M Rajshekhar, ET Bureau Nov 8, 2011, 02.24am IST
NEW DELHI: These are strange times for the nascent banking-correspondent (BC) industry, which is a vital link to reach the financially excluded. On the one hand, it is seeing from the sidelines the creation of an opportunity that can add Rs 3,000- Rs 4,000 crore to its revenues in the next couple of years. On the other, it is being told that if it wants to partake of this opportunity, it will have to change its business model.
That model is being followed by all BCs, including market leader FINO. A BC has agents carrying handheld terminals, through which customers can make deposits or withdrawals from their bank accounts. The current model is a proprietary one: it locks a customer not just to a BC firm, but also to its designated agent for that area.
Since transactions are not updated real-time between an agent of a BC and its server, villagers can bank only with that BC's agent in the village.
That model is being followed by all BCs, including market leader FINO. A BC has agents carrying handheld terminals, through which customers can make deposits or withdrawals from their bank accounts. The current model is a proprietary one: it locks a customer not just to a BC firm, but also to its designated agent for that area.
Since transactions are not updated real-time between an agent of a BC and its server, villagers can bank only with that BC's agent in the village.
Even if updated real-time, they can access their account only in those areas where the BC is present. It gives poorer Indians banking access, but in a limited form.
This is something the Unique Identification Authority of India (UIDAI), the government body designing the architecture to deliver welfare services via cash transfers, wants to change. In a full rollout, 3,00,000 crore of cash transfers will flow into bank accounts of villagers and will be accessed through the BCs. But the UIDAI's proposed solution has triggered a big battle.
This is something the Unique Identification Authority of India (UIDAI), the government body designing the architecture to deliver welfare services via cash transfers, wants to change. In a full rollout, 3,00,000 crore of cash transfers will flow into bank accounts of villagers and will be accessed through the BCs. But the UIDAI's proposed solution has triggered a big battle.
The UIDAI has recommended to the government that BC systems be made inter-operable: customers should be able to access their bank accounts through any BC terminal, as with ATMs. Also, it wants online authentication through biometrics to replace the current system of offline verification through smart cards, thus enabling people to access their accounts from anywhere. Accordingly, it has notified handheld device specifications all BCs need to follow. "If you have different standalone systems, you will also end up duplicating infrastructure," says Rajesh Bansal, assistant director general, UIDAI.
Such standardisation, however, has India's BC companies, especially older ones, up in arms.
Such standardisation, however, has India's BC companies, especially older ones, up in arms.
Take FINO, India's largest BC company. With 21,500 terminals in 397 districts, it owns 90% of all handheld terminals in India. These handheld devices authenticate identity by comparing fingerprints to those recorded in the beneficiary's smart card -- but not by sending them real-time to servers like the UIDAI wants to. If the UIDAI gets its way, smart cards will be on their way out.
Says Rishi Gupta, the CFO of FINO: "There are 50 million smart cards being used, of which, 40 million have been issued by us. We have to acknowledge that a huge investment has been made." Gupta says FINO has invested Rs 300 crore and other BCs Rs 150-200 crore. A handheld terminal costs between Rs 10,000 and Rs 25,000.
Says Rishi Gupta, the CFO of FINO: "There are 50 million smart cards being used, of which, 40 million have been issued by us. We have to acknowledge that a huge investment has been made." Gupta says FINO has invested Rs 300 crore and other BCs Rs 150-200 crore. A handheld terminal costs between Rs 10,000 and Rs 25,000.
"Should we not create a system that is futuristic?" counters Bansal of UIDAI. "People (BCs) want to protect their turf. They don't want to see their investment go down the drain."
Smaller BCs, however, are more sanguine. According to ST Prasad, CEO, Bartronics, inter-operability is not much of a challenge and that software plug-ins can be created easily. "For some BCs, however, it will call for a wholesale replacement," says Prasad. "They will have to replace their software, which is like tearing the guts out of their system."
One such BC could be Eko, which enables people to bank through mobiles and doesn't use biometrics at all. With the UIDAI insisting on biometric verification, its model is potentially imperilled. Says Eko chief CEO Abhishek Sinha: "The evolution of a new infrastructure that aims to improve public service delivery must be designed with room for innovation and continuity, rather than push existing technologies into obsolescence."
Also, with inter-operability, having a large number of handheld terminals will cease to be a source of competitive advantage. This is analogous to what happened when ATMs began to be shared. It made redundant the huge investments made by some banks, especially the private ones, in setting up ATMs and neutralised their competitive advantage on account of a large network.
Manish Khera, CEO of FINO, says the inter-operability debate is "premature and prescriptive". He feels, while inter-operability is good, he differs on how inter-operable standards should be arrived at. "If there is a business case," he says, "the market will evolve to meet those needs. Hardware evolves."
One such BC could be Eko, which enables people to bank through mobiles and doesn't use biometrics at all. With the UIDAI insisting on biometric verification, its model is potentially imperilled. Says Eko chief CEO Abhishek Sinha: "The evolution of a new infrastructure that aims to improve public service delivery must be designed with room for innovation and continuity, rather than push existing technologies into obsolescence."
Also, with inter-operability, having a large number of handheld terminals will cease to be a source of competitive advantage. This is analogous to what happened when ATMs began to be shared. It made redundant the huge investments made by some banks, especially the private ones, in setting up ATMs and neutralised their competitive advantage on account of a large network.
Manish Khera, CEO of FINO, says the inter-operability debate is "premature and prescriptive". He feels, while inter-operability is good, he differs on how inter-operable standards should be arrived at. "If there is a business case," he says, "the market will evolve to meet those needs. Hardware evolves."
"For inter-operability to come in, some basic parameters have to be defined," says Bansal of UIDAI. He adds that the device specifications were determined by 15 stakeholders -- 10 banks, IBA, RBI, IDRBT and UIDAI. "It was a 15-month process where we also met BCs." As for biometrics, he says, "these are standards that have been accepted by the cabinet."
Countering that, Sinha of Eko raises a larger question on how technology infrastructure should be created. "Can someone building a public highway insist that only a certain sort of a vehicle can ply on it?" Public infrastructure, he says, needs to be open and non-prescriptive at the front-end. "Different villagers might be more comfortable authenticating their identity through a card, a phone, a fingerprint or a numeric code. The network should be able to accommodate all those options, and leave room for innovation."
On October 21, the finance ministry issued financial-inclusion guidelines to banks that said all handheld devices must be inter-operable and BC agents must have online connectivity. However, the device, the note added, must have the ability to authenticate identity using either a combination of biometric plus card or password plus card.
Countering that, Sinha of Eko raises a larger question on how technology infrastructure should be created. "Can someone building a public highway insist that only a certain sort of a vehicle can ply on it?" Public infrastructure, he says, needs to be open and non-prescriptive at the front-end. "Different villagers might be more comfortable authenticating their identity through a card, a phone, a fingerprint or a numeric code. The network should be able to accommodate all those options, and leave room for innovation."
On October 21, the finance ministry issued financial-inclusion guidelines to banks that said all handheld devices must be inter-operable and BC agents must have online connectivity. However, the device, the note added, must have the ability to authenticate identity using either a combination of biometric plus card or password plus card.
At the bank level, the system is becoming increasingly inter-operable -- cash can move from one bank account to another. However, lower down at the villages, villagers are locked into the BC proprietary networks, which has social implications too. An ex-employee of a BC who used to be stationed in Punjab estimates 75% of BC agents are village sarpanches or their kin. "As per this model, villagers would be dependant on them for wages." In that context, inter-operability will create choice.
Khera of FINO agrees, but says the need of the hour is to increase BC coverage. "Of the 400 million unbanked, BCs have covered only 40 million," he says. India has 670,000 villages and only about 25,000 BC terminals. Khera fears that inter-operability will serve as a disincentive to BCs to invest and expand. In July, private equity firm Blackstone invested Rs 150 crore in FINO for a reported 26% stake.
The lure of the BC business is not what is happening today. Khera says the new BCs are under-cutting to bag business, oblivious of profitability. "They are willing to bid at some ridiculous price," he says. The lure is what could happen tomorrow. If the government is going to make cash transfers of Rs 3,00,000 crore, even a 2% margin will result in revenues of Rs 6,000 crore for the banking system; a large part of that will come to BCs, through whom the cash will flow to the villagers.
At present, the only payments being delivered through BCs are those relating to the National Rural Employment Guarantee Scheme and pensions. The eventual plan is to convert all welfare schemes -- mainly, food, oil and fertiliser subsidies - into cash transfers. Money will flow into accounts of villagers, who will transact via BCs. "All this flux will die down over 12-15 months," says Bansal, "in part because as the cash starts flowing, the viabilities will improve".
Khera of FINO agrees, but says the need of the hour is to increase BC coverage. "Of the 400 million unbanked, BCs have covered only 40 million," he says. India has 670,000 villages and only about 25,000 BC terminals. Khera fears that inter-operability will serve as a disincentive to BCs to invest and expand. In July, private equity firm Blackstone invested Rs 150 crore in FINO for a reported 26% stake.
The lure of the BC business is not what is happening today. Khera says the new BCs are under-cutting to bag business, oblivious of profitability. "They are willing to bid at some ridiculous price," he says. The lure is what could happen tomorrow. If the government is going to make cash transfers of Rs 3,00,000 crore, even a 2% margin will result in revenues of Rs 6,000 crore for the banking system; a large part of that will come to BCs, through whom the cash will flow to the villagers.
At present, the only payments being delivered through BCs are those relating to the National Rural Employment Guarantee Scheme and pensions. The eventual plan is to convert all welfare schemes -- mainly, food, oil and fertiliser subsidies - into cash transfers. Money will flow into accounts of villagers, who will transact via BCs. "All this flux will die down over 12-15 months," says Bansal, "in part because as the cash starts flowing, the viabilities will improve".
