Traditional bank architecture is based on bank branches. The branches ensure the physical security of your savings. You go there to deposit and withdraw money, negotiate loans, and engage in other financial transactions.
In the past two decades, the banking architecture has changed. The automated teller machine (ATM) has been a big innovation. Credit and debit cards have created new financial spaces. Some banks have experimented with rural agents.
Yet the bank branch has remained the bedrock of the banking system. You need a bank account in a branch before you can use an ATM or credit card.
That may be about to change. It’s early days still, but technocrats now view cellphones as the new architecture of virtual banks. This has the potential to make bank branches obsolete, or at least non-essential. Cellphone banking looks especially relevant for India, since it can penetrate the countryside cheaply and effectively.
The world over, cellphones are spreading at a phenomenal rate. In many developing countries, more people have cellphones than bank accounts. In India, new cellphone connections are growing at the rate of six million a month, a rate of customer expansion that no bank can dream of.
Till now, rural cellphone towers did not exist to permit services in the deep countryside. But those towers are now coming up rapidly, and cellphone companies expect to get hundreds of millions of rural customers in the next five years. For the first time in history, villagers will have instant connectivity. This has implications for every sector, including banking.
In some countries, cellphones are already part of the financial architecture. All cellphone companies have pre-paid schemes, giving each customer an e-account from which the cost of his telephone calls is debited. Cellphone companies have a wide network of agents —shopkeepers of all sorts — who accept money to recharge your SIM card when you have used up your phone time. The same shopkeepers can become virtual tellers of a virtual bank.
How? Well, when you give the shopkeeper cash, he loads it onto your telephone account by recharging your SIM card, so it’s like depositing cash in your e-account. You can withdraw cash from your e-account the same way — the shopkeeper will give you hard cash, and transfer the equivalent sum from your e-account to his own. If you want to pay an electricity bill, you can give the cash to the shopkeeper and he can transfer it to the account of the electricity company.
This is not science fiction or futurology. Many Mexican migrants to the US already send remittances home through the cellphone-cum-retailer network. This is faster and cheaper than using banks for money transfer. I suspect this will soon give hawala operators in the Gulf stiff competition for sending remittances to India.
In the Philippines, Globe Telecom has been offering branchless banking since 2000. Its G-cash service enables customers to use SIM cards to operate e-accounts. The customer can deposit cash into the e-account or withdraw it, using the retail agents of Globe Telecom, who are spread across the country. Customers can use G-cash to pay bills, repay loans, or purchase goods at shops (it’s effectively a debit card). In the Philippines, 1.3 million people now have e-accounts with Global Telecom.
In Kenya, a similar service is being offered by Safaricom, a Vodafone affiliate and the leading mobile operator in the country. Safaricom has partnered the Commercial Bank of Africa and a local microfinance institution.
In South Africa, a technology firm, WIZZIT, has become a division of the South African Bank of Athens in order to meet the central bank’s regulatory concerns. WIZZIT offers the usual services — deposit, withdrawal, payments, and airtime purchases — through a variety of access points including cellphones, ATMs, post offices and bank branches. So, it combines branchless and branch-based banking, and its link with the post office constitutes a public-private partnership. It has reached poor people that earlier could not dream of opening bank accounts.
India needs to learn from all these models. After the NBFC scandal of the 1990s, and subsequent scandals in many cooperative banks, the RBI is ultra-cautious about new architecture that may be vulnerable to abuse. It has allowed commercial banks to use microfinance institutions (MFIs), NGOs and cooperatives as retail agents. ICICI and other banks use MFIs as retail agents for disbursing and collecting loans. However, this architecture has not so far been useful for collecting deposits, paying bills, or undertaking other financial services.
Hence the time is ripe for a new set of rules to facilitate cellphone banking in all rural areas. A problem in the past has been that electricity in rural areas is very intermittent and unreliable. This makes the operation of ATMs a problem. But cellphones need very little electricity, and can be charged at night in every village using batteries based on solar energy. Such solar batteries have long been used by ITC in its e-choupals, and are not a novelty.
Indeed, the e-choupal is suddenly threatened with extinction by the rural cellphone. Till now, the e-choupal has provided electronic information in rural areas having no other source of information. But once rural cellphone towers are built, 3G technology will allow every rural cellphone to connect with the internet. This will enable cell-phones to provide all the information that e–choupals do today.
Indeed, to protect its future, ITC needs to immediately become provider of services through cellphones, making them the new architecture of future e-choupals. This will be a first step towards ITC becoming a rural banker too.
What about the regulatory framework? The RBI should probably insist that every provider of virtual banking sets up a joint venture with a commercial bank for providing such services. This will be far simpler than creating an entirely new set of rules for virtual banks. The regulations should liberally permit money transfer by cellphone. This will reduce the cost incurred by poor migrants in sending home remittances, currently done through money orders.