Financial Inclusion: Bank Account (Jan Dhan), Mobile Wallet or Social Credit Card?

Introduction

    There are three ways to increase financial inclusion (of less well of citizens): (1) Open a bank account with or without an associated debit card. (2) A cell phone based payment system with deposit facility (mobile wallet + banking) and (3) A credit card with no charges to holder and very low charges to payee (Social Credit Card). These three ways are not mutually exclusive. They can be used alone or in any combination.  If combined with a UID number for authentication & elimination of duplicates,[i] all are capable of use by government to make cash transfer directly to recipients(DCT/DBT), minimizing leakage and ensuring that every needy person gets his/her entitlement.  The key issues are (a) how quickly they can be made universal, and (b) how easy they are for the poorest to use.

Bank Act, Rupay Debit card

  Surveys suggest that 47 to 57% of the people have a bank account. Surveys of potential account holders show that poor and lower middle class people find it too intimidating to open a bank account.  One of the major justifications for Bank nationalization in 1969 was to bring such people into the formal financial system and reduce or eliminate their dependence on informal sources and money lenders.  Forty five years later at least 40% of the public still doesn’t  have a bank account. This reflects very poorly on “Nationalization” and the Nationalized banking system. Universalization of banking therefore remains a very difficult task.

The “Jan Dhan” Yojna aims to provide a Debit card, RuPay, along with a bank account. This is a novel idea in the context of financial inclusion.  The debit card will also have Rs 1 lakh of insurance bundled into it. The debit card will make the use of any money deposited in the bank account, and the overdraft facility associated with it easier, therefore providing an incentive to those who hesitate to use banks, even if they have a bank account. Deposits & repayment would still require a trip to the bank or interface with a banking correspondent, who has also been provided some incentives to enroll members. Once the bank account is seeded with UID/Aadhar  and government starts transferring funds directly into it as cash transfers or direct benefits, the account holder can use the RuPay without ever going to the Bank branch. 

Mobile Wallet, Mobile Banking

    Mobile company records suggest that 80% of the public already has a pre or post paid mobile phone. Projections suggest that over the next 5 years this will rise to 90% and in 10 years become close to universal.  Even the poorest person knows how to operate a pre-paid mobile phone that has a pre-paid deposit of money in the mobile account with the phone Company. The phone companies can easily convert these mobile accounts into a mobile wallet that can be used to pay for the purchase of any good or service by transferring funds to the sellers mobile account. The phone account could also be used to provide some simple banking services.[ii] This would the least cost method of achieving universal inclusiveness.

Unfortunately RBI regulations do not permit Mobile companies to use it as a universal wallet or to use to provide deposit-credit facilities.  RBI’s argue that this would put the stability of the payments and credit system at risk. In my view a carefully constructed and limited system can achieve complete inclusiveness, in a shorter time frame than either of the two alternatives, with only a marginal impact on the stability of the overall system.

Social Credit Card

       The third method of attaining universalization is to create and issue “RuCredit Card” analogous to the RuPay card.  Each person’s card would have a credit limit appropriate to him/her. There is no need to open a bank account, as the credit card acts as an account.  If government benefit transfers can be synchronized with the due dates of credit repayments, the credit card becomes a Social credit card with a credit limit linked to the benefits transferred. The recipient can then use the Social credit card like any other credit card to buy goods and services.    Insurance can also be bundled into the card.

Conclusion

     Any of three methods can be used to achieve universal financial inclusiveness, alone or in combination.  However, the genuine mobile payment & banking solution, if permitted by RBI regulations, is likely to be more effective and less costly to the provider, and achieve greater satisfaction levels for the low income user. The “Jan Dhan” Yojna has tried to build in incentives for all participants (bank employees, correspondents, unbanked public). Its public launch involved the PM and his ministers, demonstrating his personal commitment and the importance attached to it by the government.  There is also a hint of regulatory easing with respect to use of mobiles for payments.  If the “Jan Dhan” Yojna achieves its enrolment & usage targets, it would be a feather in the government’s cap.

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[i]  See note at  https://sites.google.com/site/chintan1997reg/institutional-reform/uid for a summary.

[ii] See http://dravirmani.blogspot.in/2014/04/mobile-banking-vs-mobile-access-to-bank.html for more details