Sucheta Dalal :Mobile banking needs regulatory fr<x>amework for growth
Sucheta Dalal

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Mobile banking needs regulatory framework for growth  

January 6, 2010

The Reserve Bank of India (RBI) has been trying to push mobile banking in a big way across the country as a medium for financial inclusion. However, due to lack of a regulatory framework, clear guidelines and security, bankers are treading with caution. They feel that in case of a fraudulent activity in any mobile banking transaction, they would be held accountable.


“The issue lies as to where the banks’, customers’ and mobile operators’ jurisdiction starts and ends,” said a senior official from the Indian Banks’ Association (IBA).


While banks agree that they are the channels through which mobile banking transactions would take place, mobile companies prefer to call themselves as facilitators.


“There are too many things which have to come into place for this kind of service (mobile banking). It’s not only the mobile service providers but also the banks (who have to take responsibility in case of any illegal activity). As of now, what we really are doing is providing a medium for these transactions,” an official from Vodafone said.


Besides the illegal activity issue, mobile banking does not provide facilities like ‘stop payment’ as banks are unable to cancel a transaction after approving the same.


Given the convenience and the number of mobile phone users in India, mobile banking is bound to pick up. The central bank has been very active in trying to take advantage of the reach and penetration of mobiles in the county. Last month, the RBI increased the amount of money that can be transacted through mobile phones to Rs50,000 every day, up from Rs5,000 per day.


Speaking at the India Telecom 2009 conference, RBI’s deputy governor Dr KC Chakrabarty had said, “While e-commerce has skipped the majority of the population due to the cost of setting up of such channels, mobile commerce (m-commerce) has the capability to be inclusive due to the widespread use of mobile phones.”


In India, out of the 32 banks which have been given approval to provide mobile banking facilities, only 21 have started providing these services. However, there is not much activity in this space, resulting in low transaction volumes, Dr Chakrabarty added. According to the deputy governor, the reason for low uptake of mobile banking facilities is the requirement of end-to-end encryption that makes implementation expensive.


Echoing the same view, German scientist Karsten Nohl, a security researcher at the University of Virginia, said hackers can easily intercept the wireless network of GSM operators in less than a second. In an interview to CIOL, he said that SMS applications used for banking and financial services are also vulnerable to this breach of security and current security solutions available for mobile phones are not capable of detecting such security leaks. During his research, Mr Nohl found that devices to decrypt an encryption code are present in India and people are unethically and illegally bugging phones of subscribers.


With the alarming status of security measures for mobile banking, many bankers think that they would be made liable for any illegal activity or financial loss to the m-commerce consumer. “Since we are the channels through which the transactions take place, we will have to take up the responsibility,” an official from Axis Bank said.


More so, the fears of bankers may well be justified. According to a senior official from the National Payment Corporation of India (NCPI), banks would have to pay for any faulty transactions and money theft through cell phones. NCPI, a newly established company promoted by Indian banks, is building a robust and state-of-the-art national level retail electronic payment system infrastructure in the country. “NPCI would soon be building a central infrastructure for mobile payments which will monitor intra-banking (activities),” said AP Hota, chief executive officer, NCPI.


The other issue banks face in providing mobile banking is that they are required to tie up with individual service providers for enabling such services. Banks face difficulties in entering into such partnerships. Again, mobile service providers do not open up channels for facilitating mobile banking services by banks.


“The successful partnering of banks and mobile service providers would also need the resolution of the issue related to customer ownership,” the deputy governor of RBI had said.


Currently, there are three modes of transactions—Short Messaging Service (SMS), client applications and mobile web. Banks are offering mobile banking tie-ups with various mobile providers to offer the back-end solutions. PayMate is a service provider offering back-end solutions to 24 leading banks and has seen a nearly 100% rise in subscribers since its inception.


In India, SMS transactions are the most popular for conducting basic bank transactions. According to Ajay Adiseshann, founder and managing director, PayMate, “All basic banking transactions such as balance information, cheque book request, etc, can be accomplished via SMS or on mobile-based applications that some banks use.” 


Due to the use of a two-factor authentication process of mobile number and mPIN authentication over Interactive Voice Response (IVR), the risks involved in using mobile banking are lower than other modes of transactions. In mobile banking, there is enhanced risk control. When a consumer enrols for this facility he provides the mobile number through which the transactions have to be carried out.


According to a research report by Juniper Research, by 2014, the international mobile money transfer market will be worth in excess of $65 billion. The growth will be driven by migrant workers based in developed countries, rising global unemployment and increased immigration controls by governments. By 2010, mobile money transfers will see massive expansion in African countries, India and the rest of Asia, the report added.


The number of telephone subscribers in India increased to 543.2 million at the end of November from 525.65 million in October 2009, thereby registering a growth rate of 3.34%. With this, the overall tele-density in the country had reached 46.32, said Telecom Regulatory Authority of India (TRAI), in its latest report. When you compare this figure with the total number of bank customers across the country, there is a wide gap.


With initiatives like boosting financial inclusion, the government is trying to lower the gap. Planning commission deputy chairman Montek Singh Ahluwalia, had said that under financial inclusion, the government is trying to develop a system where people below poverty line or whose income is around Rs600 per month would be given access to financial institutions like banks. This will help them to have less dependency on money lenders, who usually lend at very high interest rates of around 60% per annum, he said.


Mobile phones, with their wider reach and depth, would definitely play a very big role in financial inclusion, provided there is a regulatory framework that can allow secure and safe transactions.

—  Yogesh Sapkale with Aaron Rodrigues


-- Sucheta Dalal