Digital and Mobile Transfers for Meaningful Financial Inclusion

1. Digital and Mobile Transfers for Meaningful Financial Inclusion Digital Payments: Paving the Way for Greater Financial Inclusion September 9, 2014 Mumbai AshimaGoyal Professor, IGIDR

2. Mobiles and Financial Inclusion • For financial inclusion: innovations that meet real needs • Accessible, affordable • Prime example: mobile • No equivalent financial innovation • But applications to mobile transfers and other financial services • Need based innovations deliver meaningful inclusion • Create conditions for the many to contribute to and participate in growth • Why such applications are far below potential: puzzle

3. Market Size and Inclusive Innovation • Indian mobile telephony: success story • Connections: 37 million in 2001 to 904m in 2014 • Not capital intensive; users among all income classes • But mobile enabled services lagging—digital money transfers • Market size—inclusive innovations • Financial regulations were not fine tuned to this • Gaps in infrastructure –externalities

4. Infrastructure • Broadband • Rural teledensity below 50%; Cities: 10% pop access to Internet • Mumbai 2013: Quality worse yet 6 times more expensive than average US city • Villages lag: RBI survey (2012-13) • Electricity coverage 55%; UP, Bihar, Jharkhand, Assam 77% unelectrified • Rural share of ATMs 14.6%; BCs 50% (in 2.21 lakh villages) • India underbanked; great inclusion potential esp. financial services • Villagers 74% savings ac; 34% used loan facilities; 24% remittances; 12%OD; EBT 15%

5. Table 1: Rural urban differences in teledensity

6. Mobile Banking • Concerns of regulator • Prefer bank linked BC model: customer security, LR more services KYC, AML • Unwilling to allow deposit holding by non-banks • Some flexibility in adjusting regulations and limits in response to feedback • Both India and Pakistan started in 2008: bank-led model • India 2.8m transactions (2012): mobile subscriber base 904m • But Pak 10.4m transactions (2012): subscriber base 132m • So bank led not responsible for Indian underperformance: then what?

7. Table 2: Comparing ICT and mobile use in India and Pakistan

8. Mobile Banking • Indian regulations • Low initial caps, relaxed over time • Reporting and encryption requirements for small amounts also relaxed over time • Pakistan • Branchless Bank accounts—3 levels; electronic opening allowed to lower TCs • Level 0 to encourage L grps; level 3 for business; KYC, limits customized • BB not restricted to MSPs fuel distribution cos.; Pakistan post and chain stores • Activities: A2A fund transfer, P2P fund transfers, cash-in and cash-out, payments, loans and remittances • Bill payments and P2P transaction: 80% of mobile transactions

9. Mobile Banking • Both bank linked models; no monetary value stored in mobiles • Banks responsible for security and stability; data records • Each transaction through customer account • Key differences • Pak: More flexibilities and functions, customization: innovation • Higher initial levels and limits; more income categories; wider BC universe • No mandatory physical presence for customer registration: TCs • Brought in all classes;market size  more creative service devt. • Virtuous cycle of cumulative innovation and use

10. Experience elsewhere • M-Pesa: Kenya versus Nigeria • Regulator versus market-led? • Kenya 70% (17m) use: Monopoly, accidental critical mass • Nigeria did not take off • Out of 200 expts, 4-5 worked out • India Airtel money, M-Pesa 2011-12—yet to scale up • Regulatory view • Building for the long-run, multiple services, meaningful financial inclusion • Network lock-in: need to foster entry to keep prices low • But have to work with business for success

11. New trends • New trends: digital money in retail • Technology: Near field communication; cloud; new products innovation; cheap smart phones--expected sales in India 650m • Large non-bank players: google, apple; bank link—regulatory comfort, cross-border • Common standards for critical mass; coop :costs, economies of scale and scope • Customer behaviour—e-commerce; sharp rise in demand • Standard-setting and cooperation: MSPs and banks • Recent regulatory changes can support these • India, Pak experience: encouraging content creation critical • G action: Jan Dhan: condl overdraft; insurance; DBT; Rupay—fin services • NPC-IMPS-P2P ready; UID link; KYC easier ; 150m new banks accounts—MSPs • As policy increases market size it can induce a virtuous cycle of inclusive innovation

12. Conclusion • Large population  large potential market size • Large mobile user base: large market size for services • Huge potential business opportunities; low margin large scale business model • Past technology policies have not leveraged this strength to work with business • But changes on the horizon; financial inclusion can drive innovations •  market size induces innovation in affordable products • Decentralized so less subject to policy errors, bureaucratic delays • More e-delivery can itself alleviate bottlenecks in public services • Technological behavioural changes favour ‘active inclusion’ • Time ripe for coordinated push on market size Thank You