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Nick Hughes and Gautam Ivatury are two of the founding members of Signal Point Partners, a company created in 2009 to build innovative mobile services in emerging markets. Nick was previously at Vodafone, where he started M-PESA, taking it from a concept to a multi-million-dollar business in five years. Gautam’s previous role was leading the technology program at CGAP, where he focused on branchless and mobile banking.

When we launched Jipange KuSave – a mobile-only savings product – in Kenya in early 2010, our goal was to out-compete the mattress. Back then, Safaricom’s M-PESA service was in hyper-growth phase and ramping up to become the de facto national retail payment system. But even more exciting was M-PESA’s potential as a pervasive and low-cost delivery channel for a wider set of financial services.

With this in mind, we decided to attempt for savings what M-PESA had done for money transfers – get millions of Kenyans to abandon informal mechanisms and instead become our paying customers. But if Kenyans were going to save with us instead of the mattress, we’d need to solve two challenges.

First, a ‘traditional’ bank-type savings proposition would never work. Poor people have never abandoned the convenience and enforced discipline of informal savings services for a couple of percent interest.  In Jipange, the combination of micro-loans and savings in a structured program met several customer needs, notably the need for cash when cash flow is low (liquidity) and steady progress towards a lump sum (a savings goal).

Second, our costs would need to be radically low. As ING Direct had shown, “pure” mass-market savings plays can make money, but only at high volumes and low margins. And that was in developed markets with larger account balances. For us to succeed, we would need to “throw out the rulebook” and design from scratch the most efficient and lowest-cost processes to manage relationships and transactions.

With our two “first principles” in mind, we gathered the essential ammunition for an attack on the mattress:  a radical product design, drawing heavily from Stuart Rutherford’s work; a set of web-based processes to run the product solely via M-PESA (limited physical contact with customers); a stellar project lead to manage implementation; and passionate, risk-seeking funders in CGAP and FSD Trust Kenya.

Interested readers may find it useful to read more about our product development and trials here in MIT Innovations. Also, this evaluation produced by FSD Kenya. In short, the Jipange KuSave product gave customers small amounts of credit at zero interest, while placing a portion of the credit into a “forced” savings account. As customers repaid the credit at whatever speed and in whatever amounts they wished, they became eligible for a bigger zero-interest loan. By borrowing multiple times and being forced to save a portion of each loan, they gradually accumulated savings.

The short version of our battle report is this:

1. Customers are hungry for better ways to save. They deal with cash flow complexity everyday and use a range of high cost / high risk methods to achieve liquidity. Some product designers would consider blending credit and savings as too complex – that was not our experience.  Clear, structured program, yes – but too difficult for customers to grasp, no.

2. Silicon Valley-style discipline and lean startup principles are keys to success. This starts and ends with customers. We quickly acquired a first trial cohort and modified and iterated the ‘offer’ on the back of real evidence from users.

3. A brand-new, mobile-oriented deposit-taking institution has the best chance of beating the mattress. This is perhaps the most difficult stumbling block on the way to scale. Only a regulated institution can take deposits — but hungry, highly innovative regulated institutions are rare beasts.

David Porteous is Managing Director at Bankable Frontier Associates. This is the third blog in a series on G2P and financial inclusion, based on CGAP’s new Focus Note Social Cash Transfers and Financial Inclusion: Evidence from Four Countries. Read the first two posts here. 

We are also releasing today the four accompanying Country Notes which were distilled into the Focus Note. For much more detail on the link between social cash transfers and financial services in each of these countries, read the full reports on Brazil, Colombia, Mexico and South Africa. 

In our last post, Chris Bold discussed the second of three questions that our new paper on G2P tried to tackle, namely:

1. For governments: Is building inclusive financial services into social cash transfer programs affordable for the social programs?
2. For recipients: Will poor recipients use financial services if these are offered to them?
3. For providers: Can financial institutions offer financially inclusive services to G2P payment recipients on a profitable basis?

Today, I will finish off the discussion by focusing on the final question regarding the business case for providers to offer financial services to social cash transfer recipients.

The biggest challenge when it comes to the business case for banks is that the amount per grant payment is small, and as client research has shown, very little of each payment is left behind in the form of savings. However, compared with other small value accounts, G2P recipient accounts have a regular dependable cash inflow ensuring that they stay active. And there is usually a government agency that is willing to pay for the service. But these anecdotal observations alone do not make or break the business case: it all depends on how the financial institution defines a business case.

To introduce greater precision to this discussion, we identify five different levels of the business case, as the figure below shows. The first level is each individual account. Small balance bank accounts are notoriously difficult to make profitable at the individual account level. But a business case may be sustained at this basic level for G2P payments if governments are willing to pay a regular fee to the banks, as they do in the four countries from our research. Without this fee, the account-level business case would be much harder to sustain. This is rather like the case for basic bank accounts which are considered loss leaders at this level by many banks, but which are nonetheless offered for strategic reasons (other profitable government business may be sold as a result of a good record) or to satisfy regulatory requirements (without regulatory support and forbearance, the bank may struggle to obtain approval for what it considers core business).

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Recently, the CGAP Microfinance Blog hosted a series on the role that public funders can play to promote branchless banking. The series was launched in conjunction with a new CGAP Focus Note that highlights emerging lessons from public funders in this space. Regular readers of this blog are very familiar with the excitement around branchless banking and are probably aware that branchless banking is primarily being driven by the private sector. In fact, private investors have provided about 80% of the estimated $400 million in debt/equity investment in the sector. However, public funders are eager to use their resources to help bring branchless banking to more and more countries. Given the current momentum, is there a meaningful role that public funders can play without crowding out private investment?

The new Focus Note and series attempt to answer this question. We spoke with public funders that have already been active in this space and developed case studies to understand what role they played and why. We found that public funders can play an important and additive role in developing branchless banking services. However, they should ensure that their involvement includes one or more of the following factors:

1. Public funders should extract knowledge and learning that will benefit the entire industry. This can be done at both a macro level (investing in public goods to understand issues such as customer adoption and regulatory obstacles) as well as at a provider level (extracting learning from specific services that can be shared widely).
2. They should seek to influence the industry and specific implementations to develop products and services that are relevant for the low-income and unbanked segment.
3. Public money can kick-start development, especially in smaller or post-conflict countries where providers struggle to obtain the capital and buy-in to make major investments.

To learn more, read the Focus Note. Or, check out the blog series to learn how USAID is working with governments in the Philippines and Colombia to promote branchless banking, how UNCDF is working with the private sector to bring branchless banking to some of the most remote and challenging parts of the world and how the IFC is combining investments with technical assistance to help small companies grow.

- Claudia McKay

As regular readers of this blog will know, we  are excited about the developments that we’re seeing in branchless banking in Pakistan, which have led us to call it a “laboratory” for innovation. Most recently I interviewed Mansoor Hassan Siddiqui, the Director for Banking Policy and Regulations at the State Bank of Pakistan about the recent changes to the Branchless Banking Regulations that, among other things, removed the need to capture biometric information at the time of account opening.

These changes to the regulation seem to have unleashed yet more activity. Easypaisa, the longest-established service in the market launched by Tameer Microfinance Bank and their parent company, mobile network operator Telenor, now claims over half a million mobile accounts following a major campaign. The mobile account will complement their over-the-counter bill payment and domestic money transfer services which together have processed a total of Rs 43 billion (US$500 million).

The other major player in the market is UBL, which launched their Omni service in April last year, only six months after easypaisa’s debut. UBL is supporting a number of government and NGO programs in the distribution of cash transfers to nearly two million beneficiaries through their network of 5,000 agents. Recently, UBL started accepting loan repayments for microfinance institutions (MFIs) and providing cash management facilities for businesses.

Two other players, First Microfinance Bank and MCB have already been granted branchless banking licenses under which they are running pilots. The State Bank of Pakistan last month issued a microfinance bank license to Waseela, a subsidiary of Orascom – who also own Pakistan’s largest mobile operator. The move was seen by many industry analysts as a necessary step towards getting a branchless banking license which will allow Mobilink to launch a service to compete with easypaisa.

There are several other banks that are also considering applying for branchless banking licenses and many non-banks such as the courier firm TCS. Other mobile operators are also looking for suitable banking partners that will allow them to launch their own services.

This CGAP Brief released today summarizes the latest developments and offers a commentary on the biggest challenges facing the branchless banking sector in Pakistan.

- Chris Bold

Summer is now officially over here in Washington and the busy fall season is off to a quick start. If you are just getting back into high gear, maybe this is a good time for us to recap some of the things we’ve been discussing on the blog over the last couple months, some of the latest news that’s caught our attention, and some things to keep your eye on in the coming weeks.

The South African bank FNB has recently launched its latest mobile banking offering Pay2Cell which allows FNB account holders to make payments to other FNB clients using only the recipient’s mobile phone number. This is a different product offering from FNB’s eWallet which allows FNB account holders to send money to anybody with a mobile phone. The recipient does not need a bank account and can withdraw the cash at any FNB ATM.

South Africa is one of the 7 markets that we covered in our recently released branchless banking country notes. The other countries include India, Pakistan, Mexico, Brazil, Ghana, and WAEMU in West Africa. The report for WAEMU is now also available in French – la version en français UEMOA.

An active branchless banking provider in West Africa, Orange has recently launched the Orange African Social Venture Prize. This initiative aims to reward innovative projects using ICT for social and economic development in Africa. In this contest, 3 winners will be selected and will receive financial grants along with 6-months of mentoring support from management and ICT experts. The project should target at least one country where Orange has a footprint and the prizes will be announced during the AfricaCom Awards in Cape Town in November. The deadline for applications is the end of September. Read more about it here.

Staying in West Africa, Nigeria continues to buzz with branchless banking activity. The Central Bank of Nigeria recently issued operating licenses to 11 mobile money firms. As this article explains:

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This is the fifth and final piece in the five-part series launching CGAP’s Agent Network Management Toolkit (available to download and highlights are on CGAP’s website). The toolkit is based on more than a year of research that yielded data on more than 16,000 agents in Brazil, India, and Kenya. In-depth interviews were conducted with 466 agents, agent network managers and providers, including mobile network operators, banks, MFIs and technology companies.

The previous four blogs in this series have focused on the agent and the critical role he/she plays in registering customers and helping them transact. However, agents are only one of a number of links in the branchless banking supply chain. Each link plays a critical and coordinated role to deliver services to the customer. Typically, MNOs, banks, technology companies, agents and agent network managers all play some role.  At the end of the day, everyone in the supply chain has to make money somehow.  In the M-PESA implementation, Kenyan customers made enough transactions and paid enough fees for money transfers to generate enough revenue for every company in the supply chain.  Unfortunately, early evidence demonstrates that this business model has been the exception to what has happened in most implementations in the world.  Most implementations are still trying to figure out how to generate sufficient revenue to sustain everyone in the supply chain.  Most importantly, in many cases the end customers themselves will not provide adequate revenue for the entire chain.

The Agent Network Management toolkit comes with a financial model to help providers project the revenues generated in a branchless banking implementation for each member of the supply chain.  The financial model is based on user-defined assumptions about the number of active account holders and the average number and type of transactions they conduct in a month. The financial model outputs a set of tables and graphs that demonstrate the basic business model of each company, showing revenue sources according to the transaction volume in the entire system.  The model can be used to analyze the financial flows at current levels and tariff structures, and all of the variables can be changed to assess alternative scenarios.

In testing the model on different implementations around the world, we learned a great deal about the wide range of business models in play.  Successful implementations will increase revenues through some combination of increasing the transaction volume and by the supply chain companies increasing their own core business benefits.  In Brazil, for example, bank’s cost savings and increased foot traffic in agent stores drive the business model.  In many implementations, MNOs may well find that they generate enough revenue from lower commissions and increases in airtime sales to justify distributing most of the revenue from their mobile money implementation to other members of the supply chain.  And in all implementations, third parties such as governments, utility companies, merchants and employers may be willing to pay significant fees to use the channel to make or receive payments.

The branchless banking industry is still early stage but gaining momentum.  We think that the Agent Network Financial Model will help providers gain a clearer picture about how to combine different business models into a supply chain, and that this will facilitate innovative partnerships between the players.

Branchless banking is in a state of creative chaos. The impressive growth of a few pioneers like M-PESA in Kenya has demonstrated the potential, yet most providers are still pushing to achieve success in their own market.

We suspect a big part of the problem is located in the supply chain: by this, we mean agents. At its core, branchless banking is about having cash when and where customers want it: agents are the crucial link for cash conversion. Agents also verify client identity and protect against fraud. Agents are also literally the face of the service when clients have a problem that needs resolution.

CGAP’s Agent Management Toolkit aims to demystify the process of building a viable agent network. The toolkit is based on more than a year of research that yielded data on more than 16,000 agents with institutions in Brazil (Banco do Brasil and Banco Postal), India (EKO and FINO), and Kenya (M-PESA). CGAP conducted in-depth, in-person interviews with 466 agents, agent network managers and providers.

Here are a few highlights:

• Even the most successful branchless banking services have not yet proven the long-term business case for agents. In Kenya, smaller stores that comprise the bulk of M-PESA’s 21,000 agents saw their profits go down from more than US$ 5/day to less than US$ 4/day, largely due to growth in the number of agents outstripping growth in the number of transactions processed in the system. The ratio of transactions to agents is one of the 9 drivers of agent profitability discussed in the toolkit.
• Agent network managers (ANMs) are an oft-overlooked link in the supply chain. CGAP talked to a dozen to understand their business case. Increasingly, ANMs like EKO and FINO – and not banks or MNOs – are at the center of conceptualizing a branchless banking service and driving it to success.
• The branchless banking service must generate sufficient revenue to support all of the companies in the supply chain: the majority of services do not meet this test (yet). The toolkit includes a detailed analysis of the financials of M-PESA (Kenya) and an excel financial model readers can use to test their own business case.
• Too many providers leap straight to the operational nuts and bolts. Only after pinning down the supply chain economics should a provider dive into identifying, selecting and managing agents. Part 2 tackles these topics and the annexes include examples of contracts, commission structures, and other useful documents.

Over the next 2 weeks, CGAP’s Technology Program Blog will host a series of 4 blog posts detailing each of these points. Check back often, and in the meantime download the toolkit in its entirety, the financial model or browse the first sections of the toolkit whose highlights are on the website: 1) Overview of Branchless Banking Agents and 2) the Agent Business Case.

Last week, my colleague Claudia McKay continued our blog series on our new CGAP Focus Note which tries to answer the question: “Is the hype around branchless banking justified?”  To dig into some answers, we gathered data on more than 16,000 clients of branchless banking institutions in 10 countries. Today, I’ll discuss the third and final finding from the study.

How do we meet demand for products that go beyond payments?

Most branchless banking services help clients move money over distance : a money transfer to a family member in the countryside, a bill payment to the utility company, a social benefit from the government. Clients also want products that move money over time  – i.e. savings and insurance paid out today to use in the future, credit to be used today and repaid in the future.

We know the poor are very active money managers. Financial diaries used by Collins, Morduch, Rutherford, and Ruthven show low-income families in Bangladesh, India, and South Africa used an average of eight different financial instruments primarily to move money over time, and quite intensively: the average household moved more than US$1,000 through the instruments over the course of a year.

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Last week, my colleague Mark Pickens started a blog series on the 3 main findings in our new CGAP Focus Note, which looks at several aspects of branchless banking across 18 branchless banking providers with more than 50 million customers in 10 countries.  You can read a full web feature about the paper on the CGAP website.  In this post, we’ll look at the second question we asked in the Focus Note:

Is branchless banking cheaper than traditional banking, and by how much?

To answer this question, we compared the prices charged by 16 branchless banking providers across 10 countries and by 10 traditional banks in five countries across 8 use cases.  We first released the results of our analysis on this blog in May.  Here are the highlights:

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After several years of very high profile attention on mobile money and other branchless banking schemes, we think it’s time to test the hype. Or more accurately, we’ve wanted to for awhile. But acquiring good data is really, really hard. We’ve been unable to say in anything but a fragmented, mostly anecdotal way whether the unbanked really use branchless banking, what they use it for, if it saves them any money, and what more they might want (but aren’t getting yet). Just because we are excited about branchless banking doesn’t mean it is living up to the promises we make on its behalf.

Over the past year, my colleague Claudia McKay and I have pulled together data on 16,708 branchless banking customers in 18 branchless banking providers with more than 50 million customers in 10 countries. Some of the data we had to go and generate ourselves in new field work; we gained access to other people’s research; and some, particularly prices, are public and just needed to be aggregated (somewhat laboriously). We are pretty certain this is the first analysis of branchless banking with a multi-country perspective. What we found is released in a new CGAP Focus Note.  Over the next week, we will look at each of the 3 main findings.

Today: Is branchless banking really reaching the base of the pyramid?

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