The document discusses India's model of financial inclusion and examines whether mobile payments can lead future efforts. It summarizes India's bank-led model which focused on expanding access to banking services in rural areas through agents called Business Correspondents. While this model was effective in expanding access, many accounts remain unused. The document argues that leveraging India's growing mobile infrastructure through technologies like mobile payments could help address limitations and drive financial inclusion going forward. Key challenges to adopting mobile payments include expanding rural connectivity and increasing customer familiarity with digital financial services.

1. Indian model of Financial Inclusion:
Will Mobile Payments lead the future?
Anshuman Chaturvedi
Consultantwww.techvibesglobal.com

2. 1 | T h o u g h t P a p e r
Reserve Bank of India (RBI) defines Financial
Inclusion as the “process of ensuring access to
appropriate financial products and services
needed by all sections of the society in general
and vulnerable groups such as weaker sections
and low income groups in particular, at an
affordable cost in a fair and transparent manner
by regulated, mainstream institutional players”.
Financial Inclusion is one of the buzzwords
today and rightly so. If World Bank Findex
Survey (2012) is anything to go by, only 35% of
Indian adults had access to a formal bank. 2% of
adults used an account to receive money from a
family member living in another area and 4%
used an account to receive payment from the
Government. These numbers are quite
staggering and disheartening considering the
fact that a lot of initiative for inclusive banking
and financial inclusion has been continually
pursued vigorously over the last decade.
The Bank-led Indian Model
In many ways, genesis of financial inclusion
initiative can be traced back to year 2009 when
RBI formally adopted the objective and advised
banks to actively pursue financial inclusion as a
business model. It can be argued that the Indian
model for financial inclusion was shaped by the
need to tap the 61% rural unbanked population
of the total of 41% unbanked population in
India. This unbanked rural population remained
largely dependent on costly, informal, and
unregulated channels of financial services, such
as local money lenders, for their financial
needs. To facilitate structured and regulated
financial inclusion, RBI adopted a bank-led
model for financial inclusion.
The Financial Inclusion Plan (2010-13), drawn
up by individual participating banks, leveraged
the January 2006 proposal of RBI to use
Business Correspondent (BC) and Business
Facilitator model for providing financial and
banking services. This first phase of Financial
Inclusion Plan (FIP) focused on achieving
complete financial inclusion in rural areas which
had a population over 2000. The
implementation of this first phase of FIP
witnessed banks primarily adopting and
experimenting with BC models to provide ‘cash
in - cash out’ transactions at locations much
closer to rural population (not having access to
brick and mortar banks), thus addressing the
last mile challenges.
Business Correspondent model for financial
inclusion effectively leverages Information and
Communication Technology (ICT) to deliver
banking services to empanel financial inclusion
customers. Under this model, every bank
utilizes services of NGOs, SHGs, Microfinance
Institutions and other Civil Society
Organizations as intermediaries to provide
financial and banking services in remote areas.
A Business Correspondent, formally affiliated
with banks on remuneration and commission
basis, is typically provided a Point of Sale (PoS)
device (which is connected to the bank’s branch
server through internet) that he/she uses to
open customer’s account. BC approaches
unbanked individuals at their locality and
empanels them by opening their account and
creating their individual biometric smart cards
through efficient leveraging of ICT to take
photographs, scan fingerprints and capture
signatures.
The elaborate experiment by banks to use
Business Correspondents for financial inclusion
has had a positive impact in empanelling large

3. 2 | T h o u g h t P a p e r
portion of the targeted segment under FIP
2010-13, under which banking outlets have
been opened in 74199 unbanked villages
comprising 2493 branches, 69374 Business
Correspondents (BCs) and 2332 through other
modes such as ATMs, mobile vans, etc.
Financial Inclusion progress under Financial Inclusion Plan 2010-13
Mobile Payments: A platform for next
wave of financial inclusion propagation?
The success of India’s bank-led model of
financial inclusion is rooted in leveraging
existing and innovative technologies on one
hand, and implementing facilitative strategies,
including progressive regulatory reforms on the
other.
Though the BC model for financial inclusion has
been very effective in empanelling unbanked
rural population, RBI has noted some critical
issues questioning the viability of this model. In
his recent speech, Dr. Subbarao, in his capacity
as RBI governor, observed that most of the
accounts opened under BC model remained
non-operational. Also, the infrequent
accessibility of Business Correspondents was a
considerable bottleneck in dispensing desirable
banking services to the empanelled customers.
Such challenges have raised one very important
question: whether the bank should continue
tapping into their own infrastructure and
resources or should they seriously contemplate
a business case in setting shared infrastructure?
What better than to tap and ride The Golden
Trend?
The Golden Trend referred to here is the
explosive growth of mobile telephony under
India’s ICT revolution. This trend was kick-
started in August 1995, when then Chief
Minister of West Bengal made the first ever
mobile call to Union Telecom Minister to mark
the beginning of mobile revolution in India.
Eighteen years hence, India has a wireless
subscriber base of 873.37 million (as of
June’13), with a monthly growth of 3.16 million
new connections, and stands at number two in
the global ranking for highest number of mobile
phone users in the world.
Mobile Telephony’s high penetration and its
rapidly growing reach and infrastructure in the
country can be tapped as a platform to propel
India’s financial inclusion drive into the next
decade. Combined with Aadhar-enabled unified
payment infrastructure, in the wake of renewed

4. 3 | T h o u g h t P a p e r
focus of providing Direct Transfer of Subsidies
(DTS) and Electronic Benefits Transfer (EBT)
using Unique Identification Number (UID), this
shared infrastructure can be easily built upon
and leveraged by banks and mobile payment
technology providers to reach out to unbanked
population in both rural and urban India.
Golden Trend Highlights
Total Wireless Subscribers (June’13)
Urban Subscribers 522.27 million
Rural Subscribers 351.10 million
Wireless Subscribers Monthly Growth
(June’13)
Urban 0.26 million
Rural 2.91 million
India Global Ranking (2013)
# of mobile phone
users
2nd
# of internet users 3rd
In fact, steps towards leveraging this shared
infrastructure are already being undertaken. In
what is tipped as a ‘game changer’ by Mr.
Raghuram Rajan, Governor RBI, the recent
development of using Aadhar linked bank
accounts for facilitating mobile payments is
indeed a paradigm shift in India’s electronic
payment system. The pilot run of this mobile
payment system was launched in Mumbai by
four major banks including ICICI, country’s
largest private sector bank, and Union Bank of
India, a leading state owned bank. This handset
agnostic, encrypted SMS based, application
driven and mobile payment facilitated Direct
Benefit Transfer (DBT) is tipped as the future
model of financial inclusion for Bottom of the
Pyramid (BoP) customers.
Security and adoption of Mobile Payment
Technology
In the current payment system landscape,
Reserve Bank of India acts as the regulator and
supervisor of norms governing the Mobile
Payment eco-system in India. Over the years,
RBI has facilitated the evolution of mobile
payment solution by relaxing the governing
regulatory norms. Though the adoption of
mobile payment technology in India is still in its
nascent stage, it is already being prolifically
adopted in developed countries such as South
Korea, which has been innovating around
mobile for years.
Mr Kyung-yang Park, CEO MoCa, is one of the
pioneers of mobile payment technology in the
world. His user centric reverse payment
technology is the backbone behind MoCa
Alliance in South Korea, which is a
comprehensive alliance comprising 60
companies including major banks, mobile
network providers as well as UNICEF.
To understand the future of mobile payments, I
asked Mr. Park how he sees its adoption in India
vis-à-vis infrastructure requirement and
customer security. In what Mr. Park refers to as
a ‘Latecomer Advantage’, he sees India
“leapfrogging the traditional need for
developing expensive infrastructure around
mobile payments by making use of user centric
reverse process that does not require hardware
investment at merchants side, and can use any
of QR code, barcode, NFC and push notification
technologies to facilitate transactions”. Also,
goes on to explain that the reverse settlement

5. 4 | T h o u g h t P a p e r
process “prevents customer’s financial
information, which need not be sent out to
merchant’s terminal, and guarantees best
security”.
Illustrations of MoCa Pay reverse settlement process
A technology agnostic mobile payment solution
is especially relevant in India context where
smart phone penetration is still low and almost
all of the digitally connected targeted
population, for financial inclusion, carries
feature mobile handsets. Considering this, Mr.
Park feels that the future of mobile payment
landscape in India “will be determined how
Smartphone market shapes up in next 3 years
and whether, as China, India will have $100
Smartphones flooding the market”.
Challenges to overcome
The success of mobile payment model for
financial inclusion is largely dependent on
factors such as availability of digital connectivity
& relevant infrastructure, customer readiness
to accept mobile payments for their banking
needs.
Need for comprehensive digital connectivity of
rural India is also limiting the popularity of
utilizing mobile payment model for financial
inclusion. The rural wireless teledensity as on
June’13 is 41.14, which is considerably low in
comparison to urban teledensity of 139.16
during the same period. Though this has
improved by more than twice since mid-2009, a
lot is still left desired. Initiatives for
infrastructure building are already under way
with a vision to provide comprehensive mobile
and broadband connectivity in rural India.
However, till the time the vision is realized, the
next wave of financial inclusion model would
have to be a combination of Mobile Payment
model and BC model, with one leveraging the
other. This is especially relevant as the demand
side of financial inclusion i.e. financial and
technological literacy can only be improved by
efficiently leveraging BCs and other civil society
organizations as agents to impart this
knowledge.
Another challenge lies in India’s lack of
preparedness to adopt ‘non-cash’ medium of

6. 5 | T h o u g h t P a p e r
transaction. India has a low debit card
penetration of 13% and credit card penetration
close to 2%. A similar low level of penetration is
seen in adoption of mobile banking. Also, India
ranks 21st
under Master Cards Mobile Payment
Readiness Index (MPRI) that gauges
preparedness and receptivity of 34 countries for
mobile payment. So, in a country where
majority of the customers are clearly averse to
adopting non-cash medium for their banking
needs, mobile payments will have to be more
than just a ‘medium’ for traditional cash in-cash
out banking. Also, a facilitative, yet sturdy
reforms need to be in place to promote mobile
payments and also restrict its misuse, including
money laundering.
Way Ahead
Adopting mobile payment solutions to drive the
next phase of financial inclusion and to lead into
the next decade doesn’t seem like a distant
possibility anymore. Use of mobile payment
technology for commercial transactions
between consumers and merchants are already
being experimented with for some years now.
However, use of this technology to provide DBT
is something very new to India. Encrypted SMS
based mobile payment option is a step forward
in this direction; however, a lot is still left
desired vis-à-vis regulatory, technological and
infrastructural support-system to promote the
adoption of mobile payment solutions.
In order to promote mass rollout of Mobile
Payments, Direct Benefit Transfer schemes and
other social schemes, will have to be dispensed
to the targeted ‘Bottom of Pyramid’ customers
using appropriate mobile payment technology.
Recently, India has taken a step forward in this
direction by experimenting with encrypted SMS
based mobile payments for benefit transfer.
Also, banks will have to perceive Mobile
Payments as a cost effective and profitable
business model. A handful of leading banks
have already started fiddling with adoption of
mobile payment technology, indicating at not so
distant commercial rollout.
Lastly, the recent meteoric growth of
smartphone market in India has opened up
huge potential to make mobile payment
technology more accessible to large section of
population. International Data Corporation
predicts Indian smartphone market clocking
growth levels of 459.7% over the next five
years, resulting in rise of smartphone shipment
to 10.3% of the global shipment by 2017. This
high smartphone penetration is essential in
developing and sustaining mobile payment
ecosystem, which are continually getting
smarter and safer.
All the above developments hint at an imminent
use of mobile payments as a way forward.
However, it is still to be witnessed as to how
quickly India adopts mobile payments as a
technology that will lead it into the next stage
of sustainable financial inclusion.

7. 6 | T h o u g h t P a p e r
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