A draft set of Guidelines were issued for comment in June, but are still in development. RBI signaled several times in the prior year that it planned to look in earnest at mobile financial services.

CGAP’s Notes on Regulation of Branchless Banking in India took stock of the situation earlier this year.

Branchless banking can dramatically reduce the cost of delivering financial services to poor people

We believe branchless banking can offer basic banking services to customers at a cost of at least 50 percent less than what it would cost to serve them through traditional channels. Branchless banking helps address the two biggest problems of access to finance: the cost of roll-out (physical presence) and the cost of handling low-value transactions. This is achieved by leveraging networks of existing third-party agents for cash transactions and account opening and by conducting all transactions online. This sharp cost reduction creates the opportunity to significantly increase the share of the population with access to formal finance and, in particular, in rural areas where many poor people live.

The biggest cost saving is on transactions that can be done completely electronically, through mobile banking. In the Philippines, a typical transaction through a bank branch costs the bank US$2.50; this would cost only US$0.50 if it were automated by using a mobile phone (Asian Banker 2007).

The cost reduction from using agents rather than banks for remote cash transactions is equally dramatic. Banco de Credito in Peru estimates that a cash transaction at a branch costs about US$0.85, while the same transaction at an agent would cost US$0.32.4 Tameer Bank in Pakistan estimates that, in the Orangi slum of Karachi, the set up cost of a bank branch would be 30 times more than the set up cost per agent, which is about US$1,400. Monthly running costs average about US$28,000 for a branch, compared with US$300 for an agent, but also, a much larger share of monthly running costs is variable for an agent than for a branch.

Here is a report from the Business Standard on the move. Excerpt:

The wait for rolling out mobile banking seems to be over, with the Reserve Bank of India’s (RBI) issuing draft operative norms for such payment system. Now, RBI said, it will be easier and safer to use mobile phones for carrying out a gamut of banking transactions.

Banks can offer mobile-based services only to their own customers. Banks should have a system of registration before commencing mobile-based payment service to a customer, RBI said.

But only for banks… This shouldn’t be a surprise. SBP’s policy paper on branchless banking (last year) was clear on this point: a nonbank model “may be allowed at a later stage after we have sufficient experience in mitigating agent related risks using bank led model and need to think about mitigating only e-money related risks.” So for now, mobile phone companies are still waiting for the door to be opened to them as well, test the waters without clear permission and detailed guidance, or find a JV with a bank. For those with deep pockets, buying a bank outright might be an option, too.

If they want to convince central bankers that hold the keys to the payments space, mobile operators will make persuasive arguments about how mobile financial services meet traditional thinking about deposits, the new domain of payment system regulation, and the hot button issue of anti-money laundering, especially when sending money across borders.

No operator better illustrates this than Vodafone and its M-PESA money transfer service.

M-PESA’s commercial launch in Kenya required months of discussions with the Central Bank of Kenya about why M-PESA is more a payment service than a bank deposit. Once launched, the market responded with an excitement banks must marvel at: 1.8 million registered users in the first year (in a country with only 4 million bank accounts total). Central banks in other countries may be attracted by efficiency gains in the national payments system, but they won’t always be ready to allow mobile wallets if they are treated like deposits.

One solution may be payment system legislation that creates a licensing window for payment service providers that take funds from the public, but solely for the purpose of facilitating a payment or transfer. The EU’s Payment Service Directive will do just that, but much still has to be worked out by individual national governments before the November 2009 deadline. That means EU experience could become an important signpost to emerging market countries down the road. But it’s likely to be several years before a European track record emerges on carving out dedicated rules for firms in the payments business.

In the meantime, mobile operators may be better off pointing to countries that have crafted more ad hoc but, so far, very workable arrangements to oversee mobile financial services. In the Philippines, the central bank constructed accommodations allowing one mobile operator to offer a mobile wallet directly (Globe), and another model in which banks outsource the vast majority of functions to the operator (Smart). Both required some flexibility on the part of the regulator, as banking laws could easily have stood in the way. Together, Globe and Smart have over 7 million registered users for mobile financial services.

But the hurdles don’t stop here, as Vodafone seems to be finding out in switching on its UK-Kenya remittance service via M-PESA, according to this report. Moving money across borders immediately attracts concern about money laundering and terrorist financing. Vodafone is partnered with Citi, but it seems regulators still have questions about KYC. At the Kenya end, M-PESA customers open accounts via agents, who are neither employees of Citi or Safaricom, Vodafone’s Kenyan affiliate.

And that may be the one quick lesson for mobile operators: partnering with a bank may not automatically solve all your regulatory problems.

The report is the latest or progressively more encouraging signs from RBI that it plans to provide additional guidance for mobile banking to take off. In its Financial Sector Technology Vision document, released in October, RBI indicated it sees high potential for electronic banking to increase efficiency in retail banking. But RBI is also concerned about mobile security, particularly authenticating users accessing bank accounts remotely.

RBI is also closely watching several pilot schemes using mobile connectivity to improve access to financial services among low-income Indians. As the Economist reported earlier this month, one program in Andhra Pradesh is testing how to deliver pensions and unemployment benefits to around half a million people in villages, via specially-equipped mobile phones in the hands of local payment agents and smart cards issued to recipients. A parallel POS-based system is also being tested. So far, 40,000 cards have been issued.

What’s not yet clear is whether RBI guidance on mobile phone banking will be mostly concerned with mainstream banks providing mobile as an additional channel for current customers, or whether RBI will extend permission to some more far-reaching initiatives. Will mobile operators get a window to become licensed to provide electronic wallets for international remittances, bill payments and other payment services?

The G2P pilot in Andhra Pradesh also makes extensive use of local payment agents, and we understand at least some of these to be local merchants. In rural areas, its often the local store owner who has enough liquidity to pay out cash on the government’s behalf. But so far, RBI regulation on outsourcing doesn’t provide clear permission for banks, microfinance institutions or mobile operators to follow suit and use local merchants to extend banking services in places where bank branches may otherwise be too expensive to build. Will RBI make regulatory changes on issues like this, too?

This is a pharmacy in a major slum in Karachi, Pakistan – it has been in business for 30 years through two generations. A couple of weeks ago, the pharmacy became an agent / corresponsal of a microfinance bank. The bank’s decision to create this agent is to some extent experimental. This location is just down the street from their branch and bank faces little competition from other providers – they are the only one in that part of the slum. They have equipped them with a GPRS point-of-sale device and some forms. The bank’s customers can come here to withdraw and make deposits, drawn down on their loans, repay loans, and eventually pay utility bills and remit money.  The anticipated demand is high. Small business owners told me that an immediately accessible bank deposit service saves them time and gives them security when they have a lot of cash on hand.

CGAP is supporting Tameer Bank in its work. Agents and customers equipped with cards or cell phones are at the heart of what we call branchless banking. We were inspired by similar efforts in this part of the world, in Brazil, Colombia and in Africa and East Asia.

In setting up this agent location, this Pakistani bank has already learned that their set up cost is a fraction of that of their branch (1/30th) and they anticipate running costs to be even cheaper (1/100th). The bank will open agent locations further and further away from its branches. For remote rural areas, it will partner with a postal network, a government run food distribution system, and the direct distributors of one of the major telecoms.