The RBI should relax mobile money rules

Disruptive innovation has come to the world of money through the use of simple mobile technology such as the ubiquitous SMS but the Reserve Bank of India (RBI) is limiting its potential to reach the teeming masses who would most benefit from it.

For an institution which has earned global praise for steady governance under the leadership of Raghuram Rajan, the RBI’s stand on mobile money appears to defeat all logic.

A modern economy cannot function without a central bank which has monopoly power over the supply and demand of a nation’s currency.

Or so has been the conventional wisdom for at least 90 years since the hyperinflation in the Weimar Republic (present-day Germany) when the then value of a mark fell from 50 marks to a dollar to 4 trillion marks to a dollar.

A central bank, because of its charter to regulate private and public sector banks, also serves a useful role furthering the national interest. Banks can track deposits and their sources, assist in anti-terrorism activities and monitor if unscrupulous elements engage in money laundering, corruption, tax evasion or other illegal activities.

No one disputes the fact that banks are the lifeblood of modern commerce with their vast lending services, brick and mortar operations providing employment to millions and their ATM networks providing 24 hour conveniences to customers.

But banks can’t do everything. Take, for example, India’s large population of rural residents who don’t need elaborate banking services. They need to transact in cash with others to buy goods and services. They need security so that their hard-earned money is not stolen, and most importantly, they need to be able to send and receive money without having to pay large transaction costs.

India’s rural banks have an obligation to provide such basic banking services to the vast masses but have generally fallen short.

Although 840 million Indians (70 per cent) still live in rural areas, there were only 33,683 rural bank branches in 2011, according to R Ramakumar and Pallavi Chavan writing in the Foundation for Agrarian Studies .

There are, however, nearly 80,000 bank branches serving the remaining 30 per cent of the population, according to an RBI report in 2013.

This is where innovators come in. Safaricom, a UK subsidiary of Vodafone, started a revolution in Kenya in 2007 by launching M-Pesa (M for mobile, pesa is Swahili for money) as a mobile phone-based money transfer and microfinancing service.

Kenya has many similarities with India. It has a large rural population and it is mostly a cash-based economy. The average wages of a rural Kenyan are $2 a day. It has an impressive cellular network with Kenyans owning mostly the clam/flip variety of phones that can send or receive SMS messages. We’re not talking smartphones here.

So how does the M-Pesa work? A Kenyan user stops by at one of several thousand M-Pesa kiosks which are operated by retail merchants whose main business is often something else.

(These are similar to mobile recharging outlets in India where customers can stop at a small grocery store and have their SIM cards topped off). He registers to use the M-Pesa service by providing his details along with a Kenyan government ID and receives a four-digit pin that is unique to him and his mobile phone.

Once he is in the system, he can pay the merchant regular money and immediately have it electronically transferred to his phone as a credit.

Now the user can SMS money to his mother’s phone in rural Kenya instantly. The mother walks to the nearest bakery to buy bread which is paid for using another SMS transaction between her and the baker.

And on the way home, she stops by at an M-Pesa kiosk and withdraws regular cash money through another SMS transaction with the kiosk merchant.

This is powerful technology that instantly brings basic banking services to anyone with a mobile phone. And in Kenya, the M-Pesa penetration is incredibly impressive reaching 90 per cent of all adults. Notice that banks are completely cut out of every transaction that occurs.

In a November 22 interview with Leslie Stahl of CBS News , Bob Collymore, Safaricom’s CEO said: “The most effective barrier for the success of mobile money around the world is the banking lobby. The banking lobby in most parts of the world is a very strong lobby. And banks have looked at what's happened in Kenya and have decided that they don't want to see that happening in their own countries.”

It might be surprising to note that M-pesa is already available in India. But the RBI required Vodafone to team up with a bank to complete the bookends of transactions, from establishing a Know Your Customer (KYC) profile to requiring cash withdrawals at brick and mortar bank buildings.

These restrictions, no matter what the rationale, amount to disabling three cylinders of a four cylinder automobile engine. Further, Vodafone’s banking partner is ICICI which among the large banks has the weakest presence in rural markets.

It is no wonder that M-Pesa has not taken off in India although the technology infrastructure, the merchant network and the service are already in place.

The Modi government has always said that its goal is to bring basic services to the most vulnerable sections of our population. It is time the government relaxed RBI rules immediately.

And the best thing is that this decision won’t cost the government a single rupee.

The writer is MD, Rao Advisors