One of the more debated aspects of the Mor Committee’s report on “Comprehensive Financial Services for Small Businesses and Low-Income Households” is the proposal for the new class of banks, in particular, the “Payments Banks”. While it is probably a stretch to assert that this is an “incremental step” from the existing (Pre-Paid Instrument Issuers) PPIs, it is fair to say that, “Actually it is becoming a norm worldwide”.
The EU Payment Services Directive was implemented across the European Union in 2009 specifically “to increase pan-European competition and participation in the payments industry (also from non-banks)”. The Central Bank of Kenya’s regulation, which gave rise to M-PESA and is used as a model by many, allows mobile network operators (MNOs) to offer payment and deposit services (backed by a trust account in a scheduled bank). And more recently, Brazil established a new regulatory framework to allow non-bank e-money issuers (see below).
Central Bank of Brazil issued the much awaited medida provisoria (MP) for mobile payments. The bill establishes the regulatory framework to allow non-bank eMoney issuance; and while at the moment it is only a general directive that defines what constitutes a payments scheme, which actors can be involved (MNOs, digital wallet providers, card companies and merchant acquirers), and the ability of the central bank to regulate such schemes, it is already paving the way for a number of commercial partnerships to go to the market.
As I noted in June 2013 through the MMU blog “Can India Achieve Financial Inclusion Without the Mobile Network Operators?”, “… if the Reserve Bank of India really wanted to turbocharge financial inclusion it would allow MNOs to act as issuers of e-money with proportionate supervision as discussed by CGAP. The reality is that clear and simple rules applied to non-bank mobile money providers can mitigate potential liquidity and solvency risks, as has been pointed out by the GSMA”.
If (and this is, of course, a big if) the Reserve Bank of India (RBI) does implement this particular recommendation of the Mor Committee, it has the potential to have a significantly beneficial impact on financial inclusion. Why so? Why can banks not offer these basic payments and small deposit services to the low-income market, particularly when international experience shows that MNOs can?
As MicroSave has pointed out, history strongly suggests that mainstream banks are still unwilling to do this for several reasons:
- Poor people’s financial activity is characterized by high volumes of low-value transactions – the perfect description of a traditional banker’s nightmare. Mass market, dispersed distribution is the core business of MNOs – they thrive on handling and making money on, high volumes of low-value transactions.
- It takes time for banks to make a profit on digital financial services as doing so typically requires them to offer a suite of products on the digital platform. Nonetheless, this is indeed feasible (even in India) – see Great Business for Banks – So Why Are They Slow To Build Agency Banking? It is easier for MNOs to make digital financial services a viable offering in the early stages of deployment because of the potential to reduce customer churn and to reduce the costs of airtime distribution – see Is There Really Any Money In Mobile Money?.
- Most banks simply do not see the business proposition at the base of the pyramid or are too busy responding to more traditional high value, low volume opportunities offered by the burgeoning middle classes in India.
- Furthermore mobile- (as opposed to card-) based systems allow person-to-person and person-to-business payments (utility bills, etc.) without using agents – thus offering an important user value proposition. (Although MicroSave’s Rapid Agent Assessments of the leading PPIs in India in 2011-12 suggested that only a few of their clients have used this facility to date)
Even though the banks seem largely unwilling or unable to roll out and/or leverage business correspondent (agent) networks, they will, I strongly suspect, lobby aggressively to ensure that MNOs are not allowed into the payments/deposits arena through a provision for Payments Banks. After all, payments and deposits are the preserve of banks – enshrined for centuries by rigid regulatory environments.
Furthermore, if the central and state governments were to implement the 3.14% commission rate for processing electronic benefit transfers recommended by the Taskforce on Aadhaar Enabled Unified Payment Infrastructure (something that the Mor Commission also exhorts the RBI to advocate), the banks might see this as the key anchor product on which to base a serious foray into the under-served low income market. So they will be keen to keep this territory for themselves.
But I suspect that if MNOs were indeed allowed to set up Payments Banks, thus freeing them from their current dependence on traditional banks, this would focus the traditional banks on the opportunities in the under-served low-income sector much more quickly.
There is, after all, a deep DNA disconnect and a profound trust deficit between the two types of organization. In all the many countries across Asia, Africa and Latin America where MicroSave has provided consultancy on digital financial services, MNOs have consistently asked for advice on how they might offer digital financial services without banks; and banks have asked how they can offer digital financial services without MNOs.
In Kenya, the banking industry is running scared of Safaricom’s M-PESA, which now has nearly 20 million customers and has started to use its immense data set on voice and financial transactions to inform lending decisions of its partner bank, the Commercial Bank of Africa, which offers small-scale deposits and on-demand, emergency loans over the mobile phone through M-Shwari. While M-Shwari, in its current form, has many shortcomings, it has proved remarkably popular and demonstrated that low-income people do want to save and are happy to do so using the mobile phone and that there is a large demand for what are relatively high-cost emergency loans. (The latter is, of course, an opportunity that would remain the sole preserve of traditional banks).
A provision for Payments Banks would allow MNOs to offer real value-add payment and deposit services to their customers and leverage their existent networks of more than 1.5 million agents to distribute and service these. See Can MNOs Lead the Way for Banking the Excluded? (1 of 2) for details of this; and Can MNOs Lead the Way for Banking the Excluded? (2 of 2) for a discussion of the likely challenges for MNOs entering this market in India. With this type of infrastructure, if MNOs were allowed to set up Payment Banks, and these, in turn, offered the Mor Committee’s Universal Electronic Bank Account (UEBA) it is indeed just about feasible that, “… by January 1, 2016, each Indian resident, above the age of eighteen years, would have an individual, full-service, safe, and secure electronic bank account”.
An exciting, revolutionary, prospect!