Traditional banking has a ‘last mile’ problem.The fixed cost of the branch network is too high for servicing low value users and low density rural areas.Traditional wireline telecommunications also has a ‘last mile’ problem in the form of high fixed costs of the ‘local loop’.
Mobile wireless telephony appears to have been successful at overcoming the last mile telecommunications problem. Even though the wireless rural teledensity of 20% is only about a fifth of the urban teledensity of 104%, it is large compared to the fixed line rural teledensity.
Moreover, rural wireless teledensity is also growing fast, having doubled over the last one year. One conclusion from this experience is that mobile telecommunications can help solve the last mile problem of banking.
The earliest attempt to solve the last mile problem in banking is the ATM. This reflects the general approach to solving the last mile problem – unbundling of banking services and using technology and outsourcing to take some of the unbundled services closer to the customer at a lower cost.
However, ATMs are limited in the scope of transactions that they can handle, especially in rural areas. RBI has attempted to solve the ‘last mile’ problem of banking by encouraging alternative distribution channels in the form of business correspondents and use of mobile phones and prepaid card technology for providing banking services.This has also been referred to as ‘branchless banking’.
A number of potentially complex issues related to cash deposits and withdrawals arise in branchless banking. In a traditional banking environment, the bank branch is the focal point of this activity and is subject to many regulations which ensure, albeit in cumbersome way, security and reliability.
These regulations can cover not only the physical properties of the building but also the soft infrastructure, such as levels of cash holdings and security procedures or the criteria applied to the recruitment and training of staff. The same degree of regulatory control may not be possible with business correspondents and any attempt to impose such controls may render the business unviable.
RBI’s overall approach
After taking into account various issues involved, the RBI has adopted the bank-led model for mobile banking for financial inclusion. In formulating its guidelines RBI has taken the approach that m-banking should be provided by a bank-led and not Mobile Service Provider (MSP)-led model.
The RBI is quite clear that banking activities should be provided exclusively by banks. Its main concern about the MSP led model is its ability to satisfactorily address issues related to money laundering and the safety and security of transactions. According to the RBI
The customer identification processes followed in case of prepaid customers are lax as the MSPs consider this as low risk from their financial stand point. Given the large number of such cards being issued and the number of outlets through which they are issued, as a Regulator of the Payment and Settlement Systems in the country, it is difficult to contain the risk of anonymity in a MSP led model.
Even though the RBI recognizes the role of MSPs in bringing a customer base and an agent network, the RBI would prefer this agent network to be used as ‘business correspondents’ in partnership with MSPs for extending financial services.
Overview of regulation related to financial inclusion
One useful way to see the outcome of RBI’s regulations regarding ‘branchless banking’ is in terms of what banks and non banks can do with cash deposited by customers.
Banks will keep the cash in a bank account and provide interest. Accountholders can transfer the cash in their account using mobile banking to anyone, including those who have no account with any bank but have a mobile phone.
The receipt and disbursement of cash can happen either at bank branches, ATMs or business correspondents.The disbursal of funds can happen only after identification of the recipient. Similarly, opening of accounts and the associated KYC formalities can be done either at branches or through business correspondents Almost anyone can be a business correspondents, except NBFCs or large “for profit” companies.The accountholders will be customers of both the bank and the mobile service provider.
Non banks will receive cash and issue prepaid cards (semi closed payment instruments). Such cards can also be mobile phone based prepaid cards. The issuer will have to ensure full compliance with KYC /AML/CFT guidelines. All money received by the issuer will be deposited in an escrow account with a bank. No interest is payable on the account. The cash can be used only for making payments to the participating merchant establishment which contract specifically with the issuer to accept the payment instruments. The cards cannot be used for cash withdrawal or redemption by the holder. They can also not be used for person-to-person transfer of value.
While maintaining its position of a bank-led model of mobile banking the RBI has provided significant flexibility for small value transaction in order to encourage financial inclusion through mobile banking. Therefore, from a regulatory perspective there does not appear to be any significant problem and the RBI appears to be open to introducing more flexibility so long as it does not compromise on banking security and integrity.
As is apparent the key to mobile banking for financial inclusion is the role of business correspondents.
A Working Group to Review the Business Correspondent Model, set up by the RBI, submitted its report in August 2009. Overall, the data revealed that out of 50 public sector and private sector banks, only 26 banks reported appointing BCs, through which 88 lakh no-frills accounts had been opened as on March 31, 2009. The number of accounts opened formed only 26% of the no-frills accounts reported to be opened by banks till that date. Most of the banks had appointed Section 25 companies/ Trusts/ Societies as BCs in accordance with the original requirement of the guidelines. Further, almost all the Section 25 companies appointed as BCs had been floated by the technology service providers who had provided the smart card or biometric solutions.
The viability of the BC model has remained the most critical issue. The BC model is largely perceived as a channel for undertaking only liability side business (deposits). In many cases, banks are using the BCs for opening no-frills accounts through which the various government payments like NREGA, pensions and other social security payments are routed. As such, opening of the accounts to provide deposit services to begin with and subsequently widen the coverage of activities, with a view to making these accounts profitable, have not made the desired progress.
Retaining customers after the initial transactions proves to be a big challenge, partly because of lack of adequate financial awareness. As a result a majority of no-frill accounts opened by BCs remained non-operational.
More extensive use of mobile banking could reduce the costs of the business correspondents and help them achieve viability.
Issues in mobile banking for financial inclusion
Given the flexibility in the regulatory environment, banks and mobile operators now need to design and develop suitable business models for providing mobile banking for financial inclusion. This requires banks, mobile network operators and agents to work closely with each other.
Security is critical for mobile banking and mobile operators control a key element of the security infrastructure, which is embedded within the phone. The service also needs to work under precarious conditions (people using low-end handsets in areas with unreliable wireless connectivity), making the correct technology choices critical. In fact, customer experience is determined directly by the technology platform used.
Customers are more likely to take up the service if they can easily access cash from their accounts. Banks need to find a way to provide liquidity through a network of cash-in/cash-out agents. Here again mobile phone operators have a network of mass-market prepaid card retailers who can function as bank correspondents. Of course, not all of them may be ideally suited for banking activities. The branch network of the bank would need to provide significant support and training to the bank correspondents in the initial period.
If mobile banking is to be used for financial inclusion there is a need to develop a highly efficient channel to drive awareness of the service and strong branding to overcome natural customer resistance to new technologies and the associated security fears. Banks can choose to rely on mobile phone operators to promote and even brand the mobile banking service given the operators’ credibility with and understanding of mass-market marketing techniques. Of course, banks bring their reputation of safety and trust.
Other than the financial arrangements an additional issue that may need to be resolved is that of customer ownership. Both the bank and MSP are likely to claim customer ownership especially if they incur customer acquisition costs. Given the closeness of the relationship and their mutual contribution it may be useful for them to consider arrangement such as a joint venture entity.
Initially, the bank and mobile network operator relationship may be bilateral. However, in the long term customers will benefit more and pay less if interoperable networks allow them to transact with anyone, at any time.
This would require the regulator to mandate interconnection between the networks of the bank and the mobile network operator. In the initial stages there may be a need to cap interconnection charges. Of course, this would be a part of the overall business agreement between the banks and MSP.
About The Author :-
In the past he has worked with TATA Consultancy services as strategic account manager- VAS, SDP and Mobility and Co-Founded Rentimental.com.
He regularly writes articles for Hitvada- the People Newspaper.