Mobile banking services have significant potential for a country like India, where financial inclusion stands at 58.7 per cent (as per the 2011 census) as against a wireless teledensity of 73.24 per cent as of May 2014. Given telecom operators’ growing mobile footprint and strong retail presence, they are well placed to reach out to the masses, especially in areas that lack a strong physical banking infrastructure. Although several operators have attempted to leverage this opportunity by launching mobile wallets in the past few years, service adoption has not been high primarily due to regulatory restrictions on cash-out transactions as well as overdependence on banks. As a result, despite owning a cellphone, which can act as a platform for basic banking transactions, the majority of the people, especially in rural areas, have missed out on the opportunity to come under the banking radar.

In such a scenario, the Reserve Bank of India’s (RBI) recently released draft guidelines on licensing of payments banks, which allow non-banking entities to engage in banking activity (with limited scope), are a positive development in serving the unbanked population. The concept of payments banks was recommended by a panel headed by veteran banker Nachiket Mor. The panel was entrusted with the task of suggesting ways to facilitate financial inclusion across the country. In line with the panel’s recommendations, RBI’s draft guidelines allow payments banks to provide a limited range of services, such as the acceptance of demand deposits and remittance of funds, through a widespread network of access points, particularly in remote areas, either by leveraging their own branch network or through business correspondents (BCs) or networks provided by others. However, these banks are not allowed to engage in any form of lending and instead have to park all funds in government bonds.

RBI’s move has opened up new opportunities for the Indian telecom industry as wireless telecom operators feature on the list of entities that are eligible to set up payments banks in the country. Currently, banking regulations require telecom operators to partner with a bank for the cash-out function on their mobile wallets. They are required to put customers’ money in an escrow account with a partner bank. This account does not fetch any income for the non-bank payment company but the bank has access to the float. However, through a payments bank licence, operators can act as banks, which cannot perform lending functions and are required to park the entire amount of customers’ deposit in government securities.

The move is likely to have a positive impact on operator revenues. According to global financial services company Credit Suisse, mobile payments may add between 1 per cent and 8 per cent to total industry revenues, depending on the level of restrictions imposed by RBI. Moreover, telecom operators can leverage their existing retail networks to derive a strong business case from RBI’s proposition. As a result, the industry expects both incumbents and emerging players to compete for payments banks licences in order to strengthen their service portfolio and enhance profitability.

Operators’ role in the banking ecosystem

The key strength that makes telecom operators perfect candidates for acquiring payments banks licences is their readily available and widespread networks. Further, these players are already offering mobile money, m-banking and m-commerce services, and can further expand their service portfolio by providing services under the payments bank licence.

As per industry estimates, about 4 million customers currently subscribe to m-wallet services such as Bharti’s Airtel Money and Vodafone India’s M-Pesa. In fact, a payments bank licence will lend more credibility to these services and will help operators increase their mobile money customer base.

The licence will allow operators to take deposits and pay/earn interest without partnering with conventional banks. While they will not be allowed to lend money, the industry is hopeful that RBI will allow cash-out transactions, which will enable consumers to withdraw money at any location. Further, operators will be required to invest the money parked with them in government bonds, which in turn will allow them to offer higher interest rates on deposits. The payments bank model also aims to cater to migrant workers in metros or Tier 1 cities who need to send money to their families back home.

The potential success of the mobile banking business model in India also gains strength from the thriving mobile money market in African countries that have a similar demographic profile as India’s and face the same set of challenges in terms of limited financial inclusion. The M-Pesa service, which was launched in 2007 by Safaricom in Kenya, has catered to the large unbanked population in the country. The service initially allowed subscribers to carry out financial transactions with another phone user; however, it has matured and now allows money transfers to and from users’ bank account and M-Pesa wallets. Over the years, its increasing adoption has proved to be a boon for the operator as well as the Kenyan economy. Currently, the M-Pesa service has a strong user base of around 20 million and about 40 per cent of Kenya’s GDP flows through this payment platform. In 2010, Safaricom launched another product, M-KESHO, in Kenya, which offers services such as a savings account, short-term loan facilities and microinsurance products that can be accessed from a phone after registering for a bank account with an agent. Unlike M-Pesa, M-KESHO accounts pay interest without the requirement of any minimum balance and provide emergency credit facilities.

Key challenges

While the payments bank model offers huge potential for operators and consumers alike,  clarity is required on various aspects of RBI’s draft guidelines. More information is needed on whether cash-outs in the form of people-to-people (P2P) money transfers will be allowed in India. Further, clarity on stand-alone retail partners as agents is required.

Also, as per the draft guidelines issued by RBI, payments banks can only be demand deposit acceptors. In such a scenario, e-money will be considered as a deposit and will be subject to deposit insurance and will also accrue interest. The lack of clarity on the payment of interest on such accounts is a key issue that must be addressed. For instance, in case operators are required to pay interest on such accounts, it is uncertain whether it will be in line with the rates paid by other commercial banks.

Also, there are several requirements in the draft guidelines that may act as potential impediments for operators to venture into the banking business. The foremost of these is the high capital requirement. Preventing operators from engaging in lending operations may also prove to be a dampener, especially in rural and semi-urban areas that lack structured credit facility systems.

Regulatory challenges aside, the biggest task at hand for operators would be to develop credibility and customer confidence. The payments bank model will appeal to consumers only when they are offered higher interest rates and transactions become less complex.

The way forward

Financial inclusion continues to be a challenge in India, with over 60 per cent of the population still having only limited access to banking services. Mobile operators with their strong networks and technological expertise to conduct P2P transactions are well equipped to compete with as well as complement the conventional banking sector. Although the association between telecom operators and conventional banks to reach the unbanked population is not new, RBI’s guidelines will give a fillip to this association and transform the way basic banking transactions are conducted. RBI must now take into account the telecom industry’s expectations before releasing the final norms as operators will offer the dual opportunity of bridging the financial gap in the system and improving banking access for rural customers.