Archive for: East Asia-Pacific

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.

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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.

Having examined several branchless banking ventures around the world, it appears that less than 10 percent of all branchless banking customers are poor, and new to banking, and are using these channels for financial services (or activities other than paying bills, purchasing air time, or withdrawing government cash benefits). In its study in Pernambuco (a particularly poor state in Brazil), CGAP found that only about 5 percent used a banking agent at least once a month for anything more than paying bills or receiving government payments, were previously unbanked, and were considered poor by Brazil’s standards. Similarly, of about one million mobile banking customers in South Africa, CGAP estimates that fewer than 100,000 fall below South Africa’s poverty line, did not have a bank account earlier, and now use mobile banking for more than payments or transfers. And in Colombia, typical cash transactions through agents are in the range of US$100–200, which suggests that they are not being used by the poorest.

While disappointing to organizations that aim to expand access to finance, this is a fairly natural outcome in the early stages of development of a market following a major innovation. Providers experimenting with a new technology or business model typically seek to reduce risk by focusing on known markets (avoiding the “double gamble” of new business model and new customer segments), and within those on likely “early adopter” subsegments (i.e., those more naturally predisposed to try the new offering).

Indeed, a provider that focuses branchless banking on customer segments it already understands and knows how to market to will find it easier to try out services, assess customer and service profitability, and tailor propositions and market communications messages. For instance, in the Philippines, SMART and Globe Telecom originally advertised their mobile banking services mainly to up-market consumers. SMART combined its mobile prepaid account with a Maestro debit card that can be used at any store that accepts a traditional debitor credit card. SMART’s customer base at year-end 2006 mainly included segments it knew well: four million subscribers had signed up for SmartMoney, and of the 900,000 active users, nearly all were businesses distributing SMART’s prepaid air time.12

Globe Telecom’s GXI Inc., which offers the G-Cash mobile wallet service, estimates that nearly all of its 500,000 active users are individual subscribers in urban areas.13 In fact, the company moved beyond the pilot phase of registering outlets to accept or dispense G-Cash in rural are as late as early 2007. To date, just over 100 agents are registered in rural provinces, compared to the 3,000 air time resellers that Globe Telecom has signed up nationwide directly and the 700,000 airtime resellers hat buy and resell Globe air time.

Most customers are also just dipping their toes in the water. In 2006, CGAP conducted a survey of 515 people in areas served by WIZZIT. Even within the more directly enabled markets—among people who have both a mobile phone and a bank account—the study found, not surprisingly, that those who took up WIZZIT’s mobile banking service on average had a higher income and higher education levels and were more often formally employed, urban, and older. Early adopters were, in general, customers with more sophisticated banking requirements.

That poor people are not usually early adopters of technology can be explained by personal experience (they are likely to have had less exposure to technology and have less access to information about new offerings) as well as the fact that they are less attractive to providers.

This makes the job of governments and donors who are targeting poor people with financial services much harder. Government programs in India, Russia, Malawi, South Africa, and Brazil distribute social protection payments to customers through branchless banking channels. These have been found successful at opening bank accounts for millions of poor customers in some cases (notably Brazil), but have not led to regular use of those accounts to spread expenditure over time—balances tend to be withdrawn in full as soon as payments are received. More research is needed on how poor and excluded clients view their relationship with banking agents and their willingness to trust providers.

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.

Customers primarily make payments and send transfers through branchless banking channels, even when most branchless banking channels offer a broader range of services, including account opening, cash deposits, and cash withdrawals. Most customers either time their deposits to coincide with bill payments or cash withdrawals, leaving a near-zero balance in their accounts, or they do not open a savings account at all. Consider the following experiences:

• In Brazil, bill payments and the payments of government benefits to individuals comprised 78 percent of the 1.53 billion transactions conducted at the country’s more than 95,000 agents in 2006. CGAP research in Brazil found that, of the 750 people who responded to a survey in Pernambuco State, 90 percent reported using banking agents to pay utility and other bills, only 5 percent reported opening a bank account at the agent, and less than 5 percent said they had made a cash deposit in to their bank account at an agent.7 Indeed, 87 percent of those who had opened an account stated that they had done so just to receive welfare or salary payments.

• In Russia, more than 100,000 automated payment terminals have sprung up in the larger cities in recent years. One provider, CyberPlat, claims to have processed 1.2 billion transactions worth US$4.7 billion through the first three quarters of 2007 via its 70,000 “cash acceptance” points, mostly for prepaid air time, television, Internet, and other utilities.

• The average mobile banking customer of WIZZIT (a mobile phone banking provider in South Africa) bought air time with WIZZIT twice as often (2.6 times) as they withdrew funds from a branch or ATM (1.3 times), and five times as often as they made a money transfer (0.5 times).

Customers use payments and transfers rather than banking services in part because providers focus their marketing efforts on payments and transfers. M-Pesa advertises its service as “an affordable, fast, convenient, and safe way to transfer money by SMS any where in Kenya,” and WIZZIT’s slogan is “the easy way to pay.” Mobile operators, in particular, prefer marketing payments services rather than the ability to store value because payments services are a closer fit with their traditional revenue model (e.g., per minute or per SMS). Some mobile operators argue that if they did advertise the ability of their mobile banking services to take deposits, they would run afoul of the approvals they’ve received from banking regulators.

The predominance of payments services over savings also likely reflects the perceived relative value that each service brings to the economic lives of the poor. Using banking agents and electronic payments to pay utility bills takes less time than traveling to and queuing in a range of utility offices, thereby bringing very tangible benefits. Similarly, collecting a pension, remittance receipt, and welfare or salary payment is a strong driver for opening accounts.

On the other hand, the value proposition of saving money, particularly in electronic form, appears to be less strong. The former head of Banco Postal in Brazil reported that, in rural areas in particular, his team spent considerable effort trying to explain to customers why they should have a bank account at all.10 It seems that although branchless banking has brought formal banking services physically closer to many unbanked people, it hasn’t changed their perceptions of the value proposition of saving in formal financial institutions. When they receive a payment or a remittance, an overwhelming majority of people go to the agent to withdraw the full amount received.

We believe that, over time, as customers increase their use of branchless channels to make a broader range of payments, they will start to find more value in maintaining transactional or savings balances in their account. In the meantime, more research must be done to distinguish how customers feel about savings in general, about the benefits of saving in banks, and about the branch and branchless channels available to them.

The success of agents in Brazil—achieving 100 percent coverage of municipalities—hinged in no small degree on the fact that utility bill paying is considered a banking service and cannot be done at nonbank outlets. This created a natural captive market of transactions for new correspondents opening up in towns without prior bank presence, where previously residents had no choice but to travel to nearby towns to pay their utility bills. In other countries, such as Colombia, local stores may have collection contracts with utilities, and it has proven much harder for correspondents to seize the utility payments business upon entering the market.

Today we begin a blog series based on 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. In the coming days we’ll share seven observations, four uncertainties and four predictions for branchless banking - what we call mobile banking and other technology-enabled banking solutions. We begin with the first observation:

Branchless banking can dramatically reduce the cost of delivering financial services to poor people

We believe branchless banking can offer basic banking services to customers at a cost of at least 50 percent less than what it would cost to serve them through traditional channels. Branchless banking helps address the two biggest problems of access to finance: the cost of roll-out (physical presence) and the cost of handling low-value transactions. This is achieved by leveraging networks of existing third-party agents for cash transactions and account opening and by conducting all transactions online. This sharp cost reduction creates the opportunity to significantly increase the share of the population with access to formal finance and, in particular, in rural areas where many poor people live.

The biggest cost saving is on transactions that can be done completely electronically, through mobile banking. In the Philippines, a typical transaction through a bank branch costs the bank US$2.50; this would cost only US$0.50 if it were automated by using a mobile phone (Asian Banker 2007).

The cost reduction from using agents rather than banks for remote cash transactions is equally dramatic. Banco de Credito in Peru estimates that a cash transaction at a branch costs about US$0.85, while the same transaction at an agent would cost US$0.32.4 Tameer Bank in Pakistan estimates that, in the Orangi slum of Karachi, the set up cost of a bank branch would be 30 times more than the set up cost per agent, which is about US$1,400. Monthly running costs average about US$28,000 for a branch, compared with US$300 for an agent, but also, a much larger share of monthly running costs is variable for an agent than for a branch.

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 »

Mobile banking and other technologies need a balanced regulatory approach

Washington D.C. (January 31, 2008) – Basic, everyday financial services are out of reach for more than two billion people in developing countries. But the rapid growth of branchless banking – including mobile phone banking – is reducing the cost and expanding the availability of such services.

“All of this innovation presents challenges and opportunities for regulators,” says Elizabeth Littlefield, CEO of CGAP. “Policy will determine not only where branchless banking is allowed, but also which business models turn out to make economic sense - and how far they will go in reaching poor people.”

Regulating Transformational Branchless Banking is a product of collaboration between CGAP and the UK’s Department for International Development (DFID), in partnership with the GSM Association, the global trade association for over 700 mobile phone operators. The authors also benefited from conducting three of seven diagnostic missions with the World Bank’s Financial Markets Integrity Unit.

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Vodafone India Unveils Cost Cuts, IBM Deal
Vodafone has already taken a number of initiatives to grow in India, which has a population three times the size of Europe. In May, Vodafone launched two sub-$45 handsets, working with China’s ZTE Corp. (0763.HK), in a bid to make mobile phones more affordable to millions of Indians on low incomes.

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Burried in the Economist’s recent article on “The frontier of finance” was the little number that M-PESA is about to hit 1 million users signed up for its mobile payments service in Kenya. So what: mobile banking is gathering steam. That’s old news.

But lost in all the buzz is the critical role third-party agents serve in the play for millions of low-income clients. A broad range of corner stores, petrol stations, lottery kiosks, post offices and other outlets feature prominently in the system architecture for such success stories as Safaricom’s M-PESA in Kenya, as well as in other countries, such as Globe Telecom’s GCash service in the Philippines.

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FMO’s UPsides magazine this month has a whole set of stories that look at how branchless banking (such as mobile banking) and remittances can help fight poverty. Two CGAP partners, G-Xchange Inc. (Philippines) and XacBank (Mongolia) are featured in this issue:

We are dead set on proving a hypothesis: good return to our shareholders can go together with reaching the poor.
-Riza Maniego-Eala, President of G-Xchange, Inc.

Our market research shows that 50% are keen to have mobile banking services made available through local grocery stores, post offices and gas stations. But getting the service out is proving to be a challenge.
-Ganhuyag Chuluun Hutagt, CEO, XacBank

Download the pdf here.

Pakistan: State Bank issues draft policy
The launch of Branchless Banking (BB) by using delivery channels such as retail agents and mobile phones was announced Saturday by State Bank of Pakistan (SBP) Governor Dr Shamshad Akhtar.  The new system offers a significantly cheaper alternative to conventional branch-based banking and allows financial institutions and other commercial players to offer financial services outside the premises of traditional banks. BB can be used to substantially increase the outreach of financial services to “un-banked” communities. The provision of enabling a regulatory environment by careful risk-reward balancing is, however, necessary to use such models. (CGAP related resource)

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