Archive for: Access To Finance

I’ve just finished teaching a course at Boulder on the use of branchless banking channels and technology to reduce transaction costs. This was well-attended; the four-day, 10-hour course had 39 students, and a shortened single day, two-hour version had 20 students.

We had a very interesting class discussion on whether group loan repayments through branchless banking channels would undermine the group ethos, and there was surprising consensus in that it need not. Another much discussed topic was how to balance cash in and cash out at the agents, and how to promote savings on the back of electronic payments.

In terms of use of agents for deposit-taking, we know there is a very fundamental business model problem. Agents are used to taking something like 10% commission on selling a coke bottle, a mobile prepaid card, etc. So why would they do cash in/out for much less than 10% commission if that saddles them with extra security risks and extra trips to the bank? And with that sort of commission level, microsavings are dead. There are several answers to this:

• The practical solution happening out there: agents are used mostly for special transactions where someone is prepared to give them extra commission: mobile prepaid cards, international remittance termination, bill payment (if the utility wants to get out of collecting itself). But there is very little traction on savings.
• The purist solution: use product portfolio and marketing levers to balance cash in and cash out at the village level. Agents can then manage local liquidity as a ‘closed loop.’ This would need to work community by community, and there could be no universal answers. It would have more chance of working if branchless banking was a tool managed and used by local microfinance institutions with the required level of grassroots presence and understanding. But in my view it can’t work so long as branchless banking is the preserve of the larger banks and telecom operators, as today.
• Take the agent business out of stores. This gets away from high overhead and higher opportunity costs. Combine the susu collector with Wizzkids: roving people in market stalls, going door-to-door, etc., offering to buy and sell cash for electronic value. This way, you turn the agent problem into a livelihood activity.
• The shock solution: go for total cash substitution. Eliminate cash and you eliminate the cash in/out problem. Radical, but something that one colleague said could perhaps see traction in conflict areas. The security aspect can then be a powerful driver for eradicating cash by having clients express preference for electronic over cash payments.

The general feeling was one of excitement at the potential, but a realization that these channels will, at least for a while, be dominated by larger banks and mobile operators who have the wherewithal to invest in this area. MFIs should seek to share in their infrastructure rather than to try to create their own, knowing that interoperability will take a while to develop — just as it did for ATMs and POSs.

Last week a group of the world’s 25 leading medical doctors, public health professionals, development agency staff and analysts gathered in Bellagio, Italy to debate the future of mHealth, or the use of mobile phones in health systems.

This emerging field resembles mobile banking circa 2002. There are uncoordinated and relatively small pilot projects, regulators and policymakers have thought precious little about the topic, donors have no organized mechanisms for support, and there is scant public attention to the opportunities to deliver healthcare or track health information with mobiles. In a previous post, Jim Rosenberg characterized this state of play as the “technology trigger,” the first stage in the maturing of a new technology approach.

Mobile banking has clearly moved beyond that phase – indeed, with regular appearances in publications like the Financial Times, Economist, Wall Street Journal, New York Times, and trade press such as The Banker, mbanking is now farther along the lifecycle towards the “peak of inflated expectations.” (See Jim’s post)

What caused this maturing of mbanking during the past 5-6 years? For one, “mobile financial services” isn’t a new topic and has been hyped before, so we may just be following a pattern. But I’d like to share one theory that I discussed this week with the mHealth experts as they think through how to advance their field. My argument consists of six different reasons.

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Thanks to our colleagues at IFC for looking after this great summary of last May’s Mobile Money Summit in Cairo. Excerpt:

As GSMA CEO Robert G. Conway stated in his opening remarks, “The ubiquity and convenience of the mobile phone is bringing new value, opportunities that no one foresaw before in the delivery of financial services.” For businesses, the opportunities include reaching vast numbers of new customers and providing better service to existing customers. For customers, the opportunities include increased affordability, convenience, and security. The mobile phone may even open access to financial services for many who are currently excluded from the market altogether – the majority of the population in many developing countries. “

Related: Mobile Banking Needs Standardized Innovation

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.

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.
The opportunities presented by branchless banking in broadening access to banking services across the population are limited by two factors. First, assembling a proprietary retail network of agents is time consuming and implicates financial service providers in agency operational risks they may find difficult to manage. Second, because customers are able to convert their savings to/from cash only at designated agents, financial service providers are generally compelled to support the liquidity position of their agents, which exposes them to additional credit risks. Indeed, proprietary agent networks continue imposing a significant burden on banks that want to expand.

The alternative is to develop branchless banking models based on shared agent networks. This would allow financial service providers to be “liberated” from location constraints and able to compete for customers anywhere purely on the basis of product design, marketing, and branding. And rather than rely only on exclusive agents to handle customer liquidity needs, the liquidity at all agents in a given location would be pooled to serve any customer and, hence, can be used most effectively and with minimal credit support.

Without this added layer of benefits underpinning the branchless banking model, providers are not likely to find branchless banking viable, particularly in rural areas where agents are few and cash transportation is costly. Making this a possibility will require changes in bank regulation, industry business models, and commercial strategies by individual financial service 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.

In developed countries, bank customers have access to several channels, each supporting a range of services. Bank cards offer convenient cash dispensing where ATM deployment is widespread. The Internet offers convenient access to more complex bill paying or remittance services. Checks can be deposited by mail. Telephone banking provides instant access to account balances and recent transaction histories. Customers also can do all of this with a more personal, higher touch service at a branch. Therefore, mobile banking struggles to achieve customer relevance, beyond simple informational services (e.g., balance inquiry), notifications (SMS alerts), and, once phones have “contactless” card capabilities, micropayments for public transport or vending machines.

The situation is, a priori, very different in developing countries, where there is less deployed infrastructure (fewer branches, ATMs generally co-located to relieve branches, low broadband penetration). For many customers in these countries, the mobile channel with banking agent sin principle could offer a much clearer convenience advantage over alternatives (travel and queuing at branches or cash-based savings). Hence, there is more reason to believe that mobile banking will find more than a niche application and could, in fact, become the primary banking channel for large segments of the population. For this to happen, some of the key uncertainties mentioned earlier would need to be resolved favorably.

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.

Most MFI-led branchless banking initiatives have been small pilots or have had only limited success. Even though MFIs have strong local knowledge, product development acumen, and the ability to manage small loans, most lack the stable core banking systems and specialized technical skill to implement branchless banking models or tap into existing platforms.

In the Philippines, an initiative to let customers of rural banks use G-Cash instead of cash to make deposits and repayments has been constrained in part by the poor quality of banks’ core banking systems. Based on interviews with experts in the field and observations from our own visits, CGAP estimates that the vast majority of the approximately 750 rural banks will need an IT overhaul or major upgrade to participate. In Kenya, an MFI that substituted group loan cash repayments with repayments in M-Pesa found a different problem. Group loan borrowers made fewer on-time repayments under the new system. Customers no longer attended the group meetings that had helped to keep up repayment pressure.

On the other hand, those relatively few MFIs that have the financial resources and skills to deploy branchless banking have been among the first movers. Microfinance banks, including Tameer Bank in Pakistan and Xac Bank in Mongolia, are developing their own mobile banking channels and are partnering with mobile operators to reduce delivery costs and to reach unserved urban and rural areas.

Another way MFIs may get involved is  as partners for banks seeking to expand their market among the unbanked. SKS Microfinance in India has developed a mobile banking initiative in partnership with Andhra Bank, in which customers use designated SKS banking agents to deposit money into Andhra Bank accounts and use a mobile phone to repay SKS microloans. Small MFIs and local community-based organizations can also play on the other side—as correspondents for other, larger banks. This ensures them a steady revenue stream in a synergistic relationship with the larger bank, as long as they target different population segments. An interesting case is the intent of the Andhra Pradesh State government in India to use up to 30,000 village organizations (local federations of self-help groups [SHGs]), to act as a cash agent for payment of social services, for SHG members under their umbrella, as well as for local banks.

Finally, MFIs are also tackling branchless banking as a group to overcome their individual limitations. In Ecuador, for example, the Red Financiera Rural association of MFIs and cooperatives is planning to contract a technology provider to build and maintain core banking systems and branchless banking channels on behalf of the group to minimize up front costs and the expertise needed inside each member organization. This sharing of technology costs and expertise has perhaps the highest potential to bring MFIs onto payment networks and allow them to take advantage of mobile banking and other delivery channels they cannot implement alone.

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.

Most financial service providers see partnerships with businesses that have a substantial local retail presence as a key competitive strategy. They act to build their networks as quickly as they can to expand the pool of potential customers and attain local brand presence. The pace of agent sign-up is most dramatic in Brazil, where 95,000 agents have opened for business, leaving no municipality without a retail bank outlet. This agent network has directly led to the opening of more than 13 million bank accounts in the past five years.

Depending on regulations, agents can be used to open new accounts (signing up customers and conducting customer due diligence) or to conduct customers’ cash transactions (to deposit into or withdraw from an account, or to make or receive payments). Given the finding that most branchless banking customers do not build sizable deposit balances (per observation 3, above), most customer transactions do in fact entail a cash transaction. Many banks that want to enter into branchless banking have partnered with businesses that have many local outlets so that they can jump-start their agent networks, including mobile operators, post offices, and major retail chains:

• Mobile operators. Mobile operators run some of the largest national retail distribution networks to support prepaid card sales. This puts them in a strong position to lead or participate in mobile banking projects. For instance, five banks have partnered with SMART Communications in the Philippines, and Standard Bank in South Africa partnered with mobile operator MTN in South Africa.

• Post offices. Brazil’s Banco Bradesco purchased the rights to use the national post office network as a banking agent network. Bradesco created the Banco Postal subsidiary to trade on the trust that Brazil’s population has in the postal service and to differentiate from Bradesco’s branding as one of the leading private banks in the country. By May 2007, Banco Postal had an agent network of about 5,600 agents, two-thirds of which were post offices. The rest were retail outlets branded as “Bradesco Expresso” points.

• Major retail chains. Equity Bank in Kenya signed a deal in mid-2007 to use the Nakumatt chain of retail stores as its anchor banking agents, and WIZZIT has arranged to use the Dunn’s chain of about 400 clothing stores across small town South Africa to act as account opening locations. Where banks are unable to partner with large retail chains, or in rural areas where these chains have limited or no presence, banks often outsource the building and management of chains of agents to third-party agent management companies. Banco Popular in Brazil (the banking correspondent brand of Banco do Brasil) uses companies such as Net Cash in Sao Paulo State and the Brasilia Federal District and Pag Facil in Pernambuco to sign up, equip, train, and maintain agents on its behalf. Lemon Bank has no branches at all and relies on 16 agent management companies (including three that it purchased) to manage the majority of its 5,750 agents.

A bank’s ability to sign up agents in disparate locations depends on the national payments system rules and practices. Referring back to the Brazilian success case, a second legal provision spurred geographic coverage to such a stunning extent: an agent is legally able to deposit its excess cash in to its account with its sponsoring bank through the branch of any bank, at no extra cost, and without having to open an account at that bank. The situation is quite different in Colombia, for instance, where the bank with the largest network of rural branches, state-owned Banco Agrario, charges such high cash handling fees to other banks that those banks cannot profitably set up agents in remote municipalities. While Banco Agrario’s high cash handling fees may be justified by the high cost of operating in such remote locations, the result is that other banks are not able to use agents unless they set up their own branches nearby.

Based on our observations, it appears that being an early mover in creating an agent network confers three key competitive advantages:

• Early movers are able to partner exclusively with the businesses that have the largest number of local retail outlets, thereby patching together a sizable agent network relatively quickly. Subsequent entrants are likely to find it more difficult to assemble an agent network of their own, particularly in areas with few retail establishments. The number of agents or physical locations is an easy concept to differentiate advertising, and hence it becomes a self-sustaining advantage for early movers.

• Early movers with larger agent network scan negotiate more favorable agreements with utility companies and various government agencies to distribute or collect payments on their behalf. As noted earlier, most banks realize that payments (from customers to utility companies and lenders, and from governments to welfare and pension beneficiaries) is the first product likely to move through this channel.

• A bank that is first to introduce banking services in a given geography is likely to capture greatest market share among the local population. The general manager of Banco Popular in Brazil explained that putting Banco Popular agents in unserved neighborhoods gave the bank a presence and the start of a relationship with local customers. As these communities develop and become increasingly banked, Banco Popular would be the bank whose name they would remember the best.

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.

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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