Telcos find new identity in India's mobile banking

India is set to launch payments banks, a mobile banking system largely dominated by telecom companies that can reach out to the unbanked rural poor in the quickest possible time.

The payments banks will be allowed to collect deposits (initially up to Rs 1 lakh per individual), offer internet banking, facilitate money transfer and sell insurance and mutual funds.

While mobile banking is already offered by India's universal banks, services by payments banks are slated to start later this year. Five mobile phone operators are among the 11 companies that have won approval in principle to launch the service.

“Payments banks will be a game changer for financial inclusion in India,” Pawan Bakhshi, senior programme officer for financial service for the poor at Bill & Melinda Gates Foundation in India, told The Daily Star.

“Besides providing deep reach and access, the payments banks will provide relevant products and services to their customers and are also likely to introduce innovative business models.”

With this banking service, Indian mobile users will be able to conduct transactions anytime from anywhere. They will be able to withdraw money from cash-out points across the country. They will be able to save money, and even earn interest on their savings. Those without cell phones will be able to enjoy the service from the nearest banking agents.

Reserve Bank of India (RBI) has taken the initiative to bring the unbanked population into the formal banking system as part of its financial inclusion effort. In November 2014, RBI finalised its policy for the service.

The companies that received approval formed consortiums with several banks and retail shops. Consortium ownership was kept open-ended, which encouraged big telecom companies to invest. The payments banks will have to start their services within 18 months. The deadline will end in February 2017.

Bakhshi believes that RBI will allow payments banks to bring in greater innovations that would benefit the poor and the unbanked. “Banking needs adequate funding to be able to reach out to people, build trust, create a credible brand, get the right technologies in place, and ensure access through a wide agent network.”

It has been known that Kotak Mahindra Bank has a 20 percent share in the subsidiary company of Airtel, which got a payments bank licence.  Thirty percent of the subsidiary of Reliance, which also got a licence, is owned by the State Bank of India. Besides, under the category of new innovative finance, Alibaba, Amazon, and PayPal will join in through brand partnerships.

Previously in 2009, RBI opened an opportunity for non-banking entities to provide payment services using pre-paid instruments to its customers.

However, the prepaid instruments were not allowed to provide cash-out services and were not very popular with customers at the bottom of the pyramid.

Earlier, the commercial banks were entrusted to provide banking services to people in outlying areas or people outside banking services. Though they achieved some success, costs and traditional banks' limited networks made that task a bit difficult.

RBI took the initiative to open up the financial inclusion space to non-bank entities as these entities have a large customer base and rural infrastructure to expand such financial services. There are more than 950 million mobile phone users in India, and they can all benefit from these new payments banks.

The telecom companies selected for providing this service are Airtel, Vodafone, Reliance, Idea, and Telenor India. These mobile phone operators have almost 1.4 million retail points or service centres that can serve as last-mile infrastructure. Some experts believe that there is a mobile phone in almost every family in India while 40-50 percent of people in rural areas have cell phones.

“In order to get sustained growth, we need more competition, especially from new entrants who are in a better position to reach hitherto excluded parts of our economy,” Raghuram Rajan, governor of RBI, said in a speech on September 18, 2015.

Regulators are naturally a conservative lot. “It is good we are that way else there would be no speed breakers in the economy to slow its propensity to get into trouble. But we also should not stand in the way of innovation. There is a Chinese saying: Cross the river by feeling the stones. We have tried to follow that path of experimentation and incremental liberalisation.”