Reserve Bank of India moves to enhance mobile payments market

January 16, 2014 2:31 pm

Reserve Bank of India moves to enhance mobile payments market

By James Crabtree in Mumbai

Indian telecom groups such as Bharti Airtel and Vodafone are set to be given greater freedom to take on the country’s banks by offering enhanced mobile payment services, as part of forthcoming rule changes from the Reserve Bank of India.Mobile payment technologies have proved highly successful in developing markets such as Kenya, where Vodafone’s M-Pesa service is used as a virtual currency by more than 70 per cent of adults, allowing users to store money, transfer funds to relatives or buy products in shops.

However, the same technologies have been slow to take off in India’s potentially huge market, because of regulations forcing mobile companies to tie up with established banks such as ICICI or Axis, and rules stopping mobile customers gaining access to money stored on their phones – a process known as “cashing out”.

Nachiket Mor, a board member at the central bank and close ally of governor Raghuram Rajan, published an RBI report earlier this month outlining plans to change those rules, in order to promote financial inclusion in India, a country where only about a third of adults have a bank account.

Allowing mobile companies to offer bank-like payments services would be one of the “most transformative steps” in bringing financial services to India’s vast poor and rural population, Mr Mor told the Financial Times.

He says mobile groups should be given a new form of licence as a so-called “payments bank” offering the same range of services that have proved popular in other countries.

“Basically this would allow guys like Vodafone or Airtel to put signs up all around India saying to their hundreds of millions of customers that they are now Vodafone Bank or Airtel Bank,” Mr Mor says.

“It would mean if you want to remit money to your uncle in your village, or receive money from your brother in Dubai, you can do that. It would be basic banking for the masses, and it would be hugely popular.”

Any moves allowing mobile groups to offer banking services would come as part of a wider shake-up of banking competition being pushed by Mr Rajan, including new licences for private sector banks and a greater role for international institutions.

“A greater role for telcos would be transformative for the banking industry,” says Saurabh Tripathi, head of financial services at Boston Consulting Group in Mumbai.

“It is the only way India can make a big leap forward in spreading banking services to hundreds of millions of people. The banks have been trying to do it for ages, but at their current pace, it will take years and years before everyone has a bank account.”

Michael Joseph, director of mobile commerce at Vodafone, said the British group was “extremely interested” in the “vision and recommendations” put forward in Mr Mor’s report.

The RBI will next week wrap up a consultation on the proposals, although Mr Tripathi at BCG says the ideas are likely to find favour at the top of the Indian central bank.

“It is a big move, but I’m sure this is one of Mr Mor’s recommendations that will get adopted by the RBI, because governor Rajan has always been a big enthusiast for using new technology push financial inclusion and reform the banks in a big way.”