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Encrypted SMS? What RBI Gov Raghuram Rajan Should Really Do About Mobile Payments

In his first speech as the new governor of the Reserve Bank of India, India’s Central Bank, Raghuram Rajan identified mobile payments as “game changer both in the financial sector as well as to mobile companies”, and that the Reserve Bank of India is going to 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.” More importantly, he said that the RBI will work to get banks and mobile companies to co-operate in rolling out mobile payments. Some perspective for Rajan to take into consideration:

On Telecom Operators And Banks Working Together

India has been a graveyard of 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 Reserve Bank of India 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 Airtel Money is the only telecom-related entity to have been allowed a Prepaid payments wallet. Even then, Airtel money users can only withdraw money if their account is linked with a bank. For someone like Beam Money, this didn’t really work out.

So, if the Reserve Bank of India wants to get banks and mobile companies to work together, it perhaps needs to incentivize non-banking entities to take this opportunity seriously. Banks are bureaucratic, like governments, so we can’t expect any innovation from them. Not that telecom operators are much better, and right now, we have a situation where there are exclusive partnerships between some banks and telecom operators, and this ecosystem won’t take off if interconnect agreements (for the lack of a better word) between banks and telcos/prepaid payment companies aren’t in place – it should be easy (and mandatory) for all telcos/prepaid payment companies, and banks to link up together, so consumer choice of service isn’t limited by exclusive arrangements, but by who can provide the consumer better service.

On Encrypted SMS-based Funds Transfer

The RBI governor needs to explain why this is a priority for the central bank. This idea of “encrypted SMS” points towards two areas of focus for the RBI – “encryption” suggests that security is a priority, and “SMS” suggests that accessibility is a priority. It’s a noble approach popular with the RBI, but one that won’t build a market: in trying to make mobile payments more secure and accessible, the RBI has ended up making mobile payments more cumbersome and user-unfriendly. As an aside, how many people in the RBI itself use mobile payments for transactions?

The one-time-password (OTP), as we’ve said before, needs to go, and banks need to figure out a better way of implementing it. Possibly, the only reason transactions are still happening via the mobile web is that most banks tend to defer to the 3D secure payment option.

Even there, banks payment gateways keep failing (a common issue that online commerce also faces), and one more way of increasing transactions would be to audit banks on the number of failed transactions and the reliability of the payment gateways that they deploy. Ideally, the second factor of authentication needs to go, especially since it creates an odd situation wherein it’s easier to pay using international payment gateways than it is using Indian payment gateways, and this is why an Apple Store or a Google Play will see more transactions than any entity using an Indian payment gateway, and that is money going out of India… something which the RBI is not too keen on, at the moment. But that’s another story.

Businesses have lost money on mobile payments because of the OTP: read this and this. We thought the IMPS would be the solution here, but even there you need an OTP to make a mobile money transfer, and even after enabling some 52 million accounts, their best is around 701,000 transactions a month.

To Summarise

To fix mobile payments – first, get rid of the OTP (find a better way). Second, get banks for find a way to keep their payment servers working. Third: make it mandatory for banks to partner with telcos / prepaid payment companies.

Instead of trying to make mobile payments more secure and accessible for users, first focus on making them easier.

P.s.: Did we miss anything? Do leave a comment

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