Financial Inclusion through Mobile Banking

Group Members:Rashmi PatilMonika ChudiwalaKetan DalmiaSumit DhadichSiddarth JainChintan ShahApurva KaulTejas DedhiaMobile Banking Challenges in Vasai, Thane

CONTENTSSr. No.TopicPage No.

1Abstract3

2Introduction4

3Research Problem Statement6

4Objective6

5Scope7

6Literature Review7

7Research Methodology13

8Findings and Analysis14

9Interpretation and Conclusion19

11Suggestions and Recommendations20

12Bibliography and References21

13Annexure22

ABSTRACTAccording to the McKinsey Report, March 2010, more than 65% of population of India does not have a bank account. However 80% of population owns a mobile phone. Thus, banking over the mobile phone will play a major role in financial inclusion. With rapid urbanization, when people from rural areas start to adapt to city life, they create demand for goods such as television, refrigerators, and mobile phones. They emerge potential mobile banking customers, a fact that banks have been quick to spot. Mobile banking enables customers to transact on their own confidently and reliably without the need to visit a bank.The aim of the study is to find out whether mobile banking will aid in financial inclusion. This paper uses primary data and secondary data to analyze financial inclusion through mobile banking. Methodology/Approach used is examination of the demographic, attitudinal and behavioral characteristics of the mobile bank users.

INTRODUCTIONIn the last twenty years, India has undergone a transformation of its economic and regulatory structures. Policy reforms in this period have led to the increasing maturity of our markets, as well as healthy regulation. The emphasis on de-licensing, entrepreneurship, the use of technology and decentralization of governance to the state and local level have in particular, shifted India from a restrictive, limited access society to a more empowered, open access economy, where people are able to access resources and services more easily and effectively. But despite these efforts, access to finance has remained scarce in rural India, and for the poorest residents in the country. Today, the proportion of rural residents who lack access to bank accounts remains at 40%, and this rises to over three-fifths of the population in the east and north-east parts of India. This exclusion is debilitating. Economic opportunity is after all, intertwined with financial access. Such financial access is especially valuable for the poorit offers a cushion to a group whose incomes are often volatile and small. It gives them opportunities to build savings, insure themselves against income shocks and make investments. Such savings and insurance protect the poor against potentially ruinous eventsillness, loss of employment, droughts, and crop failures. However due to the lack of access to financial services, many of the Indian poor face difficulties in accumulating savings.India however is not the only country combating this challenge. As per McKinseys report, Counting the worlds unbanked: March, 2010. Fully 2.5 billion of the worlds adults dont use formal banks or semiformal microfinance institutions to save or borrow money, our research finds. To mitigate the lack of financial access in India, the regulator has focused on improving the reach of financial services in new and innovative ways through no-frills accounts, the liberalization of banking and ATM policies, and branchless banking with business correspondents (BCs), which enables local intermediaries such as self-help groups and Kirana stores to provide banking services. Related efforts have also included the promotion of core-banking solutions in Regional Rural Banks; and the incorporation of the National Payment Corporation of India (NPCI) to provide a national infrastructure for payments and settlements in the country.Advancements in technology such as core banking, ATMs, and mobile connectivity have also had enormous impact on banking. Mobile phones in particular present an enormous opportunity in spreading financial services across India. These technologies have reduced the need for banks to be physically close to their customers, and banks have been consequently able to experiment with providing services through internet as well as mobile banking. These options, in addition to ATMs, have made banking accessible and affordable for many urban non-poor residents across the country.Financial services for the unbanked are among the most promising opportunities for mobile-telecom operators hoping to counter slowing subscription growth with auxiliary offerings, such as banking, health care, and education services. In emerging markets, formal banking reaches about 37 percent of the population, compared with a 50 percent penetration rate for mobile phones. For every 10,000 people, these countries have one bank branch and one ATMbut 5,100 mobile phones.A new focus on bringing financial services to the unbankedthose without easy access to traditional banking channelsrepresents a strategic shift for mobile operators. The very small deposits and loans held by poorer customers make them unprofitable for banks that use traditional delivery models. But mobile devices reduce the cost to serve customers by 50 to 70 percent, making it possible to offer financial services to a vast population once considered unprofitable. Beyond the commercial potential, mobile money can have social and economic benefits. Access to financial services lowers the cost of sending and receiving remittances, improves the safety and security of cash, and makes payments more convenient. More importantly, it promotes saving and borrowing, allowing families to pursue economic initiatives, generate income, and accumulate small amounts of net worth. As a result, it may make it easier for lower-income families to meet their periodic expenses, such as school fees and rent, or to buy seeds at planting time and fertilizer over the growing season. Mobile money also offers a savings cushion against expected and unexpected events, such as weddings or health emergencies.

RESEARCH PROBLEM:Reserve Bank of India is actively pushing for the cause of financial inclusion with the aim to connect people with banking system. The focus is not just on credit dispensation but on long term relation building with the formal banking system. RBI also is aiming at portraying financial inclusion as a viable business model and opportunity while ensuring access to basic banking facilities. The above aims are difficult to achieve in country like India on account of large population spread, social and cultural factors, illiteracy etc.According to NSSO Survey (59th Round), only 27% of total farmer households access formal sources of credit. One third of these groups also borrow from non-formal sources. Overall, 73% of farmer households have no access to formal sources of credit. 51.4 % of farmer households are financially excluded from both formal / informal sources (45.9 million out of 89.3 million). Farm households not accessing credit from formal sources is high in North Eastern (96 % ) , Eastern ( 81 % ) and Central Regions ( 78 % ). Exclusion in general is large; it also varies widely across regions, social groups and asset holdings. Poorer the group, the greater is the exclusion. Some idea regarding financial exclusion can also be gathered from basic statistical reports on development and progress of Banking as prepared by Reserve Bank of India.In an attempt to improve this scenario, RBI has taken a lot of initiatives. The banks have come up with many innovative ways to reach the unbanked in India. Some of the approaches have been as follows: Business Correspondent Model No Frills Account General Purpose Credit Card (GCC) facility Financial Literacy SHG Bank Linkage Biometrics ATMs Mobile BankingHowever, inspite of these attempts, the acceptance and awareness of these innovative approaches to financially include those which are excluded is not as per expectations. The acceptance of mobile banking would help the banks for financial inclusion. The problem lies in the awareness of these approaches.

OBJECTIVES OF RESEARCH To study the awareness of mobile banking in semi-urban areas To find out whether financial inclusion is possible through mobile banking in these areas

SCOPE OF THE RESEARCHAs discussed earlier, there are various innovative approaches to help financial inclusion, mobile banking being one of them. The scope of this research is solely to study the awareness and acceptance of mobile banking in the semi-urban areas of Vasai, Thane. In the remote areas of Vasai, there is only one bank available which is Bank of India. Residents have to travel a long distance for access of basic banking services. Mobile banking, if accepted by the residents would provide a win-win solution to both, the bank (as the transaction costs would reduce) as well as the residents (time and cost to travel far for basic banking services would eliminate).

LITERATURE REVIEWInitially, mobile banking services were offered via SMS. However, with the introduction of the first primitive smart phones with WAP support enabling the use of the mobile web in 1999, European banks pioneered to offer mobile banking on this platform to their customers.Mobile banking has until recently, most often been performed via SMS or the Mobile Web. Apple's initial success with iPhone and the rapid growth of phones based on Google's Android (operating system) has led to increasing use of special client programs, called apps, downloaded to the mobile device.Mobile Banking offers services which include facilities to conduct bank and stock market transactions, to administer accounts and to access customized information. Over the last few years, the mobile and wireless market has been one of the fastest growing markets in the world and it is still growing at a rapid pace. With mobile technology, banks can offer services to their customers anytime anywhere, receiving online updates of stock price or even performing stock trading while being stuck in traffic.A wide spectrum of Mobile/branchless banking models is evolving. However, no matter what business model, if mobile banking is being used to attract low-income populations in often rural locations, the business model will depend on banking agents, i.e., retail or postal outlets that process financial transactions on behalf mobile service providers or banks. The banking agent is an important part of the mobile banking business model since customer care, service quality, and cash management will depend on them. Many service providers will work through their local airtime resellers. However, banks in Colombia, Brazil, Peru, and other markets use pharmacies, bakeries, etc.Indias mobile phones will reach more than the targeted half billion people by the end of 2010 or 60 per cent of the tele-density, going by the countrys telecom ministry estimates. According to a report, approximately 43 million urban Indians used their mobile phones to access banking services during quarter ending August, 2009, a reach of 15% among urban Indian mobile phone user.Reserve Bank of India (RBI) has taken progressive steps to accelerate the rollout and adoption of mobile banking services. Based on the requests received from the banks, the Reserve Bank of India has now hiked the daily ceiling for mobile banking transactions to Rs 50,000 per customer for both funds transfer and transactions involving purchase of goods and services.Thirty-two banks have been given approval to provide mobile banking services in India. Of this, 21 banks have already started providing these services to their customers. ICICI Bank now has eight million customers registered for mobile banking services. It is closely followed by HDFC Bank & State Bank of India.In RBI's Vision for Payment Systems in India- 2009-12, Mobile payments settlement network is one of the major projects intended to be pursued by banks. Technology will play a major role in these initiatives and will provide vendors new business opportunities in India.While internet penetration and use in India is relatively low, mobile phone penetration is much higher and growing rapidly. There are over 200 million mobile phone subscribers in India and the number continues to explode. Financial services companies are now working with mobile payment players like mChek to offer innovative mobile phone solutions to urban and rural Indian population. Reserve Bank of India has restrictions on non-bank involvement in money transfer. Therefore, development of mobile financial services application is being sponsored by banks in India.Mobile Banking ServicesMobile banking can offer services such as the following: Account Information Mini-statements and checking of account history Monitoring of term deposits Access to loan statements Access to card statements Mutual funds / equity statements Insurance policy management Pension plan management Status on cheque, stop payment on cheque Ordering cheque books Balance checking in the account and Recent transactions Payments, Deposits, Withdrawals, and Transfers Domestic and international fund transfers Mobile rechargingChallenges for Mobile Banking ServicesKey challenges in developing a sophisticated mobile banking application are: Handset operability: There are a large number of different mobile phone devices and it is a big challenge for banks to offer mobile banking solution on any type of device. Some of these devices support Java ME and others support SIM Application Toolkit, a WAP browser or only SMS. Initial interoperability issues however have been localized with countries like India using portals like R-World to enable the limitations of low end java based phones.

Security: Security of financial transactions, being executed from some remote location and transmission of financial information over the air, are the most complicated challenges that need to be addressed jointly by mobile application developers, wireless network service providers and the banks' IT departments. Security of any thick-client application running on the device In case the device is stolen, the hacker should require at least an ID/Password to access the application and authentication of the device with service provider before initiating a transaction. This would ensure that unauthorized devices are not connected to perform financial transactions. User ID / Password authentication of banks customer, encryption of the data being transmitted over the air, encryption of the data that will be stored in device for later / off-line analysis by the customer, one-time password (OTPs) are the latest tool used by financial and banking service providers in the fight against cyber fraud. Instead of relying on traditional memorized passwords, OTPs are requested by consumers each time they want to perform transactions using the online or mobile banking interface.

Scalability & Reliability: It would be expected from the mobile application to support personalization such as: Preferred Language Date / Time format Amount format Default transactions Standard Beneficiary list Alerts

Application Distribution & Settings: Operator settings are not really meant for critical operations since most of the settings are used for entertainment based activities. For Mobile Banking it is another area where some Banks are facing challenges. While some forward looking Banks are overhauling their gateways and reducing their reliance on Mobile Operators settings to enable customer's phones, Some Banks are actually asking that Customers come with regular Operator settings which in many instances might not be correct configurations settings. Banks that are looking at competing at this sector must look beyond operators settings which might not be correct, delayed in arrival, and may not come at all and not regularly updated. Some Mobile operators do update like every three months while some do not at all. For WAP and GPRS based Mobile Banking applications, mobile network coverage will also be an issue.Financial Inclusions means delivery of financial services at an affordable cost to vast sections of disadvantaged and low income groups Financial Inclusion may also be defined as the process of ensuring access to financial services and timely & adequate credit where needed by vulnerable groups such as weaker sections & low income groups at affordable cost. It mainly includes Savings, Credit, Insurance and Remittance facilities etc.The Reserve Bank of India (RBI) says that financial inclusion is not restricted merely to opening of bank accounts and should imply provision of all financial services like credit, remittance and overdraft facilities for the rural poor. The accounts must be operational to provide benefits beyond deposit of money like availability of credit, remittance facility and overdraft among others.The one billion numbers that today represents mobile phone owners in emerging markets without a bank account will grow to 1.7 billion by 2012. Similarly, un-banked users of mobile money will grow almost tenfold to 360 million from 45 million today. Theres an annual business worth $8 billion for the taking: $5 billion to be earned through direct fees for financial services rendered whenever someone uses the mobile phone to make a purchase or P2P payment, and another $3 billion in indirect revenues arising from the usage of voice, network and other services over mobile.With 85% of mobile subscribers being prepaid and a monthly spend over $2 bn, it is the low hanging watermelon. Mobile banking, which is catching up fast in the cities and hinterland, is not only helping the government to take a step forward towards fulfilling its aim of having one bank account for every household, but also saving it crores of rupees by way of reduced transaction costs. While the government incurs a transaction cost of Rs 12-13 for every Rs 100 it shells out, mobile banking helps it reduce the cost to a mere Rs 2. RBI estimates that around 40 per cent of Indians lack access to formal financial services and are largely 'unbanked'Mr. Sam Pitroda, advisor to Prime Minister on public information, the person who brought in the Telecom revolution in India, has said in a seminar on financial inclusion, that over 250,000 panchayats will soon be connected with broadband connections. He is planning to bring fibre cable to majority of them. According to him, financial inclusion cannot be achieved without inclusive growth and every initiative should be directed at the rural poor. He said mobile banking is the next big challenge for government and it will change the nature of banking in India. If merchants, bank and operator can come together, they can develop a platform for mobile banking. Mr. Pitroda said he is trying to set up new platforms for the new generation. For the first time we are a country of 600 million connected people.Thousands of people from rural areas across 12 states are likely to get their social security pension and wages paid under the National Rural Employment Guarantee Act (NREGA) scheme with the help of mobiles over the coming few months. In Andhra Pradesh alone, for instance, 250,000 people have registered for mobile banking services. The state government is rolling out a programme to enroll three million people by the end of 2008. Mobile banking pilots and full-scale operations has been conducted across 12 states, and the entire ecosystem is being managed by the government with the help of the Reserve Bank of India, banks, leading telecom operators and technology implementation partners.A Little World (ALW), a technology implementation partner, has collaborated with NXP Semiconductors to design a mobile for the AP government that encloses an RFID card, and works with ALW's micro-banking platform ZERO. The mobile acts as a branch of the bank by storing a database of customers. It also has a smartcard, which biometrically stores the identity of the customer such as name, address, photograph, fingerprint templates and relevant details of the savings or loan accounts held by the issuing bank. Customers get a secure electronic identity via phone or smartcard, while agents take deposits and dispense cash. ALW works with the banks on a revenue-sharing basis.Anurag Gupta, founder director & CEO of ALW, says: "We have carried out pilot projects with SBI in villages located in some of the most inaccessible and difficult terrains of the country such as Pithoragarh in Uttarakhand, Mizoram, Meghalaya, and remote villages in Andhra Pradesh." Lokanath Panda, director, ALW, also pointed out that SBI had tied up with the Indian Post to extend banking services especially in unbanked/under-banked areas. "Select post offices will make available to the public SBI's deposit and loan products, and ALW is the technology partner." ALW is also conducting a pilot programme with SKS Microfinance and the Bank of India to provide a mobile banking service that works on BSNL SIM cards.Airtel has already partnered with the Indian Farmers' Fertilizer Cooperative Limited (IFFCO) to set up IFFCO Kisan Sanchar Limited in Rajasthan. Under this initiative, the cooperative department will provide mobile handsets to farmers at marginal price through its outlets in the rural areas. These handsets would be loaded with green SIM cards, which will flash daily updates on agricultural practices and weather forecast free of cost. While he did not provide details, Kapoor hinted that the partnership deal would be extended to mobile banking services too. Kapoor reasons that with 55 per cent of the mobiles being internet-enabled, mobile banking would help bridge the digital divide.ICICI Bank account holders with Reliance handsets (even the low-end Rs 1,000 ones -with or without Internet connectivity) to make intra-bank (to ICICI account holders) money transfers. It has already tied up with HDFC to offer Reliance MPay - a virtual credit card.NRE Transfers through MBSCorporation Bank and Tata Teleservices have launched the first pan-India mobile-based financial inclusion service called `Green'. Initially, it is for mobile money transfer between migrant workers working in metros and tier-1 cities sending money back to their families in Karnataka and Kerala. This is a simple model where both the sender and the beneficiary open `no frills' accounts at PCOs, and then are able to remit money. The service is powered and the brand is owned by PayMate. The next step will be, only one of the parties needs to have a `no frills' account. And in due course, for the service to be viable and popular, perhaps it will need to evolve into a cash-in and cash-out service at either end, with no need for a mandatory bank account. And in time, perhaps, a UID linked to a job card. This is where NREGA marries with the UID project.

RESEARCH METHODOLOGY:In order to understand the reach of mobile banking as a financial service in the semi urban areas of Thane, the research method used was a structured survey research. A questionnaire was prepared and addressed to the residents of Vasai taluka. Five villages were targeted in this area with a total population of approximately, 22,000 as per a survey made by Bank of India (as displayed on their website). The sample size selected was 150 residents across these villages. The sample design used was simple random sampling.FINDINGS & ANALYSIS:The sample was divided into following villages as per the proportion of their population. Thus, the major sample size has been selected from the Juchandra village. Moreover, another reason for selecting major sample size from this village was that the proximity of the bank was closest to this village. Thus the awareness and acceptance of mobile banking in this village would give a true and fair view of the study.

As depicted in the above pie-chart, 60% of the sample is male and 40% is female.

The age group of 25 35 years was selected to be the majority respondents, as this is the age group expected to use mobile technology the most. Awareness of mobile banking in this age group is crucial.

The income pattern of the sample is shown in the above pie-chart. The income of 48% of the population was less than Rs. 1 Lakh. Thus, the revenue earned by the bank on these accounts is relatively very low. On the other, in absence of mobile banking acceptance, the transaction costs for the bank is very high.

As observed from the above pie-chart, though the income of people is less than Rs. 1 Lakh, 79% of the respondents, own a mobile phone. The rest of the population (21%), though do not own a mobile phone, they have access to mobiles owned by their relatives or friends.

Out of the total sample, even though 79% of the respondents own a mobile phone, only of the respondents own a mobile phone, only 24% have a bank account. This shows that though the penetration of mobile phone connectivity is so huge, accessibility to banks is relatively very low.

Mobile banking requires internet facility. Though mobile phone ownership is high, awareness about the internet in mobile is less. 60% of the respondents, either did not have internet facility in their mobiles, or did not know about this facility at all.

Out of the people who own a bank account, only 27% used mobile banking facility and 64% were aware about mobile banking facility provided by the bank.

After making the respondents aware about the mobile banking facility provided by their nearest bank : Bank of India, 79% of the respondents were willing to use this facility and only 21% were not willing on the grounds of security.

Majority of the respondents were interested to use the Accounting information and cheque book ordering facility, as there was no money involved in these transactions.

INTERPRETATION AND CONCLUSION

The Financial inclusion is emerging as a global hot topic. The G-20 has launched an expert group to look into the matter. Mobile banking has come in handy in many parts of the world with little or no Infrastructure development, especially in remote and rural areas. This part of the mobile commerce is also very popular in countries where most of their population is unbanked. In most of these places banks can only be found in big cities and customers have to travel hundreds of miles to the nearest bank.

Mobile banking is also seen as the most promising front end technology for broadening the access of banking in the country. Immense potential of mobile banking in the process of financial inclusion and financial growth is now well acknowledged. Its time for banking offerings to make the same evolutionary progress that automobiles, entertainment devices or mobile phones have made. This means offering choice, becoming smarter, better packaged, cheaper and easier to use. Through alliances with the right partners from the device, telecom, network, applications and retail space, Indian banks can turn this vision into reality.

With the expectation that the number of deposit account holders will double from its current 400 million to 800 million by 2019, banks need to find innovative ways of on boarding new customers and servicing existing ones. Clearly, there is no shortage of challenges or opportunities. The emergence of mobile telephony and its hi-tech variants such as 3G and BWA, kiosks, ATMs and Internet will ensure that banks get to ride the growth wave like other industries. Parallel to the Internet bank concept, we envisage the rise of the mobile-only bank, where every banking activity from origination and transaction to fulfilment and settlement can be completed using a mobile phone.

With the extensive Rural Mobile banking coverage planed by the Govt of India with the RBI & the banking sector, the true financial inclusion will be achieved in near future.

SUGGESTIONS AND RECOMMENDATIONSThe survey indicates that financial institutions still need to do more to educate consumers about the security of conducting financial activities on their cell phones and other mobile devices. A majority of respondents cited fear of transaction security as a key reason that would prevent them from using mobile banking. Due to lot of bank closures due to bankruptcy or scams, consumers are monitoring their finances especially bank statements on a regular basis. Thus mobile banking has a greater scope. Nearly two-thirds of the consumers surveyed reported contacting their financial institution once a month or more. Among owners of smart phones and other high-end devices, consumer interest and usage of mobile banking services was significantly higher than among users of basic cell phones. The rapid adoption of high-end mobile devices over the next couple of years suggests mobile banking may have a bright future.

BIBLIOGRAPHY AND REFERENCES

1. The Indian Journal of Commerce, Vol 63, April-June 2010.2. Financial Inclusion, Sameer Kochhar, Eastern Book Corporation, 2009.3. Promoting Financial Inclusion Through Innovative Policies, John D. Conroy, Julius Caesar Parrenas, Worapot Manupipatpong, 20104. The Hindu Business line, 7 Aug 20105. Financial Inclusion, M/s Taxmann Publications Pvt. Ltd., 2006.6. D Collins, J Morduch, S Rutherford and O Ruthven (2009). Portfolios of the poor: How the world's poor live on $2/day (Princeton: Princeton University Press).7. Rutherford, S (2001). The Poor and their Money (New Delhi: Oxford India Paperbacks).8. A Chaia, A 3. Dalal, T Goland, MJ Gonzlez, J Morduch and R Schiff (2009). Half the World is Unbanked.9. T Beck, A Demirguc-Kunt, P Honohan (2007). Finance for All? Policies and Pitfalls in Expanding Access10. A de la Torre, JC Gozzi and S Schmukler (2007). Innovative Experiences in Access to Finance: Market11. Mas (2009). The Economics of Branchless Banking. Innovations, Volume 4, Issue 2 (Boston, MA:12. MIT Press).13. T Lyman, D Porteous, and M Pickens (2008). Regulating Transformational Branchless Banking: Mobile14. Phones and Other Technology to Increase Access to Finance. CGAP Focus Note 43 (Washington, D.C.: CGAP).

ANNEXURE 1.1Form No.Name:Address:Gender:Male:Female:Age:Income: Less than Rs. 1,00,000 p.a. Rs.1,00,000 Rs. 2,00,000 p.a. Above Rs. 2,00,000 p.a. Marital Status: MarriedUnmarried1. Do you own a mobile?YesNo2. Does your mobile have GPRS facility?YesNo Dont Know 3. Do you use the GPRS Facility in your mobile?YesNo 4. Do you have a bank account?YesNo 5. Which bank do you hold your account in?

6. In which branch do you hold an account?

7. How many times usually do you visit the Less than 1 timebank branch every month?1 3 timesMore than 3 times

8. Are you aware that you can avail banking YesNofacilities through M-Banking?

9. Which Mobile Banking facilities are you aware of?

Account informationBalance checking in the account and Recent transactionsOrdering cheque book Status on cheque, stop payment on chequePayments DepositsTransfers Mobile recharging

10. Does your bank provide Mobile banking facilities?YesNo Dont Know

11. Would you like to avail the M-Banking facility?YesNo 12. Which M-Banking service would you avail of?

Account informationBalance checking in the account and Recent transactionsOrdering cheque book Status on cheque, stop payment on chequePayments DepositsTransfers Mobile recharging

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