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.

Low-value remittances to some extent sit at the center of branchless banking channels both card- and mobile- based. Their significance for economies like Mexico or Philippines or Kenya and elsehwere has been a driver for new low-cost remittance solutions such as G-Cash and M-Pesa. These approaches have been the inspiration for the new banking channels that CGAP has been writing about and working on over the last year.

When it comes to branchless banking, the remittance volume helps make both the business case to financial providers and is an important part of customer adoption of branchless channels. The high volumes for some corridors ($12.8 billion in official international remittance to Philippines in 2006) make the case for banks (and telecoms and others) to possibly invest either themselves in a sprawling cash-handling infrastructure or work with gas stations, post offices and retail providers to set-up agent networks. Customers are likely to use these channels to access remittances that are an important part of their livelihood. Some would even argue that the high remittance flows and their impact on the economy serve as a motivator for regulators to encourage lower cost innovations as they have in the Philippines.

But we have yet to crack the puzzle of how remittance recipients get to savings and credit. The frequently used Brazil example is worth mentioning again: billions of dollars in government transfers to low-income people via over 90,000 points - but just one in 25 of them (based on a CGAP survey) are actually saving. 

How about completely outsourcing information systems (IS) to an external technology provider, so that the MFI can focus on its main business: handling client relationships and providing financial services?  

Here now, an exciting development. IBM has developed a “microfinance processing hub,” i.e., a shared infrastructure and software platform that provides groups of MFIs with a centralized core banking system, data center, operations management, and transaction processing. “When we started to work on the Microfinance initiative of IBM, we found that gaining access to appropriate back-office technology was the single most important obstacle for the growth of small institutions and the microfinance industry in general,” says Alberto Jimenez, Global Business Advisor for the Financial Services Sector of IBM.

In Africa, IBM has partnered with CARE to develop an “African Financial Grid.” The Grid is a “shared services and infrastructure model designed to help MFIs reduce operating costs, streamline lending processes, scale rapidly, and integrate with other resources such as credit bureaus, financial institutions and international payment networks.” Initially the plan is to cover 11 countries and is open to all kinds of financial institutions.

IBM acquired some valuable knowledge on what it takes to establish and operate a processing hub for microfinance institutions, which some also refer to as a core banking application service provider (ASP) solution. One of the main challenges to do this is not even a technical one, but lies in the concern of MFIs to outsource client information to a third party.  However, according to Alexander Bloch, who leads IBM’s Global Microfinance Initiative, “these concerns can be effectively addressed through a rigorous governance  associated with the management of client information, which IBM implements for MFIs”. Connected institutions will have to slightly standardize their business processes and product features. Since MFIs access their new outsourced IS over the Internet, some rural institutions may run into connectivity problems, which is one of the problems IBM is also working on.

But these challenges seem worthwhile when looking at the long list of benefits:

• MFIs act in a group permitting them to negotiate prices with different service providers; 
• Investment fixed costs are turned into variable costs (e.g., cost per client per year, or by transaction);
• To open a branch, one only needs an internet connection, no installation of hardware or software is needed;
• New products can be added without difficult adjustments to the system;
• Portfolio, accounting, and client information is readily available for internal and external purposes; improving the overall transparency of the industry.
• Local banks feel more comfortable funding MFIs since reporting is transparent and readily available;
• Connecting with additional distribution channels like ATM networks, retail agent chains, etc. is a “plug and play” issue.

Download a presentation.

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.

Credit bureaus, or repositories of borrowers’ credit history, help reduce information asymmetries between lender and borrowers.  Such sharing of credit information can help lending institutions assess risk more efficiently and effectively, leading to improved portfolio quality and reduced interest rates for borrowers. On the financial system level, credit reporting systems increase access to credit and private sector lending, improve the efficiency of credit markets, and provide incentives for borrowers to repay their debt on time.

In 2001, the International Finance Corporation launched its Global Credit Bureau Program to support the development of functioning credit registry systems around the world. Their experience and best practice guidelines are compiled in a Credit Bureau Knowledge Guide which hints at three criteria that determine the success of a credit bureau:
1) Ownership structure (public vs. private), the
2) Type of credit information collected (negative-only vs. full file), and
3) Participation in the system (i.e., number and type of data furnishers)

These lessons have now been taken further:  PERC (Political and Economic Research Council)  recently published important research pieces (“Economic Impacts of Payment Reporting Participation in Latin America” , “Factors to Consider on the Eve of Brazilian Credit Reporting Reform” ) which not only provide a comprehensive literature review, but also an assessment of the impact of the three criteria above on private sector lending:  

“The results suggest that privately owned, full-file credit bureaus with 100% participation lead to significantly greater lending to the private sector (at least 47.5% greater) than no participation.”

But this still does not completely solve the problem of the person described in the first paragraph (just to remind you: no collateral, informally employed, in a remote location, and without existing credit history). CGAP’s Technology Program is preparing a study to learn more about the potential of alternative or non-traditional data (i.e., payment obligations such as phone, gas, electric, etc.) in developing countries to integrate these clients in the credit registry systems, but also how such data can be used by lending institutions to assess client repayment capacity and creditworthiness. A study by PERC regarding the impact of alternative data on the US market already goes into this direction.

What are banking agents?
Banking agents are retail, lottery, and postal outlets that work on behalf of a financial institution and let clients deposit, withdraw, and transfer funds, pay their bills or an insurance plan, inquire about an account balance, or receive government benefits or a direct deposit from their employer. The agents process transactions with point-of-sale (POS) card readers, a mobile phone, barcode scanners, and sometimes personal computers that connect with the bank’s server using a dial-up or other data connection. The clerk at the retail or postal outlet, not a bank teller, collects and disburses cash, and in some cases – depending on local regulation - can open bank accounts for new clients and fills in credit applications.

Why do financial institutions develop banking agent networks?
Some financial institutions in urban areas use banking agents primarily to divert existing customers from crowded branches. In areas with little branch infrastructure, the agent is used to open and service accounts for people who would not use a bank branch and previously had no access to banking services.  The low set-up and operational costs of banking agents counterbalance the low transaction values and volume in these locations. In addition to reducing delivery costs, increasing client convenience, and enlarging market share, banking agents can be an attractive service channel because they may not be subject to the same stringent and costly regulations that apply to branch operations.

What are the regulatory prerequisites for the use of agents?
To legally use non-bank agents to conduct transactions on behalf of financial institutions, a certain regulatory framework is necessary. Many Latin American regulators have recently enabled the use of banking agents to increase financial system coverage and access to finance in their markets. However, regulation on Know Your Customer requirements, product offerings at agents, transaction handling, technology devices, and many other issues will also impact the use of agents in a country.

What is the role of technology in running a banking agent network?
Establishing and operating a banking agent network is technology-intensive, requiring a range of different technologies to communicate transactions, identify customers, monitor transaction values and volumes, and authorize, verify, and settle transactions.  Financial institutions equip their banking agents with a combination of point-of-sale (POS) card readers, mobile phones, barcode scanners to scan bills for bill payment transactions, personal identification number (PIN) pads, and, in some cases, personal computers (PCs) that connect with the bank’s server using a dial-up or other data connection.  Clients that transact at the agent use a magstripe bank card or their mobile phone to access their bank account or e-wallet.

How do clients benefit from banking agent networks?
Banking agents often provide first-time access to payment and banking services low-income clients living far away from the next branch, as well as convenience for urban clients in conducting their daily transactions. The impact of financial services on people’s livelihoods has been thoroughly documented and is applicable also for access provided through banking agents. In addition, banking agents offer proximity (they’re typically located close to a customer’s home, saving a long bike ride or bus ticket), as well as more flexible opening hours and shorter lines than branches. Agents are often more accessible than branches, which many poor clients feel intimidated about using.

How do banking agents process transactions?
The transaction process for banking services using a bank card is simple. An existing bank client presents his or her card at the agent, requests a transaction, and specifies the amount to be withdrawn, deposited, or transferred. Selecting the type of transaction on the POS device, the agent enters the amount, swipes the client’s card through the reader, and lets the client enter a PIN number. Once the transaction has been authorized by the financial institution, the device prints the client’s receipt. For bill payments, clients hand over their bill, and the agent swipes it through the bar code scanner. In most cases, the client will hand over cash to pay a bill and receive a receipt.

Before a banking agent can start operating, the store has to deposit a certain amount of cash in an account at the bank it will be working for. These funds serve as the agent’s “working capital.” Many banks will extend agents a credit line instead of asking them for a cash deposit. When a client withdraws or deposits money, the agent account is adjusted in the same amount. If deposits and payments (cash in) at an agent’s location exceed withdrawals (cash out) beyond a specified limit, the agent’s transaction device blocks and can only be unblocked if the funds are deposited at a branch.

How does the cash end up at the branch?
Even though banking transactions are processed in real time, the settlement of cash between the agent and its financial institution often happens hours later. In case the volume of cash-in and cash-out is balanced, i.e., the agent does not run out of cash to be able to service client withdrawals, but also does not reach a maximum cash limit, the agent can continue operating. However, especially at the end of the month when many clients pay their bills or when salaried workers withdraw their salaries at a specific day, the agent risks having a liquidity problem. In that case, a contracted cash transport company has to pick up surplus funds, or provide additional cash. In some countries, like Brazil, the agent himself can make a deposit, up to a certain amount, at the nearest branch.

Why would a retail outlet want to become a banking agent?
For handling banking and payment transactions on behalf of a financial institution, the retail or postal outlets receive a small commission. However, the main benefit for banking agents is not from these small commissions, but from the newly generated foot traffic into their store. Stores are able to attract new clients who will not only use the newly offered banking agent services, but will also purchase other products. In addition, working for a financial institution bolsters the outlet’s reputation and helps to distinguish it from others. Depending on the specific contract, financial institutions will also pay for specific marketing activity in the agent’s community, or incentives based on performance. Some retail outlets, however, are also concerned about potential risks of working as banking agent since they will have cash at hand which could attract theft and fraud.

What are key characteristics of a good banking agent?
Since the banking agent will often be the only connection between the financial institution and its customers, the selection of the banking agent is extremely important to minimize fraud, guarantee customer service quality, achieve good transaction performance, and effectively cross-sell financial services to existing clients. Features of the community in which an agent is located will also impact an outlet’s success. Financial institutions should apply specific criteria to identify their banking agent including a security check (including credit history, criminal record, etc.), the store’s reputation within the community, its experience with POS devices, for example.

How do financial institutions manage a banking agent network?
Agent management involves selecting the location, choosing an agent, training and setting up the agent, cash management, and providing 24/7 technical and emergency support. Financial institutions must also conduct marketing and promotion activities to support agents in their locations. Rather than developing expertise in-house in how to best identify, select, train, monitor, control, and pay agents, some banks have chosen to outsource agent management to network management companies.

What are the costs and revenues in establishing and running a banking agent network?
Many financial institutions see banking agents as a way to reduce their costs. Even though financial institutions will not have to cover the high up-front cost of building branches, they still have to invest in new technology, internal organizational changes, and product development to establish their agent network. To run the network successfully, costs include monitoring, technical and product support, as well as cash transport in case of liquidity problems at the service points. Financial institutions generate revenues from fees and interest rates charged to clients and strategic partners, as well as from investment income from clients’ deposits. The costs and revenues of a banking agent network will fluctuate depending on the network structure, types of agents chosen, financial products offered, and local regulation.

What financial products and services can be offered by a banking agent?
Theoretically, banking agents can offer all varieties of transaction and banking services. However, in some countries, account opening, credit appraisal, and check cashing still have to be done at a branch. To ensure that the banking agent is complying with customer service requirements, and to provide security against fraud, many financial institutions also initially limit the range of financial services offered at an outlet that recently joined the network.

How do you ensure that each agent has just enough (but not too much) cash at hand?
Managing liquidity, or ensuring that the agent has enough, but not too much cash at hand to continue transactions, is the main challenge in running a banking agent network. Cash transport is costly, and agents expose themselves to risk when they deposit surplus funds at the branch themselves. Today, liquidity challenges prevent banking agents from reaching many remote areas, since they still depend on the possibility to withdraw needed funds or deposit surplus cash at the nearest branch. Making agents independent of the branch network will depend on how they can effectively balance cash in and cash out, or become cash intermediaries in their communities. 

How do you acquire clients remotely?
Potential clients of an agent network in developing countries either have never had access to financial services or have only used branches to access their accounts. Thus, providers have to allay clients’ concerns that their transactions at the agent might be less secure than at the branch, as well as educate clients around financial product use, terms and prices.

In locations that already have a large customer base but are far from a branch, clients often rapidly start transacting at the agent since it saves them time and money needed to travel to the branch. Promotional events, marketing materials, and word-of-mouth also help clients locate the new point of sale. Having a new financial services provider in closer proximity might also convince non-clients to open an account.

In locations in which the majority of the population is unbanked, more intense client acquisition activities, such as client sign-up vans, financial education sessions, and marketing, might be required. Client sign-up operations close to the newly-established agent will help people directly locate their new point of service.

Philippine ATM firm to extend network to rural areas
Philippines-based ATM vendor Encash plans to install 200 ATMs in remote areas of the country, a company spokesperson tells CardLine Global.

India’s mChek Enables Insurance Payments from Mobile
mChek has announced that “ICICI Prudential Life Insurance policyholders can now pay their premiums through their mobile phones, anytime and from anywhere. ICICI Prudential is the first life insurance company in the country to launch this unique service facility for its policyholders.”

Survey Shows Heavy Carrier Reliance on Transaction Fees for NFC
In a development that could long complicate the introduction of commercial services allowing consumers to make point-of-sale payments with their mobile phones, mobile network operators say they will derive POS payment revenue chiefly from consumer transaction fees.

Scotiabank Perú and N-Via Sign Agreement to Offer Mobile Money Transfers in Perú
Scotiabank Perú and N-Via USA Inc., a company specializing in financial services and money transfer, including prepaid debit cards, bill payment, mobile payments and mobile to mobile transfers, announced today an agreement to provide mobile payment services, with cash out options through Scotiabank Peru more than 400 service outlets in 27 cities across Peru.

Mexican telecoms sector sees 31.1% growth in Q3
The Mexican telecommunications sector saw 31.1 percent growth in Q3 2007 vs the year-earlier period, according to figures from Cofetel, Mexican telecommunications regulator. The growth is the highest for seven years. The growth is 10 percentage points higher than in Q2 2007 vs the year-earlier.

Full-spectrum dominance - Telecoms in India
India has met its ambitious target, set two years ago, of 250m fixed and mobile-phone connections. But the government is sadly unprepared. It has not given India’s mobile operators enough space on the radio spectrum to carry calls crisply and reliably. India, the operators complain, faces a “spectrum crunch”.

Tanzania reaches 7.7 mln phone subscribers in Q3
The number of mobile phone users in Tanzania reached 7.562 million at the end of September, up from 6.720 million at the end of June. The fixed-line user base at TTCL fell to 160,964 from 169,135 three months earlier, according to figures from the Tanzania Communications Authority.

Indian Bank pacts with NCR for e-ticket, portable ATM¼br> Indian Bank today said it has partnered with NCR Corporation, engaged in design and deployment of portable ATM centres for many Indian banks, for launching its first e-ticket kiosk and portable ATM centre.

Dabbawallas, postmen helping banks extend access to services
Across India, and notably in Mumbai, banks are using “correspondents”, or people who effectively serve as extensions of branches, in an effort to reach out to people who do not have access to banks and banking services. One such bank, the Corporation Bank, is using the city’s famed dabbawallas, the men who ferry hot lunches to office goers across the city, as its correspondents.

Bharti to tie-up with Barclays for mobile banking
Bharti Telesoft, software arm of telecom major Bharti Enterprises, is close to signing a deal with UK-based Barclays Bank for providing mobile banking services to the latter’s customers.

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.