Banks primarily perform two key functions related to mobile payments: firstly, they do the KYC (Know Your Customer) verification, so that a money trail can be identified, if needed. Secondly, they hold the customers money.
R. Chandrashekhar, Secretary, Department of IT, at the IAMAI symposium on Financial Inclusion through Mobile Phones, was fairly critical of banks, saying that services like payments for the NREGA are extremely difficult through the conventional banking system. “Banks weren’t equipped to handle large amounts of payments in small denominations, and of the 25 million no-frills bank accounts that were opened, only 2.7 million were active. Payment disbursements were also difficult for post-offices to handle, and the opportunity is there in mobile telephony, where implicit transactions are already taking place through prepaid.”
However, Chandrashekar said that a radical change of approach is needed: “The change will not happen unless the linkage with the need to have a formal bank account is dispensed with. Without that, the quantum jump (in financial inclusion) is difficult, if not impossible. There are huge issues with un-trackable transactions, so the interesting possiblity is with the UID Authority. The ID Authority does intend to provide a range of identification related services, a lot of which will be provided on the mobile. It is possible to link the three – Mobile, Payments and the ID, without linking it to a bank account.”
“My view is that unless we move quickly,” he added, “the kind of synergy which we want to establish between mobile, ID and payments, would not go very far. The government is certainly alive to the possiblity, and it need to be addressed in a short period – around 2-3 years.”
The other possibility he mentioned was about using the combination of the mobile and the UID to establish a credit history. “People in rural areas find it difficult to get credit because they have no assets or credit history. Once you have this type of facility, each person can build a credit history. Mobile allows him to create a credit history, even with day to day transactions.” Chandrashekhar mentioned that the government is tabling a discussion paper on 22nd of this month, for considering the possibility of linking the UID, Mobile and Payments.
ED: The Unique ID project will essentially address the KYC issues that banks face. That can either help in opening bank accounts for the unbanked, or allow them access to a payments ecosystem with the involvement of the banks, wherein the money is held in an Escrow account. That refers to a mobile payments ecosystem without the involvement of banks. Later in the conference, it was suggested that it’s unviable for banks to keep alive and service accounts with a low minimum balance: alluding to the fact that it’s not in their interest to try to bank the unbanked.