Accelerating Financial Inclusion through Mobile Phone Technology: Opportunities, Challenges and Policy Options for India

Dr. Sumanjeet Assistant Professor Department of Commerce Ramjas College University of Delhi Delhi-7, INDIA E-mail: sumanjeetsingh@gmail.com Voice: +91-92-153-26126
Abstrtact: Technology is the key for financial inclusion because that is the only way to reduce the cost significantly and reach the masses. But all technologies are not suitable for financial inclusion due to affordabiltiy, accessibility, security and privacy. In the last decade, mobile phone technology has emerged as the most potential and well suited channel for financial inclusion. Use of mobile phone for inclusive finance is very popular in countries where most of the population is unbanked or underbanked. Indian government has also realized that mobile phone can be an important mode for propagation of financial inclusion in the country. As a result, Indian government has already taken many initiatives to promote mobile banking as a tool to expand the credit and financial services to the excluded populations. But, mobile phone, although a critical tool of financial inclusion, does not guarantee adoption, it only indicates potential. There are many challenges in adoption and successful implementation of mobile technology especially in rural areas. In the present paper an attempt has been made to explore the potential of mobile phone technology in accelerating financial inclusion in India. The paper also highlights pitfalls of the mobile technology for financial inclusion. Further, paper makes an attempt to discuss the policy options, which needs to be done to ensure equitable access to financial services for all who want it. Key Words: Mobile; Access; Inclusive Finance; Unbanked JEL Codes: O16; G21; G2; E42

Across the developed world, access to financial services is largely ubiquitous; there is an
abundance of cash and credit on demand, from multiple channels, any locations, and 24 hours a day1. But, this story is very different in the developing countries which house nearly 90 per cent of the worlds unbanked populations2. The situation is worse in least developing

1 In mature economies, rate of exclusion tend to be low-for example only an estimated 4 per cent of the population in Germany and 9 per cent in the United States go without basic access to these services. 2 In the worlds smaller and less mature economies, financial exclusion rates reach exorbitant levelsapproximately 88 per cent of the financially excluded live in Latin America, Asia and Africa

countries3 (LDCs), where more than 90 per cent of the population is excluded from access to the formal financial system (United Nations, 2006). In many regions of the world including India, low income people do not have access to basic financial services like saving accounts (Richard et al, 2009), insurance, credit and even less to more advanced financial services that could help to improve security, predictability and opportunities for entrepreneurship. The limited access to finance severely reduces the choices citizens have in determining the way they work and live. Without broader access to finance, only the rich and connected people are able to take advantage of economic opportunities. Also, when a majority of the population is excluded from access to financial services, it can significantly and adversely affect the efficient allocation of financial and physical resources, economic growth, income and non-income inequalities, and the distribution of benefits in an economy. Therefore, the provisions of financial services to the poor and underprivileged sections of the society have always been in focus of various programmes initiated by the Governments since independence (Dasgupta, 2001). Undoubtedly, the government has formulated policies, put in place many rules and regulations, tried to mandate rural branches, leading to underprivileged, controlled money lenders. Despite encouraging policies and having a wide network of rural bank branches in India which implemented specific poverty alleviation programmes that sought creation of self-employment opportunities through bank credit, a very large number of poorest of the poor continued to remain outside from the field of formal banking system4. A World Bank-NCAER Survey (2003) on Rural Access to Finance indicates that 70 percent of the rural poor do not have a bank account and 87 percent have no access to credit from a formal source. Informal sector lenders have a strong presence in rural India, delivering finance to the poor on frequently extortionary terms. Access to other financial services such as savings accounts, life, health and crop insurance also remains limited for the rural poor. As of today, as per governments own admission, barely 27 per cent of rural households are able to access financial institutions (Economic Survey 2007-08). Further, the National Sample Survey Organization (NSSO), 59th round data reveals that, in the highest income quartile, 92.4 per cent have savings and 86 per cent have bank account. By contrast, only 34.3 per cent of the lowest income quartile has savings, and only 17.7 per cent have a bank account. In short, government has failed to deliver financial services to the majority of poor citizens. In this sense, financial inclusion5 poses policy challenges on a scale and with an urgency that is unique for developing countries like India. Finding solutions to encourage greater financial inclusion has not typically been a core activity of central banks or other financial regulators. But, the widespread realization that financial inclusion is critical for poverty alleviation, balanced economic growth and economic stability has resulted in growing leadership and ownership of the issue by policymakers. To make inclusive finance a reality in India, Reserve Bank of India and Indian government has taken number of initiatives which includes offer a

3 Take the case of Uganda, approximately 95 per cent of Ugandas citizens have limited or no access to financial services. 4 The unbanked or underbanked population is prevented from accessing financial services because of limited physical bank infrastructure and lack of access to electronic infrastructure such as debit cards, automated teller machines (ATMs), internet and mobile banking. Admission into the formal financial sector is further hampered by high banking fees; mostly cash based financial environment, and low rates of financial literacy. 5 Financial exclusion can broadly be divided into three categories: (1) Core Exclusion-Who operate their financial affairs completely outside the regulated financial system (2) Limited Access- May have a basic bank account but poor financial habits and little advice and (3) Included but using inappropriate products

basic banking No Frills Account and zero bank account6 to low income group; easier credit facility upto 25,000; simplified know your customer7 (KYC) norms; use of ICTs8; smart cards system; EBT (electronic benefit transfer9) through banks, promotion of business correspondent (BC10) and business facilitators (BF) models11 and 100 per cent financial inclusion derive. But, results are not satisfactory. The reasons are many. In India, financial inclusion is pervasive given the low geographical outreach of financial service providers, as a large segment of the population is based in rural areas whereas majority of bank branches are located in urban or peri urban areas. Out of the 600,000 habitations in the country, only about 30,000 have a commercial bank branch. Just about 40 per cent of the populations across the country have bank accounts, and this ratio is much lower in the northeast of the country. The proportion of people having any kind of life insurance cover is as low as 10 per cent and proportion having non-life insurance coverage is an abysmally low 0.6 per cent. People having debit cards comprise only 13 per cent and those having credit cards only a marginal 2 per cent. Similarly, lack of enabling environment due to the weak enforcement of contracts and commercial banks reliance on traditional banking products also act as barriers to access. In addition, a large number of people have a low literacy level and face social and
6 As on December 2008, the bank has opened 40,726zero balance accounts (no balance are required of customers) and 3,935 no frills accounts. These offer a free cheuqe book, access to over 25, 000 ATMs, free statements, a passbook facility and SMS alerts. These services are particularly aimed at market traders, artisans and micro entrepreneurs who might otherwise be excluding from financial services. 7 In order to ensure that persons belonging to low income groups, both in urban and rural areas do not encounter difficulties in opening bank accounts, the know your customer (KYC) procedure for opening accounts was simplified for those accounts with balances not exceeding Rs.50,000 and credit limits not exceeding Rs.100,000 in a year. The simplified procedure allowed introduction by a customer on whom the full KYC drill had already been done. 8 To support this development, in 2008 the Indian Finance Minister set up a Financial Inclusion Technology Fund of around US$125 million to meet the cost of technology adoption, including evolving industry-wide standards for IT solution. 9 To encourage banks to adopt Information and Communication Technology (ICT) solutions for enhancing their outreach, the RBI formulated a scheme to quicken the pace of adoption of the smart card-based Electronic Benefit Transfer (EBT) mechanism by banks and rolled out the EBT system in the States that are ready to adopt the scheme. As per the scheme, the RBI would reimburse the banks a part of the cost of opening accounts with bio-metric access/smart cards at the rate of Rs.50 per account through which payment of social security benefits, National Rural Employment Guarantee Act (NREGA) payments and payments under other Government benefit programmes would be routed to persons belonging to below poverty line (BPL) families. The scheme was implemented in Andhra Pradesh. So far, seven banks have been paid Rs.1.8 crore for smart cards issued by banks in Andhra Pradesh during July-December 2008. The process is at different stages of implementation in other States such as Karnataka and Uttarakhand and the scheme of partial reimbursement by the Reserve Bank has been extended by one year up to June 30, 2010. Banks are advised to work in co-ordination with the respective government departments at the Central and State levels to ensure that all State benefits are delivered to individuals only through bank accounts within a specific timeframe. 10 The BC Model ensures a closer relationship between poor people and the organized financial system. Reorganizing this, in 2006, RBI permitted banks to use the services of non-governmental organizations, microfinance institutions, retired bank employees, ex-servicemen, retired government employees, Section 25 companies, and other civil society organizations as Business Correspondents in providing financial and banking services. In addition to the entities presently permitted, RBI has also permitted banks to appoint the following entities as BCs (i) Individual kirana/medical /fair price shop owners (ii) individual Public Call Office (PCO) operators (iii) Agents of Small Savings schemes of Government of India/Insurance Companies (iv) Individuals who own Petrol Pumps (v) Retired teachers and (vi) Authorised functionaries of well run Self Help Groups (SHGs) linked to banks. 11 BF can undertake many activities on the behalf of banks which will enable reduction of transaction costs for banks, clients and also enable revenue sharing for BFs.

cultural barriers to access to finance. Equally important, the cost of running a branch bank has historically been high. Numerous attempts at evolving a low cost business model for rural banking have not been totally successful. Lack of physical and social infrastructure, lack of understanding and knowledge, lack of technology, lack of support, and lack of confidence, are among others. Overcoming these barriers is, in a nutshell, the challenge of financial inclusion. From the above discussion it is clear that objective of inclusive finance can not be achieved in India in the existing structure due to both demand and supply side constraints, which limit the access to financial services especially in the poor and marginalized group. But, the real question is how to promote inclusive finance in India as many initiatives have failed. Some experts argued that technology is the answer (Gangopadhayay, 2009; IBA, 2007). But all technologies are not suitable12 for inclusive finance due to affordability, accessibility, security and privacy (Sumanjeet, 2008). Mobile phones fit into the picture so well, as they could take the financial inclusion initiative to the next level. Mobile banking raises the prospect that financial services provided via mobile phones can overcome almost all the barriers to entry in the traditional banking system13. Use of mobile phone for inclusive finance is very popular in countries (Leasi, 2010) where most of the population is unbanked. In most of these places banks can only be found in big cities and customers have to travel hundreds of miles to the nearest bank (Prakesh, 2010). The Philippines is pioneer in enabling financial services through mobile phones. The country has seen the development of partnership between the mobile payment platforms provided and rural banks there. Countries like Sudan, Ghana and South Africa have adopted mobile technology for inclusive finance. Latin America countries like Uruguay, Paraguay, Argentina, Brazil, Venezuela, Colombia, Guatemala and recently Mexico started with a huge success. In Iran, banks like Parsian, Tejarat. Mellat, Saderat, Sepah offer this service. Kenyas Safaricom (Part of Vodafone Group) has had started the popular M.-PESA service-mainly used to transfer the limited amounts of money and pay utility bills. As a result, several systems have already emerged-Tigo Cash in Paraguay, Pago Movi in Peru, Nipper n Mexico and Oi in Brazil are few. In India, where an estimated 440 million (out of these 200 million do not have bank account) people own mobile phones. Mobile banking has potential to increase the efficiency of payment systems, reduce reliance on cash, and broaden access to financial services by increasing the accessibility (Peha and Kahmitov, 2004) and most important lowering the cost of offering formal financial services. For example, transactions cost involved in mobile banking as it can be observed from the mobile services of Kenya and Philippines, where a typical transaction through a bank branch costs the bank US$2.5; and it would cost only US$0.50, if it were automated by using mobile phone. A solution
For example, if a person want to buy something, first he/she will go to the ATM, withdraw cash, go to the mall and pay the cash to buy the things. The mall then deposits the money into the bank and the bank puts the money same cash in the ATM machine. Thus, use of ATM involves a cost, so it is not a technology that brings down the cost. 13 Barclays Hello Money initiative works on Unstructured Supplementary Services Data (USSD) technology, which makes it secure and safe. It allows people to bank using their mobile phones without needing access to branches. The technology is operational on all GSM networks. Customers can make account enquiries, transfer money quickly to a VISA debit or credit card and make bill payments at a very low cost. Turnaround response times for interactive applications are shorter for USSD than SMS/GPRS solutions because of the session-based feature of USSD and since it is not a store and forward service. Users do not need to download a particular phone menu to access services with this technology; they can enter the USSD command direct from the initial mobile phone screen.
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based on mobile phones can therefore substantially reduce the cost of spreading financial services over many retail environments, at least in areas with relatively high mobile phone penetration. Transferring money via mobile phones can save days of travel for workers in cities who send money home to families in rural villages. Mobile payments are also more secure than relying on informal brokers or carrying cash personally, and they have the potential to change markets by making small business-to-business transactions immediate and more reliable (Akula, 2009). Further, mobile is best suited technology for rural India where an overwhelming 61 per cent of the rural population is unbanked. Mobiles are cheaper, more portal and their extended battery life is suited to regions where access to electricity is lacking or non-existent. The infrastructure needed to connect wireless devices to the internet is easier and less expensive to build. There are also no learning curve, no literacy barrier and no technical support challenges to overcome. There are no costly and burdensome applications to load maintain and updates. Further, mobile technology gives the bank ability to cross-sell their other complex banking products and services such as vehicle loans, credit cards etc. Mobile technology also facilitates transfer of funds of various government schemes like social security pensions and wages paid under NREGS, to a mobile linked account. Added to these, rural India is a huge and challenging market insofar as banking is concerned. The country has close to 600,000 villages, making it difficult to establish brick-and-mortar banks everywhere. But, mobile banking is the cheapest way to reach the rural customer, where it costs just US$523 to US$837.5 (25,000 to 40,000 rupees) to set up a micro-banking outlet. It is expected that soon the cost will bring down to US$209 (10,000 rupees). Yet another benefit is anywhere/anytime characteristics of banking which is very important for rural people. A mobile is almost always with the customer. As such it can be used over a vast geographical area. Customer does not have to visit the bank branch or ATM to avail the banks services. Research indicates that the number of footfalls at a banks branch has fallen down drastically after the installation of ATMs. As such with mobile services, a bank will need to hire even less employees as people will no longer need to visit bank branches apart from certain occasions. Last but not the least, the bank could remind customers of outstanding loan repayment dates, dates for payment of monthly installments, electricity, and water bill or simply tell them that a bill has made on the card. The way the owner is always informed when their card is used and how much money was taken for each transaction. Government of India has understood the potential of mobile phones in financial inclusion and working very aggressively towards enabling this system as penetrative as possible. Reserve Bank of India (RBI) has issued a detailed set of guidelines14 for the mobile banking
The Reserve Bank of India issued operative guidelines for Mobile Banking in India in 2008, highlights are: (1) Mobile Banking can now be offered to customers without any debit or credit cards too (2) In order to register for Mobile Banking, the customer should be physically present. But there could be relaxation applied later (3) Banks will have to offer the mobile banking service with all mobile operators, before 6 months of the start of Mobile Banking (4) Banks may put in place end-to-end encryption of the mobile PIN number (mPIN) for better security (5) Internet login IDs and Passwords can be used for mobile banking also (6) A transaction limit of Rs 2,500 is imposed per mobile banking transaction. This is subject to an overall cap of Rs 5,000 per day, per customer. Banks may also put in place monthly transaction limits depending on the bank's own risk perception of the customer. But, in 2009, RBI relaxed mobile banking guidelines. Some of these are: (1) Banks will be able to do transactions with a daily cap of Rs 50,000 per customer for both funds transfer as well as transactions involving purchases of goods and services. Presently the transactions are subject to caps of Rs 5,000 and 10,000 respectively (2) The RBI has relaxed the technology and security standards and allowed banks to undertake transactions upto Rs 1,000 without end to end encryption. So, they have basically in some ways reducing the cost of transactions.
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(RBI, 2008). This is an initial step towards recognizing mobile phones in financial inclusion and big push for financial inclusion. Also, this is a move for retail payment from cash and cheuqe based transactions to mobile based transactions, which means great convenience and reduce the costs. As a result of strong will of government, several public sector banks have set up or are in the process of setting up mobile phone-based micro banks15. Major players include State Bank of India, Union Bank of India, Axis Bank, Andhra Bank, State Bank of Hyderabad, Andhra Pradesh Grameen Vikas Bank and Punjab National Bank16. Even telecom providers such as Bharti Airtel and Reliance Communications, have tied up with banks to extend their mobile remittance services to rural areas (Singh, 2009). Several technology firms such as Ekgaon Technologies and Spanco Systems have also stepped up to offer mobile banking tools. NXP Technologies has done pilot projects for micro banking in areas such as Aizwal (Mizoram), Medak (Andhra Pradesh) and Pithoragarh (Uttarakhand). Most micro banks use Nokias NFC-enabled 6212C handset, which allows consumers to share content, access services and information, and conduct payments (Sumanjeet, 2009) and ticketing by tapping the device. Thus, government of India has realized the potential of mobile technology and trying their best to implement this technology with the help of banks to achieve the target of inclusive finance which is the basic condition for inclusive growth. However, there is need to understand that the mobile phone, although a critical tool of financial inclusion, does not guarantee adoption, it only indicates potential. There are many challenges in adoption and successful implementation of mobile technology especially in rural areas. Few areas of concern that are common to banks and mobile service providers are: (1) Network Security (2) Customer Privacy and Informed Consent (3) Liability (4) Fraud Prevention/Authentication (5) Interoperability/Standardization (6) Data Access and Use (7) Parental Controls and (8) Financial Risks/Rewards. There are also no clear regulations-or even industry guidelines-to consult for anyone interested in offering mobile banking services to their customers. The other issue bank face in providing mobile banking is that they are required to tie up with individual service providers for enabling such services. Banks face difficulties in entering into such partnerships. Again, mobile service providers do not open up channels for facilitating mobile banking services by banks. Further, requirement of endto-end encryption makes implementation costly. They feel low ticket transactions do not require end-to end encryption. Bankers also point out that transactions limit of mobile banking need to be revised. From mobile banking services, the users face many problems right from the services providers to banks. First is lack of knowledge and trust in mobile banking (Misra and Wickamsainghe, 2004). Research shows that unbanked people require not only knowledge about the services on offer, but also have to trust in the safety and reliability of the services,
In a mobile-based micro bank, the mobile phone acts as a bank branch by storing the customer database. It also has a smartcard, which biometrically stores the identity of the customer including name, address, photograph, fingerprint templates and relevant details of savings or loan accounts held by the issuing bank. Customers are given an account number, while agents handle deposits and dispense cash. 16 State-run Punjab National Bank has introduced mobile banking service for the residents of Daringibadi, a tribal area in Kandhamal district of Orissa. With the launch of this pilot project, the bank intends to reach out to people who reside in backward areas and have not been facilitated with banking services. PNB will cover such population in the fold by opening no-frills account in the name of the customer. This project is a part of financial inclusion programme and is the eleventh initiative of its kind by PNB. Under this initiative the bank aims to cover 30,000 villages, 15 million households and 75 million people by 2010.
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understand that they have the ability to easily cash in and out at convenient locations in addition to transferring money, and of course, feel that they have enough money to make these transactions worthwhile. According to bankers, many business correspondent do not enjoy the confidence of villagers. As a result they do not hand over their savings to such correspondent and that in turn is hampering the speed of financial inclusion. Although mobile banking is free of cost, the customer still has to bear some other costs. To avail mobile banking services, one has to have a mobile phone and pay the service charges to maintain an active subscription with the service provider. (These charges need not be monthly amounts for a pre-paid card but then these are more costly than those post-paid charges). Another problem, mobile banking does not provide facilities like stop payment as banks are unable to cancel the transaction after approving the same. Rural India has more than 70 per cent of Indian population. 75 percent of the poor are in rural areas, most of them are daily wages, self employed householders and landless laborers. Most of them do not even have food for them; they can not think about buying mobile and using it for banking purpose. This problem is multiplied with the fact that literacy rate is poor in rural areas and very few people can write and understand English or Hindi language. Added to this, India is a multicultural and multilingual country; thus there is problem of content and applications in local or regional language. Network connectivity is also a big problem in rural India. The reason companies are investing more and more money where they can get more customers. They are not thinking about the noble idea of financial inclusion. Last but not the least, there are many psychological barriers in rural India regarding security and privacy. They are also not convinced with the benefit of using mobile for banking purpose. Insufficient funds, affordability and delay in implementation of government polices will be key issues in promoting financial inclusion through mobile technology. These challenges are in fact somehow different from the challenges posed by urban people. There are two main reasons for the low acceptance among urban users. First, these subscribers have accessibility to various alternative modes of transaction and payment such as Internet banking, ATMs and credit cards. Second, security remains a concern. Mobile phone technology ensures potential, not a guarantee of adoption. Potential can be realized only after adoption of technology. Indian government has already taken some initiatives in this direction. But, financial inclusion initiative of government through mobile phone will have to overcome a range of challenges from technical to administrative and regulatory ones before it becomes reality. There are many issues and challenges which are necessary to be dealt with for successful implantation of mobile technology in financial inclusion. The first component that must be provided is an effective payment system that can be deployed by means of mobile technology. This payment system must be secure, easy to use and enable payment over a distance (money remittance). The system should support the needs of the subscriber to such a degree that a large percentage of the cash can be taken up into the system. This is then a logical transition to savings. With the cash having been turned into electronic value, it will be easier to start offering saving products based on regular payments. These products should typically be targeted saving products with a monthly installment. Credit risk does not exist as it is a saving product, but the discipline of the subscriber to meet his/her monthly installments will be important. The behavriour of a subscriber with regards to payments and savings will provide mechanisms to start scoring credit, making an introduction of lending products easier. Second, there is need for multilingual service support rather than just two language support and for illiterate people there should be voice-based service support. To promote financial inclusion through mobile, low cost mobile phone base in the country need to be targeted with innovative and business

and technology solutions. There is need to put in place unified technical standards to make it possible for banks, telecom service providers and companies to jointly use the mobile platform for payments. The solution that is offered to promote financial inclusion will have to be voice based as many of the unbanked are illiterate, and many not be able to type on their phones. There is strong need to introduce separate law for mobile banking India. In India, there is Information Technology Act, 2000 which deals with issues relating to ecommerce and mobile commerce. But very few provisions of the Act are dealt with mobile banking. Further, there is need to create a regulatory regime that enables operators to extend formal financial services to the poor and is appropriate for the level of risk created. In helping to create an appropriate regulatory framework, mobile operators should ally with an industry that many might consider their natural rivals: banks and other financial institutions. Both industries are adept at working with governments to craft regulations, however, and since using mobile devices to bring financial services to the unbanked is new territory, there is little existing turf for either industry to protect and far more common ground. Indeed, successful models will probably require partnerships between companies in both industries. A first step would be to jointly develop a clear view of the full set of regulatory innovations that would support mobile banking while addressing legitimate risks and to articulate the social and commercial benefits of adopting those rules. Mobile banking introduces new challenges in fraud prevention that must be addressed before it too can be widely adopted. Mobile banking touch points are easier for criminals to gain access to, as they do not have the security layers that Internet sites do. Because fraudsters are able to mimic the appearance of a mobile device as easily as they can a PC or a laptop, they are capable of infiltrating an unsuspecting bystander's mobile banking account. Client device identification (CDI) is an extremely valuable antifraud tool that helps identify suspicious transactions. By capturing and identifying device characteristics during the login process, CDI goes beyond simple user names and passwords to detect suspect mobile transactions at the device level. It is designed to differentiate individual devices visiting a site regardless of past registration, the credentials presented or the connection (telecom carrier or IP address). Trust is another important issue in mobile banking. There are several methods to obtain user trust. In specific mobile banking research user trust is related with the design of the user interface Design of the elements in the interface can produce a feeling of trustworthiness. People have to trust the interface. Financial-services capabilities are also required across the mobile-money value chain, from designing products to managing the flow of funds to handling clearing and settlement. To offer mobile money, mobile operators must acquire these skills quickly. Mobile phone with their wider reach and depth would definitely play a very big role in financial inclusion process provided there is a regulatory framework that can allow safe and secure transaction. There is also need to devise clear guidelines for banks, mobile operators and end-users. Banks using mobile technology first time need to tread the path cautiously. The biggest decision that banks need to make is the channel they will support their services on. It is also important to understand that technology is one element. If technology is aligned with business models, probably dividend would be far better. Last but not the least, mobile technology can accelerate financial inclusion in India only when the policymakers have a clear vision about the challenges and opportunities posed by mobile technology and what they want to achieve. A key success factor is the level of political backup central bank and regulators receives. The level of political awareness and support is directly proportional to the level of development of financial inclusion strategy and policy.

References
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