Greg Chen

Photo courtesy of SEWA

This is the final post in a four-part series on branchless banking in India. The earlier blogs on MicroSave’s review of e/m-banking and the innovative service providers Beam and Eko demonstrated the power of convenience and simplicity. In keeping with this optimistic view of a still uncertain India venture, we conclude with three more positive items to highlight. Two reflect new changes by the government and one goes back to the fundamentals.

1. The Government of India has established a clearer vision for electronic payments and agents and aims to make a substantial investment to expand these capabilities across India.

The Government of India recently released a task force report on a unified payments infrastructure linked to the biometric Aadhaar number. While many questions remain, this report establishes important policy points. It recognizes the value of electronic payments to both cut costs for the government and bring convenience to the end recipients. It also sees G2P as a major flow of capital which can prime the pump, while recognizing that much more ought to flow over branchless banking channels. The Government of India also proposes to pay a 3.14% fee to banks for delivering G2P payments – a significant shift in the business case for banks. Some of the insights in the task force report built off of international G2P experiences shared by CGAP.

As always, there are potential pitfalls in this system, including the risk of building a single-purpose G2P payments infrastructure that is not widely usable for other payments. A supply push too hard by the government could create disruptions in customer service. There are other questions to contemplate such as whether biometric authentication of every transaction might forestall easier to use payments systems. such as PIN-based mobile phone payments, from emerging.

But these are all solvable challenges and the new momentum for branchless banking will shape the financial inclusion agenda in India in the coming months and years.

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Read our two previous blogs in this series on branchless banking in India here.

An Eko agent offering the tatkal service

Eko was the first company dedicated to a mobile phone-based basic savings account and payment service for the unbanked in India. Launched in 2007, Eko has carefully developed a mobile-based service usable on the most basic of handsets and continually revised and re-fashioned its approach. At first, Eko experimented with a basic deposit and payment service from one Eko account to another. But by the second half of 2011 Eko had struck on a revised formula that appeared to work as a business – providing a highly efficient and simple payment directly into the account of a bank anywhere in India. Having found a popular offering, during the second half of 2011 Eko doubled its revenues, reducing its operating losses to 16% of revenue by February 2012 with the expectation of passing breakeven in the first half of 2012.

Leveraging a strong base of agents in Delhi, Eko offers users a simple way to send money anywhere in India. Users can come to Eko’s agents to make a deposit into any bank account held by the State Bank of India (SBI). SBI is the largest bank in India with over 14,000 branches and more than 250 million accounts. By presenting the mobile number of the sender and receiver to the Eko agent, plus the account number of the receiver, the agent can make a payment into the account securely simply by dialing a short sequence of numbers. Each transaction is then verified by an SMS to both sender and receiver with a time and date stamp, the fees levied and a transaction ID.

The success of this tatkal payment service is predicated on two basic features. The first is that Eko’s service ties into the core banking system of SBI on a real-time basis. Thus, clients send and receive transactions instantly giving them confidence. The power of the service is persuasive to clients as the receivers simply withdraw the funds from any SBI channel across India. This includes a national network of interoperable ATMs which charge no fee on most withdrawals.

The second important feature is simplicity. Clients only need to know the correct account number and the sending and (optionally) the receiving phone numbers. And they only need to go to an authorized agent to complete the transaction. This is more convenient than getting to branches which may be further away and often require longer waits. “The big difference for Eko has been the irrefutable legitimacy that tatkal transactions bring to the SBI-Eko outlets. The fact that the client’s relative thousands of kilometers away can instantly withdraw cash at an ATM just a few seconds after the transaction completes is a definite ‘Wow!’ for the client”, says Abhishek Sinha, co-founder & CEO of Eko.

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Read our first post in this series on branchless banking in India here.

Anand Shrivastav, the founder of the mobile phone prepaid system Beam, says simply that his start up offers “convenience, not a financial service.” While sitting in his office, I opened up a prepaid account with Beam in less than a minute with a one line SMS message.

This simplicity is not what the government of India has in mind when it promotes financial inclusion. The Reserve Bank of India articulates the end goal of financial inclusion to be a full set of deposit, savings, insurance and payment services offered with bank-like rigor. The RBI has promoted bank-led branchless banking to achieve this agenda with considerable expansion occurring under the bank-led model across India. By March 2012 there should be close to 100,000 customer service points (also called bank agents) across India.

Beam is one example, however, of a mobile phone based service that offers something much simpler and lies at the far end of the spectrum of financial services. Beam is licensed by the RBI, but instead of a banking license Beam operates with a license to offer prepaid payment services. This license allows Beam to issue prepaid value electronically; presently with the (very significant) restriction that such value cannot be redeemed for cash, only for goods or services. Prepaid licenses specifically prevent Beam’s service from mimicking a deposit.

The first thing that strikes a new user like me is the ease of signing up. I did this without visiting any office or even presenting identification. Mr. Shrivastav explains that the initial account opening is geared to be ultra-convenient and is not intended to meet banking identification (Know Your Customer – KYC) rigor. Stricter bank level identification is intended to combat money laundering and terrorist financing which one cannot do (or would find extremely difficult to do) using prepaid value restricted to goods or services. Mr. Shrivastav explains that Beam has introduced a higher tier account where users voluntarily upgrade their account by submitting KYC details, allowing them to transact in larger amounts. But the ease of initial account opening has enabled a small start up company like Beam to open up 7 million accounts.

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Photo courtesy of MicroSave

India is undergoing a significant expansion in the use of agents (Business Correspondents) to offer a range of financial services. There are many questions about whether this present expansion can be sustained. A new publication from MicroSave highlights reasons for optimism. To understand this perspective, Greg Chen, CGAP’s Regional Representative for South Asia, asked Graham A. N. Wright, the founding Director of MicroSave, a series of questions about branchless banking in India (note: MicroSave uses the term electronic/mobile-banking or “e/m-banking” to describe this field, while we at CGAP tend to use “branchless banking”). MicroSave has a large presence in India with over 80 staff and a large practice focusing on: e/m-banking; microfinance; SME; private sector development and responsible finance.

Question: MicroSave’s latest discussion paper on branchless banking in India portrays a decidedly optimistic picture. How did you arrive at this and what are some of the positive conditions you see?

Graham Wright, MicroSave: India has huge opportunity to leverage the potential of e/m-banking and build a cash-light economy. In addition to its cutting edge information technology industry and relatively dense population, the Government of India is clearly determined to achieve financial inclusion through digital money and is taking aggressive steps to see this happen.

The gradual regulatory evolution to support business correspondent network managers (BCNMs) and banks in their outreach efforts continues – and the results are beginning to emerge. While the emphasis continues to be on numbers, the targets are such that large scale outreach infrastructure is being built in a short time frame, with an agent covering every village with a population greater than 2,000. This, coupled with the government’s resolve to move to cash-based subsidy transfer and social security payments systems, will ensure transactions. Institutions such as the Unique Identification Authority of India (UIDAI) could greatly ease customer KYC and authentication, and the National Payments Corporation of India (NCPI) has already built a national switch for inter-bank mobile transactions. This infrastructure could play expanded roles as systemic back-bones that support different players and bring about interoperability.

Question: The services necessary for financial inclusion are much broader and so what are the anchor or lead products for building agent-based branchless banking systems in India?

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Over the past several months, we have taken a close look at the branchless banking industry in a few key countries. We have presented our learning from Brazil and Mexico over the last few weeks. Today we offer a snapshot of the conditions for branchless banking in India drawn from a summary note of the Indian scene completed at the end of 2010.

POS machine used by FINO agents

India has embarked on far-reaching financial inclusion initiatives by opening up regulations to allow the use of agents (called Business Correspondents in India) since 2006. India is also building new public infrastructure which could inject a further boost. Will these conditions deliver a lasting increase in financial inclusion?

The government is making visionary investments in public infrastructure.

Allowing the use of banking agents is common today, yet India has moved even further ahead beginning to build 3 pieces of public infrastructure that could substantially accelerate financial inclusion:

1. A mobile payments switch: To take full advantage of the banking network across India, public-private collaboration has built the Inter-bank Mobile Payment Service (IMPS). This new switch allows mobile phone-initiated transactions to pass from the bank account in one bank to an account at another bank. If fully leveraged across the banking network, it would counteract some of the barriers posed by India’s size and regionally fractured banking presence.
2. Unique identification: The Unique Identification Authority of India has begun to roll out registration of the unique identification number with matching biometrics. As this becomes more widely available, it could ease KYC processes and reduce the friction of mass branchless banking operations.
3. Shifting government subsidies to electronic payment systems: The 2012 budget announced a plan to shift some public subsidies (such as $12.5 billion in fertilizer annually) to a system where payments will be delivered directly into the beneficiaries’ accounts. This change would funnel large payments volumes through branchless banking and, among other benefits, bring clients into a deeper banking relationship. This recent policy shift adds to ongoing state efforts to transfer National Rural Employment Guarantee Act wage payments electronically.

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Could new technologies in Bangladesh enable formal financial services to reach two-thirds of adults by 2020?

Conditions in Bangladesh offer scope for some optimism. Famous for high population density, Bangladesh may be able to deliver a larger volume of financial flows over a relatively smaller distribution network; possibly making the business case more tenable. The demand for remittance services is likely to be high.  There are large numbers of Bangladeshis remitting from overseas. There are plenty of internal migrant laborers needing to send money home – well illustrated by the the ubiquitous rickshaw drivers of Bangladesh’s capital, as one example. Other countries, notably Kenya, have seen branchless banking surge because of domestic money transfers.

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Greg Chen represents CGAP in the South Asia region. Recently he visited a new and innovative microfinance institution (MFI) that has begun operations over the last year or so.

India has 850 million people who live on less than $2 per day. There is strong government interest in expanding financial services, an active microfinance sector, and fast-evolving business and technology sectors.

When it comes to microfinance, information systems are critical to stronger internal controls (over cash flow, financial reporting, portfolio quality, etc.). You can see this in action at Equitas, a new MFI which has more than 200,000 borrowers and follows the Grameen style of group-based lending model.

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