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Mobile Banking: Opportunities and challenges in the Indian market

April 29, 2011
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Mobile banking has huge potential in a country like India where a major part of the population belongs to the unbanked category. The high penetration levels of mobile phones and low transaction costs involved in mobile banking are likely to be the potential growth drivers for these services. Industry experts share their views on the potential of mobile banking in India, the key impediments and regulatory reforms required for large-scale uptake of these services…


What is the potential of mobile banking in India? When is the service expected to witness large-scale adoption?

Benoy C.S. 

The potential of mobile banking in India is huge, especially with a large unbanked population. With the increasing mobile penetration in rural areas, mobile banking is seen as a tool to facilitate financial inclusion of the rural population. In the urban environment, it is seen as a tool for convenience as it facilitates faster small-scale transactions. Several leading banks are tying up with telecom operators and handset manufacturers to provide this facility in order to enhance customer service and facilitate branchless banking. 

Operators and leading banks are partnering to provide a suite of mobile banking services. Recent examples include the State Bank of India (SBI) and ICICI Bank’s partnerships with Bharti airtel and Vodafone Essar respectively. 

The service is witnessing increased uptake in urban areas with more consumers availing of mobile banking facilities for paying utility bills, accessing bank account information and making ticket payments. In rural areas, this service is poised to take off with operators focusing on the rural sector to provide services tailored for the rural community.

Jaideep Ghosh 

With 800 million mobile connections and almost 200 million debit and credit card holders, mobile handsets offer a far wider reach than other forms of banking. The mobile device can be an important tool to cover the large unbanked population in the country. Handsets offer convenience by providing the ability to transact anytime, anywhere. For banks, it serves as a cost-efficient mechanism, with the cost of transaction on a mobile estimated to be one-tenth of the transaction cost of a bank branch and one-sixth the cost of a transaction through an ATM. Due to these advantages over conventional forms of banking, mobile banking has significant potential and is likely to witness strong growth. 

There has been significant development on the regulatory front as is evident from the recommendations submitted by the interministerial group on the framework for delivering mobile banking services. With greater clarity on the role of telecom operators and pricing of services expected in the future, mobile banking is expected to witness increased uptake in the next two-three years.

Sridhar Pai 

The National Sample Survey data shows that 51.4 per cent of the nearly 89.3 million farmer households do not have access to any credit from institutional or non-institutional sources. Only 27 per cent of these households are indebted to formal sources. 

This is why rural India is considered unprofitable for traditional banking operations. Since 2005, the Reserve Bank of India (RBI) has made efforts to encourage rural banking through no-frill accounts, greater involvement of the government in enrollment, cheaper agricultural loans, etc., but has met with only partial success. 

According to industry experts, mobile banking is the cheapest way to reach rural customers. While it costs $523 to $837 to set up a micro-banking outlet, replacing this facility with mobile banking technologies costs only $209. The RBI reports that while the government typically incurs a transaction cost of 12-13 per cent, mobile banking brings this cost down to 2 per cent. 

According to a recent study by the Centre for Micro Finance, only 22 per cent of India’s migrant labourers have bank accounts. 

Since only 41 per cent of the adult population has bank accounts, whereas more than 70 per cent of adults own a mobile connection, linking banking with telecom seems to be the correct choice for India’s commercial banks. With a large mobile handset penetration, it is the obvious choice to cross the extremely low credit/debit card penetration barrier (which is below 10 per cent of the population). 

Currently, mobile banking is in the partnership phase with almost all telecom operators joining hands with leading banks. Some examples are the tie-ups between Bharti airtel and SBI, Vodafone Essar and ICICI Bank, and Idea Cellular and Axis Bank. Also, all operators have started rolling out 3G networks across the country. Mobile banking will be one of their key value-added service (VAS) offerings to cash in on 3G services.

Dr Mahesh Uppal 

The scope of mobile banking in India is huge as a lot of people do not have access to banking services. Barely 20 million people have access to banking. With the formulation of guidelines suggested by the RBI and the emergence of several mobile banking players as well as banking products from operators, mobile banking will see a fair amount of activity in the coming years. These services would take off in a year.

How is the launch of 3G likely to impact mobile banking services?

Benoy C.S. 

Mobile banking would gain traction with the launch of 3G due to the facility to provide increased security protocols and more bandwidth for secure mobile-based transactions. 3G is also expected to drive the uptake of smartphones, which will enable more secure interfaces for mobile banking applications as well as reduce fraud.

Jaideep Ghosh 

The impact of 3G on mobile banking is likely to be limited as the current 3G footprint is limited to the metros and urban/ semi-urban areas. Therefore, associated services may not witness large-scale adoption in the near term. Besides, current and planned mobile banking services are not bandwidth intensive and, thus, do not need high speed connectivity. However, higher 3G speeds will facilitate banking over mobile devices, making the experience smooth.

Sridhar Pai 

The launch of 3G services will provide a boost to mobile banking since all operators would like to cash in on these services using VAS offerings including mobile banking. Also, 3G-enabled handsets and fast internet services will support technologies related to mobile banking. Microsoft is planning to enter the mobile payment space with an embedded payment agent in Windows phones in the future.

Dr Mahesh Uppal 

3G will only have an indirect impact as mobile banking services do not require very high bandwidth. But once 3G services take off, the traffic would increase and the higher capacity network provided by 3G would be beneficial. 3G service launch will increase the number of smartphones on the network and upgrade the handsets in use. This would facilitate access to mobile banking services and make them user friendly. 

What are the key impediments to the growth of mobile banking?

Benoy C.S. 

Security concerns of end users act as an impediment to the uptake of mobile banking services. These concerns relate to being subjected to fraud in this mode of payment as well as with respect to data privacy. 

The lack of awareness about services and security protocols are also impeding the growth of these services. The low penetration of smartphones is another impeding factor, which may prevent the large-scale adoption of sophisticated mobile banking applications. 

Though reforms in the form of the RBI instituting regulatory protocols for mobile banking have been introduced, the regulator still has some way to go in terms of facilitating the mobile ecosystem for growth with an integrated framework.

Jaideep Ghosh

Some of the impediments are:

•  Low awareness

•  Low comfort level of users due to poor literacy levels, language barriers, etc.

•  Prevalence of entry-level handsets that do not support applications like JAVA  and internet browsing

•  Limited ability of the existing distribution channels to be leveraged for banking transactions

•   Concerns with respect to the security of mobile banking transactions.

 Sridhar Pai

The key impediments to the uptake of mobile banking are:

• Lack of support for all handsets: There are different handset designs across 5-10 manufacturers

•  Regulatory restrictions: There are limits on the size of transactions

•  Security risks: Trojans and other viruses are evolving rapidly in mobile banking services

•  Lack of support in local languages. 

Dr Mahesh Uppal 

The first challenge is the lack of awareness about these services. People do not see mobile phones as a natural medium for banking. Second, from the banks’ perspective, the RBI has several rules in place relating to security issues. These include “know your customer” (KYC) and other security-related norms. It is expensive for operators to comply with these regulations. Moreover, these services can be successful only when there are adequate customer volumes. It is yet to be seen whether the desired volumes can be achieved. Another key issue is the trust and comfort levels of customers, which can be established over time.

What steps are needed at the policy and regulatory levels for establishing a secure mobile banking ecosystem?

Benoy C.S. 

The RBI has taken positive steps towards providing a framework for mobile payment through the interbank mobile payment service to facilitate interoperability. However, a more integrated approach and framework for mobile banking is the need of the hour. Financial inclusion reforms should also provide norms for mobile banking for the rural population including micro credit. Stringent security norms and a framework for preventing fraud are needed to change the perceived insecurity of mobile banking transactions.

Jaideep Ghosh 

More clarity is needed in the regulations for stakeholder-specific activities, for example, at the telecom operator’s end, encryption and prioritisation of transaction-related data exchange may be required. Besides, system interlinkages between  business correspondents, mobile service providers, banks and UIDs would be critical. 

A careful selection of security standards and ensuring adherence to the same would be critical, apart from a clear division of responsibilities among the banking and telecom regulators to ensure accountability.

Sridhar Pai

•   The regulatory framework for mobile banking is moving in the right direction but the RBI should look at reducing the entry cost. For example, the KYC norms applicable to telecom companies should be enough for opening an account instead of mandating the more stringent banking KYC norms. This will reduce costs.

•  Other enabling regulations largely centred on unifying account opening and controls between operators and banks will reduce costs and increase viability.

Dr Mahesh Uppal 

From the point of view of customers, the security of networks is a top priority and this aspect should be looked into at length by the regulators. The cost per transaction is another key factor. Given that the size of the transaction might be small, the cost per transaction needs to be set accordingly. So, these costs need to be regulated. There may be issues about the security of the capital involved and the transactions, which need to be looked into by the regulators. The extent to which mobile operators can substitute or replicate services that are traditionally offered by banks should be defined by the regulator. The RBI has been reluctant to allow non-banking players like telecom operators to carry out banking operations and wants such services to be offered in partnership with the existing national banks. These issues need to be addressed on the policy and regulation front.

What has been the international experience with regard to mobile banking?

Benoy C.S. 

With respect to mobile banking, facilitating financial inclusion has been successful in Kenya, which pioneered the M-PESA system of mobile banking. This system has given the rural population a means to empower themselves through savings and transaction instruments, thereby improving their quality of life.

With respect to the global urban experience, several leading banks have adopted mobile banking to gain a competitive advantage by providing a rich mobile experience. Mobile banking is increasingly being seen as a tool for differentiation in customer servicing by banks. To provide customers a “mobile wallet” is being seen as one of the top priorities for banking institutions in the near future.

Jaideep Ghosh

There have been a few notable examples of successful mobile banking implementation in the developed as well as developing markets such as Kenya (the M-PESA service by Safaricom, which added 7 million registered customers; in terms of reach, it is better than any other financial service in the country) and the Philippines (Smart Communications). The key lesson from these examples is that the specific needs of the population need to be addressed. For example, in Kenya, the service was targeted at migrant workers, who wanted to send money to their relatives residing in villages. In the Philippines, the target segment was the large international migrant workforce remitting earnings to relatives back home. Moreover, effective deployment needs to be undertaken by creating an ecosystem around the service offering. Safaricom appointed agents for providing cash deposit and withdrawal services, thereby increasing the reach of the service.

Sridhar Pai

M-PESA in Kenya is a great success story where mobile banking services offered by Vodafone and Safaricom are being used by about 27 per cent of the population. Monthly transactions under this service amount to over $375 million and users save up to $3 per transaction.

Dr Mahesh Uppal

Kenya, Tanzania and the Philippines have seen very successful mobile banking services.

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