Inclusion through Mobile Banking and Direct Payments

Following money, as it courses through the Indian economy, offers a fascinating glimpse into how the country’s financial system works, and how parts of the country remain stuck in yesteryears.

Although many of India’s cities have flourished during the years of economic prosperity, the country’s interior remains poor and disconnected from the more modern aspects of the financial grid.

Take the case of migrant laborers, whose living is based entirely on the cash economy. How do they send money home? Without access to systems that permit transferring money conveniently, safely and cheaply, millions of domestic migrants face this dilemma regularly.

Sending and receiving money through the good old Post Office system is expensive. In addition to paying a percentage of the total transfer amount in fees, they end up spending on tips and other indirect costs.

Banks offer the cheapest method for sending money. But very few poor people use banks, largely due to the difficulty of travelling to the nearest branch, obtaining the documents needed to open an account, and waiting in queues to send or receive a payment. The upshot is that the poor tend to be excluded from the organized financial system.

Addressing the needs of those who fall through the cracks of this grid, two entrepreneurs – Abhishek and Abhinav Sinha – created a software program, 6 years ago, that allowed migrant workers in cities across India to send money to their families using a cell phone. Their company, Eko Financial Services Ltd., now works with two major banks – State Bank of India and ICICI Bank - to offer financial services to poor and low income customers using local corner stores, pharmacies, and airtime resellers as agents.

By harnessing the huge potential of domestic remittances as an anchor product, innovators such as Eko, mobile phone operators and even commercial banks hope to tap a huge potential market in India, where three quarters of the 1.25 billion people live on less than INR 80 a day.

Mobile banking can benefit those who were previously thought “un-bankable” either due to their meager savings or because they live in remote and inaccessible places. It can revolutionize banking for millions in the country who are left out of the formal system, and help them use it for transactions - ranging from sending money to far-away relatives or paying school fees.

The mobile phone revolution has the potential to dramatically transform the lives of the nation’s rural poor. An estimated 8 million rural Indians who own mobile phones do not have access to banks. Intense competition and innovation within the telecommunications sector in the last decade has catapulted India into the largest and fastest-growing mobile phone market in the world. Therefore, India is uniquely poised to make use of mobile banking technologies as a conduit for not only bridging the digital divide, but also fostering financial inclusion.

From 2005 onwards, the Reserve Bank of India, India’s central bank (RBI) has recommended that banks increase access to banking services for the “unbanked” population using the mobile payment (m-payment) systems.

Benefits

Mobile banking can be a cost effective way for cashless recovery or payment for services such as insurance, pensions, cash transfer (NREGS welfare payments), deposits and investments, loan repayments etc.

Census 2011 data indicated that half of India’s homes have cell phones, though they do not have toilets and that as much as 97% of all telephone connections in the country are cellular. This provided the impetus for the government to step up initiatives that harness mobile technology to ensure financial inclusion.

Mobile banking also has an edge over internet banking. In case of online banking, you must have an internet connection and a computer. This is a problem in developing countries. However, with mobile banking, connectivity is not a problem. One can find mobile connectivity in the remotest of places also where having an internet connection is a problem.

India’s Rangarajan Committee on Financial Inclusion (2008) defines financial inclusion as “ensuring access to financial services, including timely and adequate credit where needed to vulnerable and low-income groups, at affordable costs.”

Five years after the Planning Commission and the Central Bank of India declared “a bank account for every household” as a primary policy goal, almost 40 percent of India, or 135 million households, still remain unbanked.

While banking in urban India has achieved more than 100% penetration (many urban Indians have more than one bank account), rural India lags far behind with only 19 percent penetration.

The reason for this situation is that rural India is deemed unprofitable for traditional banking operations. Since 2005, though the RBI has made efforts to encourage rural banking through greater government involvement in enrollment and cheaper agricultural loans, it has met with only marginal success.

However, the Government of India is determined to achieve financial inclusion through digital money and is taking aggressive steps to see this happen.

The gradual regulatory evolution to support ‘Business Correspondent Network Managers’ (BCNMs) and banks in their outreach efforts continue; the results are beginning to emerge! While the emphasis continues to be on numbers, the targets are such that large-scale outreach infrastructure is being built in a short time frame, with an agent covering every village with a population greater than 2,000. This, coupled with the government’s resolve to move to cash-based subsidy transfer and social security payments systems, will ensure mobile transactions.

New momentum around branchless banking is shaping the financial inclusion agenda. Domestic remittances and government payments are driving the electronic money market. If these payments can be translated into banking that goes beyond basic bank accounts – offering savings, insurance, and loans – they will make a major impact on financial inclusion in India.