Ignoring the Unbanked: Reserve Bank of India's Mobile Payments Guidelines

The release of the final Mobile Payment Guidelines by the Reserve Bank of India (RBI) is extremely disturbing because the unbanked population of India is excluded. The guidelines define ‘mobile payments’ as ‘information exchange between a bank and its customers for financial transactions through the use of mobile phones’. The guidelines allow only banks that are licensed, supervised and have a physical presence in India to offer mobile banking services, as well as restrict the service to only those with bank accounts or credit card accounts in India. This last restriction makes it absolutely crystal clear that financial inclusion is not a goal of these guidelines, since the unbanked population of India is being ignored.

The purpose of financial inclusion is the delivery of banking services at affordable costs to vast sections of disadvantaged and low-income groups. It is argued that as banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population, without discrimination, is the prime objective of public policy. Financial inclusion is now a common objective for many central banks among the developing nations including the RBI, as articulated in a public speech by Dr Rakesh Mohan, deputy governor of RBI at the Annual Bankers Conference on 3 November 2006, where he stated: “Likewise, enabling access to a greater number of the population to the structured and organised financial system has explicitly been on the agenda of the Reserve Bank since 2004. Unlike several central banks, which focus solely on inflation, many developed and emerging economies, including ours, focus also on growth. There is currently a clear perception that there are a vast number of people, potential entrepreneurs, small enterprises and others, who are excluded from the financial sector, which leads to their marginalisation and denial of opportunity for them to grow and prosper.”

With 41% of the population in India unbanked, according to RBI’s statistics, financial inclusion could not have been top of mind when these guidelines were developed. The 41% equates to approximately 410 million people that do not have access to banking services – this is a number greater than the entire population of the US being financially excluded from mobile payment services.

With regard to mobile payment services, it is clear that mobile network operators have the technology and distribution expertise to reach many of India’s unbanked consumers much quicker than banks and thereby providing major benefits for the people by facilitating domestic and international remittances, payroll distribution, bill payment and point-of-sale (POS) transactions. Yet they are excluded as a potential solution for the unbanked. Why? The RBI can provide the right level of regulation over mobile network operators and third-party organisations to offer the service in India efficiently and safely.

In my opinion, the RBI needs to answer some very pointed questions. Why are banks the only entities permitted to offer this service? Why are there no mechanisms that make it easy for the unbanked to move money around the country? What are the financial inclusion plans for the unbanked? What is the mobile payment strategy in India?

The following excerpt from the guidelines demonstrates that there is no coherent mobile payment strategy in India: ‘To meet the objective of a nation-wide mobile banking framework, facilitating inter-bank settlement, a robust clearing and settlement infrastructure operating on a 24×7 basis would be necessary. Pending creation of such a national infrastructure, banks may enter into bilateral or multilateral arrangement for inter-bank settlements, with express permission from the RBI, wherever necessary.’ It will take a considerable period of time for this network to develop; mobile network operators could offer broad payment services with their vast networks in months rather than years. The banks, at best, can offer mobile payment services to customers of their own bank.

The RBI seems to hold the same belief that is very consistent with the views of bankers from Europe and the US. These bankers believe that funds transfers should be the exclusive domain of banks because they are heavily regulated. These bankers also believe that they should be the only entities permitted to perform such services. However, the European Central Bank and the Federal Reserve disagree that this is the sole domain of banks, and have fostered innovation and competition by allowing non-banks to offer funds transfer services (e.g. PayPal, Obopay or the EU Payment Services Directive). Banks in the US have done nothing to offer a competing service to PayPal, which has just celebrated its ten-year anniversary. We are still waiting for the bank-led solution for funds transfer in the US.

The irony of the guidelines is that the unbanked is the segment of the population that needs these services the most. While it is true that a central bank is the bank for a country’s banks, this does not mean, however, that it should protect banks at the expense of the public good. One of the statutory obligations of a central bank is to promote and supervise payment systems that are in the best interests of the public good. In the opinion of this author, it is the RBI’s responsibility to help widen the spectrum of payment services throughout the country and these guidelines will not meet that responsibility.