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Going Cashless: JAM trinity to facilitate digital payments

January 30, 2017
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Going Cashless: JAM trinity to facilitat...
By Hemant Joshi, TMT Leader, Deloitte India


Economic growth is a major driver in the development of any country. More investment and production activity are possible only when there are enough financial avenues to save money and channelise these savings to boost production. 
A formal financial system helps in the flow of funds from those who have surplus funds to those who have a shortage of funds, either through direct, market-based financing or through indirect, bank-based financing. As per the World Bank Financial Inclusion database, about 2.5 billion adults in the world (that is, almost 50 per cent of the total adult population) do not have access to formal financial services. People are forced to rely on moneylenders for credit at high rates of interest, pawn assets during health emergencies, etc.
The Financial Access Survey by the International Monetary Fund shows that there are just 13.55 commercial bank branches per 100,000 population in India, which is substantially less as compared to developed countries like Spain, France, the US and Russia, which have a ratio of 67.53, 37.52, 32.87 and 32.88 branches per 100,000 population respectively. The Pradhan Mantri Jan Dhan Yojana initiated in 2014 to accelerate financial inclusion in India has been a huge success in bringing the rural and the urban population into the financial ecosystem. Around 257 million accounts have been opened till November 2016 under the scheme, with accumulated deposits of Rs 728 billion.
Although there have been huge improvements to bring people into the financial ecosystem, customer identification (know your customer [KYC] verification) and last mile connectivity are the other important links for completing the chain. Jan Dhan, Aadhaar and mobile (JAM trinity) are working together to provide an end-to-end solution to the country’s problem of an informal financial system.

JAM Trinity
The JAM trinity is expected to drive financial inclusion to bring about overall empowerment. Aadhaar acts as a major authentication system owing to the presence of citizens’ biometrics. It is now a one-stop solution for KYC verification for different banking services. Jan Dhan provides a platform to draw Indian citizens into the financial ecosystem while huge mobile penetration provides innovative last mile access to information to 1,060 million users (588.78 million urban subscribers and 446.33 million rural subscribers).
According to the Economic Survey, about Rs 3.78 trillion or 4.2 per cent of the GDP is currently spent on key subsidies. The inefficient distribution system leads to wastage of resources rather than their usage for other developmental activities. The JAM trinity will ensure last mile delivery of benefits, eliminating multiple mid-channel layers, and empower citizens directly through technology.

Leveraging demonetisation to build a cashless economy
The demonetisation of Rs 500 and Rs 1,000 currency notes by the Government of India to counter black money and terror financing has been a huge success and has been lauded by industry leaders. Moreover, it offers a unique opportunity to rapidly move to a digital economy. Currency worth Rs 14 trillion was decommissioned through the government’s demonetisation drive and, as per the Reserve Bank of India, the banks have received deposits worth
Rs 8.11 trillion since the demonetisation drive began. Starting November 8, the public has withdrawn Rs 2.16 trillion from their accounts either through ATMs or over bank counters. The drive has helped channelise cash flows into the formal financial ecosystem, which is always beneficial to a growing economy.
However, there are several challenges involved as the new currency notes are taking time to recirculate in the market, especially in the rural sector where banking instruments like ATMs and point-of-sale (POS) terminals are comparatively less in number than in urban areas. This is a new opportunity for digital wallet service providers to gain business while the government promotes the concept of a cashless economy for the future. Although there is a shortage of cash and currency in the market, the sector provides many other alternatives to counter problems related to m-banking, e-banking, mobile wallets, unstructured supplementary service data (USSD) transaction, unified payment interface (UPI) and Aadhaar-based transactions.
• Aadhaar-based transactions: The government initiative to strengthen Aadhaar-enabled transactions is expected to simplify the digital payment process. These transactions are cardless and pinless. Mobile users will be able to digitally transact money by using their Aadhaar number and biometric authentication without having to pay the usual merchant charges.
• Aadhaar-enabled Payment System: The Aadhaar-enabled Payment System (AEPS) allows bank-to-bank transactions at PoS terminals. Customers need to provide their Aadhaar details for KYC verification and can make use of services like balance enquiry, cash withdrawal, cash deposit and Aadhaar-to-Aadhaar transfer of funds. Of late, mobile ATMs, micro ATMs and PoS machines are being provided in the rural areas to help people during demonetisation.
• UPI: Launched by the National Payment Corporation of India, UPI permits instant transfer of money to a third party using mobile phones, without having to disclose bank details. The UPI system can be used to make monetary transactions, recharge phones, pay utility and direct to home (DTH) bills, etc. Currently, UPI is used by 29 banks and is expected to be implemented for commercial use soon. Features such as an ease-of-use interface, virtual payment address, security and interoperability ensure the efficiency of the system.
• USSD-based mobile banking: The USSD is an easy method of transaction via mobile phones. Customers can link their mobile numbers with their bank accounts and make transactions of up to Rs 5,000 per day by using the mobile money identity and mobile pin. They do not need an internet connection or any specific application to use the service as transactions can be processed through the USSD platform by sending an SMS to *99#.
• Mobile wallets: Mobile wallet players facilitate basic services like mobile and DTH recharges, utility bill payments (electricity, gas, etc.), payment at grocery stores and peer-to-peer transfer of money. Users do not need to link their bank accounts to their e-wallet as the mobile number acts as the account number and funds can be transferred to the wallet from any bank account. Wallet services have user-friendly interfaces in multiple languages and use security measures like one-time passwords, QR (quick response) codes, and user password facilities. In addition, the cashback option and customer care services provide a hassle-free experience.
• Payments banks: Payments banks are setting up outlets in rural areas where users can open accounts by providing their Aadhaar details as KYC. Payments banks provide mobile ATMs, POS terminals and wallet services to help rural people with their transactions. They also offer attractive interest rates as well as loans to attract rural customers.
• Mobile money: Mobile money is a huge success in underdeveloped countries such as Africa and Kenya. Almost 75 per cent of Kenyans use Vodafone’s mobile wallet, m-pesa, for financial transactions in a country where the formal banking penetration is as low as 23 per cent. In the absence of a robust formal banking infrastructure, Indian telecom operators too can leverage the country’s high mobile penetration to boost mobile money services.

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