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April 2015

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    It is a no-brainer that banks and telecom operators are the two main players in taking financial services to the masses. Banks, by their very nature, have a role to play as they are entitled by central banks across countries to provide core financial services to the economy; yet they seem to fail or rather are less interested in catering to rural masses. This is primarily because the service models, products and delivery channels are very different for each target segment and needs a tailored approach. That’s where the role of an MNO or for that matter any organization (MFIs, business correspondents) come into the picture which is characterized by two very unique capabilities; the huge as well as low-cost distribution channel in the rural/un-banked areas and their expertise in handling low value transaction in huge numbers.

    So, it is only natural that both the banks and MNOs have to play a complementary role if we were to make financial inclusion a reality. In fact, central banks across the world are taking steps in this direction.

    I will refer to specific examples of each, wherein a bank is trying to assume the telecom company’s role in furthering the financial inclusion; the case in discussion is that of Equity Bank’s foray into Kenya as a mobile virtual network operator (MVNO). An MVNO is where in an existing brand enters the mobile telephony business without actually investing and owning the radio spectrum but borrows the network services from an existing telecom operator at wholesale rate. In early 2014, Equity Bank acquired a MVNO license to make its financial services more accessible and affordable.  It has partnered with a Taiwan based organization, Taisys, for ultra-thin SIM cards. These SIM cards are 0.1 mm thick and can be laid on top of an existing SIM card thus converting a single SIM slot mobile phone to a dual SIM phone without any hardware adjustments.

    In Kenya, m-pesa has established itself as a benchmark for mobile money deployments worldwide. The market has so far been dominated by it with 73 per cent of market share with mobile transactions throughput amounts to $ 12.5 billion in the first half of 2014. A whopping 43 per cent of Kenya’s GDP flows through m-pesa. We can safely say that Kenya represents an advanced and mature market for mobile based transactions. Thus the entry of Equity Bank as a MVNO in Kenya where the majority of the population is already comfortable with mobile transactions marks a new beginning. It can compete with m-pesa in mobile money market in two ways. It could either customize offerings to attract customers who have not been brought under formal financial umbrella or they could target existing m-pesa users by waging a pricing war. The second option seems to be easier given the price sensitivity of the customers.

    Now let us deliberate on the more common and widespread practice of MNOs assuming a bank’s role though in a limited way. The Reserve Bank of India has recently opened the way for non-Bank entities to become Payment Banks which can do much more. The Payment Bank’s guidelines has already been released and interested parties have has invited to apply for its license. After experimenting with semi-closed prepaid instruments for quite some times which, by themselves, were not allowed to accept deposits but to only offer transactional services (money transfers, prepaid recharges etc); the Reserve Bank of India has taken a much welcomed step in the direction of achieving financial inclusion leveraging on huge distribution channels of MNOs among other players.

    The scope of these payment banks includes:

    • Acceptance of saving bank deposits, current deposits.
    • Issuance of ATM / debit cards. Payment banks, however, cannot issue credit cards.
    • Payments and remittance services through various channels including branches.
    • Automated Teller Machines (ATMs), business correspondents (BCs) and mobile banking. Issuance of PPI (prepaid payment instrument).
    • Internet Banking.
    • Functioning as business correspondent (BC) of another bank.
    • It will be permitted to handle cross border remittance transactions in the nature of personal payments / remittances on the current account.

    Apart from the access to the low cost deposits, which will undoubtedly over a period of time challenge the mainstream banks something to compete for, payment banks can now enable the money transfers using NEFT/IMPS and issue ATM/debit cards without being dependent on the banks (as PPIs used to do). Consequently, payment banks will not have to share the large pie of transaction revenue with the bank which will ultimately benefit the end consumer in terms of competitive offering and lower fees (hopefully) on the transactions.

    Out of the two approaches, the one taken by Equity Bank in Kenya seems to be well suited to the mobile money matured markets where the population has already embraced mobile payment and has developed a trust telecom company providing financial services. The same cannot be said for a less matured market (in mobile payments) viz. India where people trust banks in providing financial services than the telecom company. In this light, MNOs becoming payment banks will not only equip them to provide various banking services ,not possible so far, but also automatically bestow them with the ‘trust’ factor by the very use of the term bank in their name.

    Another factor in favour of MNOs delivering financial services to the masses is their ability to quickly take innovative use-cases to the targeted customer segment in this fast paced mobile money ecosystem.

    Summary

    The role of technology is incidental where it keeps on delivering newer products by tracking customer behavior and usage pattern but it is an MNO with their huge and entrenched distribution network which take these products swiftly to the end customers. Hence for many years to come, it will be prudent for regulators to encourage and enable MNOs in delivering financial services to the masses.

    April 13, 2015 0 comment
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