Will banks respond by emulating their new competitors from the mobile world? Banks have an appetite for offering multiple products to their clients, so it would be a boon to the poor if banks wanted to ramp up their offerings via new electronic channels. But the emerging picture is not always rosy.

Many banks see mobile as merely a threat, according to IFC’s Andi Dervishi, who leads investments in alternative-payments systems for the IFC. “Banks remain conservative. They don’t see this as a big opportunity. They are taking a more defensive position, rather than offensive, and not really going after the customer. Their business model needs to be changed.” Countries like India, China, Brazil and Russia now have more mobile phones than ATMs, giving rise to the notion that mobile will support the next wave of innovation in banking in emerging markets where low-revenue customers means banks need to find low-cost channels. But instead of jumping to explore, most banks are playing defense.

One tactic banks use is putting pressure on regulators to slow down mobile operators, or block their services altogether. In Kenya, Vodafone’s local affiliate Safaricom has signed up 2.7 million clients to its M-PESA mobile money transfer service. Banks are clammoring for the central bank to do something. They claim (partially right) it’s unfair for mobile operators to have free rein, with few regulations in place, while they themselves operate under the Banking Act’s detailed rules. The central bank has responded that payment services are a different animal than full-fledged banking, and that rules are coming as soon as Parliament passes the long-awaited National Payment Systems Bill. But that hasn’t stopped banks from putting considerable pressure on their regulators. And so far none of the Kenyan banks have mobile services reaching the unbanked at any scale like M-PESA. I expect we will see a lot more of this in other countries, with banks trying to erect a regulatory wall that keeps new players out of their garden.

Banks which do aim at reaching the poor might take their cue from banks in developed markets. That may not be a good thing. A new report by Mercator’s Retail Banking practice says US banks undermine their own efforts to reach out to the unbanked by levying high fees and other charges. Banks are eager to build relationships with the unbanked and profit from their ATM withdrawals, wire transfers and POS transactions. But they will also try to maximize overdraft revenue gleaned from those customers. Unfortunately, these are the clients hardest hit by accruing fees and overdraft events. Mercator says repeat overdrafters are most often low-income, single, non-white renters. The typical debit card transaction incurs a $34 overdraft fee on a $20 purchase. South Africa’s Competition Commission Banking Inquiry has also found banks charging high fees, to the detriment of consumers, particularly mass market clients, and merchants paying high fees to accept debit card purchases.

Meanwhile, nonbanks are developing some best-of-breed services that threaten to take banks’ customers. Playing defense with regulators won’t stop new nonbank players for long - mobile operators have considerable lobbying power too. And delivering high-priced products may attract some low-income clients, but is unlikely to win their loyalty. If bank managers decide to take a more forward-leaning posture to serving the poor, they may do well to watch a number of their peers (Equity Bank in Kenya, Tameer in Pakistan, WIZZIT in South Africa) who are deep into experiments offering full-fledged retail banking to low-income clients via mobile and cards.

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.

Mobile banking and other technologies need a balanced regulatory approach

Washington D.C. (January 31, 2008) – Basic, everyday financial services are out of reach for more than two billion people in developing countries. But the rapid growth of branchless banking – including mobile phone banking – is reducing the cost and expanding the availability of such services.

“All of this innovation presents challenges and opportunities for regulators,” says Elizabeth Littlefield, CEO of CGAP. “Policy will determine not only where branchless banking is allowed, but also which business models turn out to make economic sense - and how far they will go in reaching poor people.”

Regulating Transformational Branchless Banking is a product of collaboration between CGAP and the UK’s Department for International Development (DFID), in partnership with the GSM Association, the global trade association for over 700 mobile phone operators. The authors also benefited from conducting three of seven diagnostic missions with the World Bank’s Financial Markets Integrity Unit.

Download the Focus Note at http://www.cgap.org/policy/branchlessbanking

While much of the current buzz is around mobile phones, other branchless banking applications are gaining traction as well. Brazil’s increase in access to finance has been accomplished largely through the more than 95,000 banking “correspondents”—local merchants and post offices that act as agents for banks, equipped with card-swipe and barcode-reading point-of-sale (POS) terminals. In Russia, a broad network of bank ATMs, POS terminals, and online e-money providers offer transaction services outside of traditional branch offices.
In the past five years, technology has brought 13 million people in Brazil into the banking system. In the Philippines, people would rather pay one percent to remit money via their mobile phone network than the 3-18 percent they are often charged by others.

“The market is changing, and that creates an opportunity for regulators to adapt the rules to increase the availability of financial services for the poor while maintaining a safe and sound banking system,” says Catherine Martin, Team Leader of the Financial Sector Team at DFID. “The willingness to change is a good sign for poor people who need access to formal financial services.”

A new CGAP/DFID Focus Note addresses the policy implications of branchless banking. Regulating Transformational Branchless Banking: Mobile Phones and Other Technology to Increase Access to Finance is based on assessments of policy and regulation in seven key countries, including interviews with more than 500 people from governments, the private sector, and international organizations in Brazil, India, Kenya, Pakistan, the Philippines, Russia and South Africa. Read the full report and access country-by-country information at http://www.cgap.org/policy/branchlessbanking.

“For regulators, it’s not viable to simply do nothing. Current regulation tends to be both over- and under- protective,” says Tim Lyman, CGAP’s Senior Policy Adviser and co-author of the Focus Note. “Being too restrictive can mean fewer people in the formal financial system, and higher costs to access services. But policy makers also need to be aware of potential protection gaps.”

Among the countries studied, a surprising consensus surrounds the short list of most critical topics policy makers and regulators should address to formulate proportionate regulatory policy for transformational branchless banking. These include:

• Allowing third parties, such as local merchants to conduct “cash in/cash out” transactions and interact directly with customers;
• Risk-based anti-money laundering (AML) rules, as well as rules for combating the financing of terrorism (CFT) adapted to the realities of remote transactions conducted through agents;
• Appropriate regulatory space for the issuance of e-money and other stored-value instruments (particularly when issued by parties other than fully prudentially licensed and supervised banks);
• Effective consumer protection (on a variety of fronts);
• Inclusive payment system regulation and effective payment system oversight as branchless banking reaches scale;
• Policies governing competition among providers (which balance incentives for pioneers to get into the branchless banking business against the risk of establishing or reinforcing customer-unfriendly monopolies and which promote interoperability).

“In all these areas, regulators are best guided by balancing the costs and benefits against the objectives, a proportionate approach to regulation,” says David Porteous of Bankable Frontier Associates, who was commissioned by DFID as a co-author of the Focus Note.

For branchless banking to reach its potential, consumer protection is essential. Issues include problems with retail agents, redress of grievances, price transparency, and consumer data privacy. Regulators should aim for policy that fosters, rather than inhibits, innovation so market participants are not unduly restricted from launching new financial products and services.

“Based on our research, regulators should avoid limiting the range of possible branchless banking models. They should dialogue with industry, but the private sector ought to have answers on how they’ll ensure services are safe and sound,” says Mark Pickens, CGAP microfinance analyst and co-author of the Focus Note.

About CGAP
CGAP (the Consultative Group to Assist the Poor) is a consortium of 33 bilateral and multilateral development agencies and private foundations committed to building financial systems that work for the poor in developing countries. Headquartered in Washington, D.C., and housed at the World Bank, CGAP is a global resource center for the microfinance industry, setting standards, offering technical and advisory services, training, and information on best practices, in addition to providing funding for innovative projects. CGAP’s Technology Program, co-funded by the Bill and Melinda Gates Foundation, seeks technology approaches that help provide a variety of financial services to poor and excluded people, at large scale and in a viable way, within a regulatory system that encourages their development. For more information, please visit http://technology.cgap.org/.

About DFID
DFID, the Department for International Development, leads the British Government’s fight against world poverty. DFID supports long-term programs to help eliminate the underlying causes of poverty. DFID also responds to emergencies, both natural and man-made. Its work forms part of the global goal to attain the eight ‘Millennium Development Goals’ by 2015. DFID works directly in over 150 countries worldwide, with a budget of some £5.9 billion in 2006. For more information, please visit http://www.dfid.gov.uk.

What can governments do to foster m-banking? As with the spread of mobile phones themselves, a lot depends on putting the right regulations in place. They need to be tight enough to protect users and discourage money laundering, but open enough to allow new services to emerge. The existing banking model is both over- and under-protective, says Tim Lyman of the World Bank, because “it did not foresee the convergence of telecommunications and financial services.”

CGAP has been working hard on this issue, in collaboration with DFID and the GSM Association - learning how regulation is working and how it could be improved in seven countries. The results of that work will be shared in a CGAP/DFID Focus Note in early 2008. For more information, please drop me a line or call me at +1 202 473-1084.

Mobile payments: the burning issue
Conceptually the mobile phone and the act of payment seem a natural match - their combination a good idea. But, as is the case with many of the good ideas this industry has had, material success on a grand scale remains elusive. The problems are familiar: the usecase is difficult to define, there are various technological solutions, which generally lead the demand, and the industry is reaching beyond the bounds of its natural habitat.

Back-Office Support for Busy Microfinanciers
THE microfinance industry — bankers to the poor — faces a paradox of scale, growing large in some ways but remaining small in others. There are more than 3,100 microfinance institutions worldwide, serving 113 million poor people. But even thriving microfinanciers are tiny by banking business standards. They typically make loans of $100 or so to entrepreneurs living on a dollar or two a day.
Using mobile phones as cash is put to the test in Europe
Don’t look now, but the French are in the technology vanguard again. A dozen major
companies have opened the largest trial outside of Asia for the use of cellphones as mobile money - giving consumers the ability to pay for everything from croissants and toothpaste to subway fare and wine with a wave of a handset. And they have global aspirations, hoping to prove that their systems, using the short-range radio technology called “near-field communications,” or NFC, can work securely on a mass scale.

AT&T’s Mobile Banking: A Stepping Stone to a True ‘Digital Wallet?’
Will credit cards, or even cash, ultimately become a thing of the past now that AT&T has dropped the gauntlet by embedding a mobile banking application into its most popular handsets? By partnering with Wachovia Corp., SunTrust Banks Inc., and Firethorn Holdings LLC, AT&T hopes as many as 30 million customers will ultimately use its new mobile application to view account balances and history, transfer funds, and pay bills from AT&T mobile phones. AT&T will pre-load the Firestorm software on approximately 30 of its most popular handsets.

Rural India New Target for Mobile Industry Players
Report Buyer, has added a new report showing that India’s telecommunication sector is  witnessing an explosive growth, as falling tariffs and rising incomes are bringing mobile phones within the reach of millions of new customers. “Emerging Rural Mobile Market in India” shows that mobile industry players are eyeing rural India as their new area of opportunity. The companies are encouraged by the fact that mobile users are expected to cross 230 million by 2007 end and 500 million by 2010.

Japan’s NTT DoCoMo may spend up to $8 bln on overseas investment
DCM is willing to spend between $5 billion and $8 billion to acquire minority stakes in telecommunications operators in emerging markets, a company executive said Tuesday.
“In the Asia-Pacific region, we are having many discussions with many operators,” Toshinari Kunieda, senior vice president and managing editor, told Dow Jones Newswires in an interview on the sidelines of the GSMA Mobile Asia Congress.

India: ‘Smartcard’ facility for 3 million rural poor ¼br> The successful disbursement of payments under the AP Rural Employment Guarantee Scheme (APREGS) and Social Security Pension Scheme (SSP) on pilot basis in Warangal and Karimnagar districts using the ‘Smartcard’ technology has prompted the Government to extend its reach to eight more districts in the coming few months.

Africa calling
IN THE barren surroundings of Kwa Phake in the north-east of South Africa, students from the town once left the families they supported to travel miles to the University of South Africa. Now they study at home, even receiving exam results on their mobile phones. Meanwhile, fishermen in Tanzania use mobiles to get weather reports and a service in the Kenyan capital of Nairobi alerts job seekers about vacancies by SMS.

Citi and mChek Introduce Innovative Mobile Applications
Mumbai, Maharashtra, India, Thursday, November 01, 2007 — (Business Wire India)
Citi India announced today that is has successfully piloted an innovative solution with mChek, a leading application developer in the mobile domain. This unique application significantly enhances convenience for retail investors, who are clients of a large broker, by enabling them to respond to margin calls or enhance their trading limits, even while on the move, by authorizing a transaction simply over their mobile phone.

Govt plans law to rein in banks
Harried bank customers could soon breathe easy with the government starting groundwork to provide legal cover to address their grievances and complaints. While the government has already written to RBI expressing concern over the recent incidents of banks using unfair recovery methods and unilaterally deciding interest rates and charges, sources said it has also decided to put in place a lender’s liability law. Centre and RBI had toyed with the idea of a lender liability law a few years ago, but settled on a code of conduct.

‘Lack of awareness hampers e-payment’
Mumbai: Lack of adequate awareness of the payment products is one reason why electronic payment in the country is not picking up. Both the Reserve Bank of India and banks should carry out awareness campaigns through media to promote the products. Banks can also educate customers who approach them for issue of drafts and payments to use the NEFT/RTGS for remittance of payments.

RBI in favour of migration to new payment model
MUMBAI: A change in the regulatory regime to enable a migration to a new payments model featuring the use of mobile phones and pre-paid cards may not be too far off. In its first review of payments and settlements systems in India, the Reserve Bank of India (RBI) has flagged off the need for a new payment model considering the high cost involved in the use of credit and debit cards for small payments. The review report has made out a strong case for raising awareness of payment products, transparency in charges and the need for possible regulatory changes to suit innovative products.

Overseas ATM sales help NCR in the Third Quarter
Strong ATM sales overseas, especially in the world’s hotspot regions, generated a 17% third-quarter increase in revenue for NCR Corp.’s Financial Self Service business, or ATM segment, the company reported Wednesday. Financial Self Service reported third-quarter revenues of US$407 million [281.3 million euros] compared with $349 million for the same three-month period in 2006. United States-based NCR, the world’s largest ATM manufacturer in terms of estimated number of machines shipped last year, attributed the increase to strong sales in the Asia-Pacific, Europe, Middle East and Africa markets. Retail Banking Research Ltd., a London-based strategic-research company and consulting firm, says Central and Eastern Europe is the fastest-growing market for ATM sales behind the Middle East and Africa.

The two-day event brought together a great cast of experts including representatives from the Procredit network, GXI(Philippines), Banco Azteca (Mexico), the Colombian Superintendent of Banks, as well as David Porteous and Ernesto Aguirre (who also advise the CGAP Technology Program). This very diverse group of practitioners, regulators, and technology providers created a great base to discuss and share experiences and challenges on how to provide low-income clients in Latin America and other regions with access to financial services.  The presentations touched on a range of issues vital to successfully scaling up microfinance: market research, product development, financial education, innovative delivery channels, and supporting regulation.

Even though the use of technology and new business models to push the access frontier was a major theme of the conference, the constant theme throughout all the presentations was that technology and innovative delivery channels are only part of what it takes to scale up microfinance and reach people we cannot reach today.

BancoEstado from Chile presented impressive information about the clients they want to serve. They used this knowledge on customer perceptions and preferences to design an account product without monthly account fees, but “pay per use.”   In India, banks have been experimenting with ways to support microfinance and ICICI Bank presented its partnership model, disaggregating the microfinance value chain: Banks use microfinance institutions and NGOs as banking agents to handle savings and credit transactions.   The Central Bank of the Philippines explained how they started to adapt regulation to foster innovation, but at the same time protect consumers and the financial system.

All these delegates are true pioneers and still experimenting with the right operational approaches, organizational set-ups, regulatory frameworks, demand-driven products, and a lot of other issues to ensure client take up and increase access to finance in their market.

It will take time to unleash ready-made solutions that reach the very poor in remote areas on a viable basis, and it will require substantial commitment and investment from providers.

Want more presentations? Visit the Asobancaria website.