Mobile banking: Moving beyond microfinance

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1 Mobile banking: Moving beyond microfinance Thought Paper Universal Banking Solution Systems Integration Consulting Business Process Outsourcing

2 Mobile banking: Moving beyond microfinance Only 40% of rural households in India have access to formal lending institutions. The rest live in financial oblivion and when in need of credit, are forced to depend on usurious moneylenders. Microfinance is one way to meet the financial needs of those languishing at the bottom of the pyramid and an effective one at that. According to the State of the Sector Report 2011, there were 93.9 million microfinance borrowers and the sector s outstanding loans from financial institutions stood at Rs crores. Mobile banking and microfinance Consider another statistic. While there are a mere 240 million bank account holders in India, the number of mobile phone subscribers is 850 million, rendering this ubiquitous gadget an ideal medium for providing microfinance. Most banks already provide banking services through mobile phones via the Short Message Service (SMS) feature or downloadable mobile money applications. This collaboration between the financial and telecom sectors can be taken a step further by providing mobile banking for microfinance transactions. For instance, Vodafone has entered into such partnerships across countries like Kenya and Tanzania in Africa, and Afghanistan and India in Asia to provide mobile banking facilities to people who have no access to banking. While cash deposits and withdrawal services offered by microfinance bank branches and other agents is popular, there is a lot of demand for mobile-based transaction facilities, like micro loans borrowing and repayment, payment of utility and other bills, and money transfers between accounts. One reason for the popularity of mobile banking is its 24/7 access, unlike normal branch banking with its strict timings. Also, this channel does away with the need for branch visits and standing in queues, thus enabling efficient use of customer time. It is also more secure, as money is stored in electronic form. Additionally, all money related services money transfer, banking and payment are possible with just one mobile SIM card, thus making it a very convenient medium. Microfinance Institutions (MFIs) benefit from the mobile s low transaction costs, and the foothold it gives them in difficult-to-access rural markets. 02 Thought Paper

3 Pain points Its many advantages notwithstanding, mobile banking in microfinance has its share of challenges and risks. Mobile money franchise operators / agents find it difficult to establish customer authenticity because of the ease with which one can register for mobile banking. On the other hand, customers, especially in rural areas, might be unable to withdraw the funds they receive electronically, as agents find it difficult to maintain sufficient cash float. They are also wary of fraudulent agents and hidden charges. In fact, consumers in less developed regions might hesitate to take to mobile banking because of trust issues. Moreover, consumers often face technology related issues such as forgotten passwords, illegible receipts or even malfunctioning keypads, trifles on the face of it, but which can magnify in the absence of prompt recourse. For instance, such a situation could very well arise in Russia, where there are over 100,000 automated payment terminals, but practically no customer service. Consumers also have a few agent related concerns. There have been instances when retailers posing as bank agents have disappeared with cash, leaving customers high and dry. Clients do not even have the option of claiming damages from the bank, as the third party was not an agent in the first place. Even legitimate agents have defrauded not only customers, but also providers. There have been instances of insurance frauds where providers assumed responsibility. At times, agents even persuade consumers to avail of particular services, not because they are in their best interest, but because they attract a higher fee for agents. There are others who do not disclose their intermediary status or reveal the bank to which they are affiliated. Bad experiences like these put off customers and discourage mobile banking adoption. Another problem is that mobile banking is a comparatively new medium. Add to that the low literacy of target customers. So, confounding situations are bound to occur, where customers and even agents are unsure about the precise process and security measures they need to take. For instance, when transaction errors occur, customers are at a loss as to whom they should approach and how, given that telecom operators and banks operate from offices in far off cities and towns, and agents are unable to guide them. The only solution is to train agents and educate customers. There are also regulatory challenges to be overcome. For instance, Central Banks might disallow non-bank entities from transacting on behalf of banks. This places limitations on the services offered by the non-bank microfinance model. Then there are the risks associated with consumer protection and transactions. While branch banking clearly assigns accountability for the service provided to the bank staff, mobile banking, or any other form of branchless banking for that matter, has a third party or even several other parties involved in the transaction. In the absence of adequate regulations, this could blur the lines of responsibility, leading to problems. In Kenya, for instance, the operator of M-Pesa, a popular mobile transaction platform, does not bear liability for the actions of its agents. In countries where mobile banking is new, regulators would do well to first study consumer protection and regulatory approaches in countries like Brazil, India, Kenya, Peru, the Philippines, South Africa, Russia, and Colombia where branchless banking has gained traction. This would enable them to gain insight into existing problems and come up with possible solutions in their respective countries. Thought Paper 03

4 Need for regulation Many of the above mentioned risks and challenges can be overcome with regulation. Regulators have their task cut out. First of all, they should clearly define the activities that are subject to licensing, regulation and supervision. Not just that, they need to identify and address existing loopholes and empower the authorities to monitor bank and non-bank entities and the market, and enforce consumer protection laws. They should also make it mandatory for branchless banking providers to furnish price and service offering disclosures and ensure fair dealing and compliance with rules regarding agent appointment, data privacy and security. However, mere regulation is no good unless accompanied by consistency in administration, given that branchless banking involves different industries and domains and requires coordination between various supervisory agencies. Digital wallet for microfinance As financial institutions, Mobile Network Operators (MNOs) and regulators tackle the challenges thrown up by mobile banking, technology companies are busy churning out new innovations in that space. Consider the digital wallet, which does away with the need of carrying a bulky wallet stuffed with cash, checks, debit and credit cards and seems to be the solution for problems related to the physical handling of money. The digital wallet, which can be connected to bank accounts, credit cards and even prepaid money accounts, can be easily accessed by customers over mobile, using an M-Pin. In addition to facilitating peer-to-peer (P2P), merchant and utility bill remittances, this innovative medium would also be ideal for microfinance related receipts and payments. The support of other channels like the Internet, ATM, Kiosk and IVR, and possibly even TV in the future, will only add to the digital wallet s convenience. Beyond microfinance With mobile banking moving beyond the microfinance space, fee-based revenues are projected to cross Rs. 20,250 crores over the next five years, driven by lower transaction cost, a favorable regulatory regime and also the Unique Identification Number (UID) project wherein government benefits will be paid directly into beneficiaries accounts. The recent hike in the mobile banking transaction limit to Rs. 50,000 will only help matters. By 2015, payment and banking mobile transactions are expected to touch $350 billion. However, this will largely hinge on the decisions and policies of banks, telecom operators and regulators, as well as the willingness of consumers to adopt this channel. What s more, the competitive situation we see today is set to change. As of now, most of the MNOs permit only clients registered with them to avail of their mobile banking services. However, as in the case of Nokia Money, they will soon realize the advantages of technologysharing, which will in turn, lead to interoperability of mobile connection providers, to greatly benefit consumers in the years to come.

5 Reference 1. microfinancehub.com/2010/03/02/mobilebanking-in-microfinance-countries-servicesrisks-future/ 2. technology.cgap.org/category/south-asia/ india/ en.wikipedia.org/wiki/communications_ in_india 5. en.wikipedia.org/wiki/microfinance 6. microfinancehub.com/2010/04/29/economicand-legal-conditions-important-for-thesuccess-of-mobile-banking/ articles.timesofindia.indiatimes.com/ /computing/ _1_mobile-bankingm-commerce-mobile-phones 9. en.wikipedia.org/wiki/m-pesa 10. dl.dropbox.com/u/ /users/geetika/g- MICRO%20FINANCE-ONE.pdf 11. dl.dropbox.com/u/ /users/geetika/ G-MICRO%20FINANCE-TWO%20FULL% 20PAGE.pdf Arunkumar Gandhi Consultant, Finacle, Infosys

6 About Finacle Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with accelerated innovation that is key to building tomorrow s bank. For more information, contact Finacleweb@infosys.com Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.