Purchasing an airline ticket with Rs30 in the wallet at 2am was considered nigh impossible a few years back. But it is now a distinct reality made possible by mobile phones. Is cash on the brink of extinction? Well, not yet.
With the explosion in mobile telephony, many thought that mobile payments would overtake cash and card-based transactions in a similar wave. Mobile phones have been used for mobile banking, fund transfers and even retail payments. Several mobile-based service offerings have been launched spanning financial inclusion to buying coffee. But few have evolved scale.
The reasons have been attributed to challenges in economic viability, regulatory restrictions, technological limitations or consumer apprehensions. Then, there aren’t many relevant value propositions—analyses of costs and benefits—out there, while key stakeholders have been unable to evolve participatory business models—those involving more than the banking system—within the regulatory framework.
The success of M-Pesa in Kenya, which has bypassed the banking system, or Wizzit in South Africa that complemented the existing banking networks, has further fuelled the optimism for mobile payments in India. These successes, however, have been in economies with relatively lower banking penetration and with different regulatory frameworks.
In the Indian context, there are two waves that will sweep the payments landscape in the next decade. In the first, several large banks and independent processors will be making significant investments in expanding the point of sale and automatic teller machine networks across India. This will stimulate the usage of 163 million debit cards and 22 million credit cards.
The second wave would be in processing small-ticket transactions—below Rs250—that are economically unviable for card-based systems, but that constitute over 98% of retail payments. The mobile channel can give rise to the service offerings that will fuel this wave.
The primary motivators for the regulator and the government in propagating mobile or electronic payments would lie in suppressing the grey economy, reducing the high costs of cash management and in realizing the impact of electronic payments in fuelling growth. This impetus, according to a 2006 book The Economics of Online Markets and ICT Networks, can provide 2 percentage points more growth.
But what is next in this game? Existing card-based payment systems were designed in the 1970s, when the Internet and mobile did not exist. A lot has changed since then. The Internet and mobile channels now offer a unique opportunity.
The challenge, however, lies in the aspirations of mobile operators and banks to maximize their share in the value chain. Though banks have traditionally been the custodians of currency, the new models in the second wave would be challenging this tenet, with mobile operators seeking to monetize their large customer and retailer bases.
According to a report in 2006 by M. Stomar at Finland-based Mobey Forum, two broad categories of models should emerge.
1) Bank-centric models: Here the mobile operator would play the role of carrier and user interface, as in the case of mobile banking today.
2) Transformational models, which involve a change from the above. Three sub-models that will emerge within this construct:
• Partnership model: The bank and mobile operator would jointly manage the business;
• Independent service provider model: A non-banking or telecom entity would set up a mobile payments ecosystem;
• Operator-centric: The mobile operator would take the lead, with the banking entity addressing regulatory requirements of funds, clearing and settlement.
These models would succeed in the long term if they manage to establish a set of standards that allow multiple banks, operators and service providers to operate across groups, and solidify consumer trust over time. Though possible solutions are emerging for domestic remittances and remote payments, the challenge remains in evolving a workable and convenient face-to-face payment solution and in traversing today’s complex mesh of multiple SIM cards, handsets and operating systems.
These models will also need prudent regulation. The Reserve Bank of India has gradually widened the playing field to fuel radical innovations in electronic and mobile payments over the last three years:
• The 2007 Payments and Settlements Act permitted third party clearing and settlement systems
• Prepaid cards can now be issued by non-banking entities
• The transaction sizes permitted for mobile payments and transfers have been enlarged
• The vast retailer network can be leveraged for cash deposit and withdrawal points within the business correspondent framework, as undertaken successfully in Brazil.
The government and regulator can further accelerate this. First, it could extend the purview of electronic payments—this should include payments through non-banking entities too.
Second, it should extend tax rebates to consumers and retailers for electronic payments, proportionate to the payments made annually. A similar approach for card-based payments has yielded significant results in South Korea since 1997.
Third, it should identify focus sectors. Payments for utilities, tourism and paying government taxes could be three areas where the government can offer more incentives.
As India enters the new decade, at least 180 million payment cards and 500-millon-plus mobile phone connections offer a unique opportunity to create a new wave of payment systems to stimulate growth.
Upendra Namburi is a Gurgaon-based senior banking and financial services professional. Comment at firstname.lastname@example.org