India has for some time now had a unique opportunity to build a bridge between its remarkably successful telecom revolution and relatively dismal banking evolution. The telecom revolution that began with extensive liberalisation of the sector at the end of the 90s has been a model of inclusive growth; more than 500 million Indians own a mobile phone. The banking revolution that began with nationalisation in 1969,and which purportedly had a similarly noble end-goal of inclusion,has been a dismal failure,at least for the more than 900 million Indians who still dont have access to a bank account,four decades later. Mobile banking offers a window of opportunity to leverage the outreach of telecom to foster financial inclusion.
Unfortunately,not enough progress has been made. A news report last week suggested that TRAI and RBI,the two sectoral regulators concerned with the roll-out of mobile banking,may have finally agreed to an appropriate division of turf when the roll-out happens. Not much has unfortunately been done by either to actually facilitate a quick roll-out,and the RBI must take the lions share of the blame for that.
The RBIs lukewarm attitude towards mobile banking reflects its lukewarm attitude towards radical banking reform in general. Even in post-liberalisation India,the RBI has been notoriously conservative about allowing greater competition in banking it is only just considering giving out new bank licences for the first time in many years. It has consistently been conservative on the role of foreign banks. The banking regulator has even been miserly in permitting existing banks to open more bank branches. And it has resisted the idea of business correspondents who could go out into unbanked areas and open bank accounts without the need for a bank branch in the vicinity. Public sector banks,shielded from competition and dominant in the Indian banking scene,have no incentive to reach out to the underbanked. In short,the plain result of the RBIs conservatism on banking is that too few people have access to bank accounts in India.
Private telecom companies (unlike the struggling MTNL and BSNL),on the other hand,free from government control and overbearing regulations have done a wonderful job of reaching out. This is not because of altruism of course,but rather the result of a fiercely competitive market where each operator needs to reach out to more and more customers to stay in business. What competition has done in addition to forcing tariffs down (and incoming calls are free) is allowing access to hundreds of millions not-so-well-off Indians to use mobile phone services.
The same entrepreneurship and competition will automatically propel mobile companies to offer mobile banking services should they be allowed to do so.
The technology has already been developed and there are successful role models for both telecom companies and the regulators to examine and emulate. Kenya,a considerably less developed economy than India,rolled out the globally celebrated mobile banking service M-Pesa more than three years ago in March 2007. The service is operated by Safaricom,a Kenyan telecom affiliate of Vodafone,and uses a technology originally developed by British technology firm Sagentia and now operated by IBM which enables subscribers of its mobile phone service to also conduct basic banking transactions like depositing and withdrawing money and transferring money to other users and non-users,without having a bank account. The agent who tops up airtime for prepaid subscribers,usually a local shopkeeper,simply doubles up as a banking agent collecting money from,and giving money out to,subscribers. The service has already revolutionised life for millions of poor Kenyans who had no previous access to a bank,and the techno-logy has been deployed in Tanzania and Afghanistan.
The key lesson from the M-Pesa experience is to allow telecom companies to provide some minimal banking services (deposits,withdrawals,transfers) without necessarily having to tie up with a bank.
For the moment,in India,we seem to be heading in the opposite direction of not allowing telecom companies to offer minimal banking services by themselves. Banks will effectively have to tie up with telecom companies,and the latter will only facilitate interaction between banks and final customers. This is unlikely to foster financial inclusion. It will still be as difficult for the unbanked to actually open an account with a bank first in order to use a mobile service to transact. Frankly,it is easy enough for the RBI to liberalise rules for mobile banking for those like you and I who already have bank accounts. Just as many of us already bank on the Internet and through ATMs without visiting a bank branch,we can be allowed to do so through our mobile devices. But that is a very incremental change. The real gamechanging potential of mobile banking lies in providing some minimal banking services to those who do not have existing bank accounts.
The majority of poor Indians need only basic services of the kind offered by M-Pesa (money transfers for example) that do not necessarily require a bank. All that it requires is for the agent who sells airtime for prepaid services to double up as a business correspondent for basic banking services. This doesnt require any more skills from the kirana store owner than the ones he in any case deploys to top up a phone electronically.
Of course,the RBI should be concerned about adequate security and protection against fraud. But those need smart regulation,not shutting out of mobile banking altogether. And if Kenya and Tanzania can work those out,there is no reason to believe that India cannot.
There is one enticing prospect though if the RBI sticks to its gun on not permitting telecom companies to launch a service like M-Pesa without the backing of a commercial bank. Might it prompt some telecom companies to then consider applying for the new banking licences that the RBI has promised this year? Ultimately,Bharti and Vodafone will have to take a call,but given the huge business potential of mobile banking in India,it may be worth their while to seriously consider acquiring a banking licence.
Needless to say,all this is in the realm of wishful thinking as long as the RBI remains firmly rooted to its old-fashioned thinking on banking. But if the government is serious about financial inclusion,it must make the RBI see reason in being liberal about the roll-out of mobile banking.
The writer is a senior editor at The Financial Express