Telecom vs. banking-led models of financial inclusion: Lessons for Africa and India.

Universal financial inclusion is a coveted goal for both India and Sub-Saharan Africa. The World Bank’s Global Findex Database says that India is only second to China with an unbanked population of 190 million. Low incomes, costs incurred in account ownership, distance from a bank branch, financial illiteracy and lack of relevant documentation explain low levels of financial inclusion in both India and Africa. Both the regions have developed their niche solutions to overcome these problems. In what follows, we understand how they can learn from each other’s experience of increasing financial inclusion.

In India, the cost of transaction through mobile banking is estimated to be between INR 1 compared to a bank branch transaction cost of INR 70-75. More than 50 percent of unbanked population and 66 percent of inactive account holders in India have a mobile phone. Despite 90 percent of Indians beingdigitally illiterate, the ubiquitous penetration and utilisation of mobile phones makes mobile money lend itself for improving financial inclusion.

In India, Unstructured Supplementary Service Data (USSD)-based cashless transactions over mobile phones have not lived up to their potential due to high transaction costs imposed by telecom operators, the inability to cancel a transaction once it is initiated, and weak encryption protocol. Thus prompting companies to look at the increasing penetration of smartphones and developing applications for them.

In the above case, we talk about a mobile banking model which is based on the ownership of both a bank account and a mobile phone. However, Africa is in the forefront of an alternative mechanism of mobile money, which does not require a bank account. As such, this alternative provides an opportunity of financial inclusion to those excluded from conventional financial services. Examples include Orange Money, Airtel Money and M-Pesa. In what follows, it is this alternative account that we will refer to as a mobile money account.

Today, Sub-Saharan Africa leads the globe in mobile money account ownership, with 21 percent of its population owning such an account. Mobile money accounts have enhanced financial inclusion in fragile and conflict-affected states in Africa. Moreover, these accounts have generated new avenues of financial access for women, the poor and other segments, which have otherwise faced financial exclusion.

Looking at Africa’s success, Indian telecom companies too aspired to replicate the success of mobile money in India. Airtel had entered into a joint venture with the State Bank of India (SBI) for launching Airtel Money in India. However, the Reserve Bank of India (RBI), though always espousing financial inclusion, has preferred a bank-led model. The RBI has apprehensions of non-banking entities making back-door entries into the banking sector. Hence, the RBI was quick to crack down on the Airtel-SBI partnership.

In 2009, the RBI introduced the pre-paid payment instruments (PPI) or more commonly known as wallets, where a non-banking company would be able to store limited amounts of funds (INR 10,000 or ~$142) which could be used at specific merchants for purchases or transfer of money to other wallets and bank accounts for a fee. These wallets had lower know-your-customer (KYC) norms as compared to full-fledged bank accounts. Every major telecom company in India including Airtel and Vodafone acquired a licence from the RBI for the operation of these mobile wallets. The telco model of mobile money (wallets) did not see the kind of success as in Africa due to lack of appropriate use cases for them.

In November 2014, the RBI floated the idea of a new differentiated bank called “Payments Bank,” which subsumed the mechanism of mobile wallets. Payments Banks are only allowed to accept deposits (with a limit of INR 1,00,000 or ~$1420) and not allowed to lend from their own books. They are, however, allowed to offer loan, insurance and other financial products from other entities. Telecom operators were again quick to obtain a licence for a payments bank. The RBI wanted telcos to leverage their vast distribution networks to increase financial inclusion as well as create a better credit score based on transaction data.

Airtel was first off the mark to launch their payments bank operations. Airtel opted for a pure digital play and did not even offer a physical debit card. It even charged a cash withdrawal fee to discourage cash usage. However, it did not go well with customers, as cash continues to reign supreme in India. Even the RBI had noted in a 2015 paper that majority of debit card users only used it to withdraw cash from ATMs, which accounted for 88 percent of all transaction volumes. In a sense, Airtel’s decision to not issue a debit card acted as a barrier for customers to access funds in their own accounts.

In February 2017, the Department of Telecom (DoT) mandated telcos to update their subscribers’ KYC with Aadhaar. When customers went to update their KYC with Aadhaar for their mobile connections, Airtel also opened bank accounts without the customer’s informed consent. Airtel said that it had opened 20 million accounts, but it was unclear how many were opened with the customer’s consent. The scandal was further exacerbated when it was found that government subsidies worth INR 47 crore were diverted to Airtel Payments Bank accounts between June and October 2017. The botch up was caused due to a bug in the Aadhaar Payments Bridge (APB) – a payment system for government subsidies – which would send funds to the latest bank account which was linked to Aadhaar.

Further, the RBI demanded the strengthening of KYC norms for all wallets, bringing them on par with those for bank accounts. The decision hit wallet usage as companies scrambled to update customer information. The introduction and increased adoption of the Unified Payments Interface (UPI), a payments architecture that allows users to make seamless transfer of funds to other users at no cost, without divulging their account information via aliases, invalidated this key use case and further worsened the situation for wallets. Wallets, on the other hand, were not permitted on the UPI, as banks sought a technology edge over them. This led to UPI transactions growing faster than wallet transactions over the years.

A fundamental component of financial inclusion which helps combat poverty is access to credit. India performs dismally on this account. While India is struggling to make mobile money popular for basic transfer of money, Africa is making strides towards using the same for savings and micro-credit facilities. M-Shwari, a Safaricom product, which uses the M-Pesa platform, is a classic example. The credit scoring algorithm used for accessing a loan on M-Shwari utilises Safaricom data parameters including M-Pesa transactions, airtime credit and length of time as a customer. M-Shwari customers are more likely to be non-poor, urban and banked. However, limited mobile phone usage, limited deposit and withdrawal activity and limited data needed for the credit score algorithm has deprived the unbanked and the poor from gaining access to credit. Although, Ntwiga and Weke in their paper titled Credit Scoring for M-Shwari using Hidden Markov Model (HMM) have developed a credit scoring algorithm based on the sparse deposit and withdrawal activity. This paper demonstrates how HMM-based credit scoring system assesses several unbanked and poor M-Shwari customers as being credit worthy. This result is indeed a significant breakthrough for the prospects of financial inclusion via credit access.

The success of mobile money in Africa can be significantly explained by the need for a substitute for banks, given the instability and a consequent distrust in the banking and financial system; whereas in India, excessive regulation by the banking regulator vying for a stable banking system is crushing the prospects of financial inclusion that follow the percolation of mobile money into the economic system. While avenues of mobile money can increase liquidity, competition and innovation, the economy will achieve balance when such avenues coexist with a healthy regulatory framework that ensures both consumer protection and effective monetary policy transmission.

Neither of the geographies have achieved this balance. Perhaps, leveraging the notion of a regulatory sandbox can prove quite useful for India and a sound regulatory sandbox framework is the need of the hour. If the goal is financial inclusion, India’s banking regulators need to be a bit more liberal, just as a large number of African nations need to focus on building a robust banking system. There is a need to understand how to insulate the banks and other financial institutions from the shocks emanating from economic and political instability in the region