Developing Countries Are Revolutionizing Mobile Banking

On February 16, 2012, Barclays of U.K. launched Pingit, a service that lets people send and receive money using a smartphone.

But this isn’t the first big innovation in mobile banking. These innovations are already happening in developing countries.

Poor countries are jumping ahead of rich ones by building a 21st century infrastructure (because they have little legacy infrastructure to begin with). For example, India has leapfrogged from no land-line telephones to the latest in wireless telephony. That revolution, in turn, is causing India to leapfrog brick-and-mortar banking to wireless banking for the masses. We see similar patterns in other poor countries as well. Mobile money transfer in Africa, M-Pesa, is a case in point. Counterintuitive as it may seem, poor countries may be ahead of rich countries in mobile banking.

The story of one such innovation, NPCI’s Inter-Bank Mobile Payment Service (IMPS), shows how far ahead India is with this technology.

India has a large un-banked population because of the challenge of reach and affordability. But with 840+ million mobile subscribers, mobile banking can provide a fast, inexpensive, easy, convenient and secure channel for customers across India to carry out banking transactions. While the mobile banking application of banks offers a set of services to its customers, there was a need for connecting major banks to offer an instant 24/7 remittance solution to customers. NPCI’s Inter-Bank Mobile Payment Service (IMPS) — an innovative payment mechanism — addresses this need.

NPCI has one major asset: The 60+ large banks in India connected to its ATM Network. It leveraged this infrastructure to cost-effectively offer an instant 24/7 payment service. NPCI used mobile as the channel. NPCI worked with banks and co-created this product in a very short time. It defined standards for message exchange using the same ATM connectivity infrastructure and provided a routing and settlement mechanism for transactions. The transactions are instant and immediate. Now that the banks are connected, many value-added services can also be offered through the same mechanism. NPCI plans to connect various approved non-bank entities offering prepaid solutions on this platform to provide wider access. NPCI itself is promoted by 10 leading banks in India. While these banks fiercely compete in the market, they also collaborate to achieve national objectives.

NPCI’s key innovations are:

Person-To-Person Mobile Banking
1. Instant, 24/7, 365 days/year operation — the first such remittance solution without the need for cards of any kind, money moves from account to account instantly using mobile as the channel
2. Works on all mobile phones
3. Mobile Money Identifier (MMID)
• A unique 7 digit number for each account
• Enables customers to link same mobile to multiple accounts
• Removes chances of wrong transfer resulting from change of mobile numbers and typing errors
4. Mobile number and MMID combination uniquely points to a bank account
5. Works on the existing ATM Messaging, Switch and Network, making it easier for banks to adopt this quickly.
B2B Mobile Banking
With the ease and convenience of transfer and instant nature of payments, IMPS is now being used for merchant payments, bill payments, cash-on-delivery payments and as a corporate cash management tool. (A major bank, Citi Bank and major beverages company, Coca-Cola are doing pilots). NPCI is constantly enhancing these services. For instance, it is experimenting with the concept of mobile point of sale devices as a relatively inexpensive alternate to traditional point of sale terminals. This should help reduce the overall cost of the transaction and offer customers inexpensive payment options.

Service Innovations
NPCI is also working on service innovations. Recently, it piloted a common USSD gateway application for banks. USSD is more secure than Short Message Service (SMS). NPCI will eventually establish connectivity with all telecom carriers and have a common USSD short code *99#. All customers of participating banks can just dial *99# and get an interactive menu to complete basic banking transactions. Customers can do basic banking transactions such as balance inquiry, funds transfer, merchant payments, cheque book request, statement request, etc. through a common number and a simple menu-driven mode irrespective of where the telecom account is and where the bank account is.

The M-Pesa in Africa and NPCI’s IMPS in India have the potential to revolutionize and democratize the mobile-based remittance/payments. These innovations can effectively transfer money across wide distances thereby saving cost of transport. For example, electricity bills can be paid from home instead of carrying cash to a distant office and having to wait in long queues. Mobile banking is cheaper, faster, reliable and secure. It can convert millions of “non-consumers” of financial services in the developing world into consumers, and large sections of the world’s poor population will benefit.

In time, the rest of the world will catch up too, as innovations created in developing countries flow into the developed ones.

Vijay Govindarajan is the Earl C. Daum 1924 Professor of International Business at the Tuck School of Business at Dartmouth. He is coauthor of Reverse Innovation (HBR Press, April 2012). He was ranked number three in the 2011 Thinkers50.

This blog is co-authored with Mr. M. Balakrishnan, Chief Operating Officer of NPCI and first appeared as a Harvard Business Review blog.