Will mobile money take off in India?

February 4, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Walk out of Mumbai International Airport and hundreds of local people will be glued to their mobile handsets, texting to friends and colleagues.

Walk out of Nairobi International Airport and hundreds of local people will be glued to their mobile handsets. The chances are though that in Kenya these people will be transferring money via their handset to another user or buying some groceries. Confused? Read on.

Mobile money is one of the world’s fastest growing industries, common worldwide but yet to become established in India.

The explosive growth of the mobile industry over the past two decades has led to billions of transactions using mobile devices. People now buy train tickets, goods from Amazon and their groceries with their devices.

Such mobile payment offerings are influenced by two distinct set of entities.

Firstly we have those entities whose core business is in handling payments. Examples include traditional retail and corporate banks, established payment brands and processors such as VISA and MasterCard and established non-banks such as PayPal, Obopay and new fast growing entities such as paythru.

Secondly we have the telecoms industry. Mobile operators, technology providers and hardware providers have all recognised the vast potential offered by mobile money and are allocating substantial resources to the industry.

Mobile money systems are very common in the US, Europe, Asia and Africa. Even China has been quick to implement systems such as SmartPay, UnionPay and mobile banking.

Probably the most successful method of mobile money transfer exists in Kenya and which is the M-PESA system, developed by one of Standard Chartered’s clients, the leading mobile operator Safaricom, which is 40 percent owned by Vodafone.

M-PESA was launched in 2007 by Safaricom and allows four basic types of transactions – person to person, bill payments, cash “withdrawal” and microfinance receipts and payments.

Users can transfer money subject to a maximum and minimum amount and also hold a balance on their M-PESA account, again subject to a maximum amount.

In a country such as Kenya with a relatively undeveloped retail banking system, M-PESA has proven to be incredibly popular, with over 13 million users, equivalent to over one third of the population of Kenya.

Users claim the system is very easy to use, very affordable and is one of the best methods of transferring money quickly from a worker in Nairobi to his or her family in more rural areas of the country.

Here is where the similarities with India start to become interesting – a country obviously full of people working in major cities and frequently needing to send money back home to more rural parts of the country quickly and cost effectively. So could mobile money work in India?

Conceptually, the answer has to be yes. The system is as relevant to the young professional in Mumbai buying his groceries via his tablet device as to the construction worker in Delhi transferring money back to his family in the countryside.

A big driver in India will be the role of retail banks leveraging the mobile device to provide cost effective access to basic financial services for unbanked and underbanked consumers.

Previously the business model for these consumers was uneconomic. The mobile device is changing that and giving rise to potential tie-ups between retail banks, mobile operators and other financial services providers.

The Reserve Bank of India (“RBI”) has begun to address the concept of mobile banking and in 2008 published some operative guidelines. Essentially these mean that banks can provide mobile banking services and telecoms operators are facilitators.

In 2010 signs of progress appeared. RBI issued “mobile wallet” guidelines that envisage up to 5,000 rupees with mobile operators that can be used for merchant transactions, but does not allow the physical transfer of funds outside the banking system.

Indeed in September 2010, Airtel was granted a licence enabling the operator to offer cash card services to its subscribers, whereby the subscriber can pay cash to load their mobile wallet from a retail outlet and use it to make payments. Vodafone Essar is also said to be looking at a similar opportunity.

The RBI has also announced that it is looking at creating a dedicated clearing system for mobile payments. This is quite unique in an international context and if implemented would be a welcome sign of strategic forward thinking by the regulators.

In a new service that is set to revolutionize the retail money payment sector in India, consumers will now be able to transfer money from their accounts to any other account in the country using their mobile devices via the National Payment Corporation of India’s (NPCI). It is India’s first instant, real-time, 24×7 fund transfer facility in the retail payment sector.

NPCI’s interbank mobile payment system (IMPS) will be the first globally to allow such transactions between individuals that will be routed in tandem through the bank and the mobile services provider. There is a cap of 50,000 rupees per day on mobile transactions, according to RBI guidelines.

This technically means besides Paper & Electronic we will now have mobile as an alternative settlement channel which is likely to replace all forms of small value settlement including plastic in the near future.

Rarely in the world is a facility of this magnitude present. India has nearly 300 million bank accounts, with a huge number of banks as well as mobile operators and a wide subscriber base. It is a challenging task, but the technology is equipped to deal with such a wide subscriber base.

The main difference between India and Kenya in that the former’s banking system is relatively developed, with good banking coverage across most of the country. Nonetheless as a complimentary system and also as a tool for the many people without bank accounts but with mobile devices, mobile money has great potential.

As with many things in India, regulatory discussions may slow down a rapid adoption of mobile money as we have seen in Kenya – from start-up to 13 million users in less than four years. However it is encouraging that the RBI is looking seriously at this new industry.

Certainly the mobile operators I speak to are excited and see mobile money as an important value added service to be offering to subscribers in the future.

As with the Indian mobile industry it may take some time before mobile money takes off. But if and when it does the growth may again be as spectacular and the way of lives of many Indians will change with it.

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Leading the Revenue of a Telecom Operator, I can very well vouch for the expected advancement of Mobile Money.

With the current contribution of VAS & Data averaging around 10-11% for India, while around 60% for the Developed geographies, the growth in non voice services is the deemed future of the telecom industry.

Apart from an industry perspective, evaluating the data from an economic perspective, I foresee the same to happen. As we are well aware that the maturity of any industry leads to the consolidation and eventual mergers and acquisition, thus expanding the same to the next level, works for the economy as a whole.

The combination of banking and telecom industry, leading to the development of Mobile Money, is an example of the consolidation of the economy as a whole on a macro level.

Indian economy too is growing at a great pace and shall eventually lead to the consolidation of its industries, like the example shared above in the article about the combination of the telecommunications and banking industry.

-Atul Jagga

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