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A Little World: Facilitating Safe and Efficient M-Banking in Rural India


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The initiative is led by a private sector organization, A Little World (ALW) and its sister entity, a non-profit organization, ZERO Microfinance and Savings Support Foundation (ZMF). ALW and ZMF act as intermediaries between rural communities at one end, and mainstream financial institutions and the government at the other end. ALW offers a secure, low‐cost technology driven delivery platform for financial services through special mobile phones that store and help manage a vast amount of customer bank account data, authenticates account holders through photo and biometric identification and allows access to the bank accounts as Point of Service terminals. Since its pilot project in 2006, ALW and ZMF have rapidly grown and are now present in 22 states, with over four million rural customers, 8,314 points of presence and an average of 25,000 new account openings every day.

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A Little World: Facilitating Safe and Efficient M-Banking in Rural India

  1. 1. South Asia • IndiaA Little World: Facilitating Safe andEfficient M-Banking in Rural IndiaPrepared by • Bimal Arora and Ashley Metz CummingsReviewed by • Usha JumaniSector • Financial ServicesEnterprise Class • MSME
  2. 2. Executive SummaryThis study is about a private initiative to process and streamline rural financial paymenttransactions conducted by public and private institutions in India. The initiative is led by aprivate sector organization, A Little World (ALW) and its sister entity, a non-profitorganization, ZERO Microfinance and Savings Support Foundation (ZMF). ALW and ZMFact as intermediaries between rural communities at one end, and mainstream financialinstitutions and the government at the other end. ALW offers a secure, low-cost technologydriven delivery platform for financial services through special mobile phones that store andhelp manage a vast amount of customer bank account data, authenticates account holdersthrough photo and biometric identification and allows access to the bank accounts as the Pointof Service terminals. The mobile phone is in essence a ‘bank in a box’ run by ZMF for thevillagers in rural India. The services currently offered by ALW/ZMF include: cash deposits,withdrawals and transfers (as in bank saving accounts), payments for government socialsecurity programmes and welfare schemes electronically – what is generally called theElectronic Benefit Transfer (EBT), disbursal and collection of loans and loan installments,collection of cash for third parties, insurance products and premium payments and payment ofutility bills. Thus, ensuring that the financial transactions are safe, reliable, convenient andtransparent and there is no funds leakage in the process.ALW with its technology platform, and a new reform in the banking policy, that allows thenon-profit making entities (Business Correspondents) to function as intermediaries ofmainstream banks in rural areas, fills a much needed gap for the rural households in India byoffering convenient access to affordable financial services. ZMF acts as the BusinessCorrespondents (BC) for leading private and public sector banks in India.Since its pilot project in 2006, with India’s leading bank, the State Bank of India, ALW andZMF have rapidly grown and are now present in 22 states, with over four million ruralcustomers, 8,314 points of presence and an average of 25,000 new account openings everyday. ALW and ZMF’s services in rural India, in tandem with formal financial institutions andgovernment, may mark a new beginning for rural households in the annals of financialinclusion. No surprises on ALW being ranked among the top ten most innovative companiesin India in the annual Most Innovative Companies ranking of the US-based Fast Companynews magazine.Case Study • A Little World: Safe and Efficient M-Banking in Rural India 2
  3. 3. ContextInclusive finance or financial inclusion is a complex challenge for economies andpolicymakers globally. A major barrier to financial inclusion in developing countries, inparticular, has been the non-affordability of financial services institutions and infrastructurefor the poor. To tackle this issue of financial exclusion, the Banking Agent1 Model andBranchless Banking Model began to surface in different countries since 1990s onwards. Suchmodels operated through the use of existing infrastructure such as the retail shops, lottery andpostal outlets, thus reducing the costs involved in the traditional branch banking.2 BankingAgents operate on behalf of the mainstream financial institutions and the Banking AgentModel is now widely used in countries like Brazil, Colombia, Ecuador, India, Kenya,Pakistan, Peru, Philippines, and South Africa.3 However, building a profitable and sustainablebusiness model remains a concern of the banking agents.4 Mainstream financial institutions inIndia have been using the services of banking agents since 2006.5Historically, millions of rural Indian households have been in the clutches of many social illsarising from indebtedness. To some extent, this can be attributed to the rural households’unequal access to formal sector banking and credit facilities. Due to many policies of thegovernment (see Annex, Box 1: Banking Policy and Access to Rural Credit in India), theavailability of rural credit in India has been declining in the last few decades. Since credit actsas a major form of socio-economic security for the rural poor, the decline in credit had adevastating impact (see Annex, Table 1: Growth of Bank Offices, Bank Credits and Depositsin Scheduled Commercial Banks, 1969-2000). Over 40,000 farmers committed suicide in theVidharbha region of Maharashtra and Andhra Pradesh states due to the agrarian crisis, and anestimated total of 168,000 farmers took their lives in India between 1997 and 2007.6 A famousquote on the Indian rural peasant worker by Darling is still relevant to some extent: “TheIndian peasant is born in debt, lives in debt and dies in debt”.7Duvvuri Subbarao, the Governor of Reserve Bank of India, India’s Central Bank and thefinancial and banking regulator, presented the dismal figures on financial exclusion in India inDecember 2009: out of 600,000 habitations – clusters with population of 100 or more – onlyabout 30,000 have a commercial bank branch. Merely 40% of Indian population has a bankaccount, 10% life insurance coverage and 0.06% non-life insurance, accompanied by hugeregional disparities. Analyzing the reasons behind exclusion, Subbarao observed that“Financial exclusion…is a confluence of multiple barriers: lack of access, lack of physicaland social infrastructure, lack of understanding and knowledge, lack of technology, lack ofsupport, lack of confidence, among others. Overcoming these barriers is, in a nutshell, the1 In some countries, like in India these banking agents are called Business Correspondent (BC)2 CGAP, 20093 CGAP, 2009a4 CGAP, 2009b5 Kochhar, 20096 Dhar, 20097 Darling 1928Case Study • A Little World: Safe and Efficient M-Banking in Rural India 3
  4. 4. challenge of financial inclusion”.8 Such gaps have been filled to an extent by NGOs, SelfHelp Groups (SHG) and other Microfinance Institutions (MFI) since the middle of the 1990s.Financial inclusion as a policy has been pursued at different stages since India’s independencein 1947 and, particularly since the 1970s, targeting the unbanked population and especiallythe rural poor9 (see Annex, Table 2: Growth Rates of Population, Banks and Credit for RuralIndia). The Committee on Financial Inclusion, constituted by the Government of India in June2006, recommended to the government to launch a National Mission on Financial Inclusionand a National Rural Financial Inclusion Plan10 with a target to provide access tocomprehensive financial services to at least 50% of the financially excluded households(approximately 55.77 million) by 2012 through regional and semi-urban branches ofCommercial Banks and Regional Rural Banks. The remaining households are to be coveredby 2015.11 The definition of financial inclusion in the Indian context refers to formal accessand enrollment in the organized financial system such as banks, insurance services andprocessing of government benefit payments directly via a bank account12. For example, thiswould mean at the most preliminary level, the owning of bank accounts by poor or what istermed a ‘no-frills’ bank account (see Annex, Table 3: Number of No-Frills Accounts inIndia), and availability of easy access to credit at reasonable rates of interest.13Regulatory support for financial inclusion of the excluded has become one of the reasons forbanks to link to rural communities in India (see Annex, Box 2: Financial Inclusiveness –Challenges and Incentives). Technology platforms that support branchless banking14 bringdown the costs for banks in reaching out to the rural poor. In a debating event15 organized bya media group in Mumbai in November 2009 – involving bankers and banking technology8 Subbarao, 20099 The traditional business models of the formal financial companies are unfeasible and costly inproviding appropriate reach to the unbanked population in remote areas directly for banking, insuranceand other financial services and products, and as a result, a mere 5.2% of Indian villages have a bankbranch (Kochhar, 2009).10 Committee on Financial Inclusion submitted report to the government in January 2008 (Rao, 2008).11 Rao, 200812 According to Frost and Sullivan (2008) “The Financial inclusion (FI) quotient of a country isrecognized as a key determinant to gauge that countrys overall economic and social development.Even in developed financial markets there are concerns about those excluded from the banking system,especially, migrant workers. The barriers to access formal banking system have been identified asrelating to culture, education (financial literacy), gender, proof of identity, remoteness of residence,income and assets, etc.” (Rangarajan, 2008).13 This definition of financial inclusion does not however include economic growth schemes. It denotesopening up a secure transactional space for financial activities between banks and rural customers atthe most level. Financial inclusion in India is defined as the process of ensuring access to financialservices and timely and adequate credit where needed by vulnerable groups such as weaker sectionsand low income groups at an affordable cost, according to C. Rangarajan, Chairman, Committee onFinancial Inclusion in India, 2008.14 Branchless banking is the use of technology, such as mobile phones and bank cards, for the conductof financial transactions electronically and remotely. The use of third party outlets as agents for thefinancial services provider allows customers to use financial services without going to bank branches.The financial services provider is backed by a government-licensed financial institution. Besidestransactional services, branchless banking provides basic cash deposit and withdrawal (Ivatury andMas, 2008).15 th Banking: Reaping the Digital Dividend held on 25 November 2009 in MumbaiCase Study • A Little World: Safe and Efficient M-Banking in Rural India 4
  5. 5. experts – there was a consensus that “Indian banks will have to leapfrog into adopting mobilephones and point of sale (PoS16) terminals as the primary media of banking services if theyare to reap dividends from a large unbanked population through the use of technology...Useof cell phones will help banks penetrate into the hinterland with a negligible investment andbe a win-win situation for both banks and customers”.17 The experts strongly felt that “anaggregator for transactions is needed and point of sale terminals have to get cheaper”.18Mr. Anurag Gupta, a first generation entrepreneur and visionary innovator, had spotted thisway back in the early 2000s and has been developing the concept of domestic paymentsplatform ever since.19 In January 2006, RBI issued a notification allowing banks to use theservices of NGOs, SHGs, Microfinance institutions and other Civil Society Organisations(CSOs), as intermediaries in providing financial and banking services through the use ofBusiness Facilitator (BF) and Business Correspondent (BC) models. The regulatory supportenabled Anurag to eventually set up the organizational entities: ALW (A Little World) as thetechnology partner and ZMF (Zero Mass Foundation) as the Business Correspondent to set upIndia’s first technologically enabled domestic payments platform.A Little World (ALW), an entrepreneurial technology integrator and technology platformprovider company established by Anurag (Founder, and at present, the Chief TechnologyOfficer) is engaged in producing low-cost and commercially viable solutions by leveragingnew generation technologies that work in tandem with existing and emerging public andprivate institutions and infrastructure. Zero Mass Foundation (ZMF), the non-profit entityprovides the physical infrastructure network on the ground to serve rural Indian households.ALW/ZMF: India’s Leading M-BankIn 2000, Anurag founded A Little World Private Limited (ALW) as a technology integratorand technology platform provider in Mumbai, India as a private limited company. Byeducation Anurag is an architect. Prior to setting out as an entrepreneur in 2000, Anuragworked as an independent, self-employed housing and architecture consultant in India from1991 to 2000. With the IT boom in India during the 1990s, many people desired to set uptheir own IT/ITES businesses. Anurag too desired to carve a niche in the IT space. Being self-employed all along, Anurag experienced difficulties in obtaining a credit card for himself asthe banks were not too keen on granting credit card facilities to self-employed individuals inIndia at that time. Anurag’s encounters with banks made him realize how difficult it was forpeople to secure credits in India from the formal financial institutions. In the absence of anycredit card and not being keen on carrying cash all the time, Anurag used the Smart Cardbased electronic purse (e-purse) to manage his expenses during one of his weeklong visits to16 Point of Sale devices (PoS) installed in local retailers such as grocery stores, pharmacies and gasstations act as agents and expand clients’ opportunities to conduct financial transactions.17 Rebello, 200918 Ibid.19 Indeed as Dan Balaban (2004) argued that mobile payments schemes so far failed anywhere theyhave been tried. Balaban discussed Anurag’s mobile payments venture in India in detail.Case Study • A Little World: Safe and Efficient M-Banking in Rural India 5
  6. 6. Belgium in 2000.20 Anurag was impressed with the concept of Smart Card based off-linetransactions and realized that such a service would be especially useful in a developingcountry like India. Anurag also realized that there was need for a domestic payments systemin India, which had to be affordable and equipped to handle small transactions - unlike therental PoS based business models of multinationals payment transactions companies such asVisa and MasterCard.In order to develop these products, Anurag approached and convinced technology companiesin Europe to work with him to implement the financial payments/transactions system inIndia.21 He formed the Zero-Mass Consortium by bringing together a group of technologyvendors from the Smart Card industry and related companies such as France-based GemplusInternational, Giesecke and Devrient and Infineon Technologies of Germany, and ERG Groupof Australia with plans to develop Indias e-payment system and market.22 Throughintegrating different existing technologies, ALW created a new technology platform whichevolved and innovated to suit the rural conditions during and post pilot operations. Anuragchose mobile phones as a core device for transactions for three reasons: the low educationallevel of users, poor power infrastructure in villages, and limitations of other devices for over-air transmission. “A mobile stores, computes and transmits, a PoS or laptop don’t have thesame characteristics”, noted Anurag.A new business opportunity presented itself to ALW when the Reserve Bank of India issuedBusiness Correspondent (BC) guidelines under its financial inclusion initiative in 2006. Thegovernment proposed BCs as a social initiative, allowing them to earn certain percentage ofthe total funds disbursed to cover their operating costs23. Anurag has been advocating for thiswith RBI and government for some years and founded the ZERO MASS Foundation (ZMF),as a Section 2524 company, to operate as Business Correspondent (BC) on the technologyplatform provided by ALW.As a spin-off to the RBI’s Financial Inclusion Project, in November-December of 2006, ALWbegan a pilot project for the State Bank of India (SBI) to provide banking transactions in therural villages of Aizwal (Mizoram), Madek (Andhra Pradesh) and Pithoragarh (Uttarakhand).ALW’s role was to provide the technology platform ZERO, and the ZMF developed and20 Smart Card-based e-purse is a service offered by Banksys in Belgium in which monetary value isstored on the card chip and not in an externally recorded account. Machines accepting the card need nonetwork connectivity and work on off-line mode. Such cards are in service throughout Europe since mid-1990s. Inspired by European models of Smart Cards, Anurag started his entrepreneurial journey withGO-Mumbai, an application for bus and train travel and MCHQ (now mChek), a mobile payment system.21 Though Anurag believed that “MCHQ” could revolutionize the payments system in India and workedfor about five-six years in the venture, by 2006 he had realized the huge potential of payments systemand financial transactions in the rural markets. Anurag sold off MCHQ to focus on ALW’s new initiative:creating India’s first affordable and domestic payment platform for low cash transactions in ruralmarkets.22 Balaban, 200423 Government mandated that technology be used to monitor field activities.24 Under Section 25 of the Indian Companies Act, 1956, a company can be established ‘for promotingcommerce, art, science, religion, charity or any other useful object’, provided the profits, if any, or otherincome is applied for promoting only the objects of the company and no dividend is paid to its members.Case Study • A Little World: Safe and Efficient M-Banking in Rural India 6
  7. 7. executed on-the-ground operations network. The project was to enrol about 5,000 villagers inno-frills bank accounts for Electronic Benefit Transfer (EBT) - the disbursement ofgovernment funds using biometric Smart Cards. However, it soon became apparent that thecosts to SBI for delivering the service were too high to make it viable as it lacked adistribution network to reach rural India effectively. The distribution burden to the villageswas too high for most financial institutions to shoulder alone. By the end of 2009, ZMF had enrolled over four million people for standard bank accounts (see Chart 1: Growth of ALW/ZMF in India below). More importantly, besides facilitating the opening of bank accounts, ALW’s technology platform enables corruption-free distribution of government funds (see Annex, Box 3: NREGA Scheme of Government forNREGA and Pensions Disbursals Rural Areas). Their most notable achievement is an extensive infrastructure of outreach, theimplications of which will be far-reaching in benefits through financial inclusion of themillions of unbanked, and in many cases, vulnerable population, and potentially, profits forthe financial and several other services and products operators and providers. An importantchange after the pilot stage, that characterizes their technology platform, is the elimination ofSmart Cards and instead customers are provided with a nine-digit code to access theiraccounts through the mobile phone at customer service points (CSPs). Additionally biometricidentification through a fingerprint reader at CSPs provides user authentication instead of aSmart Card.Chart 1: Growth of ALW/ZMF in India as on September 2009Source: Gupta (2009a)
  8. 8. Through setting up of a technology-driven ‘Bank-in-a-Box’ or micro-bank - India’s firstdomestic payments platform - ALW, together with ZMF, has developed and is executing anambitious plan of serving low income customer segments in every village to facilitate ruralIndia’s integration into the formal financial sector and the mainstream economy. Both theorganizations are contributing to filling critical gaps in a wider ecosystem catering to andbringing closer the formal financial institutions to the unbanked population with a focus oncontinuous improvements, and hence ALW was ranked among the top ten most innovativecompanies in India in the annual Most Innovative Companies ranking of the US based FastCompany25 news magazine.ALW/ZMF Business ModelBehind a table in a remote Indian village, two women stand together. One is the village bankCustomer Service Point (CSP), a title she holds among others: villager, agricultural worker,mother, and wife. She holds a mobile phone, a small biometric reader and a receipt printer.The other lady, slightly her senior, presses her thumb on the small square, displays her photoID badge and speaks into the phone. Within moments, her identity is verified and moneyexchanges hands. She has just received her wage payment - from a government-run socialsecurity scheme called National Rural Employment Guarantee Scheme26 (NREGS) - alongwith a receipt printed in her local language. In a corner of the room, the village headmanwatches on, silently. He is not involved in this transaction. When asked about the transaction,the woman says simply, “I used to get my payment from the post office at a distance, now ICSP Gives Receipt Printout CSP Does Fingerprint Scanningget it here, in my village”. To her, here, the ZERO Platform, a transactional technologycreated by A Little World (ALW), is a matter of convenience. She has been automaticallyenrolled as bank account holder at the State Bank of India, but she doesn’t yet understandexactly what this means. To others, about 120 of them, receiving payments that day, the story25 Fast Company is a monthly magazine, Web site, and digital distribution platform covering thebusiness of innovation worldwide ( National Rural Employment Guarantee Scheme (NREGS) was launched by the Government of Indiaafter enactment of National Rural Employment Guarantee Act (NREGA) through legislation on August25, 2005.
  9. 9. is similar. For some, it packs more of a punch, “I never knew exactly how much my disabilitybenefits were before this (the technology platform)”. For the villagers, life is almost as normal, with a few more rupees (Rs.) than before - that had previously been siphoned off by corrupt government officials, or a few less - as dead relatives are cutoff from benefits. The technology-enabled verification technique allows for the disbursement of the correct funds to the right person only. In this entire process, small shifts in power dynamics and financialCSP Registry Log literacy are underway, but what the villagers will learn in a year or so, is that this is the foundationfor a major shift in the way they deal with money, with the government and its social securityand other benefits schemes, and with the financial services providers.By combining a new generation Near Field Communications (NFC27) technology enabledmobile phones, contact-less Radio-Frequency Identification (RFID) Smart Cards, integratedbiometrics authentication system and a transaction server, to enable cost effective andconvenient mobile transaction solutions for branchless banking and financial transactions,Anurag, at A Little World Private Limited (ALW), has created the mobile-phone bankbranch. Anurag, named this as ‘ZERO Platform’.28 The ZERO Platform acts as a bank account enrollment, financial transaction system, and information hub for any village in even remotest areas. The technology platform connects a formal financial institution – such as a Bank - to villagers (customers) for standard banking operations, and disbursement of government sponsored schemes and other welfare funds, through bank accounts opened with the help of the ZERO Platform. TheZERO Platform Kit and Smart Card (ID) ZERO Platform is wielded by Customer ServicePoints (CSPs), manned by two village women, appointed by the local village self help groups(SHGs). There is a general call for recruitment by ZMF through the Gram Panchayats (village27 Near Field Communication (NFC) is a new, short-range wireless connectivity technology that evolvedfrom a combination of existing contactless identification and interconnection technologies. Products withbuilt-in NFC dramatically simplify the way consumer devices interact with one another, helping peoplespeed connections, receive and share information and make fast and secure payments. accessed on 02/12/2009.28 ALW partnered with several technology companies - such as NXP Semiconductors (for RFID), Nokia(for NFC mobile handsets), Sagem Securite (for Biometrics) - for different technological product needsand is the first company in India to develop and innovate a technology platform for low-cost branchlessmobile-banking aimed at facilitating financial transactions in remote villages.
  10. 10. councils) or broadcasting in the villages to inform the SHGs and the villagers regarding the CSP vacancies. CSP selection process usually happens at the Development Block level. With constant feedbacks and learning, emerging from the ground, Anurag kept himself engaged with finding technologically innovative solutions to eliminate bottlenecks, including creating cost effective and feasible solution for enrolments using mobile phone handsets and the use of local residents to take care of the enrolment process. Now, the enrolment is done in offline mode and on-demand by the Customer Service Point (CSP) CSP Takes Photo of NREGS Worker manned by local village women. The process of enrolment begins with photos of villagers being taken and voice recorded on the mobile phone which is then sent wirelessly. The Smart Cards are later delivered to the village. The CSPs who carry out enrolments are local residents, typically daughter-in-laws, who are not likely to move away from the village. Two women from each village are shortlisted from a group of five-ten women recommended by the village SHG, who vouch for theirCSP Training Session trustworthiness and responsible behaviour. Involvement of local SHGs not just ensures some sort of institutional guarantee and support, but also joins another link in the ecosystem of financial inclusion. Anil Tunk, the Country Head of Operations in ALW/ZMF, suggested that the selected women take an English and Maths test along with a phone round to test their confidence levels. Selection criteria also take into account their curiosity to learn. The selected women are then trained at the Block level five-day training programme (three days training on enrolments and two days on transactions). Besides, Anil noted that the women of no political affiliation are preferred as they are the most trustworthy and least prone to create conflicts among the villagers. Women are also chosen for the empowerment and shift in power dynamics this provides and, women managing ZMF’s operations in villages, receive a lot of respect from villagers and have become a sort of power centers there.
  11. 11. By May 2008, the ZERO Platform had evolved to its current state (see Operations Model ofALW below) and ZMF had sprung up to meet the Banking Correspondent demands of theState Bank of India and others banks. ZMF has since grown to be the largest BC in India (seeAnnex, Table 4: Scale of Operations of ZMF in India), providing the most reliable and Operations Model of ALWstandardized distribution channel for mainstream financial services, with a reach of over fourmillion villagers, and aiming to acquire five million customers by March 2010. Anil, the Country Operations Head at ZMF, explained that as a BC, the ZMF has an operational structure that starts from the national to the field level, managing an impressive rural outreach system. ZMF is structured hierarchically from country operations to the state’ level with a state head to a field operations manager to a technical manager and a CMS manager (cash management),ALW/ZMF Founder Anurag Gupta and as well as their teams. Each district office also hasTeam at CSP Site a technology, cash and operations personnel as well as inventory management, administration and accounts. Under the districts, there are 250 blocks served by one field team each, and each block has 20 CSPs, covering the average population of 35,000 to 40,000, with 15,000-20,000 being adult population. A Development Block could typically cover hundreds of villages, as many as 200 or more. With over four million rural customers in 22 federal states and presence in 1,000 Gram Panchayats (village
  12. 12. councils), ZMF reports having about 50% market share. Anurag’s focus is set on the deprived, under-privileged rural areas, which represent a larger proportion of financially excluded population.Chart 2: ALW/ZMF Organizational StructureSource: ALW/ZMF Internal Documents ALW/ZMFs Financial Model According to the Indian banking regulator RBI guidelines for BCs, ZMF earns commissions on the funds disbursed, but will also earn commissions from disbursing other core banking services, which are yet to take off in a big way. Commissions are negotiated with banks and vary. So far ZMF has disbursed about Rs. 200 Crores (approx. US$42.8729 million) to villages in NREGS and pension funds and in 2010, with ZMF’s reach extending nationally, Anil, Country Operations Head at ZMF, expects to disburse Rs. 1,400 Crores (approx. US$300.11 million). Anil says that “the ZMF had a mandate from different state governments for disbursement of NREGS funds – by the end of 2009, in Andhra Pradesh Rs. 1,500 Crores (approx. US$321.54 million); in Orissa Rs. 2,000 Crores (approx. US$428.72 million); and in Chattisgarh Rs. 200 Crores in two districts (approx. US$42.87 million). Additionally, ZMF was commissioned to disburse Rs. 600 Crores (approx. US$128.62 million) in Andhra Pradesh and a small amount of Rs. 2 Crores (approx. US$0.43 million) for pension funds in Andhra Pradesh and Himachal Pradesh respectively. On an average, over 25,000 new accounts are opened every day through 8,314 points of presence (as on December 2009) across 22 states for SBI and other PSU banks”. During the pilot phase with SBI in 2006, the bank paid for the technology platform equipments, which currently costs approximately Rs. 20,000 (approx. US$472.73) and is a fixed cost (see Annex, Table 5: Cost Structure of a BC). With further technological 29 The UN January 2010 exchange rate of US$1 = Rs. 46.65 is used.
  13. 13. advancements, Anurag expects this fixed cost of the equipments to come down to about Rs.12,000 (approx. US$257.24) soon. There are other costs borne by the banks, such as trainingthe BC units, administration, cash management, financial literacy and backend technologycosts, which also supports ALW/ZMF in their operations.Sources of revenue (see Annex, Table 6: Revenue Inflows for BCs) are mainly from thedisbursal fee charged by ZMF for government payments disbursal, and secondarily atechnology fee charged by ALW to active account users.30 For NREGS funds disbursement,the commission varies between states and ranges from 1.75% to 2%. Commissions are alsoearned by BCs for disbursements of other government welfare scheme such as old agepensions and scholarships as well as on selling of the core banking services such as deposits,loans, mortgages etc. For savings and deposits, BCs earn 0.5% of the amount and for loans,0.5 to 1.0% of the loan amount from banks.According to Kochhar, a BC Point of Presence currently disburses on an average Rs. 1.2million per annum.31 Currently, ZMF is not earning a profitable margin (see Annex, Table 7:Economic Viability of ZMF). However, with its scaling up plan and proposal to increase itscommission from Electronic Benefit Transfer (EBT) programmes of the government, ZMFwill be able to achieve economic viability. ZMF also has planned massive expansion throughlinkages with hitherto unexplored rural channel partners that have business interest in ruralmarkets (other stakeholders like MFIs for instance).Table 8: Expansion Plans of ALW/ZMF Sr. Categories of Financial Inclusion Penetration Target Market Size (Mn, No in 3 years in Rs.) 1 Social Security/Pension 20% 40 2 National Rural Employment Guarantee (“NREG”) 25% 90 3 Self Help Groups(Government and Bank Linked) 20% 35 4 Self Help Groups( MFI) 10% 25 5 Kisan Credit Cards 10% 55 6 Farmer Co-operatives and Federations 20% 20 7 Domestic Money Transfer/ Foreign Inward 15% 50 Remittances 8 Scholarships to Students 15% 08 9 Third Party Collections ( MFIs, Insurance, FMCG, 15% 90 Other’s)30 Dataset is from Andhra Pradesh state for the period April 1, 2007 to May 30, 2009. In AndhraPradesh, 70% and 30% of accounts were created for disbursals for NREGS funds and pension fundsrespectively. Total number of BC opened accounts in Andhra Pradesh is around 4.4 million. (Kochhar,2009)31 Kochhar 2009Case Study • A Little World: Safe and Efficient M-Banking in Rural India 13
  14. 14. 10 General Purpose No Frills 15% 80 Accounts(Saving’s/Withdrawal’s) 11 General Purpose Loan/Credit Accounts 15% 75Source: Gupta (2009b) Presentation made at Sankalp Awards, April, 2009, Mumbai.ALW has so far successfully secured investment of over US$10 million from private equityinvestors to support expansion plans. Coronet Capital, a wholly owned subsidiary of LegatumCapital of Dubai, led the first round of Series-A investments in March 2007 to pick up 13%equity in ALW with US$2 million investment.32 Enam Financials of India had picked up 10%stake in ALW, with undisclosed amount, in October 2007.33 ALW’s Series-B funding roundin August 2008 was led by Bellwether Microfinance Private Limited and India FinancialInclusion Fund, both managed by Hyderabad based Caspian Advisors. ALW managed to raiseRs. 287.4 million (US$6.16 million) in the Series-B round for building company’s operationaland delivery capacity. Legatum also invested in ALW in the Series-B round and has investedUS$3.67 million in total in ALW.Constraints & Strategies Invest in Combine Engage in CONSTRAINTS Adapt products removing Leverage the resources and policy dialogue and processes strengths of the STRATEGIES market capabilities with with poor constraints others government D BC provides Constantily Local women Leverages Advocates for Market training reevaluates Franchise Model run the “bank” government financial literacy information feedback from the programs and transparency field Engages local Uses Biometric Set up a separate ID cards give a Cooperates with governments in system for proper non-profit entity to sense of identity post offices adoption of Regulatory identification serve as BC and empowerment environment innovative technologies Parters with Advocates use ot BC network ZMF investing in ""Bank-in-a-Box" - technology new technology for provides cost- creating supply minimal Physical providers to disbursement of effective rural channel infrastructure infrastructure innovate platform govt schemes outreach required; mobile Easy-to-use cell Trains locals for Assists in Teams up with Advocates fiscal phone system serve as CSPs financially SHGs to select management; Knowledge and educatiing the and train CSPs minimizes cash skills traditionally un- exchange banked Creates last mile Timely. transparent Government and Encourages Brings bank to bank partnership Access to operations, and documented savings rural areas financial reducing dissenti disbursements of for NREGA, other services ves for banks govt funds funds32 Caspian,, accessed on 17/02/201033 Shivpriya and Iyer, 2007Case Study • A Little World: Safe and Efficient M-Banking in Rural India 14
  15. 15. ALW Strategy MatrixDuring May-August 2007, the State Bank of India issued a Request for Proposal (RFP) for atechnology partner. SBI received 36 proposals, and chose the lowest two bidders: ALW andHewlett Packard (HP). ALW was the smallest company among the bidders and ALW won thebid. The ZERO Platform was tested again.During the first month, crowd management was an issue. “All 600 people from a villagewould line up at once losing a day’s wage to wait in line,” said Anurag, “so we created anoffline model so transactions could be done at any time and uploaded later”. The ZEROPlatform underwent many technical changes during its early life. “Original ZERO Platformconsisted of a Smart Card and Nokia 3522 mobile phone. During the pilot, we had issues withconnectivity and resolved to tweak the platform”, Anurag revealed.Recounting the continuous technology innovation, Anurag stated, “Conventional devices cannever meet an unconventional set of challenges. We consistently searched for bottlenecks andinnovated around them. The new offline transaction service was operating on a 32 GB card,which was too costly, so we replaced it with a 4 GB card. We started working with Nokia6131 handsets and plain cards. Instead of the villager’s data being stored on the SmartCards, which could be lost or damaged and was costly to replace, the cards were only usedfor photo and ID number verification and the mobile phone’s memory held the villager’stransactional data”.Electricity in villages too is an issue. Anurag stated, “With few electrical outlets in villages,we decided to pare down the components in our technology platform. We paired the biometricfingerprint reader with the printer to create one-plug equipment and the mobile phoneincluded a camera, as part of our switch to enrolments through mobile phone”.Elaborating further, Anurag shared, “The next fundamental change came in the enrolmentprocedure. Enrolment was our largest cost, requiring biometric data: fingerprint, voice andphoto. For this, we were using a laptop. A four-five person caravan would drive in a jeepfrom village to village, powering a laptop and digital camera by generator. To enrol avillager, a photo was taken with the camera, loaded on the computer, collected onto a DVD,then sent via courier to the ALW back office to be prepared as Smart Card. Each subscriberreceived the Smart Card subsequently from ZMF during their next visit to the village. Thisprocedure was costly for us and also not ideal for the villagers. Besides, as the ZMFenrolment team had to be technology savvy, usually they were people from cities and notlocals. Our team visited the villages only periodically, and that meant that the villagers had toforego a day’s earnings to line up for enrolment during the team’s visit. Those who could notbe enrolled during that day had to wait until the next enrolment caravan arrived”. Becausethe ZERO Platform is now compact and efficiently distributed due to the elimination of theCase Study • A Little World: Safe and Efficient M-Banking in Rural India 15
  16. 16. laptop-based enrolment system34, ZMF is able to save more money than other BCs might,which in turn are redistributed to the villages in payment to the CSPs. Capital was, and continues to be, a constraint for ALW/ZMF, but has to some extent been overcome by external funding from venture capital firms. During Series-A investment funding round in March 2007, ALW received investments from Legatum Capital and later from Enam Financial in October 2007. Later investments were received in the Series-B funding round in August 2008 when the Hyderabad based Caspian Advisors managed Bellwether Microfinance and India Financial Inclusion Fund invested in ALW. Although, ZMF has investors, the investment cap of 10%, put by RBI, allows it to borrow only on limited terms. Anurag is lobbying the government and RBI to relax the investment cap norms. After the pilot stage with SBI ended, the capex (capital expenditure) was not supported in the scaled operations phase by SBI and other banks. In order to bear the main expenditure, that is the capex and operating expenses, funding from equity investors was secured. This highlights the shift toward use of private sector practices in inclusive business. Breakeven point for a BC unit is projected to happen in its fifth quarter from the commencement of its operations based on revenue inflows mainly from fees charged on government disbursals and to a much lesser extent from technology fees charged to active customers.35 In terms of adapting products, Anurag observed that ALW also cut down costs of technology inputs, such as printers, by manufacturing them in-house. For this initiative, ALW developed supplier partnerships with about 40 technology vendors. In future, to further its market reach in rural areas, this strategy will need to be taken to the next level by collaborating with telecom service providers.36 ALW also innovated by doing away with Smart Cards and instead issues a nine digit serial number unique for individual account holders to enable access to their accounts and conduct transactions, which saves costs further. Another issue involved attempts to politicize the BC process by using it for campaigns by political parties. ALW generally suspends its operations during election period. As technology and field infrastructure provider for financial services, ALW and ZMF are susceptible to similar issues faced by other microfinance organizations. Customer education is critical when it comes to financial products especially in rural areas. ZMF leverages support from banks to address such concerns through financial literacy camps and campaigns.34 Currently, all other financial transaction technology providers in India still use laptops for enrolment,but gradually switching to mobile phones. ALWs competing company FINO too has now realized thevalue of mobile based platform and launched its mobile based financial transaction service calledMITRA in August 2009.35 Kochhar, 200936 Bhandari and Kale, 2008Case Study • A Little World: Safe and Efficient M-Banking in Rural India 16
  17. 17. There is also an issue of lack of trust in formal sector in rural areas as demonstrated by the inactive accounts and the preference to avoid formal deposit facilities. Though almost 16 million new accounts have been created by the latest financial inclusion methods of outreach, only 15% of those accounts are actively used and 41.7% of the rural population prefers to keep savings at home.37 Only through building sustainable relationships beginning from extending favorable and appropriate lines of credit and disbursal of welfare remittances, mainstream financial networks can hope to attract the poor rural workers and will be able to meaningfully bring the rural poor into the formal financial infrastructure creating mutual value.38ALW/ZMF Stakeholders and Value CreationALW and ZMF operate in a cooperative and collaborative environment. ALW provides theZERO Platform, which makes ZMF more efficient and in turn benefits the severalstakeholders with flexibility, speed, convenience and corruption-free and transparent financialtransactions for the rural economy. Here we aim to broadly map the stakeholders and therespective value creation for them through the ALW/ZMF venture, however, this mapping isnot exhaustive. The primary stakeholders in the ALW/ZMF venture are: the financialinstitutions, government of India, state (provincial) governments39 and financial servicesregulators, the rural India and its inhabitants, investors of ALW/ZMF, companies with interestin rural markets and NGOs, MFIs and SHGs (see the ALW/ZMF Value Map below). Goverment and Regulators Financial Other Institutions BCs/NGOs/MFIs Rural ALW/ZMF Investors India ALW/ZMF Value Map37 Manashwi, 200838 This will probably take place over a period of time and therefore only those organizations which arefinancially viable and with good incentive structures in place will be able to win in the rural marketplace.39 In the Indian context, referred to as central and state governments respectively
  18. 18. Value for Rural IndiaWith ALW’s ZERO technology platform and ZMF extension service infrastructure in ruralIndia, the disbursal of government’s social security pensions, NREGS wages and othergovernment schemes come to the village safely and directly. Each ZMF customer isbiometrically identified and linked to a unique bank account through which the money iselectronically transmitted and documented, ensuring financial inclusion of rural India. Beforethis system, villagers used to collect payments at the local post office or Gram Panchayat(Village Council). The ZMF system of enrolment saves villagers the travelling time, andhence the opportunity cost of a day’s wage, and provides added empowerment. Prior to ZMF,when a villager collected payments at government offices, he or she was made to feel as ifthey were accepting money from the person at the counter and not the government. Nowpeople are not humiliated to get the money they deserve as they receive it directly in theirvillage and through a fellow villager they know and trust. This service tends to the villagers’needs by ensuring that the money goes directly to them and is not diminished while changinghands.40The ALW/ZMF services also helped to shift power dynamics within villages. With politicallyneutral, trustworthy women as CSPs controlling the disbursement of money, power hasshifted away from the village headmen. Where there once was one person with power to dealwith government funds in the village, now there are three, and two are guaranteed to bewomen (the two CSPs are trained to help one another). “No, my husband doesn’t mind mynew job,” said one CSP, “he is respected more now.” Srinivas, State Manager of AndhraPradesh field operations at ZMF added, “At first, most of the village headmen wereagreeable. Then sometimes, they realized that some of their pocket money would disappearwith the new process. Sometimes they tried to prevent the CSPs from doing their jobs, but theCSPs simply called ZMF on a mobile phone and the matter was resolved. Now, more andmore people are skeptical of anyone not interested in working with ZMF because it impliesthey are corrupt.”The CSPs currently earn some money from their work of enrolling villagers, and this couldbecome a full time job with the advent of new transaction services funnelled through thechannel. The CSPs are now viewed favourably by the fellow villagers and have earned morerespect. Srinivas noted, “At first the CSPs were nervous of their role and uncertain of theirabilities. ZMF ensures they understand the procedures over the five-day training period. TheCSPs have developed confidence from mastering the technology and this has its own trickle-down effects, where young village girls can now look up to female role models from their owncommunities. The role of the CSP is expected to increase in the future as more bankingservices and transactions are run through ZMF”. Srinivas added, “We see CSPs asinstrumental in the financial literacy of the village and they will be included in educationalefforts in the future”.40 Upon the commencement of the service, some pensioners and other recipients were surprised to findout how much their disbursals were, as they had never before received the full amount.Case Study • A Little World: Safe and Efficient M-Banking in Rural India 18
  19. 19. The service itself is village-friendly. Receipts can be printed in the local languages; the deviceis small, durable and draws little power.41 Exposure to technology and awareness of villagersmay also increase through the use of this service. Many villagers, though now have their ownmobile phones, are also introduced to more technology through the service. CSPs master thetransaction service and each user also interacts with the technology and learns to becomfortable with it.Traditionally, banking transaction costs made banking unfeasible for rural households, astheir requirements were mostly of small amounts. With the entry of low cost technologydelivery platforms by ALW, and delivery organization such as ZMF, such banking services,besides ease in receipt of welfare payments, is now viable for villagers. It also means lesscorruption and development of a credit history for villagers, which will eventually lead tocredits at cheaper rates, than what rural population traditionally gets through informalmoneylenders and MFIs, and on the whole linking the rural India inhabitants to themainstream economy.Further, migrant remittances form an important source of income for rural households. Withbank account enrollments, facilitated by BCs like ZMF, migrant remittance in India, bothdomestic and overseas, is a huge potential market as well as socio-economic value for therural households. Migrant remittances form an important source of income, particularly forrural households, in states with a low per capita income.42 A World Bank report ‘Migrantsand Remittances Factbook 2008’ claimed that with US$27 billion, India topped the list ofcountries of migrant remittance in 2007. Hence the potential market for a mobile paymentsystem is high in such situations and will be cost effective and efficient if banks started usingBCs like ZMF.Last but not the least, ZMF hires extensively in local areas for its field operations. ZMF hasprovided job opportunities to people with moderate levels of educational attainment (theminimum requirement is ten years of formal education), which in turn discourages migrationby benefiting local youth, and in turn, the local economy. The ALW team has 125 people, andthe total number of direct employees on payroll of ZMF is approximately 400 and temporaryfield staff numbers around 350. Besides, the local youth, trained by ZMF, are also gettingready for opportunities in the financial services industry, which is increasingly gaininginterest in exploring and exploiting the business opportunities offered by the rural India.VALUE FOR FINANCIAL INSTITUTIONSFrom the supply side of financial inclusion, the main constraint for formal banks is perceivedto be the transaction costs involved in small value transactions.43 Besides, lack of41 Anurag is now exploring solar power options for energizing the ZERO Platform equipments.42 Migrant remittances form an important source of income for rural families in some states like Biharwhich has a low per capita income. An estimated Rs. 450 Crores (approx. US$96.46 million) wasremitted through Post Offices in Bihar in 2005-06 (Bhandari and Kale, 2008). This is probably aconservative estimate of total migrant remittances, which may travel through other channels likepersonal contacts, for example. .43 Subbarao, 2009Case Study • A Little World: Safe and Efficient M-Banking in Rural India 19
  20. 20. infrastructure, low literacy levels, language barriers and low levels of financial literacycontribute to increase in transaction costs of managing low-value transactions.44With the move to ALW’s branchless mobile based transaction system banks can drasticallycut down their transaction costs per account (see Annex, Table 9: Financial Costs to Banks),while ensuring the much needed safety and security of transactions in the process. Thetechnology cost is almost half of the administrative cost per account, and combined together,administrative and technology costs are the biggest outflows for banks.45 Similarly, scaling upof operations by ZMF will also bring down the substantial costs to the banks, as that meansdealing with one partner for the purpose. The already extensive and growing reach of theZMF is appealing to banks that prefer to work with one large and reliable partner than severalfragmented BCs with different processes and technology platforms. Many banks haveexpressed interest in ZMF scaling up its operations at least by ten times in the currentfinancial year itself.46 Currently, ALW/ZMF have partnerships with 22 banks – includingState Bank of India (SBI), Dena Bank, Andhra Pradesh Grameen Vikas Bank, PunjabNational Bank, Axis Bank, Punjab & Sind Bank, Oriental Bank of Commerce and the UnitedBank of India (See Box 5: ZMF’s Scope of Services Agreement).In order to profit from the rural markets, banks will have to offer standard banking services,adapted to the rural markets. Through leveraging its engagement in funds under the NREGS,SBI is effectively achieving scale without a loss, educating customers and earning their trust.By providing working capital cash loans as a financial product to suit rural market liquidityrequirements, banks can tap a huge market of rural customers. A representative from SBIadded, “The ALW technology (ZERO) is what has enabled the development of this market,which we hope to turn into profitable savings and insurance business soon.”With 2.5 million no-frills accounts customers by the end of 2009, State Bank of India’s (SBI)goal is to enroll 100 million rural customers by 2012.47 Twenty six out of 50 public andprivate sector banks in India appointed BCs that opened 88.60 lakh no-frills accounts by theend of March 2009.48For now, banks team up with ZMF to disburse NREGS and other government scheme funds.Currently, in disbursing the NREGS funds, banks do not make money from the transaction,but they obtain large sums of government money to hold. When their BCs disburse themoney, it goes through a bank account in the beneficiary’s name. Though as of now, mostrural users of the service are not aware of the operations of a bank account, they do reap thebenefits of having a transparent process that documents the flow of funds to them.Government pays a 2% fee to the banks, which in turn pay a negotiated commission to theappointed BC for its services. The bank benefits from holding the government funds in themeantime. To the banks, this has a long-term value, while the distribution infrastructure and44 Ibid.45 Kochhar, 200946 Ibid47 Sharma and Dhall, 200748 RBI, 2009Case Study • A Little World: Safe and Efficient M-Banking in Rural India 20
  21. 21. market is being developed with the help of government sponsored programme funds. Oncethe infrastructure is built and BCs earn the trust of villagers, with some financial awarenessand literacy spreading in the process, the accounts will be ready for people to make savingsdeposits, and receive or transfer funds and other mainstream banking services. Already, theaccounts can be used for different banking purposes, such as remittances, if a customer wantsto.49Similar to the banking products, insurance products and services may also be deliveredthrough ALW/ZMF models of delivery in the future, and once scaled up nationally, Anuragand his teams at ALW and ZMF do have plans to extend their services to the insurancecompanies.VALUE FOR THE GOVERNMENT AND REGULATORSBefore ZMF, and in areas where ZMF services are not yet used by the government and banks,government disbursements were channeled through the post office or the village organization.Sometimes people did not get the correct amount of funds (see Annex, Box 3: NREGAScheme of Government for Rural Areas). The new system eliminated most of such misuseand discrepancies. The switch to ZMF was easy. “We used to give 2% to the post office, nowbanks gets 2%50”, stated a government official in a personal interview in Hyderabad. Thegovernment in Andhra Pradesh State was among the first to adopt the BC system, andspecifically, ZMF disbursement. They speak of this with a sort of pride. “Now we havecreated an infrastructure! We are the first to do this in India. We are the role models. There ishappiness among the beneficiaries when they receive their full benefits.” Mr. Prasad, theProject Director for Smart Cards Project in Andhra Pradesh, is proud of his state. When askedabout dissent among lower government officials who enjoyed skimming from the fundspreviously, he responded, “the ground level has to abide. If an individual feels a certain way,too bad.”ZMF estimates that 60-70% of recipients, on an average, on the beneficiaries list furnished bygovernment for NREGS and 70-80% in the beneficiaries list in the case of disbursal ofpensions, claimed their payments after going through ZMF disbursement process. But theremaining lies unclaimed, indicating the extent and number of bogus claimants on the list andthe amount of funds that would have been siphoned off if the ALW/ZMF system andprocesses had not been in place.The state government officials make surprise visits on NREGS wages disbursement days tomonitor the process. The government disburses its funds to banks that have a significantpresence in areas or districts of operations and ‘proven readiness and capability’ (through49 There is a report of a villager receiving funds through these accounts from migrant relatives in nearbycities. The villager informed his relative in the city about his bank account and passed on his accountnumber.50 In Andhra Pradesh, ZMF receives 2% as commission for its services.Case Study • A Little World: Safe and Efficient M-Banking in Rural India 21
  22. 22. their BC and technology partner).51 The government chose to disburse funds through banks inan effort to spur financial inclusion. Mr. Prasad believes that the BC system is a better systemfor the poor than microfinance. “Many things can be routed through this,” he said,“collection of SHG Premiums (savings deposits from SHG members for common fund) can berouted through this. The intention is to use this channel in the future.” Though NREGSconstitutes the vast majority of funds currently distributed through ZMF, this seems to be justthe beginning.Through ALW/ZMF system there is better tracking of number of people working underNREGS, the quantum of work done, and geographical spread of NREGS recipients, whichhelps in better planning for further development work by the government, creating thusadditional value for the government in availing the services of BCs. The government is alsoable to weed out corrupt officials and insist on straight forward and transparent practices.Officials vocally opposed to the new system are red flagged as it is presumed that dissenterstend to have unsavory motives. Additionally, people in villages in general do not have afavourable view of the government, known more for its corruption and power games, but withthe new system introduced, they feel an increased sense of trust in the government.The Committee on Financial Inclusion has plans to extended financial services to a populationof over 557 million excluded households by the year 2010.52 The technology platform offeredby ALW and the ZMF system and processes for enrolment and disbursements seem to behelping the government and the banking regulator RBI in meeting their goals of financialinclusion more conveniently and well within the set timeframes.VALUE FOR ALW/ZMF INVESTORSALW and ZMF have secured funding in Series-A and Series-B rounds of investments since2007. Investors include Legatum Capital of Dubai, Enam Financials, BellwetherMicrofinance Private Limited and India Financial Inclusion Fund of India for buildingcompany’s operational and delivery capacity. Legatum Capital has in fact invested in bothSeries-A and Series-B round of investments and has invested US$3.67 million in total inALW. Legatum, which has invested over US$1 billion in several leading private sector banksin India through stock markets, in its website, explains its investment thesis53 in ALW ventureas follows; “Cost leader with a strong competitive advantage; successfully leveragingproprietary mobile technology; and accomplished founder and professional managementteam”.51 The bank must choose a BC and technology platform itself. About the fact that banks don’t receiveremuneration for holding the government funds, The Andhra Pradesh Government Official Mr. Prasadsaid, “Somewhere, help should go to the banks”.52 Subbarao, 200953 Leagtum Ventures, accessed on 17/02/2010Case Study • A Little World: Safe and Efficient M-Banking in Rural India 22
  23. 23. Although ALW has not posted profits yet, its financial viability and growth prospects are sustainable. Anurag prefers not to discuss returns promised to its investors. However, the attractiveness of the ventures for investors is demonstrated through the successful securing of investments in both Series-A and Series-B rounds of investments.Graph 1: Projected Growth in Revenues and Enrollment of ALW/ZMF 9,000 100 Revenues(INR Mn) Enrolments (Mn) 7,200 80 5,400 60 3,600 40 1,800 20 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Enrolments(Mn) Revenue(INR Mn)Source: Gupta (2009b) Presentation made at Sankalp Awards, April, 2009, Mumbai. RBI in its fresh guidelines on BCs issued in November 2009 allowed banks to appoint several other categories of entities54 to be appointed as BCs by the banks, and also permitted banks to collect a reasonable service charge from the customers, which would be passed on to the BCs to increase their viability. However, in future, large BCs with extensive national presence and technology partner support may emerge as winners. There is still a lot of experimentation happening at various levels in perfecting the BC model to operate with formal financial institutions, the confidence of investors in ALW and ZMF shows the robustness of ALW and ZMF business model and strategies and, therefore, returns for the investors in the long run in the space of financial inclusion. VALUE FOR OTHER BCS/NGOS/ PRIVATE SECTOR ALW’s policy of free tech transfers will enable replication of the technology driven BC model of ALW by other BCs, while at the same time reducing the cost of market entry for new players through technology transfers. In future, technology integrators like ALW will ease the path for social transfer payments to the rural households, whether the payments are made by the governments or private corporations or NGOs. Anurag also expressed plans to serve non-government entities to extend the benefits of its technology platform and ZMF’s 54 Banks are permitted to appoint the following entities as BCs, in addition to the entities presently permitted: (i) Individual grocery/medical /fair price shop owners (ii) Individual Public Call Office (PCO) operators (iii) Agents of Small Savings schemes of Government of India/Insurance Companies (iv) Individuals who own Petrol Pumps (v) Retired teachers and (vi) Authorized functionaries of well run Self Help Groups (SHGs) linked to banks. – Notification no. RBI/2009-10/238, November 30, 2009, available at accessed on 17/02/2010.
  24. 24. distribution infrastructure. By building a network of on-the-ground staff, name, recognition and trust, ZMF, and other such BCs, become crucial for the entire ecosystem. The ZMF operations can also leverage market information gained from its distribution network outreach (see Annex, Table 4: Scale of Operations of ZMF) to private corporations that are interested in the rural markets. This vast and well-structured distribution network will be an impressive asset to ALW/ZMF for delivering services and products to the rural market, where reaching a critical mass in a cost-efficient way is important for profitability, especially in for profit corporations. Results ECONOMIC RESULTS Currently present in 22 states, with 22 bank agreements and 8,314 CSPs serving 16,370 villages,55 ZMF has over four million enrolments. For ZMF, NREGS and pension schemes account for more than three million plus accounts.56 Anurag noted, that “the financial costs to a BC for a CSP include an initial capex cost of Rs. 20,000. These costs can be brought down, especially capex, as the business achieves scale” (see Annex, Table 5: Cost Structure or Revenue Outflows for ALW per Gram Panchayat per Quarter). Capex cost is also brought down through manufacturing of printers in-house by ALW. Other cost reductions include eliminating Smart Cards in favor of biometric identification. Initially, banks funded the whole cost structure of BCs, but later BCs had to manage their own viability through equity funding and may pass on the cost at a higher rate to banks or at a lesser rate to rural recipients in the future.57 ALW/ZMF has a growth plan to reach out to 100 million people by FY 2013.58 Inflows currently consist mainly of technology and transaction fees (see Annex, Table 6: Revenue Inflows). Revenue inflows will increase with ZMFs proposal to increase itsGraph 2: Projected Growth in Revenues and Enrollment of ALW/ZMF 9,000 100 Revenues(INR Mn) Enrolments (Mn) 7,200 80 5,400 60 3,600 40 1,800 20 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Enrolments(Mn) Revenue(INR Mn)Source: Gupta (2009b) Presentation made at Sankalp Awards, April, 2009, Mumbai. 55 Gupta, 2009 56 Kochhar, 2009 57 Ibid. 58 Gupta, 2009
  25. 25. commissions from government schemes (see Annex, Table 7: Estimating Economic Viabilityof ZMF). As future revenue streams, ZMF plans to include third party collections andgeneral-purpose accounts and other transactions, such as through farmer co-operatives anddomestic money transfers (see Annex, Table 8: Expansion Plans of ALW). Growthprojections chart a dramatic growth path in revenues and enrolments from 2009-10 onwards,when revenues may touch Rs. 1,800 million and enrollments around 20 million. Between2010 and 2011, revenue is expected to rise to Rs. 3,600 million with approximately 40 millioncustomers.The ZERO Platform is largely used for the Electronic Benefit Transfer (EBT): National OldAge Pension Scheme, National Rural Employment Guarantee Scheme wages, scholarshipsand housing grants for the rural poor. NREGS funds are distributed weekly and the socialsecurity pension funds are distributed monthly. Besides, NREGS disbursement is seasonal innature and happens 4-8 months in a year. On average, in each CSP location about Rs. 230,000to Rs. 280,000 worth of NREGS funds are distributed weekly. CSPs maintain Rs. 5,000 asworking capital and replenishment of funds to CSPs is done by ZMF teams in districts.At present, commissions earned from the banks by ZMF are mostly used to cover the costs ofoperation. Surplus earned is invested in boosting ZMF’s infrastructure and network. InAugust 2008, ALW successfully closed Rs. 287.4 million (US$6.16 million) in Series-Bfunding to expand its operation and delivery network. As long as ALW/ZMF have thebacking of long term investors and ZMF continue to scale-up on a successful course, thefinancial viability of ALW/ZMF looks bright. The company is looking ahead to internationalexpansion, where it can replicate its ZMF outreach network and use of the ZERO Platform.SOCIAL IMPACTRight now, social results are limited to the stakeholders discussed above. Jobs created by theCSP function and field operations provide local employment and help arrest migration on asmall level and change power dynamics within villages. Access to funds carries the socialbenefit of control over one’s own money, removing the feeling of being inferior to thosedisbursing money. Anil notes that over 16,000 women are employed as CSPs in the ZMFdelivery platform, which has brought these women a certain level of social recognition andstatus in their villages.Besides social empowerment, income enhancement by working as CSPs for ZMF is anotherimportant outcome for the village women. For every enrolment, ZMF pays Rs. 10 to the CSP.CSPs also earn either 0.5% of monthly transactions, or Rs. 500, whichever is higher. Theaverage monthly income of CSPs is about Rs. 1,000. This is divided between the local villageSHG, which gets 20% and the CSP and the stand-in CSP. Each woman, as a CSP, therefore,earns about Rs. 400 and the village SHG earns Rs. 200. Anil stated that for general bankingservices in a typical village which might have about 600 people, almost 50 % of whateverZMF earns is shared with the CSPs. Besides, ALW’s innovation in technology integrationallows enrolments to happen onsite on a mobile phone instead of on a laptop. Prior to May of2008, this money was used to pay for the enrolment team caravan from cities, but now thatmoney stays in villages.Case Study • A Little World: Safe and Efficient M-Banking in Rural India 25
  26. 26. The identification cards give a sense of identity and empowerment to villagers in addition tofacilitating income generation, productivity and well-being by offering fair access to funds. Inthe future, the benefits of access to other financial products and use of no-frills bank accountswill aid in economic and social empowerment, while benefiting the national economy overall.Besides, the impact on corrupt practices at the operational levels of the government is a greatbenefit to all stakeholders.ENVIRONMENTAL IMPACTBy switching to mobile-phone enrolment, driving to villages has been eliminated. The ruralhouseholds save themselves the cost of trips and savings on transport fuel to the local postoffice or to the village headman or government officials to obtain government disbursalamounts. Mobile phones and printers admittedly add to e-waste. The environmental costs ofdisposal and production are important, but considering the fact that a single phone can act asan entire bank branch, the waste is minimal compared to that from a fully equipped brick andmortar branch. Only one or two sets of mobile handsets and a minimum of other equipmentare used to service a set of proximate villages.ConclusionTechnological and process innovations of ALW and ZMF, with their reliable, transparent,quick, cost effective and efficient delivery mechanisms of financial services from mainstreamfinancial sector to rural poor households, are commendable and a viable value proposition.With bleak scenario of financial exclusion in India, this new infrastructure of outreach has anenormous potential to bring needed financial products and services to rural India.ZMF has mastered the operations network and created a strong distribution channel whichcontinues to develop further. At present, there are few competitors, but the competition isbuilding up fast, which may lead to the development of a healthy market for facilitating easierrural access to finance. As in microfinance, the rural market in India is so vast that any player,who manages to scale up at national level fast, streamline its processes and reduces deliverycosts, can easily grow and gain an enormous customer base.Lessons from past development experiences reveal that financial inclusion withoutsustainable avenues for economic growth and income policies in rural areas will not behelpful or meaningful and financial inclusion cannot work in an atmosphere of poverty andstagnant growth.59 Additionally, the formal financial system has to be viable in terms oforganizational structure, incentives for functioning in the rural area and with a sustainablebase to support financial inclusion in a long term perspective. In that sense, encouragingprofit oriented BCs or BFs, as intermediaries, may be an apt strategy. In sum, amongst severalkinds of inclusion movements and talks of inclusive growth, financial inclusion is anotherimportant development policy instrument in the hands of the state and in the present context,59 Mulenga, 2009Case Study • A Little World: Safe and Efficient M-Banking in Rural India 26
  27. 27. an excellent opportunity for inclusion is available to the state through low cost technologyand delivery mechanisms offered by ALW/ZMF. After all, the financial inclusion of ruralhouseholds can only be a means and not an end in itself, as the broader goal through suchinitiatives should be the social inclusion of the excluded groups in a society and economy.Case Study • A Little World: Safe and Efficient M-Banking in Rural India 27
  28. 28. REFERENCESPrincipal research assistance for this case has been contributed by Hema Swamy.INTERVIEWS Personal interview with Anurag Gupta, Founder and Chief Technology Officer, ALW/ZMF on 18 August 2009 in Mumbai Head Office. Personal interview with Mr. Ram Chandra Reddy, DGM, Local Head Office, State Bank of India (SBI), Hyderabad on 22 August 2009 in SBI Hyderabad. Personal interview with Beneficiaries of NREGA and ALW/ZMF account holders on 22 August 2009, in their village in Andhra Pradesh near Hyderabad. Personal interview with Srinivas, State Manager of Andhra Pradesh Field Operations at ZMF on 22 August 2009 in Hyderabad. Personal interview with Anil Tunk, Country Head of Operations in ALW/ZMF on 25 August 2009 in Hyderabad. Personal interview with Anurag Gupta, Founder and Chief Technology Officer, ALW/ZMF on 08 September 2009 in Mumbai Head Office. Telephonic interview with Anurag Gupta, Founder and Chief Technology Officer, ALW on 12 December 2009.PUBLICATIONS Balaban, D. (2004) Bringing E-Payment to India. Card Technology, Volume 9, Issue 10. Pp. 47-49. Bhandari and Kale, (2008) Indian States at a glance 2008-09. Performance, facts and figures. Indicus Analytics Pvt. Ltd. Bhatnagar, S.C. (2009) Exploring Conditions for Delivery of Successful M- Government Services to the Bottom of the Pyramid (BOP) in India”. LIRNEasia Working Papers v1.2, Teleuse@BOP3. Kochhar, S. (2009) Speeding Financial Inclusion. Skoch Development Foundation, New Delhi. Prahalad, C.K. (2004) The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits. Wharton School of Publishing. New Jersey. Sharma, S.N. and Dhall, A. (2007) Nearly half of Indian financially excluded. Economic Times, Mumbai August 12, 2007. Shivpriya, N. and Iyer, P.R. (2007) Enam Financial picks 10% stake in rural financial inclusion firm. Economic Times, October 4, 2007, Mumbai.WEBSITES CGAP (2009) Banking Agents: The Key to Successful Mobile Banking Services, February 18, 2009. Accessed on 02/02/2010. CGAP (2009a) Country Examples Accessed on 02/02/2010.Case Study • A Little World: Safe and Efficient M-Banking in Rural India 28
  29. 29. CGAP (2009b) The Business Case. Accessed on 02/02/2010. Darling, M.L. (1928) Punjab Peasant in Prosperity and Debt. Oxford University Press. Accessed on 16/02/2010. Dreze, J., Khera, R. and Siddharta (2008) Corruption in NREGA: Myths and Reality, The Hindu, January 22, 2008, Accessed on 29/12/2009. Dhar, S. (2009) Beyond the first anniversary of the debt-relief programme. Committee for the Abolition of Third World Debt. the-first-anniversary-of. Accessed on 29/12/2009. Frost and Sullivan (2008) Technology a drawback for Financial Inclusion. Financial-Inclusion/19908110597/0/. Accessed on 22/11/2009 Gupta, A. (2009a) ZERO: Mobiles+Biometrics for MicroBanking, presentation made to NABARD on 12 September 2009., Accessed on 16/02/2010. Gupta, A. (2009b) Harnessing the Power of Abundance via the Mobile Phone as an Ultra Versatile Rural PC: Banking the Unbanked, presented at the Sankalp Awards, 2009. Accessed on 16/02/2010. Ivatury, G. and Mas, I. (2008) The Early Experience with Branchless Banking, CGAP, Washington Accessed on 29/12/2009. Manashwi (2008) Inclusive Growth - Casting the Net Wide: Financial inclusion initiatives can help banks in the long run. Business World magazine, November 14, 2008. Accessed on 07/12/2009. Mishra, S. (2007) Risks, Farmers’ Suicides and Agrarian Crisis in India: Is there a Way Out? Indira Gandhi Institute of Development Research, Mumbai. Accessed on 29/12/2009. Mulunga, M. (2009) Financial Inclusion and Poverty Reduction. reduction-857871.html. Accessed on 26/12/2009. Rangarajan, C. (2008) Report of the Committee on Financial Inclusion. Government of India, New Delhi. Accessed on 16/02/2010. Rao, B. (2008) Financial inclusion to overcome exclusions. Business Line newspaper article dated May 13, 2008. Accessed on 02/12/2009.Case Study • A Little World: Safe and Efficient M-Banking in Rural India 29
  30. 30. Rebello, J. (2009) Mobile phone technology key to financial inclusion. Accessed on 28/11/2009. Subbarao, D. (2009) Financial Inclusion: Challenges and Opportunities. Speech at the Bankers’ Club in Kolkata, 9th December, 2009. Accessed on 12/02/2010.Case Study • A Little World: Safe and Efficient M-Banking in Rural India 30
  31. 31. AnnexBox 1: Banking Policy and Access to Credit in Rural India Banking Policy and Access to Credit in Rural India Three eras of rural banking policy in India can be demarcated in implementing financial inclusion of rural poor (Ramachandran and Swaminathan, 2001). The first era began in 1969 with the nationalization of 14 major commercial banks (Bank Nationalization Act, 1970), the setting up of social and development banking covering the unbanked and opening of regional rural banks. The second era from the late 1970’s and early 1980’s was the era of directed credit mainly to needy rural recipients in the form of loan and subsidy schemes, programs like the Integrated Rural Development Programme (IRDP) and later Swarnjayanti Gram Swarozgar Yojana (SGSY) to create income bearing assets for asset-poor rural households which failed due to inadequacy of public infrastructure and provisioning systems among other reasons, and the growth and strengthening of institutionalization of rural banking system which was however extremely limited in reaching out to the rural poor. The third era began post liberalization in 1991 which did away with the directed subsidized credit schemes of the earlier era and set profitability, capital adequacy norms and market decisions as the norm of organizational functioning overturning the social and development banking principles of 1970 (see Table 1: Growth of Bank Offices, Bank Credits and Deposits in Scheduled Commercial Banks, 1969-2000). This period also saw a decline in priority sector and preferential lending to the poor in rural areas and a shift, relative to earlier periods, in credit from rural to urban and metropolitan areas (Ramachandran and Swaminathan, 2001). In this context, declining credit from the formal sector, coupled with diminishing growth yields post Green Revolution in India, lack of rural infrastructure to withstand drought failures and natural disasters, and inefficient rural markets leading to low earnings contributed to an agrarian crisis from mid 1990’s onwards (see Table 2: Growth Rates of Population, Banks and Credit for Rural India, 1973-1999)
  32. 32. Table 1: Growth of Bank Offices, Bank Credits and Deposits in Scheduled Commercial Banks, 1969-2000Year Bank Bank Credit Credit Deposit Deposit Credit - Credit- Office Office advanced advanced Deposit deposit ratio ratio Rural % to Rural(In Rs % to total Rural(In % to Rural All areas (Number) total 10 Million) Rs 10 total Million)1969 1443 17.6 115 3.3 306 6.3 37.6 71.91970 193 4.5 400 7.3 48.3 78.11971 159 3.1 378 5.2 42.1 69.71972 5274 36.0 257 4.6 540 6.5 47.7 67.21973 6024 36.5 379 5.3 741 7.4 51.1 70.31974 6447 35.9 483 5.9 923 8.0 52.3 71.01975 7112 35.5 608 6.0 1171 8.5 51.9 73.51976 8588 36.6 870 6.4 1539 8.7 56.5 77.01977 10856 40.3 1105 7.2 2010 9.4 55.0 71.71978 12534 42.5 1530 8.4 2664 10.1 57.4 69.11979 14171 44.0 2003 9.3 3559 11.4 56.3 68.91980 16111 46.9 2643 10.7 4644 12.6 56.9 66.91981 19453 51.2 3600 11.9 5939 13.4 60.6 68.11982 21626 53.0 4473 12.5 7414 14.2 60.3 68.21983 23782 52.4 5576 13.6 8828 14.4 63.2 67.01984 25541 52.9 6589 13.5 9603 13.4 68.6 68.31985 29408 54.6 7489 14.1 11722 13.6 63.9 61.91986 29700 55.7 9387 14.5 14375 14.0 65.3 63.01987 30585 56.2 11127 15.3 17527 14.7 63.5 61.01988 31641 56.2 13452 15.3 20907 14.7 64.3 61.91989 33572 57.3 15546 14.8 24383 15.0 63.8 64.71990 34867 58.2 17352 14.2 28609 15.5 60.7 66.01991 35216 58.1 19688 14.7 33163 15.1 59.4 60.91992 35218 58.0 20587 14.5 35058 15.0 58.7 61.01993 35301 57.6 23156 14.0 40672 14.8 56.9 60.51994 35379 57.2 25074 13.9 47776 15.0 52.5 56.61995 35008 56.2 28183 12.7 57399 15.3 49.1 59.21996 33092 52.7 29122 11.1 61106 14.3 47.7 61.91997 32909 50.5 32525 11.4 73769 14.7 44.0 56.81998 32854 49.9 37598 11.4 86706 14.5 43.4 55.31999 32840 49.2 42090 11.0 102697 14.7 40.0 54.82000 32673 48.7 48753 10.6 120539 14.7 40.0 56.0 Source: Kochhar (2009) Case Study • A Little World: Safe and Efficient M-Banking in Rural India 32
  33. 33. Table 2: Growth Rates of Population, Banks and Credit for Rural India, 1973-1999 Growth rates of rural population, rural bank offices, rural and agricultural credit of scheduled commercial banks, India, 1973 to 1999 (in percent per annum) Period Rural Rural Credit Rural + Credit from Credit to population bank from Semi urban rural + semi agriculture offices rural branches urban offices branches 1973-1981 1.78 15.54 23.46 12.32 16.72 18.76 1981-1991 1.84 7.15 9.97 5.95 7.91 6.64 1991-1999 1.66 -0.86 2.51 0.13 2.88 2.16 Source: Chavan (2001), Table 2.9,p.40. Note:- Credit figures were deflected with the GDP deflator (base year-1933-94)Source: Kochhar (2009)Table 3: Number of No-Frills AccountData From April 1, 2007 to May 30, 2009 No frills account Points of (in Mn) presenceTechnology Provider enabled no frills account 10.752 13077Estimated Direct Accounts opened by Banks net of 2.5 18Mn of Bhamasha ProjectTotal No- Frills accounts Net of MFI, RSBY and 25.15BhamashaEstimated Number of operational accounts out of the 2.77above(11 %)Credit / Over Draft in the above NegligibleTotal number of rural households targeted for financial 111.55inclusion##Source: Kochhar (2009:40)Case Study • A Little World: Safe and Efficient M-Banking in Rural India 33
  34. 34. Box 2: Financial Inclusiveness – Challenges and Incentives Financial Inclusiveness – Challenges and Incentives Traditionally, the formal banks have not seen the poor as potential customers because their business models were largely developed to cater to a section of society with a certain socio-economic profile and so were insufficient at serving the low-income segments of society. Existing products of the formal financial institutions are usually inappropriate for the poor and are rigid and complicated. Transaction costs for establishing and enabling contacts and servicing accounts did not make it worthwhile, and the formal sector bank branch managers were often evaluated on the volume of deposits and loans they created and thus had no incentive to sell to the poor, who had smaller incomes and therefore small saving potential. However, changes in the sector, the customers and the regulatory environment created additional need and incentives for linkages between formal banking and the poor. Banks experienced diminishing returns with current customer segments and began to look to the poor as a new segment while social and research institutions continued to highlight the necessity of financial inclusion for economic development. New products were created especially for the poor. For example, so-called “no-frills bank accounts” offer standard savings accounts for the poor that are designed to work with the rural poor’s unique lifestyle. The customers were also given increased opportunity to avail of formal banking facilities with the advent and spread of microfinance institutions.