Archive for: Access To Finance

Dr. Susan Johnson is a Senior Lecturer in International Development at the Centre for Development Studies at the University of Bath.  Her primary research interest is the means through which social and cultural factors influence the economy and in particular how these factors influence the operation of markets in developing countries.

The rapid uptake of mobile money transfer in Kenya has ignited enthusiasm globally over the potential to bank poor people via the platform of mobile phone technology. On the basis of research undertaken for Financial Sector Deepening Kenya, I argue that the evidence suggests an alternative explanation which means that formal service provision for poor people needs to be thought through in a very different way.  It means going beyond the expectation that mobile technology can adequately lower transactions costs to produce a revolution in inclusion, to recognising that managing financial resources has important social dimensions.

The research examined the reasons behind use of the whole range of services and so explores how mobile money transfer fits into the financial landscape as a whole.  For years the popularity of informal financial groups in the form of ROSCAs and ASCAs has been evident.  Indeed, many of those who are banked also use these mechanisms. Mobile money transfer has now overtaken informal financial groups as the most used service.  In our survey, based in three more rural towns and chosen to cross-cut poverty levels but particularly focus on the low-income group, some 61% were registered mobile money transfer users, 51% were using informal financial groups and 36% were using banks (higher than the last FinAccess 2009 survey figures of 22%).  So how can we explain why banks lag so far behind when from an objective perspective they appear to offer a safe and secure place to save?

The reasons people give for using mobile money transfer have now gone a long way beyond the original “send money home” remittance rationale.  Mobile money seamlessly facilitates inter-personal transfers to their close and extended family and friends for school fees, investments, celebrations and funerals, “assistance” and “help”, borrowing and so on – that is, any reason that people might need to send money to each other.

These interpersonal transfers operate within social networks that involve relationships of ‘give and take’ that can operate over long periods of time and in which resource transfers may be given in one form, for example, cash and returned in other, for example, support with resources of many different kinds or social connections to a job and so on.  Hence mobile money transfer has brought a range of financial transactions that involve a reciprocal dimension.

Informal financial groups offer, first, discipline and commitment in saving through the regularity of the contribution; second, the ability to access small but useful lumps sums; and third, proximate liquidity in the event of particular emergencies or needs. The latter is achieved through the social connections groups offer which allow people to negotiate access to funds directly from the group or indirectly from other members. These groups can also be characterised as operating through a reciprocal dimension. Hence they operate with some similar characteristics to the transfers being captured by mobile money transfer:  there is reciprocity and negotiability over how funds are borrowed (or ‘saved’ with others) and returned.

Our evidence indicates that the logic behind bank account use is often related to the need to receive payments rather than make voluntary savings and this helps explain high levels of dormancy.  Access to loans from banks is limited and they can be hard to manage when they are received.  Since interest on small amounts of savings is effectively irrelevant and loans are hard to get, putting funds in the bank secures neither access to financial support nor useful social connections. That is, banks lack an attractive reciprocal dimension and there is little negotiability involved.

Hence this argument suggests that the rise of mobile money transfer is evidence of extensive informal financial behaviour which has characteristics similar those to informal financial groups.  Hence rather than suggesting that mobile money is a short cut to formal sector financial inclusion, this analysis suggests that mobile money transfer has revealed an alternative underlying logic to which the formal sector needs to respond if it is to attract savings – it must offer an acceptable reciprocal relationship.  In order to provoke discussion an alternative approach might be for banks to pursue a “credit-led savings” strategy in which they offer easily accessible small personal finance loans in order to demonstrate that they can enter into valuable relationships with their customers.

For further information click the following links for the summary and the full report.  Also, for more information, check out Dr. Johnson’s recent post at Accion’s Centre for Financial Inclusion blog.

For those of you in Washington D.C, Susan Johnson will be discussing the challenges that formal services face in the search for financial inclusion in Kenya at an event hosted by CGAP on April 25^th.

To attend this event, please register here by April 23. 

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.

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As we look globally for innovative business models and technologies, it’s a shame how little we (as two Americans) focus on our backyard in the U.S. Despite our comfort drawing similarities and lessons across markets as different as Brazil, India, and Kenya, we seem to assume that the U.S., with its technology and banking infrastructure, relative wealth, and uniquely complex regulatory context, is truly different. To test this and see what we might uncover “locally,” we attended the 6th Annual Underbanked Financial Services Forum in June to learn more about the state of the art in the domestic financial inclusion world and look for ways where global and local conversations overlap and can be integrated.

We were not disappointed. The event, terrifically organized by the Center for Financial Services Innovation (CFSI) and sponsored by the American Banker, played host to hundreds of participants representing banks, nonbank financial service providers, retailers, regulators, and other policymakers and researchers. Some of our takeaways:

• Prepaid is the talk of the town. Prepaid instruments, particularly the general purpose reloadable (GPR) card, seemed to be one of the most talked-about innovations in the domestic market. The general feeling (particularly among the various prepaid vendors in the crowd) was that prepaid has a number of characteristics that make it better for the underserved – lower cost structure, more accessible reload points, less intimidating, easier to open, and lower/more transparent fees. Certainly the recent IPOs of prepaid giants NetSpend and GreenDot help fuel excitement around these business models.
• “Mobile” may not be as exciting in the U.S. Given the strong build-out of various types of channels and infrastructure in the U.S., many were skeptical that mobile phones hold the kind of transformative potential we’ve seen realized in markets like Kenya – at least when it comes to banking the underbanked. The biggest topic within mobile is near field communications, but NFC’s potential value seems to lie more in convenience and marketing tie-ins (particularly for data collection and in connection with location-based and loyalty services) and has limited potential to deliver significant access benefits for the financially underserved. Read the rest of this page »

On June 20, 2011 the State Bank of Pakistan (SBP) introduced a new circular that significantly modifies the regulation for branchless banking in Pakistan. We talked to Mr. Mansoor Hassan Siddiqui, the Director for Banking Policy and Regulations Department at SBP about why they made these changes and the impact that they expect to see as a result.

Photo courtesy of Craig Kilfoil, ExactConsult

In March 2008, the State Bank of Pakistan introduced some of the first regulations anywhere in the world designed specifically to encourage branchless banking. The regulations allowed a number of different business models and permitted agents to deliver financial services on behalf of banks. Three years later the State Bank has significantly amended the regulations. Among the changes are:

• Rationalization of account opening process and requirements by removing the need to capture biometric fingerprint information at the time of account opening for the lowest value accounts. The requirement to capture a digital image of the account holder (which can be done at far cheaper cost with a low cost camera-phone) remains to ensure the physical presence of the customer at the time of account opening.
• Substantial increases in the transaction limits and elimination of the maximum balance, which remedies the situation that previously existed where a customer could perform more transactions “Over-the-Counter” than they could through their own account. Bill payments are no longer included in the transaction limits.
• Introduction of a new “Level 0″ account with the lowest transaction limits which can be opened electronically with no physical paperwork required.

We asked Mr. Mansoor Siddiqui, the recently appointed Director for Banking Policy & Regulations Department at SBP, about the reasons for introducing these modifications and their expectations for what this will mean in terms of the take-up of branchless banking in Pakistan.

1. Why did the State Bank of Pakistan think that the branchless banking regulations that were only introduced in 2008 needed to be updated?

Well, as we are all aware, branchless banking is rapidly evolving as a major arena for financial inclusion and the regulators around the world have to keep abreast of the fast paced changes in this area. After issuance of initial branchless banking regulations in 2008, we have been constantly encouraging the banks to enter into this business field. At the same time, we have also been monitoring the progress of branchless banking service providers by getting regular market feedback. This two pronged approach helped us in developing an insight of the problems that the customers faced while opening and running the branchless banking accounts. These obstacles to some extent were limiting the quick take-up of branchless banking in the country. Despite a couple of successful branchless banking deployments with significant agent/merchant networks, we were witnessing very slow take-up of financial services. The total number of branchless banking accounts was only about half a million. Given the widespread financial exclusion and very low visible success of branchless banking deployments, SBP considered it necessary to review of the branchless banking regulations in line with the industry’s feedback and international best practices. Therefore the updated branchless banking regulations have been issued to tackle the bottle necks in the take-up of branchless banking through accelerated account opening and ease of operations of these accounts.

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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. You can see all our postings here for Brazil, Mexico, India, Pakistan and Ghana. Today we continue with our analysis of South Africa and share this summary note on the branchless banking industry.

South Africa has often been used as a case study by those with an interest in financial inclusion. The country has an advanced banking infrastructure with nearly 10,000 ATMs and over 100,000 POS devices deployed. The Government has for a long time been committed to expanding access to financial services to the bottom of the pyramid and around 63% of South African adults now have a bank account, higher than the other countries featured in this series. They have employed a number of policy levers that have helped to achieve this:

• The “Mzansi account” – a basic entry-level bank account which has attracted 6 million customers – was launched in October 2004 by the four largest banks as well as the state owned Post Bank as part of a compact between government and the private sector. Recent evidence, however, suggests that a large number of these accounts are dormant and banks complain that the accounts are not profitable. Policy makers and banks are now looking for other approaches to advance the access frontier. 
• Government payments of R88 billion (USD 11 billion) are made to 14 million individuals – approximately one-quarter of all South African adults every year. Recipients can choose to be paid into a bank account which is the mechanism that has been chosen by one-third of recipients. This has been one of the primary drivers of uptake of banking services, but there is still un-tapped potential to offer financial services to beneficiaries. 
• The government has also made efforts to promote an enabling environment for innovation. A proportionate approach to KYC procedures for account opening has been introduced by removing the requirement for customers to give proof of address when opening low value accounts and non face-to-face account opening is permitted. The regulatory framework also allows for the use of agents to provide banking services beyond the branch network.  

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This is the third posting in a mini-series in which we present new evidence from three countries on whether branchless banking is reaching poor people. This post looks at Orange Money in Mali. Previous posts looked at India and Pakistan.

Orange Money agent in Timbuktu, Mali

This is the final survey in the recent round of research conducted by Coffey International Development. 813 branchless banking customers of Orange Money in Mali were interviewed at 13 agent locations in and around Bamako. Due to logistical difficulties in reaching some of the more remote areas, some of the interviews in this case were conducted over the phone.  As with the other surveys in Pakistan and India customers were asked about the use of the service and also about their household living conditions to enable an estimation to be made of their likely income levels.

Below are the main results from Orange Money customers:

• Around two-fifths (41%) of active branchless banking customers in Mali are poor (defined as living on less than US $2.50 per day). Only 6% of customers were living on less than $1.25 per day.
• 62% of Orange Money customers were already using some other form of financial services. 40% had a bank account and 34% were customers of a microfinance institution. Just below a third also used the services of informal money lenders. 28% had not previously used any alternative source of finance.
• More than three quarters of users felt the service has a positive impact on their lives and two thirds of users ranked the service to be very effective.
• After depositing money, the most common transaction type in Mali was purchasing airtime which was used by 62% of respondents.

When we compare across all three services we see a surprising level of consistency around the characteristics of the customers they serve (see table).

In each of the three cases we find over two-fifths of customers living on less than US $2.5 per day. The figure for India may be considerably higher than this and Eko is the only service that is reaching significant numbers of customers living on less than $1.25/day. In all three services around two-fifths of customers lacked access to any formal financial services and over half did not have a bank account.

These studies when taken together do not give statistically significant evidence that branchless banking  is reaching poor people across the world since the sample size is only three, but they may give us the most helpful indication yet.

- Chris Bold

As part of our efforts to promote branchless banking as a way of reducing the cost and expanding the reach of financial services, the Technology Program monitors the uptake of branchless banking around the world. We have recently completed a mapping exercise to estimate the size of the current global market for branchless banking by analyzing all services in Low and Middle Income Countries (as classified by the World Bank) that were live at the end of 2010.

Before we get to the numbers, let me start with a caveat: some of the numbers in this post have large margins of error. Our aim in this exercise was not to get an exact figure for the number of people in the world that use branchless banking, but a sense of the order of magnitude and more importantly the speed at which the market is growing and the regional variations in this trend.

So with that health warning – here are some of the headline figures.

At the end of 2010 our best estimate was that there were 238 million customers registered for branchless banking services, of which we estimate that approximately 185 million were active users. Interestingly, however, only 45 million used the services for saving.

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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. We have presented our learning from Brazil and Mexico over the last few weeks. Today we offer a snapshot of the conditions for branchless banking in India drawn from a summary note of the Indian scene completed at the end of 2010.

POS machine used by FINO agents

India has embarked on far-reaching financial inclusion initiatives by opening up regulations to allow the use of agents (called Business Correspondents in India) since 2006. India is also building new public infrastructure which could inject a further boost. Will these conditions deliver a lasting increase in financial inclusion?

The government is making visionary investments in public infrastructure.

Allowing the use of banking agents is common today, yet India has moved even further ahead beginning to build 3 pieces of public infrastructure that could substantially accelerate financial inclusion:

1. A mobile payments switch: To take full advantage of the banking network across India, public-private collaboration has built the Inter-bank Mobile Payment Service (IMPS). This new switch allows mobile phone-initiated transactions to pass from the bank account in one bank to an account at another bank. If fully leveraged across the banking network, it would counteract some of the barriers posed by India’s size and regionally fractured banking presence.
2. Unique identification: The Unique Identification Authority of India has begun to roll out registration of the unique identification number with matching biometrics. As this becomes more widely available, it could ease KYC processes and reduce the friction of mass branchless banking operations.
3. Shifting government subsidies to electronic payment systems: The 2012 budget announced a plan to shift some public subsidies (such as $12.5 billion in fertilizer annually) to a system where payments will be delivered directly into the beneficiaries’ accounts. This change would funnel large payments volumes through branchless banking and, among other benefits, bring clients into a deeper banking relationship. This recent policy shift adds to ongoing state efforts to transfer National Rural Employment Guarantee Act wage payments electronically.

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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. We start here by presenting our learnings from Brazil and share our summary note on the industry. We will continue in the coming weeks to look at several other markets, including Mexico, India and Pakistan.

Financial inclusion in Brazil needs to now turn urban (Photo Credit: André Mantelli)

The job of financial inclusion in Brazil is arguably done. Brazil’s banks have made it a global leader in branchless banking. The underlying retail payment infrastructure is in place. There are agent locations in almost every municipality. New agent management companies from around the world regularly visit more than 30 of their counterparts in Brazil to understand how the business works. And Brazil’s Bolsa Familia program, already successful in moving beyond G2P payments to credit and savings, is considered a global flagship.

And yet, financial inclusion in Brazil still has a long way to go. CGAP has studied the branchless banking market in Brazil over the past few months and has written a country note available here. In this blog series, we discuss some of the challenges identified in that note. We start the series here on the CGAP Technology Blog, but we will continue the conversation on a joint blog to be developed by Center for Microfinance Studies at FGV (Fundação Getulio Vargas).

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This is the third post in our series on G2P, branchless banking and financial inclusion. Our first post on Pakistan can be found here and our second post on the Philippines can be found here.

In this post, our guest bloggers discuss the Government of Colombia’s efforts to use Conditional Cash Transfer (CCT) programs as a gateway to financial inclusion. Beatriz Marulanda is the CEO of Marulanda Consultores. She headed the team that advised the Colombian Government in the design and implementation of Colombia’s financial inclusion policy, Banca de las Oportunidades. She was also part of the team that helped in the design of the payments strategy for Familias en Acción through deposits into savings accounts. Mariana Paredes is an independent consultant with Marulanda Consultores. She worked on the design and implementation of Banca de las Oportunidades and also worked on the design of the savings pilot with Familias en Acción.

Familias en Acción is a CCT program administered by Acción Social in Colombia providing cash transfers to poor households on the condition that their children attend school and follow preventive health care measures. The program was launched in 2000 focused exclusively in rural areas, and by 2002 it had reached 300,000 families in 627 municipalities with less than 100,000 inhabitants. By 2005 the program had expanded to even smaller rural municipalities that did not have bank branches, making the payment of benefits a real challenge.

After the program’s first impact evaluation, the government decided to aggressively expand Familias en Acción to cover all 1,100 municipalities in the country, thus becoming an integral part of the government’s RED UNIDOS strategy to fight poverty. By 2009, 2.2 million families were being paid an average of USD 90 every two months.

The initial payment system was based on cash transfers paid at the branches of the public bank, Banco Agrario. This meant that many mothers had to walk for hours to reach the closest municipality with a bank branch to claim their payments. In response to this challenge, Banco Agrario began to use a strategy of “extended cashiers” that would transport cash in helicopters to recipients in rural municipalities on payment days. Even in the cities, bank payments were a challenge because the demand for liquidity on payment days surpassed most branches’ capacity.

Familias en Acción knew that it needed a more innovative payment system. In 2007, they introduced prepaid cards. 450,000 beneficiaries in seven cities were able to withdraw their payments at the ATM network of a private bank. Even this proved challenging at first…the bank’s ATM network collapsed the day after the first payments were made available because the network had breached its maximum transaction level. By 2008, Familias en Acción had a mixed payment structure as shown below.

Source: Prepared on the basis of information of Acción Social

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