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mCommerce enabling financial inclusion

Thought Paper

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mCommerce enabling financial inclusionFinancial exclusion – a background

Across the developed world, access to financial services is largely ubiquitous. However, the story is quite contrary in the developing countries which house nearly 90% of the world’s unbanked population. In India, the low income group does not have access to basic financial services like saving accounts, insurance, and credit. Reserve Bank of India (RBI) data shows that as many as 139 districts suffer from massive financial exclusion, with the adult population per branch in these districts being above 20,000 and only 3% with borrowings from banks. On the assumption that each adult has only one bank account on an all India basis, only 59% of the adult population in the country has bank accounts and 41% of the population is, therefore,

Financial inclusion has become a buzzword internationally and there are concerns about those excluded from the banking system. Technology is the key for financial inclusion as it can reduce costs significantly and reach the masses. However, all technologies are not suitable for financial inclusion due to issues pertaining to affordability, accessibility, security and privacy. In the last decade, mobile phone technology has emerged as the most potential and well suited channel for financial inclusion. Cell phone ownership has become near ubiquitous in India, with wireless subscriptions in 2014 expected to amount to more than 97% of the country’s population and the subscribers’ base in rural India set to grow at a CAGR of 35%. In fact, rural India has overtaken urban India in terms of both ‘users’ as well as ‘active SIMs’ aided by higher growth in both ‘penetration’ and ‘tele-density’ with figures of 218.9 million rural versus 188.4 million urban mobile subscriptions.

unbanked. In rural areas the coverage is 39% against 60% in urban areas. These statistics, staggering as they are, do not convey the true extent of financial exclusion. Even where bank accounts are claimed to have been opened, verification has shown that a significant portion of these accounts are dormant. Among 203 million households, 147 million are in rural areas and 89 million are farmer households. 51.4% of farm households have no access to formal or informal sources of credit while 73% have no access to formal sources of credit. Among 600,000 habitations, only about 30,000 have a commercial bank branch. The proportion of people having any kind of life insurance cover is as low as 10% and proportion having non-life insurance coverage is an abysmally low 0.6%.

Mobile commerce – the road to financial inclusionLower income class has become the single largest mass of Indian mobile users. Majority of the rural population rely on cash to conduct all financial transactions. The ratio of cash transactions is as high as 65% of total transactions. Japan has proved that smartphones are not necessarily the only devices needed for mobile payment. Kenya’s Mobile money system, M-PESA, is another good case study, more so because Kenya’s 61% population is unbanked. Thus, with a confluence of favorable factors such as large and increasing mobile user base, the Unique Identification Number (UID) project of Government of India, Aadhar, along with the support from RBI, mobile money provides an opportunity for financial inclusion to the unbanked section which lies closer to the base of the pyramid. Mobile Commerce offers an alternative banking system that provides access to formal financial services to the unbanked by creating mobile wallet which provides a safe storage for their money

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and gives them a medium to transact the money without physical exchange of money at much lesser cost. By turning each mobile phone into a quasi-bank account it will provide better alternative transaction mechanism to the expensive formal banking system that will make transaction as convenient and cheap as dealing in cash.

Solution models

There are two distinct models – one which requires a collaboration between the bank and the mobile service provider which can be called the “bank led” model as the customer would need to have a bank account with the corresponding bank in this case, and the second which can be called as the “mobile operator led” model and would be centered around the concept of “mobile wallet”. The “bank led” model would help financial inclusion to be more than just a remittance facility. It would ensure customers get minimum services like deposit insurance, access to affordable credit. On the other hand, the “mobile operator led” model using an account on the mobile phone would ensure that customers can have facilities like making utility bill payments and pay over the counter merchants using mobile phone instead of cash.

Recently, there have been examples of both – In January 2011, State Bank of India (SBI) and

Bharti Airtel announced a joint Venture (JV) to usher in a new era of financial inclusion for unbanked India and make available banking services to India’s unbanked millions. The JV is the business correspondent of SBI and offers banking products and services at affordable cost to the citizens in unbanked and other areas. It will engage Airtel’s retailers as Customer Service Points (CSP) all over India in a phased manner. With this, existing and new Airtel mobile customers can visit these outlets to open new SBI bank accounts and avail of other banking products and services available at the CSPs. Additionally, existing SBI customers can also get serviced at these outlets.

In February 2012, Bharti Airtel announced the launch of its mobile wallet service ‘Airtel Money’, a semi-closed mobile wallet service using an account on the mobile phone which allows Airtel customers to pay utility bills, recharge their phones, shop at merchant outlets and make online transactions using their mobile phones. It also allows users to make instant money transfers between one Airtel money wallet to another and to bank accounts across the country. Airtel has partnered with utility providers, state electricity boards, Reliance Energy, Indraprastha Gas, telecom (BSNL/MTNL), insurance (LIC) and mutual funds, Apollo Pharmacy, as well as local chemists and grocery stores.

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A mobile payment (M-payment) service in order to become acceptable in the market as a mode of payment has to meet the following conditions –

Mass reach

The solution must be adopted by small traders, delivery agents etc. for whom transaction volumes or values are low for supporting credit card and similar non-cash payment mechanisms.

Business model

There being several stakeholders in the system, a viable and sound business model needs to be developed that will provide a framework for revenue sharing.

Security and trust

Solution must be compliant with RBI guidelines for end-to-end encryption, fraud protection. The rural and unbanked population at which the financial inclusion is aimed should have trust in the system and should be able to trust the business correspondent with their money.

Simplicity and usability

M-payment application must be user friendly with little or no learning curve for the customer and should also be multilingual with the possible capability of being ‘voice based’ making it even more lucrative.

Universality

M-payments service must provide for transactions between customers (C2C), between business

Challenges and critical success factorsand customer (B2C) or between businesses (B2B). Payments must be possible in terms of both low value micro-payments and high value macro-payments.

Interoperability

Solution must not be linked to a particular s ervice provider. Development should be based on standards and open technologies that allow one implemented system to interact with other systems.

Device independence

Solution must not be device dependent and the compatibility should extend across devices/handsets as even the most basic and cheapest ones would have to be compatible to drive financial inclusion.

No/little requirement for additional infrastructure

Ecosystem required should be primarily set-up based on the existing wireless telecom infrastructure and the current mobile phones used by customers and merchants.

Cost and speed

M-payments should not be costlier than existing payment mechanisms and the speed at which m-payments are executed must be acceptable to customers and merchants.

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Conclusion

References

Mobile phones with their extensive reach can certainly play a critical role in financial inclusion process provided there is a regulatory framework to allow safe and secure transactions. There is a need to devise clear guidelines for banks, mobile operators and end-users and to put in place unified technical standards to make it possible for banks and telecom service providers to jointly use the mobile platform for payments. Currently, the “bank led” model certainly has greater support from RBI as it seems to be safer and more sustainable and would make financial inclusion more than just a remittance facility. However, the “mobile operator led” model should also garner equal attention and support as it definitely has the

1. Reserve Bank of India (2010) Speech - Harnessing Technology to Bank the Unbanked

2. Mobile Payments in India - New frontiers of growth (April 2011) - www.deloitte.com/in

3. The AFI Survey on Financial Inclusion Policy in Developing Countries - www.g24.org

4. Scoping Paper on Financial Inclusion - www.in.undp.org

potential to drive financial inclusion to every corner of the country with greater efficiency and minimal cost. An integration of the two models would perhaps create a powerful solution breaking the barriers of bank/operator dependency and pushing forward interoperability and universality thus leading to a more inclusive society. Additionally, the Unique Identification Number (UID) project of Government of India, Aadhar, will serve as a powerful and complementing instrument for helping the poor establish their identity to meet the Know Your Customer (KYC) norms and would thus strengthen the security perspective of M-Commerce and it enabling financial inclusion.

Vineet Malpani Associate Consultant, Infosys

5. Singh, Sumanjeet, Accelerating Financial Inclusion through Mobile Phone Technology: Opportunities, Challenges and Policy Options for India

6. Carr, Mahil, Mobile Payment Systems and Services: An Introduction, IDRBT

7. Media Centre on Bharti Airtel’s website - www.airtel.in

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