Financial Access at Population Scale through Digital commons

Formal financial markets don’t cater to the needs of millions of Indians. Access to credit and insurance is predicated upon not trusting the customer. Overtime, verification and process control have been developed as a means of who can access these products and how can they benefit from it. 

For a country as large as India, it also means this access, is restricted. It also means that financial products by their design and delivery, create exclusions. That India has over 400Mn1 people from low-income background with no health insurance cover and the gap in formal credit demand is upwards of a massive 300 Bn$2 tells a lot about the underlying problem of how access to credit and insurance is making households vulnerable to catastrophic health expenses and bottling growth. 

That almost 50% of the annual health expense is out of pocket 3.1 in India and that micro small and medium enterprises are forced to take loans at predatory rates of interest (2-10% a day) tells how formal markets fail millions in India daily. As per the 2018 All-India Debt and Investment Survey (AIDIS), households allocated less than 10 per cent of their wealth towards saving, while more than 40 per cent of households sought loans.

Loans always come with the risk of indebtment (According to the AIDIS 2018, the loan obligation of low-income households as a share of their total wealth, i.e., their debt-to-asset ratio, is very high (39.1 per cent for rural and 549 per cent for urban households)3 and millions in India fall into poverty when they cant pay for their health expenses. 

Also access to credit has a gender angle with women led businesses loan rejection rates3.2 being two times higher than men despite contrary evidence on repayment. COVID put brakes on the financial inclusion pathway India was charting putting a lot of credit/savings activity in distress.

It is not that 400 Mn people cannot pay for any health insurance or are not formal credit worthy, it’s the way formal financial products, with their credit scores and exclusions and eligibilities, have become inaccessible. 

Informal financial products seem to trust millions of low-income Indians better, than the formal ones. Millions of Indians are forced to take loans from their local lenders often sharks, borrow for events where insurance could have helped and save in high risk informal chit funds, making their financial journey always vulnerable . 

With only 6%4 of India’s population paying income taxes, there is a limit to how long access to credit and insurance can be subsidized by the government. Fin-techs have made access easier to an extent but the eligibility barrier and the threat of debt trap looms large as ever.

A people led solution at population scale to the massive need for accessible financial products is simply missing.

Our solution is simple, or as is the phrase "radically simple". We are democratizing credit. 

We are building a credit model without debt, an insurance model without exclusions and a savings model without deposit. We are building a commons’ infrastructure where people have easy access to credit in an insurance mode (no repayment, risk sharing/pooling) via a daily contributions design(savings).

We are building a daily credit demand and supply digital commons financial infrastructure (DCFI) using the principle of risk sharing. This DCFI will stand on the three pillars of Inclusion, Equity and Community.

Inclusion: This DCFI has no pre requisites, gender-age barrier or entry fee and will require having a mobile phone with internet and a UPI account. 

Equity: In this DCFI instead of paying exorbitant interest to the money lender, people will pay a fixed amount daily to a common pool with no requirement of repayment.

Community: We are replacing credit score with participation score in financing of credit demand as a community. We are replacing complex, exclusionary, dehumanizing eligibility and fraud control measures with community governed trust.

People will register on this DCFI and setup a digital wallet. This common pool created by the participating digital wallets will co-finance the demand coming from the participants on a daily basis. Any left-over amount will be returned to the wallets after deducting the infra fees. The person(s) making a demand from the commons pool have to only state the purpose of credit and the amount. The person(s) eligibility to making the demand will depend on how long the person has been participating into the commons. 

The element of profit by means of interest on credit or unused premiums is replaced by a daily participation (staking) in the commons pool via wallets. Participants fund the commons on a daily basis. 

A revolving fund to backstop the commons will be setup to meet the needs of the gestation period. 

We aim to lower the daily wallet staking amount as more people join the platform making access to this common’s money pool, a function of large numbers. 

The DCFI will then be open to other partners, banking houses, non-gnaking financial companies, financial technology companies, insurance companies, etc. to piggy back on and potentially pivot their services too.

Our solution serves the 400Mn+ people (also called as the missing middle by the public policy thinktank paper) and majority of micro and small enterprises of the 64Mn MSME’s in India that are hungry for easy access to credit. A few ground realities from the migrant workers (Yuva's case study during COVID-19 in India5) perspective in India,

● The wages of many had not been paid or in several cases earned wages held and now unable to pay rent, were rendered homeless.Findings revealed that the head of the household in 56.91% of the households was a daily wage earner and 4.6% weekly earners who were immediately affected by the announcement of the lockdown.

● They could not access ration due to delays in implementing inter state portability of ration cards under One Nation One Ration for which the work began in April 20183. We found that 82.78 per cent of the households surveyed had ration cards but only 45.49 per cent were registered within the MMR. 

● They were running out of their savings at a rapid pace. Many needed to mortgage their personal belongings, indebtedness rose sharply and many had to make difficult choices on how to spend the limited money they had.

These people often need credit to finance their health needs, education needs of their kids, capital needs of their small businesses. Formal credit and health insurance are out of their access and often these micro entrepreneurs have to borrow a small amount of money in the start of the day (to buy goods) and return to the lender with anywhere around 10% interest by end of the day. 

They go on living with their lives earning their livelihoods using informal means of credit with a dream of improving their standard of living. They take consumption and business loans from multiple sources often through microfinance and informal money lenders. Often loans taken for non business  purposes like health become the road to indebtment and slipping into poverty for them.

They also often save in informal saving models (called BHISHIS in local language or CHIT FUNDS) to raise money for their needs which are at high risk of disappearing by fly by night operators. 

The digital commons financial infrastructure that we are building solves for the credit/insurance/savings needs of these people to begin with. 

The DCFI brings access to credit without having to pay for interest and without the eligibility conditions that formal markets put. It widens the scope of financial needs that are classified as credit, insurance and savings and are met through a risk pooling design. 

An interest free non-returnable access to credit is something that this populace needs but has never got it. The cost for them is participating into the commons pool via digital wallets and staking their daily contribution.

 DCFI opens up access to credit/insurance like never before helping them escape the drudgery of high interest loans, non-accessible insurance products and unsafe savings. 

We are two co founders Bharath Palavalli and Kumar Shailabh developing this prototype.

Bharath: Bharath has been creating tools and methods (games and simulations) to allow different stakeholders to discuss, collaborate, disagree and function together on creating relevant and usable policy working with different government departments in Karnataka , the Govt of India departments, and with universities and policy training institutes. His tools help stakeholders stand in each other’s shoes and enable them to see different perspectives, and as a result, act differently. City planners can understand and incorporate the needs of marginalized and vulnerable communities, such as communities living in slums, into the city planning process using these tools. Bharat has researched and written in the areas poverty, social protection and disaster management. He has advised urban local bodies, state governments and national bodies on matters of public policy. Bharath has a Masters degree in Computer Sciences and Information Technology, from IIIT-B, where he gained his knowledge of complex adaptive systems, agent-based modelling, effects of technology on social and economic development which later helped him crystallize his idea.Bharat is an ASHOKA fellow and here is his detailed bio.

Kumar Shailabh: Shailabh has been building community based health microinsurance models for the past 18 years. His work in building people led health insurance models has created an high impact health protection products designed with people living in the slums and villages of India with a special focus on women, preventive health and technology. 

Shailabh recognized the need for different communities living in slums and villages of India to have the power and autonomy to manage their own health if they come together as a mutual. With this understanding, he is setting up multi community-led and managed mutual health microinsurance model that is changing the behaviours of low-income families communities in accessing preventive health care services to remain healthy.  In this model, Shailabh, on one hand, is ensuring that the communities have greater access to preventive health care services by organizing value-added services like outpatient network, health check-up camps, a 24x7 helpline that provides members with options to manage their health under medical guidance. On the other hand, enabling communities to govern and take key decisions with regards to the services such as microinsurance contribution, product design health services design, claim approvals, etc. based on their spending capacities.  The design of the model ensures that communities build a risk reduction approach by incorporating promotive and preventive health services. He also foresaw the need to get medicines at the best price for the communities and hence is working to provide medicines at the best rates available. This, in turn, contains the risk of having higher claim rates to sustain the small ticket size (USD 22 /year/family) of the microinsurance contribution .and reduce out of pocket expenses on actual daily health needs. He has brought the entire mutual experience to these communities through a state of the art technology via a mobile app that is available in local languages. Shailabh is also an Ashoka fellow and here is his detailed bio

The closed beta will function through a PWA that has functionalities of a mobile based wallet that allows people to make deposits, vote, participate in decision-making, make requests for credit, and approve credits.

That it requires investment in technology and marketing is where we have to build this out.

At the time of writing this proposal, none. The beta phase will be invite only, and it will be followed by three phases. At the bare minimum, within India, the potential size of users for this is every adult who needs credit. While the B2C focus in phase 1 will revolve around targeting the 400 million people, upon successful adoption by other partners it opens it up for all who need credit.

In phase 1, we will be targeting the Indian market, and as described previously, this can be categorized into three groups, those that are currently unserved, those that are served by the informal markets, and those that are served by the formal markets. In phase 1, it will be a mixture of all three (opportunistic sampling) and will be expanded state-wide by the end of the year.

In phase 2, the aim is to expand to South Asia (between 3-5 years) before opening up to the world in phase 3 (after 5 years).

Following are the reasons for us to apply to SOLVE:

Ours is a digital commons platform for easy access to finance. The model we are proposing upends quite a lot of traditional, conservative thinking around how credit and insurance are designed and delivered. 

We face multiple risks from market players in the informal credit space but also from those in the formal space. We need support in developing this and not be nipped in the bud. We need visibility and support to see this commons model through and also bring partnerships to scale this model.

While we are starting to build for India, we aim to take it to south east Asia and later to the world. We want this idea to be shared with other people and institutions globally. We need to test this under different regulatory regimes and see how this develops as an idea that really paves the way to democratizing credit in India and the world.

We need a lot of support in getting this to the people who really need it and that requires having access to legal counsel, good social media and technology to be able to distribute this at very low cost to ensure its affordability.

While we have not mentioned a lot of technology pieces in our arguments we will be using use AI, Blockchain and India's open digital stack to make this a very scalable digital commons.

Partnerships are key to achieving success in such a model, given MIT Solve's history and the nature of solutions that have been accepted, we feel this is an appropriate ecosystem for us to be part of.

Imagine getting access to credit without high rates of interest and the accompanying debt. Imagine getting access to insurance without the anxiety of exclusions.  Imagine your credit worthiness created by an altogether new paradigm (of community participation)! Imagine a woman getting access to credit without having to prove that you can do business like a man! 

We are democratizing credit. we are democratizing access. We are building a new paradigm of credit access that builds on ancient technology of the commons. Financing based on peoples trust and participation. 

Millions in India will be able to solve for their credit and insurance needs without having to fall into the trap of debt and poverty! Women who generally have more access restrictions will be able to do it with a humble mobile phone!

1. We are removing the opacity around credit worthiness for the end-user.

2. We are shifting from a role of a debtor to enabling crowd based access to credit. Everyone becomes a creditor and no one is a debtor.

3. By removing the concept of repayment, we are enabling lower overhead for all stakeholders in the ecosystem

4. By bringing in a model of participation instead of a consumer-service provider model, we increase trust in the system and change the role to participants.

5. We are creating a digital commons that other stakeholders in the ecosystem can leverage.

Our eventual goal is to ensure that those in need have access to credit (whether through us, through the use of our digital commons, or through other actors switching/pivoting their models, etc.).

1 Year goals

1. Establish Digital Commons that allows for interoperability

2. Enroll multiple stakeholders

3. Prove the concept through a homegrown mobile application (and an SMS based interface)

5 Year goals

1. Have some of the bigger fin-tech and NBFCs in India change their credit-rating mechanisms for individuals (akin to moving away from poverty line to social protection scores and multi-dimensional poverty indices).

2. Tie-ups with actors in the South Asian ecosystem

3. Adoption of the digital commons

Longer term

1. Create a forum of shepherds for the digital commons

2. Change credit scores to participation scores in the forum

Our progress will be measured along three factors using both qualitative and quantitative indicators,

1. Adoption of Digital Commons

2. Adoption of home grown application

3. "Copy cats" through other applications

In this context, often theory of change is used as a marker to understand and define impact metrics. However, as is observed and discussed frequently, theory of change is often post-facto, assumes that there is a causal relationship between effort and outcomes, and that change is either a discrete process or that the change is tractable However, as described previously, we will be tracking our progress using both quantitative and qualitative metrics. In terms of values,

1. We believe in the right to dignity and therefore have changed the power balance to favour those in need.

2. The power of commons is often not harnessed in such a solution space (while we have seen it in the technology space with examples of P2P networking, blockchains, Wikipedia, Tor networks, and torrents), we have seen it work at community scale and not at population scale. This is an attempt to harness the power of commons at population scale.

3. Ordinarily, information asymmetry is leveraged by technology or financial players in order to extract capital, by readjusting this information asymmetry, we are able to increase access to capital, credit, etc.

The technology stack can be divided into three portions,

1. Front facing: User interface through the mobile application and SMS interface. This will be largely built on nodejs and/or fluttr to begin with and then moved into an on demand scalable service as required.

2. Data analytics: Using data analytics for leveraging user behavior and patterns. This will largely be based on Python as the required tooling (including all interfaces for data analytics exist on Python) exists for linking to ML and AI toolkits has already been carried out with synthetic data.

3. Digital Commons Infrastructure: This will largely be built on a native framework either in Rust or Python, with REST APIs being provided in phase 1. In phase 2, we might explore DAOs and blockchain implementations.

Given the nature of the solution and approach, we are inherently equitable, inclusive and are diversity first. The problem space is riddled with inequity as described previously, and the solution takes a commons based approach in order to bring back equity and inclusion in the financial and technology spaces. Interestingly, our approach also opens up inclusion for people who have not been part of formal credit systems due to religious reasons and additionally, by removing entry barriers, we are increasing inclusion in the system. By underpinning participation and anonymized decision making, we embrace diversity by design.

In terms of interne withal culture and practice, as described previously, the two co-founders come with a strong background of ethical practices and that will continue to form the basis for hiring, approach and resolutions in the organisation.

Our business model is similar to insurance principles of risk pooling. Participants to the commons contribute a certain amount which collectively becomes the capital to fund credit requests to the commons on a daily basis. 

Participation to the commons via digital wallets staked every day, is the eligibility criteria for making any credit request, ensuring that there is very little incentive to freeload and reduce the value of the commons. Also as membership to the commons increases, we expect to either reduce the contribution amount or increase the credit amount or increase of number of requests per day, making it attractive to more and more people to join.

While in the prototype and early days in phase one, participation costs could be anywhere between Rs. 10 (12 cents USD) to Rs. 100 (1.2 USD) (based on which group they sign up for), we aim to reduce the eventual cost to Rs. 1 (1.2 cents USD).

A daily fee for running the commons is charged to the collected capital which will be the primary revenue generation method. There will be no entry fee to ensure that there are no barriers for entry. There might be however fee for re-entry when flouting norms to ensure that participants are committed to the rules of the commons. 

We believe the commons will attract a large enough number of people to become viable and to be able to meet the credit needs of the participating wallets. We definitely will need to take this model to the masses using the most of social media in local Indian languages. 

We plan to raise grants to test this prototype. Revenue generation is embedded into the model from day 1 but that will not be enough in the first year. We project that we will generate upto 30% of our first year's requirements though the revenue.

Phase 1 of our model (first twelve months) is aimed at testing some of the assumptions we have made and some of the risks we have outlined. 

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