Mumbai: Ashok General Stores is a mom-n-pop store in Lower Parel, Mumbai’s erstwhile textile hub, which is popular with the middle-class families living in the area who still prefer the neighbourhood grocer to the big retail stores. Ashok offers services beyond the goods on the shelves.

Charged up: RBI has allowed prepaid card issuers to offer mobile-based cash cards for up to Rs5,000 for buying goods and services. Madhu Kapparath / Mint

It also recharges the prepaid mobile phones belonging to homemakers, students and construction workers. It collects cash amounts as small as Rs10 and uses the mobile itself to recharge user accounts.

Soon, Ashok will be able to do the reverse. Customers will be able to pay for soaps, cigarettes and milk pouches with their mobiles.

The banking regulator has allowed vendors such as Ashok to collect money from the prepaid cards of mobile users. In August, the Reserve Bank of India ( RBI) said prepaid card issuers can offer mobile-based cash cards for up to Rs5,000 for buying goods and services. This essentially means that even a customer who does not have a bank account can go for cashless transactions through mobiles.

Squeezing a person’s wallet into a phone relies on a technology called near-field communication, which allows any enabled device to communicate with a cash register. When a phone is enabled with the near-field communication technology, shoppers can load bank and credit card information onto their devices and use it to buy goods at grocery stores and fuel stations.

Mehul Desai, chief operating officer, c-Sam Inc.—a company founded by Sam Pitroda—said the existing recharging merchant network offers a good foundation to build upon.

RBI first issued guidelines for mobile banking transactions in October 2008, allowing the use of mobile phones for checking bank balances, bank transactions up to Rs10,000 and transfers up to Rs5,000. In April 2009, RBI made it clear that “the use of mobile prepaid instruments for the purchase of any other goods or services shall not be permitted". But in August that year, RBI allowed mobile prepaid cash cards for purchases of goods with a cap of Rs5,000.

Since then, three non-bank entities have been allowed to issue such cards and many more are in the queue.

According to the Telecom Regulatory Authority of India (Trai), there are 471 million mobile phone subscribers in India. Roughly half of them do not have bank accounts. Even among mobile users with bank accounts, the usage of mobiles for commercial transacting is very low.

The new RBI norms have the potential to bring together a network of around 1.5 million merchants who use their mobile phones for e-recharging and a large segment of mobile users who do not have bank accounts.

Tariq Husain, director of business development, mcommerce, Sybase 365, says the mobile phone can be both a purchase mechanism (which holds the same information as it is held on a plastic card) and a point of sale, or PoS, terminal. Sybase 365 is a US-based firm engaged in mobile commerce, mobile messaging and providing enterprise software solutions to mobilize information.

“More importantly, for the Indian market, the small street seller that you would not normally provide a PoS terminal to, can now accept payments on his mobile phone, and at the end of the day, upload that value to his bank account," Husain said. If the mobile can replace the PoS terminal, it can ramp up the revenue stream of the neighbour kirana stores that survive on low-value transactions.

There are at least 1.5 million vendors who recharge mobiles and they can instantly become PoS terminals, said Sunil Kulkarni, chairman, Oxigen Services (India) Pvt Ltd, a Gurgaon-based mobile technology provider. Oxigen provides a variety of electronic payment services, including e-recharge services and a prepaid card called OxiCash. “With a clear framework laid down by RBI for prepaid instruments, it would now proliferate faster. People now using them for recharges would start using them for other purchases." he added.

Other prepaid card players such as ITZ Cash Card Ltd, awaiting RBI approval to enter the same mobile-banking market, also see huge potential. “It needs a separate approval from RBI. That process is on," said Navin Surya, managing director, ITZ Cash.

Commercial banks too are planning to use this window to expand their footprint. Vijay Ramachandran, chief marketing officer, Citibank, South Asia, said: “Prepaid cards have the potential to serve varied customer needs. They can be a first, formal account for the unbanked customer, a gift option, a card to make secure online purchases, a convenience for students etc."

He said prepaid cards will bring different segments of customers into the fold of formal, regulated banking and at the same time, offer an attractive opportunity for card issuers.

ICICI Bank Ltd, India’s largest private sector lender, which has 8 million customers registered for mobile banking, is seeing many more signing up. “These customers are able to carry out their transactions through mobile phone by using SMS, WAP (wireless application protocol) sites of operators and iMobile (a downloadable application)," a spokesperson said.

Many hurdles ahead

While the excitement is high and the potential is huge, the road ahead is not without hurdles. Stringent know-your-customer, or KYC, norms are among these. A spokesperson at Axis Bank Ltd said while the move will enable customers to utilize electronic money without having a bank account, KYC could be a hurdle. “Almost the same set of KYC documents are required for using the open-loop prepaid instrument, which may prove a bottleneck in its growth."

Service providers too agree that a lot needs to be done. Kulkarni of Oxigen said users and merchants need to be educated about the convenience and safety of this transaction mode. If the payment method gains acceptance, Surya of ITZ Cash expects mobiles replacing PoS terminals can “happen in say two to three years".

According to Mehul Desai of c-SAM, an appropriate back-end platform that can leverage the existing infrastructure and provides various applications is a key requirement. “To efficiently scale for other services for various financial as well as non-financial services, the settlement network will require additional technology," he said.