MONTHLY ARCHIVES: OCTOBER, 2013
Out of the 6 communication modes for mobile banking, namely- Wireless Access Protocol (WAP), Stand-alone Mobile Application Clients (Mobile Apps), Short Messaging Service (SMS), Interactive Voice Response (IVR), Using SIM Tool Kit (STK) and Unstructured Supplementary Services Data (USSD)- USSD is most suited for promoting financial inclusion through mobile banking services (TRAI Consultation Paper).It scores highest amongst all the other communication modes in terms of ease of provisioning, affordability and availability across various types of handsetsUSSD poses to be a potent candidate for universal provisioning of banking services through mobile in India, due to the following advantages (TRAI Consultation paper):
1) It is the most feasible and cheap mode of communication for mobile based financial services (as per Inter Ministerial Group Report).
2) It involves menu- based continuous sessionBeing menu based it proves to be a better experience for customers by enabling interactive and real time transactions.
3) It has an average duration of 2 seconds for exchange of each message therefore provides better and fast response to the end users.
4) In USSD messages are of flash type and cannot be storedHence in case of USSD based transactions the risk of misuse of MPIN is mitigated as the messages are not stored in the handset.
5) In case of USSD, a subscriber does not have to create any message to do the transactions, this accords a superiority to USSD in terms of ease of use.
Challenges in implementing USSD for Mobile based banking services in India
With all the advantages of being a cheap, convenient and secure mode for mobile banking services, the implementation and adoption of USSD has not yet materialized in IndiaRBI has recognized the importance of USSD for mobile banking services and has set up a technical committee to look into the challenges in adoption of USSD channel by banksThe issues that are responsible for sluggish acceptance of USSD based mobile banking services are:
Use of USSD based mobile banking at present in India is limited to the value added banking services as provided by banks (SBI, ICICI) to their existing customersHence such mobile banking solutions are not meeting the objective of serving the financially excluded population sectionsThere is a lack or absence of commercial adoption of USSD based services on a larger scale, and this is due to the following factors:
1) Telcos have not been very receptive to the idea of serving as facilitators for banks to provide USSD based mobile banking, therefore mobile subscribers of only few TSPs can access the mobile banking services of a particular bank.
2) Cases where customers have multiple bank accounts, the need to remember separate USSD code for each bank for mobile banking transactions, acts as a deterrent in the use of m-banking.
3) If a bank other than the one for which a TSP is acting as a facilitator, wants to offer mobile banking services, then it would have to connect to that TSP separatelyThis need to develop one to one connectivity between each bank and TSP involved in mobile banking services, makes scalability of USSD based mobile banking services difficult.
However these issues can be taken care of with a common platform to connect banks and TSPs, for instance one such platform is – National Unified USSD Platform (NUUP) as attempted by NPCI, it has the potential to bring banks (those who can provide mobile banking) and TSPs (GSM) on single platform to facilitate USSD based mobile bankingSuch common platforms can resolve the issue of multiple one- to- one connectivity between banks and TSP.
Small Screen limitation
Basic phones usually have small screens which provide a very poor interface for USSDAs the font sizes cannot be modified therefore it may lead to lot of scrolling to read a single messageHence could result in a session time out by the time a user completes reading a single messageSuch limitation will affect the effectiveness of mobile banking transactions via USSD.
USSD services are currently only available in English and therefore pose a major hurdle for the bottom of the pyramid populace to use USSD based mobile banking servicesUnless USSD services are extended in vernacular or regional languages, the adaptability will greatly suffer.
USSD only works on GSM phones, where as in India currently CDMA has 75 million subscribersTherefore until and unless USSD becomes technology agnostic, the objective of universal inclusion would remain unfulfilled.
One of the major issues playing against the universal implementation of USSD based mobile banking services is price determination of USSD based servicesAs per Inter Ministerial Group recommendation (Delivery of Basic Financial Services Using Mobile Phones, IMG report), a business to customer (B2C) pricing model should be adopted in which TSPs will charge a pay–per-use fee from their subscribers for using USSD services for mobile bankingHowever, this type of pricing structure has been contended by TSPs on the following grounds:
Firstly according to telcos, as banks are the main service providers and TSPs are service providers to banks and act as facilitatorsHence, this being a bank led service therefore banks should take the responsibility of pricing these services.
Secondly, telcos are unable to appropriately price such services due to system constraintsFor instance, TSPs can only bill all the sessions at the time of initiation, irrespective of the fact whether transactions have been completed or not. But USSD sessions are prone to dropping due to incoming calls, customer initiated call abandonment etcSo if fee is charged by the TSPs in case of incomplete sessions then it would lead to customer dissatisfactionThis will hinder the mass adaptation of such services and consequently the spread of mobile banking services via USSDOne plausible solution for this issue can be banks charging the customers like they do in case of internet banking, debiting the customer’s account directly for such transactionsIf the same procedure is carried out for USSD based mobile banking transactions then the issue of TSPs charging for incomplete sessions would be resolved and customers will only pay for the successful transactions (Strong signals for mobile banking).
Lastly, a typical USSD transaction requires around 8-9 interactive messages between a consumer and technology platformTherefore the cost of each session can vary depending on the number of messages irrespective of the fact whether the session was successful or notAnd if only successful sessions are being billed then TSP should be compensated also for the unsuccessful sessionsHowever, if TSP does the billing of sessions then it needs to install a full billing system and Call Detail Record (CDRs) to maintain and retain the records; this whole procedure would involve additional capital and operating expenditureIn this context, TSPs contend that a ceiling should not be fixed for tariff level for USSD sessions; it should be open for deliberations and discussions between banks and TSPs, so that feasible and workable model can be formulated for pricing.
Therefore, until and unless the pricing and technical hurdles are cleared the universal adaptation of USSD based mobile banking services for financial inclusion will have to wait in India.
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Financial Inclusion process in India suffers from the issue of inadequate demand and usage of financial services and products from the formal financial sectorOne of the major factors responsible for this issue is high incidence of financial illiteracy in India.
A glance at a survey based Financial literacy index by Master Card, with constituents, such as skills in budgeting, savings and responsibility of credit usage, knowledge about financial products, services and concepts and ability to make plans for long term financial needs and basic understanding of various risks associated with investment, different investment products and skills requiredAccording to this index out of 16 Asia Pacific countries- Australia, New Zealand, China, Hong Kong, Taiwan, Japan, Korea, Bangladesh, Malaysia, Philippines, Thailand, Indonesia, Singapore, Vietnam, India and Myanmar; India held the 15th rank due to its poor performance.
In addition to this several studies have highlighted the importance of financial literacy and shown a significant correlation between financial literacy and usage of formal financial services, such as OECD 2013, Cole et al 2009, Sridhar 2010, OECD 2008 and OECD 2006.
Given the criticality of financial literacy for the process of financial inclusion, MicroSave has suggested some important insights for novel and innovative ways for disseminating financial education, these are:
1) The poor view financial management as a means to match their irregular meager income with fixed and variable expensesFinancial literacy should comprise of knowledge of various products and services that would help them to manage their erratic cash flows and expenses and realize their short as well as long term goals.
2) According to Financial Capability and the poor: are we missing the mark? (Zollmann and Collins, 2010)- field studies have shown that management of financial resources is something that people learn more readily from first hand experiences rather than from class room sessionsTherefore financial literacy initiatives should be coupled with provision of financial products, so that users can understand the nuances of financial literature and management while using a productBesides this, bundling of financial literacy with a financial product also helps to disseminate financial literacy on a larger scale through marketing and sales efforts for that product.
One such avant garde in financial literacy initiatives based on these (aforementioned) insights is- IFMR Trust’s Kshetriya Grameen Financial Services (KGFS)KGFS by IFMR trust focuses on maximizing the financial well being of individuals as well as enterprisesUnder this wealth managers are appointed to deliver a range of financial services and products to the households and they assess their customer’s plans for future, income, expenditure and assets so as to identify and determine their potential need for financial servicesThe wealth managers through their thorough counseling of clients not only help them understand and realize their current and future financial needs but also make them aware of various financial products at their disposal for planning optimal use of their resourcesThis process of personalized financial counseling to the financially excluded poor gives them the necessary financial educationA remarkable feature of KGFS by IMFR is that the wealth managers are assessed on the basis of financial well-being of their clients not on the basis of sale of financial products, this kind of carrot and stick approach helps in the effective dissemination of meaningful financial education.
Therefore, while educating the financially excluded poor about the fundamentals of financial literacy for eg- why invest, why save, why insure etc, as is done by RBI under National Strategy for Financial Education, such approaches should be adopted in the financial literacy initiatives by RBI, PFRD, IRDA and other stakeholdersInitiatives to disseminate financial education should be based on the insights from the MicroSave study and cues should be taken from IFMR trust’s KGFS, to make them meaningful and effective in promoting financial inclusion in India.
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As promised by the RBI Governor in his first speech in September, a new committee has been constituted to look at financial inclusion in IndiaThe Committee on Comprehensive Financial Services for Small Businesses and Low-Income HouseholdsThe terms of reference for this committee, headed by Dr Nachiket Mor are as follows:
Further IFMR Finance Foundation has set up a dedicated website Complete Financial Inclusion & Financial Deepening , where stakeholders can give in their inputs on payments and on local financial institutions.
The RBI Governor's focus on moving away from bureaucratic norms and making the distinction between payments and banking is now set to show in the year ahead as policy measures are reoriented in a new direction.
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Several studies such as- Fighting Poverty Profitably by Gates Foundation, Extending Financial Services to the World's Poor is Within Reach by Rodger Voorhies, Innovative Financial Inclusion report by GPFI etc, emphasize the point that innovations in technology that enable the financial service providers to serve the last mile consumers in an economically viable manner are key to expanding financial inclusionIt is in this light that ISO 20022 is seen as an important innovation for payment systems and consequently for financial inclusion.
What is ISO 20022?
Universal financial industry message scheme is the international standard that defines the ISO platform for the development of financial message standardsThe business model is such that it allows users and developers to represent financial business processes and underlying transactions in a formal but syntax independent notationThe business transaction models are real business standards which can be converted into physical messages in the desired syntax (FAQs, RBI,2013)As ISO 20022 standard is based on Extensible Markup Language (XML) -a technical solution (XML constructs documents according to certain rules and regulations and makes it eligible for both computers and end users) which does not use any fixed definitionHence allows ISO20022 standard to be modified for supporting new developments (Payment Systems in India, H.RKhan, RBI) The need for this standard arose in early 2000’s with the emergence of multiple uncoordinated XML-based standardization initiatives with each having their own "XML dialect ISO20022 provides a common way of using XML and protects the internet based transactions from any future changes in syntax by proposing some common business modeling methodology (RBI, 2013).
Reasons for Adopting and Implementing ISO20022 in India
The two primary factors that make adoption and implementation of ISO20022 in India vital for the payment system are:
1) Standardization and Harmonization of Payment Systems
Banks and other system participants in India have been required to develop specific APIs (Application Program Interface) due to the emergence & presence of different types of messaging solutions and formats, each specific to a different payment systemTherefore to make the entire payment system portable and interoperable, i.eeven in case of failure of one payment system a seamless switchover to another is plausible, adoption of a common messaging solution and format is a necessary conditionIn this context ISO 20022 perfectly fits the bill to make the payments truly channel agnostic (Payment Systems in India, H.RKhan, RBI).
2) Increasing Volume of Electronic Payments
The number and volume of electronic payments is growing by leaps and bounds in India, according to RBI-
a) In 2012-13, RTGS handled 68.52 million transactions of value Rs1026 trillion with growth of 24% over 2011-12 in volume terms.
b) The total volume of electronic transactions amounted to 1.7 billion in 2012-13 recording a growth of 36% over 2011-12The value also registered an impressive growth of 25.31% in 2012-13 over 2011-12 and stood at Rs1212.37 trillionIt even surpassed paper based payment system in 2012-13 and occupied a share of 56.4% in the overall non cash payments.
Given this increasing volume and value of electronic transactions, the harmonization of payment systems has become indispensible for the sake of greater efficiency, portability and interoperability; subsequently for frictionless progress of the financial inclusion process As per RBI’s Payment Systems in India: Vision 2012-15, development of common standards for payment systems is a necessity for making the system interoperable and portableIndia’s payment systems have multiplied in terms of volume, value, product offerings, innovations etcHowever, various payment systems have different types of messaging format, e.g prepaid payment instruments, especially those issued by the non-bank entities do not all have the same standardsThe RBI is looking into the issue of adoption of international messaging standards like ISO 20022 across all payment systems, which will go a long way in expanding inclusion through payments.
Though it is expected that ISO20022 will serve as the lingua franca in the payment system, there are certain issues pertaining to its universal adoption:
1) Critical mass in investment
ISO20022 standards will be able to harmonize and re-engineer the whole payment system only when these standards are adopted by all system participants or atleast a critical minimum mass of investment is being made into this. When different players migrate from diverse standards to adoption of ISO20022 standards then the issue of multitude of standards can be done away with and payment system can become interoperable. However in this case, enforcement of standards by the regulator is needed, as private players may shirk away from the initial investment required in such standards due to the fear of lack of coordination by other players.
2) Creating Awareness
Another necessary condition towards universal adoption is creating awareness amongst system participants about these standardsTo this end, RBI has charted out and initiated series of awareness programmes- e BAAT: Electronic Banking Awareness Training along with other banks and players (Payment Systems in India, H.RKhan, RBI).While the RBI has initiated the move towards adoption of ISO 20022, all the stakeholders in the process of financial inclusion: banks, non banks, should work towards a swift acceptance and adaptation of ISO20022 standards by making the necessary investments and creating the requisite awareness about the same.
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The move worldwide recognizing digital payments as the first step towards financial inclusion has got a foothold in IndiaNon-banks are now slowly being given a larger role in the payments system, not with the intent of replacing banks but to supplement the efforts in the inclusion missionHowever, the long term goal of universal financial inclusion can only be achieved through sustainable models; in the end the business models for the players, whether banks or non-banks, will make or break our journey to inclusionIn a special report "Fighting poverty profitably the Gates Foundation examined payments systems across more than 30 countries to make four recommendations on creating a robust payments system that will work for inclusion:
Since the report makes it amply clear that each country has to create its own appropriate systems and models, the question now is to see how these recommendations apply to usOf course, preparing an economic baseline is important to ensure the sustainability of the models over timeSo far the benchmarks of progress have been defined in terms of number of villages covered, agents in the field, accounts etcConsiderable money has been spent in getting to these targets, but returns appear sparse on the ground, with high level of dormancy in account and agents, as well as low profitability for most agentsTweaking the business correspondent model in the right direction calls for more data, numbers on transactions per agent (bank or non-bank), costs, commissions, revenues, profits etc., only then can we pinpoint the exact problems and only then will appropriate solutions emerge.
The second point of allowing "best of breed providers works towards looking for the most cost effective service delivery modelsThe idea is to improve efficiency in the system, by letting providers do the job they know best, always ensuring of course that the requisite checks and balances are in place For instance, mobile operators or payment providers like MasterCard and Visa can be used to route government payments, like they do in Pakistan, South Africa, the United States etc., using their established networks and Aadhaar for authentication.
This country has enough heterogeneity to serve different models, different modes of payments, and this brings us to the third recommendation, to actively apply innovative models from abroadThis seems simple in theory, but is challenging for the regulator as it works through understanding the potential risks in any new model or modeHowever, strengthening our payments infrastructure has helped considerably here, and will continue to do soFor instance, integrating agents with the banking CBS, inter-operable POS/micro ATMs and ATM networks, resource sharing between banks and non-banks, expanding usage of Aadhaar enabled infrastructure etcThe systems are evolving and as they improve and spread, they will give considerable comfort to the regulator in opening out the space moreThis however does call for cooperation from the industry participants, banks and non-banks; processes and systems should not be followed just for compliance sake, but to be effectiveTo give a small example here, OTP (one time password for authenticating an online transaction) tokens are vulnerable to phishing attacks if the time window for validity is more than a few minutesBut when software allows use of the OTP for hours, as has happened in the case of a bank, it increases the risk in online transactionsOne case of fraud can damage trust in these new systems, and keeps the policy makers wary of change.
The final recommendation of taking a holistic view is in keeping with the ever changing landscapeRBI has been proactive, albeit calibrated, in opening the space to non-banks in payments, keeping the principles of fund isolation and fund safeguarding in place for risk mitigationHowever, more can be done and here the key point is that with new models and modes evolving, we need more coordination between the various regulatory bodies and ministries in the governmentSome positive changes have happened, for instance, TRAI and RBI guidelines on KYC norms have been in sync for the past year or so, but on something as simple and vital as encryption norms, different authorities have different rules.
The inclusion mission is getting more inclusive across the world, as more players across sectors join to increase access to the unbankedThe new RBI Governor has only speeded up the process in India and we definitely need to gear up for some rapid changes in the year ahead, hopefully towards more sustainable models that will bring meaningful inclusion in the long run.
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