Mobile Banking

CGAP finds market conditions mean benefits for poor still several years away

A new report from the global microfinance body CGAP predicts that, with the right market conditions, mobile banking could reach large numbers of poor people who are outside the formal financial system. The Early Experience with Branchless Banking calls for the development of interoperable payments platforms, practical and risk-based approaches to regulation, as well as shared networks of cash-handling agents. There is also a need for product development that overcomes the lack of human interaction and reliability concerns that may hinder customer adoption today.

“Market forces are driving down costs. In the Philippines, we see that a transaction on a cell phone or at an ATM costs one fifth that of a traditional visit to a bank branch,” said Gautam Ivatury, manager of CGAP’s Technology Program and co-author of the report. “Yet globally, we estimate that fewer than one in ten mobile phone banking customers are poor, new to banking, or doing anything more than payments and transfers.”

Payments and funds transfers dominate mobile financial services for many reasons, the report finds. Mobile operators in particular prefer to market payments services as this is more aligned with traditional revenue models. These services are also less likely to cause operators to run afoul of banking regulation.

“When it comes to reaching poor people who live outside the formal financial sector, the reality of mobile phone banking doesn’t match the potential, much less the hype, at least not yet, said Ignacio Mas, CGAP advisor and co-author of the report. ”We see opportunities for service providers who move quickly to create new products, especially if they can establish shared networks of cash-handling agents to cover that ‘last mile’ of service delivery.”

The report finds that challenges to the growth of branchless banking include a reluctance on the part of banks to get involved, as well as outdated or inadequate regulations. This is true despite the benefits of branchless banking: convenience, better security, and lower costs for customers. In cases where market conditions are not driving broader banking services such as credit and savings, there may be a role to play for policymakers and those who advocate for increased financial access.

The Early Experience with Branchless Banking will be presented at the GSMA Mobile Money Summit in Cairo on May 14.

share this:

Much has been written about how innovations go from being extraordinary and untested to becoming commonplace (Everett Rogers, Diffusion of Innovations, 2003). How can we apply the thinking that “innovation diffusion” research has come up with to mobile banking?

First, let’s identify what the innovations are in mobile banking. For someone who has a mobile phone, but doesn’t have any bank account, I would see three:

• a new concept of value – electronic, not cash or in kind
• a new financial provider – not manual exchange or through hawala or through bus driver or friends/family, but unknown / untrusted organization or some bank
• a new use of device – use existing device for new purpose (idea that phone can be used for finance is a new idea)

Read the rest of this page »

share this:

The New York Times recently highlighted the work of Jan Chipchase, a Nokia researcher trying to understand how the poor use mobile phones. The article includes a report that Ugandans are using prepaid airtime as an informal money transfer mechanism, particularly to get value back to family in rural areas.

“Ugandans are using prepaid airtime as a way of transferring money from place to place, something that’s especially important to those who do not use banks. Someone working in Kampala, for instance, who wishes to send the equivalent of $5 back to his mother in a village will buy a $5 prepaid airtime card, but rather than entering the code into his own phone, he will call the village phone operator (“phone ladies” often run their businesses from small kiosks) and read the code to her. She then uses the airtime for her phone and completes the transaction by giving the man’s mother the money, minus a small commission.”

We’ve seen this in many countries, such as DRC (several reports on this as far back as 2005) and more recently stories of overseas Kenyans using airtime to send value home to family members in need during the post-election turmoil.

While undeniably innovative, it also shows how sub-par other money transfer options are which the poor have available to them. Prepaid airtime as a currency substitute is quite costly in percentage terms, due to VAT (while a prepaid scratchcard is bought at fave value, VAT represents a hidden increase to the cost of minutes), operator’s discount (again, built into the cost of airtime), and a commission for whoever turns it back into cash (in the Uganda example).  We estimate the all-in cost from the Uganda example at at least 25% of the value sent. That’s quite high, and not all that far off from the high fees Western Union has been lambasted for charging with small value transfers.

Still, other options could be even more costly, especially if risk-adjusted, e.g. to account for the possibility of money lost when sending money with people. And other means also come with the hard-to-quantify but very real “worry factor” of waiting days or even weeks to know if the money arrived.

share this:

For providers and regulators alike, the idea of mobile banking is inseparable from the question of mobile security. When stories like this pop up – about dozens of mobile banking clients defrauded in South Africa earlier this year – it raises warning flags for some. But are questions about mobile security really new questions, and does it provide cause to pause in pursuing mobile banking?

A new study from Bankable Frontiers digs deep into the issues. Some issues are very familiar: the use of outsourced IT providers, customers protecting their PIN numbers. Several are newish, but really permutations of issues with any electronic banking channel: the reliability and end-to-end security of communication networks carrying sensitive data.

These factors do not make most mobile banking channels more or less risky than other forms of e-banking. In fact, the range of m-banking technologies already available includes some with the highest degree of security possible. But automatically requiring the most technically secure platform carries substantial tradeoffs, not least of all that high-end technologies are substantially less likely to be suitable for low-income clients.

Read the rest of this page »

share this:

State Bank of Pakistan has cleared the way for banks to use agents to handle cash, and outlined a risk-based approach to customer due diligence to enable banks to extend their reach to lower-income clients. The regulations also come with detailed guidance on minimum standards for data and network security, customer protection, and risk management procedures.

But only for banks… This shouldn’t be a surprise. SBP’s policy paper on branchless banking (last year) was clear on this point: a nonbank model “may be allowed at a later stage after we have sufficient experience in mitigating agent related risks using bank led model and need to think about mitigating only e-money related risks.” So for now, mobile phone companies are still waiting for the door to be opened to them as well, test the waters without clear permission and detailed guidance, or find a JV with a bank. For those with deep pockets, buying a bank outright might be an option, too.

share this:

Stefan Staschen works with CGAP’s technology and policy teams.  

Kenya’s banking law and regulations look all too familiar: if an institution accepts deposits and uses this money for lending or investment, it needs to have a bank licence. And banks can only transact through their head office or branches. Full stop. But the Central Bank of Kenya has realized that operating through full-fledged branches, which are subject to detailed regulatory requirements, is a very expensive proposition. If the huge gap of banking services in remote and rural areas is ever to be closed, alternative delivery models will be required. Branchless banking models such as mobile phone banking (pioneered in Kenya by M-Pesa, which is run by a mobile network operator and not a bank) and the use of retail agents will be low-cost alternatives allowing for increased rural penetration. The Central Bank Governor, Prof Njuguna Ndung’u, has now pledged to institute necessary regulatory changes allowing banks to offer financial services outside bank branches.

share this:

Mobile banking, access to finance, and the attendant challenges and opportunities are all on the agenda at the Mobile Money Summit, which takes place May 14 – 15 in Cairo. This is an opportunity to hear from innovators, meet new partners, and engage with leaders from finance, telecom and the development community. CGAP is proud to co-organize this event with DFID, IFC, and the GSM Association, which represents more than 700 mobile network operators.

Read the rest of this page »

share this:

Mobile operators find navigating financial regulation isn’t quite so easy as sailing through the telco world.

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

No operator better illustrates this than Vodafone and its M-PESA money transfer service. Read the rest of this page »

share this:

New Report from Aite Group Considers Mobile Banking Models from Africa for the United States
Uganda: Barclays Starts Mobile Banking
Alternative Data and Its Use in Credit Scoring
Right Regulation Will Help Mobile Financial Services
Over 2 Trillion Text Messages Will Be Sent Worldwide and This Number Continues To Grow

share this:

RBI Executive Director R B Barman said this week that a central bank committee is examining the regulatory challenges raised by mobile banking. The committee is expected to report recommendations next month, leading next to RBI drafting the requisite changes to the country’s regulatory framework.

The report is the latest or progressively more encouraging signs from RBI that it plans to provide additional guidance for mobile banking to take off. In its Financial Sector Technology Vision document, released in October, RBI indicated it sees high potential for electronic banking to increase efficiency in retail banking. But RBI is also concerned about mobile security, particularly authenticating users accessing bank accounts remotely.

RBI is also closely watching several pilot schemes using mobile connectivity to improve access to financial services among low-income Indians. As the Economist reported earlier this month, one program in Andhra Pradesh is testing how to deliver pensions and unemployment benefits to around half a million people in villages, via specially-equipped mobile phones in the hands of local payment agents and smart cards issued to recipients. A parallel POS-based system is also being tested. So far, 40,000 cards have been issued.

What’s not yet clear is whether RBI guidance on mobile phone banking will be mostly concerned with mainstream banks providing mobile as an additional channel for current customers, or whether RBI will extend permission to some more far-reaching initiatives. Will mobile operators get a window to become licensed to provide electronic wallets for international remittances, bill payments and other payment services?

The G2P pilot in Andhra Pradesh also makes extensive use of local payment agents, and we understand at least some of these to be local merchants. In rural areas, its often the local store owner who has enough liquidity to pay out cash on the government’s behalf. But so far, RBI regulation on outsourcing doesn’t provide clear permission for banks, microfinance institutions or mobile operators to follow suit and use local merchants to extend banking services in places where bank branches may otherwise be too expensive to build. Will RBI make regulatory changes on issues like this, too?

share this: