Author's Picture Issue: India 2008
Article no.: 4
Topic: The Mobile Micro Finance Eco System
Author: Kaustuv Ghosh
Title: Director
Organisation: mCommerce, Sybase 365
PDF size: 202KB

About author

Kaustuv Ghosh is the Director of mCommerce for Sybase 365; he heads global sales for mobile payments and remittances and natural language services. Previously, Mr Ghosh was the general manager at ACL Wireless. Prior to AC Wireless, he was the marketing strategy manager at NDTV, where he headed the business development, product development, alliances and sales for NDTV.com. Mr Ghosh has presented papers in national and international forums including Integrated Marketing Communications – The Wireless Challenge to News Broadcasters in India and Response TV: Adding Value to the News Experience in India. Kaustuv Ghosh received his Postgraduate Diploma in Communications from the Mudra Institute of Communications in Ahmedabad.

Article abstract

Many of India’s people have no access to banks or credit; they depend upon traditional moneylenders and pawnshops. India has many rural banks, yet they have not closed the gap. The Grameen Bank, which pioneered microcredit, has been so successful helping people it earned its creator a Nobel Prize. A mobile phone based ‘virtual wallet’ that villagers can use to deposit or borrow small amounts can bring Grameen-type banking services to India’s hundreds of millions of ‘un-banked’ citizens.

Full Article

Beneath the glitter of new technologies and global business, it is sobering to realize that 1.7 billion adults and perhaps more rely on earnings of less than US$2 per day – approximately the cost of a reasonable meal at a food centre in Singapore! These people do not have access to the most basic financial services and are dependent upon traditional moneylenders and pawnshops. It may be surprising, but 56 million people in the US do not have a traditional bank account or use traditional financial services. Yet, collectively, they are a US$1 billion market. Mobile commerce is about fundamental transformation and deep penetration into mass markets. As enterprises embrace mobility globally, and banks view ‘mobile cash’ transactions as their new channel for consumer engagement, the real opportunity is far removed from the ‘tap your blackberry and order a pizza’ scenario. Instead, the opportunity is found where there are crumpled khakis, potholed roads, battered suitcases and hungry eyes full of hope. The opportunity exists in regions that have had little impact upon the money economy, in regions where most people have no bank account – perhaps not even a bank to go to, and no credit cards; the time has come for a new kind of revolution. The need for micro-finance and micro-financial services to the ‘unbanked’ has never been greater. Under the double impact of declining economic growth and increasing prices – in significant part, due to loss of agricultural production – there is an urgent need to connect as many of these people as possible to a banking/financing system of sorts. Models such as the Grameen Bank in Bangladesh and experiments carried out elsewhere, including India and Uganda, have done quite well in delivering results on the ground. Yet, in India, there remains a lack of a properly geared micro-financial ecosystem to enable the sort of changes needed. This is somewhat akin to the ATM network that we are all used to; not many years ago, ATMs were scarce and ATMs of different banks and card issuers were not always interoperable. Today, in any Indian town with some basic infrastructure and a well-functioning bank, I can use my bank card to withdraw money in an emergency and keep going. That is great for many traders, salespeople, government employees and tourists who keep moving across the country. However, a large percentage of Indians still do not have a bankcard or a bank account. They rely on loans from moneylenders, family members or friends, or various innovative ways of bartering to keep themselves afloat. There is a wide network of rural banks across India, yet they have not managed to close the gap. Thus, there is a need to create this ecosystem – a virtual ATM network, which allows a person to access or deposit money anytime, anywhere. It is also vital that the money can be withdrawn (and deposited) in minute quantities and the charges levied should be minimal. Like m-pesa in Kenya and the Grameen Bank in Bangladesh, I believe this also deserves a name; let us call it API, Aapka Paisa Idhar – literally, your own money – for now. Only one kind of medium or technology is geared to run this network and make it a reality – the ubiquitous mobile phone and its associated network. Mobile telephony is a runaway success; the mobile network serves a significant part of the population and can function as a virtual money-dispensing network wherever it reaches. Today, not only the towns and cities, but also great, steadily increasing, parts of the rural hinterland have mobile coverage. Where there is no mobile coverage and no mobile affordability, there are a number of ubiquitous figures – the local post delivery person, ITC tobacco delivery person and the local wholesaler’s truck that can act as extensions of the virtual bank. Villagers can take part in this system in two ways. They can deposit some money and create a virtual wallet or they can borrow a small amount, which is then deposited in a virtual wallet. The only distinction between the two wallets is that interest is deducted from the ‘loan wallet’ every month, making it smaller and smaller unless he/she tops it up with his/her earnings. In both cases, the villager earns interest on the deposited cash and hence sees his/her money grow. This wallet can also take the form of a smart card instead of a mobile phone. The wallet’s owner can use it to purchase goods such as fertilizer, seeds, livestock and so on. It will be challenging to integrate the vendors of such goods and services into the system, but by no means impossible in today’s changing India. Increasingly, multinationals and large Indian players are entering the rural retail sector. Their structured environments are ideal for integrating sales into the network, which is likely to be time consuming. However, alliances with leading players in the business of, for example, tractors, pumps, seeds and fertilizers can help build this part of the network. How can a person withdraw cash from this system? The ideal counter for this should be the local post office – perhaps the most trusted and durable government institution at the local level. With all these transactions via mobile phone, the question is – can the rural individual be comfortable with SMS as a medium? The answer is yes and no. A common farmer would need a voice based authentication system, which he is comfortable with. Service agents, as well as educated villagers who are familiar with mobile phone usage, could possibly use natural language enabled multilingual SMS interfaces. The usage of Unstructured Supplementary Service Data (USSD) in some areas is also conceivable. Mobile financing and mobile money are by no means a rural phenomenon. Large numbers of migrant workers, who have no documentation to open a bank account, but do earn regular salaries and utilise prepaid mobile connections, should be able to tap into this API network as well. There are also many people living on the edge of poverty, doing manual labour and odd jobs, yet are rooted to the local urban community for generations. By virtue of having a lot of basic infrastructure in place, the urban market may be easier to build than rural. Indeed, it is likely that even bank account holders might eventually want to become stakeholders in this network, which makes it easy to finance small purchases. Wholesalers in towns and cities that supply large rural markets may find this a very convenient and secure way to do business. These ideas are not unique. What is missing in many of these efforts, though, is the aggregation of networks on the macro, micro and even pico levels for integration into a giant micro-financial ecosystem. One can easily imagine the traditional ATM networks in India talking seamlessly with the API network. This entire ecosystem need not serve India alone; it can be effectively linked to and deployed in a good many countries. This sort of financial system can even work for local community clusters in highly developed economies. By bringing money to the grassroots and ensuring that sustainable living in rural and semi-rural villages, it can reduce the migration to large cities and re-invigorating rural life. Above all, we may see in our lifetime the emergence of people’s capabilities as they are weaned away from a culture of dependency. Common sense tells us that handouts only resolve problems temporarily; deep-rooted change is needed. To be in charge of your own destiny by being in charge of your own money can be very refreshing. In the coming years many more villages will have greater direct access to mobile and fixed line networks. One of the greatest assets India has is the Government’s Indian Railways system, which has points of presence across the country, including remote areas where private mobile operators do not yet reach. Organizations such as RailTel, a government owned telecommunications that makes use of the railway system’s rights of way and existing telecommunications infrastructure. One of the reason’s the government created RailTel was, “to create a nationwide Broadband Telecom and Multimedia Network in all parts of the country”. Should RailTel decide to become fundamental stakeholders in the process of connectivity by allowing services – including micro-finance – to be delivered over their networks, this will considerably reduce the time and cost to build a smoothly flowing nationwide micro-finance system. There will surely be short-term successes, but building the micro-finance system – as with any sort of mCommerce undertaking – will be a long-term challenge incompatible with a near term view of the market. We are talking about creating new networks and building new capacities. Profit-making organizations can collaborate with government and with institutions such as the Asian Development Bank (ADB) to make micro-finance a reality. This technology, this service, has a fundamentally transformative role to play. There will be regulatory issues and consumer adoption challenges, amongst others, but that was true about building cars, trains, boats and planes as well.