mPay Insights 2014 Translating to Transactions For Private circulation only amongst delegates of mPay Insights event on September 17th 2014 September 2014 www.deloitte.com/in 2 Preface If technology led financial inclusion is likely to be the answer for cost effective, rapid deployment and quality services for the bottom of the pyramid, mobile enabled technology is expected to act as a disruptive catalyst for this growth which the economy needs and wants to witness. The new bank licenses on universal banks and payments banks will lead to emergence of new business models driving innovation on channels to reach the last mile. Role of mobile based technology solutions being a game- changer cannot be overemphasized. The key question is that how soon mutually beneficial business models can emerge; converging the divergent interests of customers, merchants, telcos, banks and device makers. This report, mPay Insights 2014: “Translating to Transactions” focuses on the potential of the mobile payments solutions in the Indian market. A closer look at how to translate the investments and efforts of each member of the payment ecosystem into transaction volumes warrants a discussion on three broad areas on: Retail mobile payments - Current scenario, challenges and future roadmap, Mobile led financial inclusion: Need for a collaborative model; and Ecosystem support to make mobile payments a success: From policy interventions to technology inventions. These topics are discussed in greater detail, and some new ideas are presented in this report, which I hope you find useful. Monish Shah Senior Director Deloitte Touche Tohmatsu India Pvt. Ltd. mPay Insights 2014 Translating to Transactions 3 Introduction Introduction Along with ensuring sustained growth momentum, it The Indian economy is poised to overcome the sub-5 is equally important to ensure that the growth base be per cent growth of gross domestic product (GDP) broadened to include all constituents. Financial inclusion witnessed over the last two years backed by the strong broadens the resource base of the financial system by growth in services sector. The share of services has developing a culture of savings among large segment of been consistently rising; more so since 2004-05. The rural population and plays its own role in the process of biggest drivers of the service sector expansion since overall economic development. 2004-05 were banking and communications sectors, Among the many socio-economic factors, which are the two growth engines of India. Robust growth in obstructing the inclusive growth, ‘financial exclusion’ these sectors drove the expansion of the services sector is often cited as the key impediment. Indian financial even during the global financial crisis as Indian economy services industry has been trying to address this issue witnessed a sharp economic turnaround. Both these for quite a while now and has developed innovative sectors are expected to play a pivot role in India’s models, over the years, to extend the reach of financial growth as banking provides the required capital and services. communication forms the infrastructure. Figure 1 Growth of various sectors in Indian Economy 14 Agriculture, forestry & Fishing 12 Mining & quarring 10 Manufacturing 8 Electricity, Gas & Water Supply 6 Construction Trade, hotels, transport, 4 storage & communication Financing, insurance, real 2 estate & business Services 0 Community, social & 2007-08 2008-09 2009-102010-11 2011-12 (2R) 2012-13 (1R) 2013-14 (PE) personal services -2 GDP at factor cost -4 Exhibit 1: Source Economic Survey 2014-15 The recent policy push of the government, Pradhan Internet and NFC (Near Field Communication) help Mantri Jan Dhan Yojana provides the required impetus expand the reach of financial services, which is with its ambitious targets to include the hitherto restricted in case of traditional brick and mortar financially excluded populace. The scheme aims to models as their set-up and maintenance in rural offer banking facilities to 75 million households, which hinterlands is expensive and cumbersome. is equal to population of entire United States, by 26 • On-demand availability: Unlike branches, which January 26 2015. operate during fixed hours, new technologies provide Such an unprecedented task, which is unique in the 24X7 availability of services through ATMs, Internet economic history of the world, can only be achieved by and mobile channels. a non-linear adoption of technology by banks, delivery • Lower cost of delivery: Financial transactions agents and the customers themselves. In the recent conducted on channels such as mobile cost much past, ‘Technology’, has been a key enabler for financial lower than those conducted through bank branches. services industry to further the penetration in unbanked • Higher efficiency: Replacing cash with plastic/ and under-banked regions. Key benefits of technology electronic/mobile money increases efficiency of the led models for financial inclusion are mentioned below: banking system by reducing cost and time involved in • Enhanced reach: New technologies including mobile, cash management. 4 Figure 2 Technological developments in financial services in India First ATM NEFT Regulations for Over 600 Lakh Deployed In Payments Mobile Banking MMIDs issued India in 1987 Launched by published by by Banks 2014 RBI in 2005 RBI in 2008 and Rs. 3200 crores of fund transfer 1980 1985 1990 1995 2000 2005 2010 2014 First Credit Internet Business IMPS card launched Banking Correspondents Launched for in India in 1980 Launched in allowed for Banks public by NPCI 1990 by RBI in 2006 in 2010 • Higher security: Cash management often has higher payments. Every new technology has ensured a more security concerns, which are reduced to a great extent convenient, user friendly, low cost access to financial through the use of cashless modes. services, which has resulted in furthering their reach and penetration. While some of these technology initiatives Technology has evolved radically over past years such as ATMs are expected to reach a maturity in the resulting in newer ways to access and deliver financial next 5-6 years, mobile payments are still at a nascent services. In terms of sophistication in the domain, stage and are yet to experience growth and mass market financial services industry has come a long way from acceptance. Figure 2: sources I Central Bank of India card and Point of Sale (PoS) payments, ATMs to mobile Website, https://www. centralbankofindia. Figure 3 Adoption and maturity of financial services technologies co.in/site/MainSite. Introduction Growth Maturity aspx?status=2&menu_id=128 ATMs II HSBC Website, http://www. 1,00,000+ ATMs in Indi# a hsbc.co.in/1/2/miscellaneous/ Brown label and white label about-hsbc/150-years-in-india fuelling next wave of adoption III ICMR India, The Indian Internet Banking Journey, http://www.icmrindia. org/free%20resources/ Internet Banking Branches casestudies/The%20 ~10.1% of the population uses Primary and oldest banking Indian%20Internet%20 internet in Indi*a channel Banking%20Journey- Internet banking primarily ~1,00,000branches # Case%20Study.htm restricted to urban India Incremental innovation with Visa and expansion of low cost ‘ultra IV RBI notifications, February MasterCard1 small branches’ 5th, 2010, http://www.rbi. option org.in/scripts/NotificationUser. Ad Cards Mobile Banking aspx?Mode=0&Id=5489 ~13% of the population has debit cards, ~2% of the Mobile banking and payments population has credit cards ** have just started to pick - up V RBI Circulars, January Innovation through third party PoS deployment,- pre 25th, 2006, http:// paid cards, new card networks such as RuPay www.rbi.org.in/Scripts/ BS_CircularIndexDisplay. aspx?Id=2718 Business Correspondents Innovation through delivery model and VI RBI notifications, October bringing in multiple services 8th, 2008, http://rbi.org. in/scripts/NotificationUser. aspx?Id=4524&Mode=0 * World Bank DataBank , 2011 Time VII NPCI Website, http://www. # RBI Monthly Data Figures, March 2013 ** Dun and Bradstreet Report on Indian Banking Industry, 2011 npci.org.in/aboutimps.aspx Note : Visa and MasterCard are Copyright of respective companies mPay Insights 2014 Translating to Transactions 5 The above technology initiatives have helped achieve mobile device. Payments can be made via a web financial inclusion only to a certain extent, which is to browser, web based application or SMS, and charged advance from a traditional self-help group/Joint liability to a debit card, credit card or virtual prepaid account. group based model to an assisted model driven by low At present, mobile commerce has positioned itself cost branches and business correspondents. However, in niche markets to deliver e-commerce services and despite these efforts for financial inclusion, ~40% of downloadable content such as ringtones and mobile the Indian population does not have access to formal apps. financial services. 2. Mobile Person-to-Person (P2P): Mobile P2P allows users to send and receive money using a mobile ‘Mobile’ as an inclusive channel for banking and device with payments linked either to a bank account, payments a prepaid virtual account including a mobile money Mobile phones have becomes synonymous with India’s account. Payments are typically made using SMS digital growth. The growth is evident with the Indian or via a downloadable Apps. Transaction values for mobile network operators enrolling over 886 million1 Mobile P2P tend to be relatively low ticket and driven wireless