Archive for: Mexico

David Porteous is Managing Director at Bankable Frontier Associates. This is the third 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 two posts here. 

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:

1. For governments: Is building inclusive financial services into social cash transfer programs affordable for the social programs?
2. For recipients: Will poor recipients use financial services if these are offered to them?
3. 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).

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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:

1. For governments: Is building inclusive financial services into social cash transfer programs affordable for the social programs?
2. For recipients: Will poor recipients use financial services if these are offered to them?
3. 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.

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This is the first 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”.

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:

1. For governments: Is building inclusive financial services into social cash transfer programs affordable for the social programs?
2. For recipients: Will poor recipients use financial services if these are offered to them?
3. 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.

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I think it is safe to say that the financial inclusion world has started to get used to the idea of thinking about financial service providers more broadly than traditional microfinance institutions, rural banks and financial cooperatives. With the recent growth of mobile network operators, technology providers and agent network managers, it’s evident that financial inclusion encompasses a broad set of providers. But even I am sometimes surprised to learn about some private companies that seem to have a very tangential link to the unbanked financial sector taking advantage of new opportunities in branchless banking.

Take OXXO as an example. OXXO is the largest convenience store in Mexico (comparable to 7-Eleven in the US) opening a new store every 8 hours…yes that’s 8 hours!  7.5 million people come through their stores every day, most of whom are looking for things that a normal convenience store would offer…food, snacks, paper goods, etc. But OXXO is diversifying its products to offer its wide customer base the “convenience for everything you’d need in life any time of day.”

In this video, Aiko Fujimura, Manager of Financial Services for OXXO, explains how this added convenience extends now to financial services offered through the OXXO e-wallet. She admits that there are certain challenges. “It is easy to sell soda and snacks, but not as easy to sell financial services.” Training a huge network of employees and convincing people to trust the store with their money are two issues OXXO is currently facing.

Few companies have the scale of OXXO, but convenience stores and other retail outlets are still being used to build up branchless banking agent networks. In this video, Johannes Kling of the agent network company DD-DEDO talks about the role that convenience stores play in Colombia in expanding the outreach of banks. As he explains, Colombia is still very early on in the growth curve when it comes to branchless banking. But as we all know, a strong agent network is one of the early pieces of the puzzle in building a branchless banking ecosystem.

Next week, we’ll share two more videos from more traditional players – a bank and a mobile network operator – but each with an interesting take on their new business model to reach the unbanked.

- Sarah Rotman

This is the third post in a five-part series about product innovation in branchless banking. Read the first and second posts. This post includes a detailed presentation of CGAP’s analysis of 23 firms from banking, microfinance, mobile, fast moving consumer goods, and Silicon Valley. It also describes the key features of three Product Labs which will be established by CGAP’s bank, telco and other partners.

Some managers just aren’t interested in innovation. They see being on the leading edge as being on the bleeding edge. “Let someone else fail and then I’ll copy the successes.” Quite reasonable, if you can afford to be second.

For those who cannot, where can they turn for help crafting breakthrough products and services? Standard market research tools and data mining often fail to deliver the kind of unique insights needed to identify new growth opportunities. Several new approaches are in pilot in the microfinance field: randomized controlled trials, financial diaries, behavioral economics. These have already expanded our foundational knowledge about the financial lives of the poor. But they’ll need adaptation to fit the rapid timeframes preferred by the private sector.

To find better tools we looked at 5 industries that overlap with branchless banking: either they sell financial services (traditional banking, the microfinance sector), have low-income consumers as a target segment (microfinance, fast moving consumer goods), or use electronic channels (the mobile industry, Silicon Valley). We looked at 23 firms in total. The powerpoint here includes further details.

The common connection across most success stories was observing consumers rather than asking them. In interviews or focus group discussions consumers aren’t always honest, don’t remember accurately, may believe one thing but actually do otherwise, or may simply be of several minds about a topic but only tell you one facet of their viewpoint. Observing their lives and behavior allows us to pierce the fog cloaking unstated opinions and deeply-felt needs. That’s the space where breakthrough products evolve from. We’ll give an example:

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Reaching the poor with a range of useful, convenient, and affordable financial services is challenging for all the reasons we know. In the context of Mexico, access has increased significantly in the past few years (nearly 60% of all households), and changes in regulation enabling correspondent banking are likely to bring the access barrier down even further. However, the challenge of delivering a relevant offering, tailored to the needs of the lower-income population still remains. This may be one of the reasons why many people who have access to formal financial services are not using them.

While consumer goods companies have developed an understanding of these segments, few actors in the financial services space have a deep knowledge of how “bottom of the pyramid” (BoP) customers use money and financial products, and what sort of products these customers may want in the future.

We conducted a study (available in both English and Spanish) in collaboration with McKinsey and Company, seeking to provide a closer look at the financial habits, needs, and wants of low-income customers in Mexico. The goal is to provide the kind of information that will enable financial service providers to design better products (i.e. products that reach more people and solve felt needs) and to implement products and business models with a greater chance of success.

We hope this study will help orient assumptions about customer behavior that can lead to improved product design and less risk in business models. Even though the study is intended to serve the Mexican market, we intend it to be useful and applicable to other markets.

Here are the key findings:

• Segments at the BoP save significantly. Deposits (both short term and long term) represent an amount equivalent to 20.4% of these segments’ annual aggregate income. If these deposits were to be held in formal financial institutions, the current deposit base in the formal financial sector would increase by 23.4%. Read the rest of this page »

A "Red Cerca" agent location of Banco AV Villas in Colombia

CGAP, in partnership with the Inter-American Development Bank and Akya, a banking consultancy, recently completed some analysis on the business case for banks in branchless banking. Our findings, which we share with you in a series of posts, starting with today’s, are based on interviews with over 20 banks that play some role in a branchless banking deployment. We also looked closely at the financials of a few banks that have been involved in branchless banking for five or more years, running agent channels for payment products or as a way to reach unbanked customers.

Our findings should bring some good news to the banking industry that is quite beleaguered and battered by crisis, competition and alleged illegalities. These are not the best of times for banks globally. In one part of the world, banks are barely recovering from a crisis. While elsewhere, especially in markets across Africa, new actors, such as mobile operators or technology companies are making forays into the banking business. From Brazil to India, banks are struggling to innovate to develop services for the unbanked or reach new segments and keep up with demographic changes.

As we have done with other pieces of research, we detail our findings in this presentation. We make the following five main points:

(1) Agents are the most economical channel available at low transaction volumes. Banks that have all three channels – networks of agents, branches and remotely-managed ATMs (the closest equivalent to agents) — see the lowest transaction costs at their agent channel. Transaction costs at agents range roughly from 0.27 to 0.58 USD per transaction and are 50% the transaction costs at branches and ATMs (see slide 10).  However, at higher transaction volumes, fixed cost infrastructure like ATMs, is of course more economical for banks for basic transactions (slide 13).

(2) Banks provide three main reasons for doing branchless banking. In our analysis, we identified at least seven different roles for banks in branchless banking, from holding float to running their own independent payment business (slides 15-18). But based on surveys and interviews, banks are involved in branchless banking for three main reasons where there are major business case implications: (1) as an additional, efficient channel; (2) to grow faster or reach unbanked segments; (3) for payments-led banking proposition. There is evidence that banks benefit in all three cases.

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This blog is written by Xavier Faz, CGAP & Denise Dias, independent consultant; with contributions from Carlos Lopez-Moctezuma & Brenda Samaniego, both from CNBV.

Regulators around the world today are beginning to realize that the chances of expanding access through branchless banking can be very limited without reducing the account-opening requirements through agents and mobile phones. The challenge is to strike the right balance between reducing account-opening requirements while maintaining basic controls for AML/CFT.

Enforcing full account-opening procedures often excludes important segments of the population from formal financial services, keeping them “operating” in the informal economy.  There are countries where many people (particularly among lower income segments) lack formal identity mechanisms, and other cases where people do have identity documents, but the requirements to fulfill KYC procedures make it too cumbersome and/or expensive to effectively carry out. In either case, the risk is to inadvertently push these services beyond the reach of the poor (even if geographical reach exists). Therefore, maintaining the same level of KYC requirements as for bank branches supports the prevalence of informal financial systems which in turn acts against the AML objective that was sought in the first place.

Most regulators would agree that some middle ground would be needed, but striking the right balance is not an easy thing. Early examples of this are regulations in South Africa and Colombia, which established exemptions to enable opening of deposit accounts at agents or by the individual themselves through their mobile, relying on broadly adopted national ID mechanisms and population registries that could be checked online at the time of account opening. The BCEAO in West Africa allows the use of anonymous electronic money accounts with caps in the balances.  The actual implementation of these schemes have varied in practice.

Financial sector authorities in Mexico have gone a step further in adopting an approach that addresses the challenges above.  Authorities followed a ‘tiered’ approach that implements flexible account opening requirements for low-value, low-risk accounts that are subject to increasing caps and restrictions on permitted transactions. Opening requirements increase progressively as such restrictions on transactions are eased.  This incorporates several innovative aspects:

• Five different types of deposit accounts, targeting different market segments and income brackets, with varying KYC requirements
• At the “lowest” tier (Level 1), an anonymous account enabling e-wallets as a substitute for small amounts of cash
• Non face-to-face account opening
• Paperless record keeping for the four lower levels
• Outsourcing of KYC to third parties

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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.

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Over the past several months, we have taken a close look at the branchless banking industry in a few key countries. Last week we presented our learnings from Brazil. Today we continue with our analysis of Mexico and share this summary note on the Mexican branchless banking industry.

Mexico’s financial sector is beginning a significant transformation. It is setting the stage for a broad commercial offering through innovative products that reach lower-income segments of the population. Appetite to reach lower-income segments grew in the past decade following the notable growth of Banco Azteca and Compartamos. More recently, regulation enabling the use of non-bank correspondents (or banking agents) has expanded the possibility to increase the reach of financial institutions at a reduced cost both for banks and for potential customers. These regulations proactively reduce competitive barriers in the banking sector and open opportunities for banks to serve lower-income segments historically served by other financial service providers (financial cooperatives, MFIs, microfinance banks and retail stores-cum-banks). Large retail chains (including Telecom, the state-owned telegraph network) are developing shared correspondent networks, and most major players are adopting aggressive outreach strategies.

However, most of these strategies are still about reducing the cost to serve existing customers and much less about growing towards new lower income segments. The price points of shared channels, the lack of sensibility to poor people’s needs, and to certain extent, the mandate to banks to give away free transactions on their own ATMs are slowing the development of a meaningful offering. New partnership models and ambitious experiments involving key players may drive the market towards more efficient models and more affordable low-income offerings beyond credit, but the learning curve is uncertain and is likely to require time.

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