Suyash Rai of IFMR Finance Foundation, Raghav Narayana of IFMR Rural Finance in an informal conversation with Mr. Praveen Chakravarty, who is a volunteer in the Financial Inclusion team of UIDAI. Mr. Chakravarty was involved in the Jharkhand pilot project on the ground in Ranchi and Hazaribagh which was an important milestone for demonstrating a model for financial inclusion as a viable opportunity.

 

SR: Praveen, what are the different efforts for financial inclusion by the UIDAI?

Broadly, I would say 3 aspects on how UID can impact financial inclusion. First is a change that can be facilitated at the public policy level. Second, a change at the technology level. Third, a change at the business model level.

If there is a notification by the RBI that the UID suffices as a KYC proof for opening a bank account, then that is a change at the public policy level. Second, UIDAI has said that it will provide authentication information and identity services to help enable payment infrastructure in this country. This will be provided as a government good which will be free or minimally priced. Third, on the business model side, the combination of Business Correspondents [BC], along with the public policy and technology changes, can now fundamentally alter banking and financial inclusion. Now, through a combination of these three, is financial inclusion still an obligation that is mandated by the RBI on the banks or can this now be truly an economic opportunity?

UIDAI is expected to do 600 million enrolments across the country by 2014. As per the Request For Empanelment of banks with the UIDAI process, UIDAI will offer the residents a choice of whether they need a bank account, and if they say they do, UIDAI will give them multiple choices of banks that have expressed interest in being a partner bank. Once they choose a bank, UIDAI will then transfer the demographic data electronically to that bank, which will use it to open the accounts for these customers. This means banks can now open accounts in a batch process. The cost of customer acquisition becomes almost zero. In the last 60 years or so, we have opened around 120 million bank accounts. So out of the 600 million enrolments, even if 60 million bank accounts are opened, this can be a big fillip.

SR: How many banks have you already got this coordination done with?

This is open to all Scheduled banks in the country.

SR: Sp how is the interoperability? Banks are creating different platforms, to develop their BC channels. So the interoperability of BC touch points itself for multiple banks to transact is still a question isn’t it?

BCs have been deploying their own authentication and transaction technology. Now, UIDAI has developed a set of standards called the Micro-ATM standards. Any device manufacturer can build to these specifications. There is no need to collect, or verify identification information, or issue biometric cards at the BC level. So now, it can be made interoperable. From a technology perspective, all the elements are there to make it interoperable.

SR: What kind of authentication will be possible through UID?

The authentication policy is being worked out currently and will be released soon. Currently there are tests and pilots being conducted on biometric as well as demographic authentication using devices made to a standard set of specifications.

RN: Can you brief us about the Jharkhand pilot that the UID recently carried out?

We picked a few district blocks in Jharkhand like Hazaribagh. We wanted to do UID enrolments there, and see how we can demonstrate the potential for financial inclusion. These are villages with very little banking access. We identified 3 partner banks – ICICI Bank, Bank of India and Union Bank of India across 30-35 villages. These banks in turn appointed BCs. We went and told the people that they can enrol for Aadhar and while they do that, they can also get a bank account. Initially all the banks were of the mind-set that one family or household would require one bank account, but my field experience in Jharkhand now tells me that the woman in a household was very clear that she wanted a separate bank account. The result was that around 30,000 accounts were opened in Hazaribagh alone in a matter of 2-3 months.

Once these accounts were opened, we also worked with the Rural Development Department on the muster rolls. We tried to see if we could map every NREGA job card number to their Aadhar number, and the Aadhar linked bank account number. The NREGA wages can then be disbursed through these bank accounts.

Earlier, they would travel about 40km and lose a day’s wage just to withdraw their wages. Now banks  can deploy BCs who have devices made to the micro-ATM specifications so that villagers can do cash-in, cash-out and transfers at their doorstep.

RN:  How did the Jharkhand pilot do in terms of your own expectations?

The first question about the pilot was around connectivity, especially in places like Hazaribagh, because if we could do it there, we could do it any remote place. So it is now proved that connectivity was not an issue. Second, we proved that fingerprint based biometric authentication does work. Third, we worked through the NPCI, which acted as the inter-bank switch and the authentication agency through which all authentication requests were routed.

RN: Was there anything different in this pilot that the UID did from usual biometric data collection? Was any special device used?

We collect all ten fingerprints and we also collect iris scan, as opposed to only 2 or 3 fingerprints by some BCs. Over a population of 1.2 billion, a combination of ten sets of fingerprints and iris scan can make it unique and easily identifiable.

SR: What type of connectivity was available at these BC points?

We used GSM connections. Regular cell-phones were sufficient. If the cell-phones work, the micro-ATM also works.

SR: If a financial services provider, other than just asking for authentication, wants to access to client database, demographic information, to use it for client acquisition, will the information be provided?

Such information will not be provided. There will only be a yes or no answer for authentication.

RN: For your interface with the bank, once the Jharkhand pilot scales and goes across the country, is there a revenue model that the UIDAI is looking at, for the banks and BCs and for the UIDAI itself?

In my personal opinion, there could be various revenue models and incentive structures for this model of financial inclusion to work and scale. Currently, financial inclusion is more of a mandate that is being forced upon the banks by the RBI. The banks don’t see it necessarily as an economic opportunity and unless we make it one, we will not have a scalable model of financial inclusion.  Let us consider the economics of this.

On the cost side, currently banks and their BCs incur a significant customer acquisition cost through a combination of KYC checks, identity validation through their own biometric cards as well as marketing costs. By piggy-backing on the UIDAI’s enrolment efforts, banks and BCs can bring down their customer acquisition costs to almost zero.

On the revenue side for the banks and their BCs, there is a possible combination of revenue streams such as a disbursement fee for government subsidies,  a small float income from residents, opportunity for the BC to cross-sell multiple products such as micro-insurance, telecom SIM cards etc.

- By Ignacio Mas, Bill & Melinda Gates Foundation

What a great financial inclusion journey India is on. Banks, government, NGOs, civil soviety and private sector businesses are jumping onboard as the train accelerates.

At the regulatory level, the Reserve Bank of India created a special category of reduced Know Your Customer (KYC) accounts five years ago that made it easier for any Indian to get a savings account near where they live and work. The RBI has also been providing increasingly business-friendly guidelines on Business Correspondents (BCs) and mobile transactions.

Some infrastructure pieces are now falling into place. The Unique Identity Authority of India (UIDAI) is building a biometric online authentication mechanism that can further drive mass account opening. It also offers an alternative secure transaction authentication mechanism which bypasses the mobile operator’s SIM card. The National Payments Corporation of India (NPCI) has created a mobile-enabled micro-transaction switch (the Interbank Mobile Payment Service [IMPS]) which potentially might allow any bank account holder to send money instantly to any of the other 45% of Indians who currently have access to a bank account, right from their mobile phone.

Pressure is also being applied to broaden banking services for the poor at the policy and budgetary level. The government’s Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) and other social welfare payment schemes have been key agents helping their recipients to open accounts, and have put substantial transaction volumes on the table. In the national budget there is a substantial sum set aside to encourage more people to open their own bank accounts. The Ministry of Finance and the RBI have set  financial inclusion targets for banks in rural environments, and have plans to monitor them closely.

Larger banks have been busy putting their extensive branch networks online in order to allow for real-time transactions between branches, which should allow them to offer innovative services much more easily. They have also been experimenting with a variety of new technology-enabled delivery models that extend beyond branches. The mobile operators, and even a leading handset manufacturer, have also been raring to go. They are now negotiating partnerships with banks to take the Business Correspondent model to scale.

The pieces are starting to come together. So what more can be done to stimulate the market? Three important things immediately come to mind, starting with account opening. No-frills accounts reduced the pain of opening bank accounts on the client side. Now there is a need to ease the burden on banks. Eliminate the need to transport account opening forms and paper copies of documents back to the branch.  This would significantly reduce account opening costs and create the possibility of immediate, all-electronic account opening through Business Correspondents. This will be necessary for the next few years, until national ID cards are widely available and taken up.

On electronic payments, the IMPS promises to add substantial value to people’s savings accounts by permitting secure, convenient and affordable money transfers to any other account. Accounts that combine store-of-value and means-of-payment attributes are much more likely to displace informal savings options and drive account usage. But that extra value of a savings account will be there only if banks promote mobile payments among their lower-value customers and agree to low interchange fees.

Cash in/cash out networks will be more ubiquitous and sustainable if retail outlets are able to serve the cash needs of any bank customer. As long as Business Correspondents operate on a prepaid, real-time transaction authorization basis, there is minimal financial risk involved with cash in/out transactions at BCs. A potentially huge side-effect of IMPS is that it might allow any retailer with a bank account to service the liquidity needs of any customer of any bank – with interbank settlement at the back end. BCs’ retail outlets should not be exclusive. More to the point: Business Correspondent networks could in fact be de-linked from individual banks and made to serve any bank customer.

There is a lot of energy and a palpable sense of possibility around financial inclusion in India. Let’s hope all these efforts do not fall short of the great hopes vested in them. An unsatisfactory outcome would be lots of new accounts and little usage – we’ve been there. We need to ensure there is convenience, value and liquidity on those accounts.

[Ignacio Mas is our featured guest blogger and is an expert on mobile banking and electronic payments. Click here to read his other blogs.]