Progress on mobile banking

The government has reportedly asked the Reserve Bank of India (RBI) to consider delivery of financial services on mobile phones. This is most welcome, but the ideal way to go about it is probably to create joint ventures between banks and telecom service providers ( telcos), give these entities limited banking licences and progressively expand the scope of the licence to include larger areas of banking.

The RBI has reservations about any entity being in a position to create credit without a banking licence. If the stored value of a prepaid card on a phone is allowed to be used for transactions other than communications, the service provider could, fears the RBI, offer transactions worth more than the amount already stored in the card, thus generating credit. Credit creation on a large scale has to be strictly regulated for prudential reasons. Then, there are fears over money laundering.

Since entities with banking licences would come under the banking sector regulator, the RBI can rest easy that those carrying out mobile banking would comply with relevant regulation. The point is, our banks cannot fulfil the goal of financial inclusion using the traditional branch network model, given its cost structure. On the other hand, mobile phone companies have learned the art of making large amounts of money from millions of small transactions by customers with very small amounts to spend. It makes eminent sense to make use of their expertise to advance banking inclusion.

The electronic accounts of the new pension scheme, portable across pension fund managers and independent of the account holder’s geographic or employment-specific location, offer a good model for creating low-cost bank accounts on a common, low-cost infrastructure that can be shared by all banks. When such accounts are combined with the unique identity scheme, the government would have holistic banking inclusion, rather than limited financial transactions on a mobile phone.

The RBI could decide to start with, say, three mobile banking licences, invite applications and choose the ones that best meet the fit and proper criteria.