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Mobile banking yet to take off in rural India

Regulations have been relaxed but low-value transactions, lack of priority among banks and financial illiteracy are getting in way of mobile banking adoption among users in India's rural areas.
Written by Swati Prasad, Contributor

Regulations in the country have been relaxed but the adoption of mobile banking services in rural India is still held back by various challenges including low-value transactions, lack of focus from banks, financial illiteracy and paucity of cash-points.

The statistics indicate much potential in India's mobile banking market. The country is home to the second-largest mobile phone population of over 600 million subscribers, at a penetration rate of 57 percent. At the same time, nearly 40 percent of the Indian population remains unbanked. And of those who are banked, a large chunk is under-banked.

A majority of the unbanked population resides in rural India, where the penetration of mobile telephony is 31 percent and growing at a fast clip. An estimated 8 million rural Indians who own mobile phones do not have access to banks.

In January, the Reserve Bank of India (RBI) took several steps to encourage mobile banking. The local regulator relaxed the technology and security standards, allowing banks to undertake transactions valued at up to US$21.6 (INR 1,000) without needed end-to-end encryption. This is aimed at helping banks reduce the cost of processing transactions.

RBI also allowed the remittance of funds for disbursements in cash, which is targeted to benefit rural users who can send and receive money through their mobile phones.

Despite these efforts, mobile banking has yet to gain popularity in India.

"The results [of regulatory changes] are not outstanding," Prathima Rajan, analyst at Celent, told ZDNet Asia in an e-mail. She noted that like any other channel, mobile banking will take some time to establish a comfort level among users, especially in rural India, before it becomes the primary channel to deliver banking services at affordable costs to the country's disadvantaged and low-income groups.

Sanjay Tugnait, India lead of Accenture Financial Services, concurred: "Growth in mobile banking has been limited not only by financial illiteracy but also the simplicity of offerings." According to Tugnait, banking services must not only be enabled by technology but should also ensure ease of use.

To address the unbanked population in rural areas, banks have partnered business correspondents that have the reach and low-cost technology tools to ensure feasibility. But while this has led to some growth in mobile banking services the percentage is negligible.

Not a priority for banks
Today, there are various mobile banking services including mobile-to-mobile transactions and remote ATMs. Most of these applications are cost-effective but it is the volume of transactions that makes mobile banking unviable for banks, noted Ashok Chandak, senior director of global sales and marketing at NXP Semiconductors, which makes chips for near-field communication (NFC) devices.

Chandak said in a phone interview that mobile banking is still not viable for banks in terms of returns. "And that's the reason why it is also not a priority area for banks," he said.

Ekgaon Technologies CEO Vijay Pratap Singh Aditya added: "Being pioneers in mobile technology for rural finance, our experience has been hard." Ekgaon provides IT-enabled products for financial services, agricultural services and e-governance in rural areas.

Aditya told ZDNet Asia in an e-mail that it was hard convincing banks and micro-finance institutes (MFIs) to understand the value proposition. "And being a small company, it was difficult to get contracts from big banks as they did not allow level-playing field to small players like us," he added.

Enrolling users for mobile banking services can also be a painstaking process, and on top of that, money disbursed under the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) can be as little as US$2.15 (INR 100) per person, per month. NREGA seeks to enhance the livelihood of people in rural India by guaranteeing 100 days of wage-employment a year).

"Such small transactions don't make it viable for banks to go the whole hog with their mobile banking plans," Chandak said.

Moreover, in India, cash is the preferred mode of transaction so villagers often cannot grasp why no money is exchanged in mobile transactions. "To them, it just vanishes in the air," he said.

Concurred Rajan: "A basic challenges for mobile banking is the Indian mindset that prefers cash-based transactions over electronic and mobile banking".

Aditya suggested that the RBI should introduce incentives to build infrastructure for delivering "cash" in rural areas. "Lack of cash-points in villages makes the services inaccessible," he said.

"RBI needs to take steps that allow local businesses to act as cash-points, allow partial storage of money as 'virtual' money to make the transfer at any time, and allow two-way cash transfer," he noted.

Growth beckons mobile banking
Despite the challenges, industry watchers and players see mobile banking as a promising growth area.

"We feel technology is the only way to bank the unbanked," Chandak said.

A recent Celent report estimates that government-to-person (G2P) payments, in the form of salaries or wages, made via mobile phones through business correspondents will reach 63.3 million transactions, valuing close to US$21.6 billion (INR 1 trillion) by 2012.

According to Chandak, in the long run, mobile banking will be big business for NXP. "Today, one of the biggest challenges before mobile banking is enrolment," he said. "Once the national unique identity project is in place, this challenge will be taken care of."

Players such as Ekgaon have ambitious plans. "We are catering to over seven MFIs that serve over 300,000 clients in India, and we plan to reach 5 million clients in next three years," Aditya said. The company is also working on an "Easy Money Transfer System" for rural migrants in cities so users can send money to their families in rural areas.

Banks too are increasingly showing more interest in mobile banking, Rajan said, noting that Indian banks are learning from markets such as Kenya, Philippines and other Asian markets.

Swati Prasad is a freelance IT writer based in India.

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