Payments and transfers, particularly direct benefits transfers (DBT), are the big drivers of financial inclusion at present. Effective implementation calls for new partnerships between banks and non-bank entities. Yet the opportunity remains clouded under debate over turf, roles and accountability.
Central to the debate are three issues: (1) Can non-banks issue payment instruments and accept cash clarifying whether cash-in cash-out transactions constitute banking transactions. (2) Who will be ultimately responsible for systemic risks posed by opening retail payment transactions to non-banking entities. (3) Who will regulate the evolving ecosystem, a cocktail of multiple sectors?banks, telcos, ICT infrastructure and retail commerce?each with its own regulators in place?
As for the turf issue, currently only bank accounts have been allowed/enabled to credit and withdraw payments under the DBT, which will be largest pipeline of fund flows. The scope for non-banking actors remains limited under present limitations to the purposes and the ceilings of prepaid instruments. The real question is: can banks alone deliver financial inclusion? The answer, with the limited reach and footprint of banking sector, is easy. It would therefore serve to clarify the distinction between payments and other banking functions, emphasising that payment systems that do not intermediate funds do not pose financial risks to the banking sector.
As for systemic risks?money laundering, suspicious transactions, etc, the real issues are: the vast variance and latitude in KYC norms of banks and non-banks and RBI?s own capacity to monitor suspicious activity on non-bank payment platforms. RBI?s concern in all this debate is over its own accountability, as being the one entity finally holding the can if any scams erupt in financial inclusion. Unfortunately, relaxing the KYC regime for no-frills or basic accounts opened by agents will only add to the variance and potential risks.
Taking both together, the most practical if not ideal solution is right in the face: Aadhaar, the dark horse in the arena. All the systemic risk concerns pointed out by banks can be addressed with two policy decisions: (1) Make Aadhaar the foundation of all KYC processes; with the Aadhaar authentication being a common identifier architecture for KYC for bank accounts, mobile SIM registration, benefits transfers, remittances, and prepaid instruments?cards, mobile money. This will significantly address RBI concerns on systemic risk, money laundering and fraud. (2) Route semi-closed prepaid instrument transactions through the Aadhaar payments bridge?which is operated by the NPCI, thus providing sufficient monitoring and controls by the banking sector. An Aadhaar-authenticated cash-out transaction at a retail outlet/ATM is as secure as and at par with any authentication with a bank cash-out, especially in DBT, where Aadhaar numbers are linked to bank accounts.
Besides these two risk-mitigating advantages, Aadhaar-authenticated retail payment systems will also assist in a ?less cash society? by enabling beneficiaries to access and transact, through multiple instruments?ATMs, prepaid instruments, mobile money, stored value cards, debit and credit cards?without having to withdraw cash from a bank several kilometres away.
Thus, effective implementation of Aadhaar as the standard KYC architecture can harmonise all financial transactions and mitigate the systemic risks associated with pre-paid account issuers offering payments, cash-in cash-out, and limited value accounts.
If it?s all so simple, what?s the hold up, one might wonder.
One, the paperwork. Banks and RBI would perhaps like it clarified by the government that cash- in and cash-out without intermediation of funds need not be exclusive to banks. Related to it, that RBI and banks will not be liable for transactions by non-banking channels. In fact, banks have even asked for waiver of any liabilities related to Aadhaar-enabled transfers of DBT schemes.
Two, for banks the issue is also about losing lead in another blue ocean. Retail payment services, a $1,200 billion market. An India Infoline (IIFL) research report estimates annual flows of $90 billion ($40 billion from workmen remittances and $50 billion in DBT) besides $1,100 billion in consumption spending, of which $160 billion is estimated to be utility payments. These are opportunities where banks, payment service networks and telcos will partner as well as compete for market shares. The report estimates that telcos can capture a 40-50% share of the remittances and DBT market, if appropriately enabled. Banks would be somewhat concerned over losing the lead in this blue ocean, which requires massive retail footprint. Others may hesitate rolling out the retail infrastructure and back-end without the due clarification on role and scope. To quote that old, catchy IIFL slogan, ?It?s all about money, honey!?
Progress on financial inclusion will risk remaining a patchwork until these central issues are clarified for the benefit of all stakeholders. It?s all back again to the policymakers, this time to level the field and make the financial inclusion landscape more inclusive, perhaps.
The author is fellow, Indicus Centre for Financial Inclusion, and can be contacted at firstname.lastname@example.org