Financial inclusion can sometimes be a bit of a detective game: It involves finding a market that has simply gone missing. For economists, the dilemma of bringing millions into a formal financial fold is akin to that of “missing markets”—a competitive market that should exist, but doesn’t. How exactly do we find it?
One tool available to India’s policymakers is technology. Last week, when Airtel announced it was India’s first telecom operator to get a Reserve Bank of India (RBI) licence to start a particular kind of mobile payment service, it was a small but significant clue.
RBI has been on this trail since October 2008, when it notified rules to allow banks to let their customers transact using mobile networks. But that didn’t fully leverage the effect of this technology: that there are more rural poor who have access to mobile phones than banks (those without accounts couldn’t have availed of this).
That’s why the new service is significant. Called a “semi-closed wallet”, it allows a subscriber to exchange physical cash for virtual money, to pay for third-party goods and services up to Rs 5,000. Without needing access to a bank account or credit card, the subscriber can use the prepaid virtual balance to, for instance, buy a movie ticket.
Before policymakers get too excited that they’ve cracked the case, it’s important to note that this is only one clue in what is going to be a long trail. First, more vendors—beyond the local theatre—have to be convinced to offer such services. Second, telecom operators will have a better profit motive here if they are allowed to facilitate remittances. Third, subscribers still can’t access a real credit line; they can only spend after having paid cash upfront.
And finding these other clues is a big challenge. Kenya’s M-Pesa may have leveraged every bit of its mobile network to replace banks, but India shouldn’t. RBI deputy governor K.C. Chakrabarty noted this year that a Kenya-like model renders supervision—to, say, prevent money laundering—difficult.
There’s another concern. Given the recent debate over bank licences for industrial houses, how close should a telecom operator be allowed to get to full-fledged banking? It could be better, as RBI proposed last month, to let telecom operators become business correspondents, to help only with the last mile.
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