Recently, Duvvuri Subbarao, governor of the Reserve Bank of India (RBI), said at the Banking Technology Excellence Awards, ‘World over, there are two distinct models in mobile banking – the bank led model and the mobile operator led model. The Reserve Bank has a clear preference for the bank led model.’
But how equipped are Indian banks to deliver banking services to the unbanked? According to RBI’s own statistics, out of the 600,000 habitations in the country, only about 30,000, or just five percent, have a commercial bank branch – writes Nilabh Jha. Just about 40% of the country’s population has bank accounts, and this ratio is much lower in the north-east of the country. A major barrier to the expansion of appropriate services to the unbanked poor by financial institutions is the cost of providing those services, including administering small loans.
Even though mobiles can be a perfect medium for providing banking services to the unbanked, the RBI still does not allow operators to independently offer banking and financial services. It has clearly separated the role of the bank and the operator. RBI states that it does recognise that mobile telephony could play an important role in the value chain, but it wants operators to only collaborate with banks to provide banking value added services.
Explaining the reason for the decision, the RBI governor said in media reports, ‘First, we want our financial inclusion to be more than just a remittance facility; we want our customers to get minimum services like deposit insurance, access to affordable credit and the payment system which only banks can offer. Second, given the growing concerns about money laundering and financing of terrorism, a bank led model is decidedly safer and more sustainable.’
Compared to conventional delivery models, mobile banking provides a much cheaper delivery option. In Kenya and the Philippines, where a typical transaction through a bank branch costs the bank $2.50 (Rs 115), the same transaction costs only $0.50 (Rs 23) through a mobile phone. There are 2.7 billion people living in the developing world who do not have access to any financial service. At the same time, 1 billion people throughout Africa, Latin America and Asia own a mobile phone. As a result, mobile money services are springing up all over the developing world. According to the GSM Association (GSMA), there are now 65 mobile money platforms operating around the globe, with a further 82 expected to be launched.
M-Pesa in Kenya is perhaps the most famous of these – it has attracted 9.4 million Kenyans in less than three years. In Uganda, close to 1 million subscribers have registered to use telecom operator MTN’s mobile money service, which was launched in March 2009 as a person-to-person money transfer product. The service recorded transfer volumes of over 400 billion Ugandan shillings in its first year of operation.
These are examples of operator led services, where the operator uses its own distribution network to facilitate transactions.
Banks vs Operators
In providing banking services to the unbanked, operators seem to have an upper hand thanks to a very large distribution network spanning almost every village and town in India. The scope of mobile banking can be gauged from the fact that every year, around Rs 25,000 crore is transacted on the network of the country’s largest mobile operator Bharti Airtel alone – by way of recharge coupons, according to a report by the Financial Express. This is not the case with banks that have a limited number of branches. In this scenario, a partnership between banks and operators will be the right approach.
‘Today, if you look around, you will find that mobile top ups are available everywhere, while there are only about 40,000 bank branches in India. There would be another 60,000 post offices and similar banking institutions, so all in all there are 100,000 access points for the banking system whereas there are 1.5 million telecom retailers in the country. So, operators are in a unique position today to take on the role of banks. Operators’ select retailers can take deposits and transfer the amount to a virtual wallet, which can be used to either directly withdraw money, to transfer it for any purchase, or to make any other payment,’ suggests Ritesh Andley, director, product marketing, Utiba.
The operator community is still hopeful that the initial cautious approach of the RBI will give way to a more open one after some success is visible on ground. Rajat Mukherji, head, corporate affairs, Idea Cellular, says, ‘It is work in progress and we hope for a more open approach in the near future.’
Meanwhile, banks have already started rolling out services, but currently that is limited to providing additional convenience features to the already banked. For example, State Bank of India has recently commercially launched a mobile banking application, which provides its customers with the ability to carry out transactions using their mobile phones.
Steps in the right direction
RBI has taken several steps which seem to be in the right direction. It has defined the role that it will play and also that of the telecom regulator (TRAI) in mobile banking in the country. TRAI will deal with all interconnection issues while RBI will look into banking aspects such as the maximum amount transacted per day, know-your-customer guidelines and verification criteria.
The government has already approved the framework for introduction of such facilities by banks. In fact, banks have been advised to start mobile banking services in rural areas by July 31, and complete rollout by the end of next year. This happened after the government accepted the report of an inter-ministerial group led by a committee of secretaries.
One factor that telecom operators can be happy about is the prepaid instrument, where the regulator has allowed semi-closed wallets to be operated by telcos. Prepaid instruments are virtual wallets where consumers can store money (the way they store air time), and can use this money to buy pre defined services such as utility bill payment and services offered by the operator itself.
Since mobile money services are meant for the unbanked, who are mostly uneducated and have just moved to the mobile platform, there is the challenge that they will be overwhelmed by the technology and might end up opting out of the service. Educating consumers about how the system works will be one of the biggest challenges for banks and operators alike.