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Direct collection model (DCM) – bridging the digital divide for the underbanked

A recent story in the papers reported the following remark by a Supreme Court Justice, in the context of the Covid-19 vaccinations: “Wake up and smell the coffee…digital literacy in India is still far from perfect. I am the chairperson of the Supreme Court e-committee and I have seen the problems which afflict it. You have to be flexible and keep your ear to the ground.”

No, this story is not about Covid-19 or vaccination. It is about an aspect of the digital divide. A couple of years ago in an evening gathering, I lost my cool with a city-bred young man, who even after three rounds of explanation, could not understand why a farmer in Kolhui Bazaar – a village in India’s interiors – would not pay his EMI through Google Pay. After all, he said, this is “Digital India”.

This problem has nothing to do with technology, nor does it have to do with smartphones. Technology will ensure faster and wider internet spread. Smartphones will become cheaper and cheaper. But the question is: in remote places of the country, how many of those who use smartphones and cheap internet to watch Bhojpuri movies and shoot Tik Tok videos will use the same resources to pay their EMIs digitally.

The issue is not Technological, it is Psychological. Digital payment methods are mostly linked to bank accounts, and this is a country where for generations rural customers have not found banking operations convenient. Proving a concept in Bangalore does not mean that it will work in Kolhui Bazaar. India is full of Kolhui Bazaars, and therein lies the opportunity.

The model that I am going to talk about in this article traces its roots back to 2007, when I and my co-founder Karunakaran were colleagues at a large Retail Finance Company (let’s call it ABC for convenience). At that time, we were assigned the responsibility of turning around the Two-Wheeler Finance vertical. Very quickly, we realised that the rural portfolio was behaving worse than the urban. As a first step, we stopped the entire rural business. Then we started travelling, meeting dealers, sub dealers, customers, and employees. The two-wheeler business in semi urban towns operates as a hub and spoke model – the main dealer in a town typically has a command area of around 100 to 150 sq. kms, with 8-10 sub dealers. The sub dealer is authorised by the company to service vehicles and by the main dealer to sell vehicles.  In those days, most of these locations would have banks which were marked for out-station cheque clearance.

During our investigation, we realised that it was not the customer, but the company that was responsible for the mess. Customers in rural areas were typically unbanked / underbanked customers. They would be made to open a new bank account so that they could pay their EMIs with cheques. Post-dated cheques (PDCs) were collected with great difficulty, and of course those PDCs would bounce because the rural customer had neither the time nor the inclination to stand in a bank queue to deposit the EMI every month in his account. To add to this, since these were out-station cheques which were late in being processed, by the time their fate was known to the company the customer would be two to three EMIs behind.

Following this fiasco, a collection agent would visit from the main city and create the worst possible customer experience, thereby converting a good customer to an angry customer. Dr Muhammad Yunus in his book “Banker to the poor” has called this out. According to him “Customers are credit worthy – it is banks which are not customer worthy”.

What customers really needed was the facility to pay their EMIs without depending on a bank. So, step by step, pilot after pilot, we created a completely bank-less collection model. Even today, more than 50% of ABC’s portfolio comprises customers who do not use any banking channel for EMI repayment.

Fast forward to 2017, the year I and Karunakaran started WheelsEMI, a two-wheeler solutions company. By this time, almost everyone in the country had a bank account, or at-least a Jan-Dhan* account. NACH (National Automated Clearing House) mandates had replaced cheques. Smartphones and the internet had reached almost every nook and corner of India. But in 2019, when we approached the largest two-wheeler manufacturer in the world with a proposal to set up a bank-less model like the one we had built for ABC, they immediately asked us to do a pilot. We were not surprised – the more things change; the more people remain the same.

Direct collection model (DCM) is a simple yet very nuanced and detailed methodology of repayment involving the customer, the dealer network, the manufacturer and of course us, the finance company. The basic premise it works on is that a loan should not be denied to a customer just because he / she does not have an active bank account. This is especially true when EMIs are small, and customers are earning and spending without having to resort to a bank.

The customer makes monthly visits to the dealership / sub dealership where the vehicle was bought, to pay the EMI. With their long working hours and zero bank holidays, dealerships afford the customer convenience to pay any time of the day or week. For the dealer, the EMI collection becomes a new stream of commission income. Besides, with the customer visiting every month, the dealer can service the bike more often and can also generate reference sales, since the customer seldom comes alone. In the small towns and villages of India, a visit to the dealer is akin to a social outing for which friends or family also come along. For the OEM (Original Equipment Manufacturer), this opens a completely new set of customers to market two-wheelers to.

Enabling this entire process is years of understanding which have been translated into SOPs (Special operating procedures), right from choosing the dealer and sub dealer, to the installation of systems and a sharp set of controls which ensure a seamless operation. The entire process runs on a bespoke tech platform, so that customers experience a contemporary “Digital Interface”.

In the last two years, WheelsEMI has implemented the DCM model at 220 rural locations – a little over 10% of our target of more than 2000 locations. In this period, we faced two Covid related lockdowns during which we encouraged customers to adopt digital payment methods, but very few did it. And even those that did, went back to making payments with the dealer / sub-dealer the moment the lockdowns got lifted. Collection efficiencies for DCM normally hover around an astonishingly high figure of 98%. Although this figure fell sharply during the lockdowns, it made a V-shaped recovery later, something which took many more months in the conventional banking-based repayment models used in urban towns.

The fact that we have now tied up with three of the top OEMs in India to expand this model speaks volumes of its success. And in order to understand the difference this offering is making, one has to only view the incredible testimonials of our rural customers, for whom owning a two-wheeler means more opportunities, better income generation and greater employability.

*Pradhan Mantri Jan Dhan Yojana (National Mission for Financial Inclusion)