Kotak GameChanger M2 Mobile Money

GAME
CHANGER
m2 MOBILE
MONEY
Catalyst for
- financial
inclusion
- growth at
the high end
- banking in the
developing
world
GAMECHANGERS
- convergence
- regulation
Akhilesh Tilotia
akhilesh.tilotia@kotak.com
Mumbai: +91-22-6634-1139
ABOUT GAMECHANGER
Gamechanger offers perspectives on ideas and developments that can potentially alter the course
of the markets.
The series explores and analyzes ideas, challenges conventional wisdom, plays advocate or devil’s
advocate depending on research conclusions. The factors that we identify as market changers
could come from anywhere – from policy or politics, from people or ideas, from rain or from
regulation. They could change the game for the better or for worse.
Gamechanger research has implications for macro socio-economics and for long-term market
behavior. Read it and stay ahead of the India story.
KOTAK INSTITUTIONAL EQUITIES RESEARCH

GAME
CHANGER
Foreword
Corporate history will look back at this as the blink of an
eye, the time in which mobile money became the single
biggest replacement for bricks, mortar, roads and cables
that connect banks with their customers. Mobile money is
likely to be the biggest catalyst in the race to trade with the
Indian consumer. The scope and potential of this technology
dilutes the relevance of traditional, expensive models
designed for last-mile access. In this report, we examine
how this powerful tool is going to facilitate financial
transactions for marketers of products and services in the
telecom, banking and value-add services (VAS) spaces.
Fortuitously, this phenomenon is fully supported by official
policy given that it is a truly democratic change that feeds
into the Indian government’s commitment to ‘financial
inclusion’.

Contents
Catalyst for financial services – facilitating two-way interaction 3
Catalyst for financial inclusion – reaching the unbanked 9
Catalyst for growth at the high end – convenience for the converted 17
Catalyst for banking in the developing world 23
GameChangers: Convergence; Regulation 29
Appendix 1: Profiles of some companies in this sector 34
Appendix 2: Further reading 37
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2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

chapter 1
Catalyst for Financial Services
facilitating two-way interaction
Mobile phones enjoy the highest penetration of any two-way

communicating device in India. Mobile phones reach 500 mn
unique subscribers in India as compared to the reach of cable and
satellite television's 100 mn homes. With India having twice the
number of mobiles as compared to bank accounts, M2 promises
to be the best way to deliver financial services.
Mobile Money (M2): Banking in the palm of your hand
Consider the reach of India’s 500 mn mobile phone subscribers against the reach of Indian banks with a
total of around 250 mn unique individual bank accounts, around 60,000 ATMs and 84,000 branches.
Real-time, two way communication and the ability to keep an electronic record (audit trail) of the
The cost of transactions make mobile phones an ideal tool for financial services organizations to reach out to the
reaching the customer. The security features in mobile banking are similar to those that financial services organizations
customer is low in have developed for internet banking.
the case of mobile
phones as there The decade ending FY2010 saw the emergence of new banking channels like ATMs and internet banking.
are no real estate These new channels helped significantly reduce the costs of reaching the customer. They did not help
costs and the cost reach new or unbanked customers but helped serve the ones already existing more profitably as the cost of
of the instrument
reaching and servicing them came down (see Exhibit 1).
is borne by the
customer Exhibit 1 Banks, especially private, have moved towards lower cost banking models
Transaction cost and proportion of transactions across banking channels
Cost ICICI ICICI SBI

FY2009 FY2000 FY2009 1QFY11
(Rs/tranx) (%) (%) (%)
ATM+POS 15 3 46 8
Internet banking 4 2 38 15
Mobile banking 1 0 1 0
Branch or call centre transaction 50 95 15 77
Total 100 100 100
Average cost per transaction 48 16 40
Source: TV Mohandas Pai in the Economic Times, SBI, Kotak Institutional Equities estimates
People are still

The cost of reaching the customer is low in the case of mobile phones as there are no real estate costs
comfortable using (unlike with branches) and the cost of the instrument is borne by the customer (unlike with ATMs). In
cash as a medium the case of branches and ATMs, the reach (or the number of people using them) is determined by the
of transfer of geographical proximity of customers. In the case of mobile phones, the bank or the financial service travels
value, thereby not with the client.
feeling the need
to be a part of the
Low-cost option for the already-banked
formal banking
and payments The primary payment profile of transactions in India remains cash. Retail industry estimates that 85-90%
network of the total number of transactions in India is settled in cash. One of the primary reasons for this is the
fragmented nature of India’s retail industry which boasts 15-16 mn outlets, a vast majority of which do
not have significant scale to make the current electronic modes of transfer economical. Given the informal
nature of most retail transactions, most Indians are still comfortable using cash as a medium of transfer of
value, thereby not feeling the need to be a part of the formal banking and payments network.
Even in the formal network, Indians have not taken a liking to credit cards in any significant manner.
Similarly, debit cards are used primarily for quick cash and not necessarily as payment mechanisms (see
Exhibit 2). Cheques are used primarily in the corporate sector.

GAME
CHANGER
Exhibit 2 Low usage of credit and debit cards in India

Data on number and usage of credit and debit cards in India, March fiscal year-ends, 2006-10
Cards outstanding Transactions Amount Annual usage Average amount
(# mn) (# mn) (Rs bn) (times/year) (Rs/transaction)
Credit cards
2006 17 156 339 9.0 2,171
2007 23 170 414 7.3 2,440
2008 28 228 580 8.3 2,541
2009 25 296 654 12.0 2,211
2010 18 234 629 12.8 2,685
Debit cards India scores low
2006 50 46 59 0.9 1,291 on financial
2007 75 60 82 0.8 1,358 inclusion and
2008 102 88 125 0.9 1,418 the government
2009 137 128 185 0.9 1,453
appears
2010 182 170 264 0.9 1,552
committed to
Source: RBI monthly bulletin, August 2010, Kotak Institutional Equities estimates increasing the
level of access for
financial products
Financial inclusion for the excluded
India scores low on financial inclusion (see Exhibit 3) and the government appears committed to increasing
the level of access for financial products. Financial inclusion refers to the depth, availability and usage of
the financial system by the constituents of the economy. Financial inclusion helps create suitable savings
opportunities and also allows easier access to credit. Most importantly, it allows the opening of insurance –
poor households cannot escape poverty if they suffer uninsured financial setbacks.
Exhibit 3 India ranks low on financial inclusion

Index of Financial Inclusion (IFI) for various countries, March fiscal year-end, 2007
IFI Rank
Spain 0.79 1
US 0.37 21
Japan 0.36 22
Korea 0.30 31
China 0.30 32
Kenya 0.22 40
Egypt 0.22 41
South Africa 0.21 43
Brazil 0.21 44
India 0.17 50
Note:
(1) This index has been proposed by Indian Council for Research on International Economic Relations (ICRIER) to measure financial
inclusion which they define as depth (number of bank accounts per 100 people), availability (bank branches per 1,000 people), and usage
(size of the bank credit and bank deposits, relative to the GDP) of the formal financial system for all members of an economy.
Source: Working paper 215, Index of financial inclusion, ICRIER
KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

The reasons for financial exclusion stem from a variety of sources:
■■ Lack of steady income. As we noted in our earlier GameChanger report ,“365 mn: Can India live
up to its demographic dividend?” 84% of India’s labor works in the informal/unorganized sector.
This means that the income is not steady and in most cases, received in cash. There is hence no
compulsion to open a bank account.
Three reasons for ■■ Lack of conviction in financial inclusion; unsuitable products. The benefits of being associated
financial exclusion:
with the financial system are not obvious to many. Since their daily needs are met by cash
■■ no perceived
need transactions, the need for inclusion is not felt. What gets missed in the process is the financial
■■ lack of discipline and avenues of saving and investment. In many cases, an excluded person needs a loan
conviction rather than a savings product.
■■ expensive
■■ Going to bank is costly. A visit to a bank costs customers time and money. Many of the uneducated
underbanked are intimidated by the environment in a bank. Language/dialect, cultural and class
differences are also accentuated in a physical environment. Rigid timings and procedures also do
not go down well with the needs of the financially excluded. Many micro-finance companies have
worked around this by customizing models to reach the excluded by having representatives available
at timings suitable to those who have no time to spare during working hours.
The will of the powers-that-be
The government is cognizant of the need to include more people in the financial system.
FINANCIAL INCLUSION
76. To reach the benefits of banking services to the 'aam aadmi', the Reserve Bank of India had set up a high level
committee on the lead bank scheme. After careful assessment of the recommendations of this committee, and
in further consultation with the RBI, it has been decided to provide appropriate banking facilities to habitations
having population in excess of 2,000 by March, 2012. It is also proposed to extend insurance and other services to
the targeted beneficiaries. These services will be provided using the business correspondent and other models with
appropriate technology back up. by this arrangement, it is proposed to cover 60,000 habitations.
FINANCIAL INCLUSION FUND (FIF) AND THE FINANCIAL INCLUSION TECHNOLOGY FUND (FITF)
77. In 2007-08 the government had set up a Financial Inclusion Fund and a Financial Inclusion Technology Fund in
NABARD, to reach banking services to the unbanked areas. To give momentum to the pace of financial inclusion,
I propose an augmentation of Rs100 crore (Rs1 bn) for each of these funds, which shall be contributed by
government of India, RBI and NABARD.
UNIQUE IDENTIFICATION AUTHORITY OF INDIA (UIDAI)

103. In my last budget speech, I had announced the constitution of the Unique Identification Authority of India, its
broad working principles and the timelines for delivery of the first UID numbers. I am happy to report that the
authority has been constituted and it will be able to meet its commitments of issuing the first set of UID numbers
in the coming year. It would provide an effective platform for financial inclusion and targeted subsidy payments.
Source: Excerpts from the Union Budget speech of the Finance Minister, 2010 -11

GAME
CHANGER
The central government Cabinet Secretariat also created an Inter-Ministerial Group to develop a
“Framework for Delivery of Services Using Mobile Phones” to enable finalization of a framework for delivery
of basic financial services using mobile phones. Various
authorities
Similarly, the Reserve Bank of India (RBI) is also concerned about the need for financial inclusion. RBI has working on the
taken a lead in defining the contours of the regulations in mobile banking and prepaid payments. RBI is idea:
clear that the incremental benefit of new customers should come to the banking system. For example, ■■ Finance Ministry
■■ Cabinet
any float generated in the system due to mobile banking, according to current regulations, belongs to the Secretariat
banking partner. However, the RBI is willing to take a relook based on the experience gained in order to ■■ RBI
meet the primary objective of financial inclusion. ■■ TRAI
“The Reserve Bank has made a commitment to bank-led model of financial inclusion and will support banks
in their financial inclusion initiatives by way of information dissemination, sharing of best practices and
also through regulatory incentives. However, I want to add that our commitment to a bank-led model is
not irrevocable. There are other models of financial inclusion that are being experimented elsewhere in the
world. Should banks fail to come forward and exploit this opportunity of financial inclusion, the Reserve
Bank will not hesitate to explore other models of furthering financial inclusion.” Remarks by Dr. Duvvuri
Subbarao, Governor, Reserve Bank of India at the Bankers’ Club in Kolkata on December 9, 2009.
Telecom Regulatory Authority of India (TRAI) on 28 October 2010 released a consultation paper on the
quality of service requirements for delivery of basic financial services using mobile phones.
With all stakeholders working towards creating the ecosystem, we believe that mobile banking is poised for
take-off.
Various
Significant entrepreneurial talent deployed companies are
exploring options
Various companies – across the banking, telecom (both handset manufacturers and operators) and VAS to reach the final
companies – are exploring options to reach the final consumer and crisply define a value proposition. consumer and
crisply define a
Banks (for the unbanked): They are experimenting with the banking correspondent (BC) model and
value proposition
assessing how to tweak it to reach the largest number. Technologies deployed include smart cards,
biometric cards, mobile bank accounts, using mobile for remittances, etc. The objective here is to meet
financial inclusion goals with the expectation that the benefit of increased saving accounts will match the
cost of reaching out and servicing customers.
Banks (for the already-banked): Banks are also looking to use mobile for the already-banked to offer
them quicker services and cross-sell opportunities on the go. The expectation here is that the customer will
move to a lower cost of interaction.
Telecom companies: They are entering the prepaid cards segment to ensure that not only do customers
use their network for transactions but they also deploy the cash to be used in the transactions with them.
Some are also experimenting with money-transfer companies or business correspondents to fine-tune their
technologies. The expectation is that not only will the average revenue per user (ARPU) will go up, but the
churn will also come down.

VAS companies: A wide variety of companies – from not-for-profit Section 25 companies to for-profit
technology companies – are looking to make a mark in the field. The idea for them is to help make the
process of using mobile technology for financial transaction easier, and in the process, make a small part of
the transactions processed via their products or services.
The key question to be answered is whether the change will be incremental (providing one more way to
reach clients) or transformative (bringing in new clients into the system).

chapter 2
Catalyst for Financial Inclusion

reaching the unbanked
The government is becoming a large remitter

of money via its various schemes (e.g. MG-
NREGS, various subsidies). It is also helping
put in place enabling systems (unique identity,
banking correspondents) that are directed
towards creating financial inclusion. Many
payment service companies, seeing a market
in internal remittances and transfers, are also
helping bridge the gap for the vast multitude
that does not have access to electronic cash.

Possible market size
1. Channelizing Government of India payments
As the As the government begins to move towards the payment of the subsidies to the final recipient (instead
government of routing it through pricing subsidies, which is accompanied with a black market as the cost differential
begins to move creates a significant arbitrage potential) many of the current subsidies will begin to flow through the
towards the
bank accounts of the recipient.
payment of the
subsidies to the If one were to look at the large subsidy/government support items, they include the MG-NREGS, fuel
final recipient, subsidy, fertilizer subsidy and public distribution system (PDS) subsidy which currently totals Rs2 tn (see
many of the Exhibit 4). We note that as the subsidy begins to reach the final recipient in cash equivalent terms, he/
current subsidies
she may decide to spend it in manner not intended by the government – and some of it could end up
will begin to flow
through the bank
as savings and hence, investment. The government currently pays 2% as service charges for routing the
accounts of the MG-NREGA payments, of which the bank keeps 25-50 bps and gives the BC, 150-175 bps.
recipient
Exhibit 4 Government of India pays around Rs2 tn in various subsidies and rural support
Fertilizer, food and fuel subsidy and MN-NREGS payment, March fiscal year-ends, 2001-11E (Rs bn)
2,800
Food Fertilizer Fuel MN-NREGS
2,100
1,400
700
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E
Source: Union budget documents, Kotak Institutional Equities estimates
2. The internal remittances market
The internal remittances market is estimated to be between Rs400 bn and Rs600 bn. The internal
migrant population is estimated to be around 100 mn people. Post Office, which is estimated to
account for ~15-20% of the internal remittances market (via Money Orders) reports that they remitted
Rs80 bn in FY2008. This was sent via 99 mn money transfer instruments, making each transfer average
at Rs800. (Source: “Remittance needs in India, NABARD-GTZ Technical study, August 2009, page 26).
The commission on the payments via post office is ~5% of the amount remitted.

GAME
CHANGER
Also, many customers have opened no-frills or low balance account in ‘urban’ areas and have given an
ATM card or cheque book to their ‘rural’ counterparts. As soon as they deposit the cash in the urban
branch, they intimate the rural counterpart who promptly presents himself/herself for withdrawal
(typically, the ATM or the branch could be quite some distance away, especially in unbanked areas and Many countries
have helped
hence, multiple trips are preferably avoided).
promote the
Since there is a cost of maintaining the account, from the perspective of a bank, if the withdrawal can measures to
be delayed such accounts may begin to make more economic sense. If the account holder operates via move to e-cash by
providing specific
a 'banking correspondent', he knows that the money can be withdrawn when required rather than in
fiscal benefits
one go, which allows him to possibly delay the withdrawal.
3. Enhancing the scope of mobile cash
The third possible market will be the one to pay laborers in general and not just in government
schemes. Similarly, the vast retail market where, as noted earlier, 85-90% of the transactions are settled
in cash. This market is harder to tackle as many SMEs are still happy transacting in cash. However, many
countries (Australia, New Zealand among others) have helped promote the measures to move to e-cash
A business
(and hence create the platform for using mobile cash) by providing specific fiscal benefits. correspondent (BC)
is an extension of
Financial inclusion involving Business Correspondents a bank branch. A
BC can work in a
A business correspondent (BC) is an extension of a bank branch. A BC can work in a radius of up to 30
radius of a few kms
kms from the bank branch (lower limits, if the branch is in metro or urban areas) and can perform, for all and can perform,
practical purposes, all the functions of a branch. for all practical
purposes, all the
functions of a
Who can be a BC?
branch
■■
Individuals like retired bank employees, retired teachers, retired government employees and ex-
servicemen, individual owners of kirana/medical/fair price shops, individual public call office (PCO)
operators, agents of small savings schemes of government of India/insurance companies, individuals
who own petrol pumps, authorized functionaries of well-run self-help groups (SHGs) which are
linked to banks, any other individual including those operating common service centres (CSCs);
■■
NGOs/MFIs set up under Societies/Trust Acts and Section 25 Companies ;
■■
Cooperative societies registered under Mutually Aided Cooperative Societies Acts/Cooperative
Societies Acts of States/Multi State Cooperative Societies Act;
■■
Post Offices;
■■
Companies registered under the Indian Companies Act, 1956 with large and widespread retail
outlets, excluding Non-Banking Financial Companies (NBFCs).
Source: RBI circular dated 28 September 2010

Banks have experimented with their in-house BC models, however, most of the work is out-sourced to third
parties. Companies like FINO (15 mn accounts), A Little World (4 mn accounts) and Eko, among others,
Companies are the larger players in the field. Banks typically define the geographical area in which a BC can work –
like FINO (15 thereby preventing cross-selling via different channels. SBI recently invested Rs800 mn in A Little World for
mn accounts), a 20% stake.
A Little World
(4 mn accounts) We note that the task of reaching out to the villages is an uphill one. Of India’s 593,615 villages, 494,442
and Eko are the (or 83.3%) have less than 2,000 inhabitants. These villages have a total population of 342 mn (see
larger players in Exhibit 5).
the field
Exhibit 5 India lives in its far-flung villages
Distribution of villages by population clusters
Number of villages Population
Number Proportion Cumulative Number (mn) Proportion Cumulative
Less than 100 45,276 8 8 2 0 0
100-199 46,276 8 15 7 1 1
200-499 127,511 21 37 44 6 7
Of India’s 500-999 145,402 24 61 105 14 21
593,615 villages, 1,000-1,999 129,977 22 83 183 25 46
494,442 have 2,000-9,999 80,413 14 97 239 32 78
less than 2,000 5,000-9,999 14,799 2 99 98 13 91
10,000 & above 3,961 1 100 63 9 100
inhabitants
Total 593,615 100 742 100
Source: Census of India, 2001
Technology and outreach

The BC model
The BC model relies on the amalgam of two choices – technology and outreach. From a technology
relies on the
amalgam of
perspective, a banking correspondent can choose a Smart Card or a mobile phone to reach the final
two choices – customer and from an outreach perspective, it can employ agents or enroll retail outlets. Every BC chooses
technology and to match one of the technology platforms with an outreach model (see Exhibit 6).
outreach
A smart card is similar to a credit or a debit card which identifies the owner and can be used in transactions
via a point-of-sale machine. A mobile phone requires an application or can work on SMS or unstructured
supplementary service data (USSD) technology wherein the transactions can take place wherever there is a
telecom network.

GAME
CHANGER
Exhibit 6 Every BC has to make two choices: Which technology and what outreach?
The choice that a BC needs to make
technology outreach
smartcard door-to-door
mobile phone retailer A smart card can

be deployed in
Source: Discussion with industry experts, Kotak Institutional Equities areas where there
is no telecom
A smart card typically requires an investment of Rs50 per card and the card reader machine requires an network, which
investment between Rs20,000 and Rs30,000. The advantage of this investment (which is not required in a are typically the
more remote
mobile outreach) is that it can be deployed in areas where there is no telecom network, which are typically
areas and hence
the more remote areas and hence more unbanked. However, the BC has to come to a network area where
more unbanked
the device can communicate with the bank’s server to update the transactions. The advantage of a mobile
model is that the investment in hardware is done by the final customers.
On the outreach, the agent can either be a door-to-door banker (who will go to particular streets or villages
on particular times of the week) or be a retail outlet where the customer can walk in to do transactions. In
either case, if a smart card is being used, it requires a machine to read the smart card and transact thereon.
The agent model is a push model while the retailer model is a pull model. Also, in the case of an agent,
there is typically a fixed cost of the agent (around Rs3,000 a month) before the commissions kick in while in
the case of the retailer, it is typically only a variable cost model, where this product competes with any other
FMCG product.
Expecting 80%
The agent or the retailer can accept or disburse cash by making the appropriate entry via the POS device.
of the population
The issue to resolve here is the mismatch in terms of acceptance and disbursals. The retailer is typically in a
to be a bank’s
better position to meet the cash mismatch. customers seems
misplaced
Defining the business model for BCs
From the point of view of a bank, setting up a branch requires a capital cost commitment and also a
running cost commitment. In rural areas, the capital cost of a branch is Rs1.5-2.0 mn. Looking only at the
operational costs (see Exhibit 7), the required penetration of 80% population being banked is absurdly high
given that the overall banking penetration is around 25% in India.

It requires 5-6 employees to man a branch. At an employee cost of Rs0.2 mn per employee per year, the
employee cost of a branch amount amounts to Rs1.0-1.2 mn a year. Adding operational costs of a similar
order of magnitude, the overall annual cost of rural branch is Rs2.4 mn a year. With NIMs of 3%, a rural
branch needs to raise deposits of Rs80 mn to break-even on the operational costs. With average deposit
size of Rs20,000, a branch needs to raise deposits from 4,000 customers. Given the definition of a rural
area as a place with a population of less than 5,000 people, expecting 80% of the population to be a
bank’s customers seems misplaced.
Exhibit 7 A rural branch is not sustainable with current cost structures

Estimating the cost and deposit break-even for a branch
Operating costs
Number of employees 6
Cost per employee (Rs mn/year) 0.2
Total employee cost (Rs mn) 1.2
Other costs (Rs mn/year) 1.2
Total operating cost (Rs mn/year) 2.4
Deposits
Expected Net Interest Margin (NIM, %) 3.0
Required deposit base (Rs mn) 80.0
Penetration
Average size of deposit (Rs '000) 20.0
Required number of depositors 4,000
Number of households covered by a rural branch 5,000
Required penetration to break-even (%) 80
A business model Source: Kotak Institutional Equities estimates
for financial
inclusion has
In our view, a business model for financial inclusion has to be based on lower operational costs and more
to be based
fee income from the customer. Every BC defines its anchor in terms of the product that it wants to offer.
on lower
operational costs For example, some have latched onto the MG-NREGS payouts to roll out the client acquisition model.
and more fee Others have created a hook on remittances – from urban to rural India.
income from the
The feet-on-street of a BC is currently able to do about 10 transactions a day, which makes a per
customer
transaction cost of about Rs9 (assuming a Rs3,000 per month payout to feet-on-street). We note that
Rs3,000 a month does not necessarily offer a very lucrative opportunity for a literate person in the village.
The model will possibly gravitate towards the retailer for whom a Rs3,000 a month revenue line may be
more lucrative.
Banks typically pay out around Rs10 to Rs15 per new account opened. In case of remittances, they pay out
2% while charging the sender 3%. Since the float is earned by the bank, the bank may share some of that
with the BC. From the point of view of the BC, the kicker will come in when the number of transaction per
feet-on-street (or equivalent retailer) go up to about 25-30 per person per day (see Exhibit 8).

GAME
CHANGER
Exhibit 8 Banking Correspondent model critically dependent on increasing transactions

As the value of
Model showing revenues and costs of a feet-on-street for a BC transactions goes
Current To break-even Required increase up or the quality
Number of new accounts opened per month 50 100 50 of cross selling
Revenue per new account 10 10 improves, the BCs
Account opening revenue per month 500 1,000 will be able to
make the business
Number of transactions 175 500 325 model more
Average remittance (Rs/month) 200 200
secure
Total remittances (Rs) 35,000 100,000
Commission income @ 2% (Rs/month) 700 2,000
Total income (Rs/month) 1,200 3,000

Cost of feet-on-street (Rs/month) 3,000 3,000
Profit/(loss) per agent (Rs/month) (1,800) -
Total number of monthly transactions 225 600 375

Average number of transactions per day 9 24 15
Average cost per transaction (Rs) 13 5 (8)
Source: Discussion with industry players, Kotak Institutional Equities estimates
This will be possible once the ecosystem of BC banking develops, thereby creating a positive influence
on the number of transactions. Also, as the value of transactions goes up or the quality of cross selling
improves, the BCs will be able to make the business model more secure. Putting the current cost of delivery
in the context of the current revenue potential, on the face of it, the model will require a significant time
to break even. However, as the customer’s own financial profile begins to improve, he/she will present a
significantly large cross-selling opportunity (in banking, investment and insurance products). We see the
creation of the financial inclusion model as the creation of financial services infrastructure, which will have
many positive externalities and multiple revenue lines once this is set up.
The concept of
Making the inclusion stick savings account
itself is new.
Financial inclusion currently revolves around the idea of reaching out to people who cannot open or have Hence, as soon as
not opened bank accounts. We note that the first challenge is to incorporate the habit of savings into the they receive the
payment, they
people who are being exposed to the system for the first time.
seek to withdraw
FINO, which channelized Rs15 bn of MG-NREGS funds in FY2010 (and is expecting to double this in it, without
FY2011), found that for many of its customers, the concept of savings account itself is new. Hence, as soon realizing that the
account is held in
as they receive the payment, they seek to withdraw it, without realizing that the account is held in their
their name
name and that the money will be available to them whenever they want it. (Many think that if they do not
withdraw it, the government will take it back.) Hence, FINO, which uses a smart card technology, is helping
customers open multiple accounts (a card can hold up to 10 accounts). The customer is encouraged to
transfer money from his/her NREGA account to another of ‘his own’ savings account.

As the culture of savings begins to take root, we expect that over time, the savings will get channelized into
One medical/ investment. As the incomes increase (whether on account on MG-NREGS or any other factor), people who
accidental are exposed to the formal banking set-up will be in a better position to start investing, whether in fixed
emergency or a deposits, insurance or mutual funds. FINO’s banking customer base of around 4-5 mn bank customers has
failed crop can
started maintaining an average balance of around Rs500 and have an average fixed/recurring deposit of
throw people
Rs200.
back into the debt
quagmire. Access We note that many of the savers are women, who till now did not have an avenue to save. Any money
to insurance is
saved was liquid (as it was kept as cash) and hence could easily be spent. With the ability to save and
hence critical to
withdraw as required (while earning a nominal 3.5% interest on the same), people are better able to take
keep them on the
savings path their financial future in their own hands. As people start getting integrated into the formal system, they are
exposed to life and non-life insurance. For people who are only beginning to save, one medical / accidental
emergency or a failed crop can throw them back into the debt quagmire. Access to insurance is hence
critical to keep them on the savings path.
Importance of unique identity
RBI prescribes that banks are required to frame their KYC policies incorporating the following four
key elements: (1) customer acceptance policy; (2) customer identification procedures; (3) monitoring
From the of transactions; and (4) risk management. The BC can help in the KYC procedure, however, the final
perspective of responsibility lies with the bank.
a BC, a unique
identity can help From the perspective of a BC, a unique identity can help reduce costs in complying with the KYC
reduce costs in requirements, especially with respect to the customer identification procedures. In many cases, for the
complying with the banking correspondent, getting a customer's identity may involve helping create one.
KYC requirements

chapter 3
Catalyst for Growth at the High End

convenience for the converted
With inexpensive mobile phones (<US$150) also now supporting

GPRS facilities, mobile phones are the new tool to connect the
connected with their peers and service providers. Across ticketing
(air, rail or movies), utility payments (electricity, telephones, pre-
paid time recharge) or remittances (person to person, micro-
payments or purchases), mobile-based applications have started
gaining acceptance. Mobile banking can dramatically reduce
the cost of service for banks, while possibly reducing churn for
telecom companies.
Technology opens up new vistas
Mobile phones can be used in two ways to work with the already-banked: as a means of communication
and/or as a means of facilitating transactions.
Mobile phones As a means of communication, mobile phones can be used to find out bank balances, recent transactions,
can be used in request for statements or a cheque book, etc. As a means of transaction, it can possibly help facilitate three
two ways to possible types of transfers:
work with the
already-banked: ■■ Person-to-person transfer: This refers to payments from person A to person B. This can be for
as a means of services received from a person (taxi driver, doctor, etc.) or for remittance of money (from the
communication bread-earner to his dependents). This typically requires that both the payer and the payee are on the
and/or as a mobile money network. RBI, via National Payment Corporation of India, is working on a model of
means of
letting individuals pay each other via mobile phones.
facilitating
transactions
New system that allows free fund transfers to be launched in Nov
Joel Rebello, Livemint, 4 Oct 2010 number (PIN) from the bank, after which they will
National Payments Corp. of India (NPCI) will next need to download a mobile banking application on
month launch a first-of-its-kind, 24-hour payment their handset. Both the sender and the receiver will
system that will allow bank customers to remit money receive an SMS (short messaging service) confirming
to any account in India for free using their mobile a transaction.
phones. “RBI (Reserve Bank of India) has permitted
only a pilot run with a limited number of banks. Five This is the first major project for India’s first and
banks (State Bank of India, ICICI Bank Ltd, Union only integrated retail payment system company, in
Bank of India, Bank of India and Yes Bank Ltd) are which public sector banks hold a 60% stake while
already live,” said A.P. Hota, managing director and two private and foreign banks each have split the
chief executive of NPCI. Axis Bank Ltd and HDFC Bank rest equally. Though RBI is not involved in the daily
Ltd are next in line to join the system, he added. operations of the company, it has a nominee on the
board of directors.
NPCI’s interbank mobile payment system (IMPS)
will be the first globally to allow such transactions Ten promoter banks have also collectively committed
between individuals that will be routed in tandem Rs.100 crore as share capital for the company, out of
through the bank and the mobile services provider. the Rs.300 crore equity capital for expansion. NPCI
There will be a cap of Rs.50,000 per day on mobile plans to spend Rs.400 crore over the next three to
transactions, according to RBI guidelines. The service four years to introduce new payment mechanisms
will also be accessible for holders of no-frills savings and for office expansions.
accounts.
NPCI will also launch by September 2011 its own
Senders will have to be registered for mobile banking electronic card payment system on the lines of Visa
with their banks, while both the sender and receiver and MasterCard, and is conducting surveys to finalise
must get a special Mobile Money ID (MMID) from a brand name, Hota said. RuPay and NPCI are the
the bank, besides sharing their mobile numbers front runners.
with it. Senders will also be given a personal identity

GAME
CHANGER
■■ Point of sale transactions: This refers to the ability of the customer to pay at the store using his/her
mobile. This is similar to person-to-person transfer, except that the frequency of transactions is much
larger. This is an area of development currently with handset manufacturers and retailers working
on Near Field Communication (NFC) technology to make it easy to use mobile phones as a payment
instrument. A prominent player investing in this technology is Apple.
iPay, iBuy and iCoupons? Latest patents show Apple has a clear business model for
NFC-enabled mobile payments and promotions
Excerpt from Sarah Clark, NearFieldCommunicationsWorld. at the time of purchase. Here, there is an indication
com | April 14th, 2010
that iTunes could evolve into a mobile currency,
APPLE: NFC is set to play a key role in a
with mention of the service as one of the payments
new m-commerce business. A series of patent
options along with bank transfer, credit and debit
applications filed by Apple and relating to near field
card options. The second pair of patent applications,
communication, mobile payments, mobile advertising
meanwhile, cover the use of a 'portable device' –
and mobile coupons have been published this
such as an iPhone – as a mobile point of purchase
month. Together, the patent applications describe a
or POS terminal, able to capture information about
comprehensive end-to-end mobile payments, mobile
an item for sale, determine its purchase price and
retailing and mobile marketing service that would
process payments.
put Apple at the centre of a major new mobile
commerce business – and provide clear evidence that
Now, two new patent applications entitled 'Smart
the company has a solid business plan in place for the
Menu Options' and 'Real-Time Bargain Hunting'
introduction of NFC services. Last week, we reported
have also been published which together describe a
on Apple's first four mobile payments related patents.
comprehensive mobile commerce, promotions and
payments service – including a clear business model
The first two relate to peer-to-peer (P2P) payments
that Apple could use to generate significant new The groundwork
and show an iPhone menu that would enable the for all of these
revenues.
user to choose from a variety of payments options technologies
requires a
robust network
to convert
■■ Mobile top-ups and bill payments: This requires the integration of service providers like ticketing physical cash
(air, rail or movies) and utility payments (electricity, telephones, pre-paid time recharge) with the into electronic or
payment gateway on the mobile. This is now possible on higher end phones which use the GPRS mobile cash
technology as most of the current applications (ngpay, mChek, among others) use the internet
backbone to connect the customer’s financial service provider (bank or credit card) to the payee.
The groundwork for all of these technologies requires a robust network to convert physical cash
into electronic or mobile cash. We have explored how those focusing on financial inclusion are
working with door-to-door agents or retailers to help in cash-in and cash-out. For many in the
already-banked segment, it is relatively easy to convert to e-cash via net-banking and/or credit cards.
In order to expand the network, many other payment processors are also helping convert cash to
e-cash. One such element is the pre-paid payment instrument.

Prepaid payment instruments
Prepaid payment instruments facilitate the purchase of goods and services against the value stored on such
instruments. The value stored on such instruments represents the value paid for by the holder, by cash, by
debit to a bank account, or by credit card. Prepaid instruments can be issued as smart cards, magnetic stripe
The value cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers and any such
stored on such instruments which can be used to access the prepaid amount.
instruments
represents the The prepaid payment instruments that can be issued are classified under the four categories.
value paid for
■■ Closed system payment instruments. These are payment instruments generally issued by business
by the holder, by
cash, by debit to a establishments for use at their respective establishment only. These instruments do not permit cash
bank account, or withdrawal or redemption. This is similar to a card issued at a food court, which takes cash from the
by credit card customer and charges a card with the equivalent value which can be then used in the food court.
■■ Semi-closed system payment instruments. These are payment instruments which are redeemable
at a group of clearly identified merchant locations/ establishments which contract specifically with
the issuer to accept the payment instrument. These instruments do not permit cash withdrawal or
redemption by the holder. This is similar to the Sodexho passes where the merchants which will
accept the cards that are identified. Mobile-based, semi-closed system payments have been allowed,
subject to a limit of Rs5,000, without interchange between the prepaid amount and talk-time and by
explicitly disallowing person-to-person transfer via mobile phones.
■■ Semi-open system payment instruments. These are payment instruments which can be used
for the purchase of goods and services at any card accepting merchant locations (point of sale
terminals). These instruments do not permit cash withdrawal or redemption by the holder. This can
be visualized as a credit card or a debit card that is used at a merchant’s place which can be used
RBI has specifically
only for purchase of goods or services. This is similar to having a balance or a credit line on a mobile
disallowed
any payment which can be used to buy goods and services.
of interest on
■■ Open system payment instruments. These are payment instruments which can be used for
the sums of
purchase of goods and services and also permit cash withdrawal at ATMs. This is similar to using a
money collected
under any of credit card or debit card at an ATM.
the payment
Entities other than banks and NBFCs issuing payment instruments are permitted to maintain their
instruments
outstanding balance in escrow accounts with any scheduled commercial banks where no interest is payable
by the bank on such balances. Other entities would be permitted to issue only closed system prepaid
payment instruments and semi-closed system prepaid payment instruments. The maximum value of any
prepaid payment instrument (where specific limits have not been prescribed) shall not exceed Rs50,000.
RBI has specifically disallowed any payment of interest on the sums of money collected under any of
the payment instruments. This stems from the earlier experience where the cash card companies could
offer ‘discounts’ on their cards. For example, they could issue a Rs100 card at say Rs99. This was possible
because the cash collected would be deployed in overnight markets (or possibly more risky instruments),
while the company enjoyed the float.

GAME
CHANGER
We also note that RBI does not allow intermingling of the monies paid for talk-time with the credit balance
on the mobile. Under a specific definition of ‘Mobile Prepaid Instruments’ referring to the prepaid talk time
issued by mobile service providers, RBI allows this value to be used for the purchase of those 'value added
services' which can be consumed on the mobile from the mobile service provider or third-party service
providers. Three sets of
companies are
approaching this
Three different approaches to the market
market in their
Three sets of companies are approaching this market in their own unique ways, drawing upon their existing own unique ways,
strengths and perceived strategic advantages. drawing upon
their existing
1. Financial services companies. Banks and stock broking companies are creating applications strengths and
to reach out to their customer bases. As discussed, the cost of transaction via mobile phones is perceived strategic
significantly lower than any other mode of interaction. These organizations are creating their own advantages
applications which need to be downloaded by the customer to access the organization. In most
cases, the application would work on the GPRS network for two reasons: (1) the transactions are too
complex to be done over USSD technology and (2) the security requirements typically require multi-
factor authentication.
2. Technology companies. Many companies playing roles as aggregators and payment processors are
exploring various niches in this still nascent market in which all opportunities are far from delineated.
Companies like ngpay and mChek aggregate demand for various utilities like ticketing, utility
payments and book, flower and music purchases. Companies like Suvidhaa and Itz Cash are helping
convert cash into e-cash. Banking correspondents like FINO, A Little World and Eko are creating a
distribution platform for banks to reach out to the final customers.
3. Telecom companies. Grappling with large churn, both operators and handset manufacturers are
entering the fray here to get more ‘sticky’ customers. Telecom companies see significant value in
getting float income on the prepaid cards, commission on the transactions done via their cards
and possibly a customer who decides to stay on its network due to the facilities provided. Handset
manufacturers see an opportunity to provide more value to the customer and also the retailer (note
that for every top-up sold by the retailer, he gets a small cut).

The value-
proposition of the Why should the customer come in?
offering comes in
from the ability From the point of view of the companies innovating in this space, one hurdle is that the customer they
to provide the are targeting already has access to other modes of e-cash and transacting via the same. For example, the
services on-the-go overlap between customers having a GPRS enabled phone and those having an internet connection and
– this is similar to
a debit or credit card is possibly high. The value-proposition of the offering comes in from the ability to
having a mobile
provide the services on-the-go – this is similar to having mobile email as opposed to the email popping
email as opposed
to the emailed on the office computer. As mobile screens begin to command a greater proportion of time with the users,
popping on the these companies expect to evolve their offering to suit the customers evolving needs.
office computer
For many customers who do not fall in the overlap, or who will move on to mobile phones directly as their
first means of using the internet, this service has its obvious appeal.

chapter 4
Catalyst for Banking in the Developing World
Mobile banking was a solution that fit developing world needs

like a glove. Most developing countries have suffered from low
penetration of banking and electronic cash. The model is being led
by various types of entities: banks, mobile companies and third-
party aggregators. In India, the push for mobile banking is coming
from the banking regulator committed to financial inclusion. Had
this come from India’s vast unbanked population, the task of
conversion would be far more simple and inexpensive for service
providers.
A developing world phenomenon
Mobile banking truly came into its own in the developing world. The conversion of cash into electronic
form has been very successful in the developed world. In developed markets, credit card and debit card
penetration is high (and the payment infrastructure's in place already), there is therefore limited incentive
for the players in the developed world to create new payment infrastructure with even less impetus coming
from unmet consumer needs (unbanked consumers are minimal). Low banking penetration and a high
prevalence of cash transactions in the developing world have created the impetus for converting cash into
electronic form. We look at some of the important international examples and note that the innovations
have started from Africa and Asia.
Wizzit, South Africa – Virtual bank (bank-led model)
Wizzit has positioned itself as a virtual bank (it is a division of The South African Bank of Athens Limited)
and has no branches of its own. Mobile phone subscription customers can use their phone to make person-
Since the to-person payments, transfer money, purchase prepaid electricity, and buy airtime for a prepaid mobile
money can be
phone. With their Wizzit bank account, the customers also receive a Maestro branded debit card that
transferred to
enables them to make purchases, get cash-back at retail outlets and withdraw money at any South-African
only a Wizzit
customer or Maestro labeled ATM anywhere in the world.
instantly, it
To open a Wizzit bank account, a Wizzit agent is sent to the applicant’s home or workplace. The
cannot be used
administrative processes surrounding account opening are handled by a WizzKid, very often young black
for making
payments for people who had previously been unemployed.
goods and
For most Wizzit customers, exemption from certain aspects of the AML and KYC requirements (the so-
services at non-
called Exemption 17) facilitates opening a bank account with relative ease. Exemption 17 means that the
POS enabled
stores AML and KYC requirements are not implemented so long as the maximum balance (Rand 25,000) and
maximum transaction limits (Rand 5,000) are not exceeded. In cases where these limits are exceeded the
Wizzit account is suspended until the full AML and KYC compliant procedures are completed. Less than
10% of Wizzit‘s customers have ever exceeded the maximum thresholds set out in Exemption 17.
One of the main advantages of Wizzit is that the mobile transactional technology works on any handset
and SIM card and across all the networks. In principle, one of the strengths of Wizzit is that the account
can be used to send money in real time to any Wizzit account holder in South-Africa, and overnight to
any other bank account holder. To transfer money Wizzit uses the well developed South African inter-bank
clearing house system. (Source: Vodafone Policy Paper).
Since the money can be transferred to only a Wizzit customer instantly, it cannot be used for making
payments for goods and services at non-POS enabled stores. This system supports only those customers
who are ‘already-banked’. The cash-in and cash-out is also limited to the ATM machines and POS-enabled
retail outlets which again draws on the infrastructure laid out for the ‘already-banked’. At the end of
CY2008, the company had an estimated 250,000 customers.

GAME
CHANGER
M-PESA, Kenya – Payment enabler (telecom company led model)

The money which
With 8.8 mn customers (April 2010), accounting for 65% of its customer base (source: Neil Gough
is loaded on the
presentation, April 2010, TRAI) and 15,200 agents, M-PESA is one of the most celebrated mobile banking
mobile can be sent
stories. Started by a micro-finance company to help collect repayments, the initiative was taken over by to any recipient.
Safaricom when it realized its mass-market potential. It now averages a person-to-person transfer of US$30 The final recipient
and total monthly transfers of US$350 mn. can keep it as a
balance on his
A subscriber needs to register with Safaricom which provides it with a new SIM which has the application mobile or can
loaded on it. The customer needs to create a PIN for the security of his account (typically a 4 digit number). withdraw it as cash
M-PESA allows cash-in and cash-out via retailers of Safaricom and other associated retailers. The money
collected by Safaricom (which it converts to e-cash) is transferred to a ‘trust account’ (escrow account) with
a bank.
The money which is loaded on the mobile can be sent to any recipient (not necessarily only other registered
M-PESA customer). The final recipient can keep it as a balance on his mobile or can withdraw it as cash
from any associated retailer, after paying a sliding-scale commission. The final recipient can be a company
or person selling goods or services.
Given the low penetration of the banking sector in the country, the Central Bank of Kenya has been
supportive of the growth of M-PESA. Note that M-PESA does not pay any interest on deposits to its account
holders, not does it offer any loans. M-PESA, hence, is primarily is a payment mechanism.
G-Cash, Philippines – Creating a mobile wallet (third-party-led model, affiliated with a

telecom company)
G-Cash positions itself as a mobile wallet, having partnered with government agencies, utilities, G-Cash monitors
cooperatives, insurance companies, remittance companies, universities, and commercial establishments to for multiple
facilitate payments to them. G-Cash can be used via mobile phones or via the internet. In either case, the registrations by
the same phone
confirmation is sent via an SMS.
number or SIM
For a customer to be a part of the G-Cash network, he needs to register with his name, date of birth, card or entries
mother’s maiden name and contact details via an SMS. Whenever cash is deposited or withdrawn, the under the same
customer’s details are verified against these details. The customer can deposit and collect cash from more name. Persistent
near-breaches
than 18,000 retail outlets across the country: the cash deposit can be against actual cash or via a debit
of the limits of
to the banking account or credit card of a person. Customers can buy both cash and air-time – and can transactions are
transfer them both. also monitored
To comply with anti-money-laundering provisions, G-Cash monitors for multiple registrations by the same
phone number or SIM card or entries under the same name. Persistent near-breaches of the limits of
transactions are also monitored.

The telecom
company led or Learnings
affiliated model
has gained more In all the three cases, the need for mobile banking emerges from the customer who requires an easier
acceptance given way to remit money or pay for goods or services. What is clear is that the customer requires the ability to
its wider reach
seamlessly pay the final recipient without necessarily requiring the recipient to have to open a new banking
and synergies
channel or get a new SIM card. The greater the number of entities to which a customer can remit his funds,
the larger will be the acceptance of the model.
It is important to help create the network effect – this can be done by creating an ecosystem where people
find others that they can identify with and transact with on the same network.
The telecom - company - led or affiliated model has gained more acceptance given its wider reach and
synergies (the large and spread out retail network that sells airtime can double up as the cash-in and
cash-out facilitator). Telecom companies have started to build-in incentives for the recipient to be on
their network, without making this an impediment in the process of fund transfer. Regulators are helping
facilitate the creation of enabling environments by easing AML and KYC requirements.
What are the Indian regulations?
Mobile phones RBI now (from December 2009) allows transactions (funds transfer as well as purchase of goods/services)
can be used as up to Rs50,000 a day on the mobile banking platform. Remittance of funds is also allowed (which means
■■ a standalone that the funds transferred can be withdrawn as cash by the recipient) but this is limited to Rs5,000 per day
device which
and a monthly cap of Rs25,000 per recipient.
is capable of
completing the RBI has been progressively relaxing the amounts that can be transferred via mobile banking. Prior to
transactions December 2009, RBI had imposed a limit of Rs5,000 for funds transfer and Rs10,000 for transactions
■■ as a browser
involving purchase of goods/services.
which allows
internet We note that the RBI guidelines clearly state that the money deposited by a mobile customer into his
commerce prepaid account can only be used for purchase of those services that can be consumed on the mobile itself.
Any money currently given to the telecom company as payment towards telecom services can be used only
for such purposes and not for the purchase of any goods or services.

GAME
CHANGER
RBI now allows

Mobile Banking: Technology and business model transactions up
to Rs50,000 a day
Mobile banking technology has moved rapidly from high-tech and rarified to ubiquitous. As business on the mobile
models stabilize and regulations get clearer, various stakeholders (customers, payment processors, banks banking platform.
Remittance of
and their agents, telecom companies) are gaining a better understanding of how to split the pie. We
funds is also
believe final owners of customers will be the largest beneficiaries. allowed but
this is limited to
Decoding mobile payment technology Rs5,000 per day
and a monthly cap
The use of mobile phones in commerce can be looked at from two different angles: (1) a use of the of Rs25,000 per
handset as a standalone device which is capable of completing the transactions and (2) as a browser which recipient
allows internet commerce. The telecom network can be used for interacting with banks or merchants using
the short message service (SMS) or unstructured supplementary service data (USSD) technology.
SMS usage is very common among the telecom users and hence the learning curve in using the platform
for transactions is relatively less steep. However, SMS is not necessarily a reliable mode for financial
transactions since it works on a store-and-send mechanism which can result in delays or even drops.
USSD technology (which can be used on the GSM network but not on CDMA) creates a real-time secure
connection with the servers of the telecom company. From a layman’s perspective, USSD refers to the
commands starting with # or * and involving a series of numbers and special characters. This is currently
used by mobile subscribers in some cases for querying their pre-paid balances, etc.
On the telecom network, banks can allow customer to access the account (a mobile number is linked to an
account) to query his balances/transactions and also make entries (debit or credit his account). In a mobile
phone, security is provided by a digital pin (which is typically a 6-10 digit long numeric string as most
phones have only numeric keypads).
Alternatively, the mobile phone can be used as a browser or have applications (apps) which connect with We believe that
the merchants or the banks via the internet platform. When the mobile phone is used as a browser (and an the final winner
app is just a modified browser which can work across various phone platforms), it is no different from the will be one who
net banking or e-commerce business, except that the screen is now a mobile. This typically requires a GPRS owns the customer,
or the one the
connection and also a Java enabled handset (typically costs more than Rs4,000). There are 14 mn GPRS
customer is willing
users in the country and ~40% of the phones are Java enabled.
to pay

Who will get the spoils?
The current regulations, which the RBI has taken the lead in drafting, approach the issue from the point
of view of KYC requirements and sanctity of the banking sector. RBI has been opening up the payment
systems selectively. The banks, however, have invested significantly in the debit card and credit card systems
– which are only now beginning to take off.
We believe that
the final winner
There are two elements in the revenue business model for the players:
will be one ■■ The float that will be kept in the system. RBI has maintained that the float needs to be kept by
who owns the
the banking system and any other aggregator of cash/deposits is not allowed to pay any interest on
customer, or the
the deposits.
one the customer
is willing to pay ■■ The other big benefit of mobile banking will be the commission on transactions that is
up for grabs by all the parties: telecom companies, banks and VAS providers. Given the possibility
of large quantum of transactions and the pricing done as a percentage of the value transmitted,
commissions will be a big driver.
How the market shapes up here could determine the winner in the mobile payments space. We believe that
the final winner will be one who owns the customer, or the one the customer is willing to pay.

chapter 5
GameChangers: Convergence; Regulation
The biggest GameChanger for mobile banking will be its ability

to converge the twin objectives for financial inclusion and
convenience of the already-banked. The latter will provide scale
and income while the former will create a self-sustaining ecosystem
of increased inclusion. A linkage between the two sections of the
society will also lead to increased transaction flows.
Convergence leading to a network effect
There have been piece-meal developments on both sides of mobile banking: Financial inclusion and
reaching out to the rich.
As more people Person-to-person transfer is being approached from a ‘financial inclusion’ angle as we explored earlier.
come on to the Given that the quantum of funds that are transacted in the urban setting, this is a need that needs to
mobile banking be met even in already-banked areas or with already-banked customers. The convergence will create the
network, it will
required ecosystem for mobile banking to take off. We expect that the economies of scale will kick-start
possibly create
once there are a large number of players who come on to the mobile banking network.
a virtuous
cycle, driving a We are beginning to see various players becoming very active in the space (as seen in the news reports
significant portion
below). Companies are beginning to find the niche in which they want to play – everyone is positioning
of financial
themselves in places which are important to them (financial inclusion or banking to the already banked).
transactions on
mobile phones As the various pieces begin to fall in place and more people come on to the mobile banking network, it will
possibly create a virtuous cycle, driving a significant portion of financial transactions on mobile phones. This
transition of payment methodology will be similar in magnitude to the transition from gold to paper money
– this is the next leg of virtualization.
The right policy push

There is significant prodding from the RBI to get banks to work on financial inclusion and on the need
for banks to reduce costs. International learnings suggest that the bank-led model, while having inherent
advantages of being prudential, do not necessarily take off. Telecom companies have a widespread reach
(more than 2 million outlets) and the ability to manage micro-payments. We note that the average revenue
per user per month in India is less than Rs200 and recharge vouchers of value as low as Rs5 are sold by
telecom companies.
With the RBI now allowing a larger number of people to enroll as banking correspondents, the reach for
the banking industry can widen. However, as we have noted earlier, the cost of a banking correspondent
(BC) is high. A banking-correspondent-driven model will necessarily need to involve channelizing
government payments or some other remittances via them to make them feasible.
Allowing more choices to reach the final customer may help in the emergence of a sustainable model.
Helpful regulations
Payments and transactions with the mobile banking platform are, on average, expected to be low ticket
items given the objective of the financial inclusion. As we noted earlier, countries have relaxed the AML and
KYC regulations to help kick-start the use of mobile banking channel. Even in case of large transactions,
mobile banking helps maintain an electronic record of the transactions.
RBI has allowed telecom companies to operative payment cards. This will help the companies leverage their
reach. RBI has, however, made it clear that the float from this will not accrue to the company but to the
bank, thereby taking away one of the elements of the revenue pool. Allowing a more equitable business
model to emerge, while taking into account the stability of the system, is the need of the hour.

GAME
CHANGER
Yes Bank launches a first-of-its-kind Mobile Money Services, powered by Nokia
Source: Company financial services to the consumers' mobile

device and will create a financial ecosystem
Mumbai, February 15, 2010: Nokia, a global
which is inclusive, sustainable and scalable.
leader in the mobile telecommunications
This cutting-edge technology will also facilitate
industry, YES BANK, India's new-age private
convenience and ease of usage in making
sector Bank and Obopay India, a wholly owned
mobile payments through mobile devices,
subsidiary of Obopay, Inc., have launched a
across the country. Going forward, the program
Mobile Payment Service which establishes a
application will also be pre-embedded in Nokia
platform enabling transfer of money using
mobile devices making the service highly
the mobile device in a secure manner. YES
accessible and user-friendly.
BANK, one of the pioneer banks in the Mobile
Payments space, has received the regulatory
approvals from the Reserve Bank of India This unique service will enable consumers
(RBI), India's Central Bank to act as the Issuing to transfer money to other individuals, pay
bank and the custodian of funds under these utility bills as well as recharge prepaid SIM
services. cards (top-ups), by using their mobile devices.
Subsequently, consumers will later also be
This innovative pre-paid mobile payments able to pay merchants for goods and services
service will be initiated as a pilot in Pune, one through their mobile devices. This is a first-of-
of the largest metropolitan cities in India. These its-kind service providing customers the ability
services will be widely distributed leveraging off to initiate mobile payments through multiple
the reach of Nokia's retail channel. channels i.e. SMS, IVR, WAP, JAVA and FIRE.
The pilot in Pune will also review customer
'Mobile Money Services by YES BANK in behavior & delivery benchmarks to ensure a
partnership with Nokia' will augment financial flawless service framework, prior to the national
inclusion amongst the unbanked and under- roll-out in a phased manner.
banked consumer segments by bringing

Axis Bank New instant money transfer system
Source: Mint the facility.

You can now assist your relatives or friends
with cash during an emergency or remit money The maximum you can transfer per transaction
home instantly, anywhere in India. However, is Rs5,000 and the limit per month is Rs25,000.
to do this, you need to have an account with If the receiver does not withdraw the money
Axis Bank Ltd. Axis Bank and Empays Payment within 14 days, the transaction is rolled back.
Systems, a company engaged in mobile Every receiver is permitted to receive up to
payment system, have introduced an instant Rs1 lakh per calendar year.
money transfer (IMT) system through which you
can make instant cash payments. “Since the service is new, we are charging a flat
fee of Rs25 per transaction. We have launched
Log into your account through mobile banking, the service in Mumbai, Bangalore, Ahmedabad
net banking or an automated teller machine and Hyderabad. The pan India rollout is
(ATM), you will get an option to create an expected in the next two months,“ said R. K.
IMT for the amount to be sent and enter the Bammi, president (distribution), Axis Bank.
receiver's mobile number and a pre-decided
personal identification number (PIN) that both “Currently the only way of doing this is through
of you know. The bank server takes these three a cheque, direct account transfers, money order
pieces of information – the IMT, receiver's cell or through some informal mechanism all of
phone number and the common PIN – and which have their own shortcomings in terms
sends them to the receiver along with a new of time lag, processing hassles or costs,“ said
PIN. Ravi Rajagopalan, managing director and chief
executive officer, Empays Payment.
The receiver need not be an account holder of
Axis Bank or for that matter any bank. Once he “Right now we are in the process of exploring
receives a money transfer notification on his cell tie-ups with six other public sector banks
phone, all he needs to do is go to the nearest which should begin offering these services by
Axis Bank ATM and withdraw the money. He next year. Partnering with public sector banks
would just need his mobile number will enable us to reach the masses,“ added
and the two PINs. No card is needed as the Rajagopalan.
ATM machines are being adapted to provide

GAME
CHANGER
SBI buys 20% stake in its biz correspondent
Source: Financial Chronicle A senior SBI official said, “We bought the
The country’s largest lender State Bank of India equity stake in the company for a consideration
(SBI) has bought 20 per cent equity stake in of Rs80 crore so that company could speed up
A Little World (ALW), a technology services the financial inclusion exercise of the bank.”
providing company with a strong rural focus
and an affiliate of the Zero Micro Finance and This company was the first business
Savings Support Foundation, for Rs80 crore. correspondent (BC) in India. It became a BC
for SBI in Mizoram in 2006 when the financial
The other stakeholders of ALW include Enam inclusion exercise was first rolled out to reach
Financial, Bellweather Microfinance Fund, India banking to the unbanked rural hinterland.
Financial Inclusion Fund and Legatum Ventures, The equity stake is expected to help SBI in
a Dubai-based private equity fund. its ambitious financial inclusion drive that
is expected to reach 12,391 villages in the
“SBI bought 20 per cent equity stake in ALW next two years through a network of 25,000
and henceforth we will undertake majority customer touch points.
of work for SBI in future. Considering the
enormous work that SBI plans to do undertake, The company has helped banks attain 60
there will be no time to work for other banks. lakh no-frills accounts through 10,000
At present, we have a tie-up with 24 other microbranches which operate out of grocery
banks, they will be phased out gradually shops or individuals. ALW has a track record
and while some may remain with us,” said a ofcreating commercially viable and innovative
promoter of ALW and Zero Micro Finance and technology solutions that have been hived off
Support Foundation. as separate entities after receiving investments
form investors.

APPENDIX 1: BRIEF SKETCHES OF COMPANIES IN THIS SECTOR
Banking Correspondents
A.Little.World
www.alittleworld.com
The company has a vision to "touch a billion people through innovative technologies and alliances at the
bottom of the pyramid for delivering multiple financial services at the lowest cost through mainstream
financial institutions."
Their platform consists of two products:
• ZERO is based on new generation Near Field Communications (NFC) mobile phones; contact-less
RFID smart cards; integrated biometrics authentication system and a transaction server to enable
cost effective and convenient mobile transaction solutions for Customer Service Points (CSPs) and
merchants to carry out banking and financial transactions.
• mZERO (mobile version of ZERO) is available as a self-service payment option for customers on the
mobile phone SIM to enable both over-the-counter and remote payments.
The technology focus of ALW is on a biometrics-based ID, RFID smart cards, and NFC (Near Field
Communication) mobile phones as acceptance and enabling devices (with merchants, field forces of MFIs
and as cashless ATMs). The company recently received an equity investment from SBI.
Eko
www.eko.co.in
“The Eko model works on the fundamental premise of giving everyone a bank account. Eko is building a
low cost financial services infrastructure to increase the reach of financial institutions to the un-banked and
to democratize financial services for the un-banked in urban as well as rural areas: powered by innovation
and technology.
Eko is leveraging existing distribution networks, existing behaviour and interaction mechanisms to ensure
barriers for adoption are very low. The endeavour is to build a rapidly scalable model by addressing the
challenges of the existing models and by using mobile technology to help bring down significantly the
network cost.”
Eko has tied up with SBI to help open savings accounts which can be operated via mobile phones. With
Delhi-NCR as their urban base and Bihar-Jharkhand as their rural destinations, they primarily focus on
remittances. Their customer base of around 80,000 transacts around 1,500-2,000 transactions a day.
Financial Information Network and Operations Limited (FINO)

www.fino.co.in
FINO is a multibank promoted, professional company with a board comprising of customer banks and MFI.
FINO works on national priority projects (NREGA, RSBY, SSP, etc) therefore helping reach a critical mass
to provide economy of scale to all customers. FINO has an inhouse Technology R&D team to develop and
enhance offerings. FINO has its own network of agents (Business Correspondents) at ground level and also
works with several partners to reach the remotest parts of the country The company currently has around
10,000 bandhus (feet-on-street) serving ~15mn customers.

GAME
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Cash converters
Itz Cash
www.itzcash.com
ItzCash has an extensive pan-India network spanning over 40,000 ItzCash franchisees branded as ItzCash
World Outlets. Additionally there are approximately 2,00,000 outlets in 2,000 Tier I and Tier II towns in
the country under the brand name "ItzCash Point". It has more than 8 million unique active users and
processes more than 100,000 transactions worth Rs100 mn - Rs 150 mn worth transactions daily. It is one
of the largest payment gateway on IRCTC (online railway ticket booking in India – the largest e-commerce
website in India) amongst 34 odd payment gateways.
The company has been promoted by the Essel group and has Matrix Partners and Lightspeed Venture
Partners as investors.
Suvidhaa
http://www.mysuvidhaa.com/
Suvidhaa Infoserve is a retail services aggregator which offers railway and air ticketing, mobile recharge and
bill payment services in urban, semi-urban and rural locations in India. Since its founding in 2007, Suvidhaa
has established more than 25,000 neighborhood stores called ‘Suvidhaa Points’. The company plans to
expand this network to 100,000 points in the next two years. Suvidhaa has grown its presence in 20 states
and throughout 500 cities / towns across urban and rural India. Among its investors are Norwest Venture
Partners, Reliance Venture Asset Management, International Finance Corporation.
Technology enablers
Empays Payment Systems
http://www.empays.com/
IMT is a pioneering venture in India started by Empays Payment Systems India Private Limited, a company
registered in India and partnered by Hal-Cash International, a Spanish company owned and operated by
a consortium of respected Spanish banks. Hal-Cash has built and operated a similar payment scheme in
Spain, Morocco, Ecuador and Poland. It allows the customers of member banks to make payments through
different channels like electronic banking, POS, mobile, etc. These payments are done through the network
of Automatic Teller Machines belonging to the banking institutions that are members of the Hal-Cash
system, as long as the beneficiary has a mobile telephone. It has tied up with Axis Bank to provide ATM
services.
Ngpay
http://www.ngpay.com
Imagine a mall where hundreds of large and small brands have set up stores that are open 24/7 and sell
every product and service you need – Imagine the convenience of buying from this mall with a few clicks on
your mobile phone. That is ngpay – India's Largest Mall – located entirely on your mobile handset. It allows
its customers to buy tickets for films, train, air or bus tickets, send flowers, greeting cards, chocolates and
gifts on all occasions and shop for book, apparel, games & music, gadgets, ayurvedic medicines & spiritual
products.

mCheck
The vision of the company and its founders was to augment everyone’s financial universe by creating a
mobile payment platform that could make and receive payments securely andinstantly over any distance.
One of the key design imperatives of the team was to conceive aproduct that is in keeping with times, and
one that does not change, but rather works withand integrates into the existing infrastructure, making
adoption and overall usage by all constituents simple. Besides private funding during the very early stages
of the company, Draper Fisher Jurvetson, a top tier venture capital firm, has also funded mChek. The
company has been won the GSMA Global Awards 2008 for Best Billing and Customer Care solution at
Barcelona and Global Red Herring 100 Award – 2008, among other awards and certifications.
Infrastructure creators
NPCI
http://www.npci.org.in
Reserve Bank of India, after setting up of the Board for Payment and Settlement Systems in2005, released a
vision document incorporating a proposal to set up an umbrella institution for all retail payment systems in
the country. The core objective was to consolidate and integrate the multiple systems with varying service
levels into nation-wide uniform andstandard business process for all retail payment systems. The other
objective was to facilitatean affordable payment mechanism to benefit the common man across the country
and help financial inclusion. Promoted by 10 banks (State Bank of India, Punjab National Bank, Canara
Bank, Bank of Baroda, Union bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank and HSBC), the
Board constitutes of N.R. Narayana Murthy, Chairman, Infosys Technologies Ltd as the Chairman, nominee
from Reserve Bank of India, nominees from ten core promoter banks and AP Hota, Managing Director and
Chief Executive Officer, NPCI.

GAME
CHANGER
APPENDIX 2: FURTHER READING

1. Inter-Ministerial Group’s report on “Framework for Delivery of Services Using Mobile Phones”, April
2010
2. Institute for Development and Research in Banking Technology: “Mobile Payment Systems and
Services: An Introduction”
3. NABARD: “Report of the Committee on Financial Inclusion”, January 2008
4. Reserve Bank of India’s
■■ “Mobile Banking Transactions in India - Operative Guidelines for Banks”, as updated
■■ “Financial Inclusion by Extension of Banking Services – Use of Business Correspondents (BCs)”, as

updated
■■ “Financial inclusion and challenges”, Dr. Duvvuri Subbarao, Governor, Reserve Bank of India,
December 2009
5. SEBI: “Securities Trading using Wireless Technology”, August 2010
6. TRAI: “Consultation Paper on Quality of Service requirements for delivery of basic financial services
using mobile phones”
7. “Report on Harnessing the India Post Network for Financial Inclusion”, June 2010.

NOTES

GAME
CHANGER
NOTES

NOTES

Have you read our recent GameChangers?
Sept 2010
‘The Time is Ripe’ highlights
opportunities in the agri
sector arising from
development in technology
and processing
April 2010 May 2010

‘365 million’ analyses India’s ‘Deluge of Opportunity’
readiness for its forthcoming examines pricing and
demographic dividend regulation changes that
could make water a viable
business proposition
May 2010 June 2010

‘Indian Household Savings’ highlights that Our walk on the wild side pitted
US$10 tn is up for grabs in the next 15 GameChanger’s football forecasting
years model against tea leaves and coffee
grounds. Read to find out how we fared
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GAMECHANGER VOL I.VI - NOVEMBER 2010
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KOTAK INSTITUTIONAL EQUITIES RESEARCH

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Catalyst for financial inclusion – reaching the unbanked 9

Catalyst for banking in the developing world 23

GameChangers: Convergence; Regulation 29

Appendix 1: Profiles of some companies in this sector 34

Appendix 2: Further reading 37

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Mobile phones enjoy the highest penetration of any two-way

Cost ICICI ICICI SBI

People are still

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 2 Low usage of credit and debit cards in India

Financial inclusion for the excluded

Exhibit 3 India ranks low on financial inclusion

Source: Working paper 215, Index of financial inclusion, ICRIER

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

The will of the powers-that-be

UNIQUE IDENTIFICATION AUTHORITY OF INDIA (UIDAI)

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Catalyst for Financial Inclusion

The government is becoming a large remitter

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: Union budget documents, Kotak Institutional Equities estimates

2. The internal remittances market

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

3. Enhancing the scope of mobile cash

Source: RBI circular dated 28 September 2010

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

Technology and outreach

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

mobile phone retailer A smart card can

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13

Exhibit 7 A rural branch is not sustainable with current cost structures

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 8 Banking Correspondent model critically dependent on increasing transactions

Total income (Rs/month) 1,200 3,000

Total number of monthly transactions 225 600 375

Source: Discussion with industry players, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15

Importance of unique identity

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Catalyst for Growth at the High End

With inexpensive mobile phones (<US$150) also now supporting

New system that allows free fund transfers to be launched in Nov

18 KOTAK INSTITUTIONAL EQUITIES RESEARCH

KOTAK INSTITUTIONAL EQUITIES RESEARCH 19

20 KOTAK INSTITUTIONAL EQUITIES RESEARCH

KOTAK INSTITUTIONAL EQUITIES RESEARCH 21

22 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Catalyst for Banking in the Developing World

Mobile banking was a solution that fit developing world needs

Wizzit, South Africa – Virtual bank (bank-led model)

24 KOTAK INSTITUTIONAL EQUITIES RESEARCH

M-PESA, Kenya – Payment enabler (telecom company led model)

G-Cash, Philippines – Creating a mobile wallet (third-party-led model, affiliated with a

KOTAK INSTITUTIONAL EQUITIES RESEARCH 25

What are the Indian regulations?

26 KOTAK INSTITUTIONAL EQUITIES RESEARCH