
Chapter 1

Fast growing countries slow down because they have fiscal explosions, fall prey to rent seeking oligarchies and crony capitalists, or simply fail to sustain the pace of productivity improvement

Country has to work out for itself the right balance between state and market o India failed – systematically underestimated the prevalence and the cost of government failure o Intervenes arbitrarily or to correct market failures without clear evidence market is failing – damages resource allocation and stifling business drive o Regarded as one of the worst places in the world to do business
 When justified, still intervenes in a ham fisted way – regulation of land, labor and capital markets example o Intervenes for redistributive purposes but does so ineptly and ineffectively through price controls, thus impairing economic efficiency by distorting relative prices and through costly and corrupt administrative deliveries
 Fails to harness private initiatives in public services like health care and education as it ignores the distinction between paying for services and producing them
 Does not have incentive structures in place for getting government agencies to perform

Does not fully appreciate that private sector v. public sector competition is necessary to improve the quality of provision of public services


Chapter 2
 Even so, growth of 3.5 per cent a year for three decades from 1950 to
1980, mockingly dubbed the ‘Hindu rate of growth’, was a major disappointment..

From around 1980, there was a second marked change of gear to a growth rate of more than 6 per cent a year (4 per cent per head) for the next 35 years (1980– 2015).

From 1947 to 1980, the national political scene was largely dominated by two prime ministers, first Jawaharlal Nehru, and then his daughter Indira
Gandhi.

Why did India fail to achieve rapid growth for three decades after independence (1950– 1980)? o The basic answer is that Indian policymakers acted with a mistaken conception of the role of the state.
 Convoluted regulation of economic activity created large inefficiencies and stifled business drive.
 At the same time, the state neglected to attend to areas where it should have been active.
 In particular, it failed to ensure that poor people could gain access to primary health care and education.

Experience all over the world indicates that the ‘agency problem’ is far more severe in public than in private enterprises. o Public sector managers are often faced with many conflicting objectives and many constraints on their freedom to manage, as well as no serious penalties for inefficient performance. o There is an insoluble problem in reconciling managerial autonomy and public accountability. o Some countries achieve a better compromise than others. India
was among the worst.
2


For 10 years after 1993, growth was 6 per cent a year, higher than the
5.2 per cent rate achieved in the previous 10 years.

Reform was initiated in July 1991 by the Narasimha Rao government. o The thrust of the reforms was to roll back controls in trade, industry, and finance, thereby increasing the market orientation of the economy. o Quantitative import controls on capital goods and raw materials were abolished, import tariffs were slashed, investment licensing was scrapped in most industries, and significant moves were made to open up the economy to foreign direct and portfolio investment.
 Liberalization boosted productivity growth after an initial period of pain.
 Numerous old-style conglomerates got swept aside as more nimble start-ups showed how business could be done.
 In due course, the majority of companies began to deliver a return on capital that exceeded its cost, so corporate savings and investment rose sharply.
 The response brought home the point that India possesses a dynamic entrepreneurial class whose energies had been stifled by the ‘license raj’.

The proximate cause of the slowdown from 2011/ 12 was a collapse of corporate investment. o But there was also another reason for the investment famine.
This was the souring of the investment climate caused by
‘governance failures’. o The government was involved in several major scandals and scams, whose exposure led to a period of policy paralysis.
3

o Many projects that required various clearances to proceed came to a standstill. o Another reason for the crumbling of investment was the worsening macroeconomic outlook. Inflation was around 10 per cent a year for six years from 2008. o As a result, household savings were diverted to gold imports and the current account deficit widened to the dangerous level of
4.5 per cent of GDP in 2011/ 12 and 2012/ 13

National Income Growth o Inclusive (wide growth across the board increase in living standards) o Rapid o Stable (no high inflation, recessions deep) o Sustainable (environmentally friendly)

Market Strengths: o Market interaction achieves economic efficiency o Effective way of coordinating information o Can react flexible to changing circumstances o Incentives promote risk taking and innovation disciplined by test of probability

Market Weaknesses: o Safety net needed for poorest people o Natural monopolies can form o Markets underprovide pure public goods (law order defense) o Externalities occur o Common resources over exploited

Problem with determining when to intervene
4


The implied claim from the ‘Coordination Failure’ argument that planners have the information to work out the economy’s ideal trajectory, and the power to make it happen, was breathtakingly pretentious. Example: Soviet Union and Eastern Europe, India
1947-1980. o Principal agent problem – functionaries may pursue their own agendas rather than public interest, shirk their duties, make deals to benefit specific interest groups o State intervention cause losses due to rent seeking – gov’t intervene by requiring firms to obtain licenses, permits and monopoly rights – productive entrepreneurship displaced

Problem with determining how to intervene o Replace the market
 Problem with nationalization turned out to be that public sector enterprises could not control costs or improve product quality
 Efficiency compromised by inevitable manipulation, cronyism, and interference by government due to closeness of govt n industries
 Distinction between the state paying for public goods and services and the state producing public goods and services

Public production should be restricted to law order justice rights defense stability etc o Regulate the market
 Taxes and subsidies that work with market are to be preferred to price or quantity controls
 Controls are major barriers to flexibility in the prodn/csnmtion patterns -> likely to lead to rent seeking and corruption
5

 Direct income transfers are better way of alleviating poverty than price manipulation

It is about finding the right balance between market provision, state provision, and state regulation. o Thus reform of institutions, including the state itself, matters for growth of TFP. o One specific source of ‘broad’ TFP improvement, which needs to be highlighted, is reallocation of labor between sectors. o A defining feature of underdevelopment is the presence of a
‘dual economy’ in which a large low-labor-productivity traditional sector coexists with a small high-labor-productivity modern sector. o This means there is a lot of scope for increasing TFP by shifting labor from the traditional to the modern sector. In other words, labor reallocation can be a major contributor to rapid growth

Firstly, over time, the pattern of production in organized industry has moved sharply towards capital- and skill-intensive sectors, o such as chemicals, metals, electrical machinery, petroleum refining, automobiles, and engineering products, and away from labor-intensive sectors such as food products, textiles and apparel, leather, wood, furniture, and bicycles.

The second manifestation of the bias against labor is the highly peculiar employment-size-distribution of India’s business enterprises. o The economy has an inordinate number of tiny firms with very low productivity. o This extraordinary size-distribution of firms with a ‘missing middle’ is very different from what is found in East Asia or China

India does not offer an enabling environment for enterprises to enter the market and grow.
6

o The number of permits and no-objection certificates required, o the delays in getting tax refunds, o the large variety of inspectors who have to be faced (and paid off), o the huge problems in land access and conversion, o the enormous difficulties in securing essential services such as water, sewerage, and electricity, o conspire to deter many incipient entrepreneurs
 small firm financing issues o cannot provide collateral – cannot get loans – banks find them unattractice o credit availability is issue – no creditor rights – no registries to help improve information / credit scores

Indias inflexible labor market o Excess supply of low skilled labor / excess demand for skilled labor o India awaits central and state political leaders who have the courage and the powers of persuasion to promote a policy package that increases employment for the very many by reducing job security for the very few, while ensuring a safety net for all.

Price controls and subsidies o Markets for some commodities are distorted in form of govt price controls
 Result is supply of key goods is penalized and demand for them is excessively stimulated
 Difference b/w price and cost met by explicit subsidies through budget
7

 Sometimes they are hidden o Manipulation of price is an inefficient method of income redistribution o Price and reform subsidy should be crucial element of reform agenda

Land title sucks

Govt land regulations suck

Agriculture market fragmented and supply chain weak
 More than half of prodn is wasted – multinational supermarkets would help strengthen but held up by government reluctance to displease the domestic retail trade

Reform package for ag. Would be to dismantle the network of state controls on movement / processing / storage / etc

Too fuckig complicated
Bankruptcy
Distressed firm cannot pay dues but should be given chance to be restructured and to survive
Non viable should be liquidated to enable deployment of assets
Gvoernemtn policies need to solve private collective action failures and promote optimal behavior
In india – bankruptcy laws suck o Company Law and labor law have acted in vicious concert to create phenom of sick industries – bankrupt firms that are not closed down o Creditors cant sell assets and labor is unpaid – resulting in waste of resources
Public private partnerships
Indias physical infrastructure was seen as public sector preserve
8

9
Over time – began to be understood that significant private sector participation is essential to address problems of incentives and efficiency
PPS delivered infrastructure through roads/ power/airports / etc. volume been less than desired
Pros o provides better value for money o private sector has less delays and cost over runs o result in reduced cost and performance b/w incentives o risk sharing results in lower costs of capital
cons o highly complex o value comes only if partnership works smoothly o lack of prep and coordination delays and results in failures / lack of infrastructure o lack of competency in government oversight of bidding process and writing contracts o bid manipulation
going forward – electricity o stop charging (states) cost reflective prices o write off liabilities of state distribution facilities to start fresh o utilities must be privatized and forced to compete under bipartisan regulators and open access must ensue o coal sector should be de nationalized and opened up to competition
going forward – urban facilities o states devolve more revenue to cities

going forward – environment
define property rights
distinction should be made between pollution and resource degradation
need to find balance between conventional growth claims and protection o system worsk against growth bc too slow o against env. bc pricing and regulation are not tough enough o against both bc it is excessively politicalized
carbon tax to raise prices – coal would pay highest tax
10 macroeconomic stability
1.
It means primarily ‘internal balance’, i.e. keeping inflation low and output close to its potential maximum.
2.
a sound fiscal position (‘ fiscal balance’),
3.
a sound balance of payments position (‘ external balance’), and
4.
a sound asset-liability position of financial institutions (‘ financial balance’).
Fiscal problem
1.
The ‘macro’ part is about making the fiscal position sustainable by reducing the size of government deficits and debt.
2.
The ‘micro’ part, which is about moving towards a more efficient structure of taxes, and changing the composition and effectiveness of government expenditure.
1.
Reduction of government expenditure is essential for fiscal consolidation in India. Two features of the economy have to be corrected
10

1.
a) a superabundance of dysfunctional subsidies and b) an excessive degree of state ownership of business enterprises
NBODY PAYS TAXES
 I argue that solving India’s education and health quandary will require a much greater role for the market and the private sector than assumed hitherto.
 Unquestionably, the state must ensure access to education and health care for even the poorest people.
 But it does not follow that these public services have to be delivered by the state and its functionaries
 The poor educational outcomes are the product of inappropriate incentives.
 The faulty incentives relate partly to prevailing pedagogic practice.
 Teaching in Indian schools is curriculum-driven to an absurd degree; the over-riding objective of teachers is to
‘finish’ the curriculum of each year even if the majority of students are falling behind.
 As a result, children move into upper classes without having learned the basics. Only students at the top of the distribution keep pace with the curriculum; the rest become progressively less able to cope and lose interest.
 Even more critical for poor education quality is lack of teacher effort, which again is the product of wrong incentives.
 It seems quite clear that the major reason for teacher absence is an incentive structure that engenders lack of
‘accountability’.
 Government teachers have completely secure jobs.
11

12
 They are strongly unionized and have considerable political clout; and it is, in practice, almost impossible to fire a teacher whatever the degree of delinquency.
 India’s university system needs a ‘regulatory revolution’ that removes the heavy hand of the state and replaces it by much greater decentralization and autonomy.
 The tyranny of central and state governments, and regulatory bodies like the UGC, should be curtailed and their powers confined to making broad policy and certifying that some basic norms are followed.
 An important reason for India’s miserable health outcomes is that it has neglected ‘traditional public health’, whose domain covers items such as immunization, access to safe water and decent sanitation, and nutritional support for children.
 The case for state intervention in health care is prima facie very strong. This is so not only because of powerful equity considerations but also because market failures are much more prevalent here than in many other sectors.
 Three different potential areas of health care can usefully be distinguished:
 ‘traditional public health’ (TPH);
 ‘primary care’, i.e. low-cost, routine, predominantly outpatient care; and
 ‘secondary care’, i.e. high-cost, specialized, predominantly in-patient care.
 The strength of the case for intervention, on marketfailure grounds, is very different in these three areas.
 It is absolutely decisive in TPH, strong in secondary care, and fairly weak in primary care.

13
 Of course, the challenge, as always, is to weigh the efficiency and equity considerations in favor of state intervention against the possibility of ‘government failure’.
 TPH consists, firstly, of state intervention in activities that the market will not finance at all,
 because they are ‘pure public goods’ (for example, drainage of swamps, eradication of pests such as rats and mosquitoes) or
 have very large externalities (for example, immunization, clean water, and sanitation).
 Secondly, TPH is also concerned with state action
 to encourage consumption of so-called ‘merit-goods’ (such as appropriate nutrition for children) and
 to discourage consumption of ‘demerit-goods’ (such as smoking).
 Much of TPH thus relates to preventive as distinct from curative care.
 It certainly requires spending public money and it often requires public delivery as well, since there are likely to be severe limits on contracting for delivery by the private sector.
 It may also involve over-riding of consumer sovereignty.
 Thus, state intervention in TPH is essential because it fills a clear gap in market functioning; on top of that, there is also an equity angle because absence of state action in this sphere is likely to hit poor people particularly hard.
 India has begun to introduce a state insurance system for secondary care, viz. the Rashtriya Swasthya Bima Yojana (RSBY) scheme, which takes roughly a single-payer, Canadian– North European track.
 Another cause of the failure of insurance markets is ‘moral hazard’, the tendency of insurance to change the behavior of the insured in ways that are hard to monitor.

 In primary care, market failures are of much less significance than in
TPH and secondary care.
 Primary care is clearly not a ‘pure public good’ and, in India, it is indeed largely supplied by the private sector. External effects, while present, are not pervasive. So the case for state intervention is not decisive.
 India has several social protection schemes. But two of them take pride of place as pillars of the protection architecture:
 a) food subsidies; and
 b) rural employment guarantees.
 It is hard to resist the conclusion that the TPDS is ripe for abolition if a more efficient substitute could be found;
 and this leads to the thought that the objective of ensuring food security would be better achieved by making cash transfers to people, which they could use to buy food in the market.
 The state could continue with price stabilization via buffer stocks but it could get out of the business of distribution, in which the private sector has a comparative advantage.
 Up to two-thirds of government spending on food subsidies could thus be saved and used for other socially desirable purposes.
Only the adoption of a universal cash transfer scheme with a sizeable per capita transfer could justify dispensing with the NREGS as well as other poverty alleviation schemes
 Conditional cash transfers (CCTs) are a possible solution to the problem of social protection.
 In such arrangements, cash transfers are made conditional on recipients doing specified things.
 It has now become possible to have cash transfers delivered by a secure payments infrastructure.
14

15
 The technological package has three components.
 Firstly, it is now possible to provide people with a biometricallyauthenticated unique identity in the form of a smart card
(named the Aadhar card in India).
 Secondly, there is the drive to persuade people to open bank accounts.
 The essential step of linking the bank accounts to the unique Aadhar cards is also well under way.
 The third element of the package is ‘mobile banking’ that adds to the convenience of operating the Aadhar-seeded bank accounts.
 One of the state’s functions is precisely to coordinate ‘collective action’ in the face of competing interests.
 But a democracy has to operate mainly on the basis of persuasion rather than force; and the complexity of Indian society makes it hard to gain support and consent for state intervention to resolve collective-action gridlocks.
 A related difficulty is that the diversity of Indian society makes it a fertile ground for ‘identity politics’: individuals are susceptible to appeals to put their group identities ahead of their national identity.
 Has led to caste-based and communal political parties
 ‘Social and political awakening’ is the growing self-assertion of many hitherto disadvantaged groups in democratic bargaining and contestation.
 Has had some positive side-effects, though
 ‘Institutional decay’ is the weakening of the state’s capacity for effective and beneficial intervention.

16
 However at present, the state’s ambition vastly exceeds its capabilities. So, solutions will have to focus on moderating the former as well as enhancing the latter.
 Since the Indian state is over-extended and over-burdened, it needs to open up production to the private sector more than it has done so far, while at the same time improving its capacity to regulate private sector activities (in other words, learn ‘to steer, rather than to row’).
 One potential way forward is greater decentralization. There are various services currently administered by state-level authorities that would be monitored better if they were controlled by local governments.
 Internal reforms are essential at both the central and state tiers, and in all branches of government: executive, legislative, and judicial.
 Corruption takes several forms.
 It may be ‘facilitative’ when an official has to be paid speed money to persuade him to do what his job requires of him.
 It may be ‘extractive’ when an official has to be paid a bribe to stop him harassing a citizen on a trumped-up charge or when an official simply steals government money that is on its way to designated beneficiaries.
 It may be ‘collusive’ when an official connives with the bribegiver to look the other way when a law is broken or to actively help in its violation.
 And each of these three types of corruption could be ‘petty’, involving small amounts of money in the ordinary everyday dealings of citizens with street-level bureaucrats, or ‘big-ticket’, involving huge government contracts worth billions of dollars.
 Big-ticket corruption takes place mainly in government procurement, state allocation of scarce resources, and

17 electoral finance; and often these three channels are interconnected.
 But the cumulative damages of ‘petty’ corruption are likely to be larger
 The ‘gilded age’ decay of the US system did not stop of its own accord.
 It was controlled in the late 19th and early 20 centuries by deliberate public policy choices, such as legislation to curb the power of large monopolies, instigated by the executive and the legislature, working in alliance with political and social movements, especially the Progressive Movement.
 Much credit goes to Presidents Teddy Roosevelt and
William Taft.
 More information and transparency can help because they shift the balance of power in favor of citizens – especially the educated, urbane, politically-active, middle-class
 Streamlining of procedures can also be very useful.
 Thus, the recent initiative to replace multiple inspections of compliance with numerous laws by self-certification combined with random checks is a good idea, since ‘inspections’ are a fertile ground for corruption.
 New technologies of e-governance also have a lot of potential.
For example, there is good evidence that direct transfer of
NREGS wages into workers’ bank accounts has considerably reduced the scope for stealing by intermediaries.
 Corruption in allocation and procurement can be reduced by adopting impersonal devices such as auctions in place of discretionary decisions.
 In the longer run, India needs to enact legislation
 a) to make political parties internally democratic and
 b) to fund elections from the public purse.

 In the future India may be in the special position of playing a mediating role in global financial issues such as:
 Persistent and high current-account surpluses/deficits of
‘systemically important countries
 Amendment of the articles of the IMF so that it’s supply of SDR can be managed to deal with future international liquidity crises
 Amendment of the articles of the IMF to create a truly global
[non-national] reserve currency; instead of the 4-5 reserve currency world that we seem to be heading into in the 21 st century.
 India needs to balance itself between the WTO and the PTAs delicately
 India urgently needs to devise a strategy to deal with the PTA jigsaw; especially the mega-regional agreements.
 At the same time, India should shift away from negotiating shallow bilateral agreements with all and sundry.
 In intellectual property, many of the country’s dynamic firms, even in the pharmaceuticals industry, now want patent protection in foreign markets.
 In government procurement, Indian firms want to be able to compete on an equal footing for government contracts in foreign countries.
 As regards competition, India’s exporters want competitive markets in foreign countries, and on the import side India would be helped by action against foreign export cartels.
 On investment, India has an interest because outward FDI has become an important feature of the investment plans of its companies.
Mammoth
 Overall, the steps taken by the Modi government
18

 do not create an immediate and strong upside to growth,
 but they do improve India’s ability to achieve faster and, importantly, sustainable growth over the medium term.
 What else is needed
 While demonetisation may have temporarily reduced the stock of black money, it does not dramatically change the flow. Other avenues for hoarding of black money, such as real estate, funding of political parties, need to be rigorously monitored, too
 Although electronic payments picked up immediately after demonetisation, they declined as soon as cash was replenished.
So cash-less transactions will need to be incentivised further
 It remains to be seen whether the increase in tax collections due to demonetisation can be sustained. A steady increase in India’s tax to GDP ratio would indicate success
 First, investments remain a drag on growth. Factors such as
 weak balance sheets of companies and low capacity utilization continue to be deterrents.
 Second, the fiscal health of the states, which are being projected as the engines of growth, needs to improve.
 Over the past few years, though the Centre’s fiscal deficit has fallen, that of the states has risen.
 Third, the twin-balance sheet problem – of corporate indebtedness and bad loans in banking – has been curbing credit growth
Bandhan
Considerations 4 success of .mfi
 x Small ticket size.
 X Non-availability of collateral.
 x Need for frequent and door-step servicing.
19

20
 x Proximity to the client.
 x Understanding of the rural milieu in terms of language, lifestyle and its challenges.
 x Empathy with clients and their needs (which in some ways comes out of experiencing poverty up close and personally).
 x Simplicity of paper work and formalities.
 Pros
 With more than a decade of experience, Bandhan has grown to become the largest microfinance player in India. It needs to take its operations to the next level to grow in scope and scale.
Banking seems to be the obvious step in this direction. There is a large unserved potential market that Bandhan can reach as a bank.
 As an NBFC, Bandhan could not take deposits. However, there were gaps in the market that could only be fulfilled by a bank – for example, taking deposits from those with a surplus and in turn providing loans to those who have a deficit and need money to grow their business.
 Banks collected deposits at 9% and lent out at 13%. As a bank,
Bandhan’s cost of funds would go down. It would be able to obtain funds at 9% in the form of deposits (instead of borrowing from other financial institutions at much higher rates) and would be able to pass on the benefit to customers.
 Bandhan will be able to offer related financial products and services, such as insurance and remittances, which it was unable to provide as an NBFC.
 Bandhan’s existing customer base would be converted to form an extensive part of its new accounts.

21
 Urban banks do not understand the rural market. Along with its deep presence, Bandhan has a marked advantage with its understanding of the needs and workings of this market.
 Cons
 Bandhan may find it difficult to keep up with the statutory requirements. According to the RBI guidelines, all banks had to put 4% of their deposits with the RBI with zero earnings, and another 23% in government securities at around 8% earnings.
 Bandhan would also have to learn treasury operations and risk management – new areas for its team.
 In its transformation to a bank, the risk for Bandhan was that most of its borrowers were unsecured – they had no assets to pledge against their debt.
 Bandhan’s present activities were more concentrated in West
Bengal, particularly in rural areas. After becoming a bank, it would have to grow rapidly across the country and establish a presence in urban centers, where it would have to deal with a diverse socio-economic, demographic and linguistic environment.
 Only three-fifths of current Bandhan employees are educated up to the final grade in school. As it turns into a bank, many employees would require training to deal with more sophisticated financial products.
 Bandhan would also need experienced industry professionals for senior positions in retail banking, treasury and risk management.
 Some of the key questions facing management would be:
 As a bank, Bandhan would have to work at delivering on the objectives of its investors and shareholders. Over time, will Bandhan lose sight of its overarching objective of financial inclusion?

 How would Bandhan resolve issues regarding the merging of existing and new staff? Inculcating the Bandhan “way of life,” comprising simplicity and humility, in the newly acquired staff might turn out to be the biggest challenge.
 Although Bandhan has a proven financial model, when would it be able to break even as a bank?
 Bandhan has been able to achieve a 99.78% repayment rate on its loans. This has been possible because of its unique operating model. As it expands with new branches, products and markets, how will it continue to achieve this rate?
Conditions that allowed bkash to thrive
 Large unbanked segment of the population: Bangladesh had a low
GDP per capita, and a large segment of the population was characterized as “bottom of the pyramid.”
 Growth and urbanization: The rising working class working away from home led to an increase in demand for money transfer from one location of the country to another.
 High mobile phone penetration: Most of the population had access to basic mobile phones. The telecommunications infrastructure was well developed due to the high population density and vast, flat land.
 Homogeneous country: Close links between people across different parts of the country were facilitated by a common culture and language.
 Legacy of innovative solutions to address poverty: Various worldfamous institutions got involved to address the needs of the poor
(Grameen Bank and BRAC). The connections between the firm’s founder and prior innovators facilitated insights into how to provide the bottom-of-the-pyramid segment with financial services.
22

Visionary central bank: The central bank was led by a visionary governor who wanted to achieve financial inclusion for the poor by trying out new private-sector-led solutions
 Customer Segmentation:
 the unbanked customers at the bottom of the pyramid needed a combination of several benefits: convenience, affordability, security, speed, and reach.
 Key Partners:
 The central bank allowed bKash to operate under a bank-led model with the BRAC Bank as the 51 per cent owner, while prohibiting telcos from competing in this space.
 They tapped into the existing agent networks of BRAC and the telcos.
 While its partnership with the Bill & Melinda Gates Foundation and the IFC provided bKash with initial funds, specialized knowledge, and legitimacy, it was the partnership with Fundamo that provided bKash with a secure technology platform.
 Regulatory innovation driven by liquidity imbalance:
 They lobbied for a regulation change to allow agents to deposit funds in any bank, not just a BRAC Bank. While the venture initially benefitted greatly from BRAC, bKash had grown and needed relationships with the rest of the banking sector.
 Technology innovation:
 bKash partnered with Huawei in order to run smoothly on a much larger scale and cater to other services that might be introduced later.
 bKash also started working with IDEO to come up with an application (app) design to propel customers out of
23

Unstructured Supplementary Service Data (USSD) technology
(resources and activities).
 New product innovation: [Low profit margins and difficult to further expand market share]
 bKash moved to payroll payment solutions (e.g., garment manufacturing companies) and new financial services with the
Western Union and MasterCard partnership for overseas remittances
 Regulatory backlash against the dominant player & Limits associated
with the regulatory environment.
 Telcos are a very powerful lobby
 Technological shift:
 A smart app might reduce the need for customers to rely on agents.
 Also, if the society moves to a cashless system, the need for agents will be reduced
 Security and crime:
 There is a possibility that criminals could use bKash services for crimes such as extortion, kidnapping, and money laundering.
Fin tech Mkinsey
 Three building blocks are required:
 widespread mobile and digital infrastructure,
 a dynamic business environment for financial services, and
 digital finance products that meet the needs of individuals and small businesses in ways that are superior to the informal financial tools they use today.
Attractiveness of compte nickel
 Simplicity of Opening an Account:
24

 Open an account in less than 10 minutes with only an ID and mobile phone; no minimum income required. MasterCard® debit cards work immediately.
 Convenience of Opening an Account:
 Open an account in one of the 1300 news agency partners of
Compte-Nickel. Newsagents have very long operating hours, making them extremely convenient for customers.
 Fun and Image of Opening an Account:
 An unconventional way to open a bank account: buy a box in a newsagent. No questions asked, no upselling, no overdraft possibility: you control your budget.
 Simplicity of Use:
 Cash deposit at the newsagents, cash withdrawal at the newsagents (if no ATM available, for example); customer service is available online and over the phone if needed. No feeling of being intimidated or nervous.
 Risk of Use:
 No overdraft possibility and real-time data enable secure online payments.
Challenges and possible solutions
 Note:
 Compte-Nickel dramatically reduced overhead cost by removing brick-and-mortar costs.
 They spend nothing on marketing and have a small staff:
 As of May 2016, 81 employees serve 300 000 accounts, which represent one employee for 3700 accounts. In comparison, an employee of Sociéte Générale serves 266 accounts.
 Compte-Nickel’s customer acquisition cost is €20 when online banks spend €220 to get a client.
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 But both traditional and online banks speculate with their clients’ money to generate more revenue.
 French law forbids payment institutions (legal status of Compte-
Nickel) from doing the same.
 Therefore Compte-Nickel does not earn any money from deposits and only earns revenue from the original purchase price, yearly renewal charges, and transaction fees.
 These fees, about €50 per customer per year, might put a ceiling on scalability.
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