PLUSES & MINUSES. Jan Dhan – easier said than done

The unfolding of the financial inclusion tale in India provides significant lessons about the need for regulators and market players to come together. For decades, regulators have been pushing banks to serve the rural hinterland through regulatory prescriptions such as branch licensing, priority-sector lending, and no-frills accounts. Such efforts met with little success as banks saw little business case in reaching the last mile.

Two recent initiatives aim to completely transform this scenario. First, the Pradhan Mantri Jan Dhan Yojana (PMJDY), which saw the opening of 12.54 crore bank accounts and issued 11.08 crore RuPay debit cards by January 2015.

Second, technological innovations, which have enormous potential to cut costs, making business sense to cater to the rural populace. These innovations have been led by non-traditional players such as mobile network operators, pre-paid payment instrument (PPIs) providers, card payment networks, white-label ATM networks, etc.

As a result, the market is flooded with multiple service providers offering several avenues of storing, accessing and transferring money. Money can not only be stored in bank accounts, but also in PPIs, such as mobile accounts, internet wallets, cards etc.

There is no need to walk up to a branch for accessing account or withdrawing/transferring money. The same is also possible through cellphones, business correspondents, points of customer interface, and ATMs. Add to this, soon-to-be operational payment banks, central bill payments infrastructure and such other services, while expected to make life easier for consumers and promote financial inclusion, but will increase sophistication in the market.

Strong back-end infrastructure and inter-linkages between various avenues of storage, access and transfer of funds provided by different service providers (interoperability) will be a pre-requisite to ensure success of these initiatives.

Open-loop systems promoting interoperability result in long-term benefits for the stakeholders involved (when compared with closed-loop systems, hindering the same), but achieving interoperability is easier said than done. It is dependent on several factors such as: development of the sector, state of the market, political economic landscape, regulatory maturity, technological capabilities, innovation, etc.

The Centre for Financial Inclusion notes that incumbents with established positions (and closed loop systems) jockey to maintain those positions, while second movers advocate for increased competition and demand benefits from the infrastructure and network effects.

Regulators face the difficult task of identifying the public interest in such a setting. The Consultative Group to Assist the Poor (CGAP), a forum of 34 entities working on financial inclusion, wonders how the competition authority in Kenya would respond if competitors have really exerted enough efforts to secure their own cash merchants (agents) or if they simply wish to capitalise on the established players’ efforts.

Such tough questions might arise in India as well. For instance, in 2012, the RBI allowed interoperability at the retail outlets or sub-agents of business correspondents, subject to certain conditions. A study by Microsave Research highlighted that such relaxations have had little real impact owing to technology limitations, limited freedom and lack of clarity on accountability issues. Recent news reports suggest that the RBI is considering further relaxations to the regulations.

Similarly, RBI regulations provide that only banks can operate open system payment instruments, while non-banks are allowed to run closed- and semi-closed system payment instruments. Such provisions raise competition and regulatory concerns. The scenario is expected to undergo a further change with arrival of payment banks (to which PPI issuers can convert to).

This is not to suggest that the regulations do not consider full interoperability as a long-term objective. The RBI master circulars on mobile banking and customer service require service providers to allow interoperability. The RuPay debit card (issued under the PMJDY) is also expected to be interoperable.

However, the National Payments Corporation of India (NPCI), the developer of RuPay and other similar products, has acknowledgedthat products such as RuPay, Immediate Payment Service, Aadhaar Payment Bridge, and Aadhaar Enabled Payment Systems on the existing platform offer limited interoperability between the payment instruments such as card, mobile number, and Aadhaar number. To address this, NPCI is developing a strategy for a unified payment interface.

Regulators need to craft rules that allow technology-enabled business models to emerge, while balancing access and protection for base-of-the-pyramid consumers. Also, rules should harness, and not undermine, the business case for private providers to make investments of the required scale.

To achieve this, CGAP and Bankable Frontier Associates have designed a useful systematic approach to look at interoperability. This comprises (i) clearly distinguishing intermediate (stimulating competition) and ultimate objectives (universal financial inclusion) of interoperability; (ii) adoption of tailored analysis to different payment use cases, defined by account type (bank account, wallet), transaction type (withdrawal, real-time transfer) and channel (ATM, agent), and designing customised policy and commercial pathway for each usage case; and (iii) pursuit of a managed approach by establishing a sequence of milestones, for achieving interoperability.

They further suggest that progress on interoperability should be reviewed on five levels: (i) theoretical (capability of systems to connect to each other); ii) technical (actual points of interconnection or interfaces that make it possible to interoperate); iii) functional, (capacity of points of interconnection to meet agreed technical standards); iv) business-level (existence of business rules that make interoperability commercially possible); and, v) effective interoperability (successfully meeting broader goals)

There is a need to assess if such a systematic approach to interoperability has been adopted in India. If not, evidence-based policy and practice interventions need to be designed. Regulators, market players and other stakeholders must work in tandem to achieve full interoperability and effective financial inclusion.

The writer is secretary general of CUTS International