Each time that I visit Kenya, I always admire the manner in which the country has taken to mobile money through the M-Pesa service, which facilitates financial transactions via mobiles.
When I offer to pay the local taxi driver in cash, he asks me to make the payment to his mobile money account. Such is the level of confidence in mobile money in Kenya. No wonder that over 21 per cent of the country's GDP is transferred using mobile finance.
Thirteen million people use micro finance equivalent to over one third of Kenya's population. In fact even if a person in a village is not in the M-Pesa network, a relative just needs to send him a code. The person can take the code to a local shopkeeper who is in the M-Pesa network and the shopkeeper transfers the funds.
The country is an excellent example of how mobile financial services can help ordinary citizens, whether urban labourers or rural farmers, access a plethora of financial services at a nominal cost at any given time. Other developing nations such as Bangladesh and Cambodia have also set themselves firmly on the path to financial inclusion through the mobile.
In counties near and far, mobile finance is helping achieve financial inclusion. So what stops us from replicating the model in India where financial inclusion has been the buzzword for so long? India has over 800 million mobile connections (as of March 31, 2011), while the country has only 300 million bank account holders.
The situation is grimmer when we consider the state of financial services in rural India. According to PwC, only five per cent of India's six lakhs villages have a commercial bank branch and 51.4 per cent of nearly 89.3 million farm households do not have access to any credit, either from institutional or non-institutional sources.
Only 13 per cent of farm households avail bank loans. On the other hand, rural wireless subscribers increased by 71 per cent in the last year and rural tele-density stands at 33.35 per cent, with over 280 million subscribers (as of March 31, 2011). In this context, mobile can play a critical role in increasing the reach of financial services particularly to the masses residing in rural and semi-urban areas.
However, every country needs to decide its own model based on the social, economic and regulatory pressures at work within the country. So, in India what are these factors?
Looking at India, the most compelling business case would appear to be mobile remittances, where migrant workers to the cities send money back to their families in rural and semi-urban areas. Internal remittances form a significant part of household budgets in rural areas. Mobile finance is the most cost-effective, secure and fast alternative to informal mechanisms of money transfer.
From a regulatory perspective, last June, TRAI and the RBI reached an initial agreement to ensure a smooth roll-out of m-banking; TRAI was to deal with all interconnection issues while the RBI would look into banking aspects, such as daily transaction limits, KYC guidelines and verification criteria.
Mobile financial services got a shot in the arm recently when the RBI launched the interbank mobile payment service (IMPS), which currently includes seven large banks including SBI on board.
The National Payments Corporation of India, promoted by 10 banks, will act as the settlement agency between banks and deliver the back-end support to the system.
How to use service
To use the service, an account holder will have to get mobile money ID (MMID) from the bank. MMID will be his ID for all mobile-commerce transactions. The banks will install a special application on the mobile phone, which will enable the user to make remittances.
Once the process is complete, the bank account holder can remit money to anyone, provided he has the receiver's MMID and mobile phone number. The setup is also available for a low-end phone, where the application cannot be installed; in such cases money can be transferred through SMS.
Currently, the Reserve Bank regulations cap the maximum amount to be remitted through mobiles at Rs 50,000 a day. While there is still some way to go, the stage has clearly been set for growth in mobile financial services.
With the need clear and the regulatory environment more conducive, the third and the most crucial factor in enabling mobile finance is the eco system. Banks, merchants and mobile operators need to collaborate and integrate their capabilities and services to enable widespread use of mobile wallets.
Banks and telecom operators need to put in place the necessary infrastructure and business models to be able to roll-out the services effectively and profitably across the country.
Adoption of mobile finance can lead to significant cost advantages in the proliferation of banking services. According to the RBI estimates, every transaction conducted in a bank branch costs around Rs 50, an ATM transaction costs about Rs 15 and a net-based transaction costs around Rs 4 owing to savings in real estate and personnel costs.
Costs, benefits
Mobile banking transaction costs are expected to be of the same order as Internet banking transaction costs. PwC estimates that mobile banking transactions in India will exceed 340 million in 2015, resulting in cost savings of approximately Rs (11 billion)11,000 crore.
Apart from the cost benefit, mobile financial services would help banks create financial products that better fit with the needs of low-income customers. It should also create more flexible products to finance small businesses, thereby, benefiting SMEs and entrepreneurs. Banks need to act quickly to exploit the privileged position they currently enjoy.
For operators, offering mobile financial services will enable them to become their customers bank and create an opportunity for a long-term relationship, which can address churn issues and improve overall financial performance.
For mobile financial services to succeed, telecom operators and banks need to build a robust, integrated model that offers the most cost-effective mobile financial services to Indian consumers with a special focus on users in semi-urban and rural areas. A thorough understanding of the requirements of rural subscribers is an imperative. According to the experience in other developing countries, the model would require taking help from merchants and self-help groups who play a crucial role in providing last mile access as well as educating rural consumers.
The emergence of operator-bank partnerships such as Airtel-SBI, Vodafone-ICICI and Idea-Axis Bank is a step in the right direction. Going forward, new and innovative applications and services need to be developed to meet the requirements of customers, particularly those belonging to underserved demographics. For instance, their requirements for financial services are primarily based on building their income from agriculture, services and various entrepreneurial opportunities.
These customers need to be educated and sensitised to the benefits of using mobile financial services.
This is a mammoth task and so the responsibility must be collectively borne by banks, mobile operators and the Government with a clear road-map and deliverables.
The objective is clear and now it all depends on how serious the various stakeholders are in rising above their individual interests and working towards the larger common mission of financial inclusion for the Indian masses.
The author is Executive Vice-President - Global Market Units and Chief Strategy Officer, Comviva.