Kabir Kumar

Over the past several months, we have taken a close look at the branchless banking industry in a few key countries. We start here by presenting our learnings from Brazil and share our summary note on the industry. We will continue in the coming weeks to look at several other markets, including Mexico, India and Pakistan.

Financial inclusion in Brazil needs to now turn urban (Photo Credit: André Mantelli)

The job of financial inclusion in Brazil is arguably done. Brazil’s banks have made it a global leader in branchless banking. The underlying retail payment infrastructure is in place. There are agent locations in almost every municipality. New agent management companies from around the world regularly visit more than 30 of their counterparts in Brazil to understand how the business works. And Brazil’s Bolsa Familia program, already successful in moving beyond G2P payments to credit and savings, is considered a global flagship.

And yet, financial inclusion in Brazil still has a long way to go. CGAP has studied the branchless banking market in Brazil over the past few months and has written a country note available here. In this blog series, we discuss some of the challenges identified in that note. We start the series here on the CGAP Technology Blog, but we will continue the conversation on a joint blog to be developed by Center for Microfinance Studies at FGV (Fundação Getulio Vargas).

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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 »

Today, we share with you a presentation that describes in detail five ways mobile network operators (MNOs) can think about the mobile money business case. MNOs across the globe are investing millions to develop and market mobile money. Estimates claim at least 30 implementations in Africa where MNO-driven financial services are an important part of the financial inclusion landscape. Despite the bets being placed by MNOs, the business case remains uncertain in almost every implementation.

Last year we surveyed MNOs to assess their expectations of the business case. Since then we have done analysis of two implementations (with the help of Dalberg and a major mobile money service in Africa) and taken a few steps further to understand the relationship between the business case and market structure (with the help of Bankable Frontier Associates).

Our analysis resulted in the following five insights which are backed by data in the presentation and which we expand on in subsequent posts:

How to think about the overall revenue potential?

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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.

The m-banking industry (for the unbanked) has become accustomed to describing m-banking businesses as bank-led, telco-led, and third-party. The three categories are particularly useful in explaining who is driving the business operationally and who might control the revenues. The categories have particular currency in policy circles where the top-line question is what to do with non-banks.

I am particularly intrigued by the different arrangements we see today and would ideally prefer a typology of sorts that helps us make sense of a more complex market. For example, it is useful perhaps to ask where is Safaricom likely to take M-PESA next and situating M-PESA as something other than telco-led may help us shed a light on that future.

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I have been tracking the mobile banking/branchless banking space in India for a few years – since the business correspondent guidelines were issued. India drafted those guidelines in the spirit of significantly ramping-up access to finance for poor people. The guidelines put Indians in the lead on branchless banking regulation in the South Asia region. Two years have passed and we have yet to see those guidelines translate into a dramatic change in the access to financial services picture in India. There are new companies and more experimentation with correspondents and innovative solution providers but banks have simply not been aggressive about pursuing branchless channels.

The Reserve Bank of India issued final mobile banking guidelines on Wednesday and banks are again front and center. Should we expect these guidelines to dramatically alter the picture of financial access in India? Are the unbanked winners or losers? Well….

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Why bother about savings and credit? News this week that remittances from the US to Mexico grew a measly one percent to $23.9 billion in 2007, compared to growth of 17 percent in 2006.  That hurts people who depend on remittances. The Mexican central bank recently cut its economic growth forecast for 2008 by half a percentage point.

Low-value remittances to some extent sit at the center of branchless banking channels both card- and mobile- based. Their significance for economies like Mexico or Philippines or Kenya and elsehwere has been a driver for new low-cost remittance solutions such as G-Cash and M-Pesa. These approaches have been the inspiration for the new banking channels that CGAP has been writing about and working on over the last year.

When it comes to branchless banking, the remittance volume helps make both the business case to financial providers and is an important part of customer adoption of branchless channels. The high volumes for some corridors ($12.8 billion in official international remittance to Philippines in 2006) make the case for banks (and telecoms and others) to possibly invest either themselves in a sprawling cash-handling infrastructure or work with gas stations, post offices and retail providers to set-up agent networks. Customers are likely to use these channels to access remittances that are an important part of their livelihood. Some would even argue that the high remittance flows and their impact on the economy serve as a motivator for regulators to encourage lower cost innovations as they have in the Philippines.

But we have yet to crack the puzzle of how remittance recipients get to savings and credit. The frequently used Brazil example is worth mentioning again: billions of dollars in government transfers to low-income people via over 90,000 points – but just one in 25 of them (based on a CGAP survey) are actually saving.