by Viral Shah.
Frictionless payments are an important contributor to India's growth
story. Cash
is costly for everyone in the system: for the central banker,
banks, businesses, and individuals. Yet, we are far away from a mass
adoption of electronic payments.
For electronic payments to take off, it is essential to have a bridge
between the world of physical and electronic money, allowing seamless
conversion between the two. Until recently, this could only be done at
banks or ATMs. Various developments over the last year have greatly
expanded the number of entities that can now offer such services:
- July
2009, Cash withdrawal at point-of-sale guidelines: As a step towards enhancing
customer convenience, RBI allowed cash withdrawals at point-of-sale terminals
with debit cards. - April
2010, Report of the Inter Ministerial Group on the Delivery of Basic
Financial Services using mobile phones: This group chaired by the
Secretary, DIT and included, among others, representatives from
Department of Financial Services, Department of Posts, Ministry of
Rural Development, Planning Commission, UID Authority of India, TRAI,
RBI, Department of Telecom and the Home Ministry. It suggested a
nationwide payments architecture that consisted of a simple
centralized account hosting platform as a national infrastructure,
full interoperability among payments providers, standards based
biometric point of sale terminals, and standards based mobile
payments. - April
2010, From Exclusion to Inclusion with micropayments:
The UIDAI published a strategy document
on micropayments, which provides a detailed framework for
biometrically authenticated transactions, as recommended by the
IMG. The National Payments
Corporation of India has developed an interoperability switch
for Aadhaar
and mobile based
transactions as recommended in the IMG
report. Both, Visa
and Mastercard
have also adopted this framework. - June
2010, Harnessing the India Post Network for financial inclusion:
This report was jointly commissioned and produced by Department of
Posts, Department of Financial Services, Department of Economic
Affairs and Invest India Economic Foundation. It recommended a
framework similar to that recommended by the IMG; that of a low-cost
account hosting platform and cultivating a payments ecosystem by
allowing partners to access its physical and electronic payments
network for a fee. - September
2010, Financial Inclusion by Extension of Banking Services - Use of
Business Correspondents (BCs): BC guidelines have existed for a
while, but RBI recently relaxed the rules for the entities that can
act as BCs. These new guidelines allow for-profit companies (except
NBFCs) also to become BCs. This appears like a small change but it has
had far-reaching consequences.
Over these two years, we have a vivid sense about electronic
payments making the grade, from a vaguely posed idea for the deep
future to something that is tangibly around the corner. Each of these
elements appears to be small in isolation, but the link from public
policy developments to outcomes is like
a butterfly effect.
These developments have important ramifications for mass adoption of retail
electronic payments and financial inclusion. Banks, recognizing the
importance of new regulation, have partnered with telcos with retail
networks. This allows for the telco to leverage its network of
talk-time retailers as BC sub-agents, and to also offer mobile
payments between bank accounts. A flurry of announcements has happened
recently: SBI-Airtel, ICICI-Vodafone, Axis-Idea,
and more will certainly follow.
As much as these announcements are exciting, they raise some worrisome
questions. The biggest question is interoperability. If the country is
going to have a network of a million BC outlets, shouldn't a customer
of any bank be able to use any outlet, much like they can use any ATM?
Shouldn't a customer of one bank-telco partnership be able to send
money to a customer of another bank-telco partnership effortlessly?
Network
effects are essential for mass adoption of electronic
payments. After all, regulations today allow a person with a debit
card to withdraw cash over an interoperable network of point-of-sale
terminals.
Banks and telcos are unlikely to want interoperability; to justify
investments, gain customers, and want them to stick. Perhaps the
regulator ought to take a firm stand on the issue. A good balance may
be to ensure that the products are designed to be interoperable with
some uniformity of customer experience, but offer an interoperability
holiday for the first two years.
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