The Indian switch: will it change the financial inclusion scene in India?

This post is written by Santhosh Kumar, SBI Head, South Asia.

With a 1.2 billion strong population, of which about 300 million live less than a dollar a day, India has a long way to go to bring everyone out of poverty. Financial inclusion has been recognized as a priority area in fighting poverty, but the typical large scale schemes envisioned by Indian policy makers haven’t resulted in actual financial inclusion. The key issue with many of those schemes is that they are top down mandated approaches. This combined with the policies of a highly conservative Reserve Bank of India resulted in big schemes such as the much celebrated ‘no frills accounts for all’ failing. However, as of late, there are signs of a change in attitude with the Indian government and regulators. The new Inter-bank Mobile Payment Service (IMPS) is one such step forward – a big step, actually.

After lagging behind its neighbors, India is catching up in regulations and infrastructure to promote branchless banking.

Photo credit: GTI Computers

The National Payments Corporation of India (NPCI) is a company that provides the inter-bank mobile payment service (IMPS). It provides an any time instant money transfer service through mobile phones to any other person registered for the IMPS service in any of the participating banks. The IMPS service is the first of its kind in the world, which allows fund transfer between individual bank accounts through mobile phones. Now, the majority of such inter-bank funds transfer is done through national electronic funds transfer (NEFT). But the main issue with these transfers is the time lag, as this is not a real time service and transactions are settled in batches, meaning money transfer might be affected at the end of the day or even the next day. India does have a Real Time Gross Settlement system that completes transactions in real time, but that is mainly used by banks for bulk interbank transactions, and there is a lower limit of Rs. 200,000 for transactions through RTGS.

The importance of IMPS comes to focus when we look at the staggering number of mobile phones in the country – more than 600 million. This is almost equal to the adult population in the country. Now there are several new mobile money initiatives that will allow people to use mobile phones and agent networks to start bank accounts and operate them. The IMPS infrastructure is a real boost for such initiatives as people will have instant utility by opening an account for mobile banking. This can act as an incentive for more people to sign up for mobile banking initiatives.

It seems like NPCI thinks the same. It wants to encourage banks and customers to use IMPS more. Hence, it has reduced the switching fee for mobile money transfers using the inter-bank mobile payment service (IMPS) to 10 paise ($0.002) from the proposed 25 paise ($0.005) for a successful transaction to the remitting bank. It would be effective from April 1 until the end of the next fiscal year. Clearly, such a low fee will be an incentive for people to switch to mobile based money transfers. Hopefully, this incentive will be strong enough for people to actually go to a bank or mobile money initiative, register themselves, download the mobile money application to their phone, get a Mobile Money Identification number (MMID) and PIN, and start using it. There are some signs of uptake until now as NPCI has issued nearly 6.6 million MMIDs in a span of 6 months. By March next year, NPCI thinks it will have 50 million customers using IMPS.

However, IMPS will be only one element in the Indian mobile banking ecosystem. In order to deliver value to the customers and to bring the vast unbanked into formal banking through this channel, banks and other players in the ecosystem will have to up their efforts. Efforts to develop an agent network that is present in every village, awareness campaigns and appropriate products from banks (apart from money transfer that is promoted now) are key in scaling up this ecosystem. If that happens, mobile money can become a real alternative delivery channel for banking services. Hopefully regulators, governments, private investors and donors will allocate enough resources for such a scale up. Otherwise, IMPS will end up as just another channel for the few currently banked customers in the vast country of 1.2 billion people.


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4 thoughts on “The Indian switch: will it change the financial inclusion scene in India?

  1. Thanks Santhosh for this interesting post !. I believe the (IMPS) looks like a promising initiative towards efficient, quick and cost effective payments and transfers in India. However; I understand that the service is applied through bank accounts, so is that really will help to enhance financial inclusion? as I can see it will create ease of access for current banked people but may not necessarily transform bulk of mobile users into bank account holders hence; will the larger banks and telecom operators be open for flexible terms and conditions at the same time of maintaining end-user’s security ?

    • Ahmed- Yes, you are right that the service is applied through banks. However, in India there are several initiatives such as our partner Sub-K developing agent networks and bringing low income people to formal banking sector using mobile technology platforms. Most of the large banks have now tied up with initiatives such as FINO, Eko, Sub-K, ALW etc that have agent networks in villages/ rural areas and provide services to unbanked. Through such initiatives, people are now beginning to do banking transactions without ever going to a bank. Now with IMPS, such account holders will be able to do payments at a low cost with anyone that have a similar account. Hence, I hope this will be an added attraction for people to open bank accounts through such agent networks and technology platforms and will help such initiatives to scale up. Ofcourse it will also benefit people that currently have bank accounts.

      • Sounds really helpful to attract people to banking, relying on those cost effective and distinguished initiatives. Thanks for these valuable info’s !

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