Mobile payments in India

Mobile Payments is a new and alternate mode of payment using mobile phones. Instead of using traditional methods like cash, cheque, or credit cards, a customer can use a mobile phone to transfer money or to pay for goods and services. A customer can transfer money or pay for goods and services by sending an SMS, using a Java application over GPRS, a WAP service, over IVR or other mobile communication technologies . In India, this service is Bank-led. Customers wishing to avail themselves of this service will have to register with Banks which provide this service. Currently, this service is being offered by several major banks and is expected to grow further. Mobile Payment Forum of India (MPFI) is the umbrella organisation which is responsible for deploying mobile payments in India.

Background

India has a vast un-banked population, most of whom reside in the rural areas. The traditional banking industry can not cater to the needs of India's large rural populace. Setting up a conventional branch in a rural area would require considerable amounts of money to be spent on infrastructure and additional personnel. Most of rural Indians are cut-off from access to basic financial services which includes deposits and withdrawals from a trusted source.

The Growth of Mobile Phones in India

Annual growth of mobile subscriber base in India

However, India is the second largest telecommunications market and has more than 650 million mobile phone customers. Mobile phones are quite common even in the remote villages. The mobile phone industry is growing at a rate of 100 million per year. It is expected to touch the 1 billion mark by 2013. The share of the urban subscribers is 66% and the share of the rural subscribers was 34%. In the month of May 2011, the net monthly addition in terms of the number of subscriptions was 13.35 million. Of these 13.35 million new subscriptions, 7.33 million were from the urban segment and 6.02 million from the rural segment. The subscription growth rate on a monthly basis is 55% for urban segments and 45% for rural segments. Given this context, it is possible to consider the mobile phone as an economically viable instrument to enable inclusive access to financial services.

Impact of Mobile Phones on Welfare

Mobile telephony has had an impact mainly by allowing for agents in information restricted areas to engage in more optimal arbitrage. The adoption of mobile phones by fishermen and wholesalers resulted in a dramatic reduction in price dispersion, the complete elimination of waste, and a near-perfect adherence to the Law of One Price. Both consumer and producer welfare increased. .

Mobile payments can have a positive impact on welfare by easing operational aspects and associated costs of cash-based transactions related to cash handling, storage and transfer, and by providing a strong platform for Financial Inclusion.

Model of Mobile Payments in India

The basic aim of mobile payments is to also enable micropayments on low-end mobile devices which support only voice and text, in addition to higher end phones which could support web-browsing or Java application capabilities. A person who has subscribed to a mobile payment service should be able to send money to any other person who has subscribed as well. This should be independent of the mobile network and the bank to which either of the persons belong. This is referred to as interoperability and is a key concern for any major technology to be successful.

In India, the model for the delivery of mobile financial services will be bank-linked; This implies that customers wishing to avail themselves of this service should have:

• Initially, a registered mobile phone account with any network operator in the country, and
• A Bank account
• Register for the Mobile Payment service with the Bank

In contrast, in economies such as Kenya the mobile network operators lead the development of mobile financial services. Choosing a bank-linked model enables offerings of a variety of value added financial service built on top of the basic mobile payment transaction. The idea of mobile financial solutions will only then permeate to all levels of society; customers, merchants, business houses and the government.

The technical standards are set up by MPFI, which are implemented by the various participating entities after being ratified by the RBI.

Transaction Flow

Flowchart describing the transaction flow of a mobile payment

The transaction flow of a mobile payment

The transaction flow can be simply described as 'customer-bank-bank-customer'. When a customer initiates a transaction by sending an SMS to the bank's gateway, this SMS is processed by a Mobile Payment Provider (MPP). The role of MPP is defined in the standards document. After appropriate checks with the customer's bank, the transaction is forwarded to a central switch. The role of the switching agency is played by the National Payments Corporation of India (NPCI). NPCI routes transaction to the payee's bank based on the MMID.

A transaction is initiated by sending the following details:

• Mobile number of the payee
• The 7-digit MMID of the payee
• Amount of money to be transferred
• The 4-digit PIN of the payer

Depending on the type of the transaction, either both parties (payer and payee) or only a single party is notified about the transaction. A successful transaction will be notified by an SMS to both parties.

The communication between the MPP's and the banks takes place using ISO 8583 message format, which is the standard message format for all financial messages in India. In order to test the compliance and conformance to the standards set and the message formats, a Certification Lab is being setup at IIT Madras.

MMID

The Mobile Money IDentifier, is the key identifying detail of a user participating in a transaction. An MMID is a 7-digit number given to a customer upon registeration with a bank for the service.

In the 7-digits of the MMID,

• 4-digits are used to identify the bank of the user
• 3-digits are used to identify the account of the user

A mobile number and a MMID will uniquely identify a customer’s account with the respective bank. The design of the MMID allows customers to operate multiple bank accounts linked to a single mobile number; each bank account having its own MMID. Additionally, since the MMID of the payee must be entered along with the payee's mobile phone number, tt serves to reduce the possibility of an erroneous transaction when the payer inadvertently enters an incorrect mobile number.

It should be noted that the MMID is not intended to be a secret – it is simply an identifier and it does not give away any sensitive information about the customer. For example, a merchant will advertise his mobile number and MMID publicly in order to receive payments from the customers.

Security

Following RBI's guidelines on security of mobile payments, a two-factor authentication mechanism is employed. No transaction can take place without the use of the secret PIN. An SMS sent through a Java application on the mobile device is as secure as an Internet Banking transaction. For micropayments, plain SMS based transactions are as secure as other modes of payments. However, there is a cap on the amount of money that can be sent through a plain SMS.

A Java based application on the mobile allows the SMS to be encrypted when being sent over the air. Once the SMS reaches the base station, all the communication happens over a secure SSL channel.

Services Offered

The mobile payments service is available over a wide range of communication channels including SMS, WAP, USSD, IVR among others. This service allows a person to transfer money to any other person in exchange of goods and services. It can also be used to make payments online, pay at restaurants, remit money, etc. A major pain point for migrant workers (from other states) in India is to transfer money to their kin in their native states. Using this service, transfer of money is safe, fast and effective as established by a pilot study conducted.

Banking Correspondent

Though a mobile payment allows payments to be made electronically, they do not enable depositing money into a bank. The Reserve Bank of India (RBI) tended to this issue by creating the post of a banking correspondent (BC). The role of a BC is to act as an interface between the bank and its customers in places where traditional banking is not feasible. Banks can appoint a trusted third-party as a BC in a village. All the villagers who wish to transact with the bank can get in touch with the BC. Deposit and withdrawal of money is handled by the BC. When a person deposits money at the BC, their account immediately gets credited. The person can then use their mobile phone for additional transactions.

Differences with Mobile Banking

The major difference between mobile banking and mobile payments is the total absenteeism of the bank account number. In mobile banking, or Internet banking, money can be transferred only when the account number of the payee is known before-hand. The account of the payee has to be registered with the payer and only then can a fund transfer happen.

In mobile payments, the account number is masked from being public. One need not know the account number of a person to transfer money . This opens up a range of possibilities from buying tickets to paying auto fare, both of which would not have been feasible had the account number been mandatory for a simple transaction.

External links

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