Archive for: Telecom

This is the fifth and final post in our series on remittances and branchless banking.  You can read the first four posts here.  So far, we have highlighted the emerging success factors and challenges featured in our 2012 landscaping exercise.  Paolo Baltao from Globe’s GCASH shared with us the lessons learned over a period of eight years during which time he led one of the first services to link remittances to a mobile wallet.   Subsequently, Stefan Staschen explored the untapped opportunities in leveraging the large flows of remittances between Russia and Tajikistan by linking them to other financial products.  This week, we revisit the study conducted by CGAP and Dalberg Global Development Advisors, by focusing on the role of bigger players such as Western Union and BICS Homesend in consolidating existing corridors and accelerating further adoption. 

Since we started this series, new remittance data from several countries has been released by the World Bank. This newly available dataset reveals that officially recorded remittance flows to developing countries reached $372 billion in 2011, an increase of 12.1 percent over 2010. This is higher than our earlier estimate of $351 billion. While there is clearly some market potential there, so far we have seen that uptake for mobile enabled remittances services has been anaemic to say the least.

Source: CGAP & Dalberg Global Development Advisors

As our understanding of the factors that lead to customer adoption of branchless banking expands, there is a growing consensus that for international remittances services to reach a significant level of scale, they will require an existing mobile money ecosystem that allows for downstream transactions which give users access to a wider array of cost-effective services and products such as payments and access to savings.  This will provide not only value-added for consumers but also the much needed transaction revenue for providers.  It is evident that these recalibrated strategies will no longer place remittances as the core driver for adoption, but factor them in as one of the many financial services which can be provided to a customer once a branchless banking ecosystem has reached a certain level of maturity and depth.

One thing is certain: although some new innovative models have emerged, traditional remittance providers or MTOs like Western Union still have a huge advantage through the benefits they offer to partners. These include fast access to a broad range of sending countries as well as significant brand recognition and regulatory compliance, though often at the expense of their partner’s pricing power (an expense which could end up being passed on to consumers, ultimately reducing the demand for these types of services).   Nevertheless, Western Union has already launched mobile money transfer services in nine countries: Bangladesh, Burkina Faso, Canada, Kenya, Madagascar, Malaysia, the Philippines, Tanzania and the U.S, and in the last couple of months, has announced strategic alliances with MTN Uganda, Roshan in Afghanistan and Tigo in Paraguay.  This move will allow senders to remit funds directly into the recipient’s mobile wallets from any of Western Union’s agent locations around the world.  It is evident that MNOs remain optimistic about deploying international remittances through mobile money, yet they are increasingly aware that the full benefits will only be realized in the long-term.  As mobile money ecosystems become more mature in these markets, these flows could play a pivotal role in consolidating corridors and accelerating adoption.

Alternately, hub providers such as BICS Homesend are now making it possible to integrate mobile wallets or money transfer systems of two different providers. Besides facilitating services that are mobile centric from sender to receiver, HomeSend can provide access to other service providers, such as MTOs and banks which can offer technical solutions to streamline domestic interoperability between systems and competing regulatory frameworks. Given their structure, Homesend is a cheaper alternative to giants such as Western Union and can provide a more flexible partnership without having to cede too much control from the side of the operator or bank.  However, they don’t have the same instant global reach and given their lack of direct interface with mobile wallet users, they are completely reliant on their partners to market and push transactions which make the issue of consumer education even more critical.

Nevertheless, operators seem to remain optimistic over the long-term opportunity to deploy international remittances through mobile money, and hope it will eventually contribute to the economic viability of their deployments through the added revenue opportunities for them and their agent networks.  It remains to be seen how these remittance flows are actually tied to specific financial products and services.  Only then will the real impact of mobile-enabled remittances on the unbanked be uncovered.

- Camilo Tellez

Pablo García Arabéhéty is an independent consultant who focuses on business model innovation in the mobile and environmental industries.  He has previously worked at the Organization of American States and the Innovation Lab at the Inter-American Development Bank.

Last December, Starbucks announced that during 2011 it processed 26 million transactions in the US through its mobile payment application. While this news was anecdotal for traditional financial service providers such as banks and credit card companies, it showed mobile network operators (MNOs) the speed with which they can be left out of the business. Their only income in this case was the data traffic generated to complete the transactions.  It is not news that the Average Revenue per User (ARPU) continues to decrease and mobile financial services are a great opportunity to reverse this trend. In mature markets such as Western Europe, the decline in ARPU has already led to a reduction of revenue. In Latin America the continued expansion of the subscriber base still enables revenue growth, but this trend will not last forever.

Source: Strategy Analytics 2012

I recently met with Tom Elliot from Strategy Analytics, a Boston-based consulting firm to discuss these issues.  Tom stressed that nowadays it is hard to find an MNO that is not developing some kind of financial service, but that nonetheless the business model is still uncertain, and what works in certain contexts is hard to replicate successfully in other markets.  Strategy Analytics’ forecasts for 2016 (see charts) do not show many signs of innovation in the industry. Their outlook is rather an inertial one where the aggregate income of the industry will flatten or decrease according to the region. These figures are more or less within the consensus of the mobile industry consulting world.  However, the promise of financial service provision is enticing for MNOs when properly implemented. M-Pesa, Safaricom’s mobile money service in Kenya, contributes 17% of total ARPU, which represents 53% of non-voice ARPU. While Kenya has its own particular market characteristics, we can use this as a best case indicator of the potential of mobile financial services. A 17% increase in ARPU in 2016 in the case of Western Europe, for example, would push income levels above those of 2007.[1]

The threat to this promise is the model à la Starbucks, where MNOs become dumb pipes. The model for obtaining significant revenues must be one in which the carriers are efficient players of the ecosystem, beyond the mere provision of connectivity to mobile phones.  Consequently, the construction of a model that avoids treating carriers as dumb pipes in the developing world requires important definitions of the core variables of the ecosystem. Depending on the definitions of these variables, very different business models can be shaped: from a scheduled savings product for house improvement targeting the unbanked, to the Starbucks model mentioned above. In each of these models, the players of the ecosystem have different roles: banks, MNOs, retailers, credit cards, etc.   In Latin America, at the time of shaping this ecosystem of mobile financial services, carriers have decided to split the risk and the investments by partnering with banks, credit card companies or both. The two most significant initiatives in the region are Wanda, a joint venture between Telefónica and Mastercard and Transfer, another JV between America Móvil and Citibank, which officially launched in Mexico this past month.

Source: Strategy Analytics 2012

The uncertain viability of the different business models explains much of the reasoning behind this decision. However, these partnerships have direct implications when defining the basic variables mentioned above, which need to be negotiated and agreed with the partners.  Banks for example, can be very good partners for cash management and identification of customers, but not so effective for other tasks. A report published this year by the World Bank, puts Latin American banks among the most expensive in the world. Expensive partners might be reluctant to embark in low margin/high volume business models. Experience shows that banks have yet to reach out with a value proposition to the 50% or 60% of unbanked households in Latin America.  On the other hand, credit card companies can be great allies for mobile payments and short-term loans, but their record in offering other financial products such as savings products is lean.

There is still little evidence in LAC to establish the conditions under which these associations can be functional to the carriers’ need to supplement their declining ARPU.  But already some points are clear. Carriers are those with the most to gain (and to lose) in this bet on mobile financial services. Their partners do not have as much at stake. Some results that would be catastrophic for MNOs, such as the Starbucks model, would leave their partners relatively well positioned.  In an industry with the current volumes exhibited in Latin America, there is ample space for a wide array of players to explore the business opportunity to provide mobile financial services for the base of the pyramid, which will hopefully result in a more tailored provision of services to those who most need it.

 

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[1] Strategy Analytics 2012

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