For the past decade, India has been at the forefront of developing its digital public infrastructure, paving the way for the next era of inclusive financial development, as exemplified by the India Stack. Despite remarkable advancements, accessing formal credit in rural and low-income households remains a daunting challenge. According to the 2021 Global Findex report, while 45% of adults in India reported borrowing money, only a third did so from formal sources. From the perspective of financial institutions (FIs), reaching these remote and underserved populations is often deemed too costly, primarily due to their geographic isolation and the lack of accessible customer data. Consequently, rural customers are left with limited, often informal, borrowing options.

In early 2022, CGAP, Sahamati, and the India Post Payments Bank (IPPB) recognized this pressing issue and embarked on a partnership to create a transformative solution. Their aim was clear: to ensure every household in India, regardless of their location or economic status, has access to formal lending products. Their strategy? Leveraging the power of technology and the India Stack, particularly account aggregators (AAs), to enable IPPB’s vast rural agent network to facilitate digital loans from various FIs for underserved rural customers who already possess smartphones.

This groundbreaking initiative seeks to revolutionize the way rural Indians access loans, making the process seamless, paperless, and convenient. The goal is to reduce the application and disbursal of loans to under 10 minutes. As they prepare to launch the pilot, the project’s leaders are eager to share lessons from the business model and app design process that have brought them to this point.

Determining a Model: Understanding Rural Households’ Needs

The project began with a critical step: understanding the needs of the target customer segment and assessing whether the proposed solution could meet those needs. A comprehensive survey was developed in collaboration with MicroSave Consulting (MSC) to delve into financing requirements, formal finance usage, and attitudes toward agents and financial institutions.

The survey results revealed that the existing process for applying for formal loans was cumbersome, often taking up to 15 days, requiring significant paperwork, and involving multiple interactions with lenders before approval. However, customers demonstrated trust in formal FIs when it came to borrowing because of their lower interest rates, prompt loan disbursals, and support from bank staff.

Notably, the survey indicated that customers preferred lenders who could assist in the application process, with 90% of respondents expressing a need for help, even if they owned a smartphone. These valuable insights were instrumental in shaping the model choice—a self-service app with agent assistance.

The proposed app promises to reduce customer costs significantly by streamlining the documentation process typically required by FIs. Additionally, it empowers customers to explore various borrowing options. For lenders, the app accelerates the loan documentation collection process and, with data from the AAs, enables them to make more precise loan offers.

Lessons from the Design Process

The development of the lending app posed several design challenges, given the target audience—rural customers with smartphones—often lacked the confidence to complete loan applications independently. Recognizing this, the project team emphasized a simple user experience (UX) combined with agent assistance as the key to successful adoption.

To achieve this, the project collaborated with local app developer Jocata and international designer IDEO. Together, they crafted a user-friendly, intuitive, and visually-driven UX tailored for individuals with low literacy and digital literacy rates. The app’s design prioritized icons over text, eliminating complicated disclosures and ensuring easy-to-understand information at every step of the application process.

Crucially, all regulatory requirements, product descriptions, and branding were meticulously considered during the design phase. Input from CGAP, IPPB, Sahamati, and various lenders ensured compliance with industry standards.

To further enhance customer understanding and trust, postal agents would receive comprehensive training from Jocata. Agents would be equipped to address customer questions throughout the application process, providing information about recourse channels should issues arise post-application.

A Significant Coordination and Commitment

Designing the app was just one facet of the project. Establishing an innovative backend architecture that allowed different partners to integrate seamlessly presented one of the most significant challenges. Jocata had to navigate the intricate process of connecting all FIs to the app through AAs and the open API OCEN (Open Credit Enablement Network). This demanded substantial coordination, commitment, and financial investment from key stakeholders, signaling their willingness to explore new frontiers.

Impacts on Consumer Protection

Apart from the lessons learned during the design process, the project identified vital implications for customer protection arising from the proposed model.

Implication 1: Enhancing Product Transparency and Customer Empowerment

A customer-centric formal lending marketplace can enhance product transparency, allowing customers to make informed decisions. Lenders participating in the ecosystem must consistently and comparably present key product terms and disclosures to customers.

Implication 2: Reducing Fraud and Ensuring Data Privacy

Combining a user-friendly app with agent assistance can mitigate fraud and data privacy risks while providing continuous customer support. A self-service app ensures customers provide data and make decisions themselves, with agents available to answer questions during the application process.

Implication 3: Eliminating Agent Product Steering

A centralized, lender-agnostic app facilitated by IPPB can minimize the risk of agents steering customers towards specific products or providers. When agents receive uniform commissions, irrespective of the lender or loan amount, their incentives to favor particular products or providers diminish.

Replicability Beyond India

While the journey to provide digital-only, customer-centric loans to rural and low-income households is uniquely tailored to India, several lessons from this context can guide efforts in other countries.

Policymakers and regulators must devise long-term strategies for building integrated financial systems and investing in interoperable infrastructure, allowing the formal financial sector to leverage and innovate on these public platforms.

Providers should actively seek innovative partnerships, recognizing that no single stakeholder can create the solution in isolation.

Funders play a pivotal role by connecting stakeholders, facilitating discussions, and providing resources where individual participants may lack incentives.

What Lies Ahead

Offering formal small-value credit to millions of households on this scale is unprecedented, and this pilot project represents the pioneering attempt to do so. Although the journey has been fraught with challenges, the potential to increase the value of financial accounts for low-income customers in India is a compelling motivator. The world eagerly awaits the results of this innovative pilot project.