Anuj Kumar and Himanshu Gupta
Friday, July 31, 2009
1 Financial Inclusion and the Role of IT
The Scenario – Did you know:

Financial inclusion has been a focus of attention in recent times. However, the facts above reveal the real and somewhat uncomfortable picture. The increase in the number of branches has not answered the needs of the farmers; and reaching the unbanked population to enable inclusive growth is a serious problem today. Branchless banking could be the big step towards providing easy financial access to the poor people and achieving financial inclusion.

The Initiatives
It has been over two decades since microfinance initiatives were introduced in India, but financial inclusion still remains a distant dream. The Reserve Bank of India (RBI) has shown sincere interest in this matter and the following initiatives have been taken:

The Target
Committee reports submitted to the Indian government call for access to financial services, including credit, to be raised to 50 percent by 2012 and 100 percent by 2015.

Such a mammoth task at hand can only be achieved by an earnest technology incursion which can be achieved through branchless banking.

The Solution
Branchless banking is the concept of providing banking services outside the conventional bank branches by either using information and communication technology services or third party organizations (commonly referred to as ‘Business Correspondents’).

Information technology is becoming a key business enabler and is being positioned as a key differentiator. The banking industry has achieved significant success in leveraging IT through the implementation of core banking solutions and it has helped them in streamlining, standardizing, and expanding their services portfolio. Information, communication, and technology (ICT) solutions will continue to help banks in providing seamless systems to capture customer data, ensure unique identification, and facilitate financial transaction services using remote connectivity through mobile devices. These systems will also ensure uninterrupted service delivery, consumer data protection, customized products, dissemination of information on credit options, and multiple financial products in local languages. It is only with the help of ICT that financial inclusion can be completely achieved from an economy as well as localization perspective at reduced costs and with greater accessibility.

2 Business Models: Comparison and Recommendations
Achieving total financial inclusion is a concern of most countries; yet it is very geographical in nature, as it largely depends on a country’s financial policy and its financial industry regulations. The financial world has witnessed several branchless banking pilot projects, trying to examine the various business models that could be used to ensure the most proper implementation and sustenance of branchless banking systems. The most widely used models have been the business correspondent based model and non-business correspondent based model.

The business correspondent (BC) model allows the bank to use third party financial institutions to handle account opening, transaction management, and other financial services. Regulations from RBI emphasize that transactions should be visible in the bank’s books within 24 hours. Such a compulsion has encouraged the use of smart cards and mobile technology by the BCs (for e.g. pilot projects by Corporation Bank). They use a biometric scanner cum identifier (for e.g. fingerprint or voice recognition), a mobile, and a printer to process the payments. The biometric device is used for the identification and authentication of the beneficiary. Once authenticated, the Radio Frequency Identification Device (RFID) chip embedded in the card gets charged. This chip communicates with the mobile device, and the necessary transaction forms are made available in the mobile.

The BC selects the relevant option and feeds the transaction amount and sends a message to the back-end server. The server authenticates the message, processes the transaction, and sends an update back to the mobile, which in turn writes back to the card. When the card is brought close to the printer, a transaction report is printed. This technology can also be used to conduct other financial activities like fixed deposits, loan disbursement, and insurance.

In the non-business correspondent model the business correspondent is excluded from the system and the customer himself is provided with a mobile device. The regulatory policies of India have recently allowed transactions from mobile devices, but with a very small ticket size. The mobile devices are used to store information of the user, conduct transactions, and maintain transaction records. Various models have been proposed to realize mobile based banking. One model is where the mobile devices are equipped with Near Field Communication (NFC) technology and RFID chip, which are then used for user authentication and some transactions. Another model which proposes to leverage the widespread network of retail agents involves both banks and telecom operators where the retailer has an account in the bank and the transactions are carried out in a manner similar to the way customers recharge their phones.

The Eight Factor Model
The graph below shows a comparison of the BC model and the non-BC model for India and Brazil. The comparison has been done on the basis of eight critical factors for the success of a branchless banking business model. The eight factors identified are:

The weighted mean average model was used to compare the two business models. In India, the mobile based model scores over the BC model in most of the parameters that were identified as critical success factors. Thus, the results clearly show that the non-BC model, i.e. a mobile based branchless banking model, will be more successful than a BC model in India.

In Brazil, the non-BC model has been a huge success in the past, more because of regulatory relaxations at an early stage. However, our study shows that either model can succeed. This is also strengthened by the increasing telecom penetration worldwide, particularly in Brazil.

3 The Three Fold Challenges
The great deal of excitement that started off sometime in early 2006 with RBI permitting the use of ‘Business Correspondents’ by bank branches has not been instrumental in fetching the Indian banking industry a winning story. The Indian Council for Research on International Economic Relations (ICRIER) released a study recently which ranked India 29th in a list of 55 countries based on the level of financial inclusion, which reflects the unimpressive results despite regulatory relaxations.

The three fold challenges for branchless banking in India are:

4 Leveraging Mobile Based Banking: Opportunities and Challenges Ahead
Telecommunications has taken the world to a new phase in managing communication and data irrespective of a person’s location. The global economy is abuzz with the increasing use of handheld and mobile devices for data transfer, information exchange, and service delivery. The banking and payments industry is witnessing a similar excitement with the analysts predicting that mobile banking is going to be the next big revenue generator.

The Indian banking industry looks set to move into a new phase leveraging the mobile industry and its growing outreach, especially among the rural population. It is expected that there would be 200 million rural connections by 2012, up from the current 90 million. Thus, the use of mobile devices for payment and banking services can be the best suited model for branchless banking in India.

5 Conclusion
Developing and under-developed economies all over the globe are looking for new modes and means to contain poverty and include their citizens in the financial system. One of the important factors that would help achieve this vision is to ensure total financial inclusion.

The regulatory bodies of the country have laid down their priorities and financial inclusion is at the top of their agenda. To set the momentum right, there have been regulatory relaxations and initiatives such as mobile payments and third party business correspondents to realize this distant dream. The concept of branchless banking will be instrumental in achieving the mammoth task of gaining 100 percent financial inclusion by 2015 in India. The idea is currently in the inception stage, and will require trials to realize the best frameworks and models suited for this mission. The main focus of the banks in the country has been towards using business correspondents for reaching out to the unbanked population. However, with the increasing penetration of telecommunications in the country and greater reach, mobile based business models (also referred to as M-Banking) will prove to be instrumental in realizing branchless banking and taking it to higher grounds by enabling low cost and real time transactions over secure networks. The mobile market is quite immature in terms of handling such data and providing highly secure transactions, but an increasing focus on reaching remotely situated customers will lead to the emergence of proper solutions to such problems.

Our study, weighing the two prominent business models for branchless banking based on eight critical success factors substantiates this view. A recent survey done in the Asia pacific countries shows that 42 percent of the mobile customers use the basic banking services, such as checking the account balance, on their mobile devices. It is also estimated that India will, in future, turn out to be the leader in mobile banking usage in the Asia Pacific region.

The authors of the article are Anuj Kumar and Himanshu Gupta, Consultants and Specialists – Banking, Financial services, and Insurance Vertical, Wipro Consulting Services.
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