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Tuesday, August 1, 2017

4 key reasons why India is still stuck with costly and slow payment modes like money order

The money order system of the Department of Post, better known as India Post, is an interesting case study of access versus cost in payment systems. Customers have been paying fees to the extent of five-ten times those for a remittance of the same amount made through the banking system. Surprisingly, the system is continuing without any debate or discussion on pricing. As many as 65 million transactions were effected during 2016-17, which means customers have endured high cost of remittance with no questions asked.

The reason is simple. Bank-based remittance system has yet to get universal. India Post, with its 1,50,000-plus service outlets, has been providing the money order service silently and with simplicity for more than 150 years. In the good old days, the service used to be entirely manual. The money order form, filled in by the customer at the originating post office, used to be physically sent to the destination post office and cash delivered at the doorstep of the beneficiary. In recent years, the department has upgraded its service and introduced three forms of digital money orders: electronic money order (eMO), instant money order (iMO) and mobile money order (mMO).

Pay Through the Nose

In eMO, the originating post office gives the receiving post office the details of the beneficiary electronically and the destination post office delivers cash to the beneficiary within 24 hours. The maximum amount that can be remitted  is Rs 5,000. The fee charged to the remitter is 5% of the remittance amount. For remitting Rs 1,000 under eMO, the remitter has to pay a fee of `50 as against just Rs 2.50 under the National Electronics Funds Transfer (NEFT) system.

Under iMO, the remitter is given a 16-digit password, which the remitter communicates to the beneficiary. After 15 minutes, the beneficiary can approach the post office with the password to collect the money. Minimum amount that can be remitted is Rs Rs 1,000 and the maximum is Rs 50,000. The service charge ranges between Rs 150 and Rs 330, as per amount slab. The cost is almost 10 times that of Immediate Payments Service (IMPS) and Unified Payments Interface (UPI). In Mobile Money Order, both the remitter and the beneficiary need to have mobile number. An SMS message with transaction reference number and PIN will go to the remitter while the beneficiary will get only transaction reference number. The remitter will communicate the PIN to the beneficiary, and beneficiary will have to approach the post office. The maximum amount that can be remitted is Rs 10,000. The service charge will be Rs 40-100 as per slab.

Till about 2005, when Real Time Gross Settlement (RTGS) and NEFT were introduced, money order was the primary mode of money transfer for up to Rs 5,000. For higher than Rs 5,000, bank draft or bank telegraphic transfer (TT) were used. With other forms of electronic funds transfer like IMPS, UPI and Bharat Interface for Money (BHIM) in vogue, the usage of money order has come down. But it has not died. On July 14, 2013, the 163-year-old telegram service was closed. With the prevalence of mobile phones and messenger services like WhatsApp, telegram was no longer relevant. Money order system, however, has survived because of some weaknesses in the banking system.

Chinks in Banking

1. First,
electronic payment systems like NEFT, IMPS and UPI require a bank account at either or both ends. The Pradhan Mantri Jan Dhan Yojana (PMJDY) is a work in progress. Though all 245 million households have been covered for opening bank accounts, all adult have not been, as yet. Number of accounts — 1.1 billion as published in the website of the Government of India — is not the number of active accounts. Active accounts data is not available publicly but anecdotal evidence shows that a good number of adults in almost every village are without bank accounts.

Even in MBA schools, there are students who use the add-on debit cards of their parents and do not have bank accounts. Fortunately, the directive to link Aadhaar with bank accounts would bring out the truth in the matter. In the absence of a bank account by the beneficiary, money order is the only way. The big remittance corridor is of migrant workers sending money from Mumbai to their villages in Uttar Pradesh and Bihar. A good number of money orders are used in this corridor. Same is the case in the corridor between Gujarat and Odisha — used by textile workers.

2. Second, mobile wallet systems and mobile-based remittance systems are heavily dependent on smart phones. Though a billion-plus mobile phones are in the country (maybe with 700 million unique persons), more than two-thirds of mobile phones are feature phones which cannot be used for remittance. If at all it is available, it is either in English or in Hindi. Linkage of mobile with the bank account is still limited. Banks have also been reluctant to provide financial services on SMS or USSD channel. Though Kenya and Bangladesh are big success stories of SMS-based remittance, banks in India have concerns on security.

3. Third, there is still some distance to be covered to bring all bank branches under the electronic payment systems. All regional rural banks and rural cooperative banks have to be brought under a pan-India electronic network. NEFT, IMPS, UPI and BHIM should be viewed as public good, and services that should be made universal, like money orders. These systems should not be confined to large commercial banks. Of the 371 district central cooperative banks, only a handful are part of these systems. Even the customers of many regional rural banks (RRBs) are underserved from the angle of remittance facility. The participation of RRBs in IMPS is limited though they have 15,000+ branches. Remittance between urban and deeply rural is still being carried out through the age-old money order system. Many state governments are still using money order system for disbursement of social benefit payments in rural areas.

4. Fourth, money order system meets the needs of a section that requires doorstep delivery of service. Aged parents would prefer money being delivered at home by the postman who knows the beneficiaries well. Banks have not been able to match the service. Banks have also failed to market their service which is more cost effective than money orders. There is also no meaningful partnership between banks and post offices. About 1,50,000 service outlets of the postal system and bank branches operate without inter connectivity. The ideal stage would be interconnectivity of all these outlets. A customer making a money transfer, which is delivered by the postman in a remote village.

At the launch of UPI, Nandan Nilekani had said that “WhatsApp moment in payments has arrived”. Possibly, to make pricing of remittance service equitable for all and to make UPI service universal, WhatsApp itself would have to enter the remittance system.

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