Mobile phone adoption in India is increasing faster than in any other country. According to Counterpoint Research, India has surpassed the U.S. market and is the second largest smartphone market with over 220 million users. And, as of the end of April, almost 45 percent of mobile connections in the country were in poor rural areas. But does that foretell the same rate and pattern of adoption for mobile banking?
The Telecom Regulatory Authority of India considers this high penetration rate of mobile phone usage a strong indicator that mobile banking could advance financial inclusion among the nation’s poor. But this is assuming that the rural poor are willing to use their phones for banking transactions and that they actually have a bank.
The logic is based on examples worldwide where mobile telephones have delivered financial services, particularly in developing countries. For example, the M-Pesa in Kenya, Smart Money and G-Cash in the Philippines and Easy Paisa in Pakistan.
Proposed new regulations to allow USSD for financial services build on the initiatives of the Reserve Bank of India (RBI) in 2005 and subsequent government initiatives. At this time, all banks were urged to offer a “no-frills,” low-cost basic account while government initiatives expanded bank branches and ATM networks and developed new transfer systems and new card payment schemes to reduce dependency on international card schemes.
Despite these earlier efforts, as of June 2015, in rural and semi-urban areas, there were less than eight bank branches per 100,000 people, less than half the almost 19 bank branches per 100,000 people in urban areas.
Another initiative, the Jan Dhan-Aadhaar-Mobile (JAM) government scheme, linked individuals’ bank account numbers and mobile numbers with an Aadhaar number to better target and transfer financial resources to the poor.
The target group for mobile banking and financial services are low-income, semi-literate users with limited knowledge of technological applications. The target group is typically mobile phone users who prefer a low-cost, user-friendly (preferably no downloading of software) system. USSD fits the bill. However, since 2014 when USSD-based mobile banking services were made available, progress has not reached expectations.
What’s Going Wrong?
A major problem is inadequate usage despite adequate access, and the real problem lies in determining why usage is low. The level of ceiling tariffs for USSD is also a major impediment to the growth of USSD-based mobile banking services, but this is an easier problem to troubleshoot.
In February 2016, the Government of India initiated plans to improve the ease of conducting card/digital transactions, reduce the risk and costs of handling cash at the individual level, build a transaction history to enable improved credit access and financial inclusion, reduce tax avoidance and reduce the effect of counterfeit money.
The National Payment Corporation of India has connected all banks and providers offering global services through its USSD aggregation platform.
Currently, only mobile banking transactions are permitted on the USSD aggregation platforms, but authorities consider that a variety of mobile payment services should be supported such as merchant payment, utility bill payment and mobile/DTH recharge so that payment through digital means may be promoted in the country and cash transactions discouraged.
The report by the Telecom Regulatory Authority of India suggests that less cash use in society is financially inclusive and benefits national output. Handling cash is burdensome and expensive for banks, and the cost is borne by the individual and, ultimately, the whole economy.
The governments’ goal then is to institute an integrated USSD platform that can support all mobile payment services, not just mobile banking services to decrease cash transactions. The issues to be ironed out are the mobile banking USSD process, the pricing model, and whether the existing USSD aggregation platform should host a variety of mobile payment services.
Will The Plan Work?
Bloomberg suggests that “leapfrogging” will see cashless payments increase in India if they are easy and frictionless. After all, many Indians went from having no phone at all to having only a mobile phone, and the smartphone is seeing faster growth in India than in any other country. There is also significant incentive for the government to make sure the plan works, which is to reduce tax evasion for which cash transactions are the bane.