India is a land of contrasts, an aspect strikingly highlighted by the dramatic growth of its mobile telephony sector. While on one hand the country is struggling to get its crumbling physical infrastructure in order, wireless communication has taken off – and how.
India today boasts the second largest number of mobile subscribers in the world after China, and much of this growth has occurred in the past 24 to 36 months as a result of a steady decline in tariffs and falling handset costs. Between 2006 and 2010, its mobile phone subscriber base shot up from 150 million to 752 million and more than 20 million subscriptions were added in December 2010 alone.
In stark contrast, PC penetration in India remains at about 5%, and there are no more than 35 million landline connections and only 81 million internet connections in the whole country. Furthermore, since about 60% of India’s 1.2 billion population has no access to formal finance, there are now more people with mobile phones than there are with bank accounts.
Banks go mobile
Attracted by the almost universal presence of the mobile phone across the urban and rural populace, nearly a third of the banks in India have jumped on to the mobile banking bandwagon. According to the country's central bank, the Reserve Bank of India (RBI), there are already 34 banks in the country that actively provide mobile banking services, and six more have regulatory approvals to do so.
While some leading private sector players have been experimenting with mobile banking over the past decade, it took a nudge from the banking industry regulator for most other Indian banks to wake up to the vast potential of mobile banking. The country’s largest state-backed lender, State Bank of India (SBI), for instance, launched mobile banking in December 2008, only after the RBI published mobile banking guidelines.
Shyamala Gopinath, deputy governor of the Reserve Bank of India, says: “The RBI recognised the potential and growing importance of mobile phones as a medium for providing banking services and, in October 2008, issued formal guidelines for mobile banking, covering regulatory and supervisory issues, technology and security standards, interoperability, transaction limits, customer service and so on.”
The RBI has since revisited these guidelines, including enhancing the limit for funds transfers to Rs50,000 ($1079) and removing the requirement for end-to-end encryption for small-ticket transactions below Rs1000. Also, the RBI-backed National Payment Corporation of India last year launched a new mobile payment system (IMPS) that facilitates real-time person-to-person funds transfer across banks.
Slow take-up
Despite these proactive initiatives by the RBI and efforts by the banks themselves, mobile banking has not yet caught on.
“Logically, the mobile channel appears to be the most convenient for customers to talk to banks, but that is not so,” says Rahul Bhagat, country head for retail liabilities,marketing and direct banking channels at HDFC Bank, which first offered mobile banking way back in 2000.
Mr Bhagat says that in HDFC Bank, where nearly 80% of customer-initiated transactions are made through alternative delivery channels, only about 2% of the transactions are initiated through the mobile phone. On the other hand, more than 50% of HDFC Bank’s active customer base transacts on internet banking at least once a month.
In Mr Bhagat’s view, the low adoption levels are due to the fact that mobile banking in India is not a particularly customer-friendly service. In the early days of mobile banking, the network speed was extremely slow, and the application itself was clunky. Even now, he says, mobile banking does not appeal to customers because it is not easy to use, and they feel intimidated by it.
For instance, he explains, customers of SMS-based banking need to remember certain keywords to initiate transactions, while browser-based mobile banking has the problem of low network speeds, and in application-based banking, customers find downloading apps a cumbersome process. Another challenge for application-based mobile banking in India is that banks need to keep developing new applications to keep up with the vast number of low-cost handsets arriving on the market, especially from China.
Reaching the unbanked
In addition to enabling banks to offer mobile banking to their urban customers as another delivery channel, mobile phones are expected to achieve another important goal. In a country in which various studies have estimated that less than 6% of the 600,000 villages has a bank branch, mobile banking will enable financial inclusion by making it possible for banks to engage with the unbanked population.
The past few months have seen a flurry of partnerships between several leading banks and mobile network operators (MNOs) to enable financial inclusion. State Bank of India has established a joint venture with the largest telecom player in the country, Bharti Airtel; HDFC Bank has tied up with Vodafone Essar; ICICI Bank has partnered with Vodafone Essar and Aircel, and Axis Bank is partnering with Idea Cellular.
These bank-MNO partnerships are offering a wide range of financial products – such as savings accounts, pre-paid instruments and credit products – via a mobile-phone-based platform to unbanked customers in remote locations without access to bank branches.
Meaning business
MNOs, with their deep distribution network, are now acting as business correspondents in rural areas, and helping the unbanked to set up basic bank accounts with low minimum balances and simplified Know Your Customer requirements.
The banking regulator had long mandated that only non-profit companies could be business correspondents, but since September 2010 the rules have been relaxed, which has enabled network operators to participate in the mobile banking revolution.
“With an extensive network of retail outlets – even in remote places where there is no bank branch – mobile operators have an important role to play, as partners with banks, to facilitate the reach of mobile banking across the country,” says Ms Gopinath. But she made it clear that the MNO’s role is primarily of a service provider, enabling quick transmission of messages across a network, while that of the banks is to provide banking services to the people.
S K Mitra, president of Axis Bank’s agri-business and rural banking, says: “The partnership between banks and telecom companies will be effective. We are seeing good interest among non-bank customers. People already have handsets and are comfortable using the mobile.”
He concedes that mobile-banking-based financial inclusion faces several challenges, such as network connectivity issues, guaranteeing real-time transactions and costs. “It is not a profitable initiative,” he says. “While the break-even for a bank branch is 12 to 18 months, for mobile banking it is much longer. We have to reconcile to a longer break-even of a minimum of three years or maybe longer.”
Where's the profit?
Samaresh Parida, director of strategy at Vodafone Essar, says that mobile banking in rural areas will be a commercially profitable venture only when the fund transfers and remittances are high. “Rural financial inclusion accounts are very low-value accounts,” he says. The economics will work only when the volumes are huge. Also, the regulatory environment should be enabling. Mr Parida says: “Of course, things have improved a lot in recent months, with the regulator allowing for-profit companies to act as business correspondents.”
According to Mr Parida, in Kenya – where Vodafone operates the hugely successful mobile phone-based money transfer service, M-Pesa, in partnership with Kenyan MNO Safaricom – the MNO plays the key role in the mobile payments initiative and, in contrast to India, customers do not need to open bank accounts.
However, he is optimistic about the future success of mobile banking-based financial inclusion in India. He notes that M-Pesa, of which one-third of Kenya’s 40 million-strong population are customers, handles transactions worth $15m each day. “If it can happen in Kenya, it can happen [in India] too,” says Mr Parida.
Eclipsing the urban
Eventually, the financial inclusion share will become much larger than mobile banking for urban customers in India, says Deepak Chandnani, president of US-based mobile banking and payment service provider Obopay. In India, Obopay, along with Nokia – which holds a significant stake in the company – has partnered with Yes Bank and Union Bank of India for providing mobile-based financial services to the unbanked.
“Mobile banking adoption among urban customers will not be very high in the long term because these customers have many different ways to access their bank accounts. Financial inclusion needs more effort and education, but has a much higher potential,” says Mr Chandnani.
Mr Bhagat at HDFC Bank believes that mobile banking will play an equally important role in both urban and rural contexts. Commenting on the potential of mobile banking among their urban customers, he says: “Do we still believe in mobile banking? The answer is Yes! Just look at the mobile usage in this country. It is ubiquitous, overwhelmingly adopted and customers are very comfortable talking or texting.”
The main reason for his optimism is the recent launch of 3G in India and the availability of low-cost smartphones. “With near-broadband network speeds, browsing over smartphones will be as good as over the internet, so the ease of browser-based mobile banking will be comparable to that of internet banking.”
Other industry experts suggest that success for urban mobile banking lies in smaller towns and cities. “Customers in the top-tier cities have access to a variety of delivery channels, and prefer internet banking,” says a senior official at State Bank of India’s mobile banking department. “In smaller towns, internet penetration levels are low, and customers do not have access to a PC, so they will value mobile banking as a means to talk to their bank. We are planning to start pushing mobile banking in these towns.”
Here to stay
Despite their varying viewpoints and perspectives, industry participants are unanimous in their belief that India’s unique mobile banking industry, which straddles the two ends of the banking spectrum, is here to stay.
Joydeep Sengupta, head of McKinsey’s financial services practice in India, is bullish about mobile banking in India: “There are lots of players driving mobile payments, the penetration of mobile is very good, customers use the mobile for a lot of purposes and the RBI has very proactively and favourably come up with good regulations. Additionally, there is ongoing migration from rural to urban towns and cities, which will drive the need for remittances. The environment is ripe for mobile banking.”
In the next seven to 10 years, he predicts, mobile banking is going to be a $350m to $500m opportunity, with mobile payments playing a key role, and between $100m and $150m coming through financial inclusion.
