Dispersing cash in a country as large as India has traditionally been hugely problematic due to the way the financial services infrastructure has developed in the country. In effect, the inability to service low value customers due to a systemic cost problem with the industry (driven by both regulation and staff unions who have opposed many measures to increase efficiency in the past, including ATMs) has resulted in a very urban-centric distribution coverage by the industry.
As a result, reaching the beneficiaries of benefit payments in rural areas has been particularly difficult and beset by corruption and inefficiencies. Some countries such as South Africa, have tried to address the issue in partnership with private enterprise by using biometrically enabled stored value card technology (Net1) and India has tried to replicate such initiatives with companies such as Fino. However, in a country with such a large population and diverse geography, such methods are difficult to scale without being quickly rendered uneconomical.
Indian retail has itself been going through difficult times. Real estate has become increasingly expensive leading to rental costs rising significantly. In addition, the Indian government recently won a significant and controversial vote in the Parliament to open up the country's highly-protected retail industry to foreign chains, a move that has been criticised as being a death threat to the already declining profitability of the Indian retail and domestic industry.
With the elections looming in 2014, the government has a major incentive to boost small industry and one of the ways it has done this is to leverage the Business Correspondent (“BC”) framework which has given the retail sector a potential source of additional revenue by effectively becoming an extension of traditional branch banking.
The legislation allows retailers to explore cash dispersal as a way in which to remain profitable. However the current system only covers basic bill payment, simple domestic remittance and mobile top up, and is not leading to a large enough revenue stream to cover the costs of becoming a BC, particularly the cost of funding the cash float.
There is certainly scope for investigation into how this model might be redeveloped to broaden the range of services that retailers can offer to include international and domestic remittance services, welfare payments and to generally act as the “last mile of payment” for consumers.
By broadening the product set available to retailers and allowing them to reuse their cash float (which they need to pre-fund to minimise risk) for multiple cash in and cash out products, it is possible to build a business model which creates a reasonable and sustainable revenue stream for the retailer.
In addition, the implementation of the Aadhar scheme in India (Aadhaar is a 12 digit individual identification number issued by the Unique Identification Authority of India on behalf of the Government of India which is linked to a record of three biometric characteristics of each individual — face scan, fingerprints and iris scan) ensures that BCs will be able to function without some of the other cash related KYC (‘know your customer’ information) issues seen in other markets.
In my mind, the key to a successful business model is not just the product set itself but the underlying processes that are implemented at the retailer level. Maintaining a certain standard amongst the BCs ensures that the sponsor banks (each BC needs a sponsor bank) are comfortable that a bank grade retail network is operating as an extension of their own network.
Finally, the Reserve Bank of India has created regulations that have allowed the interoperability of BCs so that any payment can be made with any BC regardless of both which bank they work for and the recipient bank account. This has resolved one of the main barriers to creating a sustainable network – interoperability.
All of this has significant ramifications for financial inclusion in the country. The ability of a retail affiliate network of agent shops, supporting both the disbursement of benefits and providing an array of services around cash acceptance and disbursement allows the wider populous to get access to electronic money which has huge positive implications on efficiency and growth.
There is an amazing initiative in India called Sarvajal, which was funded by a private company foundation in India with the vision to bring clean drinking water to every corner of India in a sustainable way. The company developed a water purification plant that could be placed in a village, run by self employed franchise owners to provide clean drinking water to the villagers who in turn were happy to pay a fair price for the water. This allowed the entire venture to become self-sustaining with cash flows funding new plants in new villages.
I had a chance meeting with the CEO of this project, Anand Shah, a little while ago, who told me that their biggest impediment to large-scale expansion was the inability to transmit the cash collected at the village level up the distribution chain to head office so that it could be used to fund new plants. They developed a clever solution using a prepaid card based system that made franchise owners purchase credits to use the plants from distributors but this was really a band-aid solution. The provision of last mile distribution of cash that allows cheap and easy transmission would immediately solve such a problem.
This is only one example of how development can fundamentally be accelerated with such services. Philosophically, I believe that any such system needs to be self-financing and self-sustaining and therefore this becomes a very critical part of what we are trying to design and implement. I believe the confluence of regulatory and political changes will finally make this possible.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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