As Ignacio Mas pointed out in his blog ‘Better than Cash, or Just Better Cash’, digital financial services often have a tendency to promote the use of cash, instead of discouraging it, by making cash more efficient. His central argument is that by facilitating cash-ins and cash-outs, service providers are encouraging easy movement of money while not according sufficient attention to the need for savings.
We believe that making the movement of cash more efficient has its own advantages, especially when low income customers are involved. However, these benefits pale before the advantages of driving a cash-lite ecosystem using digital means. A cash-lite ecosystem removes inefficiencies pertaining to cash-in and cash-out while ensuring that the reliance on physical cash comes down substantially over a period of time. Storing money digitally can potentially lead to cascade effects and drive economies of scale for digital money in the longer term.
The Nachiket Mor Committee on “Comprehensive Financial Services for Small Businesses and Low Income Households”, in its advocacy to set up Payment Banks[1] addresses the need to make cash more efficient by recommending cash withdrawals from accounts maintained at these banks.
Over the years, many studies by MicroSave and others have reported that the “unbanked households” need a range of financial services (not limited to credit alone), and are willing to pay the “right” fee for these services. These financial services include the need to store and save money. Customers will normally store or save money once they are convinced that they can easily withdraw the money.
Unlike banked customers, the unbanked need frequent, low value transactions rather than a few high-value transactions. There are two ways in which this can be facilitated. One is to ensure that the agent always has requisite cash to facilitate cash-outs and second is by providing more opportunities to conduct digital transactions.
Enabling cash-out by PPIs is the first step in the direction and in all likelihood, a very important one. It will significantly improve service delivery and also ensure that the customer starts trusting the agent network. However, cash-out comes with attendant challenges such as liquidity management. PPIs[2] (who are likely to convert to Payment Banks) have not yet addressed liquidity management in a comprehensive manner.
Given the restricted acceptance of the current prepaid instruments (Semi Closed Wallets); customers in all likelihood will be forced to withdraw cash to send / spend on daily needs. The recommendation would have been much more interesting from a policy perspective had it focussed on ways and means to keep money electronic while providing universal access.
Unfortunately, the recommendation does not address the need to make merchant registrations easier. Currently the PPIs have to spend significant energy, time, and cost to acquire / on-board physical merchants. This has led to them redirecting focus from merchant acquisition to remote payments, thereby severely restricting merchant payment opportunities for the customers. One of the major costs for a PPI currently is the cost of digitisation of money. This will significantly increase if the money needs to be reconverted from digital cash to physical cash, thereby putting extra pressure on the customers in terms of higher transaction charges or making the business unviable. The secret is to be able to keep the money in a digital form for as long as possible. Along-with cash withdrawal, it would have been ideal if Payment Banks were given the freedom to allow any merchant to accept payments.
From the view point of stakeholders in the ecosystem, it is important that a cash-lite economy emerges (assuming included = cash-lite). Customers have to be able to spend the digital cash easily and across different types of merchants as cash handling can often be expensive for them. A move in this direction will trigger a relook at the existing Merchant Subvention Fees (MSF). We believe that a new MSF for digital financial services has to emerge, the current structure will not encourage the merchants to sign-up or will continue to push merchants into not accepting mobile money thereby severely denting the progress that can be made.
Given the customer segment the committee wants to address, the recommendation for setting up Payment Banks and the design structure conceived, while promising in its outlook, may not entirely meet customer needs but can be treated as the starting point in the evolution of making mobile money completely ubiquitous.
[1] Payments Bank: This is a design that provides payment and deposits, but not credit. A Payments Bank may or may not pay interest on the account/wallet that it provides. Once again, a Payments Bank can be nested or independent. A Nested Payments Bank would need to partner with a bank (Sponsor Bank) to hold both the escrow account and to participate in the payments network. An Independent Payments Bank would be a direct participant in the payments system and instead of escrow balances with the sponsor bank would hold some combination of CRR and SLR directly with the Central Bank.
[2] Pre-paid instrument issuers.