A secure and efficient payment system would enable the circulation of money and economic activity. This would be the primary goal of any payment system globally. The increase in the number of payment systems, the participation of larger number of institutions in the financial market, recent financial crisis have made brought in focus the public policy makers. Over the recent yesteryears, Indian Policy makers especially on the economic and technology front have taken some bold yet cautious forward steps. The caution has borne fruit, by the insulation the country had during the recent crisis.
Today, there is a positive struggle between the policy makers and the market to drive the economy forward at a faster rate; the payments systems are continuously fine tuned and enhanced with newer payments systems. Gone are the days of manual clearing. Today, the customer has a bouquet of payments systems to choose from: from paper transactions to paperless transactions, from netting to gross settlements, from T+3 to real time settlement. Viz. Speed Clearing, Electronic Clearing Systems (Credit & Debit), National Electronic Funds Transfer, Real Time Gross Settlement, Internet Banking.
The Payment Visions document of RBI envisages Triple-S and E standing for Safety, Security, Soundness and Efficiency. The payment systems in India reflect retails payments and large value payments, both paper based and electronically based.
Across the globe, various type of payment systems are followed, both for paper based and electronic. Variations in structure and delivery channels are also diverse. The ownership of the systems varies from Central Banks, financial institutions to separate entities owned by financial institutions. While the large value and bulk payments taken care by RTGS and ECS (Credit and Debit), it is the retails payment that need attention. Still the consumers and bankers are dependent on paper based transactions.
The Retail Payment System:
The potential and growth of retail payment system has encouraged the RBI to delegate the system to be operated by approved service providers, banking institutions. Due to the proliferation of so many players in the payment systems, the central bank is apprehensive of permitting non-financial companies to enter the Retail Payment System. With the legal structure regarding electronic funds revealing inadequacies, the situation for the central bank and policy makers make it even more complex. The prominent and safe method traditionally perceived is the credit transfer or wire transfer. Such transfers are done bank to bank electronically, though not necessarily by banks. The liberalized economic policies have encouraged non-banking companies to enter the Retail Payment System Market.
The Retail Payment System involves high volume and low average value transactions, between individuals & business and individuals & individuals. The retails payments are done for one and many of the following:
• Purchase of services and goods
• Utility bill payments
• Person to Person transfers
• Cash withdrawals
The above retails payments are done electronically mostly by debit and credit cards, and to an extent through the Netbanking facility offered by banking institutions. With the tremendous growth in the number of ATMS and the advancement of technology, paperless transactions of the electronic retail payment system have outgrown the paper transactions, both in value and volume.
But then, that is only the best part of the system. A deeper analysis would reveal that the electronic retail payment system in India is highly biased towards urban population. At 72%, the rural population gropes in the dark with regard to banking services. Recently the Deputy Governor quoted with disappointment that only 31,000 villages out of 7 lakh villages are serviced by a bank. A stark contrast to the sophistication banking facilities available to the urban India.
In spite of the facilities available for the retail payment system, the consumer still has to walk across to the ATM or hit the internet button on the computer screen. The under-privileged go the extra mile to the bank branch.
Indian Telecommunication Industry
3rd largest telecommunication network and 2nd largest wireless connections, India is the fastest growing market in the world, expecting to touch a billion connections in 2015, currently at 525 million connections(Dec 2009) with a teledensity at 47.89%. Looking at this figure with the background of the population figure at 1.15 billion, the penetration of the mobile across the economic and geographic strata is tremendous. The growth is deep into the rural market as well, currently at 30% of the national figure. The purchasing power of rural India has definitely increased, and presents a potential market for the telecommunication industry. With basic infrastructure developed across the country, and with various welfare measures implemented, the rural market is waiting to be lapped. A few marketing lessons can be learnt from the FMCG market.
The Great Indian Game
Coupling the penetration of the mobile phones across the country-urban & rural and the disparity in services offered across the population, here is a market opportunity for the Indian Telecommunication Industry. The power of the mobile phone is still underutilized on the financial angle, though tremendous improvements have been witnessed on the entertainment and internet front. The unbanked Indian Population stand to gain by blend of mobile and money transfer. Money lenders and hawala operators apart from non-banking finance companies thrive on this technology, and the masters of mobile money transfers.
The government only needs the legal framework and the will to give the approval for a system that is already in practice. For a faster growth in the economy, RBI needs to come out of its colonial culture and embrace technology the way the citizens have embraced. After all the democratic government is of, by, and for the people.
Mobile Money Transfer
A new service is in the anvil that connects the mobile service provider and the customer on a financial platform.
It is not going to be long before the mobile service provider would also be providing a service involving money transfer. Welcome to the world of Mobile Money Transfer. A Service that would enable a customer to transfer money from one place to another place using his mobile, without any financial intermediaries.
With one of the largest consumer base, the telecommunication companies already know how to handle large number of accounts. With almost 80% of its consumers having an average monthly transaction of Rs.500/-, the mobile service providers possess the technology, which is again continuously upgraded, to handle large number of low value transactions, similar to the retail payment system. Today, the operators are mature in their business dealings and which clearly reflects their acumen to be financial dealers.
It is interesting to note that the service providers are already into handling customers’ money by way of Pre-Paid SIM cards. These cards are stored value card which has monetary consideration. The monetary value stored in the card is used up when the subscriber uses the mobile. A regulatory freedom is required for the service provider and the customer in using the stored value for any other purpose, though of late certain services are available.
The transfer of money through the mobile is quite simple. In the early days of Mobile Services, recharging of pre-paid mobile SIM cards was done with scratch cards by the user. With the development of technology, the consumers mobile could be recharged electronically by a third party without the consumer visiting any dealer. In simple terms, one mobile could be recharged remotely. The charged money value is used up by the customer over a period of time i.e. the mobile service provider provides a service over a period of time for the money value deposited by the consumer by way of charging his mobile.
The Service providers already run a large network of retails outlets owned and franchised. This network can challenge the bank networks for its penetration and customer service. The mobile network and retail outlets have penetrated much deeper than the banks.
The challenges for providing such a service are equally daunting for the mobile service providers. Our financial system has developed over a period of time with strict discipline and regulatory control. Even during the worst of the financial crisis, our financial system took no or little beating, basically because of our strong discipline and monitoring. Such discipline was engraved into our financial service providers right from its birth. On the other hand, mobiles service providers are known to flout rules and regulations to expand their business. The discipline that is required for financial transactions would be a hard thing to be taught to the mobile service providers.
Shedding their competitive spirit, mobile companies need to standardize across for the purpose of compatibility and interoperability. Standardization should address privacy and security issues of the consumers. The first mover advantage should be neutralized by the government by introducing necessary regulatory reforms.
Though as of now, mobile payments do not have the legal status to be considered as legal tender, for all the ethical reasons mobile companies need to treat it as legal tender and back by promises to pay.