Archive for: Telecom

This is the third post in our series on interoperability and related issues in branchless banking and mobile money. Read the first post that presented the overall framework for the discussion and the second post that looked at the interconnection of mobile money platforms. Today, we discuss interoperability at the agent level as it relates to agent exclusivity. We include agent exclusivity in the topic of interoperability because it raises many of the same issues as platform interoperability.

Agent exclusivity revolves around the ability of a customer of one provider to use the agent of another provider for cash-in and cash-out services related to that customer’s account. Non-exclusive agents can expand financial access by providing more access points to a greater  number of customers, while limiting the rise of a dominant actor which could ultimately reduce competition. But as with platform interoperability, regulators are cognizant that prohibiting exclusive agents could deter private actors from entering the market. What service provider would invest in identifying, training, and equipping agents if competitors can piggyback off their investment?

To be clear, when we speak of agent exclusivity, we are only referring to the cash-in and cash-out services performed by agents – not other services (where permitted) such as customer enrollment, related KYC, and processing of loan documents. Agents providing only cash-in and cash-out services are often called “cash merchants”. We distinguish the cash merchant services from other services because cash merchant functions arguably present less risk to the financial service provider since agents typically transact against their own accounts. Think human ATMs.

We identify at least four different ways to share cash merchants:

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In our first post in this series on interoperability, we introduced a three-level interoperability framework focusing on (i) platform interconnection, (ii) agent exclusivity, and (iii) customer-level interoperability. You can see the full framework in this presentation. In today’s post, we delve deeper into the first level–interconnection of mobile money platforms.

Platform-level interconnection is what most people have in mind when they think of interoperability in branchless banking. When we speak of interoperable platforms, we are referring to platforms that permit the transfer of funds from one mobile account to the mobile account of another service provider. This is similar to being able to send money from your bank account to your sister’s account at another bank. Or it is similar to being able to send a text message from your phone with your mobile network operator to your friend’s phone on the network of a different mobile network operator.

These “cross network” transactions should not be confused with “off-network” transactions which many mobile network operators claim to be platform interoperability. Off-network transactions make it possible for account holders to send money to anyone, whether they hold an account or not. For example, you send money from your mobile account to your friend, who doesn’t have an account, and your friend cashes out at your service provider’s agent. While off-network transactions can be beneficial for low-income users, we believe they are not as financially inclusive as cross network transactions. Off-network transactions require recipients to cash out, whereas cross network transactions make it possible for recipients to store received funds, on-send them or use them to make payments.

We identify different ways platforms can interconnect. In basic terms, platforms can interconnect: (1) directly (as the two ATM networks, 1Link and MNet, did in Pakistan) or (2) indirectly where a third-party entity which is either owned by providers, owned independently, or owned by the government interconnects platforms (as POS networks are currently doing in Brazil). The way in which platforms interconnect impacts pricing and efficiency of the payment system and potentially the ultimate value to customers.

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Mention the word interoperability in branchless banking and mobile money circles and watch people react in very different ways. For some, the word means something positive – efficient services and lower prices for consumers. For others, it means something negative – more costs, threats to competitive advantage and less profitability. For still others, the word means a reality that is inevitable but far in the distant future. Some don’t want you to say the word at all.

At the end of the day, we suspect interoperable systems will accelerate financial inclusion by allowing customers to use the infrastructure of multiple service providers to access their accounts. The question is how best do we get there?

A discussion on interoperating branchless banking and mobile money services that have yet to reach critical mass appears premature. But businesses and policy makers are already grappling with these issues in a number of markets where CGAP is heavily involved. In Ghana, the government is trying to understand its role in promoting interoperable branchless banking. In Pakistan, where Central Bank regulations permit a “many-to-many” model, there are questions about how the market will evolve into interoperable systems. In India, interoperability at the agent level is part of the financial inclusion vision painted by the Unique Identification Authority of India.

In general, governments are struggling to understand a regulatory approach that will balance the interest of customers with those of market players. They do not always adequately consider the state of the market or fully understand the implications of their approaches.

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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.

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Chrissy Martin is currently a Senior Consultant at MEDA. Previously, she worked for 12 months as the Product Manager for Digicel in Haiti, which has rolled out a mobile money service called TchoTcho Mobile. Through both Digicel and MEDA, Chrissy has worked with several NGOs that are interested in mobile money services to make payments to beneficiaries of cash-for-work programs. She outlines some of practical challenges that have to be overcome to make this a reality.

Mobile Money in Haiti

There are many reasons to be excited about mobile phones as a way to distribute cash transfers, such as government payments or NGO cash-for-work programs. First, cash transfers are often sent to groups of people in multiple locations, and it can be easier to reach them via mobile than to bring them together in one place. It is also easier to track payments if they are sent electronically, which can reduce corruption and increase confidence that the right amount of money ends up with the right individuals. A third possible benefit is that relying on a network of mobile money agents who already handle cash will increase security over creating new systems for transporting cash. This was the situation in Haiti, where cash-for-work payments were made on-site at camps, which created a security risk for the bank employees who had to stand with and distribute large amounts of cash in crowded, outdoor locations. For these reasons – the potential to have a more convenient, secure, and traceable method to distribute payments – mobile cash transfers have been attempted in multiple countries from Pakistan to Niger.

Unfortunately, implementation on the ground often proves to be far more difficult than it seems at first glance. The first and most obvious challenge: not everyone has a mobile phone, let alone an account linked to their phone which can accept fund transfers. Despite all of the justified excitement over the rapid growth of mobile phones worldwide, in any given developing country a large minority of people may still not own a phone, and these people are likely the marginalized populations that are often targeted by social cash transfers. In this case, an organization (NGO or government entity) planning to implement such a program has a few choices:

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Over the past several months, we have taken a close look at the branchless banking industry in a few key countries. Last week we presented our learnings from Brazil. Today we continue with our analysis of Mexico and share this summary note on the Mexican branchless banking industry.

Mexico’s financial sector is beginning a significant transformation. It is setting the stage for a broad commercial offering through innovative products that reach lower-income segments of the population. Appetite to reach lower-income segments grew in the past decade following the notable growth of Banco Azteca and Compartamos. More recently, regulation enabling the use of non-bank correspondents (or banking agents) has expanded the possibility to increase the reach of financial institutions at a reduced cost both for banks and for potential customers. These regulations proactively reduce competitive barriers in the banking sector and open opportunities for banks to serve lower-income segments historically served by other financial service providers (financial cooperatives, MFIs, microfinance banks and retail stores-cum-banks). Large retail chains (including Telecom, the state-owned telegraph network) are developing shared correspondent networks, and most major players are adopting aggressive outreach strategies.

However, most of these strategies are still about reducing the cost to serve existing customers and much less about growing towards new lower income segments. The price points of shared channels, the lack of sensibility to poor people’s needs, and to certain extent, the mandate to banks to give away free transactions on their own ATMs are slowing the development of a meaningful offering. New partnership models and ambitious experiments involving key players may drive the market towards more efficient models and more affordable low-income offerings beyond credit, but the learning curve is uncertain and is likely to require time.

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Today, we share with you a presentation that describes in detail five ways mobile network operators (MNOs) can think about the mobile money business case. MNOs across the globe are investing millions to develop and market mobile money. Estimates claim at least 30 implementations in Africa where MNO-driven financial services are an important part of the financial inclusion landscape. Despite the bets being placed by MNOs, the business case remains uncertain in almost every implementation. 

Last year we surveyed MNOs to assess their expectations of the business case. Since then we have done analysis of two implementations (with the help of Dalberg and a major mobile money service in Africa) and taken a few steps further to understand the relationship between the business case and market structure (with the help of Bankable Frontier Associates). 

Our analysis resulted in the following five insights which are backed by data in the presentation and which we expand on in subsequent posts:

How to think about the overall revenue potential?

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There was much movement in 2010 at the intersect of technology and access to finance for the poor. CGAP’s new Branchless Banking Database synthesizes a mass of data into a short 12-image “story” about what branchless banking is and the key hurdles we face in 2011. The focus is on mobile phones, but we quickly add that some of the most interesting work is still being done with debit cards and even simpler technologies, such as bar codes.

Today’s blog starts a three-part series. We first present the latest data about the explosion of mobile ownership in emerging markets and how that converts into an opportunity to boost financial access. The second and third posts will look at performance to date: are we really reaching the poor? Is this proving to be a profitable business for industry? What are the key challenges around products, pricing and channel to pay attention to in the coming year?

Mobile ownership has grown explosively in poor countries over the past decade. In 2005 the mobile phone became the 1st communications device in history to have more users in poor countries than rich. In 2010, mobile phone owners in poor countries accounted for two-thirds of the world’s 4.77 billion phones.

But while people in poor countries became increasingly well-connected via mobile, they remained much less well-connected financially. An emerging market consumer is 2x less likely to have a bank account in their name than own a mobile phone. Access to financial services enables consumers to smooth unpredictable income, acquire productive assets, invest in health and education, and make other purchases that enrich their lives. Fortunately, the explosive pace of mobile connectivity might be leveraged to also fuel financial inclusion.

Providers can reap substantial cost savings from channels that replace branches with “branchless banking” (technology paired with agents, typically merchants who handle deposits and withdrawals and are connected via mobile or card-swipe POS terminals). The figure at left shows the cost reduction for 4 Mexican and Colombian banks from moving deposit transactions from teller to agent. Cost savings will vary by institution, driven by inter alia the fixed cost of branch depreciation on one side and variable cost of agent commissions on the other. CGAP estimates most banks will see 50% cost savings or greater. This enables them to reach low-income clients who were previously uneconomical to serve. Other providers — mobile operators, tech firms — which want to enter financial services for the first time can also employ agents to cost-effectively roll out.

Increasingly, financial sector regulators have established enabling regulation for branchless banking. CGAP’s latest analysis is available in two recently published Focus Notes, which build on the scene-setting “Regulating Transformational Branchless Banking”, jointly produced by CGAP and DFID.

CGAP’s Branchless Banking Database is available here. It marshals data from our 2010 field work on agents, business models, customer adoption, and regulation, and combines it with data on banking access, mobile penetration, population, and income in 168 countries. Graphics are easily imported into your own presentations, and the data is presented in Excel, enabling you to manipulate it for your needs.

- Mark Pickens

Having just returned from 2 weeks in West Africa looking at the branchless banking market, one thing became quite clear to me: most African commercial banks have a very small retail banking business. As a Reuters Africa News blog post recently wrote:

Retail banking is not a high margin business. It is one where you have to earn a little from lots of customers, know them well and serve them well – not easy when you have many millions spread over a large area who may not be worth much individually even if they are better off than they have ever been before.  

But the post goes on to make reference to a report by Bain & Company indicating that the financial services industy in Africa could grow by 15% a year until 2020, with the biggest growth area coming from retail banking.  So what’s changed? 

Mobile banking in particular is seen as being a powerful driving force after the success of the M-PESA mobile money transfer service in Kenya and others elsewhere.

Speaking of M-PESA (when are we not, right?), there’s been some interesting discussions lately around interoperability in the Kenyan market. An article in the Business Daily bemoans the fact that a proposal has gone to the Prime Minister’s office asking the Central Bank of Kenya to “establish a form of clearing house that will process all transactions from all four mobile money platforms.”  The article goes on to say:

The small print [behind this proposal] reveals that some kind of market imbalance is being hatched in the quest to level what some believe is an uneven playing field. The success [of M-PESA] did not come easy to its creators. It was a hard fought battle against regulators as well as an expensive exercise for Safaricom who had to spend million – perhaps billions – educating its agent network, and indeed the world on a previously untested product. The proposal will effectively hand M-PESA’s rivals access to over four years experience in crafting that working eco-system - at no cost.

This topic also came up at the AITEC Banking & Mobile Money COMESA conference in Nairobi last week where Paynet Groups’ CEO in Kenya Bernard Matthewman said that there were 24 bank switches and credit management systems with multiple mobile banking platforms across the country. He continued on to say:

There is efficiency to be gained by not replicating infrastructure – you reduce costs and reap greater margins. You are in a much better position to go to places with less economic activity. Competition is increasing and CEOs are recognising that critical mass and volumes are needed to compete in the retail space. They are realising that they cannot reach competitive scale on their own.

Interestingly, the article includes similar quotes from representatives from Equity Bank and Orange, but not from Safaricom. Instead, in another article from the Business Daily describing the proposal before the Prime Minister, Claire Ruto, Safaricom’s corporate affairs officer said that:

Although consumers may initially enjoy the resulting price cuts, such a move bears the risk of killing innovations in the money transfer market. This is proprietary innovation and we don’t understand why our competitors should want to ride on it yet they too have theirs.

But to finish up, let’s switch from the supply side of the discussion to the demand side. We’ve blogged a lot over the last couple months about the launch of mobile money in Haiti. But one wonders how it is actually being used by people now that it’s in the market. A grant from USAID/HIFIVE has allowed a pilot of 100 beneficiaires to receive their unconditional cash transfers through the mobile phone, supported by Mercy Corps Haiti’s Economic Recovery Team. Here’s an update from Mercy Corps about how the first mobile money disbursement went:

When Marie first attended mobile money training, she didn’t understand how the money could be on the phone and would have preferred to be given cash directly. Now that she has seen mobile money in action, she believes that buying things is ‘very easy with the phone.’

- Sarah Rotman

The news wires have been busy with the recent announcement of partnerships and joint ventures in the Indian branchless banking market.  India’s largest public sector bank, the State Bank of India, announced a joint venture with the mobile operator Bharti Airtel to offer mobile banking. Meanwhile, India’s largest private sector bank, ICICI Bank Ltd, announced its tie-up with Vodafone Essar to bank the unbanked via the mobile phone. As the Hindu Business Line writes:

These two initiatives take mobile banking services to a whole new level. While Vodafone manages over 1.5 million retail points for acquiring customers and servicing them, Airtel is present across 5,101 towns and more than 500,000 villages.  That’s a big deal considering that The National Sample Survey data reveal that 51.4% of nearly 89.3 million farmer households do not have access to any credit from institutional or non-institutional sources…Only 13% are availing loans from the banks in the income bracket of less than Rs 50,000.

The Pakistani media was also abuzz with the pronouncement of the State Bank of Pakistan Governor that:

Branchless banking is the future of the country’s financial sector as it opens up opportunities for bringing unbanked segments of society into the financial system.

Governor Kardar made this address at the signing ceremony between United Bank Limited (UBL) and Shore Bank International for UBL’s branchless banking initiative, Omni banking. Meanwhile, easypaisa, launched by Tameer Microfinance Bank and Telenor in October 2009, reports carrying out 10 million transactions valuing Rs. 17 billion in 15 months since launch.

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