We had already interviewed several senior executives about this pre-paid innovation and were well aware of its background. Regulations by the Reserve Bank of India (RBI) mandated not to pay by cash to micro finance clients while settling death claims. Adding to this the Insurance Regulatory and Development Authority of India (IRDAI) mandated direct payment of the claim dues to the client and outstanding to the MFI, the master policy holder. Because many clients did not have bank accounts, payment by cheque or electronic funds transfer was out of the question. Many claim payments were stalled for a long time and many cheques turned stale since they could not be cleared by banks due to KYC mismatches. The option of mobile-based payments was also ruled out since it hasn’t taken off in general among the rural population. During our visits to Varanasi and nearby villages we saw sign boards of Airtel Money and Vodafone M-pesa but our interactions with the locals revealed very limited use of mobile money. Mr. Satyen Dash of Bajaj Allianz Insurance, Mumbai says, “There were difficulties in going for mobile phone-based solution due to issues of connectivity, non-possession of smart phones by poor people, KYC issues and the individual perceptions.” Hence came the idea of pre-paid cards as they comply well with the regulatory requirements of the RBI and IRDAI and pay the claim amount directly to the client. The process is illustrated in the figure below.
An interesting finding was that people often preferred soiled banknotes to new banknotes for fear of counterfeit currency. This emphasis on tangibility and trust based on physical signs of repeated use explains in part why mobile money has not taken off as a mode of payment and why some did not take as well to the pre-paid cards. A female respondent from a village near Varanasi said, “I don’t believe in new notes. The MFI agent once refused to accept them because the metallic part [the machine readable security thread and electrotype water mark] were damaged in the new currency note I had as part of my fortnightly deposit. The new notes have not been used before and I don’t know if they are genuine. I think many of my friends share this feeling too.” Other beneficiaries felt that cards were better substitutes of cash. They felt that they could store their cash in this mode and use it as needed, which made them save a bit more in the process. The spouse of a female client said, “I think I overspend if I have cash. If I have money in my card I will spend when I need and save the rest.” This implies that employing card-based services for even collection and disbursement of loans by MFIs could be useful and could also serve other existing needs of potential clients.
Some design issues in this experiment also merit attention. The seven cases of settlement of claims by cards that we witnessed in our field visits were related to first time users of such cards. None of them previously had bank accounts or ATM cards. Though their perception of the utility of such cards was positive, one could see potential problems of using this new instrument. First, ATMSs dispensing cash belong to different banks and possess distinct display features. Second, the cards used in these machines are either credit or debit cards and the accounts too are of different types. Finally, the currency dispensed by the machine is sometimes limited to relatively high denominations. For instance, some machines do not dispense notes of Rs100/- denomination. In such cases some quick user guides for these pre-paid cards would help the users to effectively use the card. As mentioned earlier, claim amounts were not rounded off and the clients ended up losing a few Rupees in every transaction. If the claim amount was Rs. 5329 the machine would not dispense Rs. 29. But the MFI executives became aware of this lapse and there was an attempt to correct it in the next lot of cards by rounding off the amount to benefit the client.
|The Prayer/Pledge - A Financial Literacy Move by Utkarsh|
Is the pre-paid card based settlement/payment method sustainable in the changing environment of MFIs in India? Are MFIs fading away or are their roles shifting since some of them have been granted Small Finance Bank (SFB) licenses? These are some of the questions that remain. So far only eight MFIs have been issued SFB licenses by the RBI and others may follow in future. A majority of them will however probably continue as MFIs of small & medium sizes with the use of not very high-end technology. Pre-paid cards seem to fit that bill and may be well-suited to providing services like disbursement of loans and collection of repayments in addition to insurance claim payments discussed in this study.
Read more in Acharya and Parida's Final Report.