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CEO view: Mobile commerce is key to financial inclusion

IndiaTechOnline is happy to bring you this special feature on  financial inclusion, with special reference to the India scenario,  specially written for us by Justin Ho, Co- CEO of Utiba, a global leader in mobile financial transaction platforms, whose solutions have been brought to customers in  this country by Airtel and BSNL.

Financial inclusion is a necessity if we are to lift people at the bottom of the pyramid out of poverty. Inclusion provides economic opportunity to be included in the economy, have access to loans for business and savings products.
Inclusion also allows Governments and economists to reduce the possibilities of tax evasion, criminal activity, improve financial transparency and, lower transaction cost.
The banking industry has shown tremendous growth in volume during the last few decades. However, despite of making significant improvements, banks have not been able to include vast segment of the population, especially the underprivileged sections of the society, into the fold of basic banking services. According to the Global ATM Market & Forecasts 2013 report published by Retail Banking Research (RBR), the penetration of ATMs in India is low when , compared to other  Asian couuntries and certainly far lesser than the developed economies. India, currently has about 33 ATMs per million. The total land area in the country is 3.3 million square kilometres with a population of 1.2 billion and total number of bank branches in both rural and urban area is around 82511, a back of the envelop calculation shall reveal that there are about 68 bank branches per million, clearly not enough to service the entire populous. Similarly we have 1,55,015 post offices in the country and average area serve by the post office is 21.21 Although, on a common measure, mobile phones in India and globally as well, outnumber ATM machines, bank branches and post offices.

ATM costs in India

Establishing a bank branch or an ATM usually comes as a huge cost to the bank. Setting up an ATM typically, costs around Rs 8,00,000 lakhs, including the VSAT, interiors, signages, IT equipment and Safes. Rental costs can differ from area to area and could range from Rs 5,000 a month in small towns to Rs 50,000 a month in upmarket areas in metros. The total expenditure per ATM is around Rs 2.5 million over a 5-7 year period. The cost of a bank to set up say around 1,000 ATMs will be at Rs 1 billion. Similarly, set up cost for a branch is around Rs 4 millon  in metros, Rs 3 million in Tier I cities, Rs 2 million and Rs 1 million  each for Tier II and rural areas respectively. Each branch takes 18 months on an average to break even. Also, most of these bank branches are more concentrated in urban areas. The brick and mortar cost becomes too high for the bank, making it unprofitable and unviable to serve the sparse population with low-income. Similarly, the expenditure on the financial services offered by post office eg money order, it spends Rs. 5456.432 million whereas the total revenue earned on money order is Rs. 3382.97 million (Source 2009-10 annual report by the department of posts)
Formal banking is usually extended to those with regular income or collateral. People at the Bottom of the Pyramid with irregular income and informal businesses often have no choice but make use of informal financial services which many times are more expensive than formal ones. The high deposit level and transaction fee ensures that formal banking remains the preserve of the relatively wealthy.
Financial Inclusion becomes a key strategy to bring banking services to the vast section of disadvantage and low-income groups. It is financial inclusion that will not only give a thrust to financial deepening but also inclusive economic growth.

A   talk by Nandan Nilekani at an  Institute for Development and Research in Banking Technology (IDBRT)  seminar on “Affordable technology for inclusive growth", highlighted that financial inclusion means inclusive growth, allowing underprivileged to participate in the financial economy is the important part of the inclusive growth. In this respect, he talks about the payments aspect of financial inclusion, which is how to give and receive money identifying it as the root cause of exclusion of the poor from financial services.
He points out that today we are lacking in retail payments; retail payments are the transactions made at each given point which is today 90% cash based unless we take these payments to an electronic model, we will not able to lower the transaction cost to an extend where poor can participate in the economy. Electronification of retail payments to increase electronic transaction and reduced the paper based transaction at the retail level is single biggest challenge getting people onto the system.
The vast majority of people in the village do not have access to withdraw or deposit money easily. It is those people that have to be touched and given an access to financial services. Nilekani points towards a  Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) worker who spends one day in travelling to a bank branch or a post office to withdraw money since bank branch is not easily accessible. Hence, the amount of overhead that is put on the poor in terms of travel, harassment and inconvenience can be reduced by eco-system which is accessible to everyone in an affordable way.
One such eco-system which encompasses almost everyone today is eco-system created by mobile network. Today, mobile phones globally outnumber bank ATM machines and bank branches. According to the Telecom Regulatory Authority of  India the current growth of mobile telephony is around 15 million connections per month. The total wireless subscriber base {GSM, CDMA and WLL (F)} stands at  over 700 million today.
The mobile phone has become one of the most potent channels to connect people across geographies. The eco-system established by mobile phone is all inclusive, today we have around 1.5 million mobile retailers presence whereas there are 1,55,015 post offices in the country. Therefore, distribution network created by retail network can become a point of service that can provide financial services and act like a bank branches. All the agents in the Mobile Network Operator (MNO) network can become an easy access points that will offer financial services at a much lower cost. For example, the network created by electronic top up has made it affordable for everyone to have a mobile phone. This same network certainly has the potential to become the cash in and cash out centres that will offer banking services.

Mobile Commerce.

Mobile Commerce could be the step in providing an alternative banking system that provides access to formal financial services to the unbanked by creating mobile wallet which provides a safe storage for their money and gives them a medium to transact the money without physical exchange of money at much lesser cost and access.
By turning each mobile phone into a quasi bank account it will provide better alternative transaction mechanism to the expensive formal banking system that will make transaction electronically as convenient and cheap as dealing in cash. A recent speech by the  RBI Deputy Governor by Usha Thorat at World Bank in Washington on 2-3 June 2010 on Financial Regulation and Financial Inclusion stated that discussions are going on especially in the context of mobile phone-led retail payments system. The 2009-2010 annual report by Department of Post highlights the steps taken to offer mobile remittances services which will provide inclusive banking to rural, remote and hitherto unbanked areas.
Therefore, we believe that mobile based financial transactions are the future of commerce. The unbanked are unbanked for a reason; once given a secure, easy and cost effective channel to transact we can successfully do financial inclusion of unbanked section, by giving them access to finance and promote inclusive growth.

Founded in 2001, Singapore-headquartered Utiba is a leading global supplier of mobile financial transaction platforms for mobile operators and financial institutions is Utiba’s products are successfully deployed across 4 different continents and 200 million subscribers. Utiba’s solution for Airtel’s online application has been a major breakthrough in the online banking space. Airtel pioneered voucherless re-charge with Utiba’s U:Choose in December 2003, under the EasyCharge brand name. Airtel has since leveraged this success by launching Utiba’s U:Tunes under the EasyMusic brand name in February 2006. Utiba also won a large tender to provide voucherless top up for 2 of the four BSNL zones. Operating as a managed service, Utiba is paid on a per transactions basis and sees this is as the future model for many of Utiba’s engagement

Aug 26 2010