This is the final post in a four-part series on branchless banking in India. The earlier blogs on MicroSave’s review of e/m-banking and the innovative service providers Beam and Eko demonstrated the power of convenience and simplicity. In keeping with this optimistic view of a still uncertain India venture, we conclude with three more positive items to highlight. Two reflect new changes by the government and one goes back to the fundamentals.
1. The Government of India has established a clearer vision for electronic payments and agents and aims to make a substantial investment to expand these capabilities across India.
The Government of India recently released a task force report on a unified payments infrastructure linked to the biometric Aadhaar number. While many questions remain, this report establishes important policy points. It recognizes the value of electronic payments to both cut costs for the government and bring convenience to the end recipients. It also sees G2P as a major flow of capital which can prime the pump, while recognizing that much more ought to flow over branchless banking channels. The Government of India also proposes to pay a 3.14% fee to banks for delivering G2P payments – a significant shift in the business case for banks. Some of the insights in the task force report built off of international G2P experiences shared by CGAP.
As always, there are potential pitfalls in this system, including the risk of building a single-purpose G2P payments infrastructure that is not widely usable for other payments. A supply push too hard by the government could create disruptions in customer service. There are other questions to contemplate such as whether biometric authentication of every transaction might forestall easier to use payments systems. such as PIN-based mobile phone payments, from emerging.
But these are all solvable challenges and the new momentum for branchless banking will shape the financial inclusion agenda in India in the coming months and years.
Read our two previous blogs in this series on branchless banking in India here.
An Eko agent offering the tatkal service
Eko was the first company dedicated to a mobile phone-based basic savings account and payment service for the unbanked in India. Launched in 2007, Eko has carefully developed a mobile-based service usable on the most basic of handsets and continually revised and re-fashioned its approach. At first, Eko experimented with a basic deposit and payment service from one Eko account to another. But by the second half of 2011 Eko had struck on a revised formula that appeared to work as a business – providing a highly efficient and simple payment directly into the account of a bank anywhere in India. Having found a popular offering, during the second half of 2011 Eko doubled its revenues, reducing its operating losses to 16% of revenue by February 2012 with the expectation of passing breakeven in the first half of 2012.
Leveraging a strong base of agents in Delhi, Eko offers users a simple way to send money anywhere in India. Users can come to Eko’s agents to make a deposit into any bank account held by the State Bank of India (SBI). SBI is the largest bank in India with over 14,000 branches and more than 250 million accounts. By presenting the mobile number of the sender and receiver to the Eko agent, plus the account number of the receiver, the agent can make a payment into the account securely simply by dialing a short sequence of numbers. Each transaction is then verified by an SMS to both sender and receiver with a time and date stamp, the fees levied and a transaction ID.
The success of this tatkalpayment service is predicated on two basic features. The first is that Eko’s service ties into the core banking system of SBI on a real-time basis. Thus, clients send and receive transactions instantly giving them confidence. The power of the service is persuasive to clients as the receivers simply withdraw the funds from any SBI channel across India. This includes a national network of interoperable ATMs which charge no fee on most withdrawals.
The second important feature is simplicity. Clients only need to know the correct account number and the sending and (optionally) the receiving phone numbers. And they only need to go to an authorized agent to complete the transaction. This is more convenient than getting to branches which may be further away and often require longer waits. “The big difference for Eko has been the irrefutable legitimacy that tatkal transactions bring to the SBI-Eko outlets. The fact that the client’s relative thousands of kilometers away can instantly withdraw cash at an ATM just a few seconds after the transaction completes is a definite ‘Wow!’ for the client”, says Abhishek Sinha, co-founder & CEO of Eko.
Read our first post in this series on branchless banking in India here.
Anand Shrivastav, the founder of the mobile phone prepaid system Beam, says simply that his start up offers “convenience, not a financial service.” While sitting in his office, I opened up a prepaid account with Beam in less than a minute with a one line SMS message.
This simplicity is not what the government of India has in mind when it promotes financial inclusion. The Reserve Bank of India articulates the end goal of financial inclusion to be a full set of deposit, savings, insurance and payment services offered with bank-like rigor. The RBI has promoted bank-led branchless banking to achieve this agenda with considerable expansion occurring under the bank-led model across India. By March 2012 there should be close to 100,000 customer service points (also called bank agents) across India.
Beam is one example, however, of a mobile phone based service that offers something much simpler and lies at the far end of the spectrum of financial services. Beam is licensed by the RBI, but instead of a banking license Beam operates with a license to offer prepaid payment services. This license allows Beam to issue prepaid value electronically; presently with the (very significant) restriction that such value cannot be redeemed for cash, only for goods or services. Prepaid licenses specifically prevent Beam’s service from mimicking a deposit.
The first thing that strikes a new user like me is the ease of signing up. I did this without visiting any office or even presenting identification. Mr. Shrivastav explains that the initial account opening is geared to be ultra-convenient and is not intended to meet banking identification (Know Your Customer – KYC) rigor. Stricter bank level identification is intended to combat money laundering and terrorist financing which one cannot do (or would find extremely difficult to do) using prepaid value restricted to goods or services. Mr. Shrivastav explains that Beam has introduced a higher tier account where users voluntarily upgrade their account by submitting KYC details, allowing them to transact in larger amounts. But the ease of initial account opening has enabled a small start up company like Beam to open up 7 million accounts.
India is undergoing a significant expansion in the use of agents (Business Correspondents) to offer a range of financial services. There are many questions about whether this present expansion can be sustained. A new publication from MicroSave highlights reasons for optimism. To understand this perspective, Greg Chen, CGAP’s Regional Representative for South Asia, asked Graham A. N. Wright, the founding Director of MicroSave, a series of questions about branchless banking in India (note: MicroSave uses the term electronic/mobile-banking or “e/m-banking” to describe this field, while we at CGAP tend to use “branchless banking”). MicroSave has a large presence in India with over 80 staff and a large practice focusing on: e/m-banking; microfinance; SME; private sector development and responsible finance.
Graham Wright, MicroSave: India has huge opportunity to leverage the potential of e/m-banking and build a cash-light economy. In addition to its cutting edge information technology industry and relatively dense population, the Government of India is clearly determined to achieve financial inclusion through digital money and is taking aggressive steps to see this happen.
The gradual regulatory evolution to support business correspondent network managers (BCNMs) and banks in their outreach efforts continues – and the results are beginning to emerge. While the emphasis continues to be on numbers, the targets are such that large scale outreach infrastructure is being built in a short time frame, with an agent covering every village with a population greater than 2,000. This, coupled with the government’s resolve to move to cash-based subsidy transfer and social security payments systems, will ensure transactions. Institutions such as the Unique Identification Authority of India (UIDAI) could greatly ease customer KYC and authentication, and the National Payments Corporation of India (NCPI) has already built a national switch for inter-bank mobile transactions. This infrastructure could play expanded roles as systemic back-bones that support different players and bring about interoperability.
Question: The services necessary for financial inclusion are much broader and so what are the anchor or lead products for building agent-based branchless banking systems in India?
We’ve done a lot of thinking at CGAP about the different business models and partnerships that exist in branchless banking. What I find interesting is that rarely do you find two models that look exactly alike. Once you begin to really dig beneath the surface, you realize that even among those businesses that we might simplistically call “telco-led” or “bank-led”, there are significant differences. For example, Orange’s partnership with BNP Paribas in Cote d’Ivoire (the local subsidiary BICICI) is slightly different than MTN’s partnership with Societe Generale (local subsidiary SGBCI) also in Cote d’Ivoire. Similarly, when we did our comparative agent research in Kenya, Brazil and India, we learned that while many banks in Brazil use agents extensively in their outreach strategy, they each manage their agent networks quite differently.
Instead of playing to the same tune, I’d say that branchless banking actors are playing variations on a theme. Here we share a couple videos that describe two particular variations out of the many that exist.
1st Variation: One of the largest Brazilian commercial banks Bradesco has been targeting the mass market since its beginning, going so far as to build branches without doors to encourage anyone to enter. It’s no surprise then that Bradesco has always been trying to be as close as possible to its customers (which currently number 62 million) and to future customers. In this video, Marcos Bader, General Director at Bradesco, explains how technology and new business models based on the use of agent networks have helped the bank reach this goal. He explains many interesting aspects of their business, but what I find quite remarkable in particular is that 90% of all transactions at the bank go through alternative distribution channels. Marcos also lives up to the Brazilian stereotype by somehow finding a way to draw a parallel between branchless banking and soccer!
2nd Variation: Regulation usually defines what branchless banking players can and cannot do. Roar Bjaerum, Head of easypaisa at Telenor Pakistan explains in this video how the regulation in Pakistan was clear in its “bank-led” approach. But regulation also allowed telcos to take ownership in banks. In 2008, this is exactly what Telenor Pakistan did in partnership with Tameer Microfinance Bank, paving the way for a truly innovative business model in branchless banking. As Roar explains, the market has since taken off in many different directions, with some banks leading their own branchless banking business and some telcos acquiring microfinance licenses. We’ve written about and discussed the Pakistan market a lot, but here Roar describes the market from the perspective of someone working on the day to day business of mobile money.
In these two particular “variations on a business model theme” and in the many others that exist around the world, the challenge, as Marcos puts it, is “to define the boundary between cooperation and competition.” This is indeed the task at hand in order to produce a wonderful melody instead of discordant chords in our objective to reach the unbanked.
Watch the two videos we posted last week on OXXO and DD-DEDO here.
Our discussions on branchless banking on this blog do not often touch on the role of microfinance institutions (MFIs). The main actors in this space seem to be mobile network operators, commercial banks, larger microfinance banks and technology companies. We have done a bit of thinking on microfinance and mobile banking, notably in this Focus Note and at this Virtual Conference.
In our last post of the year, we bring the discussion squarely back to the role technology can play for MFIs. Our guest author is Leo Tobias, Grameen Foundation’s Technology Program Manager of the Solutions for the Poorest Microsavings Initiative.
Cashpor Officer processing loan payments on mobile
Grameen Foundation’s Microsavings Initiative is a three-year project funded by the Bill & Melinda Gates Foundation. It was launched in November 2009 with a goal of reaching 1.45 million new savers across 3 MFIs in the Philippines, India and Ethiopia.
Offering voluntary savings is demanding. Financial institutions compete with the alternatives that exist to formal savings accounts (home, relatives, neighbors, etc.). A common theme in our savings market research is the customer’s desire to have easy and convenient access to their funds. To deliver on those desires, our MFI partners face common technology challenges.
Here are two major challenges:
1. Front End Technologies
To meet customer demands, financial institutions must develop delivery channels that offer accessibility and close proximity to the end client.
Selecting the right technology is an important first step. The 3 MFIs are at various stages of investigating or implementing mobile technology. In India, CASHPOR (CASHPOR Micro Credit) incorporated mobile in both their credit and savings processes. In the Philippines, CARD Bank (Center for Agricultural and Rural Development) implemented an SMS system for an on-demand savings deposit pickup service. The use of mobile phones is clearly a powerful venue for bringing the transaction closer to customers. However, it is not the only technology to be considered.
In Ethiopia, ACSI (Amhara Credit and Saving Institution) is planning to use cards (most likely smart cards) and POS devices as their first front end technology implementation. With only approximately 14% mobile penetration in the country, all indicators point to the fact that the majority of the rural poor will not have access to mobile phones in the next couple of years. In the Philippines, the majority of microfinance customers are in provinces classified as “urban” or “semi-urban”. In many of these areas, ATM machines are accessible. CARD Bank chose to provide access to the national and international network of ATMs as a feature of its voluntary savings product in addition to the use of mobile phones.
Integrating all the sophisticated technology requires the help of external providers who can bring a wide array of specialized expertise to the organization. However, managing relationships with outside technical providers can be new and difficult since most of the technical needs of MFIs had previously been met by in-house expertise.
The MFIs are ultimately responsible for the relationship with their customers. The MFIs therefore have to provide the training and support needed to make sure members are comfortable with and trust the technology. A component of our holistic program has been to recognize this need and to develop educational programs to introduce not only the savings products but the technology associated with them.
PayPal made news recently by launching a new report, Money: The Digital Tipping Point, which predicts that by 2016 UK consumers won’t need cash or a wallet to go shopping. I’m not sure why the UK market was the focus of this report, but I won’t tell PayPal that KPMG just came out with its own research that showed that “when it comes to mobile banking, consumers in the UK are more resistant than elsewhere. Only 27% of Brits surveyed said they had used some form of mobile banking in the past six months (globally 52%).”
But Carl Scheible, Managing Director of PayPal UK, is persistent and argues,
We’ll see a huge change over the next few years in the way we shop and pay for things. By 2016, you’ll be able to leave your wallet at home and use your mobile as the 21st century digital wallet.
I’ve been intrigued to see several recent new stories spouting off about the grandiose vision of a cashless society. To a certain extent I thought we had moved past this debate. While recognizing it as desirable, this high and mighty goal seems somewhat unattainable, at least in the short to medium term. At CGAP, a former colleague and I wrote about mostly failed attempts to go cashless in developed economies in the late 1990s and early 2000s through various mobile and electronic payment schemes. A few of us also wrote about the attempt in Singapore to dictate a cashless economy about 10 years ago, but to my knowledge I believe there’s still cash floating around Singapore.
Cashless seems a bit naive; cash lite seems more realistic, although still a big challenge despite the innovations that have happened since these initial attempts a decade ago.
Everyone is always talking about trying to move the branchless banking industry beyond just payments. Those of us concerned with accelerating “real financial inclusion” long to see credit, savings and insurance products pushed over new delivery channels. But is it possible that there’s still work to be done within the payments space itself, just diversifying a bit beyond simple P2P transfers?
For example, I’ve been hearing a lot of talk recently about really trying to crack the nut on merchant payments. Branchless banking providers see this as a huge opportunity not only for increased transactions (and therefore revenue), but also as a way to solve some of the tricky problems around liquidity management at agent locations when more people use electronic value for direct purchases instead of just cashing in and out. But how do small merchants respond to the possibility of being brought into the formal economy through using a traceable payments service? Will merchants and customers be willing to pay a fee to transact electronically instead of in cash? These are just a couple of the open questions that still need to be answered.
I ran across the organization Venture Capital for Africa (VC4A) at a recent conference in Ethiopia. One of their recently profiled ventures is addressing some of these questions around moving past person-to-person transfers to merchant payments and other business transactions. The start-up Yo! Payments in Uganda is trying to connect the ecosystem and facilitate mobile money as a real “medium of exchange.” Read about some other pretty cool startups in the African mobile market here.
What about even fancier transactions than just merchant payments, like investments? At a recent African bonds market workshop in Nairobi, discussions involved the possibility of allowing mobile phone users to buy Treasury bonds through mobile money transfers. I wouldn’t bank your investments on this yet though, as the article was clear that “details are yet to be worked out” and this seems to be the sort of transaction where the devil is indeed in the details.
As regular readers of this blog will know, we are excited about the developments that we’re seeing in branchless banking in Pakistan, which have led us to call it a “laboratory” for innovation. Most recently I interviewed Mansoor Hassan Siddiqui, the Director for Banking Policy and Regulations at the State Bank of Pakistan about the recent changes to the Branchless Banking Regulations that, among other things, removed the need to capture biometric information at the time of account opening.
These changes to the regulation seem to have unleashed yet more activity. Easypaisa, the longest-established service in the market launched by Tameer Microfinance Bank and their parent company, mobile network operator Telenor, now claims over half a million mobile accounts following a major campaign. The mobile account will complement their over-the-counter bill payment and domestic money transfer services which together have processed a total of Rs 43 billion (US$500 million).
The other major player in the market is UBL, which launched their Omni service in April last year, only six months after easypaisa’s debut. UBL is supporting a number of government and NGO programs in the distribution of cash transfers to nearly two million beneficiaries through their network of 5,000 agents. Recently, UBL started accepting loan repayments for microfinance institutions (MFIs) and providing cash management facilities for businesses.
Two other players, First Microfinance Bank and MCB have already been granted branchless banking licenses under which they are running pilots. The State Bank of Pakistan last month issued a microfinance bank license to Waseela, a subsidiary of Orascom – who also own Pakistan’s largest mobile operator. The move was seen by many industry analysts as a necessary step towards getting a branchless banking license which will allow Mobilink to launch a service to compete with easypaisa.
There are several other banks that are also considering applying for branchless banking licenses and many non-banks such as the courier firm TCS. Other mobile operators are also looking for suitable banking partners that will allow them to launch their own services.
This CGAP Brief released today summarizes the latest developments and offers a commentary on the biggest challenges facing the branchless banking sector in Pakistan.
India is just one of a handful of countries that is implementing financially-linked G2P payments at scale. And of course, “scale” in India – a country with nearly 1.2 billion people – means something a bit bigger than in most countries. In India in 2008-2009, 22 welfare schemes paid out a total $65 billion to tens of millions of Indians – which doesn’t even include the substantial G2P flows for government salaries and small savings schemes. The yearly budget of the National Rural Employment Guarantee Scheme (NREGS), one of two welfare schemes that dominate the G2P payments space is $6.7 billion. And, most excitingly from our perspective, these schemes are leveraging emerging branchless banking models to disburse these payments, moving from the former branch- and cash-based distribution model to the distribution of funds into no-frills bank accounts serviced by business correspondents outside of branches.
Not surprisingly, though, this is only the start of the story. While the ambitious link of G2P payments to bank accounts is exciting and can be a source of learning and inspiration for other countries, challenges and complexities persist. We visited India this summer to learn more about G2P payments as they relate to financial inclusion. Our full overview note is available here, but here’s a summary of our key insights.
State governments exercise significant control over the management and administration of central government-mandated G2P schemes, and there is great variability in the fees paid by state governments to banks for disbursing funds to citizens – some states pay 2% of values disbursed (or more), but others refuse to pay anything. This weakens the business case for banks and fails to generate enough money to feed the many mouths in the G2P value chain.
Business correspondent network managers (BCNMs) are particularly squeezed, as they must compensate their network to keep them engaged and reliable, but the current fee structures from banks leave little money left over.
In the absence of transaction fees, many banks appear motivated to disburse G2P transfers because they view this as a “foot in the door” for future business from governments, an especially compelling prospect for private banks who have traditionally been boxed out of this business by public-sector banks.
