Over the past decade, far more people in India have gained access to mobile phones than to banking services. It’s estimated that more than 400 million Indians have mobile telephone connections today and from the beginning of 2009 close to 15 million new mobile users have been added every month. In just the past 6-7 years mobile phones have become trusted and accepted by a large section of society as a means to exchange of information verbally as well as through text menus and messages. The Telecommunications Regulatory Authority of India (TRAI) estimates that while more than 70% of Indians have access to mobile telephone networks, outreach to the rest is happening quickly.  

The formal financial system has been built over the past 150 years and by contrast reaches a smaller portion of India’s 1.15 billion people. Nationwide there are approximately 55 million bank accounts, 14 million customers of microfinance institutions, 42 million members of village-based self-help groups with links to banks, and an estimated 100+ million members of cooperatives that offer financial services.[ii]

India has 850 million people who live on less than $2 per day. At the same time it is emerging as one of the world’s most influential countries. There is strong government interest in expanding financial services, an active microfinance sector, and fast-evolving business and technology sectors. India has all the ingredients for making mobile banking work: a government committed to increasing access; a central bank cognizant of the potential and the risks posed by branchless banking models; a large, sophisticated banking sector; a dynamic and competitive mobile phone industry; and no lack of cutting-edge technology providers. In addition, the relative ease and low cost of getting connected means that mobile telephones have rapidly become more accessible to poorer people than any other service provider network. All over India mobile telephones are being used by poor and rich alike. However, the potential of mobile banking is still largely unrealized.  

Financial inclusion regulations put banks at center

The Reserve Bank of India (RBI) has consistently expressed a strong interest to improve access to financial services for poor people. Three years ago the RBI was amongst the first regulators to issue agent (business correspondent) guidelines in an effort to create space to provide financial services outside bank branches, along the lines of what Brazil and South Africa had previously done. Since then three areas of particular concern - promoting access to finance, protecting customers, and banking sector stability - have shaped RBI’s thinking on branchless banking and mobile banking in particular. But progress has been slow so far. Despite the proliferation of business correspondent organizations that have signed on several million customers, regulatory restrictions on the BC model means that it is difficult to make it profitable. Banks largely regard the use of business correspondents as a corporate social responsibility rather than a business opportunity. As a result, no viable models for the use of business correspondents have yet emerged. Reaching out to the hundreds of millions of un-banked people with financial services does not appear to be happening. The regulator can play a greater role in expanding access by pursuing policies that both make it easier to roll out services and that provide standards to ensure mobile banking is both broadly available and secure. 

In general, the regulator has taken a bank-centric approach to mobile commerce. In October 2008, RBI issued mobile banking guidelines that permit only licensed banks with a physical bank presence in India to launch mobile banking. The guidelines follow previous directives on the use of business correspondents and technology to extend basic banking to the poor, both of which also assign a central role to licensed banks. The October guidelines state that banks offering mobile banking must ensure that customers with mobile phones from any network operator can use the service. Additionally, only domestic Indian rupee transactions are permitted and are capped at Rs 5,000 (US$104) per customer per day for fund transfers and Rs 10,000 (US$208) for purchases.[iii]  

Current regulations for e-money clearly do not permit issuance of e-money (or other similar stored-value instruments) by non-banks. As a result, non-banks, such as mobile telecommunications providers and e-payment service providers interested in branchless banking, have had to negotiate partnering arrangements with banks – this could be an expensive and complex proposition that will limit the potential for outreach. Banks often comfortable with their existing client segments show little serious effort to expand their mobile banking offerings.  

Banks move gingerly into mobile services  

To date, several banks have shown interest in mobile phone-based services, though none yet sees it as a part of its core business offerings. One of the earliest offerings was introduced in 2004. ICICI, India ’s second largest bank, launched a service in conjunction with Reliance Communication (R-Com), India ’s third-largest mobile provider. The service enabled an ICICI Bank customer who also subscribed to R-Com to send to and receive money from another ICICI customer (up to a maximum of Rs 5,000 in any one day). Today, the mobile banking service is also accessible through four other mobile providers: Airtel, Vodafone, Tata Indicom and Idea.  

More recently, Airtel, India’s largest mobile provider, launched a range of mobile commerce services in partnership with India’s HDFC Bank, ICICI, SBI, Corporation Bank, and VISA. The services, launched early last year, include mobile money transfer, bill payment, and prepaid recharge. Also last year, Barclays India introduced an offering called Hello Money that lets customers perform tasks such as checking balances, paying bills, transferring money, and adding prepaid minutes.  

Meanwhile, public sector banks are rolling out their own mobile banking solutions. Union Bank of India recently rolled out UMobile, a mobile service for account inquiries and fund transfers. And State Bank of India, the country’s largest commercial bank, now offers the first rendition of a service called SBI FreedoM, which provides fund transfers, account inquires, bill payment, and top-ups.  

Technology intermediaries lead the way

Technology companies that provide backend functions for mobile commerce are taking the lead in rolling out new services that involve banks and mobile network operators. But while they are driving ideas, technology providers need partnerships to carry them out. Banks hold the accounts and mobile network operators have the channels and large agent networks.

To date, technology providers like Oxigen, mChek, Obopay, FINO, and A Little World have developed m-payment platforms and business models that are ready to be rolled out to un-banked customers via agent networks. The future growth of these depends on both creating partnerships with banks and agent networks (often organized under a non-profit business correspondent company).

Recently, Airtel partnered with mChek, an Indian provider of mobile security and payment technology, to provide the means to operate its mobile commerce platform. mChek says that currently more than 1 million users are accessing its technology. Another technology provider, FINO, is developing a solution combining the use of smart cards, biometrics, and electronic capability that will enable ICICI to see all transactions with partner microfinance institutions within 24 hours, thus addressing the difficulty in complying with know-your-customer requirements. FINO is experimenting with similar technology with a dozen other banks as well.

A Little World is another technology vendor which has made an initial foray by providing the technology which has enabled banks to open thousands of accounts quickly. For example, teaming with the State Bank of India in the state of Andhra Pradesh over the last two years has enabled the bank to open 1.8 million accounts, each attached to a basic no frills account and magnetic swipe card. The state government processes some of its social payments through this newly developed channel increasing efficiency and removing opportunities for corruption. This early progress though still faces an uphill task in generating enough revenue to cover the costs. Estimates indicate it has cost the bank 50 rupees to open each account but it has earned only 5 rupees per account thus far. All must remain hopeful that the new channel adds more business to become fully viable,

Some action, no breakthroughs 

Still, while banks, mobile network operators, and technology providers are rolling out a number of initiatives to extend cell phone banking, uptake has been slow. Banks are not well placed to take the lead nor are they enthusiastic to do so, technology providers are limited to complex partnership-based business models that are still unproven, and mobile network operators have the scale, appetite, and networks but are restricted by regulation. The potential for payment and m-banking services to be provided by mobile network operators and other non-banks has not yet been realized due in part to restrictions on e-money issuance by non-banks.  

There have been indications, however, that change is on the horizon. International experience suggests that it is not necessary to subject non-bank e-money issuers to the full panoply of licensing and prudential requirements applicable to banks. The risks of non-banks issuing e-money can be minimized by stipulating certain specific regulatory requirements, such as limiting investment of the e-money float to low-risk/ highly liquid instruments, and limits on per-customer transactions and maximum e-money balances. In addition, to minimize risk of loss of customers’ funds, operators can be subjected to enhanced security requirements and risk-appropriate market entry requirements.  

The RBI to its credit is also taking initiatives to open up more regulatory space. The new Governor has publicly noted the potential of technology to extend banking services. And in recent months the RBI has taken some steps to further open up some of the initial restrictions placed on the use of business correspondents by extending the distance they can be opened from bank branches. A new working group has been formed to consider what kinds of people and organizations can be used as business correspondents. To date, prominent players in India’s telecommunications, technology, and financial sectors have invested substantial time and resources into developing mobile banking services and infrastructure. It is time to think about how these investments will make a greater contribution to financial inclusion for the unbanked.