Archive for: Banks

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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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.

Why do so few people have accounts with formal institutions? One key constraint is the sheer cost to banks of building and maintaining branch networks to reach dispersed or low-income populations.

On July 22 at a CGAP lunchtime event in Washington, Ignacio Mas talked about how networks of agents can be used to optimize access for poor clients, basing his presentation on the recent CGAP Focus Note “Banking Through Networks of Retail Agents.” He began the discussion by drawing an analogy with Coca-Cola. Why is Coke sold in every tiny village around the world, while financial services are not? The obvious response is that Coke leverages retail stores in these locations to distribute and sell its product on its behalf. In a similar way, the logic of branchless banking as a low-cost transactional channel is to use existing retail infrastructure to provide financial services everywhere, literally. By deploying technology that already exists in SIM cards and mobile telephones, transactions can be made at retail agents that then clear with a customer’s bank.

There are various objectives of agent networks from a bank’s perspective. They can be used to simply offload transactions from branches; they can target a different customer profile such as low-income people; they can serve as a branch substitute to extend geographic coverage; and finally they can serve as a branchless banking mechanism to minimize fixed costs and accelerate scale.

Globally, the use of banking agents is still in its early stages. Brazil is a leader with about 55,000 agents nationwide, followed by South Africa with 6,500 agents. In all, fewer than a dozen countries have begun using retail agents for banking services.

This low uptake may be explained by the three biggest challenges with branchless banking. First, the “perfect” business model is still being worked out. How can agents be sufficiently incentivized to carry out cash transactions? How can transaction volume, which has so far been quite low, be increased? Second, while most banks do not seem very interested in using agent networks to cater to new customer segments, most microfinance institutions do not have the capacity to take advantage of technology-based channels. Third, branchless banking presents new challenges in regards to regulation.

None of these challenges are insurmountable. With a bit of innovation and creativity, the potential for banking through networks of retail agents remains strong.

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 »

Brazil’s ACSP Launches Global FICO Consumer Credit Scores
Fair Isaac and Associacao Comercial de Sao Paulo (ACSP), one of the largest credit bureaus in Brazil, have announced ACSP’s launch of Global FICO Score for Brazilian businesses - saying that “the launch of this innovative consumer credit-risk score makes Brazil the first South American nation to access Fair Isaac’s global-standard FICO credit risk scoring technology.”

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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.

Europe turns nose up at mobile banking
Mobile banking could be failing to capture the imagination of consumers, according to a
survey of 2,500 retail financial services customers across Europe. The research, conducted by TNS on behalf of Fujitsu Services, found 65 percent of respondents prefer to access banking services online. nly five percent of the sample said mobile banking is the channel of choice. Physically going to a branch is the second choice, at 53 percent. The findings differ from a UK-only survey which put face-to-face or voice interaction as the preferred method of accessing banks.

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Industry Leaders Announce Android Open Platform for Mobile Devices
In news that could affect the evolution of mobile banking and mobile payments, a broad alliance of leading technology and wireless companies have announced they have joined forces to develop Android - calling it “the first truly open and comprehensive platform for mobile devices.” Google, T-Mobile, HTC, Qualcomm, Motorola and others have collaborated on the development of Android through the Open Handset Alliance, a multinational alliance of technology and mobile industry leaders.

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The many in-store Mexican banks have only begun to scratch the surface of the unfulfilled demand for financial services among low-income Mexicans. Or so hope Banamex, Soriana, and Wal-Mart Mexico, the latest entrants into the consumer credit bonanza in Mexico. The success of Banco Azteca, Coppel and other retailers who opened financial services outlets in their branches has attracted a wave of new competitors.

Banamex and Soriana recently launched a partnership making Banamex services available in all 240 Soriana stores, which see an average of 25 million customers per month. “Mi Ahorro Banamex” offers two products: a prepaid MasterCard card, redeemable at all Soriana and affiliated stores, and a savings card. They plan to introduce additional products, such as remittances and savings, in the future.

Wal-Mart’s approach is slightly different. Instead of partnering with a bank, they’ve decided to do it themselves. Banco Wal-Mart de Mexico Adelante is set to begin operations before the end of the year. Wal-Mart is certainly known for its low-cost, high volume business model, but will this carry over into their banking services? With 964 stores covering nearly every region of Mexico, the potential impact on the estimated 80% of unbanked Mexicans is huge.

Without getting into the debate on whether or not consumer credit is better, worse, or in fact the same as what microfinance institutions are offering, the impact of these new entrants will certainly be felt by both the consumer outlets as well as the microfinance institutions. And perhaps that’s not a bad thing, especially if it finally brings about price competition in this notoriously expensive market.

Right after the government in 2005 had enabled banks to use banking agents, retail and postal outlets to handle transactions on behalf of banks, a number of Peruvian banks started to roll out their agent networks. One of them, Banco de Credito (BCP) with their “agentes BCP.”

Already in November 2006, Mr. Luis Almandoz, BCP’s man in charge of their agents, had presented the bank’s thorough planning of the network roll out at a conference in Colombia. Last week, newspaper El Comercio, described the bank’s success story installing more than 1,000 banking agents with lightening speed (1.5 agents per day!). Rather than the expected 300,000 transactions, the agents process today 900,000 transactions per month (i.e., around 30 transactions per day per agent).

The planning phase paid off and the bank’s learning curve was steep: “At the beginning it took us 3 days to open a new banking agent, today we need maximum 4 hours. Once we have one agent in a neighborhood, within three months, there will be three more.” said Almandoz.

The new channel, for which BCP won the 2006 Business Creativity Award (Premio Creatividad Empresarial), benefited all actors involved:

• Clients can now transact closer to their home at agents not only in urban Lima, but also in some parts of rural Peru. Almandoz also mentions reduced transaction cost: “mine workers often pay up to S/.30 (US$10) to transact in non-bank establishments.” Whereas bill payments at the BCP agents are free of charge, and account fees are low.
• Seventy percent of the agents were able to increase their sales by around 12% due to the increased foot traffic generated from their work for BCP. In addition, they earn around US$45 – US$200 per month in commissions.
• BCP was able to increase their coverage by 1,000 points and process transactions for over S/. 1m (US$ 330,000) at each agent each month.

The question is what are BCP’s secrets of success….. one is definitely their marketing (the bank’s anual marketing budget is around US$300-450k) and definitely their commitment and thorough planning. But how are they managing cash? We hope to find out….

Other banks like Interbank, Scotiabank, and Mibanco are also gearing up in Peru and the network of agents is expected to increase massively next year.