Know your customer (KYC) requirements on financial institutions have received increasing attention by governments in their anti-money laundering and combating the financing of terrorism (AML/CFT) initiatives. AML/CFT regulations introduce specific obligations on account opening, including, at the very least, checking the customer’s identity. This poses a particular challenge to branchless banking for two reasons. First, the absence of branches means that banks need to find alternative ways of conducting face-to-face interviews or identity checks, where those are required. Regulations may allow banks to “outsource” this function to a third party (perhaps the cash-in/cash-out agents) , but it remains the bank’s responsibility to ensure KYC procedures are performed adequately. In the Philippines, the growth of rural agent networks has been limited because all agents need to take a Central Bank-supervised training course in Manila before they are allowed to operate. Many agents find this required training to be too costly and disruptive. Second, to the extent that branchless banking targets poorer and more remote customers, it may be more difficult for these customers to show proof of identity at all.

On the other hand, AML/CFT risks associated with branchless banking initiatives can be mitigated by capping account sizes, account functionality, and transaction volumes. As governments’ interest in access to finance grows, they are becoming increasingly pragmatic about KYC requirements, allowing for simplified procedures where risk is limited. In South Africa, the Reserve Bank permits remote account opening for certain types of accounts; this has allowed WIZZIT to undertake KYC procedures through a network of roving “WIZZkids”—often previously unemployed youths.

For branchless banking to develop, governments need to continue to work with providers to find flexible solutions that meet policy and business requirements. It is unlikely that there will be a one-size-fits-all solution. Instead, governments will need to be responsive to proposals coming from providers and to evaluate these proposals based on the risks involved.

In a survey CGAP conducted in South Africa, roughly half of those surveyed said they preferred to deal face-to-face with a person rather than with an electronic device, even if the device is quicker. Interestingly, the responses were similar between WIZZIT customers and people who have a mobile phone but do not use it to conduct transactions.

Despite being satisfied with the mobile banking service, users still missed the human touch. Customer research conducted in South Africa pointed at a likely reason for this: having to deal with machine interfaces undermines people’s sense of control over the process. Indeed, a larger proportion of WIZZIT customers than nonmobile-enabled bank customers felt that they had insufficient control over their finances. Similarly, in one anecdote from South Africa, customers using ATMs for the first time checked their balances so frequently that they lost their entire balances to ATM fees.

The same research in South Africa also highlights the need to improve customer awareness of branchless banking and to educate customers about how it works and what it costs. Not understanding the technology is the single most frequent reason given for WIZZIT customers who have stopped using the service. Nonusers thought the cost of the service was on average 14 times more expensive than it really is.

These results demonstrate the importance of marketing and of balancing technology with human interfaces, both to improve awareness and understanding, as well as to improve perceptions of the service. Achieving this through a branchless model will be a challenge.

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.

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.

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.

China: Non-banking Institutions to Have Access to Small Payment System
China’s central bank People’s Bank of China (PBC) is going promulgate regulations on opening its small payment system to the non-banking institutions, said Xu Zhen, a director of PBC. The move shows PBC’s efforts to bring the small payment system into the competitive market. Detailed rules are expected to be released in 2008.

South Africa: Cell Phone Banking On the Rise
Cell phone banking in South Africa has more than doubled in one year and usage is to climb even more sharply in the coming year.  This is according to the Mobility 2007 study by technology research firm World Wide Worx. World Wide Worx’s latest study of mobile technology and commerce in South Africa, conducted in partnership with First National Bank (FNB), was released in Johannesburg on Tuesday.

MasterCard to tap ‘mobile’ data to widen reach
Mastercard is getting ready to tap the unbanked population in the country using the mobile phone customer base which has been seeing a rapid growth. The sharp domestic growth has made India a focal point for Mastercard, even as international banks like Standard Chartered, HSBC and Citi see it as a growth driver.

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.