There have been 100 mobile money deployments in emerging markets. At least 84 of them within the last three years.

What I have found to be common for those that are successful (14 of them, as defined by number of payments relative to the size of the addressable market) are growing the customer base and network in tandem.  This   makes  the overall agent economics and agent enrollment efforts remunerative. What is not so explicitly stated, but key, is role of ‘Regulation’. In under regulated, low banking penetration, light regulatory touch economies such as Kenya, Tanzania, and Uganda it has worked well. But in robustly regulated and supervised markets like India – the outcome is poor.

M-pesa cant be re skinned for local conditions just with addition of ‘a’ and ‘i’ and drop of an ‘e’, Vodafone has been experimenting with M pesa in India for some years. They launched in 2011 with a pilot in Chomus, Rajasthan along with HDFC Bank. And again recently with ICICI Bank. It would be interesting to assess the outcome of that pilot.  And   understand goals set now with ICICI Bank. The original program was envisaged to board 10 million farmers for its financial inclusion efforts. Before that Tata Teleservices launched its own domestic money transfer program with Corporation Bank. As did Axis Bank and Airtel  for the same purpose. While Airtel & SBI’s JV was short lived.

It seems banks and telcos are dancing a tango to see how best to crack the conundrum of mobile money. Ideally the telcos have been trying hard to edge the banks out of this – they see it as a next value driver and best geared organizationally to deliver tangible results. And the Banks are generally wary and averse against this being driven solely by telcos and the customers being owned by them. Probably for the same reason.  Except they call it fear of systemic risk! Sometimes KYC1

So what is the way out?

Even if the over strict interpretation of Banks role for cash-in/cash-out (CICO)is maintained, there are ways to skin the cat – so that ‘unbanked beneficiary’ can still avail of the service..

But for this to happen (and happen it has to) two things need to change.

First, the differentiation between a payment service providers and credit issuers has to be understood. In the former accepting and keeping 100 % of monies collected in pooled accounts by way of escrow or reserve requirement does not constitute systemic risk, or, constitute what is known as a Systematically Important Payment System (SIPS). In fact the mobile wallet   poses even less overall risk than banking and any other payments systems. For e.g. in 2010 the accumulated balance in all Mpesa, Kenya accounts represented just 0.2 % of all bank deposits even though M Pesa transactions accounted for over 70 % of all electronic transactions! Further, as a measure of abundant caution, PPI’s do not intermediate funds or issue credit!

Second, regulatory dispensation has to now accommodate a sender/receiver or both NOT necessarily

(a)    Having any form of formal Bank account, but just having a unique mobile wallet issued by a RBI certified PPI’s. This mobile wallet is what I call as – ‘Account-in-the-Cloud. Lets us give it a generic brand name – My Paisa account.

(b)   As per prevailing RBI norms some form of KYC applies for creation/loading up such a virtual wallets.  Aadhaar, as a (mandatory in time) RBI accepted KYC tool per se –  valid ID proof,  serves that purpose, The Aadhaar number  also doubles up as an  unique identifier mapped to the wallet and mobile number, and in due course to a no frills account or regular account.

(c)    Of course until UID reaches mass acceptance, the older KYC norms used thus far over the last 60 years will suffice for creation of the wallet as per prevailing RBI Prepaid guidelines.

(d)   While the conventional Bank-BC Model has yet to deliver any tangible outcome over the last 7 years. Arguably though it may have met its penetration levels into villages. It has yet to deliver by way of account registration and/or account activity terms. This effort is now best also complemented by established private players (viz. FMCG, retailers, fair price shops, etc) to allow for network effects to kick in a la Tanzania with its 27000 agents for a population of 37 million.

(e)    In India a clear a million such existing unique established and trusted points of presence are there built up over the last 100 years. Even if we don’t count the Telco touch points. Allowing for cash -out on such a larger definition of BC’s/BF’s/BA’s by starting of leveraging the established & accepted networks of private payments processors & agent aggregators, will be par for the course.

Once this is done, direct cash transfers or payments or remittances can be done directly into a farmer’s, citizen, or customers or any aadhar-wallet account, to be redeemed at merchant points for goods & services or cash out, via the established private payment processors outlets. Subsequently one could look at e money issuers (Non bank PPI’s ) to also pay the customer interest on an e float maintained by the account holder by way of  some form of subvention  where on the pooled account some interest is earned.

Author Probir Roy is CEO, Paymate

In a report tabled in the Parliament, the Standing Committee on Finance laid stress on expanding the brick and mortar branches for financial inclusion. This emphasis is completely out of sync with latest trends in financial inclusion, where worldwide the brick and mortar branch framework has been given up in favour of BC model, mobile banking, more participation of non-banks with strict risk regulation etc. “The Committee have been emphasising that no other model can substitute brick & mortar branches in achieving the goal of financial inclusion, it added” It is this emphasis that is costing the country dearly,not just in making the whole proposition of financial inclusion more expensive for banks, but by lost opportunities in not expanding rapidly.

The same panel states that “the Ministry may review the Business Correspondent (BC) or Business Facilitator (BF) model for better results in the interim, while ensuring that it should not become an instrument of exploitation of the rural poor.”  Ironic that this report should come out now when the headlines are grabbed by the Saradha Chit Fund scam in West Bengal. How do such companies proliferate? Two opinion pieces by T K Arun (Economic Times) and Monika Halan (Mint) highlight how the RBI’s regulatory model needs to be revamped to allow easier access to financial services by the poor, so that they are not left to be exploited by dubious companies.

T K Arun says, “Blame not just greed and financial illiteracy, blame also India’s stunted formal finance, and that keeps out the unwashed masses. How does the RBI become Accused No. 1? By being so stingy on bank licences. By being obtuse on the use of technology, by still dreaming that physical branches lay the path to financial inclusion, by refusing to recognise the ecosystem that mobile phones represent is ideal for mass electronic banking. That the prepaid SIM is a portable electronic vault that can be remotely credited and debited is less important than the network of authorised vendors of phone companies that can easily be moulded into a network of those authorised to sanction loans and collect repayment. The Aadhaar system offers a sound route to universal banking coverage. Provided the RBI finds the courage to innovate policy based on advances in technology.”

Halan says, “Clearly, there is money at the bottom of the pyramid and there is no dearth of enterprise in India. So why do we see so much under-the-surface activity in businesses that mimic banks? Could it be because existing regulation is a lot about preserving the business models of existing banks? What else would explain the reluctance to allow non-bank linked e-payment systems into the country, using the bogey of safety of depositor money? Why is separation of client funds such a tough idea for the RBI to understand—the mutual fund industry has used it successfully for more than 15 years now without a single instance of somebody decamping with investors’ money. Unfortunately, what we’ll get is a knee-jerk reaction that shuts off chit funds and other forms of non-bank finance, further pushing people into the clutches of illegal operators.”

It is time to move on to newer systems and models, accept a more open environment with  lighter but tighter supervision. This can be done. The sooner we get around to debating this with an open mind, the sooner we can leave behind older modes and the sooner the poor will get a choice of whom to invest with.

Meaningful financial inclusion calls for understanding the needs of the customer, and not going in for a top-down approach.

Tilman Ehrbeck puts this point through well in his blog post, calling for the starting point to be from demand-side insights rather than supply-side considerations:

Half of all working-age adults globally lack access to formal financial services. And contrary to popular belief, these people are often entrepreneurs in the informal economy — by necessity, not by choice. Unbanked people don’t live financially simple lives; they have a strong need for income-generating opportunities, the ability to build assets, and tools to mitigate risks and smooth consumption in the face of emergency. By listening to what these people really need, we can dramatically fast-track innovation in financial services to reach more people with a greater range of products at affordable prices to help them improve their lives.

Dr Subir Gokarn, then Deputy Governor RBI, had given a similar approach in a speech in 2001, ‘Financial inclusion: A Customer Centric View‘:

Who the potential consumers are, what motivates and drives their decisions, what constraints and risks they face and so on are all fundamental questions, the answers to which are the starting points of strategy formulation.  In other words, the better the understanding banks and other financial service providers have about the potential consumers of their inclusion-oriented products and services, the more likely their strategies are to succeed in a way that benefits both consumers and producers.

Under India’s bank-led model for financial inclusion, banks need to get this message and work to tailor their products to customer needs, the business case will then flow automatically.

Under Direct Benefit Transfer(DBT) Scheme,the government proposes to transfer subsidies to the deposit accounts of beneficiaries in the banks. These accounts are required to have recorded in their Core Banking Solution account data base the Aadhaar numbers(unique identity numbers given on behalf of government of India) so that the money can directly reach these accounts through a central process. This  process of recording  is called seeding of Aadhaar numbers by banks

The government concern for coverage of larger number of beneficiaries in a short time has lead to certain shortcuts in Aadhaar Seeding  which need to be examined for their  long term impacts.

UIDAI on its home page provides an Approach Document for Aadhaar Seeding in Service Delivery Databases version 1.0 which explains the concept and approach for this activity and is also quoted by Planning Commission Office Memorandum on DBT.

According to UIDAI, Aadhaar Seeding is expected to be undertaken mainly by contacting the account holders, obtaining of  the Aadhaar numbers and then entering it in bank data server( called organic seeding). UIDAI further suggests that this seeding should be test checked  through authentication process with their CIDR by sending details online and getting confirmations(well explained in appendix in UIDAI document).

UIDAI has also suggested direct seeding of bank accounts/ data bases by importing Aadhaar from their Central depository.

Planning Commission OM states that the concerned government departments will prepare digitised lists of beneficiaries with the details  of name,bank account number, Aadhaar number etc, forward these to banks  who  will seed their CBS server with Aadhaar number from this data base. Thus, the responsibility for correct seeding of beneficiaries data bases  with Aadhaar rests with the government departments.

ISSUES

Under  DBT, banks have made provision for entering Aadhhar in the account details and are relying on the government lists to do so. However, they are not verifying this from UIDAI CIDR. It will be preferable if bank branches are enabled to be capable of authentication by providing necessary biometric readers, software and  connectivity. This is also required if Aadhaar is to be accepted as Know Your Customer (KYC) by the banks directly.

It can  also be considered if Aadhaar seeding based on DBT lists received from the department ( without verification at bank level) and aadhaar entered as a KYC source are entered separately in CBS data base.

UIDAI allows access to its CIDR for authentication of demographic and biometric details to Authentication User Agencies(AUA) through Authentication Service Agencies(ASA) and enters into  detailed agreements with them. Some major banks are  not AUA and hence can’t access CIDR. UIDAI primary concern, in providing standards for authentication, seems to be the responsibilities involved in verification of identities from CIDR during the financial transactions such as withdrawal or transfer of funds.

However authentication for the limited purpose of seeding of Aadhaar or as KYC source need to  be provided by UIDAI as a public service to all banks /government departments seeding Aadhaar without any restrictions or charges(present or in future).

Authentication standards/ conditions for financial transactions purposes can be dealt with separately if UIDAI has a definite case for the same.

Under DBT, as the beneficiary databases are to be seeded by government departments  with Aadhaar numbers as per government directives, they should be fully responsible for  correctness of the seeding exercise which may be termed Primary Seeding .  The recording of Aadhaar numbers in account details by banks may be treated as Secondary Seeding  equal to mere recording the facts.

However if banks undertake organic seeding  themselves  directly from the customer, then it may be Primary  Seeding with all attendant responsibilities for following UIDAI prescribed guidelines, even undertaking sample testing as proposed.

Finally, accounts with Aadhaar numbers seeded in them are to be mapped with National Payments Corp of India( NPCI).  Mapping refers to the mapping of the IIN number of the banks with Aadhaar number of the customers. NPCI document on mapping states that the beneficiaries’ consent need to held on record to do so. We need to allow this under DBT scheme on regular basis through an official fiat. In other cases, the banks may follow NPCI guidelines and obtain consent.

These  issues relating to seeding and mapping of Aadhaar numbers with bank accounts  need to be examined in detail by all concerned like UIDAI, NPCI, Banks and finally the government departments (especially planing commission DCT dept) and a uniform clear  approach needs to be adopted so that  DBT smoothly moves on from pilot to regular mode.

* Y P ISSAR is Ex GM FI of a nationalised bank. These are his personal views.

While there has been ample discussion and debate in the media on DBT, there is very little ground level evidence to understand the practical issues in disbursing government payments on such a massive scale. MicroSave has undertaken detailed case studies in Aurangabad and East Godavari districts to identify the challenges and the best practices being followed. An issue raised is that there are significant variations across districts in: (a) the level of maturity and automation, both within the state or the district, and within the specific beneficiary programmes; and (b) the motivation and ownership of the officials driving the programmes. Finally leadership that makes for effective organisation of the tasks and processes involved is the key to making this scheme a success.

A post by Shweta Banerjee on the CGAP blog describes her experiences during a visit to Pilkhi, a village in Bihar. Most transactions at the village CSP counter, run by SBI, are by women withdrawing remittances from male family members in the cities. The trust levels in keeping the money in the bank account are low and cash is still preferred.

She also talks of the experiences of women receiving old age pensions from the government, the time and effort it takes to access the post office, the frustration of finding out the money has not been credited etc. These women would benefit a lot if the pensions were disbursed at the kiosk, at a higher frequency than the current half-yearly scheme.

As reported by her, the GSMA report on Women and Mobile Financial Services in Emerging Markets points out that women can drive rapid adoption of financial services. But for this it is vital to win and retain their trust. Unfortunately, little has been done to understand the needs of women, their financial lives…and there are huge rewards for financial inclusion once that happens!

DBT for the next financial year has been proposed in a very subdued manner when the FM simply states in the Budget that it will be rolled out across the country during the UPA government term itself that is by 31.3.14 perhaps.

During the last year budget speech, then FM had said that it will the endeavour to scale up(earlier pilots) and roll out these  Aadhaar enabled payments for various government schemes in at least 50 selected districts within next six  months.(para24/25 of Budget speech 2012)

Presently  FM says  that we shall be redoubling our efforts to ensure that digitised lists are available,that a bank account is opened for each beneficiary and that the bank account is seeded with Aadhaar in due course.(para114 of Budget speech2013)

During the implementation during the current financial year, FM has shown great sagacity in lowering the expectations from this programme after personally going to great lengths in gathering grassroots level feedback and listening to senior bankers. This has brought out various micro issues to the fore say mapping of Aadhaar  with NPCI mapper for proper crediting of the accounts.

Two issues need attention. Firstly, the banks have been told by DFS to seed the accounts with Aadhaar number as provided by the lists prepared by the departments concerned. While these instructions are being complied with, the correctness of this number is not being tested by bankers. If Aadhaar is to be accepted as provided and more so if it is to treated as a full KYC, all bank branches need to be capable of testing aadhaar from UIDAI data base. This service must be delinked from the AEPS suite and become mandatory.

Secondly, NPCI mapping instructions say that an authority from the beneficiary need to be obtained before mapping which is not being complied with at present. DFS need to resolve this issue.

FM’s mature handling of the subject  and also the low key rollout has won him many friends in the banking industry who do not feel rushed through. A stable and phased  roll out will win Government lot of goodwill till Aadhaar coverage is much better.

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NOTE: The author, Mr. Y P Issar is Ex-GM for Financial Inclusion at a Nationalized Bank. Rights of contents of the post rest with the author.

The Central Government current budget is likely to adversely impact financial inclusion efforts in the country as it removes the emphasis the last two year budgets had on the coverage of villages with banking services especially through Business Correspondents(BC).

Last two year budgets had brought the coverage for villages with population up to 1600 (even up to  1000 in many states). In the action taken report, the government mentions that under the Swaabhiman Campaign, 74314 habitations with population up to 2000 and above stand covered and the guidelines have been issued for remaining  coverage and thus the action has been completed.

Without any mention in budget, the fate of the concept of Ultra small branches also remains unknown.

The Government  has also not announced in the Budget the important concept of Sub Service Area (SSA) under which all  service area villages/ Gram Panchayats are to be clubbed in to SSAs covering 1000 to 1500 households which should be serviced either by a bank branch or a business correspondent.

This concept has been introduced by DFS in Dec 2012 and is being followed by the banks in rolling out the BC coverage plan. SSA concept is also applicable to the urban centres where the wards are also being allocated amongst the bank branches. RBI is yet to endorse this concept.

The government appears to be totally concentrating on the Direct Benefit Transfer(DBT) programme and expects the banks to ensure that the declared districts have the banking means for disbursements of funds to beneficiaries- through bank branches, ATMs or BCs without any specific preference.

RBI has  however already  got the business plans of the banks for coverage of  villages with population below 2000 through banking channels (including BCs) from the State Level Bankers Committees route. With the Financial Inclusion Plans for next three years under preparation by banks, RBI seems to be gearing fully for strengthening the next financial inclusion drive in the country, with special focus on covering over 6 lakh villages.

Focus on financial inclusion is clearly shifting back to RBI with the budget just leaving the field open with only an announcement that BCs can sell micro insurance products.

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NOTE: The author, Mr. Y P Issar is Ex-GM for Financial Inclusion at a Nationalized Bank. Rights of contents of the post rest with the author.