«July 2012 THE WORLD BANK Acknowledgements The preparation of this paper was led by the Financial Inclusion Practice of the World Bank. Lead author is ...»
o Appointed representatives of the stakeholders are senior managers with an involvement in payment matters. They report directly to the top management of their respective institutions.
o The Council is comprised of an appropriate number of experts. The composition of the Council should be consistent with the objective of having effective discussion in the meetings.
o The Council has an internal governance structure with a chairperson and deputy(s), an executive body, formal rules to determine the terms and conditions for the appointment of the executive positions, and formal rules to govern the activity of the executive body.
o In the early stage of its life, the Council might seek, if necessary, assistance from other national and international entities highly experienced in managing payment system groupings.
o The Council may invite, if needed, other institutions and/or individual experts to participate in its meetings.
Annex 3: Financial Inclusion Initiatives in India India faces enormous challenges for financial inclusion. Recent estimates for outreach by the formal financial sector are summarized below: 87
These figures are a simple ratio of the corresponding metric and number of adults. For example, they do not indicate that 81.5 percent of adults in India have accounts, as many adults have multiple accounts, which this ratio does not capture. By means of comparison, in 2009, the number of deposit accounts per 1000 adults was 2022 and 737 for high-income countries and developing countries, respectively.88 The Reserve Bank of India (RBI) defines financial inclusion as ―the process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low income groups at an affordable cost in a fair and transparent manner from mainstream institutional players.‖89 As this definition indicates, the RBI is focused on ensuring wider access using existing banks.90
Accordingly, the RBI has made a series of regulatory interventions. These include:
In the early 1990s, the RBI allowed banks to provide deposit and loan services to self-help groups (SHGs).91 By March 2010, 97 million low-income households had been reached through SHGs.92 All domestic commercial banks are required to direct 40 percent of their lending to designated ―priority sectors,‖ including micro and rural lending, either directly or through loans to SHGs and regional rural banks. Any shortfall below 40 percent must be restituted through deposits into a fund for development of rural infrastructure. As of March 2009, this program covered 51 million accounts.
Additional licenses for banking branches are tied to progress made in financial inclusion efforts.
87 th Source: Speech by Dr. K.C. Chakraborty, Reserve Bank of India Deputy Governor, at 20 SKOCH Summit, July 2009, Mumbai. Estimates by extrapolation based on RBI Report on Currency and Finance; and CGAP and The World Bank 2010.
Source: CGAP and The World Bank 2010.
It is estimated that only about five percent of villages have bank branches, and outreach by microfinance institutions and self-help groups varies by state—from less than four percent of the adult population in northern and low-income states to more than 40 percent in southern states and relatively higher-income states.
SHGs are not regulated or licensed; they are informal groups of 15 or more members coming together to manage their financial needs by pooling resources.
National Bank for Agriculture and Rural Development 2009-10.
In 2005, the RBI enjoined banks to create simple, low-cost banking accounts—the ―no-frills‖ account—with simplified KYC procedures. By June 2010, 35 million such accounts had been opened.
In 2006, the RBI enabled banks to extend their reach using business correspondents. Guidelines for this approach have been progressively simplified.
Today, banks are free to appoint a wide range of individuals and entities to act as business correspondents. Since 2007 the RBI has allowed non-bank entities to provide payment services.
As recommended by the 2008 Rangarajan Committee on Financial Inclusion, the Government of India, RBI, and National Bank for Rural Development (NABARD) have jointly constituted two funds managed by NABARD, each with INR 6 Billion: the Financial Inclusion Fund (FIF) and the Financial Inclusion Technology Fund (FITF).
As of March 2010, projects totalling INR 195 Million from FIF and INR 218 Million from FITF had been approved, covering 50,225 villages.93 In 2008 the RBI launched a programme to compensate banks issuing smartcards for government payments at the rate of INR 50 a card, provided the concerned state government also contributed by paying a mutually agreed fee to banks processing the payments. This scheme lapsed in June 2010, and though many banks in Andhra Pradesh and other states availed of this scheme, no banks in Bihar did. But banks in Bihar are planning to request an extension of this scheme.
In January 2010, the RBI required all commercial banks to develop three-year financial inclusion plans and required their boards to track progress on implementation of the plans.
The RBI has set a target of achieving at least one financial services point within a four-kilometer radius of all villages with populations of more than 2,000 households by 2012. There are 8,947 such villages in Bihar. The RBI has required that statelevel banker committees track progress.94 These initiatives have generated strong momentum for financial inclusion in India.
Several commercial banks have made significant progress, with multiple pilots and solutions under way.95 Almost all solutions have involved a combination of opening nofrill accounts and servicing clients through business correspondents, with some differences in the technology used. The three variants have been widely piloted, with
some showing promising results:
Kiosk model: Clients are provided with smartcards, cards with magnetic strips, or passbooks and are serviced at kiosks run by business correspondents.
Smartcard-POS model: Clients are provided with smartcards and are serviced using POS-equipped business correspondents.
Mobile mode: Clients or business correspondents use their mobile phones to conduct transactions.
An inter-ministerial group constituted by the Government of India has proposed a framework for providing basic banking services to customers by using an NABARD 2009-10 Source: Various RBI publications and transcripts of speeches on the RBI website www.rbi.org.in In parallel and sometimes in collaboration, microfinance institutions (MFIs) and self-help groups (SHGs) are playing a key role in promoting financial inclusion in India. Several MFIs are linked to banks or other payment service providers for remittances and payments for their clients. But because few MFIs and SHGs play leading roles in payment services, they are not specifically discussed.
interoperable, shared-services infrastructure linking business correspondents equipped with mobile phones to service no-frill bank accounts. It has been proposed that the shared services infrastructure be linked to the national unique identification infrastructure for client authentication. The client no-frills bank accounts are linked to client mobile phone numbers, and clients exchange payment instructions initiated from their mobile phones with a proximate business correspondent to operate their no-frills bank accounts.
Annex 4: Interventions by the Reserve Bank of Australia (RBA)in Card Payments
Credit Card Reforms96 Studies by the Reserve Bank of Australia undertaken from 2000 to 2002 concluded that the structure of pricing in the Australian card payments system was encouraging inefficient use of credit cards relative to EFTPOS (debit cards). From 2003, therefore, the Bank progressively introduced reforms to address this issue: interchange fees were reduced, merchants were permitted to reflect the cost of different payment instruments in their prices to consumers, and merchants were provided with more freedom to choose the payment instruments they accept.
The effect of these changes was to increase the price to cardholders of using a credit card relative to EFTPOS, thereby reducing the incentive to use the more costly payment instrument (credit card) over the less costly one and reducing the overall cost of the payments system. The reforms also strengthened the ability of merchants to put downward pressure on the fees they pay when they accept cards.
The combination of decreases in interchange fees and surcharging on credit card transactions has resulted in most cardholders paying more to use credit cards and less to use EFTPOS. Furthermore, cardholders are likely to have found that the benefits of using credit cards (in the form of loyalty points earned) have declined. At the same time, merchants have seen the cost of accepting credit cards decline and the cost of accepting EFTPOS cards increase somewhat.
The change in prices to cardholders has been the result of two effects. First, the reduction in interchange fees has resulted in financial institutions changing the prices they charge to their cardholders. With a reduction in the fees received from the merchant bank, credit card issuers have responded to the loss of revenue by increasing fees and reducing benefits. Annual fees have risen and the benefits from loyalty schemes have been either reduced or capped, sometimes both. This has increased the effective price of using credit cards.
The price to cardholders of using EFTPOS, on the other hand, has declined. Many card issuers have introduced transaction accounts that offer cardholders unlimited electronic transactions (including EFTPOS) for a fixed monthly fee. This change reflects a number of factors, but the reduction in EFTPOS interchange fees as a result of the reforms has made it more viable for institutions to offer accounts that do not have EFTPOS transaction fees.
While the reduction in interchange fees has resulted in some increase in the price of using credit cards, the ongoing presence of loyalty schemes and interest-free periods means that many cardholders are still being encouraged by issuers to use credit cards.
This is where the second effect comes into play—surcharging. Since the beginning of 2003, when the no-surcharge rule was removed, the number of merchants surcharging has risen substantially (Graph 2). Survey data indicate that in June 2010, around 40 percent of very large merchants imposed a surcharge; for small or very small merchants, the percentage was closer to 20 percent.
Although the size of the surcharge varies across merchants, the survey data suggest that the average surcharge imposed is currently around 1.7 percent for MasterCard and Visa transactions, and around 2.7 percent for American Express and Diners Club transactions.
There is evidence that cardholders do react to prices when choosing which payment instrument to use. Surveys indicate that credit card users who pay off the balance by the due date and receive the benefits of loyalty points and an interest-free period undertake more transactions using a credit card than cardholders that pay interest on their credit card; the latter group tends to use debit cards more frequently. Indeed, many credit cardholders who do not pay interest do not use a debit card for any payments. In other words, the pattern of credit and debit card use appears to be influenced by the relative prices faced by different types of cardholder. While it is difficult to measure the precise impact, the number of debit card transactions has in fact been growing more quickly than credit card transactions over the past few years, consistent with the shift in relative prices from the reforms.
ATM Reforms97 The key element of the reforms in March 2009 was a change in the way ATM owners are paid for a cash withdrawal or balance inquiry made by a customer of another financial institution (known as a ―foreign‖ transaction). Prior to the reforms, the cardholder‘s financial institution paid a fee (known as an interchange fee) to the ATM owner. Typically, the cardholder‘s financial institution recouped this amount (and often more than that) from the cardholder in the form of a ―foreign fee.‖ The reforms abolished interchange fees and allowed ATM owners to charge customers directly for the use of an ATM at the time of the transaction. The reforms mandated that the direct charge be displayed to customers prior to them completing the transaction, and that customers be given the opportunity to cancel the transaction without cost if they do not wish to proceed.
Filipovski and Flood 2010.
While the prices of most foreign ATM withdrawals are similar to those before the reforms, consumers as a whole are paying fewer ATM fees. The increased transparency of the new arrangements, combined with arrangements put in place by individual institutions to provide additional charge-free ATMs to their customers, has resulted in cardholders changing their behavior in order to reduce the fees that they pay.
In the first year of the new regime, the number of foreign withdrawals fell by 18 percent from the preceding year, while cardholders‘ withdrawals at their own financial institutions‘ ATMs (‘own‘ transactions) increased by nine percent. As a share of all ATM transactions, foreign transactions fell from around 44 percent to 38 percent and this share has been relatively steady since the reforms became effective. This points to a distinct change in cardholder behavior.
Not only have consumers responded to more transparent pricing by using their own institution‘s ATMs in place of foreign ATMs, they have also increased the average value of each ATM withdrawal so that they visit foreign ATMs less often. Overall, the number of ATM withdrawals fell by around 3.5 percent in the year after the reforms, even though the total value withdrawn was little changed from the preceding year.
This effect has been concentrated in ―foreign‖ rather than ―own‖ transactions; the average value of a foreign ATM withdrawal was $156 in the year to February 2010, up from $148 in the year prior to the reforms.