Archive for: Europe and Central Asia

This is the fourth post in a series on remittances. The previous blog in this series discussed the scale of the remittance flows between Russia and Tajikistan and the huge potential for linking them with other financial products. Stefan Staschen works regularly as a consultant for CGAP’s Government and Policy Team and is an Associate with Bankable Frontier Associates. 

You can probably understand our excitement when CGAP learned about the initiative of two banks to leverage the large remittance flows between Russia and Tajikistan. Agroinvestbank in Tajikistan offers three such linkage products in cooperation with Russlavbank in Russia, which operates the CONTACT money transfer system.

The following three products are offered:

1. A “Road Loan” where migrants (before they leave Tajikistan) can receive loans up to US$1,000 mainly to cover travel expenses for their trip to Russia. The migrant, once in Russia, uses the CONTACT system to make repayments from Russia at a preferential commission rate (i.e. a lower rate than charged for remittances). In April 2011, Agroinvestbank had 6,000 road loans in its portfolio with an outstanding loan balance of US$3.2 million. (This is the only product which is also offered by a number of other banks.)
2. “Hamvatan” (meaning “compatriot”) is a basic deposit account offered by Agroinvestbank, which can be opened remotely at Russlavbank branches in Russia and can be replenished through the CONTACT system. Only the migrant can withdraw money from this account (and only once he has returned to Tajikistan). So in a way it’s a savings account in Tajikistan replenished by a remittance from Russia. As of mid-2011, only 38 accounts had been opened with an aggregate balance of US$30,000. Most clients close their account once they return to Tajikistan as they would rather deposit the money in an account earning a higher interest rate.
3. “Family Card” is a current account with two debit cards – one for the migrant and one for his family. The migrant worker opens the account in Tajikistan before he travels and he can replenish it from Russia through the CONTACT system at a preferential commission rate. Unlike the Hamvatan account, family members can withdraw money in Tajikistan even before the migrant returns home. (No data on number and volume of accounts was available for this, but I assume the banks would have touted the success if there was anything to tout.)

What are the reasons for the low take-up of these products, even though the potential seems huge, and what can be done to make them more attractive? The following are a few indications, although more detailed research would be required to provide definite answers to these question Read the rest of this page »

This is the third post in a series on remittances. Stefan Staschen works regularly as a consultant for CGAP’s Government and Policy Team and is an Associate with Bankable Frontier Associates. 

Tajik migrants, courtesy of Stefan Staschen

My colleague Olga Tomilova and I recently were in Tajikistan and Russia to learn more about the large remittance flows between these two countries. We were most interested in the potential to link remittances with other financial products, such as loans and savings accounts in order to increase access to finance on both ends of the remittance corridor.

Having lived and worked in Kenya for many years, I inevitably started comparing Tajikistan with Kenya, and I realized that this is actually quite an interesting comparison.

For example, taking one point of comparison, in Kenya there is a lot of talk about the high aid-dependence of the economy (5.7% of GDP). But it turns out that it is still small in comparison to the “remittance-dependence” of Tajikistan, which peaked at 50% of GDP in 2008 (i.e. just before the effects of the global financial crisis could be felt) and stood at 40% in 2010 (according to the World Development Indicators). Obviously remittances and donor funds are not the same, but if we are concerned about the changing mood of donors and its potential effect on Kenya, how much more should we be concerned about fluctuations in remittance flows to Tajikistan!

Such large remittance flows do not only benefit the recipients, but can also be great business for banks. (In the case of one bank, the revenues from commissions corresponded to 46% of its net interest income in 2009.) But they create the risk of precarious living conditions for Tajik labor migrants and expose the recipients and the Tajik economy as a whole to the whims of Russia’s immigration policy, which has already been tightened several times.

There is actually another analogy between Kenya and Tajikistan: in both countries remittances boom, only that in Kenya it is mostly domestic remittances exemplified by the run-away success of Safaricom’s M-PESA mobile money service. While every Tajik receives about $325 in remittances annually (of which at least 90% originates from Russia), domestic transfers flowing through the M-PESA system alone amounted to about $200 per capita in 2010. Mostly as a result of M-PESA, the percentage of the population excluded from formal financial services dropped substantially between 2006 and 2009.

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Archil Bakuradze is the chairman of the microfinance institution Crystal Fund. Here he discusses the “Reaching Georgia’s Rural Poor through Mobile Remittances” project, which is a joint effort of the Crystal Fund, Mobile Finance Eurasia and the microfinance organization Crystal and is funded by the Financial Facility for Remittances of the International Fund for Agriculture Development.

International remittances play an important role in the lives of people across the world, but in Georgia they are of major economic importance, accounting for 9% of the country’s GDP. According to various studies, about half of international remittances in Georgia go to rural areas.

Although it constitutes half of the country’s workforce, the rural population of Georgia generates only a small share of the country’s GDP and is poor and largely unbanked, despite the good overall progress of Georgia’s economy and the financial sector.. The aim of our project is to reduce the transaction costs of sending remittances to Georgia, especially to the country’s rural communities, thus enabling them to spend more money on productive activities.  

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Casey Wilson is the Co-founder and CEO of Wokai, the first person-to-person microfinance platform for China. Wokai – 我开 – means “I start” in Mandarin.

What’s happening in China?
China has the second largest potential microcredit demand in the world, next to India. Yet the total loan portfolio of China’s non-government microfinance sector is only $200 million, in contrast to India, whose microfinance sector is projected to reach $3 billion by the beginning of 2010.

Founded in 2007, Wokai  aims to create a sustainable source of capital to grow China’s microfinance sector by connecting individual contributors around the world with borrowers in rural China. Our website offers users a transparent and secure way to give as little as $10 dollars to support the loans of micro-entrepreneurs in China to start small businesses and lift themselves out of poverty.

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A few months ago, Ignacio Mas and I wrote a CGAP Focus Note entitled Going Cashless at the Point of Sale: Hits and Misses in Developed Countries. Our aim was to analyze the history of electronic money schemes in developed countries, more specifically in Europe and Asia. We thought it would prove a useful exercise as CGAP works towards sustainable branchless banking models in developing countries. As expected, our research revealed several important insights.

In the paper, we discuss three broad approaches, and in each case we look at two providers who met different degrees of acceptance in the marketplace. Already on this blog, I have highlighted the two cases of smartcard-based electronic-cash providers: Mondex in the UK and Octopus in Hong Kong; as well as mobile operators facilitating existing payment instruments: Mobipay in Spain and Moneta in Korea.  Now I turn to the final approach, mobile operator-centric payment schemes. The first example of this is Simpay in Europe.

Simpay was launched in February 2003 by a consortium of the four leading European mobile operators: Orange, Vodafone, T-Mobile, and Telefonica Moviles. Its mission was to develop and operate a pan-European payments system for mobile phones, focused on micropayments (less than 10 euros). Despite the company’s tagline—“pay for stuff with your mobile”—the system was also designed to allow purchases from PCs connected to the Internet. Read the rest of this page »

In a recent CGAP Focus Note, Ignacio Mas and I wrote about six cases of e-money schemes in developing countries. Going Cashless at the Point of Sale: Hits and Misses in Developed Countries intended to extrapolate lessons from these experiences to shed light on the work being done with e-money in developing countries. In past posts, I chose excerpts of the paper that discussed smartcard-based electronic-cash provider schemes. Now I turn to mobile operator-faciliated instruments, looking first at Mobipay.

Mobipay is a mobile payment mechanism that allows customers to pay for goods through their mobile phone using a range of payment instruments: credit cards, debit cards, or the operator’s account. It supports both in-person and remote payments. The platform is open to any mobile operator or payment instrument issuer in Spain.

Each Mobipay customer gets a virtual wallet, which can contain up to nine different payment instruments. Each time the customer wants to make a payment, the system will ask which of the available payment instruments the user wishes to pay with. Customers can register a new bank payment instrument in their mobile wallet by requesting it from its issuer (through their branch, ATM, Internet banking, or telephone banking channels) or by sending a short messaging service (SMS) with the keyword ALTA (subscribe) followed by the card number. Mobile operators automatically register the mobile account as a payment method (whether the customer is on a prepay or postpay plan) when their customers use Mobipay for the first time.

There are three main ways of initiating a payment. For smaller, in-person transactions, customers can give their phone number to the merchant, who will then issue the payment request. Larger retailers can use a special barcode reader that can acquire the customer’s mobile phone number directly by reading a tag on the customer’s phone, which reduces the possibility of error. For purchases from machines or for remote purchases, the customer can enter a transaction code that identifies the product to be purchased (e.g., a parking meter might display the code *145*980*122#). In this case, the customer initiates the payment request.

Mobipay was trialed in mid-2002 in a small town and launched nationally in late 2002. In less than a year, it acquired 17,000 customers and 4,500 merchants (2,800 online and 1,700 bricks and mortar). Six years later, there are only 400,000 registered—not necessarily active—users, amounting to less than 1 percent of the population. And less than 2000 transactions are processed daily.

This dismal performance can be explained by two main factors. First, Spain is highly penetrated with banking services and infrastructure, so Mobipay struggled to open up a niche in the retail payments market. Second, Mobipay did not have a marketing budget to promote its own service; it had to rely instead on promotion by its shareholders (who were also its customers). These shareholders, in turn, did not see much benefit in promoting the Mobipay brand, because they felt that their competitors (whether the telecoms or the banks) would benefit equally from their marketing expenditures. As a result, Mobipay has languished in the absence of effective marketing or a “killer application” that can raise public awareness of the service.

You can read about the other cases we analyzed in the paper here.

Recently, Ignacio Mas and I wrote a CGAP Focus Notes entitled Going Cashless at the Point of Sale: Hits and Misses in Developed Countries. We wanted to analyze the history of electronic money schemes in developed countries, more specifically in Europe and Asia. We thought it would prove a useful exercise as CGAP works towards sustainable branchless banking models in developing countries. As expected, our research shed light on important lessons.

In the paper, we discuss three broad approaches, and in each case we look at two providers who met different degrees of acceptance in the marketplace. Although our primary interest is with payment through mobile phones, we start with two cases that use smartcards, because these share many of the same characteristics and issues as payments through mobile phones. Here is an excerpt discussing the first case, Mondex.

Mondex is electronic cash on a card. It was designed to mimic cash, particularly small notes and coins (e.g., micropayments), so transactions with Mondex had to be extremely fast and had to incur no transactions cost. Accordingly, Mondex was conceived as an offline transactional method that does not require clearing systems to support individual transactions. Mondex-type systems are generally called “e-purses.” Many such systems emerged across Europe in the late 1990s: the Proton system backed by Visa in Belgium and the Danmont system in Denmark were other early projects.

Under the Mondex system, customers are issued a smartcard, which is a plastic card with an integrated circuit or chip from which data can be read and updated by card-reading devices. The chip stores the money value, but this is not linked to any bank account, and the information is not backed up on a server. Thus, the money value is irretrievably lost if the card itself is lost, and the card provides a much higher level of anonymity for users.

Consumers load Mondex value by transferring money from their (separate) bank account using an ATM or a Mondex-enabled telephone, which has a card reader and is connected to the Mondex system. The float is kept by the Mondex issuer (a private company set up by Mondex International in each country), from whom participating banks would “buy” Mondex value to meet their customers’ requirements for Mondex value.

Extensive field tests were conducted in Swindon, in the United Kingdom, during 1995–97 and in Guelph, Canada, in 1997–98. Both involved a very strong marketing push to get a critical mass of merchants to take up the card-reading devices. In the Swindon trial, 14,000 cards had been issued by the time the trials were discontinued after 3 years, compared with the uptake of 25,000 cards that had been anticipated for the first year alone (Van Hove 2005). Use of the cards turned out to be much more disappointing. Although this service still lingers in a few countries, it never met much market success.

Mondex is one case which shows that customers will adopt (or not) a new payment service or technology when (i) it provides clear benefits relative to current alternatives and (ii) they can trust it based on a clear understanding of the risks involved. Mondex failed to convince the public on both grounds.

Read the rest of the cases we analyzed here.

Olga Tomilova is CGAP’s regional representative for Europe and Central Asia. She works on policy, technology, and aid effectiveness. Based in Moscow, Olga sends us this snapshot of how the financial crisis may be affecting branchless banking.

As the financial crisis reached Russia and banks began to struggle, some analysts thought the situation would accelerate the acceptance and usage of electronic instant payment systems. A popular branchless banking solution in Russia, such systems allow people to make micropayments via cash-in automated payment terminals without opening a bank account. In fact, the sector has been growing at an annual pace of over 100% each year in recent times.

The current economic climate seems to be hurting the prospects for branchless banking here. As in many other places, most payments are for air-time and e-money purchase, but these have dried up as people purchase less. The profits of cell phone operators plummeted during the last quarter of 2008 by 20 to 40% compared to the same period in 2007.

As for e-money, some say that declining economic activity and purchasing power will sharply decrease the level of online transactions with e-money.  Experts’ predictions include consolidation of some payment companies and closing down of the others – especially if these companies become subject to a planned audit of their systems of personal data, for their compliance with the requirements of Federal Law 152 “On Personal Data”.

We will see if these predictions come true or not, but for me personally, I can say that I was forced to reduce my number and volume of transactions via payment terminals after the commissions soared from 0-2% to at least 6.5%. There is always internet banking, an option for some, certainly not for all.

Mobile operators have notched some high profile successes in offering financial services to the poor. Think M-PESA in Kenya or GCash and Smart Money in the Philippines. They’ve have logged several million users for their mobile money transfer services which appear cheaper and more convenient than traditional banking products.

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.

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This is an excerpt from a recent CGAP paper, The Early Experience with Branchless Banking. The paper synthesizes the observations and research of the CGAP Technology Program. Gautam Ivatury and Ignacio Mas wrote the paper, with substantial input from the entire program team. This blog series will cover seven observations, four uncertainties and four predictions for branchless banking – what we call mobile banking and other technology-enabled banking solutions.

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.