has as much expertise in managing inverters and generators as its banking operations. ALW is perhaps the most spread-out banking correspondent company in the country. With 10,300 outlets, it delivers services on behalf of SBI at some of the remotest locations in India-from the Andaman islands to Jammu and Kashmir to Naxal-infested Dantewada, Chhattisgarh. There have been instances when ALW employees carrying cash boxes were abducted.

Still, growth is scorching: the company aims to triple its 5.7-million customer-base by the end of 2010-11 and expand to 30,000 locations. And then, there is the question of margins. None of the bank correspondent companies is profitable. "We have a mandate to operate in Arunachal Pradesh where the population density is 13 people per sq. km. If that's the average, you can imagine that there are areas where there are less than six people," explains ALW Founder Anurag Gupta. "Offering services in such places can be costly."

THE OPPORTUNITY Over 700 million do not have access to a bank account Over 32.5 million families below the poverty line (BPL) are to be provided health insurance under RSBY The Central government's outlay for the scheme is Rs 39,100 crore in 2009-10, a minuscule portion of this passes through private channels like FINO or AWL Just the opportunity for secure highmemory contactless cards for various fi nancial inclusion drives is estimated to be in the region of Rs 400 crore in the next couple of years THE PROBLEMS Cracking rural India is not easy. Companies like FINO and AWL say it's a logistical nightmare Banks are yet to get used to the business correspondent model. Till late 2009, banks were not allowed to charge customers Margins are wafer-thin and as a result, profits are a long way away. Not one of these players has broken even THE RECENT FILLIP In November 2009, RBI permitted banks to charge customers "reasonable fees" for using banking correspondents (like FINO) under board-approved policies. That's likely to boost the margins of these companies and make the sector more viable RBI also allowed kirana stores, medical, and fair price shop owners, Public Call Offi ce (PCO) operators to act as banking correspondents. That's likely to help players like ALW and FINO expand their networks

The payments to the banking correspondent companies are typically modelled on a commission or percentage basis. Public sector banks pay about Rs 10 for every new account opened and a commission of about 0.5 per cent of the value for a cash in-cash out transaction. A fee of about Rs 40 is also paid per active customer on an annual basis.

Companies like FINO and AWL, which provide the technology solutions, get paid a little extra. That's, perhaps, one of the reasons why most of these companies have got into disbursing government funds and entitlements for schemes like NREGS and RSBY. "These schemes provide a steady cash flow in addition to the prospect of adding new customers. Typically, a commission of 1.5-1.75 per cent of the transaction value is given in the NREGS funds, varying from state to state and bank to bank," says an insider in the bank correspondent industry.

FINO, for example, disburses NREGS payments worth about Rs 150 crore a month in states such as Andhra Pradesh, Karnataka, Madhya Pradesh, Rajasthan and Haryana. Eko is working on a pilot project for the Bihar government to disburse payments to Accredited Social Heath Activist (ASHA) workers employed under the Central government's National Rural Health Mission for antenatal and neonatal care. It will start with 500 workers, but the potential is huge: the state has about 800,000 ASHA workers. "That's how big these projects can get," says Sinha, Eko's CEO.

But the key to profits, most agree, lies in leveraging the same customer base to deliver multiple products and services. "The companies that will make profits eventually are the ones that will be able to scale up significantly and cross-sell a bouquet of products," says Khera of FINO. True to his word, his company added remittances as a product earlier this year to a suite already including deposits and insurance. ALW, too, is pushing a remittance service.

The last mile network may be getting ready to ring the till.