Branchless banking can dramatically reduce the cost of delivering financial services to poor people

We believe branchless banking can offer basic banking services to customers at a cost of at least 50 percent less than what it would cost to serve them through traditional channels. Branchless banking helps address the two biggest problems of access to finance: the cost of roll-out (physical presence) and the cost of handling low-value transactions. This is achieved by leveraging networks of existing third-party agents for cash transactions and account opening and by conducting all transactions online. This sharp cost reduction creates the opportunity to significantly increase the share of the population with access to formal finance and, in particular, in rural areas where many poor people live.

The biggest cost saving is on transactions that can be done completely electronically, through mobile banking. In the Philippines, a typical transaction through a bank branch costs the bank US$2.50; this would cost only US$0.50 if it were automated by using a mobile phone (Asian Banker 2007).

The cost reduction from using agents rather than banks for remote cash transactions is equally dramatic. Banco de Credito in Peru estimates that a cash transaction at a branch costs about US$0.85, while the same transaction at an agent would cost US$0.32.4 Tameer Bank in Pakistan estimates that, in the Orangi slum of Karachi, the set up cost of a bank branch would be 30 times more than the set up cost per agent, which is about US$1,400. Monthly running costs average about US$28,000 for a branch, compared with US$300 for an agent, but also, a much larger share of monthly running costs is variable for an agent than for a branch.

But only for banks… This shouldn’t be a surprise. SBP’s policy paper on branchless banking (last year) was clear on this point: a nonbank model “may be allowed at a later stage after we have sufficient experience in mitigating agent related risks using bank led model and need to think about mitigating only e-money related risks.” So for now, mobile phone companies are still waiting for the door to be opened to them as well, test the waters without clear permission and detailed guidance, or find a JV with a bank. For those with deep pockets, buying a bank outright might be an option, too.

This is a pharmacy in a major slum in Karachi, Pakistan – it has been in business for 30 years through two generations. A couple of weeks ago, the pharmacy became an agent / corresponsal of a microfinance bank. The bank’s decision to create this agent is to some extent experimental. This location is just down the street from their branch and bank faces little competition from other providers – they are the only one in that part of the slum. They have equipped them with a GPRS point-of-sale device and some forms. The bank’s customers can come here to withdraw and make deposits, drawn down on their loans, repay loans, and eventually pay utility bills and remit money.  The anticipated demand is high. Small business owners told me that an immediately accessible bank deposit service saves them time and gives them security when they have a lot of cash on hand.

CGAP is supporting Tameer Bank in its work. Agents and customers equipped with cards or cell phones are at the heart of what we call branchless banking. We were inspired by similar efforts in this part of the world, in Brazil, Colombia and in Africa and East Asia.

In setting up this agent location, this Pakistani bank has already learned that their set up cost is a fraction of that of their branch (1/30th) and they anticipate running costs to be even cheaper (1/100th). The bank will open agent locations further and further away from its branches. For remote rural areas, it will partner with a postal network, a government run food distribution system, and the direct distributors of one of the major telecoms.

But the equation can radically change in emerging markets, making cash unduly expensive for financial service providers and clients alike.

Up to 70% of the 2000 ATMs installed in Pakistan are reportedly unable to dispense cash accurately. Pakistan’s has two Rs 1,000 notes in circulation, and the quality of the notes themselves can vary dramatically. As a result, ATMs routinely jam, or fail to accurately count notes dispensed. Branch-housed machines are repaired more quickly, but even there the error rate is reportedly 30%, according to a study by ShoreBank International. Consumers shy away from using ATMs, and banks’ investment in ATMs yields a diminished return, rather than cost savings they may have hoped for as customers are reluctant to give up the teller window for ATMs.

In Kenya, cash represents risk for ordinary people sending money home. Friends and bus companies are the preferred way to send money to family in other parts of the country, according to FinAccess, a nationwide survey of financial service behavior. However, Kenyans are quick to cite neither is perfect: money can too easily go “missing” with friends, and though bus companies are more reliable, the transit times are still long (often days). By contrast, clients of M-PESA, Safaricom’s mobile wallet service, say its cheaper for both them and their family, as there is often a Safaricom agent close by which will receive or dispense cash.

Cash can be costly for providers and clients alike. Moving transactions into electronic channels could make services more affordable to offer and use.

Mobile banking and other technologies need a balanced regulatory approach

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That was fun. What did we learn? 

We reaffirmed that small, including micro, enterprises have proven themselves to be reliable and sustainable ways to help people out of poverty and that, in that context, we have abundant proof that microfinance is a workable idea.

MFIs, although having reached increasingly impressive numbers of people, must nonetheless recognize that more than two-thirds of the inhabitants of developing countries remain to be touched by the MFI mission of bringing the advantages of banking to the unbanked and under-banked.

Both the time and the opportunity have arrived for MFIs to rethink their original ethic of experimentation, labor intensiveness and small scale and to extend access to finance to as many as possible of the 2.5 billion who lack access to finance.

This volume of clients can only be reached through significant reductions in the cost of MFI’s operation and a quantum leap in the scale at which the industry functions.

The response to this imperative for reduced cost and increased scale must include the optimum use of technologies that are available or that can feasibly be put in place, as well of credit bureaus and credit scoring.

We started our discussions with the promise that we would engage in a round of critical and in-depth analysis of what has worked in these areas and what needs to be done differently and more efficiently and effectively. Fortunately, we did not inaugurate this meeting with the idea or the promise that after three days of discussion we would be able to take a vote and announce to the world the answers to the questions posed by the pursuit of greater access to finance. Indeed, if anything, our attempts to find answers to questions often yielded a harvest of new questions.

Productive inquiry begins with the asking of the right questions, so, if all this meeting produced was a greater clarity of the issues that we need to address, our assembling here in Washington would have been of tremendous value. But we believe that we also achieved at least four other advantages. These are:

• A greater understanding of each other’s concerns, which, as we have seen at the level of individual partnership arrangements, is critical to any progress in the access to finance area.
• A greater awareness of each other’s successes, which we believe, are a necessary encouragement as we continue with the enormous task that access to finance represents.
• An understanding that the idea that every problem represents an opportunity is, in the context of access to finance, more than a jargon, and is in fact the only mindset that we can afford to take to the challenges and opportunities that beckon us.
• A belief that prevailing opportunities for reaching the next 2 or 3 billion of the world’s financially excluded inhabitants represent nothing less than a tipping point that we cannot afford either to ignore or to mismanage.

When the Meeting Began

So when we opened our meeting on Monday, what were the questions we set out to answer? Perhaps there were four main ones:

• How can we take advantage of the growth in MFI investments, lending volumes and outreach and the availability of a range of financial technologies to increase scale and reduce costs in microfinance operations with a view to increasing access to finance for those who still lack such access?
• How can the establishment and functioning of credit bureaus and the use of credit scoring enhance decision-making, portfolio management and other MFI functions?
• Is the suggested approach destined to leave the poor exactly where they are, or does it really have the potential to transform the financial sector in both developed and developing countries and generate what one speaker called a seismic shift in the circumstances of people in the developing world?
• And to look at that question another way, what are the likely consequences—for the financially disenfranchised, for the MFI as we know it today and for the new actors responding to the opportunities and challenges of access to finance—represented by the new disaggregated business model and the attempt to employ second-generation solution to first-generation problems.

After some 50 people have spoken on stage and many hundreds more taken questions and answers in the audience, some salient ideas.

The Technological Imperative

• While not understating the concerns that some have expressed on the possible negative impacts of certain technological innovations, there seems general agreement that using financial technologies in the pursuit of access to finance is not a question of whether or even of when, but one of how.

• Need to focus on the back end for information systems. “The back end is broken.”

• Interoperability

• Balancing need for a common platform perhaps based on open source technology (as against a plethora of individually customized systems) with the need to do sufficient customization to meet the peculiar needs of clients at the bottom of the pyramid.

• Cultural requirements—Multilanguage, literacy and related concerns.

The Efficiency, Transparency and Accountability Imperative

• As with technology, the use of credit bureaus and the introduction of some form of credit scoring are a sine qua non for financial institutions wishing to avail themselves of the opportunity to reach masses of potential clients without losing control of the management of the decisioning and portfolio-management processes.

• Increased presence of credit bureaus in emerging markets.

• Again, meeting the specific needs and circumstances of the target market.
Experiments, Experiences and Successes in Innovation

• We’ve received reports of a wide array of studies, plans, experiments, experiences and successes that seem to establish that, given the right circumstances and correct actions, innovation can work.

• These vary from the project being developed by CGAP and Xac Bank Mongolia to more mature examples in Kenya, India, and the Philippines.

• The experience of Alieu Conteh, who started the first GSM network in the Democratic Republic of Congo.

The Need to Balance Optimism with Realism

•This conference provided us with many moments when we could easily have been tempted to see the glass not only as half full, but as approaching the three-quarter mark. We should therefore thank those who kept calling us back to a  recognition of the reality and reminding us that, despite the wonderful successes, we are engaged in a work in progress, indeed a work barely begun. So we have to balance optimism with realism.

The Requirements, Benefits and Challenges of Partnership

However, one of the great takeaways from our discussions is the importance—indeed the inevitability—of conceiving, establishing and managing effective partnerships if we are to be successful either on the credit bureau/credit scoring or the technological side of the equation.

Bringing together elements previously seen as discrete—e.g. a large international bank and a small MFI/NGO, an international mobile-phone provider and a local bank downscaling to the microfinance market, or perhaps a larger consortium of actors including a systems provider, a number of MFIs, a credit bureau and a regulatory agency. Not to mention the silent partners, i.e. the hundreds or thousands of underserved clients.

Only a thin line stands between such actors being partners and becoming competitors—or between their working together at this important enterprise or walking away from the table.

Potential fault lines in this relationship relating to such variables as the sharing of fees and the question of exclusivity need to be carefully managed.

The Urgent Need for a Generation of Visionary Regulators

The need for an inviting regulatory framework, long a challenge in the world of microfinance, becomes even more critical with the degree of experimentation, the possible high investment costs and the larger number of stakeholders that must be managed in this new phase of access to finance.

Regulators now need not only to understand the distinctions between MFIs and the traditional banking sector but also the requirements and challenges of combining the peculiarities of different sectors and technologies—principally telecommunications and banking and finance.

The Future of MFIs

How could the management and sustainability of the “group loan” methodology be affected by both credit scoring and mobile lending?

Danger of the ethic, or the very existence, of the MFI being forgotten if not threatened by the emerging discourse between banks downscaling to reach the microfinance market and mobile phone providers becoming aware of that market.

Abbas Sikander’s (Tameer Bank) encouraging revelation of how he emerged from his identity crisis and his confusion about the future MFI role early in the conversations at his meeting an awareness that the growing interest of these new players and what they bring to the table represent new opportunities for MFIs.

Delivery Channels for Microfinance. Banking agents are becoming a popular way of signing up new customers and offering services outside of the branch environment. Can these agents deliver a range of products? How far from the bank branches can this model reach to serve rural areas? Moderator: William Schoch, Vice President, Consumer Products, Visa International.

• Abbas Sikander, Group Executive Director for Operations and Technology, Tameer Bank, Pakistan
• Alex Acosta, Credibanco Visa
• Rizza Maniego-Eala, President, G-Xchange, Inc.

You can watch it live here.