When it comes to digital finance, India punches below its weight.
The 2014 Intermedia Financial Inclusion Insight (FII) Survey of 45,000 Indian adults found that 0.3% of adults use mobile money, compared to 76% in Kenya, 48% in Tanzania, 43% in Uganda, and 22% in Bangladesh.
This stems from a range of factors, but lack of innovation-friendly regulation has been barrier #1.
Most importantly, the Reserve Bank of India (RBI) historically allowed non-banks to participate in payment services in two restricted ways. They could build and manage an agent network on behalf of a bank; or they could issue a “semi-closed” wallet which allow customers to cash-in, buy airtime and other services, but not cash-out—not a particularly useful product for a poor customer.
This regulatory framework ensured that India’s banks controlled not only the market for savings and credit, but also payments. The problem is that banks have struggled globally to shift away from their reliance on branch-based approaches and legacy technologies to establish digital payment connections in poor and rural communities. With this restriction in place, it’s unsurprising that only 0.3% of Indian adults use mobile money.
This all changed in 2014.
In November, the RBI issued Payments Bank guidelines which allow companies with significant distribution expertise (including mobile operators, retail chains and existing agent managers) to offer deposit accounts and payments as a stand-alone business. Payments Banks won’t be able to directly offer credit, but they can:
- Build branch, ATM, and agent networks;
- Issue debit cards;
- Offer deposit accounts;
- Process domestic and international remittances;,
- Process utility payments; and
- Serve as an agent to distribute credit, insurance, and mutual funds on behalf of other financial service providers.
Payments Banks will initially be restricted to holding a maximum balance of Rs1,00,000 (US $1,600) per customer, but the RBI indicated that it would re-evaluate this limit as the model evolves. Deposits will be covered under India’s Deposit Insurance Corporation and accounts will be eligible for the RBI’s simplified know-your-customer (KYC) norms. Payments Banks have access to the national payment system and interbank markets for temporary liquidity management. Despite misunderstandings in the press, Payments Banks license applicants, like mobile network operators, will be permitted to leverage their existing distribution networks and technology systems, creating a big opportunity for those organisations to extend digital payment services into poor and rural communities. The deadline for submitting license applications is February 2, 2015 and several major players plan to apply.
The Payment Bank regulations are a game-changer, but they overshadow five other key regulatory moves in 2014:
- First, the RBI lifted its prohibition against banks establishing agents more than 30 kilometers from the nearest bank branch. The 30km rule has befuddled the financial inclusion sector for years by preventing smaller banks with limited branch networks from building national agent networks. By lifting this restriction, the RBI effectively leveled the playing field between large and small banks, at least when it comes to agent banking. And once Payments Banks come online, they will be able to establish agents without worrying about building brick and mortar branches to comply with the 30km rule
- Second, the RBI removed the requirement that customers provide proof of current and permanent address for opening a bank account. This requirement was particularly tricky for migrant laborers who have trouble securing documents which prove their current address.
- Third, non-bank finance companies (NBFCs) can now act as business correspondents. This will allow India’s microfinance institutions—many of which already serve millions of poor customers—to build agent networks on behalf of banks.
- Fourth, the RBI concluded its pilot to determine if licensed prepaid issuers, such as Airtel Money and Vodafone M-PESA, could allow their customers to cash-out. If the RBI removes that restriction in 2015, it will create more options for non-bank providers to offer payment services
- Lastly, the Telecom Regulatory Authority of India (TRAI) issued guidelines which require mobile operators to provide banks USSD channel access for mobile banking. This will ensure that banks can leverage mobile operators’ communications channels when offering mobile banking.
These regulatory moves add up to a game-changing year, paving the way for a big expansion in digital financial inclusion in the next 2-3 years.
But 2014 was as much about the Indian government’s policies as it was about regulatory changes.
In parallel to the RBI’s interventions, prime minister Narendra Modi launched an ambitious financial inclusion scheme called Pradhan Mantri Jan-Dhan Yojana (Prime Minister’s People’s Wealth Scheme)—the only scheme from India’s technology-friendly prime minister that carries his name.
Digital transactions have not been the focus of previous financial inclusion efforts in India, which often rely on public sector banks to push accounts but without a pathway to make those accounts transaction ready in a digital ecosystem. While PMJDY also relies on public sector banks and has an initial focus on accounts opened, it also breaks from the government’s previous financial inclusion efforts by focusing on digital transaction functionality and making full use of some extraordinary payments infrastructure already in place.