Wednesday, December 23, 2015

The Role of Mobile Money in Replacing Cash in India

by IMTFI Researcher Lakshmi Kumar

Mobile money as an intersection of finance and telecommunication faces regulations from both these sectors. Most underdeveloped economies have a poorly regulated financial sector, with the bottom third of the population having hardly any access to banks. Mobile money has provided one solution to this situation.  

In India, there are an estimated 310 million savings accounts with banks. The mobile subscriber base is 680 million, out of which 32% are subscribers based in rural areas (TRAI, 2012-13). The growth rate in mobile subscriptions in rural areas is anticipated to be between 45% and 50% over the next couple of years (TRAI, 2012-13). The link between financial inclusion and information technology has been crucial, and one can observe that mobile services have succeeded in areas where banks have been unable to penetrate. The Telecom Regulation Authority of India reports that 91% of the villages in India are covered by at least one mobile network operator. However, as the network of mobile money operators scale up their services, questions of data protection also arise. What is the state of customer protections mechanisms and how willing are individuals to shift from their comfortable cash transactions to mobile money?  

With the introduction of mobile money in India, we wanted to research the empirical understanding about its role in replacing cash amongst migrant and non-migrant workers in Chennai (Tamil Nadu) and Hyderabad (Andhra Pradesh).  We also wanted to understand the role of middlemen in this broad ecosystem.  Lastly, we want to understand whether the poor trust mobile money. 

Migrant workers constitute about one-third of the population of India, and nearly 70% of them are women (UNESCO, 2012). They are treated as second class citizens, and are often excluded from the general economic, social, cultural, and political mainstream of society. They come from different states seeking employment, and often their first goal is to remit money home. Money transfer takes the form of hawala, the post office, the bank, or the present mobile money transfer. Using a questionnaire, we interviewed migrant workers in the outskirts of Chennai and Hyderabad among whom were both users and non-users of the mobile or non-users to their home. 

We found that on an average income of mobile money users was higher than non-users and additionally transfer of money particularly during times of emergency was higher among mobile money users. There was greater interstate transfer of cash by mobile money users.  Our regression results clearly show that mobile money users send about 14% more than non-mobile users. Also mobile money users send about 34% more emergency money than non-mobile users.  Its usage also increases with age, education and marital status. (For details see, Lakshmi Kumar and Swati Dutta (2015), Role of mobile money in replacing cash: A study among migrant workers in South India, Economic and Political Weekly, Vol l(Issue 28)). Three distinct outcomes became clear about the rationale as to why both the agents and the clients believe in this system.  They are:

1. The client’s potential to save in their home bank accounts through remittances.

2. The automatic client attraction to the product; the pull not the push strategy.

3. The employer who remits on behalf of his client has created a sub-ecosystem of mobile money over unsafe cash.  This is evolving and requires further study.

4. The ‘SMS’ which the clients receive instantly has created trust and safety.

Mobile money is fast catching on in India. Clients, particularly migrants have a need for it, and seem to trust the technology. Our research shows that mobile money has huge potential both from the client perspective as well as from the revenue standpoint. The runaway success of the M-PESA model which is being emulated the world over is a basic remittance model, a model to drive the client to remit money to their family.  In India too, the target by many Mobile Network Operators (MNOs) is to create a single product namely a remittance product and target the same to the migrant worker. 

Interoperability is the mandate of India's central bank, but what seems to happen in reality is very different. We find MNOs tying clients to banks, or, worse still, clients having no access to bank accounts and left to the mercy of their employers for all of their financial needs. Many MNOs have used this basic model as their revenue model. The question that arises is what next?  Figure 1. below is a proposed model for the mobile money ecosystem in India under we create a model path to financial inclusion for migrant workers in India. Ideally we first create a bank account and a mobile account for a client, and then allow the client to transfer money in a manner such that it is bank agnostic. Secondly, the client's account is activated so that he can receive any government transfers to his bank account while he receives a message on his mobile. It is possible for him to transact with his account from any bank/bank branch/MNO.  Thirdly, the MNO goes about acquiring many customers and helps them with the basic remittance product. This follows with the client engaging in other bank products, which are asset-oriented products like savings or insurance products. The MNO then develops mobile wallets for the customer, and simultaneously finds acceptance of the mobile wallet at various retail merchants. The MNO's dual role of connecting people to asset products in banks and to mobile wallets can encourage people to hold less cash, and to instead transfer value to mobile accounts. The whole process obviously requires a change in the mindset of the people. Obviously, when there is a need in the mind of a person there is a chance for change. Just like how the remittance product is a success because of an inherent need of the client, it is necessary for the MNO to look out for the client’s needs and to create opportunities. But sometimes one can preempt a need or create a need--as suggested in the proposed model in figure 1--by being ahead of the learning curve of the client. Thus, this is one model by which a large percentage of Indian workers can be financially included.  

Figure 1: A Model for Mobile Money Ecosystem in India

Given a reality where as per the UNESCO Report-2012, migrant workers make up about 30% of the population in India, there is a huge opportunity waiting to be tapped towards the benefit of this population such that they may be included in the economic, social, and political systems of the country.

Read the full final report here.  

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