The Framework and Regulations Of

CHAPTER 4

THE FRAMEWORK AND REGULATIONS OF

MOBILE COMMERCE

4.1 REGULATORY FRAMEWORK

The Telecom Regulatory Authority of India (TRAI) has issued the “Mobile Banking (Quality of Service) Regulations, 2012” [1]prescribing quality of service standards for mobile banking to ensure faster and reliable communication for enabling banking through the mobile phones.

These regulations have been issued after elaborate consultation process starting with the issue of a consultation paper seeking the views of stakeholders on Quality of Service parameters for meeting the requirement of financial transaction on mobile phones. The objective of the consultation process was to identify quality of service parameters for facilitation financial transactions using mobile phones as per the framework for mobile banking finalized by the government, based on the report of the Inter Ministerial Group.

Based on the feedback of the stakeholders and keeping in view the interests of consumers and service providers the authority has finalized the “Mobile Banking (Quality of Service) Regulation 2012″.

The salient features of “mobile banking (Quality of service) Regulations, 2012” are as follows:

(i) The access service providers shall facilitate the banks to use SMS, USSD and IVR to provide banking services to its customers. The access service providers can also optionally facilitate the bank to use WAP or STK.

(ii) The response time for delivery of message for mobile banking services generated by the customer or the bank shall be within the prescribed time frame of <= 1 seconds for SMS, IVR, WAP and STK and <= 2 seconds for USSD.

(iii) The regulations also mandates that if SMS sent by the bank is not delivered to the customer due to network or handset related problems, an USSD communication to the customer confirming the completion of the transaction should be sent.

(iv) For mobile banking transactions. The service providers have to meet the Quality of Service standards laid down by TRAI for Cellular Mobile Telephone Service and certain customer centric parameters and laid down in the new regulations.

(v) The service providers have to maintain complete and accurate record of the transactions, using mobile banking services through mobile phones.

4.2 Technological Framework

Technically speaking most of Mobile Commerce (mobile banking) services can be deployed using more than one channel. Presently, Mobile Banking is being deployed using mobile applications developed on one of the following four channels.

1. IVR (Interactive Voice Response)

2. SMS (Short Messaging Service)

3. WAP (Wireless Access Protocol)

4. Standalone Mobile Application Clients

IVR – Interactive Voice Response

IVR or Interactive Voice Response service operates through pre-specified numbers that banks advertise to their customers. Customer's make a call at the IVR number and are usually greeted by a stored electronic message followed by a menu of different options. Customers can choose options by pressing the corresponding number in their keypads, and are then read out the corresponding information, mostly using a text to speech program. Mobile banking based on IVR has some major limitations that they can be used only for Enquiry based services. Also, IVR is more expensive as compared to other channels as it involves making a voice call which is generally more expensive than sending an SMS or making data transfer (as in WAP or Standalone clients). One way to enable IVR is by deploying a PBX system that can host IVR dial plans. Banks looking to go the low cost way should consider evaluating Asterisk, which is an open source Linux PBX system.

SMS – Short Messaging Service

SMS uses the popular text-messaging standard to enable mobile application based banking. The way this works is that the customer requests for information by sending an SMS containing a service command to a pre-specified number. The bank responds with a reply SMS containing the specific information. For example, customers of the HDFC Bank in India can get their account balance details by sending the keyword ‘HDFCBAL' and receive their balance information again by SMS.

However there have been few instances where even transaction-based services have been made available to customer using SMS. For instance, customers of the Centurion Bank of Punjab can make fund transfer by sending the SMS ‘TRN (A/c No) (PIN No) (Amount)'. One of the major reasons that transaction based services have not taken of on SMS is because of concerns about security. The main advantage of deploying mobile applications over SMS is that almost all mobile phones are SMS enabled.

An SMS based service is hosted on a SMS gateway that further connects to the Mobile service providers SMS Centre. There are a couple of hosted IP based SMS gateways available in the market and also some open source ones like Kannel.

Figure 4.1 : SMS Network Architecture

WAP – Wireless Access Protocol

WAP uses a concept similar to that used in Internet banking. Banks maintain WAP sites which customer's access using a WAP compatible browser on their mobile phones. WAP sites offer the familiar form based interface and can also implement security quite effectively.

A WAP based service requires hosting a WAP gateway. Mobile Application users access the bank's site through the WAP gateway to carry out transactions, much like internet users access a web portal for accessing the banks services.

The following figure demonstrates the framework for enabling mobile applications over WAP. The actually forms that go into a mobile application are stored on a WAP server, and served on demand. The WAP Gateway forms an access point to the internet from the mobile network.

Figure 4.2: WAP Network Architecture for Mobile Applications

Standalone Mobile Application Clients

Standalone mobile applications are the ones that hold out the most promise as they are most suitable to implement complex banking transactions like trading in securities. They can be easily customized according to the user interface complexity supported by the mobile. In addition, mobile applications enable the implementation of a very secure and reliable channel of communication.

4.3 RBI Guideline

Mobile Banking in India - Guidelines

India has about 207 MM (September’ 2007 TRAI Data) [2]mobile phone subscribers, a number that is larger than the number of bank accounts or Internet users. Given the mobile tale-density of about 20% and development of secure mobile technology solutions, banks are well-positioned bridge the digital divide and introduce the unbanked sector to the financial mainstream

You may be aware that Reserve Bank of India had set up the Mobile Payments Forum Of India (MPFI), a ‘Working Group on Mobile Banking’ to examine different aspects of Mobile Banking (M-Banking). The Group had focused on three major areas of M-Banking, i.e., (i) technology and security issues, (ii) business issues and (iii) regulatory and supervisory issues. A copy of the Group’s report is enclosed. RBI has accepted the recommendations of the Group to be implemented in a phased manner. Accordingly, the following guidelines are issued for implementation by banks. Banks are also advised that they may be guided by the original report, for a detailed guidance on different issues.

However to start with, we must understand who the various stakeholders are and what there expectation is:

Stakeholders are as follows

a)  Consumers

b)  Merchants

c)  Mobile Network operators

d)  Mobile device manufacturers

e)  Financial institutions and banks

f)  Software and technology providers

g)  Government

Each stakeholder group has the following expectations:

a) To meet the following Consumer expectations:

·  Personalized service

·  Minimal learning curve

·  Trust, privacy and security

·  Ubiquitous – anywhere, anytime and any currency

·  Low or zero cost of usage

·  Interoperability between different network operators, banks and devices

·  Anonymity of payments like cash

·  Person to person transfers

b) To meet the following Merchant expectations:

·  Faster transaction time

·  Low or zero cost in using the system

·  Integration with existing payment systems

·  High security

·  Being able to customize the service

·  Real time status of the mobile payment service

·  Minimum settlement and Payment time

c) To meet the following Telecom Network Providers expectations:

·  Generating new income by increase in traffic

·  Increased Average Revenue Per User (ARPU) and reduced churn (increased loyalty)

·  Become an attractive partner to content providers

d) To meet the following Mobile Device Manufacturers expectations:

·  Large market adoption with embedded mobile payment application

·  Low time to market

·  Increase in Average Revenue Per User (ARPU)

e) To meet the following Banks expectations:

·  Network operator independent solutions

·  Payment applications designed by the bank

·  Exceptional branding opportunities for banks

·  Better volumes in banking – more card payments and less cash transactions

·  Customer loyalty

f) To meet the following Software and Technology Providers expectations:

·  Large markets

g) To meet the following Government expectations

·  Revenue through taxation of m-payments

·  Standards

Regulatory Roles and Responsibilities of Stakeholders

Role of Banks

·  Any money exchange i.e. Payments, P2P, remittance, etc – should be executed through Banking instruments & Infrastructure.

·  This is to ensure compliance with all financial controls and regulation. Payments can be made by the following

a.  Savings Bank Account/Debit Card

b.  Credit Card Account

c.  Pre-paid Cards

d.  Virtual Cards (Credit & Debit Cards)

·  Bank’s role should be of providing normal transactional services to customers using the full range of services including Cash, Saving’s account, Credit Card, Debit Card and Prepaid Cards services.

·  Transactions should be maintained within the banking network and all the stakeholders in transaction processing and should be subject to equal level of scrutiny and regulation as are other bank accounts.

·  Transaction settlement should ride on the existing infrastructure for efficient settlement and payment systems.

a.  Intra Bank - Transactions involving Bank A/c to Bank A/c funds Transfer should be real time or near real time transactions

b.  Inter Bank - Transactions involving Bank A/c to Bank A/c funds Transfer should ride on the NFS or other existing switches available for inter-Bank transactions.

c.  Intra Bank – Transactions involving Card A/c ( including Credit & Debit Cards) to Merchant/ recipient account should ride on the existing settlement & payment systems available with Banks.

d.  Inter Bank – Transactions involving Card A/c (including Credit & Debit Cards) to Merchant/ recipient account should ride on either on India Switch , VISA, MasterCard or any other available switching infrastructure.

·  The bank should take responsibility for audit, fraud management, account security etc. under its normal banking license. Banks should ensure that the service operates entirely within the RBI framework.

·  Banks should be responsible for ensuring the identity of the sender and the receiver of funds. Banks can design the process of verification of sender and receiver as per the existing guidelines. In case where the existing process of KYC compliance cannot be met, new methods of verification such as mobile based PIN verification and transaction limit fixation can be considered

·  In case of m-wallet propositions the pooled funds should be held with a bank so that systemic risk of defaults is minimized.

·  Banks may end up playing a limited role in P2P and cash to cash payments other than settler of funds via the pooled account. This should be permissible subject to transaction limits etc.

4.2 Regulatory Framework suggested for Mobile Payments

Payment Account to be used for Mobile Payments e.g. Credit card account, Savings Bank Account, virtual account, Pre-paid account should be similar existing Credit card, Debit Card / bank account issuance framework.

While we can use innovative mechanisms to enable payments through mobile phones, following should be taken into considerations

·  RBI’s Guidelines and policies on KYC

·  RBI’s Guidelines and policies on AML

·  Financial settlement between the various entities should be undertaken as per the existing Guidelines and processes.

·  The messaging system between Application and Bank needs to be regulated and standardized to ensure standard transaction processes and settlement systems.

·  Guidelines need to be evolved to ensure complete interoperability of between all the stakeholders of mobile payments. This will lead to the growth of ecosystem and will benefit all the stakeholders.

·  Guidelines need to be evolved for allowing domestic money remittances by Cash In and Cash Out at Telco Outlets including usage of Telco’s KYC and adherence of AML guidelines.

Telco’s role should include providing platform to initiate transactions and carry the messages to the bank’s systems

4.4 Information and Communication Technology Model

During the past decade, the ICT rapidly increases communication source in banking industry. There are various forms of Information and communication technological innovations and electronic delivery channels which are adopted by banks. ICT innovations have been identified to contribute to the effective distribution channels of Banks. The electronic delivery channels are collectively referred to as Electronic Banking. ICT on banking is really not one technology, but an attempt to merge several different technologies. Each of these evolved in different ways, but in recent years different groups and industries have recognized the importance of ICT usage working together. Bankers now see a kind of evolution in their business, partly, because the world has taken a quantum leap in the use of ICT in the past several years. New electronic services adopted by banks such as online retail banking are making it possible for very small institutions to take advantage of new technologies at quite reasonable costs. These developments may ultimately change the competitive landscape in the financial services.

Figure 4.3: ICT in Banking

Use of ICT in Banking

ICT is a network of networks. It is not a single network, but a global interconnected network providing free exchange of information. It implies the most pragmatic use of information technology as medium of universal communication. It has brought unprecedented changes in society. Spanning the entire globe, the net has redefined the methods of communication, work, study, education, interaction, entertainment, health, trade and commerce. The versatile facilities and opportunities provided by the ICT led to the development of electronic commerce. This became possible when the ICT transformed from the ordinal system providing static web pages, into interactive two-way system such as E-Commerce, E-Banking & M-Banking.

[1] source :http://insightvas.com/trai-facilitates-mcommerce-with-new-sets-of-regulations

[2] http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=1660