Digital India. The mobile phone has already shaped. The Rush to Mobile Money: Madness or Master Stroke? The Size of the Prize

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1 Digital India The Rush to Mobile Money: Madness or Master Stroke? By Neeraj Aggarwal, Nimisha Jain, and Arvind Subramanian The mobile phone has already shaped India indelibly, drawing the far-flung regions of the nation closer together and creating economic opportunity for many individuals and small businesses. The mobile phone is now poised to become the fulcrum that launches mobile money as an everyday form of currency. Mobile money promises to unleash a radical transformation of the financial and telecom sectors. While these developments are promising for India, they may not be a financial boon for telecom operators. However, mobile money can help reduce churn and provide other benefits to operators so that they have strong reasons to capture this opportunity. The Size of the Prize Policy, economics, and geography explain the appeal of mobile payments and banking. The national government is strongly behind bringing banking to the unbanked. India has more than 500 million mobile-phone subscribers, compared with just 240 million individuals with bank accounts, 20 million credit cards, 88,000 bank branches, and 70,000 ATMs. More than half of Indian households 110 million altogether do not have a bank account. Yet, of the households without a bank account, 42 percent have at least one mobile phone. And nearly 90 percent of those phones are capable of handling basic financial transactions. It is far less costly to offer banking and payment services using mobile technology than to build new branches in a country that, outside of major cities, is still largely rural. Mobile-enabled business correspondents, who are authorized to conduct business on behalf of banks, can serve a customer for 8 to 15 cents per transaction far below the $1.00 to $1.50 cost at a branch. These correspondents can promote the acceptance of banking services in remote locations by providing a level of comfort to new customers. For customers willing to conduct banking directly on their mobile phones, the cost per transaction drops to less than 1 cent. (See Exhibit 1.) For more on this topic, go to bcgperspectives.com

2 Exhibit 1 Technology Can Radically Lower Banking Costs High Branch $1.00 $1.50 Online businesscorrespondent model 8 15 Quality Customer experience and services offered ATM Internet/ mobile phone <1 Low High Cost (US$) Call center Low Sources: BCG case experience and analysis. By 2015, $350 billion in payment and banking transactions could flow through mobile phones, compared with about $235 billion of total credit- and debit-card transactions today. 1 This forecast is based on a recent analysis conducted by The Boston Consulting Group and depends on the willingness of banks, telecom operators, regulators, and consumers collectively to embrace this form of payment. Electronic payments are in their infancy in India. Today, ATM withdrawals, rather than payments, account for more than 90 percent of all card transactions. Mobile payments, meanwhile, are younger still. As mobile-money initiatives take shape, the projected fee income in India from mobile payment and banking transactions could exceed $4.5 billion by That amount is less than it might appear. These fees will be shared by banks, telecom operators, device makers, and service providers. In India s hotly competitive market, several operators will be competing for their share of the telecom slice of the pie. Even without a huge cushion of fee income, operators can still generate business advantages by offering mobile-money services. The GSM Association recently studied the profitability of MTN Uganda s MobileMoney initiative and concluded that indirect benefits accounted for 48 percent of the gross profits. The study, Is There Really Any Money in Mobile Money?, found that MTN Uganda paid lower commissions and had lower costs on airtime purchased with mobile money. Customers who used mobile money were also less likely to leave MTN Uganda and more likely to increase airtime consumption. Lower costs and lower churn are worthwhile benefits, but they will not just happen unless operators actively recognize and pursue them. So long as operators recognize that these reasons rather than fees will drive the business, they can gain important advantages in customer stickiness and lean operations. The State of the Market India is aflutter with mobile-money activity. In recent months, Bharti Airtel and the State Bank of India, Vodafone and ICICI Bank, and Idea Cellular and Axis Bank have also announced mobile-banking ventures. Nokia, a leader among technology companies in reaching consumers in Digital India: The Rush to Mobile Money 2

3 emerging markets, recently teamed up with Union Bank of India and Obopay to offer mobile banking. Mobile banking is a tale of two metamarkets in India: rural and urban. Unbanked rural markets have a tremendous need for mobile payment and banking services. Over the next five years, they could begin to rival the urban market in size. In urban areas, many consumers have bank accounts but still rely on cash for 90 to 95 percent of small-ticket transactions. Mobile payments would be a tremendous convenience for these consumers. Within both markets, five primary categories of mobile payments and banking exist. (See Exhibit 2.) Government payments: $40 billion in potential mobile-based transactions by These include disbursements under the Mahatma Gandhi National Rural Employment Guarantee Act and by states, the central government, and employee pension plans. Peer-to-peer remittances: $70 billion by The largest share will be the transfer of money from urban workers to their families in rural areas. Individuals working overseas sending remittances to their families in India could also be a large contributor. These transfers are currently handled through money orders, couriers, and other expensive, time-consuming methods. Bill payments and point-of-sale (POS) purchases: $40 billion by With every mobile handset potentially acting as a debit card, this is likely to emerge as the second-largest category. India s retail industry is dominated by momand-pop shops. If they trusted the service, store owners could easily and inexpensively accept mobile payments through text messages. Business payments: $60 billion by Small and medium-size businesses could make mobile payments to their employees, and both those businesses and self-employed individuals could Exhibit 2 Mobile Payments and Banking Could Generate More Than $4.5 Billion in Fee Income % contribution Estimated potential, Fee income ($millions) Rural 30% Welfare schemes Pensions Subsidies 1,200 1,250 Micropayments Domestic and international remittances POS transactions Mobile recharge Utility bills Ticket purchases Payments to other businesses Payments to employees Cash withdrawals Credit disbursal and servicing Urban 70% $1 billion $2 billion $3 billion $4 billion Government payments Peer-to-peer remittances Bill payments and POS purchases Business payments Consumer banking Sources: India Post; Reserve Bank of India; India Ministry of Rural Development; India Ministry of Human Resource Development; Indiastat; India National Rural Health Mission; Indian Public Finance Statistics; India Ministry of Defence; Telecom Regulatory Authority of India; India Planning Commission; India Insurance Regulatory and Development Authority; BCG analysis. Digital India: The Rush to Mobile Money 3

4 make mobile payments to other businesses. Consumer banking: $150 billion by Banks could profitably serve many of the unbanked households with basic bank accounts and credit and savings products if they adjust their business model. They could also offer mobile payment and banking services to current customers. While banks, telecom operators, business correspondents, and others will all vie for business across the board, the three largely urban categories will be most attractive for telecom operators: peer-to-peer remittances, bill payments and POS transactions, and business payments. At least five developments have converged to accelerate action in this exciting new market. First, in line with its goal to promote financial inclusion, the Reserve Bank of India has recently relaxed transaction limits and know-your-customer requirements and permitted the use of for-profit business correspondents to reach consumers. It is also supporting lower-cost, interoperable networks through recent micro-atm standards and the imminent launch of Rupay, a domestic competitor to Visa and MasterCard. Second, in 2009 the national government launched an initiative to assign a unique identification number to all residents. The Aadhaar program is based on biometric identification and is expected to create 600 million numbers in the next four years. Financial services providers and operators will be able to access this system for a nominal fee, dramatically reducing customer-acquisition and processing costs while improving their ability to assess customers creditworthiness. The government s recent request for proposals from banks to couple no-frills accounts with the issuance of a unique ID received an overwhelming response. Third, a mobile-money value chain is finally in place. Its key links are the reduction in mobile-connectivity costs, from 40 cents per minute in 1999 to less than 1 cent today; the adoption of critical banking technology; and the creation of such intermediaries as the National Payments Corporation of India. Many of the micro-atm and POS offerings, for example, have become possible only in the last few years. Fourth, the targeted consumer segments are ready to embrace this new technology. In numerous in-depth interviews with BCG, consumers said that they recognize the value of mobile payments and banking. And fifth, the ecosystem is maturing. In addition to the bank operator ventures, many other kinds of companies are experimenting with emerging tools of the trade of mobile payments and banking everything from biometric handheld scanners to Internet kiosks. From this explosion of innovation, several successful business models are likely to emerge. What It Will Take to Win Although the blueprint for building a mobile payments and banking business has not yet been written, the dynamics of the market are in place. Companies that understand and exploit these dynamics will make the right strategic choices and will hold the pole position. Operators need to make three fundamental choices. Do they want to offer a prepaid wallet or a mobile account linked to a bank account, or both? The wallet will likely appeal to consumers who want an alternative to cash: a convenient way to make purchases and transfer money. The mobile account will be particularly relevant for unbanked consumers who need to send money to and receive money from government bodies, family members, and others. They will also be able to engage in basic banking services, often for the first time. These two products will require two very different sets of capabilities. Organizations will have to be clear about which business they are in, and they will have to develop variations on these two main themes to target specific consumer groups. Digital India: The Rush to Mobile Money 4

5 Where in the mobile-money value chain do operators want to play? The mobile payments and banking business consists of three core activities: enrollment, servicing, and interactions. Enrollment covers customer acquisition and verification. Servicing covers the facilitation of cash collections and withdrawals, as well as risk management. Interactions cover the software and hardware required to link merchants, cash-out points, and mobile phones with business correspondents and consumers. A single company cannot operate across all three realms at scale. The most natural place for operators to focus on is aspects of servicing. They have the extensive sales and distribution footprint to facilitate cash deposits and withdrawals. They are also adept at integrating third-party software and hardware solutions to handle interactions with merchants, consumers, and others. However, operators historically have not been strong in risk- and cash-management activities. The enrollment activity presents both an opportunity and a challenge. Operators in India largely run a prepaid business with over-the-counter enrollment of walk-in customers. To drive the adoption and consistent usage of mobile payment and banking services, operators will need a high-touch enrollment process that initially will be equal parts education and sales. In addition, operators will have to enhance their understanding of their customers in order to realize the indirect benefits that will make or break the business case for them. How will operators partner with other companies to fill in the gaps? Operators must decide which companies they will partner with in order to provide end-toend seamless service. Business correspondents, for example, have the local knowledge necessary to provide effective enrollment, while banks can provide the cash- and risk-management capabilities to serve clients. Several technology companies have developed applications and devices including low-cost biometric readers and micro-atms. Partnerships and unconventional collaboration models will emerge. Such relationships can be a source of strength or friction, so operators will need to carefully select their partners and manage these relationships. The mobile payments and banking opportunity is on its launch pad, ready to take off. But companies must show that they can develop services that respond to consumers needs and achieve scale. The companies that gain early success have the chance to shape consumers habits and expectations. The company that owns the customer and successfully orchestrates the ecosystem will own the largest share of revenue, but perhaps more important, it will have lower costs and churn and higher customer satisfaction. Note 1. We define mobile payments and banking as any payment or banking transaction facilitated through a mobile device, in which the money is held either in a bank account, on a credit card, or in a mobile-based prepaid account. The phrase includes small-ticket payments among individuals, businesses, and governments and cash withdrawals from a mobileenabled cash-out point or business correspondent. It does not include large-ticket payments such as remittances or flows among businesses or with the government. About the Authors Neeraj Aggarwal is a partner and managing director in the New Delhi office of The Boston Consulting Group. You may contact him by at aggarwal.neeraj@bcg.com. Nimisha Jain is a principal in the firm s Mumbai office. You may contact her by at jain.nimisha@bcg.com. Arvind Subramanian is a partner and managing director in BCG s Mumbai office. You may contact him by at subramanian.arvind@bcg.com. The authors thank Jamshed Daruwalla, Neha Gupta, Ranjan Kant, and Mark Voorhees for their contributions to this article. The Boston Consulting Group (BCG) is a global management consulting firm and the world s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their Digital India: The Rush to Mobile Money 5

6 highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 74 offices in 42 countries. For more information, please visit The Boston Consulting Group, Inc All rights reserved. 7/11 Digital India: The Rush to Mobile Money 6