Having examined several branchless banking ventures around the world, it appears that less than 10 percent of all branchless banking customers are poor, and new to banking, and are using these channels for financial services (or activities other than paying bills, purchasing air time, or withdrawing government cash benefits). In its study in Pernambuco (a particularly poor state in Brazil), CGAP found that only about 5 percent used a banking agent at least once a month for anything more than paying bills or receiving government payments, were previously unbanked, and were considered poor by Brazil’s standards. Similarly, of about one million mobile banking customers in South Africa, CGAP estimates that fewer than 100,000 fall below South Africa’s poverty line, did not have a bank account earlier, and now use mobile banking for more than payments or transfers. And in Colombia, typical cash transactions through agents are in the range of US$100–200, which suggests that they are not being used by the poorest.

While disappointing to organizations that aim to expand access to finance, this is a fairly natural outcome in the early stages of development of a market following a major innovation. Providers experimenting with a new technology or business model typically seek to reduce risk by focusing on known markets (avoiding the “double gamble” of new business model and new customer segments), and within those on likely “early adopter” subsegments (i.e., those more naturally predisposed to try the new offering).

Indeed, a provider that focuses branchless banking on customer segments it already understands and knows how to market to will find it easier to try out services, assess customer and service profitability, and tailor propositions and market communications messages. For instance, in the Philippines, SMART and Globe Telecom originally advertised their mobile banking services mainly to up-market consumers. SMART combined its mobile prepaid account with a Maestro debit card that can be used at any store that accepts a traditional debitor credit card. SMART’s customer base at year-end 2006 mainly included segments it knew well: four million subscribers had signed up for SmartMoney, and of the 900,000 active users, nearly all were businesses distributing SMART’s prepaid air time.12

Globe Telecom’s GXI Inc., which offers the G-Cash mobile wallet service, estimates that nearly all of its 500,000 active users are individual subscribers in urban areas.13 In fact, the company moved beyond the pilot phase of registering outlets to accept or dispense G-Cash in rural are as late as early 2007. To date, just over 100 agents are registered in rural provinces, compared to the 3,000 air time resellers that Globe Telecom has signed up nationwide directly and the 700,000 airtime resellers hat buy and resell Globe air time.

Most customers are also just dipping their toes in the water. In 2006, CGAP conducted a survey of 515 people in areas served by WIZZIT. Even within the more directly enabled markets—among people who have both a mobile phone and a bank account—the study found, not surprisingly, that those who took up WIZZIT’s mobile banking service on average had a higher income and higher education levels and were more often formally employed, urban, and older. Early adopters were, in general, customers with more sophisticated banking requirements.

That poor people are not usually early adopters of technology can be explained by personal experience (they are likely to have had less exposure to technology and have less access to information about new offerings) as well as the fact that they are less attractive to providers.

This makes the job of governments and donors who are targeting poor people with financial services much harder. Government programs in India, Russia, Malawi, South Africa, and Brazil distribute social protection payments to customers through branchless banking channels. These have been found successful at opening bank accounts for millions of poor customers in some cases (notably Brazil), but have not led to regular use of those accounts to spread expenditure over time—balances tend to be withdrawn in full as soon as payments are received. More research is needed on how poor and excluded clients view their relationship with banking agents and their willingness to trust providers.

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.

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.

If they want to convince central bankers that hold the keys to the payments space, mobile operators will make persuasive arguments about how mobile financial services meet traditional thinking about deposits, the new domain of payment system regulation, and the hot button issue of anti-money laundering, especially when sending money across borders.

No operator better illustrates this than Vodafone and its M-PESA money transfer service.

M-PESA’s commercial launch in Kenya required months of discussions with the Central Bank of Kenya about why M-PESA is more a payment service than a bank deposit. Once launched, the market responded with an excitement banks must marvel at: 1.8 million registered users in the first year (in a country with only 4 million bank accounts total). Central banks in other countries may be attracted by efficiency gains in the national payments system, but they won’t always be ready to allow mobile wallets if they are treated like deposits.

One solution may be payment system legislation that creates a licensing window for payment service providers that take funds from the public, but solely for the purpose of facilitating a payment or transfer. The EU’s Payment Service Directive will do just that, but much still has to be worked out by individual national governments before the November 2009 deadline. That means EU experience could become an important signpost to emerging market countries down the road. But it’s likely to be several years before a European track record emerges on carving out dedicated rules for firms in the payments business.

In the meantime, mobile operators may be better off pointing to countries that have crafted more ad hoc but, so far, very workable arrangements to oversee mobile financial services. In the Philippines, the central bank constructed accommodations allowing one mobile operator to offer a mobile wallet directly (Globe), and another model in which banks outsource the vast majority of functions to the operator (Smart). Both required some flexibility on the part of the regulator, as banking laws could easily have stood in the way. Together, Globe and Smart have over 7 million registered users for mobile financial services.

But the hurdles don’t stop here, as Vodafone seems to be finding out in switching on its UK-Kenya remittance service via M-PESA, according to this report. Moving money across borders immediately attracts concern about money laundering and terrorist financing. Vodafone is partnered with Citi, but it seems regulators still have questions about KYC. At the Kenya end, M-PESA customers open accounts via agents, who are neither employees of Citi or Safaricom, Vodafone’s Kenyan affiliate.

And that may be the one quick lesson for mobile operators: partnering with a bank may not automatically solve all your regulatory problems.

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.

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.

But lost in all the buzz is the critical role third-party agents serve in the play for millions of low-income clients. A broad range of corner stores, petrol stations, lottery kiosks, post offices and other outlets feature prominently in the system architecture for such success stories as Safaricom’s M-PESA in Kenya, as well as in other countries, such as Globe Telecom’s GCash service in the Philippines.

Customers can sign-up for an account, deposit and withdraw funds via an agent. In fact, for mobile banking platforms run by mobile operators who don’t have a bank partner, agents may be the only way clients can sign up. No agents: no customer acquisition. And for mass market customers who want easy cash-in/cash-out, agents are the critical bridge from the electronic device to the cash economy they live in.

And finally, for managers having to show sizeable returns within a reasonable investment period, agents contribute to rapid scaling up in customers, transactions and cash-flow.

Consider this: M-PESA is about to hit 1 million registered users in less than 10 months operation. That amounts to a customer base one-third of the size of all of the clients of all of the banks in the country (approx. 3 million Kenyans have a bank account). M-PESA did it by building a network of 850 agent locations, which compares very favorably to the 550 bank branches in total. In the Philippines, GXI and Smart have over 5.5 million customers signed up, accessing service via more than 5000 agent outlets.

No doubt, customer uptake is measured by more than just sign-ups, and usage is a key driver for transaction-based fee revenue. Product design, ease of use on the mobile phone, marketing and other factors affect all this, but agents are a lynchpin in the business model for outfits like Safaricom and Globe aiming banking the unbanked.

We are dead set on proving a hypothesis: good return to our shareholders can go together with reaching the poor.
-Riza Maniego-Eala, President of G-Xchange, Inc.

Our market research shows that 50% are keen to have mobile banking services made available through local grocery stores, post offices and gas stations. But getting the service out is proving to be a challenge.
-Ganhuyag Chuluun Hutagt, CEO, XacBank

Download the pdf here.

In the Philippines, another pioneer, Globe’s GCash mobile wallet, isn’t classified as banking either, but it is regulated by the central bank, unlike M-PESA (for now). What’s going on? Is there cause for concern? While Vodafone operates in a vaccum, the Philippines central bank crafted a special regulatory window that not only gives Globe’s GCash permission to operate, but gives the central bank the authority it needs to see mobile payments is safe for consumers and the financial system.

Kenya’s Banking Act [SEC. 2(1)] defines business as the acceptance of money from the public on deposit or on current account and the use of this money “by lending, investment or in any other manner for the account and at the risk of the person so employing the money.” Although M-PESA involves accepting repayable funds from the public, Safaricom structured the product in such a way that it falls outside the definition of “banking business.”

Funds collected from M-PESA account holders are held by M-PESA Trust Company Limited in a pooled account with the Commercial Bank of Africa. Interest earned on this pooled account does not accrue to or benefit Safaricom, and therefore M-PESA fulfils only the first half of the definition of banking (taking deposits) but not the second (employment of deposits to make money).

This is not necessarily cause for alarm. Vodafone has substantial reputational risk which tends to make it super careful about tainting its very profitable voice business. But what about a fly-by-night operator, which may be much less scrupulous and have far less to lose? Right now, Kenya does not have a national payment system law, and consequently CBK lacks the powers it wants to control entry into the mobile payments / banking space, require reporting and supervise for safety and soundness.

In the Philippines, the launch of GCash was also facilitated by the definition of banking in the General Banking Law [SEC. 3.1]. Banks are defined as “entities engaged in the lending of funds obtained in the form of deposits.” GCash involves a store of value for clients’ funds, but lending isn’t part of the service. Ergo, it’s not banking, like M-PESA.

But within a relatively short time span after the launch of GCash, the Philippines central bank crafted Circular 471, classifying Globe’s subsidiary, GXI, as a remittance agent. Rather than place the full weight of banking regulation on the GCash model, which may have been prohibitively expensive, the “remittance agent” category is sufficiently light, but crucially gives the central bank the ability to decide who can operate in the mobile payments space, engage with providers to understand their systems, request changes as necessary, and require reporting, so the central bank can actively monitor developments. Latest news from Kenya is the Payment System Bill will give CBK similar powers. However, the bill has yet to clear parliament and likely will not until the first or second quarter of next year, after Kenya’s election.

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.