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Governments will have to close the digital divide to reap the benefits of digital financial services. This means finding the right balance between enabling financial innovation and addressing several risks

MOIN QAZI | New Delhi |

Technology is changing how we live. One of the most visible effects of this is a revolution in how we pay for goods and services and transact with each other financially. From cash and checks it has rapidly transitioned into realtime transfers, contactless payments and app-based banking. In the critical times of Covid 19, mobile money has helped governments in navigating the financial dystopia and addressing the practical challenge of delivering affordable and efficient financial services. Mobile money is a service that allows monetary value to be stored on a mobile phone and sent to other users via text messages. Digitisation has turned a smartphone into a wallet, a cheque-book, a bank branch and an accounting ledger. The ubiquity of the mobile phone has made it possible to deliver financial services to people for whom a bank account is a distant dream. In emerging and developing economies, millions have cellular phones but no bank accounts, credit cards or debit cards. For them, mobile money has begun filling the gaps in financial services. It serves as a lifeline, bringing those who currently lack access to banking into the financial mainstream

Mobile money ~ sometimes considered a form of branchless banking ~ has allowed people who are otherwise excluded from the formal financial system to perform financial transactions in a relatively cheap, secure, and reliable manner. Some of the most profitable gains for mobile banking have come in remote areas. In these communities, basic mobile phones have leapfrogged the substandard physical branch-banking system. We’ve gotten to the point where more people use phones for banking than use banks. For instance, people in far-flung areas of the country and remote villages are now able to make payments, deposit money, transfer funds, receive social benefits and wages and buy rations ~ affordably and reliably.

Further, the penetration of cellular phones puts developing countries in an advantageous position where making a quantum leap in financial inclusion is concerned. For communities with low literacy levels and sporadic incomes, digital money can transform the socio-economic landscape. Mobile banking is enabling women to overcome common barriers. It reduces the need to travel long distances to access banking facilities and ensures a level of privacy and security. We have seen how one connected handset can transform the life of not just its owner, but also the lives of family and the broader community. By enabling people to store and transact money in digital form, millions of underserved people are safer, more productive with their time and their money, and can take advantage of emerging socio-economic opportunities. Mobile money has laid the foundation for a raft of innovation, evolving from a tool for purchasing airtime and sending money between friends and family, to a convenient way to access and pay for essentials, such as water bills or school fees. Cellular phone banking eliminates the problem of geographical inaccessibility and high set-up cost of bank branches. The traditional mobile money value chain has five parts, which can be covered by banks, mobile network operators (MNOs) or third parties, such as FinTechs:

Deposit holder: Mobile money customers exchange cash for mobile money credits. The deposit holder holds this cash, in a tightly regulated part of the value chain usually handled by banks. Electronic money issuer: The electronic money issuer issues customers mobile money credits in exchange for cash. These businesses must guarantee they will always have enough liquid funds to pay out customers that might decide to redeem their credits for cash. Agent network operator: This player recruits, trains and manages agents who handle customer transactions. These agents are often small retailers or postal outlets best positioned to target unbanked and often rural-based customers.

Payment service provider:

These companies provide the technical and commercial infrastructure used by merchants and agents to process transactions. They are only required in a B2C context, not in the typical P2P transactions. Telecom network provider: The telecom network provides the communications infrastructure which hosts the technical and commercial infrastructure. These functions can be covered by different providers in various mobile money operating models. Variations may include:

Bank-led: The bank covers all functions except for those of the telecom channel. It is similar to mobile banking, with mobile money markets relying on existing bank branches and affiliated agents. Mobile network operatorled: MNOs rely on local agents, such as stores or post offices, to spread their services to operate this model. The success of MNOled schemes lies in having a large network of agents in rural areas, often home to large unbanked populations.

FinTech-led: In this model, the Mobile Money Operator (MMO) does not hold deposits or provide the telecom channel ~ but it does everything else. These MMOs act as a platform where partners offer various valueadded services, such as financial products, airtime, data or voice packages. Digital mobile finance offers at least three major advantages over traditional financial models. First, digital transactions are essentially free. In-person services and cash transactions account for most routine banking expenses but mobile finance clients keep their money in digital form. They can send and receive money without incurring transaction costs from their banks or mobile service providers.

Second, mobile communication generates copious amounts of data which banks and other providers can use for developing more profitable services. It even acts as a substitute for the traditional credit scores.

Third, mobile platforms link banks to their clients in real time. This means that banks can instantly relay account information or send reminders and clients can quickly sign up for services on their own.

Further, digital footprints and transaction data can be of great help to assess individual creditworthiness. Mobile network operators are teaming up with banks, financial-tech companies and data analytics specialists to use customer information to gauge their credit risk and offer microfinance products to some who would otherwise lack any proof of their capacity to repay a loan. If the customer is a regular user of a digital money transfer service, the operator may also be able to assess how much disposable income he has. In fact, mobile operators’ data can be good enough to lower the lender’s risk significantly, enabling interest rates to fall and making microfinance a more attractive proposition for small businesses and individuals.

But such success stories do not happen in a vacuum. To begin with, everyone needs a cellular phone with an affordable data plan. It is entrusted upon governments and non-governmental organisations to extend mobile networks to remote areas. Governments must also ensure that networks between banks and telecommunications companies are interoperable otherwise, widespread use of mobile phones for financial services and payments would be impossible.

Mobile money transactions will also have to address the limitations which prevent countrywide adoption of the channel. Exchanging mobile money for cash can still be expensive. And digital and financial illiteracy are known to hinder adoption of digital mobile services. People in rural and remote areas may lack network coverage, easy access to money agents, or simply electricity. A robust identification system, widespread, consistent internet access and trustworthy ways to get money into digital formats could be important for digital payments to thrive.

Women’s access to mobile finance is affected by the fact that fewer females possess mobile phones as compared to men. The promises of mobile finance are certainly very seductive. However, the reality is much harder than we can imagine. It is easier to spread technology than to bring about extensive change in social and individual attitudes. As clients become comfortable with mobile phone usage for financial transactions, the goal is that over time, use will be expanded to include an extensive suite of products including airtime top-up, remittances, financial education and savings among others.

Although mobile telephony might entail initial fixed costs, the variable costs associated with their use are significantly lower, enabling an overall reduction in transaction costs. Mobile banking can be a strong income stream for telecom operators, helping them to counter slowing subscription growth and growing competition in traditional niches.

Since success is in everyone’s best interest, mobile and financial industries and regulators should work collaboratively with each other to unlock the transformative social impact of cell phone money. It is only then that we will be able to deliver life-changing mobile financial services to millions of people across the world, who still have no access to traditional banking.

The pandemic has shown that the trend towards greater digitalisation of financial services in India is here to stay. In recent times, many operators have expanded their mobile money portfolios from basic money transfer and bill payments to value-added features such as insurance and other sophisticated offerings.

As with any revolution, the old order is giving way to a new one, and banks are just one group of players on the mobile money battlefield. Telecommunication companies, internet and technology firms, retailers, and others are also in this fight. Governments will have to close the digital divide to reap the benefits of digital financial services. This means finding the right balance between enabling financial innovation and addressing several risks: Lack of financial and digital literacy, insufficient consumer protection and unequal access to digital infrastructure and data bases.