1. Digital and Mobile Transfers for Meaningful Financial Inclusion Digital Payments: Paving the Way for Greater Financial Inclusion September 9, 2014 Mumbai Ashima Goyal Professor, IGIDR

2. Mobiles and Financial Inclusion  For financial inclusion: innovations that meet real needs Accessible, affordable  Prime example: mobile No equivalent financial innovation But applications to mobile transfers and other financial services  Need based innovations deliver meaningful inclusion Create conditions for the many to contribute to and participate in growth  Why such applications are far below potential: puzzle

3. Market Size and Inclusive Innovation  Indian mobile telephony: success story Connections: 37 million in 2001 to 904m in 2014 Not capital intensive; users among all income classes But mobile enabled services lagging—digital money transfers  Market size—inclusive innovations Financial regulations were not fine tuned to this Gaps in infrastructure –externalities

4. Infrastructure  Broadband Rural teledensity below 50%; Cities: 10% pop access to Internet Mumbai 2013: Quality worse yet 6 times more expensive than average US city  Villages lag: RBI survey (2012-13) Electricity coverage 55%; UP, Bihar, Jharkhand, Assam 77% unelectrified Rural share of ATMs 14.6%; BCs 50% (in 2.21 lakh villages)  India underbanked; great inclusion potential esp. financial services Villagers 74% savings ac; 34% used loan facilities; 24% remittances; 12%OD; EBT 15%

5. Table 1: Rural urban differences in teledensity Table 2: Rural urban differences in teledensity Total wireless subscribers (in million) Rural share (%) Teledensit y Urban teledensit y Rural teledensit y June 2009427.329.536.687.215.4 June 2012934.136.077.0162.539.8 March 2014 904.540.572.9139.943.3 Note: Quarter ending March 2014 Source: http://www.trai.gov.in/Content/PerformanceIndicatorsReports.aspx?ID=1&qid=1

6. Mobile Banking  Concerns of regulator Prefer bank linked BC model: customer security, LR more services KYC, AML Unwilling to allow deposit holding by non-banks Some flexibility in adjusting regulations and limits in response to feedback  Both India and Pakistan started in 2008: bank-led model  India 2.8m transactions (2012): mobile subscriber base 904m  But Pak 10.4m transactions (2012): subscriber base 132m So bank led not responsible for Indian underperformance: then what?

7. Table 2: Comparing ICT and mobile use in India and Pakistan Fixed broadband Internet subscribers (per 100 people) Internet users (per 100 people) Mobile cellular subscriptions (per 100 people) IndiaPakistanIndiaPakistanIndiaPakistan 19910.007 19920.011 19930.013 19940.0010.020 19950.0260.0080.032 19960.0460.0030.0330.052 19970.0710.0280.0880.101 19980.1390.0440.1170.142 19990.2730.0550.1820.188 20000.000.530.340.21 20010.00 0.661.320.620.51 20020.010.001.542.581.211.13 20030.01 1.695.043.081.58 20040.020.031.986.164.703.24 20050.120.522.396.338.008.08 20060.200.792.816.5014.5221.45 20070.270.793.956.8020.1638.34 20080.451.254.387.0029.5352.70 20090.651.545.127.5044.1255.46 20100.911.837.508.0062.3957.28 20111.091.7410.079.0073.2061.81 20121.21 (28.5)2.1512.58 (79.3)9.9669.92 (96.0)67.06 20131.16 (28.5)2.6215.10 (84.2)10.9070.78 (95.5)70.13 Note: Figures in brackets are for the US Source: International Telecommunication Union, World Telecommunication/ICT Development Report and Database, and World Bank estimates.

8. Mobile Banking  Indian regulations Low initial caps, relaxed over time Reporting and encryption requirements for small amounts also relaxed over time  Pakistan Branchless Bank accounts—3 levels; electronic opening allowed to lower TCs Level 0 to encourage L grps; level 3 for business; KYC, limits customized BB not restricted to MSPs fuel distribution cos.; Pakistan post and chain stores Activities: A2A fund transfer, P2P fund transfers, cash-in and cash-out, payments, loans and remittances Bill payments and P2P transaction: 80% of mobile transactions

9. Mobile Banking  Both bank linked models; no monetary value stored in mobiles Banks responsible for security and stability; data records Each transaction through customer account  Key differences Pak: More flexibilities and functions, customization: innovation Higher initial levels and limits; more income categories; wider BC universe No mandatory physical presence for customer registration: TCs   Brought in all classes;  market size  more creative service devt. Virtuous cycle of cumulative innovation and use

10. Experience elsewhere  M-Pesa: Kenya versus Nigeria Regulator versus market-led? Kenya 70% (17m) use: Monopoly, accidental critical mass Nigeria did not take off Out of 200 expts, 4-5 worked out India Airtel money, M-Pesa 2011-12—yet to scale up  Regulatory view Building for the long-run, multiple services, meaningful financial inclusion Network lock-in: need to foster entry to keep prices low But have to work with business for success

11. New trends  New trends: digital money in retail Technology: Near field communication; cloud; new products innovation; cheap smart phones-- expected sales in India 650m Large non-bank players: google, apple; bank link—regulatory comfort, cross-border Common standards for critical mass; coop :  costs, economies of scale and scope Customer behaviour—e-commerce; sharp rise in demand Standard-setting and cooperation: MSPs and banks  Recent regulatory changes can support these India, Pak experience: encouraging content creation critical G action: Jan Dhan: condl overdraft; insurance; DBT; Rupay—fin services NPC-IMPS-P2P ready; UID link; KYC easier ; 150m new banks accounts—MSPs As policy increases market size it can induce a virtuous cycle of inclusive innovation

12. Conclusion   Large population  large potential market size Large mobile user base: large market size for services Huge potential business opportunities; low margin large scale business model Past technology policies have not leveraged this strength to work with business But changes on the horizon; financial inclusion can drive innovations     market size induces innovation in affordable products Decentralized so less subject to policy errors, bureaucratic delays More e-delivery can itself alleviate bottlenecks in public services  Technological behavioural changes favour ‘active inclusion’ Time ripe for coordinated push on market size