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Mor Committee report: Will DBT be the way to financial inclusion?

Posted on by MSC

The Nachiket Mor Committee on “Comprehensive Financial Services for Small Businesses and Low Income Households” made some concrete recommendations to enhance the spread and use of formal financial institutions. These recommendations include methods to transform the way government distributes social welfare funds. If the recommendations are accepted as they are, Direct Benefit Transfer (DBT) will go through a sea change. In this blog we assess the recommendations that impact “Direct Benefit Transfer”.

The most revolutionary, and therefore the most talked about, recommendation is the provision of a “Universal Electronic Bank Account” (UEBA), for each adult Indian using Aadhaar as e-KYC. This fulfils the most basic and critical condition of receiving direct benefit transfers: having a bank account. Significantly, the report recommends that these accounts are opened as soon as the Aadhaar identification number is issued, so that the time taken to open an account is reduced to almost nil.

The alternative method for opening an account, through the normal route of filling an application form, submission and verification of KYC documents etc., takes a long time, usually an average of 15 days … and in some cases the account is never opened at all.

Beneficiaries of different DBT schemes either do not have bank accounts; or if they have one, linking (or “seeding”) the Aadhaar number to these accounts is extremely challenging, because of discrepancies in the databases involved, and the low number of bank branches (because seeding can be done only in a bank branch). If the method of account opening proposed by the Mor Committee actually materialises, it will solve one of the bigger impediments that has contributed to uncertain and painfully slow progress of DBT – that of beneficiaries not having Aadhaar-seeded bank account. Apart from a handful of States where non-Aadhaar transfers are working well (for example Madhya Pradesh), for the majority of DBT schemes, Aadhaar seems to be the only reliable and feasible option. The recommendation for the UEBA takes care of both necessary conditions: a bank account that is also seeded to the beneficiary’s Aadhaar number.

The RBI has already allowed use of Aadhaar as e-KYC, but Indian banks have, to date at least and for understandable reasons, demonstrated a high level of inertia, and are taking too long to accept and respond to the new realities. It will take a few progressive banks to take initiative and provide the proof of concept, after which all banks will rush to follow.

While UEBA will address the necessary conditions – a bank account and seeding with Aadhaar – for DBT, where will beneficiaries withdraw the money?  The Mor Committee report discusses this issue as well and makes more recommendations to increase the number of access points in remote and rural locations. This can be done if the government increases commission paid to the banks for G2P payments to 3.14% of the amount transferred – thus making rural agents or customer service points (CSP) viable. This should take care of the viability issues for banks, aggregators and agents even in locations where the number and value of transactions is relatively low.

Another recommendation of the committee is to make the BCs interoperable. Under the current approach banks follow the “service area” approach to set-up business correspondent (BC) touch points. This means that each service area, is serviced by the area’s designated bank. Without interoperability, these touch points do not add lot of value to many clients who have accounts with a variety of banks – many or all of which do not have a BC touch point in their vicinity. If BCs are made interoperable, rural bank account holders will much better served and the business case for BCs and their CSPs will be greatly enhanced.

These recommendations potentially can transform the BC landscape by reducing the number of dormant CSPs, and also multiplying the number of access points available to beneficiaries irrespective of their parent bank and aggregator. The current state of CSP presence in India is not very encouraging as has been highlighted in a recent MicroSave India Focus Note “The Curious Case Of Missing Agents In Rural India”.  The study shows that only 4% villages could really be considered to have effective or usable CSP coverage.  In other places, CSPs were either dormant or were never appointed, and others simply do not exist at all. Until steps are taken to ensure viability of business proposition for banks, aggregators and agents, we can safely assume that neither Aadhaar-enabled benefit transfers nor financial inclusion will take off.

The Mor Committee’s report also makes a few other recommendations that have potential to change the BC landscape and provide much more room for banks to make business decisions. The recommendation to discontinue the requirement for bank branches to be within 15 km (urban) / 30km (rural) of their CSPs will help to make the case for banks to treat this as mainstream business and thus take a business decision on where to place their CSPs. It will be a welcome break from current target based approach. Another of committee’s recommendations, that banks can decide on charges for clients transacting at CSPs, also strengthens the business case for banks, BCs and their agents. There are locations in remote areas of hilly terrains where it may just not be feasible for banks to offer BC services at the same fee/commission as is in cities and towns in plains. If banks are free to decide charges, they will be more willing to open CSPs even in otherwise ‘unviable’ locations. And because all banks will be free to do this, competition should check exorbitant pricing.

Thus the Mor Committee’s report has addressed all the basic factors that are needed to make DBT successful and help achieve universal financial inclusion. The report challenges regulators to provide favourable conditions for fair and open competition, so that India has a larger number of viable players offering financial services. The regulator should recognise and respond to these new realities/possibilities. This is indeed new age, and new age banking provides us the opportunity to finally realise the dream of financial inclusion using DBT as an “anchor product” on top of which banks can offer a larger range of services.

Business as usual is not working and is unlikely to do so in the foreseeable future!!!

Introducing a catalogue of product functionalities and innovations in mobile money

Posted on by MSC

Much of the dialogue around mobile money is shifting from how to build a basic mobile money proposition (regulatory enablement, industry partnerships, cash merchant networks, technology choices) to how to transition to an e-payment ecosystem, whereby funds are born and used digitally. New product development in mobile money is central to this much-awaited transition.

The key battleground in the future will be to increase usage levels, and that means providing more customers reasons to do more things using their mobile. Despite the growing clutter in mobile money menus, customers remain very limited in what they do: according to the latest MMU State of the Industry report, 92.5% of mobile money transactions globally are either airtime purchases or basic person-to-person transfers. I suspect that dispensing with the mobile wallet and allowing for over-the-counter transactions (which may make good business sense in the short run but limits the opportunities for customer growth) has been the biggest innovation in the last few years.

But beyond the headline products: how diverse are the offerings of mobile money platforms across the world? How much product experimentation is going on? Is there a healthy supply of creative new product ideas?

In a new paper written in collaboration with my former Gates Foundation colleague Mireya Almazán who is now with the MMU, we have sought to shed light on these questions by creating a first-of-its-kind catalogue of mobile money functionalities and services. We include offerings that have been rolled out or are being piloted, as well as service concepts that have been proposed. We structure the paper based on the product typology depicted in the figure below. For each product class, we describe the range of implementation modalities in detail. We hope this report will be viewed as a comprehensive product definition reference guide by practitioners.

We found that while the range of product categories is still rather narrow, the specific ways in which services are defined and packaged does vary to a surprising extent across operators and markets, especially for payment services (peer-to-peer transfers, bill payment, merchant payments, transfers to/from linked bank accounts) and for linking mobile money accounts to regular bank accounts.

The paper did not get into the factors which may be hindering more far-reaching innovation, but let me posit some hypotheses here. First, many mobile money providers have inflexible platforms which are run by small teams on tiny budgets; for them, innovation is seen as more of a distraction than a solution to their business problems. Second, practically all mobile money providers run closed systems without adequate application programming interfaces; they are unwilling or unable to enlist partners to experiment for them. Third, unnecessary regulatory barriers to entry prevent smaller, nimbler, more innovation-minded players from mounting credible competing propositions. (I’m thinking here about the unjustified regulatory insistence that cash in/out presents agency problems, hence requiring a strong contractual binding of cash merchants to individual banks or mobile money providers, which precludes the spontaneous development of cash in/out networks serving all providers. Or the unjustified regulatory insistence that non-bank players shouldn’t promote savings services or pay out interest, even if they are 100% backed-up into fully regulated bank accounts.)

I believe that embracing innovation will be the only way to achieve scale by most players. And for any transactional business, scale is job #1.

Product Needs for Enterprises

Posted on by MSC

Despite the fact that MSMEs contribute significantly to the economy and employment, MSMEs are undersupplied with adequate, affordable, timely and market-led financial products. MSMEs play a vital role in developing economy, says MSC’s Assistant Director, Bhavana Srivastava. In this video, she outlines the financial needs of a typical MSME such as Credit, Savings, Transactional Banking Services and Business Development Services. And also voices the need for financial literacy and awareness programs for SMEs.
Bhavana concludes that a perceptible change in MSME banking can only happen when banks start viewing this segment as a viable business segment and include MSME banking in their core business strategy.

District readiness for G2P payments: Ready or not…Well, still mostly ‘not’ part – I

Posted on by MSC

G2P (Government to Person) payments have been common in India for a long time but questions are consistently raised as to whether the payments reach the intended beneficiary. In addition to this, the convenience, cost, efficiency, and certainty with which a beneficiary can avail, and then withdraw, the benefit payment also remain under scrutiny. As a result, with G2P payments such a key part of government strategy, there is a great deal of focus on ensuring timely, effective and convenient delivery to the intended beneficiary.

Electronic Direct Benefit Transfer (EBT) is one way to transfer funds electronically from the relevant department/treasury to individual beneficiaries’ bank accounts. EBT seeks to minimize leakages at the same time improving upon the time it takes to transfer funds. However successful implementation hinges on successful withdrawal, and for this, there has to be a network of available and accessible “Cash-In-Cash-Out” points servicing beneficiaries within their vicinity.

The core value adds are that:

It is indeed a win-win situation if achieved … but an implementation of DBT/EBT has thrown up more challenges than policymakers ever anticipated.

Typically there are a host of stakeholders involved in the entire process. These might differ depending on if it is Aadhaar based DBT or non-Aadhaar based one. But the diagram outlines the generic system.

It is evident from the above diagram that it is a multi-stakeholder process, and calls for a seamless coordination between a large number of players … and this is where the fundamental challenge lies.

At the front-line, beneficiaries must interact with:

  1. The district administration for scheme-related matters such as enrollment and updates in the beneficiary details, etc.
  2. Financial institutions and their cash-in cash-out (CICO) networks for account opening, linking or “seeding” of Aadhaar number (if Aadhaar authentication is used), checking account status, and financial transactions.

There is also back-end coordination and interaction between different stakeholders, but beneficiaries are not aware of these and there is no role they can directly play in them, so we do not discuss them here.

The Government of India announced more than 100 districts for Aadhaar based DBT roll out, and in addition, state governments have other such programmes in other districts. But there does not seem to be any clear basis for choosing the districts for rollout. This leads us to a very basic question: Could there be a tool that helps governments to decide which districts to choose for DBT roll out depending on districts’ readiness level? And, of course, this tool may also help us all to understand which areas need focus for successful roll out.

In the next blog in this series, we will discuss how MicroSave has responded to this challenge and developed “district readiness assessment” (DRA) tool, to assess the readiness of a district to deliver EBTs.

Mor committee report: Is cash-out the answer everyone is looking for?

Posted on by MSC

As Ignacio Mas pointed out in his blog ‘Better than Cash, or Just Better Cash’, digital financial services often have a tendency to promote the use of cash, instead of discouraging it, by making cash more effectively. His central argument is that by facilitating cash-ins and cash-outs, service providers are encouraging an easy movement of money while not according sufficient attention to the need for savings.

We believe that making the movement of cash more efficient has its own advantages, especially when low-income customers are involved. However, these benefits pale before the advantages of driving a cash-lite ecosystem using digital means. A cash-lite ecosystem removes inefficiencies pertaining to cash-in and cash-out while ensuring that the reliance on physical cash comes down substantially over a period of time. Storing money digitally can potentially lead to cascade effects and drive economies of scale for digital money in the longer term.

The Nachiket Mor Committee on “Comprehensive Financial Services for Small Businesses and Low Income Households”, in its advocacy to set up Payment Banks[1] addresses the need to make cash more efficient by recommending cash withdrawals from accounts maintained at these banks.

Over the years, many studies by MicroSave and others have reported that the “unbanked households” need a range of financial services (not limited to credit alone), and are willing to pay the “right” fee for these services. These financial services include the need to store and save money. Customers will normally store or save money once they are convinced that they can easily withdraw the money.

Unlike banked customers, the unbanked need frequent, low-value transactions rather than a few high-value transactions. There are two ways in which this can be facilitated. One is to ensure that the agent always has requisite cash to facilitate cash-outs and second is by providing more opportunities to conduct digital transactions.

Enabling cash-out by PPIs is the first step in the direction and in all likelihood, a very important one. It will significantly improve service delivery and also ensure that the customer starts trusting the agent network. However, cash-out comes with attendant challenges such as liquidity management. PPIs[2] (who are likely to convert to Payment Banks) have not yet addressed liquidity management in a comprehensive manner.

Given the restricted acceptance of the current prepaid instruments (Semi-Closed Wallets); customers in all likelihood will be forced to withdraw cash to send/spend on daily needs. The recommendation would have been much more interesting from a policy perspective had it focussed on ways and means to keep money electronic while providing universal access.

Unfortunately, the recommendation does not address the need to make merchant registrations easier. Currently, the PPIs have to spend significant energy, time, and cost to acquire / onboard physical merchants. This has led to them redirecting focus from merchant acquisition to remote payments, thereby severely restricting merchant payment opportunities for the customers. One of the major costs for a PPI currently is the cost of digitization of money. This will significantly increase if the money needs to be reconverted from digital cash to physical cash, thereby putting extra pressure on the customers in terms of higher transaction charges or making the business unviable. The secret is to be able to keep the money in a digital form for as long as possible. Along with cash withdrawal, it would have been ideal if Payment Banks were given the freedom to allow any merchant to accept payments.

From the viewpoint of stakeholders in the ecosystem, it is important that a cash-lite economy emerges (assuming included = cash-lite). Customers have to be able to spend the digital cash easily and across different types of merchants as cash handling can often be expensive for them. A move in this direction will trigger a relook at the existing Merchant Subvention Fees (MSF). We believe that a new MSF for digital financial services has to emerge, the current structure will not encourage the merchants to sign-up or will continue to push merchants into not accepting mobile money thereby severely denting the progress that can be made.

Given the customer segment the committee wants to address, the recommendation for setting up Payment Banks and the design structure conceived, while promising in its outlook, may not entirely meet customer needs but can be treated as the starting point in the evolution of making mobile money completely ubiquitous.

[1] Payments Bank: This is a design that provides payment and deposits, but not credit. A Payments Bank may or may not pay interest on the account/wallet that it provides. Once again, a Payments Bank can be nested or independent. A Nested Payments Bank would need to partner with a bank (Sponsor Bank) to hold both the escrow account and to participate in the payments network. An Independent Payments Bank would be a direct participant in the payments system and instead of escrow balances with the sponsor bank would hold some combination of CRR and SLR directly with the Central Bank.

[2] Pre-paid instrument issuers.

Increasing Staff Productivity in Agriculture Microfinance

Posted on by Parul Tandon

This Note highlights the efforts of TSPI in the Philippines to develop productivity incentives to support the growth of their TSPI Palayan (Rice) Programme (TPP). TPP is now offered in 92 branches with outreach to 15,000 clients and a loan portfolio of PhP369 million (US$8.2 million) as of December 2013. In 2013, TSPI embarked on an expansion campaign targeted at increasing TPP productivity. Early results from the pilot test of the incentives, which resulted in increased outreach as well as portfolio quantity and quality, encouraged TSPI to extend the campaign to succeeding cropping seasons.