Reserve Bank of India (RBI) is working on a new system that will allow you to send money via SMS, which can then be withdrawn from any ATM, even if the recipient does not have a bank account, RBI governor Raghuram Rajan announced at the Nasscom India Leadership forum.

With this move, the apex bank is trying to cater to 41% of the population who do not have a bank account. According to RBI data (pdf), 40% of the people living in urban areas do no have a bank account, while in rural areas 61% of the population are unbanked.

When Rajan became RBI governor, he had identified mobile payments as “game changer both in the financial sector as well as to mobile companies” in his first speech. He had then set up a technical committee to look into the feasibility of using “encrypted SMS-based funds transfer using an application that can run on any type of handset”.

How will it work?

The method recommended by the technical committee appears to be very different from the one suggested by Rajan. As per the committee, the fund transfer happens directly between bank accounts with operator playing a role only in the initial part of the process.

STK_architecture

What the RBI Governor has suggested now is the creation of an intermediary that will process the payment. So if you want to send the money to someone, you need to send an SMS to the intermediary in a certain syntax. The intermediary will then take that amount from your bank account or mobile wallet and send an SMS to the recipient, who can then use those details and withdraw money from any ATM. It’s not clear if RBI is thinking of using Aadhaar based authentication for such a transaction. UIDAI’s Nandan Nilekani had suggested at the possibility of making P2P payments via SMS using Aadhaar, in October last year.

The governor also said that the RBI will hold talks with key players in the telecom industry in the next few months to get this off the ground. At this point, it is not clear who will be responsible for managing the money, the bank or the carrier. It is also not clear whom the customer should approach in case there is an issue with the transaction. Hopefully, we’ll have more clarity on these details when the concept is closer to launch.

Issues with SMS payments

RBI’s technical committee had pointed out various issues that exist in using SMS for monetary transactions. The biggest issue they highlighted was the lack of encryption in SMS as it exists now. To overcome this hurdle, it recommended encryption of SMS using an application that’s installed in Sim Tool Kit (STK).

Such an application does not exist on SIMs of all operators now, so it had suggested that operators should install  the encryption app in STKs for new SIM cards and push out the same to older SIMs via an over-the-air update. The RBI committee had also said that the Government of India should issue a mandate to all handset manufacturers and resellers in India asking them to pre-load the application on to handsets.

Another issue it pointed out was the absence of a single multi-bank application that can use published public keys of the banks or its agents for encryption. It asked large corporates, third party players and operators, handset manufacturers / resellers to initiate pilot programs to develop this solution.

On Telecom Operators And Banks Working Together

The method also raises questions about existing mobile payment systems that are used in the country. India has been a graveyard for mobile payment companies (MChek, Paymate and Obopay’s B2C initiatives come to mind), and even those who have survived, had to change their business models and become vendors for banks, because when it came to choosing who to allow to do Mobile Money in India, the RBI went with the banks.

Entities that were not banks were only allowed semi-closed wallets (which means consumers can’t withdraw the money deposited in these), licenses take very long to issue, and there are now a handful of services such as Airtel Money, Tata Docomo’s mRupee and Vodafone’s m-Pesa in India now. It’s worth noting that all three telcos tied-up with ICICI bank for the service.