How to make banking accessible to all

The largest e-commerce company in the Asia-Pacific, including Japan, is an Indian one. This first rank is on the basis of number of transactions, not value. But even in value terms, it is pretty big. Its projected e-commerce turnover this financial year is about Rs 9,000 crore (Rs 90 billion).

It handles close to half a million transactions daily. It has won several awards, including the best e-governance site, and is a mini-ratna public sector company. It is a young company born in 1999. Heck, it is also responsible for delivering one million hot meals daily.

Yes, this company is the Indian Railway Catering and Tourism Corporation (IRCTC), a public sector enterprise under the Ministry of Railways.

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The point is not to compare IRCTC with Amazon or Ebay. After all, its net profit is merely Rs 50 crore (Rs 500 million), a fraction of those American giants. But the big point to note is that unlike them, roughly half of IRCTC's end customers are unbanked.

They neither have credit nor debit cards, they do not have a bank account, nor do they have internet access from home.

That is the most remarkable feature of this Indian e-commerce company. In a way, at least in terms of providing a payment solution, this company has done tremendously well as far as financial inclusion is concerned.

Fifteen per cent of IRCTC ticketing is through what may be described as "scratch cards" which are sold in retail kiosks - a method also pioneered by MTNL in the old days of providing long distance trunk dialling access to pay-as-you-go customers.

So, based on its payment solution outreach performance, should IRCTC be a candidate to become a bank? This question may sound senseless and provocative, but it is deliberate. There is talk of awarding new banking licences, and those licences may be given largely on the basis of potential for financial inclusion.

These days, it is impossible to encounter a sentence about financial inclusion which does not contain the word telecom.

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With India's stupendous growth in telephony, and with the promise of a magical combination of technology and reach, it has become tempting to equate telecom with banking.

In the coming years, that promise might very well translate into a tangible reality, with mobile banking becoming mainstream. But for now, it is important to distinguish between a payment outreach and the spread of banking.

Long before telephony spread to the remote corners of the country, consumer goods companies like Hindustan Lever had touched the people in remote villages.

The achievement of FMCG companies as also that of modern telephony reflects the genius of a distribution model. To be able to sell products in sachet sizes (whether shampoo or talk-time) in millions of small units and recover those small payments all the way back to the head office is a victory of business model innovation.

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Think of the complex and widespread ecosystem of wholesalers, distributors and retail outlets working together smoothly. In telephony, unlike in FMCG, the payments are actually advance payments, since the service is "consumed" over the next two months or longer.

This pretty much describes India's telephony, since 90 per cent is pre-paid business. This might also be true across most emerging market economies. A consumer just buys a SIM card (or top-up) like toothpaste or soap, and walks away.

The fact that telecom consumers are willing to pay in advance (that's why it is called pre-paid) means that there is a trusting relationship with the telecom company.

But even then the comparison with the FMCG business model is not inappropriate. Hence, once a transaction is done, i.e. payment received and services rendered, the telecom company need not have any continued relationship with the customer.

Of course, in this era of stiff competition, the fear of churn and the arrival of the dreaded number portability, the relationship with the customer need to be enduring, whether pre-paid or post-paid. Hence the need for developing a trustworthy brand. A banking relationship is entirely different. It is based on trust.

It is about accepting deposits and savings, and providing credit. Banks create credit based on deposits received from trusting depositors. The depositors can withdraw at will, but recalling the credit (loans) is not possible at short notice.

Credit creation far exceeds the ready reserves available with the bank at any time. If the trust and confidence break down, then depositors might all at once rush to withdraw, causing the bank to fail. Mere panic or rumours can bring down a bank. A bank run causes widespread systemic damage far beyond individual customers.

That is why banks have to subject themselves to rigorous regulation and supervision, and pass several litmus tests. These tests are getting tougher in the wake of the financial crisis, and new Basel norms will make banks behave even more conservatively. Even their credit-creation capacity will be capped.

So, to expect banking services to spread as rapidly as telecom is inappropriate for two reasons. First, because they are more dissimilar than popularly portrayed. One is largely FMCG business, while the other is about building long-lasting relationships. And secondly, soundness and stability call for greater caution in rapid spread of banking services.

Other concerns like money-laundering and terrorist-funding make it even more difficult. Telecom may be great for payments, remittances and fund transfers, but all this will still require an old-fashioned bank to be in the loop.

The KYC (know your customer) check of banks is usually stronger than that of telecom (e.g. the Jama Masjid bomber's SIM card turned out to have a fake name and address).

The challenge of financial inclusion will require joint efforts of banking and telecom, just like computerisation of two decades ago. Incidentally, it was computerisation of railway ticketing which led to the eventual birth of IRCTC.

Financial inclusion is a massive challenge for India. Its inadequacy, on a macro level, deprives us of half of our national savings, which do not get intermediated through the financial system. On a micro level, it deprives millions of people of basic things like savings, credit, insurance and pension.

In the past five years, we have tried innovations like no-frills bank accounts and enabling banking correspondents to work as appendages to bank branches. But we have made no dent in the larger problem.

The introduction of Adhaar universal ID will help. But doorstep banking and last-mile delivery to the remotest village is a bridge still too far. A phone call will not help.

The author is chief economist, Aditya Birla Group.