Archive for: POS

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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A recent blog post running on PCWorld highlights the idea of delivering aid via mobile phones. No doubt there’s real potential – we certainly think so. Consider how social protection grants are getting to some of the world’s poorest via bank cards in South Africa, Malawi and Kenya.

Going electronic can knock down costs of getting help to people who need it. The bar isn’t set very high: 65% of USAID’s food aid budget is consumed by the cost of delivery, for example. Handing out cash grants could be much more cost-effective, while boosting demand for local farm production. Using direct deposit with a debit card can also reduce corruption - light fingered officials siphoning off funds for the poor. So branchless banking should help with the relief industry’s traditional stumbling blocks of cost and corruption.

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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.

Jamii Bora is a rapidly growing Kenyan MFI which is using 200 handheld terminals with their 185,000 members, via 72 branches and 142 outlets in 13 locations across the country. JB staff are adamant that going electronic has allowed their back office to keep up with the rapidly growing numbers of clients coming through the front door. The Sagem-branded POS terminals are equipped with a magnetic stripe reader for debit cards, an alphanumeric keypad, display screen, and thumbprint reader. They connect to the MFI’s core banking system via GPRS over the local mobile networks. Jamii Bora has re-engineered its processes so that nearly all transactions are completed via the POS, the client’s debit card, and their thumbprint as identification.
Clients have more confidence in printed rather than handwritten receipts. This is particularly important for Jamii Bora’s clients, who organize in 5-person groups and usually send 1 member with all of their repayments and deposits. The POS application has been customized to print out itemized receipts which group members can use to verify transactions were correctly completed. The migration to electronic has also radically sped up data processing. Clients can see their money in the account the next day, which is valuable as Jamii Bora ties loan size to the amount of savings on deposit. And the MFI can also see the end of day cash position for its 72 branches, a simple but critical piece of data for management.

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RBI Executive Director R B Barman said this week that a central bank committee is examining the regulatory challenges raised by mobile banking. The committee is expected to report recommendations next month, leading next to RBI drafting the requisite changes to the country’s regulatory framework.

The report is the latest or progressively more encouraging signs from RBI that it plans to provide additional guidance for mobile banking to take off. In its Financial Sector Technology Vision document, released in October, RBI indicated it sees high potential for electronic banking to increase efficiency in retail banking. But RBI is also concerned about mobile security, particularly authenticating users accessing bank accounts remotely.

RBI is also closely watching several pilot schemes using mobile connectivity to improve access to financial services among low-income Indians. As the Economist reported earlier this month, one program in Andhra Pradesh is testing how to deliver pensions and unemployment benefits to around half a million people in villages, via specially-equipped mobile phones in the hands of local payment agents and smart cards issued to recipients. A parallel POS-based system is also being tested. So far, 40,000 cards have been issued.

What’s not yet clear is whether RBI guidance on mobile phone banking will be mostly concerned with mainstream banks providing mobile as an additional channel for current customers, or whether RBI will extend permission to some more far-reaching initiatives. Will mobile operators get a window to become licensed to provide electronic wallets for international remittances, bill payments and other payment services?

The G2P pilot in Andhra Pradesh also makes extensive use of local payment agents, and we understand at least some of these to be local merchants. In rural areas, its often the local store owner who has enough liquidity to pay out cash on the government’s behalf. But so far, RBI regulation on outsourcing doesn’t provide clear permission for banks, microfinance institutions or mobile operators to follow suit and use local merchants to extend banking services in places where bank branches may otherwise be too expensive to build. Will RBI make regulatory changes on issues like this, too?

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.

The Hindu has a great interview with NCR’s P. P. Manjunath Rao, who leads that company’s sales efforts for India. Recently the Indian subsidiary of NCR tripled its production of ATMs to nearly 900 units a day - and with just 28 ATMs per million people (compared to 200 ATMs per million in Mexico, for example) it would seem that there’s room to run for ATM providers. Rao tells the Hindu:

Using thumbprint and voice guidance in ATMs reduces literacy requirements to a considerable extent. Thus, establishing the identity of a rural depositor through biometrics makes it possible for illiterate or barely literate people to become part of the banking user community.

A simplified menu on ATMs coupled with possible audio guidance in local language enables easy use for rural masses. So far, bank ATMs are dependent on PIN (personal identification number) verification. The fingerprint authentication method is non-PIN based, and this requires enhancements to the standard switch environment. Though identification can be via face, voice, retina or iris, fingerprinting has the advantage of being a familiar concept worldwide.

Though exciting, widespread deployment will be a challenge. How to handle cash - what about banking agents? What is required for customer adoption? With lower levels of functional literacy, what about financial literacy? These are questions we at CGAP are working on with our research collaboration with Microsoft Research India, as well as our project partners.

An important part of effectively rolling out a banking agent network - a network of retail or postal outlets that handles transactions on behalf of financial institutions and mobile operators - is the agent location. 

Our project partner, Credibanco VISA in Colombia, is using a georeferencing tool to advise banks as to where large numbers of their target clients are located, and also which retail outlets in that area might make good “corresponsales no bancarios”, as the Colombians call their banking agents.

The process is easy. Based on the bank’s target clientele (e.g., income up to COP 250,000 per month [US$122] and “estrato 2″ reflecting the Colombian economic classification of 0-6, where 0 is poorest and 6 highest income) and preferred location (e.g. high population density, no financial infrastructure, etc.), VISA uses census data, financial infrastructure coverage, and retail information from yellow pages to develop heatmaps which combine the following:

• poverty and income levels 
• population density
• postcode boundaries
• existing financial infrastructure (e.g. branches, ATMs, etc.) and card holders
• stores and other commercial activity
• areas that generate a lot of foot traffic (e.g. bus stations, markets, hospitals, etc.)

Based on the resulting maps, the bank can see in which areas their agent would be most effective. Factors like poverty and income level, population density, and existing financial infrastructure will impact the agent’s future transaction volume; placing agents near bus stops and market areas will make them more visible and increase the likelihood that clients will repeatedly use the agent to conduct transactions.

On the picture you see the final heatmap. Red areas show neighborhoods with great opportunity to reach the bank’s target clients; the mountains refer to population density. If you would like more detail, please send me an email and I can forward you VISA’s complete analysis of Ciudad Bolivar, a poor neighborhood of Bogota, Colombia.

CGAP and Microsoft Research India (MSRI) are collaborating on joint research to better understand the needs of people who have low levels of literacy when it comes to technology. In plain English, this means we all want to know how to design something that would be of use to an illiterate person.

In addition to the focal research on User Interface design, the MSRI-CGAP collaboration will also involve joint explorations in understanding the social and economic context and impact of mobile-banking on poor households.

What we learn will be shared with everyone. Aishwarya Ratan is with MSRI and joined us in Washington at our conference this week to talk about the work envisioned and some of the things MSR has already learned in India. Here are her thoughts.

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That was fun. What did we learn? 

We reaffirmed that small, including micro, enterprises have proven themselves to be reliable and sustainable ways to help people out of poverty and that, in that context, we have abundant proof that microfinance is a workable idea.

MFIs, although having reached increasingly impressive numbers of people, must nonetheless recognize that more than two-thirds of the inhabitants of developing countries remain to be touched by the MFI mission of bringing the advantages of banking to the unbanked and under-banked.

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