Kabir Kumar

In this fourth post in our series on interoperability, we describe interoperability at the customer-level. Read the first three posts here.

One agent. Five mobile money services (Photo taken by Ben Lyon of Kopo Kopo near Geomaps Centre in Nairobi)

In our work on interoperability, we find that there are some questions that we are unable to adequately address at the platform and agent levels alone. For instance, the opening of USSD gateways by mobile operators may allow customers of one operator to access services of another operator without either platform interconnection or agent sharing.

We identify two interoperability scenarios related to the mobile handset:

1. Customers can access their account through any SIM on the same network. For instance, one service in East Africa allows its customers to access their service from any handset as long as it is on their network.

2. Customers can access multiple accounts on one SIM. For instance, SMART in the Philippines allows customers to access SMART Money on their SMART SIM, as well as access accounts with various banks through different enabled interfaces.

Allowing customers to access their account via other SIMs or other accounts via one SIM increases the potential size of the market and increases customer convenience. In the latter case, providers may fear that customers will readily switch to another provider. MNOs run the risk that another service accessible to their subscribers will cannibalize their own service. Providers with large market share, in particular, may be less inclined to allow customers of other services to access their accounts. In addition, number portability has made it easier for customers to switch telecom providers.

Mobile money and the link between the mobile phone number and mobile financial services are supposed to help retain customers. Even if providers permit access to other services, they may use pricing, marketing and other features to try to keep customers from churning (e.g., make it hard to find the other service on the menu).

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This is the third post in our series on interoperability and related issues in branchless banking and mobile money. Read the first post that presented the overall framework for the discussion and the second post that looked at the interconnection of mobile money platforms. Today, we discuss interoperability at the agent level as it relates to agent exclusivity. We include agent exclusivity in the topic of interoperability because it raises many of the same issues as platform interoperability.

Agent exclusivity revolves around the ability of a customer of one provider to use the agent of another provider for cash-in and cash-out services related to that customer’s account. Non-exclusive agents can expand financial access by providing more access points to a greater  number of customers, while limiting the rise of a dominant actor which could ultimately reduce competition. But as with platform interoperability, regulators are cognizant that prohibiting exclusive agents could deter private actors from entering the market. What service provider would invest in identifying, training, and equipping agents if competitors can piggyback off their investment?

To be clear, when we speak of agent exclusivity, we are only referring to the cash-in and cash-out services performed by agents – not other services (where permitted) such as customer enrollment, related KYC, and processing of loan documents. Agents providing only cash-in and cash-out services are often called “cash merchants”. We distinguish the cash merchant services from other services because cash merchant functions arguably present less risk to the financial service provider since agents typically transact against their own accounts. Think human ATMs.

We identify at least four different ways to share cash merchants:

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In our first post in this series on interoperability, we introduced a three-level interoperability framework focusing on (i) platform interconnection, (ii) agent exclusivity, and (iii) customer-level interoperability. You can see the full framework in this presentation. In today’s post, we delve deeper into the first level–interconnection of mobile money platforms.

Platform-level interconnection is what most people have in mind when they think of interoperability in branchless banking. When we speak of interoperable platforms, we are referring to platforms that permit the transfer of funds from one mobile account to the mobile account of another service provider. This is similar to being able to send money from your bank account to your sister’s account at another bank. Or it is similar to being able to send a text message from your phone with your mobile network operator to your friend’s phone on the network of a different mobile network operator.

These “cross network” transactions should not be confused with “off-network” transactions which many mobile network operators claim to be platform interoperability. Off-network transactions make it possible for account holders to send money to anyone, whether they hold an account or not. For example, you send money from your mobile account to your friend, who doesn’t have an account, and your friend cashes out at your service provider’s agent. While off-network transactions can be beneficial for low-income users, we believe they are not as financially inclusive as cross network transactions. Off-network transactions require recipients to cash out, whereas cross network transactions make it possible for recipients to store received funds, on-send them or use them to make payments.

We identify different ways platforms can interconnect. In basic terms, platforms can interconnect: (1) directly (as the two ATM networks, 1Link and MNet, did in Pakistan) or (2) indirectly where a third-party entity which is either owned by providers, owned independently, or owned by the government interconnects platforms (as POS networks are currently doing in Brazil). The way in which platforms interconnect impacts pricing and efficiency of the payment system and potentially the ultimate value to customers.

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Mention the word interoperability in branchless banking and mobile money circles and watch people react in very different ways. For some, the word means something positive – efficient services and lower prices for consumers. For others, it means something negative – more costs, threats to competitive advantage and less profitability. For still others, the word means a reality that is inevitable but far in the distant future. Some don’t want you to say the word at all.

At the end of the day, we suspect interoperable systems will accelerate financial inclusion by allowing customers to use the infrastructure of multiple service providers to access their accounts. The question is how best do we get there?

A discussion on interoperating branchless banking and mobile money services that have yet to reach critical mass appears premature. But businesses and policy makers are already grappling with these issues in a number of markets where CGAP is heavily involved. In Ghana, the government is trying to understand its role in promoting interoperable branchless banking. In Pakistan, where Central Bank regulations permit a “many-to-many” model, there are questions about how the market will evolve into interoperable systems. In India, interoperability at the agent level is part of the financial inclusion vision painted by the Unique Identification Authority of India.

In general, governments are struggling to understand a regulatory approach that will balance the interest of customers with those of market players. They do not always adequately consider the state of the market or fully understand the implications of their approaches.

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A "Red Cerca" agent location of Banco AV Villas in Colombia

CGAP, in partnership with the Inter-American Development Bank and Akya, a banking consultancy, recently completed some analysis on the business case for banks in branchless banking. Our findings, which we share with you in a series of posts, starting with today’s, are based on interviews with over 20 banks that play some role in a branchless banking deployment. We also looked closely at the financials of a few banks that have been involved in branchless banking for five or more years, running agent channels for payment products or as a way to reach unbanked customers.

Our findings should bring some good news to the banking industry that is quite beleaguered and battered by crisis, competition and alleged illegalities. These are not the best of times for banks globally. In one part of the world, banks are barely recovering from a crisis. While elsewhere, especially in markets across Africa, new actors, such as mobile operators or technology companies are making forays into the banking business. From Brazil to India, banks are struggling to innovate to develop services for the unbanked or reach new segments and keep up with demographic changes.

As we have done with other pieces of research, we detail our findings in this presentation. We make the following five main points:

(1) Agents are the most economical channel available at low transaction volumes. Banks that have all three channels – networks of agents, branches and remotely-managed ATMs (the closest equivalent to agents) — see the lowest transaction costs at their agent channel. Transaction costs at agents range roughly from 0.27 to 0.58 USD per transaction and are 50% the transaction costs at branches and ATMs (see slide 10).  However, at higher transaction volumes, fixed cost infrastructure like ATMs, is of course more economical for banks for basic transactions (slide 13).

(2) Banks provide three main reasons for doing branchless banking. In our analysis, we identified at least seven different roles for banks in branchless banking, from holding float to running their own independent payment business (slides 15-18). But based on surveys and interviews, banks are involved in branchless banking for three main reasons where there are major business case implications: (1) as an additional, efficient channel; (2) to grow faster or reach unbanked segments; (3) for payments-led banking proposition. There is evidence that banks benefit in all three cases.

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This blog post summarizes a quick review of commercial investments in mobile financial services and branchless banking. We focused our review on equity deals between 2005 and 2010 involving mobile payment companies, agent companies, payment platforms and others providers that we knew were targeting the financially excluded in developing countries. We looked at press releases and other publicly-available sources for information on deal sizes and structures. We also included a few notable deals involving banks such as Telenor’s acquisition of Tameer Microfinance Bank in Pakistan and the creation of BanKO by Globe Telecom and others in the Philippines. The dataset is available upon request (technology@cgap.org).

Here are a few basic findings:

• 47 deals with USD 400 M in cumulative volume between 2005 and 2010
• Average deal size of USD 7 M with the largest number of deals under USD 4 M
• Most investments were in technology companies but new opportunities are emerging
• International Finance Corporation (IFC) was the most active investor globally
• India was the most active market

Click on images for clearer view

47 deals with USD 400 M in cumulative volume between 2005 and 2010.  Whether USD 400 M is sizeable or not depends on your perspective. It is sizeable if you consider that grant funding to companies in branchless banking between 2005 and 2010 totaled well below USD 100 M. From the perspective of those of you watching the larger payments or mobile money environment, the total size might be small, but there are a number of additional factors to keep in mind. First, a large share of the USD 400 M is attributed to a single deal – Obopay’s deal at USD 139 M. In fact, investments made into four firms – Obopay, Cointel, FINO, and Monitise – account for 60% of volume. Second, there are roughly 15 deals with an amount that was not publicly available or disclosed to us. Lastly, USD 400 M is not the complete figure of private investments made into mobile financial services or branchless banking. That figure is significantly higher if you consider internal investments made by mobile network operators, banks and others into their implementations.  Read the rest of this page »

EasyPaisa, the m-banking service by Telenor and Tameer, went live on Oct 14. They call it the “largest branchless banking service in Pakistan” on their website where you can watch a couple of the ads that people may have been discovering on You Tube.

Photo courtesy Patrick Cooks

3000 agents have been set-up to handle both bill payments and remittances. They aim to have many more trained and branded by Jan. They have covered the country with marketing, promoting the brand everywhere and pushing people to the agent network. The advertising has generated a lot of buzz and interest and their two call centers are fielding over 5000 calls a day. As of two weeks ago, they had all the major billers signed up and those previously not interested were now calling them (see here about a minor scuffulle in the media about billers which seems to have passed).

They are seeing modest success. Within the first few days, they handled 20,000 bill payments ranging from very large to small at an average ticket size of $13.

Why is this launch any more interesting than what we are seeing in other markets?

First, it is true that even in Pakistan, m-banking services have been live for a while. Mobilink partnered with the post office chain and has been in the market for almost a year. But what is unique about EasyPaisa is the business model. Telenor owns part of Tameer and that provides for unique advantages on the cost side and benefits in terms of product design.

Second, the partnership illustrates the possible tie-ups between a MF provider and a MNO. In this case, the MNO bought the MFI. In other cases, the MNO could strike a revenue sharing arrangement with the MFI in exchange for access to its distribution.

Third, the partnership illustrates how regulation and policy decisions from both the banking and telecom side can add up to produce impact. On the banking side, regulation opened up the market for the use of retail stores as agents (CGAP has been involved with branchless banking regulation in Pakistan from the beginning). Regulation made it possible for a bank and telecom operator to enter into unique partnership arrangements.

On the telecom side, MNOs are in a race to the bottom in their core business. Prepaid ARPUs are half of what they were three years ago. This race to the bottom has been precipitated by new licenses (there are seven operators in the market today) and number portability. MNOs had to climb the value chain of services faster than what you might see in the other markets.

The EasyPaisa service is within the bounds of the vision and strategy CGAP set out with Tameer Bank originally: it is both bill payments and remittances (our original financial model was with bill payments); people have the option of opening a savings account; KYC is automated using the national ID which now covers over 50 million people.

We have a lot to be optimistic about but one of our main concerns right now is that account opening is possible only at a subset of agents, roughly a third of the network. This is because of SBP requirements over account opening. While EasyPaisa locations where you can open an account are still sizeable in number, we know from the M-pesa experience (and common sense) that you want to make it as easy as possible to get people to start transacting. People will be able to do cash-only transactions (cash to cash or cash to account) at all EasyPaisa locations; so that helps. But we are figuring out a way to make account opening possible at all agents – possibly a specialized device or a document management system or something else.

-Kabir Kumar

Since the official launch of GCASH in early 2004, Globe Telecom’s subsidiary GXI set-up a number of initiatives to help them arrive at a strategy for mobile banking in the Philippines. As part of those efforts, CGAP and GXI partnered to roll-out GCASH in three predominantly rural and low-income provinces of Bohol, Palawan and Surigao. Our goal was to understand how to expand the reach of GXI’s agent network into smaller towns and how customers would use the service. I am writing to share briefly what we learned in terms of customer usage and preferences in the low-income provinces that we have been working in.

In 18 months, GXI signed up 120,000 new GCASH customers in three low income provinces (Bohol, Surigao del Norte and Palawan) and set-up 200 agents to service those customers (GXI has 1.1 million GCASH customers nationally with 3,000 agents). GXI reached over half of the registered base in the first three quarters of 2009 – roughly 72,000 new GCASH accounts. About 2,000 of those customers (under 3 percent of total) have been conducting one or more GCASH transactions a month. The average transaction size was very low at USD 30, reflecting GCASH’s appeal to those looking to transact at low values. In addition, a very small number of customers have used the wallet for storage. We found a small subset (6-7 customers) maintain a monthly running balance.

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The launch of BanKO, Globe Telecom’s new bank, raises a number of questions. Why a new bank for Globe when it has a mobile commerce outfit, GXI, and why now? For one, they can do it — regulation permits it. Few other regulators would easily permit such a bank. CGAP is aware of a couple of other similar businesses being set-up in Africa but EasyPaisa in Pakistan and now BanKO are the two notable ones to date. For Globe/GXI, it means the possibility of more revenue if they reach Filipinos with a range of financial services. CGAP is not complaining. If they are able to design products and leverage their distribution, then Globe/GXI will help bring even more reliable formal options to low-income Filipinos than they currently face.

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As you review the businesses I briefly described in yesterday’s post, you may want to keep the following in mind.

First, in every case, there is always a bank in the picture – holding funds, issuing e-money, issuing an account – and the bank’s role itself and what the bank charges for its services is an interesting aspect of the business model.

Second, because we are talking about businesses that serve people who live largely in a cash economy, distribution networks are extremely critical. Charging customers to convert cash to electronic and vice-versa is part of the revenue pie.

Third, mobile network operators are uniquely positioned in this business. For example, let’s take a MNO as a money service provider. If (1) the MNO runes that business as a stand-alone P&L (and not another telecom product) and (2) they can make use of their existing distribution, then they are likely to see mostly variable costs. As illustrated in the chart, in a typical mobile money business, MNOs may incur marketing and agent/distribution commission costs with heavy spend upfront on marketing and increasing on agent commissions as their distribution network grows.

Third, regulation and what the regulator will permit set up incentives for what kinds of partnerships businesses strike, if any.  Philippines, India and Kenya are countries where the impact of regulation on business models is quite explicit.

Yesterday I listed five  business arrangements. There is a sixth business worth mentioning. You don’t see much of it and, frankly, it is not entirely a new business to begin with: a bank pursuing an agent+mobile channel as an alternate to branches. While not an entirely new business model, we know that this “mobile+agent” model presents a unique set of challenges for banks. It is not business-as-usual for them. It is not only fee-based transaction products, but the service is being delivered at scale to people transacting at low values. It is no surprise that we see banks and microfinance providers having limited success with this channel. Basix’s bank in India has set-up a distribution network and they have been successful in servicing loans through that channel. Tameer Microfinance Bank had modest success with agents in the slum of Orangi in Karachi but that channel has now been scaled-up in their tie-up with Telenor.