Cashless transactions and the poor
The mobile wallets and prepaid instruments players will target the tech-savvy elite customers, as the 40 players in the PPI space are currently doing
The year 2015 will be seen as an important year in the history of banking in India for the bold moves that the Reserve Bank of India has undertaken—to roll out two new universal banks, of which one has had a background of being a grassroots microfinance institution and to grant 21 new licences to two categories of differentiated banks. While these banks might not by themselves bring in the volumes to disrupt the way banking is done, these will definitely bring in practices that will disrupt the market.
The policy on new banks follows the recommendations of the Nachiket Mor Committee which looked at the issue of inclusion, one is not very sure if the differentiated banks will indeed address the issue of inclusion very effectively. From early indications of what the payments banks would do, it appears that they would largely expand the mobile wallet and prepaid instruments business. Already 40 institutions have been given permissions to operate as prepaid instrument providers and six of them are going to be payments banks. The difference for these six would be in making two-way (cash) transactions as against the existing policy of having only one-way transactions by the account holder. The penetration of the mobile wallets and prepaid instruments show that they are being used for on-the-net purchases and certain types of payments.
Early indications indicate that the players will target the tech-savvy elite customers, which is what the 40 players in the PPI space are doing. Will this penetrate to the poorer segments of the society and help them in the larger cause of inclusion? This is to be seen over a period of time. The trajectory as of now seems to be to migrate from an existing cheque/NEFT (National Electronics Funds Transfer)-based bank transactions and card-based transactions to mobile wallets—thereby indicating that this is largely a replacement market than a market that is leap-frogging for the “excluded” customers using technology.
Till now the prepaid instrument issuers have largely bypassed the traditional banking system. Even the National Payments Corporation has not been able to hammer out a common back end payments platform on its Immediate Payments Systems (IMPS) with the mobile companies, even though the protocols are there. With some of these players becoming banks, the possibility of a co-ordination between the traditional banks and the differentiated banks will be enhanced. The strategic partnerships of some of the public and private sector banks with the licencees of payments banks is an indication.
Will these initiatives have just a convenience for a time stressed pizza ordering software professional? Or will it make banking services inclusive to the poor living in remote rural areas, with no physical access to banking? The answer is in waiting and watching. While the business model for the prepaid instruments and the mobile money players will work out with volumes, the same cannot be said of the poor. The poor need the top-up of their instruments through cash transfers and those transactions have to be captured. The government has preferred traditional Aadhaar-backed bank accounts through the Jan Dhan Yojana as a strategy. As of now the roll out of volumes is largely in cooking gas subsidy payment that is mostly an urban phenomenon. The other elements of direct benefit transfers will flow, but will the accounts of the poor with the payments banks justify the overheads of interoperability of multiple players at the back end? The government is not willing to pay more than 1% commission on payments. So the business model for “inclusive” payments systems is yet to be seen. We need to be cautiously optimistic on how these differentiated banks will change the architecture in the inclusive segment.
Then there is the question of privacy. Not privacy as seen by the activists—which could be a valid concern—but privacy as in the data being mined and the customer being bombarded with lucrative offers to spend. The intrusion into the private space of a well thought out purchase being converted into a meaningless impulse purchase through the push of offers—we just need to watch the e-commerce space to understand the phenomenon—is something to be worried about when it is about poor and vulnerable customers.
This means that these 11 players would need to find ways of getting transaction volumes to make the inclusive customers viable. But if the players are promoting more transactions through push of impulse consumption using data mining algorithms particularly with the poor and vulnerable, would they be defeating the cause of inclusion? How does this technology-led easy payments pan out on prudence and careful management of financial resources at the unit level of an individual family? Every solution brings in a new issue to be addressed.
M.S. Sriram is a visiting professor at IIM Bangalore and Udaipur, and is a fellow at the Institute for Development and Research in Banking Technology.
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