K C Chakrabarty: Convergence of mobile banking, financial inclusion
and consumer protection-trend
Remarks by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at the
Financial Consumer Protection Network (FINCONET) meeting, OECD Headquarter, Paris,
9 November 2011.
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Assistance provided by Ms Radha Somakumar in preparation of this address is gratefully acknowledged.
Ms Ursula Menke, Commissioner, Financial Consumer Agency of Canada and Chair of the
International Financial Consumer Protection Network (FinCoNet), distinguished participants,
ladies and gentlemen.
1. I thank the FinCoNet for including a special session on Financial Inclusion, Mobile
Banking and Consumer Protection in today's agenda and inviting me to share the Indian
perspective. Further, given the extent of financial exclusion that prevails in India where out of
the 6,00,000 habitations in the country, less than 30,000 have a commercial bank branch,
only 55% of the population have deposit accounts, and the proportion of people having any
kind of life insurance is as low as 10 per cent, the RBI and the Government of India are in
recent times aggressively focussing on financial inclusion as one of the most important
drivers of inclusive growth.
2. In a technology driven financial sector scenario, although intermediation is probably
more tiered, it should eventually result in lower costs, greater financial inclusion and
customer protection. Customer protection becomes more important and perhaps more
difficult due to such an intermediation. Given this scenario, the RBI makes a conscious
evaluation of the customer service and financial inclusion issues while approving any new
innovation in the financial sector in general and payment system in particular. The fact that
the RBI had appointed a high level committee on customer service in banks headed by
Mr. M. Damodaran and representations from both the industry and the public to examine the
entire gamut of customer protection issues indicates the importance which we attach to
customer service and protection. The Committee incidentally has come out with more than
100 recommendations for our consideration.
3. Let me now turn to specific issues I have been asked to speak on viz. mobile
banking, financial inclusion and consumer protection.
A. Bank-led vs non-bank led model of mobile banking
4. We were confronted with the question "which model of mobile banking should India
go for - a bank led model or a non-bank led one?" Protagonists of the non-bank led model
referred to the success of such models in a few countries like Kenya and Philippines. While
acknowledging that the mobile banking models in these countries were perhaps the
appropriate solution in the respective jurisdictions, we, in India, came to the conclusion that
absence of a bank presence in large parts of the country cannot be solved by non-bank
players alone. Having said that, after a careful evaluation of the existing banking
infrastructure in place, it is our own perception of the scope of financial inclusion and the
relative merits and demerits associated with the two models that India opted for the Bank-led
model. It is perhaps this model which has the capability to deliver the minimum of four basic
products and services, viz. a savings account with overdraft facility, a remittance product, a
pure savings product, preferably, variable recurring deposit, and an entrepreneurial credit
product which in our perception are minimum qualifying products that any financial inclusion
model should contain. Further, the bank led model provides regulatory comfort as the banks
have been in the business of banking including money transfer; systems to adhere to
KYC/AML norms and customer grievance redressal are in place and are under the direct
regulation and supervision by the Reserve Bank of India. At the same time, we did recognize
the important role which the mobile service providers (MSPs) could and should play in this
payment space given their vast agent network across the country touching the remotest
areas where banks did not have a physical presence. We, therefore, enabled these MSPs to
be appointed by banks as their Business Correspondents of banks to foster a healthy
partnership between the two which could gainfully utilize the expertise of banks and the
reach of the MSPs. The new partnerships are beginning to happen and the full impact of this
liberalisation is unfolding still.
B. Regulatory initiatives taken to promote mobile banking
5. The first measure to regulate mobile banking in India was taken in October, 2008.
Since then, we have progressively liberalized the manner and extent to which banks can
conduct mobile banking; alive to the needs of the market, in particular, the unbanked
population and the migrant labour force within the country. Today, banks in India are
permitted to facilitate funds transfer between bank accounts through a mobile phone. To
enable such transfers in a cost-effective manner particularly for the small ticket transactions,
we have waived the need for end-to-end encryption for transactions of value up to Rs. 5000
(around USD100).We have also enabled money transfers from a bank account with cash
pay-out to the receiver at an ATM or a Business Correspondent with a cap on the transaction
value.
6. To enhance the efficiency of the mobile banking system, we had approved a unique
initiative, the Inter Bank Mobile Payment System (IMPS) which provides a centralized
interoperable infrastructure and enables money transfers between customer accounts in
different banks through mobile phones in real time. This service rides on the existing National
Financial Switch (NFS) Interbank ATM transaction switching infrastructure and message
format - and hence easy for banks to adopt.
C. Present position of mobile banking in India
7. Banks are given one time approval to commence mobile banking based on criteria
set by RBI. 52 banks have been approved to commence mobile banking services. The
volume of mobile banking transactions in July 2011 was 1.74 million with a value of
Rs.1.51 billion, an increase of 223% over the position in July 2010.
D. Do the non-banks, including the mobile service providers have a more direct
role in the payments space?
8. India was conscious of the fact that non-bank operators need to come in directly as
well into the payment space given the size of the country. Presently 17 non-banks are
authorized to issue prepaid payment instruments, including mobile-wallets. These include a
mobile service provider and a mobile phone company. Funds transfers from these
instruments have been permitted albeit in a limited way to enable money transfers by the
domestic migrant population to their families.
E. What are the consumer protection measures taken by the banking regulator?
9. There is often a debate as to who owns the customer for a mobile financial service.
The general trend is to create a win-win partnership for both parties, leveraging their
respective capabilities and reach. Since India has accepted the bank-led model, the
customers of the banks get full protection for effecting transactions through this delivery
channel as in the case of any other banking transaction. The lack of visible transaction costs
and efficiency-based pricing means that the proper price signals don't reach the end-users
and, thereby, impede an efficient choice of payment instrument. RBI plays a crucial role in
rationalising the charges in its pursuit of customer participation, satisfaction and adequate
resolution of complaints. The customers have recourse to the Banking Ombudsman a
customer complaint redressal machinery put in place by RBI.
10. The three stakeholders viz. the telecom operators, banks and merchants have
realized the value proposition and the only sustainable business model is where these
stakeholders work together to deliver true value to customers and effectively share the costs
saved and new revenues generated. Hence, it is imperative that all the three while being
cognizant of their strengths, do not lose sight of their weakness and find ways to integrate
their offerings without losing their individuality. The broad regulatory approach of RBI has
been to permit such entities to provide payment services that are fee based without access
to funds of the customers. Customer service issues have been pain points in efficient
delivery of services. The use of agent networks and the use of SMS channel mainly for
transactions have associated customer service issues.
11. In particular, I would like to mention some of the important measures taken by the
RBI aimed at customer protection
 Mandating online alerts for all card-based transactions irrespective of the value or
the delivery channel. This would include transactions effected through the mobile
wallets.
 Mandating a second factor of authentication for all card-not-present transactions
based on information not available on the card. M-PIN, which is mandatory, serves
as the second factor authentication for mobile banking transactions.
 In case of prepaid instruments including mobile wallets issued by non-banks, an
escrow arrangement whereby the issuers do not have access to the funds collected
from the purchasers of such instruments. This also ensures that the amount held in
the escrow account is protected from bankruptcy of the issuer and the card holder
has prior claim over other creditors.
 Payment system operators have been prohibited from entering into any agreement
with an agent with an "exclusivity" clause preventing the agent from doing a similar
business with another payment system operator.
 Mandating minimum security standards for mobile transactions one of which is to
insist on end to end encryption of messages except for small value transactions.
F. How does India envision the goal of financial inclusion and inclusive growth?
There are over 600 million active wireless telephone subscribers in India. Reserve Bank has
acknowledged the importance of mobile banking channel as a critical element to achieving
inclusive growth in India and has been taking several important steps, the recent being
enabling the mobile companies to partner with banks as business correspondents. The twin
challenge in our country would be to succeed in reducing the use of cash while encouraging
the spread and use of mobile wallet and mobile banking to reap the full benefits of this
ubiquitous product. The stance adopted by RBI is to restrict deposit taking activity to banks
while promoting the branchless banking model for unbanked areas.
I thank the FinCoNet for giving me this opportunity to speak on an issue of topical interest.