Today, RBI took another incremental step in defining Mobile Payments in India. The bank has published draft guidelines for Mobile Payments – “Mobile Payments in India – Operative Guidelines for Banks†. It’s encouraging that steps are taken in recognizing the industry and putting standards around it. However; it seems like a cautious approach. My observations:
RBI has defined Mobile Payments as
• Exchange of Information on mobile – Balance Enquiry, Statements etc
• Payments done involving mobile
RBI has acknowledged Banks as an important partner (since banks are liable for KYC norms) in offering mobile services and therefore, such services are restricted to KYC/AML compliant instruments – Bank Accounts, Credit/Debit Cards
Implications:This would bring services like eWallet / mWallet / Store value cards under RBI scanner and I see a regulatory risk in such businesses
The bank has recognized the long term goal of mobile payments to enable Peer to Peer (or Peer to Business) money transfer. However; RBI has also limited this scope to bank accounts.
Implications:Going back to my above point; I think businesses like Paypal might not pass regulatory hurdle in India. All operators & service providers have to partner with banks to enable payments involving mobile. I also don’t see any hope for relaxing this in future.
RBI has also raised the entry barriers for new entrants. Banks have to take board approval for offering such services to their customers. It would mean longer sales cycle – good for existing players but bad for new ones.
We have been following payment space from last some time and it looks interesting to us. I have also seen some case studies in geographies similar to India. In my opinion, two top most success factors in this industry would be:
• A strong use case to drive user adoption – In all success case studies, I have seen there is one use case which compels customer to try mobile payments. It can be mobile recharge, peer-to-peer money transfer, ticketing for mass transit system etc etc
• It would need active involvement of banks and mobile operators. While banks provide the backend payment infrastructure (& regulatory issues around payments); operators are best partners to acquire customers.
If you want to read technologies related to Mobile Payments in India, find them here
I would be happy to discuss and understand what new payment start ups are doing in Mobile Payments
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RBI has been widely criticised on the mobile banking regulations. I have tried to disect the regulations as per my knowledge in the area –
“Regulation 1: The RBI guidelines, by implication, say that only banks can offer mobile transaction services. The guidelines say this service can be offered only to customers of banks and/or holders of debit/credit cards. Document-based registration is called for, with the mandatory physical presence of the customer, before mobile services are offered. The banks are responsible for ensuring Know Your Customer norms, and must have core banking systems in place.
Several MFIs today act as a business correspondent (BC) (agents who work on behalf of banks) for commercial banks to reach areas where opening a bank branch is not viable. Usually at the business correspondent’s office, a bank representative is present who oversees the enrolment of clients and ensures that the KYC requirements are complied with. The bank through a BC can enroll clients, the clients can be served by the bank using mobile banking thus fulfilling the objective and the spirit of financial inclusion
Regulation 2: The RBI’s guidelines call for a two-factor authentication for validation of a customer. The industry has reacted to this by interpreting that two-factor authentication can be supported only by GPRS and not through SMS. Media has also criticized RBI by saying that the new mobile banking regulations such as the two factor authentication do not facilitate financial inclusion since basic mobile phones owned by majority of people in rural India do not support GPRS.
Secure transactions can happen even via SMS. SMS’es are of two types – Normal and Encrypted SMS. Normal SMS is what we use for day-to-day communication and is not secure. The SMS is not encrypted when it passes through the pipe it can be accessed. On the other hand, an encrypted SMS is converted into non-readable text using a RSA / AES (security) algorithm. The text that can be encrypted are numbers from 1-9, capital letters from A-Z and small letters from a-z. Special characters cannot be encrypted. When the bank client sends a sms from his phone to the server, a sms along with an encrypted key is sent to the server. If the encryption algorithm is strong enough, it is not possible to read the SMS. The server then decrypts (opens) the encrypted key using a RSA encryption algorithm. This technology is perfectly secure and GPRS is not mandatory. Not many phone users in India subscribe to GPRS and even fewer have phones that can support GPRS. Around 60 percent of the 306 million handsets or mobile connections in India are without GPRS and WAP. Due to lack of GPRS connectivity, Smart Trust applications, secure SMS based applications will be the prominent at least in the initial years of mobile banking.
Regulation 3: The RBI has capped daily mobile transaction limits at Rs 5,000 for transfer of funds and Rs 10,000 for purchase of goods or services.
This regulation, at least in the early stages of mobile banking, does not affect customers who will be vary of performing high value transactions. It will surely not affect rural customers who rarely receive more than Rs.5000 per day through remittances. It is also unlikely that the rural customer will pay more than Rs.10,000 for paying his utility bills or other services.
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Very insightful blog, Mukul. Are there any credible MSPs globally who do not work with telcos or banks, accept cash from public and are still allowed to function by respective central banks?
Mukul – I know it would come in as a major drawback in our system to tie up with an MSP. And we had to revise our entire marketing strategy after that.
Initially we were planning to buy out the complete hardware. Although this would be a big financial burden and constraint to launch in big numbers, we really didn’t want to position ourselves as a manufacturing Company, rather we eyed on the gateway revenue and the charges from the e-service providers, making it absolutely free for our customers.
But now since its a very unlikely option and we are now working on building our own products, but after the launch only, because we dont want to delay the launch much further. Also, we plan to charge a nominal monthly subscription fee from the users or charge per use. These are the things we need to work on now. But nothing has materialized so far.
Our prime goal now is to develop a supreme product and get all the partnerships done on time. And meanwhile figure out the rest; and also hoping to see no more strict guidelines from RBI in this dept in the future.
Shanub – I am not sure if partnering with MSP will create value for you because MSP itself would be on a revenue sharing basis with Bank and Operator. So you would not get any revenue share but a fixed services fee. However; it would be a faster way to validate your concept/technology.
Hi Shanub Sidiq,
I would like to discuss some opportunities with you. Can you mail me your contact details to skmdos@yahoo.com.
Regards,
Kumar