Mobile Money

MOBILE MONEY & FINANCIAL INCLUSION: A REALITY CHECK

The history of money has been very interesting; it has evolved from a barter system to
commodity money, from wooden sticks or clay accounting tablets, to precious metals, cowries,
manilas, letters of credit, banknotes, non-precious coins, and now e-money, what counts is the
symbol and the trust. Each medium representing this symbolic value had its heyday. This
evolution has been driven by convenience, trust and security, however the benefits of this
evolution are being enjoyed only by a privileged few. There is a vast majority of population
without access to the banking services.
With a burgeoning population which has crossed the 1.2 billion mark, India, the second
most populous country in the world continues to struggle in its growth story due to the lack of
adequate infrastructure, a primary component of this being the banking sector. It is undisputed
that financial inclusion is the need of the hour. The RBI revealed that 41% of India’s households
are unbanked. 40% of urban population and 61% of rural population do not have bank accounts.
Approximately 67% of all retail transactions are still being conducted in cash. Transfer of money
to parents living in a village without access to banks by youth working in urban cities is difficult.
The connectivity in terms of power and transport sector is also pretty weak in India thus widening
the gap between the haves and the have-nots.
In a survey conducted by www.CGAP.org (Consultative Group to Assist the poor) an
NGO running in 34 countries, it was found that approx. 57% of poor used informal payment
channels like hawala, cash courier, long distance bus / truck drivers or a friend to transfer money
in India. The average cost of such a transfer was 4.6% of the transfer amount also contrary to
the popular perception, sending or receiving money through India Post was expensive, since in
addition to paying 5% of the transfer amount as fees approx. 1% was used up as tips / bribe etc.
Only 13% of the respondents used India Post as a means of transferring money. Banks offered
the cheapest way costing only 3%, however there are associated difficulties of travelling to the
nearest bank, documents required for opening an account, minimum balances to be maintained
and the waiting time in the banks. While most of the respondents overwhelmingly preferred to
make transfers through a bank, they were constrained from doing so. Nearly half of those who
use hawala couriers would prefer not to use them if they could avoid it. Thus, there is a need of
a process of ensuring access to appropriate financial products and services to all sections of the
society at an affordable cost in a fair and transparent manner by regulated, mainstream
institutional players. Financial inclusion plays a major role in helping the rural population avail
the benefits of various government schemes, subsidies and welfare programs.
In India a number of banking innovation schemes related to financial inclusion in rural
areas were started with RBI leading initiative of Lead Bank Scheme in 1969. Most nationalized
public sector banks followed suit with many a schemes having traditional names with a rustic
tinge such as Grama Vikas Kendra, Gramodaya kendras, Sampoorna, Farm Clinic etc which
had the potential for financial inclusion but remained neglected since they are being
implemented lackadaisically. Regional Rural Banks (RRBs) were established in 1976 as a low
cost financial intermediation structure in rural areas. They were expected to have the local feel
and familiarity of cooperative banks with the managerial expertise of commercial banks.
However in practice they borrowed the politicization in lending rampant in cooperative banks
and worst form of unionism from the commercial banks. The low cost structure was also washed
away when a GOI report sought parity of pay scales with commercial banks. As a net result the
RRBs suffered huge losses and their numbers have shrunk considerably.
Commercial banks are
currently losing money in most of
their rural operations. High operating
costs, poor connectivity and low
savings in rural areas does not clear
the cost benefit analysis of
expanding the banking network to
rural areas. The RBI has also set strong Know-Your-Customer (KYC) policies, which prevent the
rural dwellers who lack certain documents which serve as identity proof from being able to avail
banking services. Recently, the RBI governor, Raghuram Rajan has decided to accept the
AADHAR card as identity proof, which will help to tackle the constraints of KYC policies. The
average cost per transaction in a bank costs Rs 50 while those done at an ATM cost Rs 18.
However, banks are not keen on installing ATMs in villages given the problems of electricity,
connectivity and security.
The phenomenal growth of Indian telecom industry, enrolling over 905 million subscribers,
with as much as 40% rural clientele has enabled provision of communication, entertainment &
information based services to the last mile without the need of in-person service delivery. India
is the second largest mobile telecommunications market in the world and is also the fastest
growing telecom network in the world. Innovative mobile applications have offered an opportunity
even to sectors other than to solve challenges of reach, transparency and provision of good
quality services at low costs. India's Associated Chambers of Commerce and Industry has
predicted mobile penetration in the country will be 100 per cent by 2015. The Indian Financial
services sector has also recognized the opportunity to ride on the telecom wave and has greatly
improved the service quality for the financially included through mobile based financial services
– broadly termed M-Banking, M-wallet and M-Payments. However all these are unfortunately
operated by banks or are linked to banks and cater to the financially included.
A mobile phone can be used as a ‘pre-paid instrument’ in one of the four configurations:-
(a) Closed-System Payment Instruments: Generally issued by business establishments
for use at that particular establishment only. These instruments are generally not re-
loadable and do not permit cash withdrawal e.g. gift vouchers, loyalty cards etc.
(b) Semi-Closed System Payment Instruments: Redeemable at a group of
establishments listed out by the issuer. These instruments are generally issued by third
party service providers. These instruments can be issued in re-loadable or non-reloadable
formats but do not permit cash withdrawal.
(c) Semi-Open System Payment Instruments: Can be used for purchase of goods and
services at any card accepting merchant locations. These instruments can be issued in
re-loadable or non reloadable formats but they do not permit cash withdrawal e.g. gift
cards issued by banks
(d) Open System Payment Instruments. Can be used for purchase of goods and
services. These instruments can be issued in re-loadable or non-reloadable formats.
These instruments also permit cash withdrawal.
There are more than 150 mobile money operators in the world, all dreaming of replicating
the success story of Kenya’s M-Pesa, the poster child of mobile money. In five years of
operation, 70 per cent of the adult population in Kenya uses the service and 30 per cent of the
country’s GDP rolls through it. It is worthwhile to see how mobile money was created in Kenya.
M-Pesa
First, let’s briefly revisit M-Pesa’s
early days to help us understand why and
how the service came into being in the
first place. The amazing thing about it is
that in its current form M-Pesa is largely
the creation of its users. It is a standard
practice in Kenya for mobile phone users to purchase their airtime on a per-minute basis, rather
than entering into monthly contracts. At some point several years ago, some users of Safaricom
(Kenyan mobile operator) realized that there was value in the airtime they purchased beyond its
conversational utility. Instead of talk their way through the credit, they could exchange it for a
product or service by transferring it to another Safaricom user. In effect, airtime became a
medium of exchange, i.e. money. Transferring airtime between users distantly was a much
easier task than transferring Kenyan shillings. Airtime in this way became base money in its own
right, due to its more liquid characteristics. A competing currency to the national shilling, issued
not by the Central Bank but by Safaricom, the company. Then the mobile operator’s executives
realized that they could simplify the process further by removing the need to purchase airtime
and Safaricom began issuing credits directly through a network of 40,000 agents. And so M-
Pesa was born as an Open System of Pre-paid Payment Instrument in March 2007. The M-pesa
units don’t earn interest. Safaricom charges small fees for transfers and slightly more substantial
ones for actual redemptions against shillings. Today M Pesa offers other value added banking
facilities like M-Shwari offering overdraft facilities.
M Pesa has spread to other countries, however with not so much resounding success as
in Kenya. In 2008 M Pesa was launched in Tanzania and Afganistan. While it failed in Tanzania,
it was a resounding success in Afghanistan, with even the Afghan government using it to pay
salaries to their policemen deployed in far flung areas, curbing payment to ghost police officers
who didn’t exist. M Pesa spread to South Africa in 2010 and India in 2011, receiving luke warm
response in both the countries. M Pesa expanded to Mozambique, Egypt and Lesotho in 2013
and has recently been introduced in Romania this year.
M Pesa in India
M Pesa success in Kenya is due to the fact that
the Central Bank of Kenya gave M-PESA the space to
grow, innovate and evolve. Regulations weren’t
imposed right from the start, but slowly introduced as
the service grew. Thus initially, the regulations were
lax, but were gradually introduced to avoid risks and at
the same time to promote innovation. M Pesa although also launched in India is struggling to
survive due to a varied of reasons explained below.
Firstly, due to stringent banking regulations, RBI has labelled mobile money a banking,
rather than a telecom product, and therefore requiring strict rules. Any mobile company wanting
to enter the market must partner with a bank. M-PESA in India is a Semi Closed System Pre
Paid Payment Instrument, with the sender necessarily having a bank account unlike the Open
System of Pre-paid Payment System in India. Reserve Bank of India (RBI) is the regulatory and
supervisory body of all such mobile money instruments. Non-banking institutions which intend
to introduce such mobile money instruments in the market need to seek the approval of the RBI
under the Payment and Settlement System Act 2007. Banks and Registered Non-Bank Financial
companies which intend to do the same, need to seek the approval of the Department of
Payment and Settlement System under the RBI.
Secondly, Safaricom had a monopoly (80%) in the mobile telecommunication market in
Kenya before the introduction of M-PESA. In fact, the advent of M-PESA helped Safaricom to
increase its customer base since many Kenyans switched their mobile service provider due to
tha added benefit offered by Safaricom. Indian mobile market, on the other hand, is highly
competitive and no firm has a monopoly or can exercise its dominance in the market. Various
mobile service providers such as Airtel, Uninor, Idea Cellular, BSNL, Reliance, Tata Docomo etc
operate in the market. The only way in which M-PESA can impact the Indian market as much as
it did in Kenya is if the various mobile network service providers in India decide to collaborate
and integrate their efforts for the promotion of M-PESA and if inter-mobile service money transfer
is allowed. However an analysis of the Indian market makes us believe that such a collaboration
is highly unlikely until and unless it is regulated by the formal banking sector or by the Reserve
Bank of India.
Thirdly, there are various substitutes of a Semi Closed, Semi open and Closed System
Pre Paid Payment Instrument available in the Indian market for the under banked such as FINO
PayTech, Western Union money transfers, and the India Post. There is also severe competition
within the mobile money industry itself. Bharti Airtel launched its Airtel Money, Idea cellular
launched MyCash in partnership with Axis bank, The Green Mobile Money which was launched
by PayMate, Corporation Bank and Tata Indicom.
Fourthly, literacy levels in the country. While introducing M-PESA in Afghanistan a country
with literacy levels as low as 28%, an Interactive Voice-Recognition (IVR) system was introduced
which allowed the users to choose the language in which they want to listen to the various
transaction options. A People’s Literacy Survey of India report indicates that India is home to
780 languages / dialects. Although the rural literacy rate in India is slated at 67% much higher
compared to Afghanistan, the lack of education in a common language gives rise to the need of
a system similar to IVR in the Indian market as well which will prove to be quite a task.
Fifthly, success of M-PESA was ultimately about people management, not technology. In
simpler words, M-PESA did well because of its strong distribution network of agents. India is
poor in the quality of its workforce. Therefore, the training of these agents in not only about the
task at hand, but to be equipped with tools to tackle the various problems that may arise which
would differ from region to region, may be culture specific or religion specific is of prime
importance.
RBI and Mobile Banking
The Reserve Bank of India is also contemplating to make it possible
for anyone to send money to another party, regardless of whether that party
has a bank account. All the users would have to have is a mobile phone. A
government intermediary will be set up to facilitate the transactions. The
sender would initiate the transfer via SMS to the recipient′s mobile phone, who would receive a
PIN. The recipient can then enter that PIN into any ATM to get their cash. Here also the sender
requires a bank account. The unbanked are still relying on hawala and cash couriers.
What is not so explicitly stated but is key is Regulation. In under regulated, low banking
penetration, light regulatory touch economies such as Kenya and Afghanistan, M Pesa has
worked well. But in highly regulated and over enthusiastic guidelines markets like India, it has
bombed. M Pesa can’t be re skinned with the addition of 'a' and 'i' and drop of an 'e', to Indian
conditions. Even if the over strict interpretation of Banks role for cash-in/cash-out is maintained,
there are ways to skin the cat, so that 'unbanked beneficiaries' can avail of the service, even
though the sender needs some kind of no frills account to be set up. But this will and has to
change for people to people (P2P) transactions to kick in. Regulatory dispensation has to
accommodate both sender/receiver not having any form of bank account, but following some
form of KYC at either end.
Conclusion
Mobile payment systems hold great promise to improve the financial lives of the poor.
Compared to other banking delivery channels, mobile phone has an advantage in terms of reach
and cost to serve. But problems of cost, complexity, management, and even human behavior
stand in the way of progress. Regulators need a more inclusive and innovative approach to
Financial Inclusion in India. The ability to conduct financial transactions in a timely, secure and
efficient manner is an intrinsic part of our lives. But it is lacking for those who need it to break
out of the cycle of poverty. The statistics of financial inclusion in India are not encouraging.
Dependence on physical cash makes it harder for the poor to manage finances and increases
the marginalization of the poor from the formal economy. It is a risky and costly medium and
harder to save due to behavioral reasons. They are underserved by formal financial services
because the economics of supporting small denominations of cash transactions is not viable for
providers using the traditional paradigm of brick and mortar banking business, issues of last mile
access, identity, risk, behavior, literacy etc., also contribute to costs and increase barriers to
service.
Mobile Money in particular, motivates us to aspire for a world where anybody and
everybody with a mobile phone can access and operate a full suite of financial services. Moving
the needle on this entails diverse technological, economic and behavioral challenges. And the
coordinated collective efforts of diverse stakeholders namely, mobile network operators, banks,
regulating agencies, service providers, technologists and social scientists to develop innovations
and insights to address these challenges.
Refrences:-
(a) www.rbi.org.in / Report of technical committee on Mobile Banking.
(b) www.CGAP.org / Mobile Payment Systems: What can India Adopt from Kenya’s Success
(c) www.mpesa.in
(e) www.wikipedia.in