Archive for: Business Case

Mobile operators have notched some high profile successes in offering financial services to the poor. Think M-PESA in Kenya or GCash and Smart Money in the Philippines. They’ve have logged several million users for their mobile money transfer services which appear cheaper and more convenient than traditional banking products.

Will banks respond by emulating their new competitors from the mobile world? Banks have an appetite for offering multiple products to their clients, so it would be a boon to the poor if banks wanted to ramp up their offerings via new electronic channels. But the emerging picture is not always rosy.

Many banks see mobile as merely a threat, according to IFC’s Andi Dervishi, who leads investments in alternative-payments systems for the IFC. “Banks remain conservative. They don’t see this as a big opportunity. They are taking a more defensive position, rather than offensive, and not really going after the customer. Their business model needs to be changed.” Countries like India, China, Brazil and Russia now have more mobile phones than ATMs, giving rise to the notion that mobile will support the next wave of innovation in banking in emerging markets where low-revenue customers means banks need to find low-cost channels. But instead of jumping to explore, most banks are playing defense.

Read the rest of this page »

This is an excerpt from a recent CGAP paper, The Early Experience with Branchless Banking. The paper synthesizes the observations and research of the CGAP Technology Program. Gautam Ivatury and Ignacio Mas wrote the paper, with substantial input from the entire program team. This blog series will cover seven observations, four uncertainties and four predictions for branchless banking - what we call mobile banking and other technology-enabled banking solutions.

Early movers with a disruptive business model can afford to be picky about the segments they address. Emboldened by a dramatic cost advantage over established players, they are able to focus on the most attractive customer segments. As long as these constitute a sufficiently large pool of people to meet their growth aspirations, they have little incentive to expand into others. They will concentrate on building defensive barriers through scale (growing quickly) and depth of retail network, rather than on expanding into new segments and service offerings. Thus it is, as explained above, that early branchless banking projects have not addressed the currently unserved population.

However, the benefits of the cost advantage will be eroded overtime as their own success induces new entrants or the adaptation of existing players to the new cost structure. With greater competition, the focus of new entrants will be on expanding the market so as to avoid head-to-head competition for market share with early movers who will have secured a strong position through scale. Hence, we can expect targeting of currently unserved customers to come not with the innovation but with the competition phase of branchless banking.

One should not underestimate the market-transforming potential of solutions that cut the cost of service provision at least 50 percent or so. What is less clear is how long it will take for the competitive dynamics to play out for the benefit of currently underserved populations.

They both re-engineer something used for decades in rich countries , rethinking every assumption to make it affordable for low-income clients. And both may be safer than the alternatives poor people are already using.

Tata announced the Nano last week as an ultra simple but stylish car costing US$2500, closer to affordable for Indian families than any other new car. To slash prices, Tata engineers questioned everything conventional wisdom said is a “must have”: why not one large windshield wiper instead of two? Why does the beam connecting the wheel to the axle need to be made of solid steel? Today’s steel is far stronger than what Henry Ford started with, but no one had changed it yet. Less steel equals saved expense, and a lower cost in the quest for something rabidly cost-conscious consumers will buy in emerging markets like India.

But critics are bashing the Nano already for not getting close to meeting environmental and car safety standards like those in Europe, Japan and North America. Isn’t the Nano safer than the typical sight of an Indian family of 6 on one motorcycle, dodging trucks in traffic?

The lesson might be instructive for those watching the mobile banking space. Would mobile banking, through a licensed bank or reputable mobile carrier, be safer than the informal mechanisms poor people use now: stuffing cash in the mattress? or saving through poorly regulated cooperatives? sending money through bus drivers and friends, who might not deliver it at all? Research is needed to know. Read the rest of this page »

The Reserve Bank of India (RBI) announced it will develop a regulatory and oversight framework for mobile banking, and made clear its concern over the safety of transactions through mobile phones. 

Mobile banking is taking off. Or is it?  The buzz around mobile banking is matched by a recent flurry of product launches. In the US, nine banks rolled out a mobile banking platform to their customers this year. And they’re already late to the game. In Africa, Asia and elsewhere, banks and mobile phone companies have offered mobile payment and banking services for several years. Vodafone’s M-Pesa service has a half million users in just 6 months in Kenya, in a country with just over 3 million people with bank accounts.

Clients might sign up, but will they use mobile banking? Business projections, and a few careers, are likely to live and die on the answer. CGAP’s research in South Africa suggests low-income customers won’t understand the value until they use the service. Once they do, clients can become active users.

But a blizzard of studies in developed markets is clouding the picture with different answers, which has to be somewhat unsatisfying for senior bank and mobile manager deciding on whether to invest in mobile as a channel. Earlier this year, Celent argued 35 percent of online banking households will be using mobile banking by 2010, with new functionalities making mobile banking distinct from other channels.  Meanwhile, a more pessimistic Jupiter Research touts survey results showing only 8% of cell phone users who use online banking services are interested in mobile banking.  The debate in the US frames the same questions managers are asking in emerging markets. So which is it? Consumers will love it, or hate it?

Read the rest of this page »

Banking agents, retail and postal outlets handling banking transactions for financial institutions and mobile operators, are mushrooming all over! It took less than four years to cover almost all of Brazil. Colombian banks established 3,548 service points in just one year. In Peru banks manage more than 2,500 agents. Equity Bank in Kenya is piloting agents in rural areas. Xac Bank in Mongolia is planning to develop an agent channel….

Read the rest of this page »

Sci-fi seer William Gibson said “The future is already here: it’s just unevenly distributed.” If that’s true, then the future of mobile is already happening in places like Kenya, the Philippines and South Africa. And two numbers released this month by Wireless Intelligence tell us why mobile payments and banking is much more likely to happen in poor countries than rich ones.

August saw the world’s three billionth mobile phone connection made. The first billion mobile connections took a dozen years, and the second just two and a half years, with 82 percent of new subscribers coming from developing countries. The third billion: just under two years. The growth of mobile is centered squarely in places like Mumbai, not Munich, Lagos, not London.

Meanwhile, ARPU, or average revenue per user, continues its downward trend, sliding another 12 percent globally. This means mobile operators are earning less per customer. The trend is most pronounced in poorer countries. In Africa, blended ARPU has declined by a quarter from 2005, down to 13.9 Euros, compared to the world average of 22.6. ARPUs look even less enticing if you also factor in churn (percentage of customers lost), which increases customer acquisition costs.

Read the rest of this page »

Some pioneers are using technology to deliver financial services to low-income clients, often with business models built around payments. Their success mirrors that of microfinance institutions (MFIs). A 38-country analysis found that 349 MFIs are more profitable on average than the 1799 commercial banks in those same countries.

Nothing attracts competition like success. Most new entrants to branchless banking will be honest, but some might be less-than scrupulous. Consumer protection is already a hot topic in the microfinance industry.

So are there special consumer protection issues with branchless banking, or the delivery of financial services to poor clients using electronic channels and cash-handling agents? Some US utility companies’ tie-ups with agents are already attracting scrutiny and some criticism, and the potential exists for the same thing to happen in developing countries with branchless banking aimed at the poor. Read the rest of this page »

Putting in place a cost-effective, efficient, scalable core banking system (or information system) is a tough job for any business. For many small and medium microfinance institutions (MFIs), it’s proven to be virtually impossible. Strong IT staff are hard to come by and retain, managers have limited training in making IT decisions, and getting loan officers and accountants to buy into a new system is no piece of cake.

When are these MFIs going to learn to stick to their knitting and outsource their IT systems, just like the rest of the financial services world? … Well, maybe it’s not so easy…

Read the rest of this page »