PEST analysis of Mobile Banking

Background

Mobile banking, a symbiosis of technology and financial services, is the hottest area of development in the banking sector and is expected to replace the debit/credit card system in future.

ATM and Internet banking have been around in India for a while. While both modes have had some success, penetration and use levels have been moderate. While ATMs offer convenience, they pose a perceived security threat in India given instances of mugging around them. Senior citizens and women appear reluctant to use ATMs if they have a choice to go to a branch and withdraw money in safety. The security situation in India shows little sign of improvement and therefore a large-scale proliferation of ATMs will remain a challenge. Internet banking, on the other hand, relies on PC and Internet penetration. Estimates suggest that there are approx 40 million Internet users that are expected to rise to 100 million soon – despite this growth; penetration and use levels remain low, especially in non-metro areas.

Unlike online banking, mobile banking has certain advantages on its side. It would not attract much investment from the bank and would not need a change in the existing infrastructure of the bank.

Mobile banking has the potential to bring a whole host of people that have no/little access to land lines/internet connections onto the electronic platform – an innovative way to generate financial inclusion. To do so successfully will require customer training, technology stabilization and managing carefully the ‘know your customer’ issues.

The table below shows the Political, Economic, Social and Technology (PEST) factors that affect the mobile banking industry in India

Political Factors

Only Banks can Offer Mobile Transaction Services: Only licensed banks that a have a physical presence in India are allowed to offer mobile-banking services. The banks are responsible for ensuring Know Your Customer norms, and must have core banking systems in place.

Several MFIs today act as a business correspondent (BC) (agents who work on behalf of banks) for commercial banks to reach areas where opening a bank branch is not viable. Usually at the business correspondent’s office, a bank representative is present who oversees the enrolment of clients and ensures that the KYC requirements are complied with. The bank through a BC can enroll clients, the clients can be served by the bank using mobile banking thus fulfilling the objective and the spirit of financial inclusion

Mobile operators and mobile-application developers require a separate set of guidelines for nonbanking providers who want to offer mobile banking services.

Regulations on Security: The RBI’s guidelines call for a two-factor authentication for validation of a customer. The industry has reacted to this by interpreting that two-factor authentication can be supported only by GPRS and not through SMS. Media has also criticized RBI by saying that the new mobile banking regulations such as the two factor authentication do not facilitate financial inclusion since basic mobile phones owned by majority of people in rural India do not support GPRS.

Secure transactions can happen even via SMS. SMS’es are of two types – Normal and Encrypted SMS. Normal SMS is what we use for day-to-day communication and is not secure. The SMS is not encrypted when it passes through the pipe it can be accessed. On the other hand, an encrypted SMS is converted into non-readable text using a RSA / AES (security) algorithm. The text that can be encrypted are numbers from 1-9, capital letters from A-Z and small letters from a-z. Special characters cannot be encrypted. When the bank client sends a sms from his phone to the server, a sms along with an encrypted key is sent to the server. If the encryption algorithm is strong enough, it is not possible to read the SMS. The server then decrypts (opens) the encrypted key using a RSA encryption algorithm. This technology is perfectly secure and GPRS is not mandatory. Not many phone users in India subscribe to GPRS and even fewer have phones that can support GPRS. Around 60 percent of the 306 million handsets or mobile connections in India are without GPRS and WAP. Due to lack of GPRS connectivity, Smart Trust applications, secure SMS based applications will be the prominent at least in the initial years of mobile banking.

Daily Transaction Limits: The RBI has capped daily mobile transaction limits at Rs 5,000 for transfer of funds and Rs 10,000 for purchase of goods or services.

This regulation, at least in the early stages of mobile banking, does not affect customers who will be vary of performing high value transactions. It will surely not affect rural customers who rarely receive more than Rs.5000 per day  through remittances. It is also unlikely that the rural customer will pay more than Rs.10,000 for paying his utility bills or other services.

Goal of Financial Inclusion: Currently in India, 134 million households are financially excluded, which is 60 percent of country’s population. Moreover, Financial Exclusion in Urban India is about 44 percent where as exclusion in Rural India is about 76 percent. Among the recent Government initiatives it has been proposed that a National Rural Financial Inclusion Plan should be launched with a clear target to provide access to comprehensive financial services to at least 50 percent of the financially excluded households (approximately 55.77 million) by 2012 through regional and semi-urban branches of Commercial Banks and Regional Rural Banks. The remaining households are to be covered by 2015. The Finance Minister in his budget for 2007-08 announced the setting up of a fund for financial inclusion of about Rs. 500 Crore to meet cost of technology adoption. Looking at financial inclusion especially in unique nature of states such as Uttarakhand and Himachal where a ‘money order’ economy prevails and transferring money is problematic; mobile phone banking would prove an effective way to expand the reach of financial service delivery. The topography in hilly terrains is such that banks cannot open branches in every corner. Mobile banking as a technology is certainly an answer to the growing demand for banking facility at the village level.

Economic Factors

Cost of Handsets: Handsets are priced currently at less than $25 (Rs.1000) and call rates are less than 0.05 cents (Rs.2) per minute.  Industry participants like Bharati Airtel have already awarded a contract worth $2 billion over two-years to Telefonaktiebolaget LM Ericsson, to expand its network in rural areas and provide capacity management. Gartner expects 58 percent of the rural population and 95 percent of the urban population to be covered by mobile networks by 2011. It is expected that the predominant model is likely to be a community owned handset, a concept that has already been tried and tested in some areas. Considering the rapid growth mobile phone usage, offering financial services through mobiles could help thousands, especially in rural areas, gain access financial services (banking and insurance products).

Increased Penetration in Rural India: Approximately 400 million Indians do not have a bank account. India has a base of approximately 300 million mobile handsets. Also, the Indian mobile phone market is worth up to 10 million handsets a month. With the advent of an exponential growth in mobile phones in India, mobile banking applications can be used as an efficient channel to deliver financial services to the farthest parts of the country at significantly low costs both for the financial institution as well as the client. Only 2% of rural India has access to cell phones today. With most mobile companies focusing aggressively on rural India, this situation is likely to change in the very near future. In remote geographies of India, mobile recharge cards are a fast moving product and Kirana (packed, to-the-brim stores) storeowners earned a significant portion of their revenues by selling prepaid mobile recharge cards.

Social/Demographic/Infrastructure Factors

A Required Behavioral Change: Banks plan to capitalise on this gap to increase penetration. There are 300 million mobile users, with 6 million being added every month. Despite such potential for convenience and business opportunity, few people use mobiles even for simple banking queries.

But people have their reasons for not yet lapping up the opportunity. They find many features complex to handle. That apart, there is the issue of sensitising customers. There have been cases where help-desks at banks have not been able to offer much to willing users. Mobiles have become ubiquitous, and using them for banking is the logical step. But in order for banks to explore full potential, increasing awareness is essential. A good strategy for banks to ride on the mobile way will be to initially offer some services for free.

Banking Network in the Country: There are about 68,000 bank branches in this country and 23,000 ATMs. But what’s astounding is that the number of mobile subscribers in India, which is 85 million, is growing by 5 million each month. So while today mobile banking is still not as widely used, the possibilities are limitless

Illiteracy: Illiteracy could prove an issue when using technologies like mobile phones, especially for tribal communities. Moreover, mobile banking pre-supposes that the mobile holder has a bank account, and thus along with providing capacity building organizations will have to focus on financial inclusiveness. This challenge can be overcome by service provider developing a user friendly mobile application using local languages.

Technology Factors

One Comprehensive Application for All Mobile Handsets: A major challenge for mobile application development is the great variety of different target devices with different capabilities, features and restrictions. There are a large number of different mobile phone devices and it is a big challenge for application providers to offer mobile banking solution on any type of device. Some of these devices support J2ME and others support WAP browser or only SMS. Ideally, the technology provider should ensure that the application should function on all handsets ranging from a Nokia 1010 to a I Phone.

Security Concerns: Security of financial transactions, being executed from some remote location and transmission of financial information over the air, are the most complicated challenges that need to be addressed jointly by mobile application developers, wireless network service providers and the banks’ IT departments. Security applications will gain a lot of ground during the period 2009-12. These applications will include anti-theft and device recovery features via GPS. There will also be a lot of interest in areas such as remote data locking.

Conclusion

Mobile Banking is the most spoken about factors in the area of development in the banking sector as a whole and is expected by industry experts to replace the credit/debit card system in future. During the last quarter of 2008, there are 47 million mobile users, with an average of 2 million being added every month While the government incurs a transaction cost of Rs 12-13 for every Rs 100 of loan disbursement, mobile banking helps it reduce the cost to a mere Rs 2. The number of mobile users is estimated to have far surpassed the number of Internet users. Some techniques that can be implemented for the same include using the phone-lock function on your mobile device when it is not in use, choosing passwords which are difficult to crack and keeping them safe and ensuring that the phone is configured securely, especially when it comes to configuring the Web browser and email software.  Finally, unless the experience on the mobile device is as frictionless and simple as possible, consumers will wait to check their account status by visiting the bank..