The alternative is to develop branchless banking models based on shared agent networks. This would allow financial service providers to be “liberated” from location constraints and able to compete for customers anywhere purely on the basis of product design, marketing, and branding. And rather than rely only on exclusive agents to handle customer liquidity needs, the liquidity at all agents in a given location would be pooled to serve any customer and, hence, can be used most effectively and with minimal credit support.

Without this added layer of benefits underpinning the branchless banking model, providers are not likely to find branchless banking viable, particularly in rural areas where agents are few and cash transportation is costly. Making this a possibility will require changes in bank regulation, industry business models, and commercial strategies by individual financial service providers.

In developed countries, bank customers have access to several channels, each supporting a range of services. Bank cards offer convenient cash dispensing where ATM deployment is widespread. The Internet offers convenient access to more complex bill paying or remittance services. Checks can be deposited by mail. Telephone banking provides instant access to account balances and recent transaction histories. Customers also can do all of this with a more personal, higher touch service at a branch. Therefore, mobile banking struggles to achieve customer relevance, beyond simple informational services (e.g., balance inquiry), notifications (SMS alerts), and, once phones have “contactless” card capabilities, micropayments for public transport or vending machines.

The situation is, a priori, very different in developing countries, where there is less deployed infrastructure (fewer branches, ATMs generally co-located to relieve branches, low broadband penetration). For many customers in these countries, the mobile channel with banking agent sin principle could offer a much clearer convenience advantage over alternatives (travel and queuing at branches or cash-based savings). Hence, there is more reason to believe that mobile banking will find more than a niche application and could, in fact, become the primary banking channel for large segments of the population. For this to happen, some of the key uncertainties mentioned earlier would need to be resolved favorably.

Most MFI-led branchless banking initiatives have been small pilots or have had only limited success. Even though MFIs have strong local knowledge, product development acumen, and the ability to manage small loans, most lack the stable core banking systems and specialized technical skill to implement branchless banking models or tap into existing platforms.

In the Philippines, an initiative to let customers of rural banks use G-Cash instead of cash to make deposits and repayments has been constrained in part by the poor quality of banks’ core banking systems. Based on interviews with experts in the field and observations from our own visits, CGAP estimates that the vast majority of the approximately 750 rural banks will need an IT overhaul or major upgrade to participate. In Kenya, an MFI that substituted group loan cash repayments with repayments in M-Pesa found a different problem. Group loan borrowers made fewer on-time repayments under the new system. Customers no longer attended the group meetings that had helped to keep up repayment pressure.

On the other hand, those relatively few MFIs that have the financial resources and skills to deploy branchless banking have been among the first movers. Microfinance banks, including Tameer Bank in Pakistan and Xac Bank in Mongolia, are developing their own mobile banking channels and are partnering with mobile operators to reduce delivery costs and to reach unserved urban and rural areas.

Another way MFIs may get involved is  as partners for banks seeking to expand their market among the unbanked. SKS Microfinance in India has developed a mobile banking initiative in partnership with Andhra Bank, in which customers use designated SKS banking agents to deposit money into Andhra Bank accounts and use a mobile phone to repay SKS microloans. Small MFIs and local community-based organizations can also play on the other side—as correspondents for other, larger banks. This ensures them a steady revenue stream in a synergistic relationship with the larger bank, as long as they target different population segments. An interesting case is the intent of the Andhra Pradesh State government in India to use up to 30,000 village organizations (local federations of self-help groups [SHGs]), to act as a cash agent for payment of social services, for SHG members under their umbrella, as well as for local banks.

Finally, MFIs are also tackling branchless banking as a group to overcome their individual limitations. In Ecuador, for example, the Red Financiera Rural association of MFIs and cooperatives is planning to contract a technology provider to build and maintain core banking systems and branchless banking channels on behalf of the group to minimize up front costs and the expertise needed inside each member organization. This sharing of technology costs and expertise has perhaps the highest potential to bring MFIs onto payment networks and allow them to take advantage of mobile banking and other delivery channels they cannot implement alone.

Most financial service providers see partnerships with businesses that have a substantial local retail presence as a key competitive strategy. They act to build their networks as quickly as they can to expand the pool of potential customers and attain local brand presence. The pace of agent sign-up is most dramatic in Brazil, where 95,000 agents have opened for business, leaving no municipality without a retail bank outlet. This agent network has directly led to the opening of more than 13 million bank accounts in the past five years.

Depending on regulations, agents can be used to open new accounts (signing up customers and conducting customer due diligence) or to conduct customers’ cash transactions (to deposit into or withdraw from an account, or to make or receive payments). Given the finding that most branchless banking customers do not build sizable deposit balances (per observation 3, above), most customer transactions do in fact entail a cash transaction. Many banks that want to enter into branchless banking have partnered with businesses that have many local outlets so that they can jump-start their agent networks, including mobile operators, post offices, and major retail chains:

• Mobile operators. Mobile operators run some of the largest national retail distribution networks to support prepaid card sales. This puts them in a strong position to lead or participate in mobile banking projects. For instance, five banks have partnered with SMART Communications in the Philippines, and Standard Bank in South Africa partnered with mobile operator MTN in South Africa.

• Post offices. Brazil’s Banco Bradesco purchased the rights to use the national post office network as a banking agent network. Bradesco created the Banco Postal subsidiary to trade on the trust that Brazil’s population has in the postal service and to differentiate from Bradesco’s branding as one of the leading private banks in the country. By May 2007, Banco Postal had an agent network of about 5,600 agents, two-thirds of which were post offices. The rest were retail outlets branded as “Bradesco Expresso” points.

• Major retail chains. Equity Bank in Kenya signed a deal in mid-2007 to use the Nakumatt chain of retail stores as its anchor banking agents, and WIZZIT has arranged to use the Dunn’s chain of about 400 clothing stores across small town South Africa to act as account opening locations. Where banks are unable to partner with large retail chains, or in rural areas where these chains have limited or no presence, banks often outsource the building and management of chains of agents to third-party agent management companies. Banco Popular in Brazil (the banking correspondent brand of Banco do Brasil) uses companies such as Net Cash in Sao Paulo State and the Brasilia Federal District and Pag Facil in Pernambuco to sign up, equip, train, and maintain agents on its behalf. Lemon Bank has no branches at all and relies on 16 agent management companies (including three that it purchased) to manage the majority of its 5,750 agents.

A bank’s ability to sign up agents in disparate locations depends on the national payments system rules and practices. Referring back to the Brazilian success case, a second legal provision spurred geographic coverage to such a stunning extent: an agent is legally able to deposit its excess cash in to its account with its sponsoring bank through the branch of any bank, at no extra cost, and without having to open an account at that bank. The situation is quite different in Colombia, for instance, where the bank with the largest network of rural branches, state-owned Banco Agrario, charges such high cash handling fees to other banks that those banks cannot profitably set up agents in remote municipalities. While Banco Agrario’s high cash handling fees may be justified by the high cost of operating in such remote locations, the result is that other banks are not able to use agents unless they set up their own branches nearby.

Based on our observations, it appears that being an early mover in creating an agent network confers three key competitive advantages:

• Early movers are able to partner exclusively with the businesses that have the largest number of local retail outlets, thereby patching together a sizable agent network relatively quickly. Subsequent entrants are likely to find it more difficult to assemble an agent network of their own, particularly in areas with few retail establishments. The number of agents or physical locations is an easy concept to differentiate advertising, and hence it becomes a self-sustaining advantage for early movers.

• Early movers with larger agent network scan negotiate more favorable agreements with utility companies and various government agencies to distribute or collect payments on their behalf. As noted earlier, most banks realize that payments (from customers to utility companies and lenders, and from governments to welfare and pension beneficiaries) is the first product likely to move through this channel.

• A bank that is first to introduce banking services in a given geography is likely to capture greatest market share among the local population. The general manager of Banco Popular in Brazil explained that putting Banco Popular agents in unserved neighborhoods gave the bank a presence and the start of a relationship with local customers. As these communities develop and become increasingly banked, Banco Popular would be the bank whose name they would remember the best.

Having examined several branchless banking ventures around the world, it appears that less than 10 percent of all branchless banking customers are poor, and new to banking, and are using these channels for financial services (or activities other than paying bills, purchasing air time, or withdrawing government cash benefits). In its study in Pernambuco (a particularly poor state in Brazil), CGAP found that only about 5 percent used a banking agent at least once a month for anything more than paying bills or receiving government payments, were previously unbanked, and were considered poor by Brazil’s standards. Similarly, of about one million mobile banking customers in South Africa, CGAP estimates that fewer than 100,000 fall below South Africa’s poverty line, did not have a bank account earlier, and now use mobile banking for more than payments or transfers. And in Colombia, typical cash transactions through agents are in the range of US$100–200, which suggests that they are not being used by the poorest.

While disappointing to organizations that aim to expand access to finance, this is a fairly natural outcome in the early stages of development of a market following a major innovation. Providers experimenting with a new technology or business model typically seek to reduce risk by focusing on known markets (avoiding the “double gamble” of new business model and new customer segments), and within those on likely “early adopter” subsegments (i.e., those more naturally predisposed to try the new offering).

Indeed, a provider that focuses branchless banking on customer segments it already understands and knows how to market to will find it easier to try out services, assess customer and service profitability, and tailor propositions and market communications messages. For instance, in the Philippines, SMART and Globe Telecom originally advertised their mobile banking services mainly to up-market consumers. SMART combined its mobile prepaid account with a Maestro debit card that can be used at any store that accepts a traditional debitor credit card. SMART’s customer base at year-end 2006 mainly included segments it knew well: four million subscribers had signed up for SmartMoney, and of the 900,000 active users, nearly all were businesses distributing SMART’s prepaid air time.12

Globe Telecom’s GXI Inc., which offers the G-Cash mobile wallet service, estimates that nearly all of its 500,000 active users are individual subscribers in urban areas.13 In fact, the company moved beyond the pilot phase of registering outlets to accept or dispense G-Cash in rural are as late as early 2007. To date, just over 100 agents are registered in rural provinces, compared to the 3,000 air time resellers that Globe Telecom has signed up nationwide directly and the 700,000 airtime resellers hat buy and resell Globe air time.

Most customers are also just dipping their toes in the water. In 2006, CGAP conducted a survey of 515 people in areas served by WIZZIT. Even within the more directly enabled markets—among people who have both a mobile phone and a bank account—the study found, not surprisingly, that those who took up WIZZIT’s mobile banking service on average had a higher income and higher education levels and were more often formally employed, urban, and older. Early adopters were, in general, customers with more sophisticated banking requirements.

That poor people are not usually early adopters of technology can be explained by personal experience (they are likely to have had less exposure to technology and have less access to information about new offerings) as well as the fact that they are less attractive to providers.

This makes the job of governments and donors who are targeting poor people with financial services much harder. Government programs in India, Russia, Malawi, South Africa, and Brazil distribute social protection payments to customers through branchless banking channels. These have been found successful at opening bank accounts for millions of poor customers in some cases (notably Brazil), but have not led to regular use of those accounts to spread expenditure over time—balances tend to be withdrawn in full as soon as payments are received. More research is needed on how poor and excluded clients view their relationship with banking agents and their willingness to trust providers.

We are looking into the different pieces of the value chain for delivering information and core banking systems through an application service provider (ASP) OR software as a service (SaaS) model. These functions may be performed by a microfinance institution (MFI), a national or regional microfinance association (MFI-A), a local IT service provider (ITSP), the ASP or SaaS vendor (Vendor), or another, new party.

ASP or SaaS models would seem particularly likely to fall short of customer expectations when it comes to support functions. One reason that MFIs are so dissatisfied with existing microfinance software vendors is that they provide poor quality support after the sale – and in particular that most of these vendors do not have local support providers in the countries in which their MFI customers operate. For example, a vendor from Ecuador may have customers in Peru but no on-the-ground support staff in that country.

When we talk of ASP or SaaS models, there is even less personal interaction between supplier and MFI consumer. Software and servicing post-implementation is touted as being completely remote. To ensure that ASP and SaaS vendors aren’t painted with the same brush as traditional MFI software suppliers, these vendors must pay particular attention to the customer experience post-sale. Support functions, as well as other critical “soft” pieces of the value-chain are asterisked for emphasis. These pieces seem relatively more likely to influence whether an MFI will sign up for the service and how satisfied with the service it will be post sign-up.

In most cases the functions above can be matched easily with one or another actor’s competencies or potential capabilities. But for several functions, none of the actors on the scene seem best positioned to assume responsibility. In general, these functions require a combination of technical and microfinance abilities that typically neither a vendor nor microfinance association possesses. Most functions in this category relate to offering the service to the MFI community – they include the design of packages, the “onboarding” of an MFI onto the service platform, and perhaps most importantly, the handling of responses to MFIs who request bug fixes or adaptations to the service.

This topic is only getting more interesting. Last week I had the opportunity to speak via videolink to a conference in Brazil on how the web could revolutionize - or is revolutionizing - life in developing countries - via cell phones. That was a great conversation, organized by our friends at the World Bank and linked up to the Workshop on the Role of Mobile Technologies in Fostering Social Development, organized by the people who brought you those three w’s in your web browser, W3C.

That conversation touched on issues beyond mobile banking - including health, agriculture, public safety. And there were some fascinating parallels between the different fields. For example, Mark Landry, Office of the U.S. Global AIDS Coordinator talked about a program that his group is working on in Africa that uses mobile phones to reach out to patients to remind them of treatment visits, or send vital information to providers. Mark said something that resonated with me - he said that “mobile heath needs to build on the existing health infrastructure - it’s about getting on the grid.” The same is true for mobile banking. We don’t want to see a bunch of not-connected financial subsystems that leave people out of the formal financial system. That isn’t good for anybody. You can watch the discussion here.

Another comment that was striking came from Brazil - that we all need to be careful to not fall in love with the technology. That we shouldn’t be doing things just because we can. That issues of culture, levels of education, and tradition all have much to do with the speed and efficacy of adoption of new services over technologies such as mobile phones. This is not a new idea - this is something we have been saying at CGAP for awhile, and most recently in Focus Note 46, “The Early Experience with Branchless Banking.” And it’s not specifically about developing economies, either. If you and I trade mobile handsets in a coffee shop, we’re both going to need a few minutes to figure out how to use the unfamiliar device. And if you have an application on that handset for a particular service - that is even more true.

All this has me wondering where mobile banking is on Gartner’s famous (or infamous) hype cycle. If you don’t know it, I’ll let them explain:

Since 1995, Gartner has used Hype Cycles to characterize the over-enthusiasm or “hype” and subsequent disappointment that typically happens with the introduction of new technologies (see Understanding Gartner’s Hype Cycles) for an introduction to the Hype Cycle concepts). Hype Cycles also show how and when technologies move beyond the hype, offer practical benefits and become widely accepted. Read More.

Market momentum is certainly accelerating. There are signs of activity in Latin America, as well as a deepening of the mobile banking work already underway in parts of Asia and Africa. But where are we at in this cycle (hype cycles can be applied to any technology, I’m not just picking on mobile banking). Given the blog buzz, media focus, and parade of conference announcements and press releases, I think we’re somewhere between numbers one or two here (source again, Gartner):

1. “Technology Trigger”
The first phase of a Hype Cycle is the “technology trigger” or breakthrough, product launch or other event that generates significant press and interest.

2. “Peak of Inflated Expectations”
In the next phase, a frenzy of publicity typically generates over-enthusiasm and unrealistic expectations. There may be some successful applications of a technology, but there are typically more failures.

3. “Trough of Disillusionment”
Technologies enter the “trough of disillusionment” because they fail to meet expectations and quickly become unfashionable. Consequently, the press usually abandons the topic and the technology.

4. “Slope of Enlightenment”
Although the press may have stopped covering the technology, some businesses continue through the “slope of enlightenment” and experiment to understand the benefits and practical application of the technology.

5. “Plateau of Productivity”
A technology reaches the “plateau of productivity” as the benefits of it become widely demonstrated and accepted. The technology becomes increasingly stable and evolves in second and third generations. The final height of the plateau varies according to whether the technology is broadly applicable or benefits only a niche market.

So again, I think we’re somewhere between “Technology Trigger” and “Peak of Inflated Expectations” here. Gartner did look at consumer mobile applications about a year ago. The key is to think about getting to numbers four and five, right? To see this through to when it can actually become widespread. Something to remember if we get to the “trough of disillusionment.”

The Forum will bring together financial service providers and technical solutions providers for technical workshops on using new technology to increase access to financial services. In addition to the forum, the event offers an opportunity for vendors to participate in a commercial tradeshow of products and services. This year’s themes include MIS, the link between social protection and technology, and mobile banking.

The Technology Forum is free of charge and open to all those who are interested in attending. We strongly recommend that you pre-register by sending in the registration form available on http://www.capaf.org/pages/forumtechnologie_2008/Inscription.html and following the instructions.

You can also send an email to capaf@orange.sn to request the form.

Please note that the working language of the Forum is French but simultaneous interpretation in English and French will be available for the technical workshops.

Forum de Technologie 2008 : Améliorer l’accès aux services financiers

Le CGAP et son programme régional CAPAF ont le plaisir d’annoncer que le troisième Forum de Technologie se tiendra à Yaoundé, au Cameroun, le 1 et 2 juillet 2008.

Le Forum rassemblera des fournisseurs de services financiers et des prestataires de solutions techniques pour des ateliers techniques sur l’utilisation des nouvelles technologies pour améliorer l’accès aux services financiers. Au delà des ateliers, le Forum donne la possibilité aux prestataires de services financiers et de technologie d’exposer leurs services et produits dans le cadre d’une foire commerciale. Les thèmes du Forum 2008 comprennent les SIG, le lien entre la protection sociale et la technologie, et le M-banking.

Le Forum de Technologie est ouvert à tous et gratuit. Il est fortement recommandé, cependant, de s’y inscrire au préalable. Le formulaire d’inscription, le programme provisoire et autres informations sont disponibles sur la page http://www.capaf.org/pages/forumtechnologie_2008/Inscription.html.

Vous pouvez également envoyer un courriel à capaf@orange.sn et nous demander le formulaire.

That said, who will pay for interoperability? If I am a service provider, why should I subsidize/pay for the infrastructure that could benefit my competition?  Visa/Mastercard and the like were not interoperable at first, and we might well expect the same in the mobile banking space. So initially, it makes sense that the field of mobile banking is developing the way it is.

This week our team has been in Cairo for the first ever Mobile Money Summit. Organized by CGAP, DFID, IFC and the GSM Association, 429 delegates from 67 countries gathered to hear from telecom CEOs, banks, microfinance organizations, solution providers, and regulators. GSMA tells us that delegates were more or less evenly comprised of these four groups: telecoms, financial service providers, vendors, and the NGO/government/donor community.

In between powerpoints and conversations in the exhibition hall, some common threads have emerged:
-an awareness of the need for developing domestic financial services and systems, not just international remittances;
-a real emphasis on the vital role played by banking agents, who conduct the cash-in and cash-out function on behalf of a service provider;
-seeing poorer customers as a big opportunity.

As noted in a recent CGAP Focus Note, mobile banking won’t automatically benefit poorer people. There’s a need for the development of interoperable payments platforms, practical and risk-based approaches to regulation, as well as shared networks of cash-handling agents. There is also a need for product development that overcomes the lack of human interaction and reliability concerns that may hinder customer adoption today.

Those challenges are evident in places such as Kenya. Andy Chung of Vodafone spoke about M-PESA, which today boasts 2.3 million customers and is expanding in Afghanistan and would like to expand into even more markets. But are those customers poor people? Would M-PESA automatically reach poor people?

“Any new product penetrates from the top-down. This is the early adopter model that we see with all technologies,” said Chung.  Only with active engagement and perhaps subsidy from development organizations would the people making less than $2 a day begin to take on such services.

Is this discouraging? No. It just means that for mobile banking, it is really early days. The  Mobile Money Summit has been billed as the world’s first global mobile banking conference, and that’s true. It would have been difficult to convene a gathering of this size and shape even one year ago. Now seems to be just the right time to convene this sort of gathering.

What is next? Will industry momentum continue? Will poor people be served by ever
more providers? What will the status of industry be one year from now?

Watch this space.

A new report from the global microfinance body CGAP predicts that, with the right market conditions, mobile banking could reach large numbers of poor people who are outside the formal financial system. The Early Experience with Branchless Banking calls for the development of interoperable payments platforms, practical and risk-based approaches to regulation, as well as shared networks of cash-handling agents. There is also a need for product development that overcomes the lack of human interaction and reliability concerns that may hinder customer adoption today.

“Market forces are driving down costs. In the Philippines, we see that a transaction on a cell phone or at an ATM costs one fifth that of a traditional visit to a bank branch,” said Gautam Ivatury, manager of CGAP’s Technology Program and co-author of the report. “Yet globally, we estimate that fewer than one in ten mobile phone banking customers are poor, new to banking, or doing anything more than payments and transfers.”

Payments and funds transfers dominate mobile financial services for many reasons, the report finds. Mobile operators in particular prefer to market payments services as this is more aligned with traditional revenue models. These services are also less likely to cause operators to run afoul of banking regulation.

“When it comes to reaching poor people who live outside the formal financial sector, the reality of mobile phone banking doesn’t match the potential, much less the hype, at least not yet, said Ignacio Mas, CGAP advisor and co-author of the report. ”We see opportunities for service providers who move quickly to create new products, especially if they can establish shared networks of cash-handling agents to cover that ‘last mile’ of service delivery.”

The report finds that challenges to the growth of branchless banking include a reluctance on the part of banks to get involved, as well as outdated or inadequate regulations. This is true despite the benefits of branchless banking: convenience, better security, and lower costs for customers. In cases where market conditions are not driving broader banking services such as credit and savings, there may be a role to play for policymakers and those who advocate for increased financial access.

The Early Experience with Branchless Banking will be presented at the GSMA Mobile Money Summit in Cairo on May 14.