FINAL PAPER

Proposed Title: Mobile banking & m‐Commerce and related issues.

Authors:

Mr. Sourabh Agarwal, 1st year MBA student, SITM

Email id: agrwl.sourabh@gmail.com
Contact Details: Room No 273, Boys Hostel SITM, Symbiosis Knowledge Village,
Near Lupin Research Park, Lavale, Mulashi Pune 411042
Contact No.: +91 9011037273
Mr. Vikram Singh Mains 1st year MBA student, SITM
Email id: vikramsingh_mains@yahoo.co.in
Mr. A.V. Chirputkar, Asst Professor-Finance, SITM
Email id: chirputkar@symbiosistelecom.com
Mr. Giri Hallur, Asst Professor-Telecom, SITM
Email id: girihallur@ symbiosistelecom.com

Through this paper we would like to present the current scenario in Developed/Developing
countries so as to highlight the reasons that have enabled these nations to pioneer or
successfully extend m-banking & m-commerce services to its citizens. This paper also depicts
the existing regulatory mechanism in the Indian context and suggests changes that will act as
enablers. This includes the detailed study of RBI guidelines and its role in the m-banking
ecosystem. We have studied countries like Kenya, South Africa, Japan, USA to understand the
reasons behind their success of m-banking & m-commerce. We have explored the possibility
of partnering with other agencies like Post Offices which are present in 89% of the rural areas
and companies like BillDesk that can play an important role by becoming a third party in the
eco-system of m-commerce. We have also studied the likely impact of Union Budget 2010-11
on banking sector & hence on m-commerce.
Introduction
According to the World Bank it is estimated that an extra 10 phone per 100 people in a typical
developing country boosts GDP growth by 0.8% points 1. In India the total wireless
subscription as on 31st December 2009 has touched 525.15 million, with the addition of 19.1
million subscribers in same month. Our wireless tele-density stands at 44.732. The total
broadband subscriber base too has increased from 7.57 million in November-09 to 7.83 million
in December-09, there by showing a growth of 3.56%. This shows that the basic infrastructure
required for the uptake of m-commerce & e-commerce has gradually been built. But at the
same time we have over five lakh un-banked villages in our country3. In an attempt to extend
banking services in villages, banks have been trying to establish branches in gram panchayats.
For example SBI had earlier entered into a Memorandum of Understanding with the Orissa
Government to provide banking outposts in all 6,234 gram panchayats to facilitate Electronic
Benefit Transfer of National Rural Employment Guarantee payments and other social security
benefits throughout the state paving the way for financial inclusion of disadvantaged and low
income groups4.

On the mobile operator’s side the picture is not rosy with average revenue per minute (ARPM)
declining rapidly at 5%-6% quarter-on-quarter in 2009. Voice ARPM has declined from 75-85
paisa in the first quarter of FY08 to 45-55 paisa in the second quarter of FY10.The share of
rural areas in additions of new subscribers too has increased from 25.6 % in Sept 08 to 29.8%
in Sept 095. This factor is responsible for further bringing down the ARPU.

Potential of m-commerce in India: It is estimated that out of the 321 million wage earners,
all carry mobile phones, but only 40 percent are involved in the banking activities of the
country6. 41% of the total population in India, 40% of urban population and 61% of rural
population is unbanked7. According to financial services and research firm Celent claims, in
2010, nearly 35 per cent households registered for online banking will use mobile banking too.
This will increase the mobile banking user base to 2 per cent from last year’s 0.2 per cent.
These facts present a great potential for mobile operators to increase their VAS revenues
through mobile banking in the mobile-connected but unbanked pockets of our country. The
banks too have an opportunity to extend their reach to the unbanked population through the
mobile operator at a much lower cost. Once this population is served by m-banking the same
service can be extended to m-commerce. The potential of m-commerce can also be understood
by various examples of m-commerce deployment around the world with varied economic
stature.

Present scenario in Developed/Developing counties

The pioneering step of offering m-commerce was taken by NTT DOCOMO in Japan when it
offered its subscribers the service of “mobile wallet” in 2004.But, the most successful example
of mobile money is M-PESA, launched in Kenya by Safaricom of Kenya. It has about 7mn
users out of population of 38mn & 18.3mn mobile handsets. The income of Kenyan
households using M-PESA have increased by 5-30% since they started mobile banking.
Similarly, there are many more examples of success of m-commerce around the world.

1. MTN launched Farmer’s friend, phone-based agricultural-information service in

Uganda

2. Google & the Grameen Foundation’s “Application laboratory”, or AppLab

3. China Mobile service, Nong Xin Tong, providing the same services has reached over
50mn users. It also runs a website 12582.com.

4. TradeNet launched in Ghana in 2005

5. CellBazar in Bangladesh

6. Wizzit in South Africa

7. Celpay in Zambia

8. Gcash & Smart money in Phillipines

There are more facts that are revealed after study of success stories of various countries of m-
commerce. Mobile commerce means something different to each country and to each mobile
network operator. There is no universal approach to the product, its deployment and its use
even within a country. The uptake for mobile commerce solutions is expected to be more
aggressive in lesser developed economies in near future. Some markets are dominated by the
mobile operator, while others will be dominated by the banks. Still others will have a mix. The
reasons for success of m-commerce in Japan & USA are:

1. Acceptability of technology

2. Minimal constraints from Regulatory

3. Same regulatory authority for IT & telecom in Japan

4. High teledensity & per capita income

5. High revenue share given to the VAS providers.

Reasons for success of M-PESA in Kenya are:

1. The unusually high cost of money transfer

2. The unusually high market share of Safaricom(80%), the main mobile operator
 3. The regulator’s decision to allow the scheme to proceed, even without formal
regulatory approval

4. The post-election violence in the country in early 2008

Existing framework for m‐banking in India

Practically, India has implemented m-banking services only and no other m-commerce service
is implemented in India. Following are the guidelines given by RBI in December, 20098:

1. Transaction limit: Banks are now permitted to offer this service to their customers
subject to a daily cap of Rs 50,000/- per customer for both funds transfer and
transactions involving purchase of goods/services. Presently, such transactions are
subject to separate caps of Rs 5000/- and Rs 10000/ -respectively.

2. Technology and Security Standard: Transactions up to Rs 1000/- can be facilitated by

banks without end-to-end encryption. The risk aspects involved in such transactions
may be addressed by the banks through adequate security measures.

3. Remittance of funds for disbursement in cash:

In order to facilitate the use of mobile phones for remittance of cash, banks are permitted to
provide fund transfer services which facilitate transfer of funds from the accounts of their
customers for delivery in cash to the recipients. The disbursal of funds to recipients of such
services can be facilitated at ATMs or through any agent(s) appointed by the bank as business
correspondents. Such fund transfer service shall be provided by banks subject to the following
conditions:-

1. The maximum value of such transfers shall be Rs 5000/- per transaction.

2. Banks may place suitable cap on the velocity of such transactions, subject to a
maximum value of Rs 25,000/- per month, per customer.

3. The disbursal of funds at the agent/ATM shall be permitted only after identification of
the recipient. In this connection, attention of banks is drawn to the provisions of the
Notification dated November 12, 2009, issued by Government of India, under
Prevention of Money Laundering Act, 2002, as amended from time to time.

4. Banks may carry out proper due diligence of the persons before appointing them as
authorized agents for such services.

5. Banks shall be responsible as principals for all the acts of omission or commission of
their agents.
Technical & Regulatory issues in m‐Banking:

Some of the issues which RBI suggested mobile service providers & TRAI to examine are9

1. Facilitation of mobile banking requires tie-ups with individual service providers for
enabling such services. Banks face difficulties in entering into such partnerships.

2. MSPs do not open up channels for facilitating mobile banking services by banks-
Opening up USSD (Unstructured Supplementary Services Data) channel for mobile
banking and enabling the accessing of mobile banking facilities through all GPRS
connections.

Present volume of e-commerce transactions in India9

The total amount of e-commerce in India:

1. ECS (Electronic Clearing Service)

The volume of ECS (Debit) transactions increased from 75,202 thousand to 1,60,055
thousand during this period.

2. NEFT (National Electronic Fund Transfer)

The aggregate value of transactions increased to Rs.2,51,956 crore during 2008-09

3. RTGS (Real Time Gross Settlement)

The daily average volume of transactions is 90,000 for about Rs.1,200 billion of which
82,000 transactions for about Rs.980 billion pertained to customer transactions as at end of
August 2009.

Study of government initiative as mentioned in Union Budget & Economic

Survey10
The Government is also committed to GDP growth which is evidenced in its Union Budget
2010-2011. For overall growth it is also required that banking sector financial inclusion along
with growth in telecom sector may bring more benefits to society at large.

Financial inclusion is seen as a major factor for overall economic growth as it indicates
inclusion of those who have been deprived of banking system. The barriers evidenced in
financial inclusion are – awareness of banking system, financial literacy & spread of
knowledge of banking system among the citizens especially at rural areas and partly at urban
and semi-urban area.

The financial inclusion which may contribute to overall GDP growth can be achieved partly
with the help of m-banking coupled with m-commerce.

According to RBI guidelines, “mobile banking transactions” is undertaking banking

transactions using mobile phones by bank customers that involve credit/debit to their
accounts.11

Related to Banks:

a) Banking Licenses: RBI is considering giving some additional banking licenses to

private sector players. Non Banking Financial Companies could also be considered, if
they meet the RBI’s eligibility criteria. The commitment to growth in banking sector
along with allowing mobile banking will help to achieve the objective.

b) Public Sector Bank Capitalization: Rs.16,500 crore provided to ensure that the Public
Sector Banks are able to attain a minimum 8 per cent Tier-I capital by March 31, 2011.

c) Recapitalization of Regional Rural Banks (RRB): Government to provide further

capital to strengthen the RRBs so that they have adequate capital base to support
increased lending to the rural economy.

Related to Financial Inclusion:

a) Appropriate Banking facilities to be provided to habitations having population in

excess of 2000 by March, 2012.

b) Insurance and other services to be provided using the Business Correspondent model.
By this arrangement, it is proposed to cover 60,000 habitations.

c) Augmentation of Rs.100 crore each for the Financial Inclusion Fund (FIF) and the
Financial Inclusion Technology Fund, which shall be contributed by Government of
India, RBI and NABARD.

Rural Development:

a) Rs. 66,100 crore provided for Rural Development.

b) Allocation for Mahatma Gandhi National Rural Employment Guarantee Scheme

stepped up to Rs.40,100 crore in 2010-11.

c) An amount of Rs.48,000 crore allocated for rural infrastructure programme under

Bharat Nirman.
Other relevant Scheme:

a) A new initiative, “Swavalamban” will be available for persons who join New Pension
Scheme (NPS), with a minimum contribution of Rs.1,000 and a maximum contribution
of Rs.12,000 per annum during the financial year 2010-11, wherein Government will
contribute Rs.1,000 per year to each NPS account opened in the year 2010-11.

b) Allocation of Rs.100 crore made for this initiative. Rs 1,900 crore allocated to the
Unique Identification Authority of India (UIDAI) for 2010-11. UIDAI will be able to
meet its commitments of issuing the first set of UID numbers in the coming year.

c) A Technology Advisory Group for Unique Projects (TAGUP) to be set up to look into
various technological and systemic issues for effective tax administration and financial
governance.

To make these initiatives deliver, certain changes are recommended

Stage 1 services – Financial literacy based – can be provided by bank along with telecom
operators. The VAS provider may help them building financial literacy. This can be typically
enhanced and channelized through various primary schools teachers at rural and remote levels.
Even NGOs can act as financial literacy intermediary (Allowing companies under Section 25
of the Companies Act to work in these areas or even as BC.) In the days to come like
Computer literacy acted as a major force, mobile literacy may act as replacement. Further to it
overall literacy and education through mobile is helpful. Once this stage is achieved, a base
can be created for subsequent development. VAS providers & telecom operators may sell their
services to earn their pie and banks and other financial intermediaries will have to wait till
subsequent stages implementation. As per the RBI initiatives it has already undertaken a
project titled “Project Financial Literacy” which may be in line with above.12

Stage 2 – Information based services like balance enquiry etc.

Stage 3 Services – Savings based – The money saved is money earned. Special efforts will
have to be made to initiate and enhance savings base at these areas. The savings at bank level
can be enhanced through mobile operators where operators can act as agents and banks will be
the recipient of deposits. There are various schemes which help rural population to earn
minimum wages, through self employment, or other means, the money earned / generated at
these areas can be channelized to banks through intermediaries. E.g.: Pigmy Deposit – A daily
savings scheme at your doorsteps. Banks may also use the services of Business Correspondent
appointed in compliance with RBI guidelines, for extending this facility to their customers. 11

The process implies in the following diagram as

Citizens – Money collecting agent having mobile handset and license to act as intermediary –
Bank branch – banks – Money may come in the economy

A basic saving account with bank is a necessity which would lead to safety of funds, security
for future along with earning interest on it on daily basis. (www.rbi.org.in notification dated
04th March 2010 & 19th February 2010)
If such unbanked population is covered by telecom operators along with licensed
intermediaries (Business correspondents) vide RBI guideline January 2006, then the
proportion of unbanked population will be reduced since such population can be covered
through mobile operators along with licensed intermediaries. The normal route of channelizing
the savings along with constant financial literacy will lead to offering more banking products
to citizens which may be in the form of Fixed Deposits, Recurring Deposits and other schemes
which will increase the liquidity base for banks, increase savings at poor level, they will earn
interest on the same and it will ensure the future for them. The telecom operators and VAS
providers will be facilitators which may have to design their business model. (Ref: August
2008: Banks can engage companies registered under Section 25 of the Companies Act, 1956,
as Business Correspondents (BCs) provided in such Section 25 Companies NBFCs, banks,
telecom companies and other corporate entities or their holding companies do not have equity
holdings in excess of 10 %.)

Stage 4 Other Services leading to Savings – At a later stage a few more schemes can be
offered which are;

 Mutual Fund

 Insurance

 New Pension Scheme which is an excellent opportunity

However, only those banks who have implemented core banking solutions would be permitted
to provide mobile banking services11.This may limit the penetration of m-banking & m-
commerce since all the banks that have rural presence may not have core banking solution.

Stage 5 Remittances – It carries more risk as compared to above models. For this existing
RBI guidelines are sufficient. Over a period of time growth in micro finance is also expected.

For e.g.: State Bank of India has gone ahead with above and has plans for the same. Bank has
designed and implemented SBI Tiny Card savings bank accounts based on smart card based
technology, operated with fingerprint identification. The process works through POS
comprising of a mobile phone, fingerprint scanner & printer. The technology will support
opening and operation of Saving, Recurring Deposits products and remittance products.

Stage 6- Offering of Credit and loans and advances against their deposits and / or offering
other banking products to this citizens.

Mobile – banking alliance – If the banks partner with mobile operators then it will help them
to penetrate at rural areas. If mobile operators tie up with banks for mobile payments then for
banks mobile operators can act as intermediaries for collecting the savings and other banking
transactions. Point of sale terminals, biometrics and smart cards can be offered subsequently.
Even though on different savings scheme as mentioned above the nominal rate of return is
same for all citizens, rural unbanked population is likely to gain advantage since the tax rate
will be nil and inflation rate may be lower to the exclusive advantage to rural citizens.

Information Security is most critical to the business of mobile banking services and its
underlying operations11.

Banks offering mobile banking service must ensure that customers having mobile phones of
any network operator is in a position to avail of the service. The visionary objective may be
total financial inclusion irrespective of banks and mobile operators (like interbank transactions
shall also be permitted).

Existing framework for m-commerce in India

From the literature available it is clear that only concerns involving m-banking has been
addressed by the banking regulator, the RBI. For other areas like digital rights Management,
copyright issues, invasion of subscriber privacy, unfair trade practices etc have not been
debated or researched on.

To understand the role & scope of the various sector regulators we need to first understand the
scope of m-commerce and e-commerce.

M-commerce has been defined as “any transaction with a monetary value that is conducted via
a mobile telecommunication network”13. In a very broad sense m-commerce includes all
services that can be initiated over mobile devices such as voice telephony, SMS-based
services, internet access on mobile, payments for goods and services through mobile, services
over local radio systems like Wi-Fi, Bluetooth, NFC etc13.

Electronic- commerce signifies an “anytime access” to business processes, however the access
to computer networks is stationary. The services are not completely independent of the
geographic location of the user13 and most importantly the user has to possess certain basic
operating knowledge of computers & the internet.

M-Commerce signifies an “anytime and anywhere access” to business processes. The access
takes place using mobile communication networks, making availment of these services
independent of the geographic location of the user [Hohenberg and Rufera, 2004].

The key difference between the two is that for m-commerce the user neither needs knowledge
about internet/PC nor does he need to be an expert with his handset. The user can still avail the
services just by following the guidance provided through an Interactive Voice Response (IVR)
system. So, the mobile operator or the mobile payment platform provider should not treated
merely as a conduit like is the case with the internet. The RBI guidelines on mobile banking
provide specific instructions for banks14. We feel there is a need for such guidelines for
telecom operators, mobile payments gateway providers and any other members in the value
chain. During the period 1997-2002 when incumbents had different interconnection
agreements with different mobile operators the TRAI intervened and issued a reference
interconnect agreement.

Since the value chain for m-commerce is much unorganized here too we feel the TRAI should
intervene and provide a reference VAS agreement to be signed between the various members
of the value chain and the telecom operator.

Post 3G auction when the m-commerce will find more acceptance among the users it may be
used for other purposes like content download, banking, advertising etc. These services fall
outside the scope of regulation of the TRAI. And so in the event of a dispute co-ordination
among the various ministries and the sector regulators will be required. Moreover some
services may involve the approval of more than two ministries (e.g.: for offering movie
download service we may require approval of I&B ministry and telecom). For overcoming
similar problems in wireless installations the DoT under the purview of WPC has constituted
Standing Advisory Committee on Frequency Allocation (SACFA). The SACFA has members
from DD, AIR, WPC, ISRO, Defense etc. Each of these members issue a No-Objection
Certificate for the particular installation after which the installation can be commissioned.

In the convergence of device & services there is scope of unfair trade practices hence the need
for involvement of MRTPC or Competition Commission of India.

The Ministries /Regulatory bodies that will play key roles in m-commerce are15:

 Ministry of Information and Broadcasting (content),

 Ministry of Communication & Information Technology

 Reserve Bank of India (Finance),

 Telecom Regulatory Authority of India (carriage),

 Advertising Council of India (advertisements),

 Securities and Exchange Board of India (capital markets),

 Competition Commission of India

We suggest that Advisory Committee on m-commerce should be constituted under the

chairmanship of TRAI comprising of representatives of each of the above mentioned bodies.
This committee will approve various m-commerce services that the service providers wish to
provide.
Initiatives from Indian mobile operators/banks
1. MTS India, the Mobile services brand of Sistema Shyam Tele Services Limited (SSTL)
roped in UTIBA the global supplier of mobile financial transaction platforms, to offer
electronic top-up option on prepaid recharge and range of m-Commerce value added
services to its CDMA Mobile subscribers across India16.

2. State Bank of India in association with GE Capital has launched mShop to enable its
customers shop from over 100 merchants across the country, using their mobile
phones17.

3. A pilot project on m-commerce is started by collaboration of Nokia, Yes Bank &

Obopay in Pune. As per our observation, people have shown a lot of interest in these
services. Their major concerns are how easy it is to operate & what are their
transactions secure.

Key Concerns
1. Issue of ownership of customers

2. Security Concerns

3. High Transfer Charges

4. Changes in revenue sharing model between the VAS provider/bank and the telecom
operator.

Recommendations
1. As suggested earlier, an Advisory Committee for M-Commerce should be set up

2. Guiding principles from TRAI for telecom

3. Security involving UID should be implemented fast

4. The concept of Virtual SIM card should be explored & adapted to the Indian market.
References
1) Economist October, 2009

2) http://www.trai.gov.in/WriteReadData/trai/upload/PressReleases/721/Pr27jan2010no8.
pdf

3) http://beta.thehindu.com/business/companies/article98836.ece

4) http://www.cmlinks.com/sbi/NewsText.asp?Code=1375&period=1001&srno=9031003
020

5) http://www.trai.gov.in/WriteReadData/trai/upload/Reports/49/Report7jan10.pdf

6) http://paymate.co.in/web/MPOWER/MPOWER_Sep_08.pdf

7) www.nabard.org/departments/ppt/Bank%20of%20India.ppt

8) http://rbidocs.rbi.org.in/rdocs/notification/PDFs/MGR241209.pdf

9) http://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/DGKCCS0412009.pdf

10) http://indiabudget.nic.in

11) Mobile Banking transactions in India - Operative Guidelines for Banks – RBI,
RBI/2008-09/208DPSS.CO.No.619/02.23.02/ 2008-09

12) www.rbi.org.in

13) From Electronic To Mobile Commerce: Technology Convergence Enables Innovative

Business Services By Rajnish Tiwari1, Stephan Buse2 and Cornelius Herstatt3

14) The RBI guidelines on mobile banking:

www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=1660

15) Government Policies & Regulations: Impact on Mobile Commerce in Indian Context
by Deepali Sharma, Indian Broadcasting (Engineering) Services, Government of India,
Rajluxmi Murthy, Assistant Professor, Indian Institute of Management Bangalore,
D.Krishna Sundar, Associate Professor, Indian Institute of Management Bangalore

16) http://telecomtalk.info/mts-india-ties-up-with-utiba-to-offer-e-top-up-and-m-
commerce-vas/16793/

17) http://www.financialexpress.com/news/sbi-card-launches-mshop/544163/