India is attempting to create financial inclusion using direct benefit transfers as the flywheel that turns the engine of an electronic payment system, the creating volumes and interoperability necessary for real financial inclusion. Currently volumes at rural agents are simply not adequate – resulting in very low commissions and debilitating levels of agent churn. Furthermore, MicroSave has already demonstrated that “integration and interoperability of financial services is good for the poor, and great for banks and governments”
 
But India is seeking to do this largely without the mobile network operators (MNOs), preferring a bank-led, bio-metric card-based, model. MNOs offer great advantages, but (in the Indian context at least) also suffer from disadvantages. Nonetheless, worldwide, almost all, successful digital finance services are MNO-led – see GSMA-MMU’s deployment tracker.
 
In their paper “A Digital Pathway to Financial Inclusion”, Radcliffe and Voorhies outline how basic mobile connectivity and digital remote payments are the first two necessary steps towards an inclusive digital economy. 
 
 
So can India really achieve financial inclusion without involving the mobile network operators?
 
MicroSave’s work with Equity Bank has clearly shown that a bank-led model can indeed be successful and rapidly achieve high volumes of transactions. Indeed, Equity Bank’s agent-based banking model looks set to take Kenyan customers to Radcliffe and Voorhies’ Stage 3 of a full range of digital financial services. However, while there are disadvantages in an MNO-led approach to financial inclusion, it is increasingly clear that achieving a bank-led model of financial without MNOs leading the way is unlikely. 
 
MNOs are better suited to managing high volumes of low value transactions (the mere mention of which is enough to give most bankers nightmares). Furthermore, most banks simply do not see the business proposition at the base of the pyramid or are too busy responding to more traditional high value, low volume opportunities offered by the burgeoning middle classes in most developing countries. Furthermore mobile- (as opposed to card-) based systems allow person-to-person and person-to-business payments (utility bills etc.) without using agents – thus offering an important user value proposition. 
 
MNOs can (and perhaps must) play a catalytic role to bring banks into the market and thus achieve Radclifffe and Voorhies’ Stage 3 … by demonstrating that they can and will play an important role in the payments systems, and in the case of M-Shwari, beyond. This is turn will persuade banks leverage digital financial services to serve the base of the pyramid.
 
Fortunately, the business case for MNOs is based on reducing customer churn and digitising payments for airtime as well as the revenues for managing payments transactions. And payments are inter-spatial transfers that can be confirmed either by receiving the money, and/or with a simple call by the sender to the receiver – thus building instant trust. These factors (together with MNOs’ natural advantages as first movers in this market) put them in the perfect position to make the market for digital financial services.  
 
The business case for banks is primarily based on offering a range of products. But since many of these products (for example insurance and savings) are inter-temporal (as opposed to inter-spatial) in nature, immediate confirmation and thus trust in the new digital financial system is much more difficult to achieve. 
 
MNO-led systems therefore have a hugely important role to play to create the market – to build people’s confidence in digital financial services and local agent-based systems – and thus lay the foundation for digital financial inclusion. Emerging models such as the Axis Bank-Airtel and ICICI Bank-Vodafone tie-ups bode well for the future. 
 
But if the Reserve Bank of India really wanted to turbo charge financial inclusion it would allow MNOs to act as issuers of e-money with proportionate supervision as discussed by Kate Lauer and Michael Tarazi, “Supervising Nonbank E-Money Issuers”, CGAP Brief, July 2012. 

This blog was earlier published on GSMA website. 

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