One of the sectors which has witnessed the highest growth rate, nationally as well as globally, is the telecommunications sector. The mobile phone subscriber base in India, as of March, was around 261 million, and growing at about eight million a month. In fact, considering the low penetration ratio of around 26% in the country, the sector is expected to maintain its scorching pace of growth.
With the rapid growth of mobile phone subscribers in India, banks (and mobile phone operators) have been exploring the mobile phone medium for various services.
Till recently, no formal guidelines existed in relation to mobile money payments and, hence, this was being governed by normal banking regulations, which had evolved in an era when no such services were available.
Various banks, in collaboration with telecom service providers, have already initiated pilot projects to offer mobile payment facilities, which would allow a subscriber to transfer funds through his mobile phone.
Considering the impending flurry of such service launches, the Reserve Bank of India (RBI) issued draft operating guidelines concerning mobile payments in India on 12 June.
The guidelines recognize that various banks have started offering information-based services—such as balance enquiry, stop payment facility, etc.—through the mobile phone medium. Some banks have started offering advanced services concerning transfer of funds to beneficiaries of the same or other banks, etc.
Considering that the mobile payment technology is at a nascent stage, RBI considered it imperative to issue operating guidelines for strict adherence by banks. RBI’s focus seems to be on the security aspect, especially vis-à-vis the second category of transactions, that is, transfer of funds, etc.
An important clarification provided by RBI is that the guidelines are applicable only in relation to banking customers, within the same bank and across banks.
The term “mobile payment” has been defined in the guidelines as “information exchange between a bank and its customers for financial transactions through the use of mobile phones”.
Illustration: Malay Karmakar/Mint
The guidelines recognize that a mobile payment framework would have various players. Apart from the bank (which would provide the regulatory umbrella for carrying out such a mobile payment transaction), there would be mobile payment service providers, mobile network operators, etc. The guidelines seem to suggest that the role of such intermediaries is restricted to providing technology/telecom infrastructure.
Some of the key features of the draft operating guidelines:
—The guidelines clarify that only banks which are licensed/ supervised in India and have a physical presence in the country would be permitted to offer mobile payment services to Indian residents.
—It has been further stipulated that banks would be free to use the services of business correspondents for extending the mobile payment facility to customers. The scope of a business correspondent has been curtailed significantly by RBI, and it remains a question as to whether such a route can be utilized effectively by banks to achieve the objective of reaching out to areas where the banking presence is remote. A business correspondent is generally a non-governmental organization or a section 25 company permitted by RBI to assist a bank in carrying out its banking functions.
—The guidelines stipulate that banks should offer mobile-based banking services only to their own customers. RBI guidelines on KYC (know your customer) and anti-money laundering norms would also be applicable to such customers.
—Banks would have to adhere to the guidelines issued by RBI on “Risks and Controls in Computers and Telecommunications” vide circular dated 4 February 1998.
—Prior registration of customers (through a signed document) would be necessary, irrespective of the level of mobile banking services provided by banks. Such procedures can also be completed by the bank’s business correspondents.
—A very important stipulation is that there should be interoperability between the banks and mobile phone network provider. In other words, when a bank offers mobile payment services, it should be ensured that customers with mobile phones of any network operator should be in a position to request the service from the bank.
—The guidelines also prescribe an illustrative framework of technology and security standards for providing mobile payment services. Further, it has been clarified that for inter-bank fund transfer transactions, banks can either have bilateral or multilateral arrangements, pending the creation of a 24x7 infrastructure for a nationwide payment framework.
—The banks should also get the mobile payment scheme approved by their respective boards/local boards (for foreign banks) before offering it to customers. A very important requirement is that the board approval should document the extent of operational and fraud risk assumed by the bank, and the processes and policies designed to mitigate such risk.
While RBI has done a commendable job in taking the first step towards facilitating the mobile payment facility, there are some areas where further clarification could be built into the final guidelines.
For instance, the guidelines stipulate that banks can use the business correspondent route for offering services to customers in remote areas. The existing regulatory framework does not directly permit a telecom operator to become a business correspondent, and such a restriction could prove a hindrance to the growth of the mobile payment culture in India. Of course, there are other routes available—such as the telecom operator establishing a section 25 company to act as a business correspondent, etc.—but such routes have their own complexities and are not the best options from a commercial perspective. Permitting a telecom operator to become a business correspondent could probably be an important step in facilitating mobile payments in India, considering the reach of such network operators would stretch beyond that of conventional banks.
Hence, in a way, the national objective of rural inclusion in financial services could be accelerated. In any case, the guidelines could throw further light on this aspect. Such entities can prove to be of great value to banks and the larger process of mobile money payments.
Clarity is also required vis-à-vis the question of co-branded mobile payment services under the regulatory umbrella provided by a bank (which, in the current set-up, seems possible, though not without some kind of complexity and some regulatory ambiguity).
RBI has done a commendable job in terms of initiating the first step towards developing a framework for mobile money transfer. However, to increase the penetration of such services without compromising on the security aspect, the guidelines may need to address issues such as the widening of the business correspondent route, laying down a larger role for intermediaries, co-branding of mobile payment services, etc., so as to enable a robust framework, backed by a commercial business model, to accelerate the mobile payment culture in India.
Ketan Dalal is executive director of PricewaterhouseCoopers. Your comments and feedback are welcome firstname.lastname@example.org