Mobile banking raises security concerns. In principle, security concerns over mobile banking are more manage able than that of Internet banking, because they happen on a more trusted—or at least a more tightly controlled—network. On the other hand, security concerns over mobile banking are bigger than for traditional ATM or POS devices, which are more directly specified and controlled by the provider.

We still do not know the tolerance threshold for errors and fraud for both users and providers in the mobile banking context. Because the mobile banking service is intangible, it is likely that customers will react negatively to (real or perceived) security risks of mobile banking more quickly than to the risk of loss or theft of physical cash. We suspect that customers will not be very tolerant of security lapses, and therefore the security track record must be impeccable.

Security can always be tightened, but that often results in higher demands on the user (more complicated password procedures) or a less favorable customer experience (reentry of PINs, SIM swap). We do not know the extent to which the benefits of mobile banking will be sufficiently appealing to cause customers to put up with increasingly frustrating security measures or, indeed, to develop a higher tolerance for errors or fraud. The industry will need to find ways to offer sufficient security to manage risk.

Of fraud or violation of privacy, without making what is already a precarious customer experience (because of very limited user interface capabilities of mobile phones) a hopelessly frustrating one.

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.

Customers primarily make payments and send transfers through branchless banking channels, even when most branchless banking channels offer a broader range of services, including account opening, cash deposits, and cash withdrawals. Most customers either time their deposits to coincide with bill payments or cash withdrawals, leaving a near-zero balance in their accounts, or they do not open a savings account at all. Consider the following experiences:

• In Brazil, bill payments and the payments of government benefits to individuals comprised 78 percent of the 1.53 billion transactions conducted at the country’s more than 95,000 agents in 2006. CGAP research in Brazil found that, of the 750 people who responded to a survey in Pernambuco State, 90 percent reported using banking agents to pay utility and other bills, only 5 percent reported opening a bank account at the agent, and less than 5 percent said they had made a cash deposit in to their bank account at an agent.7 Indeed, 87 percent of those who had opened an account stated that they had done so just to receive welfare or salary payments.

• In Russia, more than 100,000 automated payment terminals have sprung up in the larger cities in recent years. One provider, CyberPlat, claims to have processed 1.2 billion transactions worth US$4.7 billion through the first three quarters of 2007 via its 70,000 “cash acceptance” points, mostly for prepaid air time, television, Internet, and other utilities.

• The average mobile banking customer of WIZZIT (a mobile phone banking provider in South Africa) bought air time with WIZZIT twice as often (2.6 times) as they withdrew funds from a branch or ATM (1.3 times), and five times as often as they made a money transfer (0.5 times).

Customers use payments and transfers rather than banking services in part because providers focus their marketing efforts on payments and transfers. M-Pesa advertises its service as “an affordable, fast, convenient, and safe way to transfer money by SMS any where in Kenya,” and WIZZIT’s slogan is “the easy way to pay.” Mobile operators, in particular, prefer marketing payments services rather than the ability to store value because payments services are a closer fit with their traditional revenue model (e.g., per minute or per SMS). Some mobile operators argue that if they did advertise the ability of their mobile banking services to take deposits, they would run afoul of the approvals they’ve received from banking regulators.

The predominance of payments services over savings also likely reflects the perceived relative value that each service brings to the economic lives of the poor. Using banking agents and electronic payments to pay utility bills takes less time than traveling to and queuing in a range of utility offices, thereby bringing very tangible benefits. Similarly, collecting a pension, remittance receipt, and welfare or salary payment is a strong driver for opening accounts.

On the other hand, the value proposition of saving money, particularly in electronic form, appears to be less strong. The former head of Banco Postal in Brazil reported that, in rural areas in particular, his team spent considerable effort trying to explain to customers why they should have a bank account at all.10 It seems that although branchless banking has brought formal banking services physically closer to many unbanked people, it hasn’t changed their perceptions of the value proposition of saving in formal financial institutions. When they receive a payment or a remittance, an overwhelming majority of people go to the agent to withdraw the full amount received.

We believe that, over time, as customers increase their use of branchless channels to make a broader range of payments, they will start to find more value in maintaining transactional or savings balances in their account. In the meantime, more research must be done to distinguish how customers feel about savings in general, about the benefits of saving in banks, and about the branch and branchless channels available to them.

The success of agents in Brazil—achieving 100 percent coverage of municipalities—hinged in no small degree on the fact that utility bill paying is considered a banking service and cannot be done at nonbank outlets. This created a natural captive market of transactions for new correspondents opening up in towns without prior bank presence, where previously residents had no choice but to travel to nearby towns to pay their utility bills. In other countries, such as Colombia, local stores may have collection contracts with utilities, and it has proven much harder for correspondents to seize the utility payments business upon entering the market.

Branchless banking can dramatically reduce the cost of delivering financial services to poor people

We believe branchless banking can offer basic banking services to customers at a cost of at least 50 percent less than what it would cost to serve them through traditional channels. Branchless banking helps address the two biggest problems of access to finance: the cost of roll-out (physical presence) and the cost of handling low-value transactions. This is achieved by leveraging networks of existing third-party agents for cash transactions and account opening and by conducting all transactions online. This sharp cost reduction creates the opportunity to significantly increase the share of the population with access to formal finance and, in particular, in rural areas where many poor people live.

The biggest cost saving is on transactions that can be done completely electronically, through mobile banking. In the Philippines, a typical transaction through a bank branch costs the bank US$2.50; this would cost only US$0.50 if it were automated by using a mobile phone (Asian Banker 2007).

The cost reduction from using agents rather than banks for remote cash transactions is equally dramatic. Banco de Credito in Peru estimates that a cash transaction at a branch costs about US$0.85, while the same transaction at an agent would cost US$0.32.4 Tameer Bank in Pakistan estimates that, in the Orangi slum of Karachi, the set up cost of a bank branch would be 30 times more than the set up cost per agent, which is about US$1,400. Monthly running costs average about US$28,000 for a branch, compared with US$300 for an agent, but also, a much larger share of monthly running costs is variable for an agent than for a branch.

It is early morning in Bukura, a small village in Western Kenya. The shop-keeper and his wife are preparing to open their small store, which sells household commodities such as flour and cooking oil. They also offer M-PESA services. There is already a queue outside. A group of about twenty villagers are crowding the entrance. “It is always like this,” the shop-keeper complains while pointing to the crowd. “Since we have become M-PESA agents we have no time to rest. This thing has even over-run our other business”. He then holds up a packet of sugar. “We have not sold any sugar in months. They only want M-PESA”. Not just the Bukura agent has seen a great demand for M-PESA services. Since its introduction in March of 2007, the M-PESA application has had great success all over Kenya. There are currently over 2.3 million registered users. Over 18 Billion Ksh had been moved through the system, via person-to-person transfers.

Some of the work that I have been doing makes several arguments as to why M-PESA has become so popular. Firstly, it is the young, male, urban migrants who are driving the uptake of services – customer adoption. These migrants are what innovation researchers call ‘early adopters’ of a technology. They are usually better educated and earn higher incomes than those in the village. Because these migrants are the senders, they can choose the channel for money transfer. They then influence recipients in the rural area—who are usually female, less educated and poorer—to also use M-PESA. This segment is referred to as the ‘technology laggards’. They are usually the last, and often the least likely, to adopt an innovation.

This research also notes some barriers to adoption. Both agents and customers complain of cash float problems, especially in the rural areas. Because the majority of transactions in the village are withdrawals, agents must maintain their cash float. They do this by making frequent trips to the bank. This can be problematic if the agent is not close to an urban centre, where most banks in Kenya are located. An agent in Malaha, a small village in Western Kenya, commented, “almost every day I ride my bicycle to Kakamega to top-up my float. This takes me almost three hours. I have to leave at 6am because I want to be there when the bank opens. I must then come back again and serve my customers”. When asked if there was any other means of transport to Kakamega, the agent shook his head. He said that he was several kilometres away from the main road. He also said that he could not afford to pay the 200 ksh fee for the matatu (shared taxi).

Despite these cash float problems, the majority of customers in both the urban and rural areas assert that they prefer M-PESA over other money transfer services. This means that M-PESA must be offering them some kind of substantial benefit. In Bukura, this benefit comes in the form of savings on transport. Customers do not need to travel into Kakamega, the nearest town, to access the service. One elderly farmer commented that “I can just walk from my shamba (farm) and get money. I don’t have to spend and go into town. If the agent does not have cash today, then I will come back tomorrow. It is cheaper to wait”. Finding strategies to manage the cash float problem will undoubtedly be one of the greatest challenges for Safaricom. For now, however, it seems like customers are willing to accept the inefficiencies of the service. It is, after all, cheaper to wait.

The report is the latest or progressively more encouraging signs from RBI that it plans to provide additional guidance for mobile banking to take off. In its Financial Sector Technology Vision document, released in October, RBI indicated it sees high potential for electronic banking to increase efficiency in retail banking. But RBI is also concerned about mobile security, particularly authenticating users accessing bank accounts remotely.

RBI is also closely watching several pilot schemes using mobile connectivity to improve access to financial services among low-income Indians. As the Economist reported earlier this month, one program in Andhra Pradesh is testing how to deliver pensions and unemployment benefits to around half a million people in villages, via specially-equipped mobile phones in the hands of local payment agents and smart cards issued to recipients. A parallel POS-based system is also being tested. So far, 40,000 cards have been issued.

What’s not yet clear is whether RBI guidance on mobile phone banking will be mostly concerned with mainstream banks providing mobile as an additional channel for current customers, or whether RBI will extend permission to some more far-reaching initiatives. Will mobile operators get a window to become licensed to provide electronic wallets for international remittances, bill payments and other payment services?

The G2P pilot in Andhra Pradesh also makes extensive use of local payment agents, and we understand at least some of these to be local merchants. In rural areas, its often the local store owner who has enough liquidity to pay out cash on the government’s behalf. But so far, RBI regulation on outsourcing doesn’t provide clear permission for banks, microfinance institutions or mobile operators to follow suit and use local merchants to extend banking services in places where bank branches may otherwise be too expensive to build. Will RBI make regulatory changes on issues like this, too?