Digital and Mobile Transfers for Meaningful Financial

Inclusion

Digital Payments: Paving the Way for Greater Financial InclusionSeptember 9, 2014

Mumbai

Ashima GoyalProfessor, IGIDR

Mobiles and Financial Inclusion For financial inclusion: innovations

that meet real needs Accessible, affordable

Prime example: mobile No equivalent financial innovation But applications to mobile transfers and other

financial services

Need based innovations deliver meaningful inclusion Create conditions for the many to contribute to

and participate in growth

Why such applications are far below potential: puzzle

Market Size and Inclusive Innovation

Indian mobile telephony: success story Connections: 37 million in 2001 to 904m in 2014 Not capital intensive; users among all income classes But mobile enabled services lagging—digital money transfers

Market size—inclusive innovations Financial regulations were not fine tuned to this Gaps in infrastructure –externalities

Infrastructure

Broadband Rural teledensity below 50%; Cities: 10% pop

access to Internet Mumbai 2013: Quality worse yet 6 times more

expensive than average US city

Villages lag: RBI survey (2012-13) Electricity coverage 55%; UP, Bihar, Jharkhand,

Assam 77% unelectrified Rural share of ATMs 14.6%; BCs 50% (in 2.21 lakh

villages)

India underbanked; great inclusion potential esp. financial services Villagers 74% savings ac; 34% used loan facilities;

24% remittances; 12%OD; EBT 15%

Table 1: Rural urban differences in teledensity

Table 2: Rural urban differences in teledensityTotal wireless subscribers (in million)

Rural share (%)

Teledensity

Urban teledensity

Rural teledensity

June 2009 427.3 29.5 36.6 87.2 15.4

June 2012 934.1 36.0 77.0 162.5 39.8

March 2014 904.5 40.5 72.9 139.9 43.3

Note: Quarter ending March 2014Source: http://www.trai.gov.in/Content/PerformanceIndicatorsReports.aspx?ID=1&qid=1 

Mobile Banking

Concerns of regulator Prefer bank linked BC model: customer security,

LR more services KYC, AML Unwilling to allow deposit holding by non-banks Some flexibility in adjusting regulations and limits

in response to feedback

Both India and Pakistan started in 2008: bank-led model

India 2.8m transactions (2012): mobile subscriber base 904m

But Pak 10.4m transactions (2012): subscriber base 132m So bank led not responsible for Indian

underperformance: then what?

Table 2: Comparing ICT and mobile use in India and PakistanFixed broadband Internet

subscribers (per 100 people)Internet users (per 100 people)

Mobile cellular subscriptions (per

100 people)

India Pakistan India Pakistan India Pakistan

1991 0.007

1992 0.011

1993 0.013

1994 0.001 0.020

1995 0.026 0.008 0.032

1996 0.046 0.003 0.033 0.052

1997 0.071 0.028 0.088 0.101

1998 0.139 0.044 0.117 0.142

1999 0.273 0.055 0.182 0.188

2000 0.00 0.53 0.34 0.21

2001 0.00 0.00 0.66 1.32 0.62 0.51

2002 0.01 0.00 1.54 2.58 1.21 1.13

2003 0.01 0.01 1.69 5.04 3.08 1.58

2004 0.02 0.03 1.98 6.16 4.70 3.24

2005 0.12 0.52 2.39 6.33 8.00 8.08

2006 0.20 0.79 2.81 6.50 14.52 21.45

2007 0.27 0.79 3.95 6.80 20.16 38.34

2008 0.45 1.25 4.38 7.00 29.53 52.70

2009 0.65 1.54 5.12 7.50 44.12 55.46

2010 0.91 1.83 7.50 8.00 62.39 57.28

2011 1.09 1.74 10.07 9.00 73.20 61.81

2012 1.21 (28.5) 2.15 12.58 (79.3) 9.96 69.92 (96.0) 67.06

2013 1.16 (28.5) 2.62 15.10 (84.2) 10.90 70.78 (95.5) 70.13

Note: Figures in brackets are for the USSource: International Telecommunication Union, World Telecommunication/ICT Development Report and Database, and World Bank estimates.

Mobile Banking

Indian regulations Low initial caps, relaxed over time Reporting and encryption requirements for small

amounts also relaxed over time

Pakistan Branchless Bank accounts—3 levels; electronic

opening allowed to lower TCs Level 0 to encourage L grps; level 3 for business;

KYC, limits customized BB not restricted to MSPs fuel distribution cos.;

Pakistan post and chain stores Activities: A2A fund transfer, P2P fund transfers,

cash-in and cash-out, payments, loans and remittances

Bill payments and P2P transaction: 80% of mobile transactions

Mobile Banking

Both bank linked models; no monetary value stored in mobiles Banks responsible for security and stability; data

records Each transaction through customer account

Key differences Pak: More flexibilities and functions,

customization: innovation Higher initial levels and limits; more income

categories; wider BC universe No mandatory physical presence for customer

registration: TCs Brought in all classes;market size more

creative service devt. Virtuous cycle of cumulative innovation and use

Experience elsewhere

M-Pesa: Kenya versus Nigeria Regulator versus market-led? Kenya 70% (17m) use: Monopoly, accidental critical

mass Nigeria did not take off Out of 200 expts, 4-5 worked out India Airtel money, M-Pesa 2011-12—yet to scale up

Regulatory view Building for the long-run, multiple services,

meaningful financial inclusion Network lock-in: need to foster entry to keep prices

low But have to work with business for success

New trends

New trends: digital money in retail Technology: Near field communication; cloud; new

products innovation; cheap smart phones-- expected sales in India 650m

Large non-bank players: google, apple; bank link—regulatory comfort, cross-border

Common standards for critical mass; coop :costs, economies of scale and scope

Customer behaviour—e-commerce; sharp rise in demand

Standard-setting and cooperation: MSPs and banks

Recent regulatory changes can support these India, Pak experience: encouraging content creation

critical G action: Jan Dhan: condl overdraft; insurance; DBT;

Rupay—fin services NPC-IMPS-P2P ready; UID link; KYC easier ; 150m new

banks accounts—MSPs As policy increases market size it can induce a

virtuous cycle of inclusive innovation

Conclusion Large population large potential

market size Large mobile user base: large market size for services Huge potential business opportunities; low margin

large scale business model Past technology policies have not leveraged this

strength to work with business But changes on the horizon; financial inclusion can

drive innovations

market size induces innovation in affordable products Decentralized so less subject to policy errors,

bureaucratic delays More e-delivery can itself alleviate bottlenecks in

public services

Technological behavioural changes favour ‘active inclusion’ Time ripe for coordinated push on market size

Thank You