We are also releasing today the four accompanying Country Notes which were distilled into the Focus Note. For much more detail on the link between social cash transfers and financial services in each of these countries, read the full reports on Brazil, Colombia, Mexico and South Africa.
In our last post, Chris Bold discussed the second of three questions that our new paper on G2P tried to tackle, namely:
For governments: Is building inclusive financial services into social cash transfer programs affordable for the social programs?
For recipients: Will poor recipients use financial services if these are offered to them?
For providers: Can financial institutions offer financially inclusive services to G2P payment recipients on a profitable basis?
Today, I will finish off the discussion by focusing on the final question regarding the business case for providers to offer financial services to social cash transfer recipients.
The biggest challenge when it comes to the business case for banks is that the amount per grant payment is small, and as client research has shown, very little of each payment is left behind in the form of savings. However, compared with other small value accounts, G2P recipient accounts have a regular dependable cash inflow ensuring that they stay active. And there is usually a government agency that is willing to pay for the service. But these anecdotal observations alone do not make or break the business case: it all depends on how the financial institution defines a business case.
To introduce greater precision to this discussion, we identify five different levels of the business case, as the figure below shows. The first level is each individual account. Small balance bank accounts are notoriously difficult to make profitable at the individual account level. But a business case may be sustained at this basic level for G2P payments if governments are willing to pay a regular fee to the banks, as they do in the four countries from our research. Without this fee, the account-level business case would be much harder to sustain. This is rather like the case for basic bank accounts which are considered loss leaders at this level by many banks, but which are nonetheless offered for strategic reasons (other profitable government business may be sold as a result of a good record) or to satisfy regulatory requirements (without regulatory support and forbearance, the bank may struggle to obtain approval for what it considers core business).
Chris Bold spent two years on secondment from DFID to CGAP where he worked on G2P-related issues, among other things. He has since returned to DFID where he is an Adviser on Private Sector Development in Fragile Countries. This is the second blog in a series on G2P and financial inclusion, based on CGAP’s new Focus Note Social Cash Transfers and Financial Inclusion: Evidence from Four Countries. Read the first post here.
Our recently released Focus Note on Social Cash Transfers and Financial Inclusion looks at the evidence from four large and well established programs in Brazil, Colombia, Mexico and South Africa to attempt to answer three broad questions that are relevant to different stakeholder groups:
For governments: Is building inclusive financial services into social cash transfer programs affordable for the social programs?
For recipients: Will poor recipients use financial services if these are offered to them?
For providers: Can financial institutions offer financially inclusive services to G2P payment recipients on a profitable basis?
In the first post, Sarah Rotman looked at the costs to government. Today, I am going to expand on what we found about the recipient experience of receiving payments electronically and into “mainstream financial accounts”. David Porteous will look next at whether there is a business case for providers to offer financial services to social cash transfer recipients.
Last week, Sarah explained our characterization of payment approach into three categories: (i) physical cash, (ii) limited purpose instrument and (iii) mainstream financial accounts. We set the bar quite high for what we deemed to be fully “financially inclusive” – to earn the title of a mainstream financial account it must allow a recipient to store funds indefinitely, access them through the mainstream financial infrastructure (think ATMs and POS devices) and deposit additional funds. Some schemes only enable some of these features and while we recognize the steps that they are taking toward being fully financially inclusive we label these accounts “limited purpose”.
The data show a very clear trend over the past few years away from recipients receiving their payments in physical cash and toward electronic payments. Three of the four countries also showed increases in the number of customers receiving their transfers into a mainstream financial account with South Africa leading the way by paying 59% of transfers paid into mainstream accounts.
While I was in West Africa a few weeks ago, there was a recurring theme running through all our meetings. Whether we were meeting with MFIs, commercial banks, mobile network operators or third-party e-money issuers, they all came back saying about the same thing: their branchless banking business viability depended on capturing more flows of money to turn into consistent, revenue-generating transactions.
Branchless banking is, fundamentally, a business built on high-volume, low-value transactions. Over two years ago, colleagues and I published a Focus Note on the potential for government-to-person (G2P) payments to bring banking to the poor by leveraging the consistent flow of money that goes from governments to its citizens. In particular, social cash transfer programs were just beginning to make innovative changes to the way payments were made, mostly by transitioning from cash to electronic delivery. We wondered about the extent to which electronic payments could go even further by landing directly into the newly opened bank accounts of the beneficiaries.
But the evidence base at the time was sparse because these transitions were just getting started. Our paper was largely forward-looking by presenting the potential of this space, while posing still unanswered questions around three main topics:
For governments: Is building inclusive financial services into social cash transfer programs affordable for the social programs?
For recipients: Will poor recipients use financial services if these are offered to them?
For providers: Can financial institutions offer financially inclusive services to G2P payment recipients on a profitable basis?
A lot has changed over the past two years. Our new Focus Note “Social Cash Transfers and Financial Inclusion: Evidence from Four Countries” attempts to answer these questions by building off of the evidence base from four large social cash transfer programs: Bolsa Familia in Brazil, Familias en Accion in Colombia, Oportunidades in Mexico, and Child Care Grants and Old Age Pensions in South Africa. We selected these countries because they are the few that have pursued the twin objectives of electronic government payments and financial inclusion at scale. Admittedly, these countries are all large, middle-income countries with relatively well-developed financial infrastructure. But unfortunately, and quite telling I think, the evidence base does not yet allow us to speak to the situation of low-income countries because G2P-linked financial inclusion is only happening at a pilot level in these countries, if at all.
Over the coming weeks on this blog, my two co-authors, Chris Bold (DFID), David Porteous (Bankable Frontier Associates) and I will provide an overview of the answers to the three questions posed above. Today, I tackle the first question regarding the cost to governments. I have found this question in particular to be asked quite often by social protection practitioners, for good reason. But before I get to that, I first need to frame the discussion with an updated categorization of payment approaches that our paper presents.
“The improvement of data on financial inclusion is undoubtedly the most immediate challenge to overcome. This must be accompanied by the analysis of the needs and expectations of the population.”
We recently spoke with Elvira Cruvinel, head of a new Brazilian Central Bank team coordinating financial inclusion efforts. Only a handful of countries globally have created such financial inclusion teams at central banks. Elvira is part of this small pioneering group of leaders looking to effect major changes to the financial access landscape.
1. What is the Brazilian Central Bank’s vision of financial inclusion?
In recent years, the Central Bank of Brazil has determined that the promotion of financial inclusion is a strategic contribution to the development of the Brazilian economy. We believe that adequate financial inclusion helps reduce poverty, since meeting the demand for financial services can improve quality of life and the development of the financial industry can spur economic growth. We also believe that financial inclusion is beneficial to economic stability, financial system efficiency and the effectiveness of monetary policy instruments.
2. Your team was created in 2009. What have you been able to do since then?
In 2009, we created the Financial Inclusion Project at the Central Bank, after realizing that it was necessary to integrate various stakeholders to develop effective policies for financial inclusion. This required a great deal of interdepartmental coordination and collaboration with other institutions, both national and international. Another major part of our effort was the collection, organization and analysis of data and research on various issues related to the subject. At the end of that first year, we published the book “Perspectives and Challenges for Financial Inclusion in Brazil: a view of different actors.”
Through our efforts that first year, we were able to solidify the Central Bank’s role on this issue in Brazil. In my opinion, our role in pulling stakeholders together showed clearly in Brazil’s first Forum on Financial Inclusion in 2009, which was organized by the Central Bank but involved multiple ministries and hundreds of participants across industry and policy circles. The second Forum, held in 2010, also shed light on regulatory issues, allowing for the definition of a financial inclusion agenda in Brazil. The third Forum, carried out in November 2011, shed light on ways to measure financial access, the quality of inclusion and products.
We’ve done a lot of thinking at CGAP about the different business models and partnerships that exist in branchless banking. What I find interesting is that rarely do you find two models that look exactly alike. Once you begin to really dig beneath the surface, you realize that even among those businesses that we might simplistically call “telco-led” or “bank-led”, there are significant differences. For example, Orange’s partnership with BNP Paribas in Cote d’Ivoire (the local subsidiary BICICI) is slightly different than MTN’s partnership with Societe Generale (local subsidiary SGBCI) also in Cote d’Ivoire. Similarly, when we did our comparative agent research in Kenya, Brazil and India, we learned that while many banks in Brazil use agents extensively in their outreach strategy, they each manage their agent networks quite differently.
Instead of playing to the same tune, I’d say that branchless banking actors are playing variations on a theme. Here we share a couple videos that describe two particular variations out of the many that exist.
1st Variation: One of the largest Brazilian commercial banks Bradesco has been targeting the mass market since its beginning, going so far as to build branches without doors to encourage anyone to enter. It’s no surprise then that Bradesco has always been trying to be as close as possible to its customers (which currently number 62 million) and to future customers. In this video, Marcos Bader, General Director at Bradesco, explains how technology and new business models based on the use of agent networks have helped the bank reach this goal. He explains many interesting aspects of their business, but what I find quite remarkable in particular is that 90% of all transactions at the bank go through alternative distribution channels. Marcos also lives up to the Brazilian stereotype by somehow finding a way to draw a parallel between branchless banking and soccer!
2nd Variation: Regulation usually defines what branchless banking players can and cannot do. Roar Bjaerum, Head of easypaisa at Telenor Pakistan explains in this video how the regulation in Pakistan was clear in its “bank-led” approach. But regulation also allowed telcos to take ownership in banks. In 2008, this is exactly what Telenor Pakistan did in partnership with Tameer Microfinance Bank, paving the way for a truly innovative business model in branchless banking. As Roar explains, the market has since taken off in many different directions, with some banks leading their own branchless banking business and some telcos acquiring microfinance licenses. We’ve written about and discussed the Pakistan market a lot, but here Roar describes the market from the perspective of someone working on the day to day business of mobile money.
In these two particular “variations on a business model theme” and in the many others that exist around the world, the challenge, as Marcos puts it, is “to define the boundary between cooperation and competition.” This is indeed the task at hand in order to produce a wonderful melody instead of discordant chords in our objective to reach the unbanked.
Watch the two videos we posted last week on OXXO and DD-DEDO here.
In this third post in the series on Brazil, we discuss another recurring issue about the agent business in Brazil. Read our first two posts on Brazil here.
In a country where agents have existed for close to 10 years nationwide, we would expect that by now banks would have found business reasons to share agents. From a consumer perspective, it is clearly attractive to be able to access banking services for multiple providers at a single agent. Yet agents in Brazil are still exclusive to banks and branded exclusively. Regulation in some markets requires agent exclusivity, but that is not the case in Brazil which makes this largely a business decision. After all these years, why hasn’t it made business sense to banks to share agents? Why haven’t retailers and agent companies struck partnerships with multiple banks and been more aggressive as they have in Mexico?
Does the new Elo brand indicate future plans to share agent networks?
It is important to note that there is already “sharing” of agents at some level. Credit agents are already shared between the small and medium banks, like Banco Cacique and Banco BMG, which specialize in offering payroll-consigned loans. Sharing credit agents turns out to be an attractive situation for these banks which often don’t have bank branches. New regulation recently restricted tiering for these types of agents — you can only outsource one level — but that will not stop the sharing (it should decrease however, the actual number of agents). Transactional agents, on the other hand, while exclusively branded and contracted with one bank can handle transactions for multiple banks. Just as it is with interoperable ATMs, transactional agents of one bank can process boletos (see here again on background) of another bank with differential charges. At least when it comes to processing boletos, which as discussed in an earlier post cover a range of payment transactions and are most likely 70%+ of transactions at agents, there is some form of interoperability at agents. Read the rest of this page »
In this second post in the series on Brazil (read the first one here), we answer the first of the following two recurring questions about the agent business in Brazil: (1) Will agents become a channel for a wider range of financial services for the poor? (2) Will banks share agents and why has that not happened already?
Banco do Brasil agent in Brasilia
The prevailing wisdom about Brazil’s vast agent network (largest in the world, 4x that of Kenya and the Philippines combined!) is that it is used mainly for bill payments. This network appears to be a missed opportunity to also make credit, savings, and other products available to low-income people in an affordable way. Is this channel being underutilized for poor people? (See here for agent numbers and here for coverage maps.)
The truth is that credit, savings and insurance have been made available via agents. Government benefits are also disbursed via agents. At the ~160,000 transactional agents, which include stores, the postal and lottery networks, customers make a variety of payments, deposit into and withdraw from accounts. Even though the role of transactional agents in the account opening process is restricted by regulation to ID check, document collection and forwarding, banks still use them to start the account opening process. In addition, there are ~500,000 credit agents, which are individuals on foot who sell payroll-consigned loans. While all banks use credit agents, small and medium banks rely on them for their core loan business. Both transactional and credit agents are covered by the same set of regulations.
While research indicates that the majority of transactions at transactional agents (70%+) are “bill” payments, the bills against which payments are received cover a range of services, not just utilities. Any service provider can issue a bill or boleto which can be paid at any agent (more on boletos here). The payments part of any financial product could be issued as a boleto. A lender can issue a boleto to borrowers for repayment. An insurance company can issue a boleto for premium payments.
While products are available at agents, it is also true that banks have not systematically developed products for the poor via the agent channel. A few factors are likely to play a part in how exactly banks end up using agents moving forward:
Lawsuits. The banking employees unions are suing banks and agent companies arguing that agents should be treated like bank employees and paid accordingly (read this basic FAQ on these lawsuits). Banks argue that agents do a lot less than bank employees and their role is similar to a basic teller. If this line of argument allows banks and agent companies to win lawsuits (they have had some favorable rulings already), it will mean that while banks may not be able to develop the agent channel to do more (into a sales and service channel, for instance), they can continue to use agents to process boletos.
Regulations. New regulations that came out four months ago have very nearly eliminated any business from doing just the banking agent business. The regulations prohibit agents whose sole function is that of a transactional agent from receiving and forwarding account opening proposals and processing receipts, payments and electronic transfers for bank deposit and payment orders. As a result, banks will continue to face natural time and bandwidth restrictions on how much an agent does.
Viability. An implication of these new regulations and lawsuits is that transactional agents can perform nothing more than a basic teller function. Will banks and agents find this limited role economically attractive moving forward? Historically, banks have paid little to agents to handle transactions and agent companies stay in business only because banks pay more for account opening and for loans offered by credit agents. Moreover, at higher transactional volumes, fixed cost infrastructure like ATMs is more economical for banks. In fact, banks are exploring ATM-like alternatives to agents especially in higher volume urban areas where most Brazilians reside anyway.
Channel strategy. Large banks in Brazil already own large acquiring networks and with boletos becoming electronic (read here), the difference between payments at those networks and agents disappears. While a number of municipalities in the most economically poor areas of the North and Northeast are serviced only by agents today, banks have been known to open mini-branches and install ATMs on the heels of agents, and they may do more of that. More importantly, a couple of banks in the process of developing services for lower-income segments are not necessarily restricting themselves to agents but considering leveraging all their channels.
Building a viable agent network is a critical success factor for any branchless banking service. But the industry is in a state of creative chaos with widely divergent approaches (and performance) to rapidly setting up a dense, liquid carpet of agents adhering to service quality standards.
In February, CGAP released an Agent Management Toolkit which aims to demystify the process. The toolkit is based on 500 interviews with agents, agent network managers and financial institutions in Brazil (Banco do Brasil and Banco Postal), India (EKO and FINO), and Kenya (M-PESA). All told, CGAP analyzed data on more than 16,000 agents for the Toolkit.
We’ve distilled the Toolkit into an Agent Management Training Package to enable you to train your own colleagues and service partners about key steps in building a robust agent network.
Section 1 looks at the business case from the agent’s perspective. This includes an exercise comparing the business drivers for 3 agents from Brazil, India and Kenya.
Section 2 looks at the role of Agent Network Managers, with a case study of a Brazilian ANM’s journey towards profitability.
Section 3 looks at options to generate adequate revenue to satisfy all partners in the supply chain, and an exercise where participants will discuss a hypothetical branchless banking service.
Section 4 looks at structuring an agent network, with a case study showing how the supply chain has evolved for M-PESA in Kenya.
Section 5 looks at lessons from Brazil, India and Kenya for managing agents, with an exercise comparing training approaches in these and other markets.
The package can be used in multiple ways, from a 30 minute rapid review of key messages, a day-long training, or selecting one of the modules matching your interest. The package includes detailed notes for trainers on how to present each slide and key takeaways to highlight. Feel free to use with attribution.
This is a guest blog by Mireya Almazán & Ignacio Mas from the Bill & Melinda Gates Foundation.
A couple of months ago, we launched the Bill & Melinda Gates Foundation initiative, Showcasing Successes in Banking Beyond Branches, and blogged about it here. We’re pleased to report that success stories are out there and 3 institutions have claimed success under the showcase criteria: Safaricom, Banco de Crédito del Perú (BCP), and Banco Wal-Mart (BWM). Safaricom and BCP lead the way in the Bridges to Cash showcase, and BWM carries the torch for the Digital Piggy Bank showcase. Successful showcase entries were announced at the World Economic Forum Africa Summit in Cape Town this week, and you can read about them on the foundation’s website.
As a reminder, the Bridges to Cash showcase recognizes players who have built a dense and sustainable network of cash merchants where people cash-in and cash-out conveniently from their electronic accounts. Under the showcase criteria, this is defined by a volume of transactions at cash merchants of at least 30 per day, and a network of cash merchants with at least 10 times the number of bank branches of the largest bank in the country where it operates. The Digital Piggy Bank showcase recognizes players that can demonstrate their electronic accounts are being used as a store of value, with at least 100,000 customers with a non-zero balance in their electronic accounts, and an average balance of at least 20 USD.
Over the past several months, we have taken a close look at the branchless banking industry in a few key countries. We start here by presenting our learnings from Brazil and share our summary note on the industry. We will continue in the coming weeks to look at several other markets, including Mexico, India and Pakistan.
Financial inclusion in Brazil needs to now turn urban (Photo Credit: André Mantelli)
The job of financial inclusion in Brazil is arguably done. Brazil’s banks have made it a global leader in branchless banking. The underlying retail payment infrastructure is in place. There are agent locations in almost every municipality. New agent management companies from around the world regularly visit more than 30 of their counterparts in Brazil to understand how the business works. And Brazil’s Bolsa Familia program, already successful in moving beyond G2P payments to credit and savings, is considered a global flagship.
And yet, financial inclusion in Brazil still has a long way to go. CGAP has studied the branchless banking market in Brazil over the past few months and has written a country note available here. In this blog series, we discuss some of the challenges identified in that note. We start the series here on the CGAP Technology Blog, but we will continue the conversation on a joint blog to be developed by Center for Microfinance Studies at FGV (Fundação Getulio Vargas).
