I’ve written before about the Indian environment and what the Reserve Bank of India (RBI) called its “calibrated” approach to mobile payments, beginning with strict regulation back in 2009, and how it failed to unleash the latent demand from Indian consumers or the inherent enterprise and creativity of Indian businesses. We are familiar with the stories of mobile payment use in, say, Kenya or China. But India has been lagging, and I have always thought that it was the regulatory environment that was to blame.
In India, where 22 percent of the world’s unbanked reside and over 900 million mobile phone connections exist, 0.3 percent of adults use mobile money.
That is not to say that nothing is happening in India! That’s not true at all (and in fact a Consult Hyperion team was in Mumbai last week working with a client in the payments field). But I think it is fair to say that India has not yet fulfilled its potential in mobile payments. In fact, a couple of years ago it was clear to many people that the India was missing out because of this and that something would have to be done to allow the multiple benefits of mobile payments to spread in the country. Mobile payments have a key role to play in financial inclusion and this is vitally important to India, so the lack of progress was becoming a social and political issue. Back in 2013, there was an article in the New York Times titled “Mobile Payment Startups Face Reluctant Indian Consumers” that I suggested at the time should really have been titled “Mobile Payment Startups Face Reluctant Indian Regulators”! I never thought the sticking point in India was the lack of consumer demand.
In their book “Financial Inclusion at the Bottom of the Pyramid”, Carole Realini and Karl Metha look at the issue of financial inclusion in India in some detail. They note that the previous approach towards national financial inclusion there was to use “business correspondents” (i.e. banks were to use third-party non-bank “BC” agents to deliver services) and have an interesting case study on Eko, one such BC. I couldn’t help but notice that the most widely-used EKo services is domestic remittance, which is a payment application in my eyes and not really a banking application at all. So while, as Carole and Karl note, India may have relatively few bank accounts but a lot of mobile phones, it is not in my view the natural corollary to imagine that getting people to open bank accounts and then access those bank accounts using those mobile phones is a way forward. This isn’t just my opinion: the figures show that it is not the optimum route to inclusion. More than half of the 160m bank accounts created in the Indian government’s most recent account opening drive have never been used and at cost of $3-$4 to open and maintain, that’s a lot of wasted money. Most consumers, most of the time, need payments not banking.
Unbanked, as we say, is not the problem and banked is not the solution. Therefore I was very happy to see the steady relaxation of the Indian mobile payment regulations. This culminated last year in the decision to create a new category of finanicial institution (similar to the approach adopted in Europe) and issues licenses to these new “payment banks”. I am sure that the competition and innovation that these non-banks will bring to the Indian market will lead to a pretty rapid increase in the use of mobile financial services there. Payment banks can:
- Accept deposits from individual customers with a maximum limit of Rs. 1 lakh (around 1,300 euros).
- Issue debit and ATM cards for transactions but not credit cards.
- Allow transactions through Internet and leverage technology to offer low cost banking solutions.
Importantly, a key to overall systemic risk evaluation is that a payments bank cannot undertake any lending activity. This makes it possible to expand the systemically less risky payments business while keeping the systemically risky core banking credit activities under control. Anyway, news has now arrived to the effect that the RBI has now granted the first 11 licenses in this category to a variety of fintech, tech and telecoms companies and consortia.
Among the successful bidders are telcos Vodafone M-Pesa and Bharti Airtel, tech firms Fino PayTech and Tech Mahindra, the Department of Posts, and Vijay Shekhar Sharma, the founder of m-commerce outfit Paytm.
I think this is unreservedly good news. The Indian market will now grow and Indian entrepreneurs will create services to deliver across the social spectrum, the Indian mobile payments industry will expand and a new non-bank financial services industry will grow up innovating around products and services.