Archive for: Value Chains

This is a guest blog by Salah Goss, Associate Program Officer in the Financial Services for the Poor program and Ignacio Mas, Deputy Director in the Financial Services for the Poor program at the Bill & Melinda Gates Foundation.

New technology-enabled models for financial inclusion seek to take transactions outside of bank branches and into retail shops that exist in every community where poor people live and work. Constructing the necessary transactional infrastructures and service propositions requires bringing a broad set of assets and skills, which are likely to emerge from partnerships between various kinds of players.

But who will play orchestrator of such schemes? While much of the debate has so far focused on banks versus telcos, there is in fact a broader cast of characters angling to get in there. Here we evaluate the opportunities for some categories of ‘third party’ players who may someday become principals.

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What can we learn from recent acquisitions of banks by mobile network operators? Over the last year we have seen a number of mobile network operators (MNOs) buying stakes in banks or looking to acquire their own banking licenses. Are these isolated incidents or does this point to an industry trend?

On November 21, 2008 Telenor Pakistan entered into an agreement to acquire 51% of the shares in Tameer Microfinance Bank. A year later, in October 2009, Globe Telecom received permission from the Central Bank of the Philippines to acquire a 40% stake in Pilipinas Savings Bank with their parent company taking a further 20% stake. And, most recently, China Mobile confirmed earlier this month that they are in talks to buy a stake in Shanghai Pudong Development Bank in an explicit strategy to enter the m-payments market.

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In 1968, a film titled “Planet of the Apes” captured the dystopian mood of the time by vividly telling the story of an astronaut who gets lost in space for many years, and eventually crashes on a strange world where apes, not men, are at the top of the food chain. The main plot twist comes when the astronaut finds the buried head of the Statue of Liberty, and realizes he is not on another planet, but rather, is on a post-nuclear-holocaust planet Earth – many years in the future. Everything mankind took for granted is gone. Humans are relegated to a life of servitude, subordinate to the super smart race of apes that has come to rule the planet.

This week at the Mobile World Congress has felt a bit like a live-action version of “Planet of the Apes,” with a few differences. Instead of apes, we have apps. The species rising to power goes by the ticker symbols of GOOG (Google), YHOO (Yahoo!), APPL (Apple), though some telecom wags seem to think these are simply four letter words.

On Planet of the Apps, the species running in fear are the mobile network operators.

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This week we’re blogging from Barcelona, site of the Mobile World Congress. Today is the second full day of focus on mobile money, where the GSMA’s Mobile Money for the Unbanked working group convenes market players to compare notes. CGAP Microfinance Specialist Mark Pickens is presenting the latest work we’ve been doing on agents.

• Download the presentation comparing agents in Brazil and Kenya

Industry actors say their biggest unknown is how to build a viable network of branchless banking agents. Over the next 3 months, CGAP’s Technology Program will analyze agents in 3 reference countries (Brazil, India and Kenya). Because this area is so new, we will be out in the field ourselves talking to agents, network managers and banks.

We’ve already begun in Brazil, where CGAP is partnering with The Center for Microfinance Studies at FGV (Fundação Getulio Vargas), the leading Brazilian business school. Planet Finance Brazil is also a partner in the field research. Data was gathered on 295 agents, 49 of which were interviewed in-person. Read more about this collaboration.

-Mark Pickens

Next: A round-up of mobile banking developments from the Mobile World Congress.

It’s been an interesting week in Kenya, with several high profile announcements between banks and mobile operators:

• The second largest mobile money service — Zap — tied up with Housing Finance bank.
• Safaricom and Equity Bank announced a tie-up which enables M-PESA’s 8.5 million users to withdraw funds at Equity’s 550 ATMs (the largest ATM network in the country), which may help relieve some problems of agents not having cash.
• Equity made a tie-up in Dec. with Essar, who bought the 4th mobile license in Kenya last year and recently launched the 3rd mobile banking service in the country. Equity’s branches will serve as agents for its service YU. However, this is all one way to withdraw from a mobile wallet at a bank’s ATMs. Bank customers can’t yet go to an agent and withdraw money from their bank account. But that’s coming soon….

It’s not just banks and telecom firms in the headlines. This week, the Central Bank of Kenya plans to distribute for comment draft regulations which will finally enable banks to use agents (about 3 years since Safaricom started using agents for its M-PESA service).

-Mark Pickens

I confess guilt. As a lawyer seeking easy solutions to the often thorny questions of how to regulate branchless banking, I was seduced by the argument that if service providers are simply held strictly liable for the actions of their “agents”, then regulators should freely allow the use of such agents.  It was elegantly simple. Perhaps too simple.

As it becomes increasingly clear that the largest obstacle to the success of branchless banking is the lack of a viable business model that provides financial incentives to all parties in the value chain (including the agents), regulators need to pay increasing attention to how to allocate risks and liabilities in way that promotes viable business models. All too often, all the burden of liability is placed on service providers – the banks and the MNOs – perceived as powerful and bottomless pits of money when compared against the poor, unbanked target customer or the small retail agent.

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In 2009, CGAP teamed up with the GSM Association (GSMA) and McKinsey to measure the global market for financial services delivered via mobile phones (mobile money) in 147 developing countries. This is the first study of mobile money and the unbanked—those without access to formal financial services—estimated to be almost 4 billion worldwide.

The Philippines provides a window onto the complex financial lives of low-income families. Three out of four Filipinos are unbanked (Demirgüç-Kunt, Beck, and Honohan 2008). The country hosts two of the earliest pioneers in mobile money—Smart’s Smart Money launched in 2001 and Globe’s GCASH launched in 2004. CGAP, GSMA, and McKinsey gathered data on 1,042 unbanked consumers in the Philippines, split between mobile money users and nonusers.

Download Window on the Unbanked: Mobile Money in the Philippines

Members of CGAP’s Mobile Banking and Microfinance Group can also request an in-depth toolkit with which they may replicate this analysis in their own market(s).

-Jim Rosenberg

George Conard is the Executive Director, Technology for Microfinance, at Grameen Foundation. The Foundation’s Mifos Initiative delivers open source technology and business services for microfinance institutions worldwide.

Back-office management information systems (MIS) are a critical enabler of the growth and effectiveness of microfinance. To realize the full value of the technology, however, MFIs must look beyond the software and consider human and business process factors. Further, the value of the technology investment will be multiplied dramatically as the core MIS is integrated into other internal and external technology systems.

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As you review the businesses I briefly described in yesterday’s post, you may want to keep the following in mind.

First, in every case, there is always a bank in the picture – holding funds, issuing e-money, issuing an account – and the bank’s role itself and what the bank charges for its services is an interesting aspect of the business model.

Second, because we are talking about businesses that serve people who live largely in a cash economy, distribution networks are extremely critical. Charging customers to convert cash to electronic and vice-versa is part of the revenue pie.

Third, mobile network operators are uniquely positioned in this business. For example, let’s take a MNO as a money service provider. If (1) the MNO runes that business as a stand-alone P&L (and not another telecom product) and (2) they can make use of their existing distribution, then they are likely to see mostly variable costs. As illustrated in the chart, in a typical mobile money business, MNOs may incur marketing and agent/distribution commission costs with heavy spend upfront on marketing and increasing on agent commissions as their distribution network grows.

Third, regulation and what the regulator will permit set up incentives for what kinds of partnerships businesses strike, if any.  Philippines, India and Kenya are countries where the impact of regulation on business models is quite explicit.

Yesterday I listed five  business arrangements. There is a sixth business worth mentioning. You don’t see much of it and, frankly, it is not entirely a new business to begin with: a bank pursuing an agent+mobile channel as an alternate to branches. While not an entirely new business model, we know that this “mobile+agent” model presents a unique set of challenges for banks. It is not business-as-usual for them. It is not only fee-based transaction products, but the service is being delivered at scale to people transacting at low values. It is no surprise that we see banks and microfinance providers having limited success with this channel. Basix’s bank in India has set-up a distribution network and they have been successful in servicing loans through that channel. Tameer Microfinance Bank had modest success with agents in the slum of Orangi in Karachi but that channel has now been scaled-up in their tie-up with Telenor.

What functions are involved in the ASP or SaaS model for microfinance IS/CBS?

We are looking into the different pieces of the value chain for delivering information and core banking systems through an application service provider (ASP) OR software as a service (SaaS) model. These functions may be performed by a microfinance institution (MFI), a national or regional microfinance association (MFI-A), a local IT service provider (ITSP), the ASP or SaaS vendor (Vendor), or another, new party.

ASP or SaaS models would seem particularly likely to fall short of customer expectations when it comes to support functions. One reason that MFIs are so dissatisfied with existing microfinance software vendors is that they provide poor quality support after the sale – and in particular that most of these vendors do not have local support providers in the countries in which their MFI customers operate. For example, a vendor from Ecuador may have customers in Peru but no on-the-ground support staff in that country.

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