Market Study of Digital Financial Services in India - Summary Report

Market Study of Digital Financial Services in India - Summary Report Study by Amarante Consulting Sponsored by Amdocs June 2014 0

Preface This report provides an objective assessment on the current status of Digital Financial Services (DFS) in India, future insights into the development of the industry and market conclusions based on global best practices. Amarante Consulting, a boutique firm specializing in DFS across emerging markets has produced this report in partnership with Amdocs, a provider of customer care, billing and order management systems for telecommunications carriers and internet services providers. www.amaranteconsulting.com www.amdocs.com 1

Acknowledgements We would like to thank all the people who took out time for us during this study. Their immense support and contributions is much appreciated, without which compiling this report would not have been possible. Our interview list spans across the following sectors* : Government and National Organisations Mobile Network Operators Commercial Banks Microfinance Institutions and Foundations Business Correspondent Entities Mobile Wallet Providers Prepaid Card Providers Other Innovative Technology Start-ups This report is destined for a limited publication and is being emailed directly to the intended readers with whom we interacted during the study. *In the interest of keeping anonymity requested by some interviewees, this report does not make reference to any particular individual or organization encountered during the study. 2

Methodology This report analyzes the Digital Financial Services (DFS) landscape and related opportunities in the Indian sub-continent, compiled through research and analysis involving: - Desktop studies - Phone interviews - On-field visits to key implementation sites and meetings with key stakeholders - In-house knowledge on global DFS best practices, challenges and opportunities - Observation of customer and agent journeys and distribution and overall ecosystem dynamics 3

Report contents Snapshot of the market context for Digital Financial Services in India Snapshot of the regulatory environment Opportunity for Digital Financial Services in the country Business models, uses cases and customer profiles Conclusions Some Digital Financial Services industry best practices & examples 4

Snapshot of the market context for Digital Financial Services in India

Context India s population is over 1.2 billion; 60% of whom are under-banked, whilst 75% have mobile phone access. Around 67% of payments are still made in cash. Card penetration (debit and credit) is less than 10% and sending money through informal and expensive channels e.g. hawalas is commonplace. Given this context, the country presents a huge opportunity to tackle financial inclusion through the adoption of innovative digital financial services. For a while now, the government has initiated a crackdown on cash, encouraging the use of digital payments, and especially mobile, as a cost effective, secure and reliable channel. Since the enactment of mobile banking regulation in 2008, mobile payments have scaled significantly. The acceleration of mobile transactions has been attributed to the introduction of IMPS (Immediate Payments Service) in 2010 which allows for interoperability between banks and Mobile Network Operators. In 2013, RBI registered 20 million users for financial transactions over the mobile and 1,194 million in transaction volumes. By 2020, it is estimated that the mobile will have the potential to serve 250 million people for financial services in India. However, there is still a long way to go and a number of challenges to overcome. These largely pertain to the regulatory environment, service proposition, customer awareness, ecosystem dynamics and agent network management. This report presents a snapshot of the current digital financial industry in the country and also provides examples of global industry best practices that players can benefit from. 6

India: Overview Total population: 1.2 billion 70% rural population 30% urban population 69% under poverty line 60% below 25 years $3,910 GNI/Capita 73% literacy rate (35% women) 40% access to financial services 11.38 commercial bank branches / 11.21 ATMs per 100,000 habitants 12 MNOs (10 private players representing 88% of the sector) 75% mobile penetration 900 million mobile connections 200 banks with 65 banks licenced for mobile banking and 59 banks live 14 MFS Solutions (excluding mobile banking solutions) Source: World CIA Factbook, Global Findex 2012, GSMA, TRAI, CGAP, World Bank 2012, 2013 7

Business is currently driven by complex array of factors/players The payment industry in India is very mature with a multitude of payment instruments available Payment Instruments Service Providers Regulation Cash Bank PSP MNO Pre-paid card Debit card Linked bank account Credit card Mobile account Initial single entity-led models being replaced by joint ventures and collaborations across players ATM E-Payments Platform/Switch Channels/Access Points Online Retail Outlet POS Phones Integration of retail agents with existing financial infrastructures (ATMs /POS) leads to more rapid uptake Regulatory framework drives what is permissible and possible in terms of players and products these players offer in a given market. However, while there are wide options for transactions and fungibility of channels for the urban banked, the unbanked and rural populations often have access to one channel (mostly cash), if at all. 8

Progression of payment initiatives and digital channels in the country Electronic Payment Processing Internet & Mobile Banking Branchless Banking & White Label ATMs Prepaid Payment Instruments & Mobile Money 2004: The Real Time Gross Settlement (RTGS) system which is similar to NEFT but operates in real-time on a transaction to transaction basis and is primarily meant for large value transactions. In 2013, RTGS system and regulations updated 2005: The National Electronic Funds Transfer (NEFT) payment system to facilitate (in a batch-mode with netting) one-to-one funds transfer from an account in any bank branch to an account in any other bank branch in the country. 2012: The National Electronic Clearing Service (NECS) to facilitate centralised processing for repetitive and bulk payment instructions 1996: Internet Banking, offered primarily by banks for customers to access their accounts and make transactions over the net 2008: Mobile Banking RBI published Mobile Banking regulations where banks could use the mobile as a channel for existing customers. 2006: Business Correspondent Banking, a network accredited by banks to engage individuals, and for-profit or non-profit organisations as banking agents for the performance of some of the core banking functions 2010: The Immediate Mobile Payment Service (IMPS), an instant interbank electronic fund transfer service allowing bank transfers to be instructed on mobile phones 2012: White Label ATMs (WL- ATMs) offered by non-bank entities who recognise that investments in ATMs can be leveraged for delivery of a wide variety to customers and expanded the scope of banking to anytime, anywhere banking through interoperable platforms 2009: Prepaid Payments Instruments (PPIs), a payments system for the issuance and operations of prepaid Instruments that can be issued by licensed banks and non-banks 2009: Mobile Money: A system permitting banks and non banks to offer services to their customer over mobile phones Back office electronic systems for transaction processing Expansion of channels, including mobile Non banks entering payments market & New payment channels emerging and maturing 9

The Government is focusing on getting everyone connected through enrollment for a digital ID called Aadhaar Aadhaar is a 12 digit individual identification number issued by the Unique Identification Authority of India to serve as a proof of identity and address, for any one residing in the country. Started in: Purpose: Method: February 2009 under United Identification Authority of India (Government Department) Provide every Indian resident a digital ID (from toddler to senior citizens) Fingerprint and Iris scan identification along with a 12 digit number Goal: All residents of India to be enrolled by 2016 Status so far: Enables: Role of mobile phone: 650 Million people enrolled, many of them low income, street kids etc. 1 Million people being enrolled a day An individual to have an ID proof Signing up for a bank account while enrolling Linking 12 digit Aadhaar number to an existing bank account E-KYC Optional field in Aadhaar enrollment form Used by Aadhaar to communicate with Aadhaar card holder Population reaction: Though take-up is good, petition is being fought in Supreme Court RBI and Money Laundering Act declare Aadhaar sufficient for KYC 10

The Aadhaar: Mixed views by the population Reactions from urban/banked tech savvy world Why should I take up aadhaar? What if I am a victim of identity theft? It may be risky since they can link my bank account to it I don t need another ID, I have many IDs They start it and then stop it * I got it done for my maid. Its useful for her. Reactions from urban and rural un(der)banked world Very useful since I can prove my identity now It is easy to subscribe for a SIM It is easy to open a bank account * Issue regarding payment of LPG (gas) bills for which Aadhaar card was made obligatory but only for a while before it was stopped 11

Aadhaar and Digital Financial Services Implications for Aadhaar for DFS Using a unified national identity system, such as Aadhaar, for KYC, assures regulators and all stakeholders that the service provider is dealing with the legitimate holder of an account. The Aadhaar Enabled Payment System allows Aadhaar card holder to carry out financial transactions on a micro ATM terminal at a Business Correspondent. The Aadhaar number along with an individuals mobile number and an electronic bank account number can revolutionize the way people access and transact with financial products and services Aadhaar has the potential to become the universal linkage for disbursing government payments in a more secure, streamlined, efficient and cost effective way Deployment of Aadhaar-compliant biometric fingerprint devices at hundreds of thousands of agents can be a costly and complex proposition,. This can make it challenging for the system to be adopted quickly and on a large-scale. Status of Aadhaar (as of Q1 2014) As of March 2014, around 650 million people have been enrolled into the Aadhaar program. Currently, the lead time between enrollment and card reception is less than two months. Effort is being made to reduce this time to 30 days. (At worst of times, it has taken a year to get the card to the people.) 12

A fragmented Digital Financial Services market: Examples of some providers Telcos Banks / MFIs Third Parties 13

Snapshot of the regulatory environment

Regulatory environment evolution of events 2006-2010 2006: RBI allows banks to expand beyond bank branches through non profit BCs (but within 15 km radius of branch) 2008: Mobile banking regulation published 2009: - E-money regulation published - Prepaid instruments (PPI) license introduced For profits allowed to be appointed as business correspondents and can apply fees Branch BC radius increased to 30 km Transaction limit raised to Rs. 50K per customer per day for mobile banking transactions 2010: NPCI created mobile micro transaction switch and interbank mobile payment services (IMPS) allowing bank holders to remit to other bank holders via mobile 2011 2012 2013 2014 so far Mobile banking regulations modified to allow banks to facilitate funds transfer both for personal remittances and purchase of goods without any ceiling. Banks free to decide on the limits. Small value transactions fund transfers up to Rs. 5,000/- can be effected through the mobile phone without the need for end-to-encryption. Domestic Money Transfer guidelines issued - Remittance from a bank account and cash out for unbanked beneficiary at BC allowed (up to Rs. 10,000/- per transaction subject to a monthly cap of Rs.25,000) BC status opened up to include for profit MNOs and mobile payment providers as well BC interoperability agreed, in principle (no operational guidelines yet) MNOs can provide prepaid instruments and licensed as PPIs RBI authorizes fully enabled electronic KYC (e-kyc), based on the Unique ID initiative Aadhaar Card as a valid process for KYC verification under the RBI s Prevention of Money Laundering Rules RBI sets up Financial Inclusion Committee Market hopeful for: TRAI set a ceiling price for outgoing USSD-based mobile banking service: INR 1.50 per session RBI allows non bank holders to withdraw funds received from bank account holders, through ATMs Licensing of non financial institutions as commercial banks (lead time of 18 months to prove readiness.) - Restrictions lifted on cash out for PPIs - Authorization of a new type of player: Payment Banks, although recent media coverage has pointed to doubts about its realization, now pending due to the recent change in government Setting the Stage Initial relaxation on limits Focus on reach Facilitation & Fin Inclusion Further opening up of sector 15

Key elements of regulation impacting DFS in India Bank led model MNOs can be BCs and PPIs Banks liable not BCs Payment Banks expected Aadhaar based KYC Switch for m- banking Fixed tariff/ limits Mobile banking regulation formalized in October 2008 and e-money regulations were published in 2009 RBI reserves the right to authorize non financial institutions (MNOs/others) to work with banks to offer services under the Payment and Settlement Act 2007 (any issuer wishing to offer MFS without a bank needs to seek authorization directly from the RBI as stated in the Act) For profits, including MNOs, can be Business Correspondents (BCs) and use their retail points as customer service points (CSPs), managing delivery channels and applying service fees MNOs, like other non financial institutions, can be licensed Prepaid Payment Instruments (PPIs) and offer prepaid or stored wallet accounts but clients are not allowed to perform cash withdrawals and accounts cannot earn interest. Banks remain liable for all transactions done through BCs and CSPs The Banks are responsible for KYC, AML and CFT and must meet any RBI charges for any breach. However, KYC requirements are less sophisticated to open simple accounts and wallets. In 2014, RBI is expected to license a new market player, called payment bank which PPIs can upgrade to. This will lift current restrictions revolving bank liability, settlements, etc. Unique Identification Authority of India issued Aadhaar; a 12 digit individual identification number that will facilitate access to banking and digital financial services through a more efficient KYC process IMPS allows interoperability for mobile banking transactions between banks. Standard fee of Rs 1.50 for outgoing USSD mobile banking transactions Remittance from a bank account for cash out to a non bank account at an ATM/BC outlet up to Rs 10,000 per transaction subject to a monthly cap of Rs 25,000 Maximum limit of Rs.50 K on prepaid wallet accounts 16

Implications of regulations 1/2 Issues Possible Solutions Legislation for BCs to be no more than 30 KMs far from a bank branch hinders the expansion of financial services Remove restriction to expand financial services Into rural areas and increase availability of touch points 3 rd party agents cannot perform complete account opening and are restricted to only certain processes Cumbersome KYC requirements make it difficult to fully offer financial inclusion products/service to the (un)der banked Government regulation of charges and fees e.g. mandating fixed tariffs Pass greater control and decrease dependency on banks whilst improving fraud monitoring Make KYC proportionate to the level of customers and services required. KYC process for SIM card registration should be used to open a mobile money account Allow market based and competitive pricing to incentivise investment in DFS Source: Amarante Research, GSMA Mobile Money, the opportunity for India 2013 17

Implications of regulations 2/2 Issues Possible Solutions Only banks are licensed deposit takers and authorised to pay interest. Non banks are forbidden to take deposits. Change rules on deposit taking to enable mobile money providers to pay interest on stored value accounts for un(der)banked Non FIs can offer prepaid stored value accounts but clients cannot perform cash withdrawals from these accounts Allow cash out from mwallets provided by non FIs to limit dependency on banks and improve usability Regulatory concerns around consumer protection and customers losing money Interbank interoperability exists but not for wallet to wallet which requires a lengthy pre approval procedure to be followed by non Financial Institutions. Cash backing mobile money should always be held in a regulated institution, whatever market evolution takes place IMPs should integrate wallet to wallet interoperability to expand the DFS ecosystem Source: Amarante Research, GSMA Mobile Money, the opportunity for India 2013 18

Opportunity for Digital Financial Services in the country

Overview The Indian payments market is complex and represented by a diverse range of channels, cash, prepaid/debit/credit cards, virtual and mobile accounts; which in turn has led to the formation of partnerships in cross industry sectors. Yet the omni channels, are limited largely to the urban and connected world, with less options available to the under served and unbanked, (especially in rural areas) whom are often restricted to one channel. However, the advent of business correspondent banking, which has resulted in the integration of retail agents within the existing financial services infrastructure (ATMs and POS) aims to deepen financial access. Moreover, joint ventures and collaborations amongst players to launch digital financial services is increasing to further maximize the distribution of financial services to those currently restricted. Initially, the Reserve Bank of India stated that only banks could offer the full breadth of DFS and any player entering the market must tie up with a bank. However, non-banks licensed as Prepaid Payment Instruments (PPIs) can offer money transfer services, but customers are prohibited from cash out. Thus, mobile network operators and third parties have been limited in scope with the services they can provide, which has prompted collaborations with banks, such as; the case with Vodafone and ICICI Bank, Airtel and Axis Bank. However, if new regulation comes into force allowing these non banks to become payment banks, they will have a greater role to play in payments and deposits activities. Recently, the government has agreed to license a couple of non financial institutions as commercial banks provided they go through a period of transformation, over 18 months, to be ready in accordance with RBIs standards. Clearly, the government has played an instrumental role in providing the framework for what is and is not permissible in terms of products and stakeholders. It will be interesting to see how business models and the payments market at large will develop under the new government in power. 20

Opportunity to increase access to financial services India faces a major financial exclusion challenge: 60% of population lacks access to basic financial services 90 per cent of small businesses have no links with formal financial institutions ~ 67% of total payments are still made in cash Less than 10% credit and debit cards penetration ~ 20% of the unbanked avail credit from local lenders ~ 30% of the population have access to savings 100 million Indians have insurance cover India has one fifth of the world s young population, a large majority of whom are tech-savvy Indian domestic remittances market is valued at Rs.630 Bn (10 Bn USD) but only 30% of migrants (300 million migrant population) have bank accounts and many still remit money informally, e.g. hawalas Government benefits payment market is worth $55 billion (mostly transferred in cash to beneficiaries; a costly and inefficient process) Across regions, financial exclusion is more acute in Central, Eastern and North-Eastern regions Source: CGAP, Yale School of Management Mobile Banking in India: Barriers and Adoption Triggers, 2013, The Hindu Vodafone to take mpesa pan india next year, Dec 2013, Reserve Bank of India, Nachiket More Report, 2013, Munich Re Foundation & GIZ, The Landscape of Microinsurance in Asia and Oceania published at the Conference, 2013. 21

Opportunity for financial inclusion and financial deepening Financial inclusion and financial deepening remain poorly developed and uneven on a regional basis There is a wide disparity across the nation. The six largest cities in India have 11% of the country s bank branches. Meanwhile, the 50 poorest districts have 4,068 loan accounts per 100,000 people, compared with the national average of 11,680. These districts have just 3 branches per 100,000 people, which is less than half the all- India average of 7.6. The Southern areas of the country have higher levels of financial inclusion in comparison to the North The South also has better credit penetration, the number of loan accounts per 100,000 of population at 17,142 which is nearly twice that of the all-india average. Source: Crisil, http://www.crisil.com/about-crisil/crisil-inclusix.html#findings, 2013 22

Opportunity with regards to the youth segment India has a fifth of the world s young population Youth are most likely to adopt smartphones and mobile applications driven by a demand to be connected 24/7and the availability of low cost smartphones - 5% of 16-18 years old owned smartphones in 2012 which jumped to 22% in 2013, a four fold increase - 92% of 21-35 year olds in urban areas use smartphones, and 44% use their phones more than laptops or computers to access the internet - Popular uses includes: social networking, mobile TV, banking, sports, news and emails Educational institutes may collaborate with portal and mobility solutions to get more engagement with students in both urban and rural areas. Preference of Indian youth to have advanced phones has resulted in intense competitiveness amongst manufacturers and this is being seen as an important engine of growth for the telecom industry. Source: Smartphone Incidence Study, Nielsen 2013, The Economist 2013, India Onward, July 2013, India On Demand, June 2013, Slums, Youth and the Mobile Internet in Urban India 2012 23

Opportunity with regards to government payments In India, the government benefits transfer market is worth $55 billion (mostly transferred in cash to unbanked beneficiaries, a process that is costly and inefficient) Branchless banking and mobile technology can make G2P payments more accessible while simultaneously decreasing costs and increasing the efficiency of the payment process G2P Payments on the mobile channel will reduce funding leakages, procedural delays and corruption (transaction costs are likely to decrease from 12%-15% to 2%) Aadhaar, the national digital identification system can provide the universal linkage for disbursing government transfers and will ensure they reach the intended beneficiary in a secure manner Customer service points of business correspondents can serve as delivery agents for G2P Payments. They can use mobile phones and biometric devices to capture beneficiaries data and authenticate payments Source: CGAP, Yale School of Management Mobile Banking in India: Barriers and Adoption Triggers, 2013, The Hindu Vodafone to take mpesa pan india next year, Dec 2013 and MicroSave, What Will It Take To Deliver Direct Benefits / Cash Transfer Programmes Successfully, 2013 24

Opportunity with regards to credit, savings & insurance Close to 90% of small businesses have no links with formal financial institutions and 60 % of the rural and urban population do not have a bank account Bank credit to GDP ratio in the country stands at 70%, but in large states such as; Bihar, it can be as low as 16%. A large part of the economy is dependent on the informal sector for meeting its credit needs. Difficulties in accessing finance, and gaining a positive return on financial savings coupled with illadapted financial products has led the un(der)banked to a move away from savings in formal financial institutions to more unregulated and informal means. Savings as a proportion to GDP has fallen from 36.8% in 2007-08 to 30.8% in 2011-12. The financial savings of households have declined from 11.6% of GDP to 8%. Micro-insurance can serve as a powerful safety net for the poor to protect against illness, death, disability, property damage, catastrophes, weather and natural disasters. However, only 10% of the population have some form of insurance in the country RBI proposes that by 2016, each district would have a total deposits and investments to GDP ratio of 15% and a total term life insurance sum assured to GDP ratio of at least 30%. Credit to GDP ratio is aimed at about 10%. Mobile and branchless banking can increase distribution of much needed credit, savings and insurance products to low income households and businesses whilst reducing interest rates and premiums Source: RBI, Nachiket More Committee Report, 2013, Journal of Business Management & Social Sciences, Micro-Insurance in India Protecting the Poor, 2013 25

Transaction Fee (INR) % of Remitted amount Opportunity for domestic remittances Percentage costs per remitted amount per channel 6 5 4 3 2 1 0 80 1.5 1.5 0.5 5.5 0.8 3.8 Bank Post Office Hawala Courier 0.2 3.2 Cash Courier 0.3 Friends Indirect Costs Average cost of a typical domestic remittance of Rs.2,000 through a hawala is 4.6% of the transfer amount, including formal fees and indirect costs, such as paying a bribe or traveling to the nearest payment outlet. Sending and receiving money through India Post is expensive: in addition to paying 5% of the total transfer amount, 1% is spent in bribes, tips, and other indirect costs Banks offer the cheapest method for sending money but are difficult to travel to, require high KYC and take up a lot of time in travel and queuing Mobile and branchless banking channels are significantly less expensive, especially for lower transaction values 60 40 20 0 0 500 1000 1500 2000 Transaction Size (INR) Mobile Banking Branchless Banking Alternative channels to cash are not only more affordable, (especially for low income providers) but are secure, reliable and allow proximity payments, saving customers time and money Note: Remittances through mobile and branchless banking channels has not fully taken off and the market is quite fragmented in terms of service providers compared to other domestic remittance markets. The information provided in the bottom graph may not be wholly accurate as the total market share of remittances per service provider is unavailable. For the purpose of the graph (bottom) tiered pricing has been converted into single pricing. Source: Centre Microfinance (IFMR Research), CGAP Blog, How do migrant workers move money in India, 2011 26

Business models, uses cases and customer profiles

Snapshot of the Digital Money Ecosystem India Regulators Central Bank NPCI Telecom Regulator Service Providers Banks/Financial Institutions Prepaid Payment Instruments (PPIs) Mobile Network Operators Technology ATM/POS/Card Networks mwallet Providers Communication Infrastructure Providers Handset/Equipment Manufacturers Traditional Customer facing channel Branches MNO recharge stores Other Customer facing channels Business Correspondents Final customer facing outlets Customer Service Points 28

Key Stakeholders Banks/MFIs Telecom Operators* Third Parties* Motivation Fulfilling RBI obligations Deposit Mobilization Outreach Required partners Distribution Network Reducing churn Increasing revenues Penetrating a new market Good revenue generating business Offer value proposition to banks who want outreach Build innovative technology to make business model viable Likely partners Technology providers Banks/MFIs** Technology providers Banks/MFIs Technology providers *These entities have a PPI license and usually have access to a distribution network **Largely due to Regulatory compulsion 29

Main Model for Digital Financial Services in the Country Bank Led Model Banks/MFIs Telecom Operators Third Parties Model Use Telco distribution, communication infrastructure and wallet platform to open bank accounts Cash in possible at bank accepted telco CSPs Cash out possible at branch/atm or at bank accepted telco CSPs Equipment Account opening: form filling + KYC doc collection Cash in/cash out: Retailer s mobile phone with preloaded menu/app Model Use PSP distribution and platform to open bank accounts Cash in possible at bank accepted BC CSPs Cash out possible at branch/atm or at bank accepted BC CSPs Equipment Account opening on the computer with front end interface that syncs to the CBS + form filling + KYC doc collection (sometimes e-kyc) Cash in/cash out: Computer/tablete/phone and/or camera/phone camera + biometric device 30

There are currently three main types of account offering in Digital Financial Services in India Bank Account Based Model Requires the client to have a bank account Mobile/Digital channel can be used to access and transact from the bank account Allows inter-bank transfers and cash outs (though some transaction limits may apply) Examples: ICICI imobile or Axis Bank s mobile banking application All banks that are active via IMPS Semi Closed Prepaid Wallet A mobile wallet offering where cash in is allowed but cash out is prohibited Requires clients to have concerned mobile operator s SIM subscription Bank partner not needed Full KYC needed in order to use the account for remittance and payments (max a/c limit INR 50 K) No KYC if wallet used only for bill payments (max a/c limit INR 10 K) Examples: Airtel Money (Express and Power Accounts) Open Loop Prepaid Wallet Provided by third party players (MNOs, Distribution networks, ) in liaison with banks KYC must be performed (max a/c limit INR 50 K) Cash out is allowed at business correspondents of the concerned banks This service may allow for transactions across across banks, merchants and billers and uses of payment processors like Visa and MasterCard. Example: Airtel Money (Super Account) 31

Digital Financial Services Use Cases By 2015, mobile money transfers in India could total $350 billion annually Financial inclusion, G2P payments and remittances are expected to be the biggest drivers for digital money adoption Merchant payments services are expected to grow as middle class and youth become more tech savvy and the availability of adapted handsets increases at a more affordable cost. Current Use Cases 1. Prepaid airtime top up 2. Utility payments (DSTV recharge and utilities) 3. Remittances 4. Merchant Payments Future Potential Use Cases 1. Remittances 2. G2P Payments 3. Merchant and Utility Payments 4. Savings/deposits 5. B2B (MME/SME) payments Key drivers for mobile payments Availability of 3G/4G network Increasing mobile phone penetration Lack of access to formal financial services Demand from MNOs and banks to improve stickiness and revenues Cheaper channel to send and access money Government pushing for Financial Inclusion Source: CGAP, Deloitte M-Banking & M-Payments: The Next Frontier, 2013, GSMA Mobile Economy India 2013, Amarante Consulting 32

Potential Customer Profiles: Primarily un(der)banked people 1/2 Migrant workers Around 500 M workers in India of which 94% in unorganized sector (2012). The min wage as of 2011 = 115 Rs./ day Come in to the cities to find work Feel there are better opportunities in the city Usually engaged on manual/seasonal work Earn weekly, fortnightly, monthly Share lodging with many others Need: A safe place to store/save money Have money accessible Transfer money bank to family in the villages May need loans etc., (but MFI offerings usually target micro entrepreneurs) People in the villages Around 835 M people live in around 640 different villages. (census 2011) All age groups For income/ livelyhood, they depend on: Agriculture, household enterprises, small businesses for revenue Remittances Government payments Source: http://en.wikipedia.org/wiki/labour_in_india; http://en.wikipedia.org/wiki/2011_census_of_india; Amarante interviews Main expenditures: Household maintenance Electricity bill (home and farm) Farm input: fertilizers, grains, etc. Children school fees Need: Access to formal finance Savings, loans, insurance 33

Potential Customer Profiles: Primarily un(der)banked people 2/2 Informal retailers Non earning tech savvy Youth Small scale shops, usually less that 500 sq ft in size. 14M outlet in India of which only 4% are shops >500 sq ft (2010). Usually pay for their stock in cash Do not systematically use bank accounts for their business (although they may have one for savings) Many do not keep any registrars of inventory to stock purchases and sales Usually work on revolving credit offered by the wholesaler Cash at the end of the day it either reinvested in stock or taken home for expenses/savings 18% of the population (222 M) between the ages 15 to 24. (2014 est.) Young, tech savvy segment Have no bills to pay or earning of their own Get pocket money/spending power from parents Interested in hanging out, entertainment, content, apps etc. Potentially would like to: Encourage more foot traffic Have credit facility Have secure ways to conduct payments However: Would not like to pay for having to use or provide a service (e.g. paying for POS transaction etc.) Would be motivated to help their community Main spending on: Eating out P2P among peers Downloading content, music etc. / online merchant payments Cinema tickets, rock shows, other events etc. Source: http://en.wikipedia.org/wiki/labour_in_india, http://en.wikipedia.org/wiki/2011_census_of_india, World CIA Factbook, Amarante Interviews 34

Conclusions

Challenges and opportunities for banks and MFIs Banks Challenges Not motivated to serve low income customers Opening up bank accounts on Core Banking Systems (CBS) for low value balances and transactions makes it expensive Cumbersome sign up process for customers. Customers need to open bank accounts and many times need to go to the bank branch at least once (e.g. to pick up ATM card). Moreover, some customers also do not have the requisite KYC documents Lead time is long between application form filling/account opening at a business correspondent and customers actually being able to transact full fledged on the account (sometimes more than a week) Opportunities e-kyc with Aadhaar will make account opening easier Remote validation of bank account opening based on a scanned electronic copy can also ease the KYC burdens Abridged CBS platforms (or payment bank platforms, if approved by the sponsor bank/rbi) can lower processing costs for healthy transaction volumes and providing real time transaction processing White label business correspondents can be added to banks distribution network and generate more transaction volumes MFIs Challenges Not enough financial muscle to invest in technology on their own Mobile phone (SMS / USSD / Application) based instructions are still a challenge for poorer, uneducated or non tech savvy people Cards infrastructure can get expensive Opportunities A good partner with viable technology and adequate reach can facilitate substantial customer take up 36

Challenges and opportunities for MNOs and third parties MNOs Challenges Current regulations do not allow MNOs to offer cash out through mobile wallets unless the offer is tied to opening a bank account (which needs a bank partner) Telco distributors and retailers do not see value in mobile money services due to low commission (0.5-1% for mobile money transactions vs 1-2.5% for normal top ups) On-time float/support is not provided by distributors in a timely manner and this causes service disruption at the customer service point Customer awareness is low Clients and retailers are more reassured when they see a bank logo as opposed to a MNO logo on its own Third Parties Challenges Set up and management of a sufficiently large distribution network is tough Cash & liquidity management and monitoring & risk management is not an easy task and it is indispensable for this business There is often not enough push and commitment from the partner involved (especially if it s a bank) Opportunities MNOs have the capability to process low value transactions in a more economical and efficient way. Once consumer trust is built, more transaction volumes will lead to more revenues Status of a payment bank will allow more freedom to offer extensive products and services related to payments and deposits, thus, improving the client value proposition White Label Business Correspondents can complement existing networks and be more economically viable to increase out reach and therefore transaction volumes Opportunities Should the RBI approve the Payment Bank License, service providers can offer more adapted services to the clients e.g. deposits and cash out Incentives can be offered to distributors and retailers. For example, processing transactions on behalf of illiterate customers can earn agents commission instead of them having to take time to educate the customer. Agents can also be offered credit at attractive rates depending on the volume of their activity 37

Overall market SWOT analysis Strengths - The government is largely proactive and is driving digital and mobile financial initiatives. - The national payments corporation focuses on mobile and digital financial initiatives and provides a strong switch with nation wide reach - Large populations can be brought on board with the right ecosystem and customer message/education - The mobile channel offers a cost effective, secure and convenient alternative to access financial services - Technology is evolving to meet the needs of low end to high end consumers, and is already accessible through USSD, IVR, SMS, web and apps. Opportunities - The regulatory environment is becoming more enabling, as the government looks to further leverage mobile channels for financial inclusion - The Aadhaar ID should make it easier to sign up to services and become more financially included - India is a huge market with many potential markets segments standing to benefit from digital financial services (migrants, poor, youth, women, recipient of government disbursements, middle income, high earners and micro/small businesses, ) Weaknesses - Despite the market opportunity, the number of actual customers is still low, largely due to regulatory constraints and weak business models. - Banks still need to do more to extend financial services to un(der) banked segments - Service providers need to invest more time and money to make digital financial services a viable business. It cannot just be an add on to an existing business line. - More marketing and awareness campaigns need to be developed to educate consumers - Even though technology is progressive, there are still incompatibility issues between handsets and required applications/software to access services Threats - Risks exist around fraud and there have been some instances of agents in Customer Service Points running away with customers funds - The huge costs associated with spectrum could mean that Telcos are not able to prioritize digital financial services. Moreover, bureaucracy and policy transparency do not provide the best environment in this regard. - Technology doesn t seem to be a differentiator given the wide range of technology solutions available. Customer and agent journeys and ecosystem viability (in terms of commissions, margins etc.) will make the difference 38

Main conclusions Through the research and analysis conducted, the following are the main conclusions and facilitating factors for digital financial services to take off in India: By linking Aadhaar numbers to Know Your Customer (KYC) norms, RBI has already paved the way for universalising bank accounts and removing one of the most important barriers to financial access. Given this, one of the main inhibitors to digital financial services will be lowered if business correspondent outlets are equipped with the right devices and if all clients are is asked to use their Aadhaar number for registration and transactions Relaxing the distance criteria (5KM to 30 KM) between the BC and the sponsor bank s nearest branch, which is a major obstacle of Business Correspondent (BC) distribution in rural areas, can encourage Digital Financial Services (DFS) and be immensely beneficial especially given the lack bank branches in those areas. Introducing Payment Bank license and allowing existing PPIs to upgrade so that these players can introduce expansion in the DFS product and services offering will enhance and facilitate more access to finance. Their services would then include deposits into accounts, transfers and withdrawal from accounts. This will ultimately drive consumer transactions and adoption and cater to a more complete offer rather than just remittance and payments. The National Payment Corporation s IMPS initiative allows transactions to be instructed between bank account numbers and phone numbers but the next step is to permit transactions between MNOs, other providers and also the different Business Correspondent (BC) networks in order to create a fully inclusive ecosystem. Greater investment in developing the telecommunications infrastructure in rural areas is needed and will ensure a good provision of services that is not inhibited by poor network coverage. Good agent management is absolutely critical for the business. Motivated and trained agents will provide a good level of customer service which in turn will create trust and credibility that is crucial for service take up. With a strong BC/agent network in place, offering more services will naturally increase transaction volumes and reduce account dormancy Service providers should consider offering incentives on customer activity and not just on registration: The distribution sales force should have strong incentives to register customers that might actually use the service. With proper incentives, the sales force will take more care with each customer interaction and encourage clients to use the service frequently. 39

Some Digital Financial Services industry best practices & examples

Client acquisition Use appropriate and relevant market study results in order to design a value proposition adapted to the customer demand Familiarize the customer with the product and promote the value proposition to the customer Ensure easy registration process and a good customer experience Activate account immediately after a registration to encourage the use of product / service Ensure that the distribution network is capable of handling operations Ensure effective customer service A good experience, especially during the first use of the service will create positive publicity and will go a long way to motivate agents too! 41

Example of good customer experience In Africa, Orange Telecom enjoys a healthy volume of clients adoption thanks to the good customer experience it provides Orange Money is available in 13 countries in Africa and the Middle East Orange Money has experienced high customer take up; in Senegal there are 10 million customers; in Ivory Coast and Madagascar more than 40% of Orange customers are registered with mobile money accounts Much of Orange s success can be attributed to their strong emphasis on the customer experience From a marketing perspective, Orange Madagascar emphasize three key aspects: the first is understanding the market through a full customer segmentation; the second is preparing new products by testing the value proposition through focus groups and the third is testing the customer experience before launch. Each of these approaches puts the user, and their needs, at the centre of the process. Orange has invested resources in the end user experience and created a strong brand image by partnering with established companies e.g. utility companies. In Ivory Coast, it has built a network of ATMs, which allows customers to access cash at any time without the assistance of an agent. In Madagascar, they focus internally on aligning the marketing and distribution sides of the business to be able to rapidly adapt to customer demand, reacting quickly in order to roll out new products. In terms of customer service, Orange conducts regular training with customer support to ensure active responsiveness and monitors agents closely to ensure customers receive a good experience By meeting the needs of customers and linking the brand with trusted and credible associations, Orange has become recognized as a reliable and secure service. Source: Orange, GSMA 42

The marketing campaign Have a marketing campaign that is: Clear, simple, with one or two specific messages Transparent on pricing per transaction In a language spoken by all, easy to understand and in the local/popular language Educative and formative In proximity to the target client M-pesa Man, the M- pesa mascot in Tanzania 43

with below-the-line (BTL) and above-the-line (ATL) marketing 1. Create the «buzz»: (BTL/proximity marketing) Flyers Posters Road shows Educative sessions Street marketing Signs and boards at agent sites 2. Leverage on ATL marketing (high value, high reach marketing) Radio spots, Television ads Billboards 44

Key considerations when setting up an agent network Look for a mix of Operational Efficiency, Geographical Coverage & Overall Control Have a concrete channel management structure and plan: Ensure flexibility in plan to accommodate for market feedback and evolution Select agents with potential : This must fit with your business objective, be adapted to end customer context and be easily set up with required equipment Determine an appropriate policy on commission: No one will work for free Have a distribution plan that is aligned with customer take up of the business and is split by region/area to be covered. Implement best practices for liquidity management and other relevant support: The service is going to considerably impact the agents cash management and business size Provide comprehensive training: Enable the agents to perform tasks needed Divide roles and responsibilities between three key tasks: Agent recruitment, documentation & process and overall agent management Establish mechanisms for monitoring and evaluation of performance: Always ensure adequate control 45

The role of the agent (at the very least) Verify client identity Ensure KYC process (if any) Safeguard against fraud Handle client s transaction request Offer clients easy access to perform their transaction (cash-in, cash-out etc.) Alert MM provider on all suspicions transactions Ensure all transactions are made according to set norms Be the customer s point of contact Educate the client about the service Provide first level support to the client 46

Example of good agent network management MTN has built a strong agent network and employed good agent network management techniques across many African countries. MTN has deployed a very successful agent management, recruitment and training programme across its operations in Africa through: - Strong recruitment criteria for agents - Managing agent performance closely - Increasing support of agent liquidity Initiatives have accelerated agent activity levels and contributed to agent profitability multiplying four fold Agents have become more motivated and provide better service to customers at the point of sale MTN Côte d Ivoire now has one of the highest agent activity rates in the world, with over 95% of its agents active on a 30-day basis. In Uganda, MTN communicates with its network of 15,000 agents through Agent Forums, which complement the traditional means of communication via bulk SMS and on-site interaction. These forums are held in key communities across the country on a quarterly basis. Over 25 key towns within Uganda are touched and over 8000 agents are accessed. These forums enjoy high level participation by agents because of the easy access to the centres and the content of the conventions. Content discussed is related to Fraud Awareness & Prevention, Liquidity Management, Product Awareness, Customer Service Practices, Agent Experience Sharing and Q & A. Source:GMSA, MTN, MobileMoneyAfrica 47

Example of successful product and service delivery through multiple channels In South Africa, First National Bank is an example of successful product and service delivery through a network of ATMs and retailers First National Bank is one of the largest banks in South Africa, and one of the country s mobile money pioneers, 51% of mobile money users are FNB ewallet customers. In October 2009, the bank launched its first ewallet mobile money solution and since then has become the largest mobile money service in South Africa with over 2.5 million recipients and has processed transactions for over USD 499 million. FNB has also rolled out the ewallet in Botswana, Lesotho, Namibia, Swaziland and Zambia. Part of the ewallet s success is that it is network agnostic, not relying on any one of the MNOs. Customers can place funds in the wallets through online banking or through the phones, whilst the receiver can use the money in various ways e.g. pay bills, buy airtime or transfer money. As a bank, it has relied on its own network of 4000 ATMs and has also partnered with retailers to complement the network s reach. In rural areas, the bank has deployed 1000 mini ATMs (which are small touch-screen terminals installed in a retailer s shop) allowing anyone to withdraw cash and FNB customers to check their account balances. Also in rural areas, the bank has opened lower-cost branches. Typically staffed by two people, these are located around townships, offer simple products and use automated deposit machines so they can limit the handling of cash. The bank also has a mobile application and site which work on all internet enabled cell phones, including feature phones. Source: FNB, GSMA 48

Example of good partnership dynamics In Bangladesh, bkash is an example of good ecosystem expansion through partnerships Partnerships are important to successfully grow and scale businesses. Mobile money providers can work with stakeholders from a variety of sectors and common tie ups occur with financial institutions, government/ngos, MFIs, merchants and schools/universities. bkash, a joint venture between Brac Bank and Money In Motion in Bangladesh, is one example of a service provider who has continuously focussed on partnership development. IFC and Bill & Melinda Gates Foundation have also provided support to bkash. BRAC Bank, a SME focused private commercial bank in Bangladesh, works closely with its parent organization, BRAC, which has a presence all over Bangladesh. Money in Motion, provides the technology and brings together investors and mobile network, mobile money and mobile commerce operators. IFC and Gates Foundation, along with the capital, bring global governance practices and knowledge on financial inclusion. bkash has created a strong value proposition which has enabled it to successfully expand and diversify across industry sectors bkash is now widely accepted across Bangladesh and has become the largest payments service provider. Its service is interoperable with each MNO: Robi Axiata, Grameenphone, Banglalink and Airtel which has allowed Bkash to serve almost 100% of the population and even those using the most basic handsets. Initially focussing on serving the poor, bkash now services a vast majority of the population. Source: bkash, Amarante Consulting, efse 49

Example of a successful interoperable ecosystem In Indonesia, three of the largest MNOs, Telkomsel, Indosat and XL have allowed customers to send and receive money across each other's networks to any account or mobile wallet Each of the three operators had established payments systems on their own, but in a geographically dispersed country like Indonesia, isolated payments schemes are unlikely to have enough reach to drive significant usage. With a new enabling regulator, connecting their platforms would allow them to capitalise on the potential of the payments market, strengthen the value proposition for their customers, and become more competitive overall in the payments market The operators were able to develop and launch a solution quickly by setting up teams with members from each department covering legal, customer care and IT that would be especially be affected by mobile money interoperability. Challenges that needed to be overcome included: How to route transactions between the different schemes, enabling communication across platforms, managing AML/CFT and handling financial processes related to reconciliation and settlement. Cash-in and cash-out are handled by agents of the mobile money schemes of which the customer is a member or to which the customer belongs Sending money across networks costs customers IDR 2,000 (less than USD 0.20). This fee is shared between the originating and receiving schemes. Transferring money within a particular mobile money scheme is, however, free of charge. Source: AFI, GSMA 50

Constant feedback collection and service improvement is key Client feedback Agent Feedback Market evolution Improvement and expansion of the service 51

Other useful reading material CGAP, Yale School of Management Mobile Banking in India: Barriers and Adoption Triggers, 2013 GSMA, State of the Industry: Mobile Money, 2013 Nielsen, Smartphone Incidence Study, 2013 The Economist, India Onward, 2013; India On Demand 2013: Slums, Youth and the Mobile Internet in Urban India, 2012 Centre Microfinance (IFMR Research), CGAP Blog, How do migrant workers move money in India, 2011 GSMA, Mobile Economy India 2013 Deloitte, M-Banking & M-Payments: The Next Frontier, 2013 Reserve Bank of India, Nachiket More: Financial Inclusion Committee Report, 2013 GSMA, Mobile Money, the opportunity for India 2013 IFC, Market Scoping India, 2013 MicroSave, What Will It Take To Deliver Direct Benefits / Cash Transfer Programmes Successfully, 2013 CRISIL, http://www.crisil.com/about-crisil/crisil-inclusix.html#findings 52

Thank you Digital Financial Services Design and Implementation 53