By Pradeep S Mehta
Given the numerous players and
rapid churn in financial inclusion technologies, regulators
face a challenge
The unfolding of the financial
inclusion tale in India provides significant lessons about
the need for regulators and market players to come together.
For decades, regulators have been pushing banks to serve the
rural hinterland through regulatory prescriptions such as
branch licensing, priority-sector lending, and no-frills
accounts. Such efforts met with little success as banks saw
little business case in reaching the last mile.
Two recent initiatives aim to
completely transform this scenario. First, the Pradhan
Mantri Jan Dhan Yojana (PMJDY), which saw the opening of
12.54 crore bank accounts and issued 11.08 crore RuPay debit
cards by January 2015.
Second, technological
innovations, which have enormous potential to cut costs,
making business sense to cater to the rural populace. These
innovations have been led by non-traditional players such as
mobile network operators, pre-paid payment instrument (PPIs)
providers, card payment networks, white-label ATM networks,
etc.
As a result, the market is
flooded with multiple service providers offering several
avenues of storing, accessing and transferring money. Money
can not only be stored in bank accounts, but also in PPIs,
such as mobile accounts, internet wallets, cards etc.
There is no need to walk up to a
branch for accessing account or withdrawing/transferring
money. The same is also possible through cellphones,
business correspondents, points of customer interface, and
ATMs. Add to this, soon-to-be operational payment banks,
central bill payments infrastructure and such other
services, while expected to make life easier for consumers
and promote financial inclusion, but will increase
sophistication in the market.
Strong back-end infrastructure
and inter-linkages between various avenues of storage,
access and transfer of funds provided by different service
providers (interoperability) will be a pre-requisite to
ensure success of these initiatives.
The challenges
Open-loop systems promoting
interoperability result in long-term benefits for the
stakeholders involved (when compared with closed-loop
systems, hindering the same), but achieving interoperability
is easier said than done. It is dependent on several factors
such as: development of the sector, state of the market,
political economic landscape, regulatory maturity,
technological capabilities, innovation, etc.
The Centre for Financial
Inclusion notes that incumbents with established positions
(and closed loop systems) jockey to maintain those
positions, while second movers advocate for increased
competition and demand benefits from the infrastructure and
network effects.
Regulators face the difficult
task of identifying the public interest in such a setting.
The Consultative Group to Assist the Poor (CGAP), a forum of
34 entities working on financial inclusion, wonders how the
competition authority in Kenya would respond if competitors
have really exerted enough efforts to secure their own cash
merchants (agents) or if they simply wish to capitalise on
the established players’ efforts.
Such tough questions might arise
in India as well. For instance, in 2012, the RBI allowed
interoperability at the retail outlets or sub-agents of
business correspondents, subject to certain conditions. A
study by Microsave Research highlighted that such
relaxations have had little real impact owing to technology
limitations, limited freedom and lack of clarity on
accountability issues. Recent news reports suggest that the
RBI is considering further relaxations to the regulations.
Similarly, RBI regulations
provide that only banks can operate open system payment
instruments, while non-banks are allowed to run closed- and
semi-closed system payment instruments. Such provisions
raise competition and regulatory concerns. The scenario is
expected to undergo a further change with arrival of payment
banks (to which PPI issuers can convert to).
This is not to suggest that the
regulations do not consider full interoperability as a
long-term objective. The RBI master circulars on mobile
banking and customer service require service providers to
allow interoperability. The RuPay debit card (issued under
the PMJDY) is also expected to be interoperable.
However, the National Payments
Corporation of India (NPCI), the developer of RuPay and
other similar products, has acknowledgedthat products such
as RuPay, Immediate Payment Service, Aadhaar Payment Bridge,
and Aadhaar Enabled Payment Systems on the existing platform
offer limited interoperability between the payment
instruments such as card, mobile number, and Aadhaar number.
To address this, NPCI is developing a strategy for a unified
payment interface.
A systematic approach
Regulators need to craft rules
that allow technology-enabled business models to emerge,
while balancing access and protection for
base-of-the-pyramid consumers. Also, rules should harness,
and not undermine, the business case for private providers
to make investments of the required scale.
To achieve this, CGAP and Bankable Frontier Associates have
designed a useful systematic approach to look at
interoperability. This comprises (i) clearly distinguishing
intermediate (stimulating competition) and ultimate
objectives (universal financial inclusion) of
interoperability; (ii) adoption of tailored analysis to
different payment use cases, defined by account type (bank
account, wallet), transaction type (withdrawal, real-time
transfer) and channel (ATM, agent), and designing customised
policy and commercial pathway for each usage case; and (iii)
pursuit of a managed approach by establishing a sequence of
milestones, for achieving interoperability.
They further suggest that progress on interoperability
should be reviewed on five levels: (i) theoretical
(capability of systems to connect to each other); ii)
technical (actual points of interconnection or interfaces
that make it possible to interoperate); iii) functional,
(capacity of points of interconnection to meet agreed
technical standards); iv) business-level (existence of
business rules that make interoperability commercially
possible); and, v) effective interoperability (successfully
meeting broader goals)
There is a need to assess if such a systematic approach to
interoperability has been adopted in India. If not,
evidence-based policy and practice interventions need to be
designed. Regulators, market players and other stakeholders
must work in tandem to achieve full interoperability and
effective financial inclusion.
The writer is secretary general
of CUTS International
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