Access to financial services in rural areas has been very limited as the traditional banking business model is deemed unviable due to the high cost of service delivery. To overcome this issue, mobile banking services were envisioned to drive financial inclusion in rural areas. However, the uptake of these services continues to be below expectations.

The Reserve Bank of India (RBI), in its half-yearly financial stability report released in December 2013, attributed the limited adoption of mobile banking services (in both urban and rural areas) to low levels of customer awareness and acceptance. It further highlighted constraints such as the inability of banks to link a customer’s mobile number with their bank account number, incompatibility of handsets with mobile banking applications, absence of collaboration and revenue sharing models between banks and telecom operators and the inability to get the unstructured supplementary service data (USSD) channel in operation for mobile banking services.

Nevertheless, the central bank and the government remain optimistic about the potential of mobile handsets as a channel for improving the availability of financial services to rural customers. They base their expectations on the success of mobile banking services in countries like Kenya, the Philippines and South Africa. In Kenya, the m-banking service, M-Pesa, currently contributes about 40 per cent to the country’s gross domestic product flows, thereby highlighting the significance of the services in empowering rural communities. Another reason for the government favouring mobile banking is the lower transaction cost. As compared to Rs 40-Rs 50 for a traditional banking transaction, mobile banking costs only Re 1-Rs 1.50. Reduced transaction costs will therefore result in the proliferation of mobile banking services.

Mobile banking can also serve as a one-stop solution for the payment of subsidies in a transparent manner to rural workers employed under various central and state government schemes. As per market estimates, at present, only 15 per cent of the funds meant for the poor reach them. The payment mechanism can be improved if the capital is delivered to their bank accounts, through their mobile number, rather than through manual transfer.

Government initiatives for financial inclusion

In its efforts to promote and encourage the adoption of mobile banking services, the government, along with the RBI, has taken several steps. The RBI issued mobile payment guidelines in 2008. The guidelines were amended in 2009 to increase the limit on the transfer of funds and purchase of goods from Rs 5,000 to Rs 50,000 per day for each customer. This limit was removed altogether in December 2011 and banks were allowed to put their own restrictions on daily transactions on the basis of the risk perception of their customer profiles.

To ensure interoperability among different telecom service providers and various banks, the National Payment Council of India launched the interbank mobile payment system (IMPS) service in 2010. The 24x7 service allows customers to quickly transfer funds to an individual’s bank account through a mobile phone. The funds transfer is protected with a separate identification number, Mobile Money Identifier, for the customer’s bank account and a mobile PIN. The scope of the service has been extended to include merchant payments as well.

However, one of the disadvantages of IMPS is that the service can only be availed of by people with bank accounts through bank branches and ATMs, which are limited in number in rural areas. Given that about 40 per cent of the population in India is unbanked, especially in rural areas, the RBI is making concerted efforts to overcome this issue. In this regard, the central bank has given in-principle approval to a payment mechanism that would allow customers to transfer money through their mobiles to people without bank accounts. Under this system, the sender would give instructions to an intermediary, such as a bank or another company, to process a money transfer. Subsequently, the intermediary would generate a code and message it to the recipient, who would be able to use the code to withdraw cash from an ATM.

Meanwhile, the Telecom Regulatory Authority of India has lowered the tariff ceiling on mobile banking services to Rs 1.50 per USSD, per transaction, to ensure greater penetration of mobile banking services. This reduction in tariffs will bring down the overall cost of service delivery and thus attract the interest of rural customers. Given that USSD-based services can be accessed even through low-cost handsets, mobile banking services delivered through this mode can enable the government to achieve its objective of financial inclusion.

Collaboration of operators and banks

With their extensive presence across the country, mobile operators have emerged as the key technology and communication partners for banks in offering mobile banking services to rural customers. For instance, ICICI Bank in collaboration with  Vodafone India (through its subsidiary Mobile Commerce Solutions Limited), offers a mobile payment service, M-Pesa, which completed its pan-Indian roll-out within a year of its commercial launch in April 2013. The M-Pesa service allows Vodafone customers to transfer money to any mobile phone in India. However, Vodafone has stated that the service is primarily used for mobile phone recharges in rural areas.

The two partners recently signed an agreement with the Panchayati Raj Department of the  Odisha government, to pay wages to workers contracted under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) in the state. Under this arrangement, Vodafone will issue SIM cards to the workers and ICICI Bank will open accounts for them after fulfilling the Know Your Customer norms. The mobile numbers of the workers will act as their savings account number. The workers will receive alerts via SMS and will subsequently be able to withdraw cash from a designated retail outlet simply by authorising the transactions on their mobile.

A similar partnership has been formed between Bharti Airtel (through its subsidiary Airtel M Commerce Services) and Axis Bank. MNREGA workers can subscribe to the Airtel Money service to receive their wages on their mobile phones. They can subsequently withdraw cash from Airtel retail outlets.  With Idea Cellular also getting a prepaid payments licence from the RBI, the operator is likely to launch its mobile banking services in collaboration with Axis Bank soon.

Positive outlook

In the future, the uptake of mobile banking services in rural areas is expected to grow at a rapid rate given the significant rise in the adoption of mobile handsets, expansion of services and increase in customer awareness. Also, as the industry matures and new standards and guidelines are issued, the cost of mobile banking service delivery will decline further, which will encourage adoption among rural customers. Meanwhile, successful demonstration of subsidy and wage payments to workers under government schemes in Odisha will encourage other state governments to follow suit.