Know your customer (KYC) requirements on financial institutions have received increasing attention by governments in their anti-money laundering and combating the financing of terrorism (AML/CFT) initiatives. AML/CFT regulations introduce specific obligations on account opening, including, at the very least, checking the customer’s identity. This poses a particular challenge to branchless banking for two reasons. First, the absence of branches means that banks need to find alternative ways of conducting face-to-face interviews or identity checks, where those are required. Regulations may allow banks to “outsource” this function to a third party (perhaps the cash-in/cash-out agents) , but it remains the bank’s responsibility to ensure KYC procedures are performed adequately. In the Philippines, the growth of rural agent networks has been limited because all agents need to take a Central Bank-supervised training course in Manila before they are allowed to operate. Many agents find this required training to be too costly and disruptive. Second, to the extent that branchless banking targets poorer and more remote customers, it may be more difficult for these customers to show proof of identity at all.

On the other hand, AML/CFT risks associated with branchless banking initiatives can be mitigated by capping account sizes, account functionality, and transaction volumes. As governments’ interest in access to finance grows, they are becoming increasingly pragmatic about KYC requirements, allowing for simplified procedures where risk is limited. In South Africa, the Reserve Bank permits remote account opening for certain types of accounts; this has allowed WIZZIT to undertake KYC procedures through a network of roving “WIZZkids”—often previously unemployed youths.

For branchless banking to develop, governments need to continue to work with providers to find flexible solutions that meet policy and business requirements. It is unlikely that there will be a one-size-fits-all solution. Instead, governments will need to be responsive to proposals coming from providers and to evaluate these proposals based on the risks involved.

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.

In principle, one would expect open, interoperable payments platforms to be easier to market and more successful than closed ones. Some early ventures have indeed tried to work seamlessly with existing systems, offering bank cards alongside mobile phone capability (SmartMoney, WIZZIT).

Yet other ventures have involved closed systems, through which users can transfer funds only to other members of the “club” (G-Cash, M-Pesa). Promoters of closed systems may be able to seize time-to-market advantages by not having to engage in lengthy negotiations with partners. Particularly in a context where many customers may not trust financial institutions to begin with, creating a vertically integrated end-to-end model maybe a reasonable market entry strategy rather than outsourcing key functions, such as cash handling or sales and marketing, to third-party agents or even large retail chains.

But whatever market entry strategies are used, in the long run customers will benefit more and pay less if interoperable networks allow them to transact with anyone, at any time.

In a survey CGAP conducted in South Africa, roughly half of those surveyed said they preferred to deal face-to-face with a person rather than with an electronic device, even if the device is quicker. Interestingly, the responses were similar between WIZZIT customers and people who have a mobile phone but do not use it to conduct transactions.

Despite being satisfied with the mobile banking service, users still missed the human touch. Customer research conducted in South Africa pointed at a likely reason for this: having to deal with machine interfaces undermines people’s sense of control over the process. Indeed, a larger proportion of WIZZIT customers than nonmobile-enabled bank customers felt that they had insufficient control over their finances. Similarly, in one anecdote from South Africa, customers using ATMs for the first time checked their balances so frequently that they lost their entire balances to ATM fees.

The same research in South Africa also highlights the need to improve customer awareness of branchless banking and to educate customers about how it works and what it costs. Not understanding the technology is the single most frequent reason given for WIZZIT customers who have stopped using the service. Nonusers thought the cost of the service was on average 14 times more expensive than it really is.

These results demonstrate the importance of marketing and of balancing technology with human interfaces, both to improve awareness and understanding, as well as to improve perceptions of the service. Achieving this through a branchless model will be a challenge.

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.