Archive for: Remittances

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.

This Focus Note considers the issues, challenges, and opportunities of banking through networks of retail agents. It addresses the idea that, to achieve universal access, banks will need to adapt their systems to a low-value, high-volume transactional environment and to build more flexible, scalable retail networks of points at which people can conveniently pay into or cash out from their transactional accounts.

Olga Morawczynski is a doctoral candidate at the University of Edinburgh. She has spent over 9 months investigating customer adoption and usage in both urban and rural Kenya. Below are some of her observations from the field.

It is early morning in Bukura, a small village in Western Kenya. The shop-keeper and his wife are preparing to open their small store, which sells household commodities such as flour and cooking oil. They also offer M-PESA services. There is already a queue outside. A group of about twenty villagers are crowding the entrance. “It is always like this,” the shop-keeper complains while pointing to the crowd. “Since we have become M-PESA agents we have no time to rest. This thing has even over-run our other business”. He then holds up a packet of sugar. “We have not sold any sugar in months. They only want M-PESA”. Not just the Bukura agent has seen a great demand for M-PESA services. Since its introduction in March of 2007, the M-PESA application has had great success all over Kenya. There are currently over 2.3 million registered users. Over 18 Billion Ksh had been moved through the system, via person-to-person transfers.

Some of the work that I have been doing makes several arguments as to why M-PESA has become so popular. Firstly, it is the young, male, urban migrants who are driving the uptake of services – customer adoption. These migrants are what innovation researchers call ‘early adopters’ of a technology. They are usually better educated and earn higher incomes than those in the village. Because these migrants are the senders, they can choose the channel for money transfer. They then influence recipients in the rural area—who are usually female, less educated and poorer—to also use M-PESA. This segment is referred to as the ‘technology laggards’. They are usually the last, and often the least likely, to adopt an innovation.

This research also notes some barriers to adoption. Both agents and customers complain of cash float problems, especially in the rural areas. Because the majority of transactions in the village are withdrawals, agents must maintain their cash float. They do this by making frequent trips to the bank. This can be problematic if the agent is not close to an urban centre, where most banks in Kenya are located. An agent in Malaha, a small village in Western Kenya, commented, “almost every day I ride my bicycle to Kakamega to top-up my float. This takes me almost three hours. I have to leave at 6am because I want to be there when the bank opens. I must then come back again and serve my customers”. When asked if there was any other means of transport to Kakamega, the agent shook his head. He said that he was several kilometres away from the main road. He also said that he could not afford to pay the 200 ksh fee for the matatu (shared taxi).

Despite these cash float problems, the majority of customers in both the urban and rural areas assert that they prefer M-PESA over other money transfer services. This means that M-PESA must be offering them some kind of substantial benefit. In Bukura, this benefit comes in the form of savings on transport. Customers do not need to travel into Kakamega, the nearest town, to access the service. One elderly farmer commented that “I can just walk from my shamba (farm) and get money. I don’t have to spend and go into town. If the agent does not have cash today, then I will come back tomorrow. It is cheaper to wait”. Finding strategies to manage the cash float problem will undoubtedly be one of the greatest challenges for Safaricom. For now, however, it seems like customers are willing to accept the inefficiencies of the service. It is, after all, cheaper to wait.

“Standardized innovation” is the phrase used by Dialog Telekom’s (Sri Lanka) Dr. Hans Wijayasuriya at the Mobile Money Summit in Cairo today. In a phrase I think is quite useful, he was summarizing the need to have mobile banking standards, interoperability, worldwide. Right now we are observing many proprietary systems taking shape – most notably, M-PESA in Kenya, Smart Communications, and as they move further into the m-banking space, Western Union. Imagine having hundreds of transaction networks – Visas, Mastercards – that don’t talk to each other. Hopefully, that’s not the direction in which mobile banking is headed. Proprietary is fine, interoperable is essential.

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The New York Times recently highlighted the work of Jan Chipchase, a Nokia researcher trying to understand how the poor use mobile phones. The article includes a report that Ugandans are using prepaid airtime as an informal money transfer mechanism, particularly to get value back to family in rural areas.

“Ugandans are using prepaid airtime as a way of transferring money from place to place, something that’s especially important to those who do not use banks. Someone working in Kampala, for instance, who wishes to send the equivalent of $5 back to his mother in a village will buy a $5 prepaid airtime card, but rather than entering the code into his own phone, he will call the village phone operator (“phone ladies” often run their businesses from small kiosks) and read the code to her. She then uses the airtime for her phone and completes the transaction by giving the man’s mother the money, minus a small commission.”

We’ve seen this in many countries, such as DRC (several reports on this as far back as 2005) and more recently stories of overseas Kenyans using airtime to send value home to family members in need during the post-election turmoil.

While undeniably innovative, it also shows how sub-par other money transfer options are which the poor have available to them. Prepaid airtime as a currency substitute is quite costly in percentage terms, due to VAT (while a prepaid scratchcard is bought at fave value, VAT represents a hidden increase to the cost of minutes), operator’s discount (again, built into the cost of airtime), and a commission for whoever turns it back into cash (in the Uganda example).  We estimate the all-in cost from the Uganda example at at least 25% of the value sent. That’s quite high, and not all that far off from the high fees Western Union has been lambasted for charging with small value transfers.

Still, other options could be even more costly, especially if risk-adjusted, e.g. to account for the possibility of money lost when sending money with people. And other means also come with the hard-to-quantify but very real “worry factor” of waiting days or even weeks to know if the money arrived.

Mobile banking, access to finance, and the attendant challenges and opportunities are all on the agenda at the Mobile Money Summit, which takes place May 14 – 15 in Cairo. This is an opportunity to hear from innovators, meet new partners, and engage with leaders from finance, telecom and the development community. CGAP is proud to co-organize this event with DFID, IFC, and the GSM Association, which represents more than 700 mobile network operators.

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Why bother about savings and credit? News this week that remittances from the US to Mexico grew a measly one percent to $23.9 billion in 2007, compared to growth of 17 percent in 2006.  That hurts people who depend on remittances. The Mexican central bank recently cut its economic growth forecast for 2008 by half a percentage point.

Low-value remittances to some extent sit at the center of branchless banking channels both card- and mobile- based. Their significance for economies like Mexico or Philippines or Kenya and elsehwere has been a driver for new low-cost remittance solutions such as G-Cash and M-Pesa. These approaches have been the inspiration for the new banking channels that CGAP has been writing about and working on over the last year.

When it comes to branchless banking, the remittance volume helps make both the business case to financial providers and is an important part of customer adoption of branchless channels. The high volumes for some corridors ($12.8 billion in official international remittance to Philippines in 2006) make the case for banks (and telecoms and others) to possibly invest either themselves in a sprawling cash-handling infrastructure or work with gas stations, post offices and retail providers to set-up agent networks. Customers are likely to use these channels to access remittances that are an important part of their livelihood. Some would even argue that the high remittance flows and their impact on the economy serve as a motivator for regulators to encourage lower cost innovations as they have in the Philippines.

But we have yet to crack the puzzle of how remittance recipients get to savings and credit. The frequently used Brazil example is worth mentioning again: billions of dollars in government transfers to low-income people via over 90,000 points - but just one in 25 of them (based on a CGAP survey) are actually saving. 

Conventional wisdom says cash is king. It’s cheap to use, attracting no fees or minimum balances, unlike credit and debit cards.

But the equation can radically change in emerging markets, making cash unduly expensive for financial service providers and clients alike.

Up to 70% of the 2000 ATMs installed in Pakistan are reportedly unable to dispense cash accurately. Pakistan’s has two Rs 1,000 notes in circulation, and the quality of the notes themselves can vary dramatically. As a result, ATMs routinely jam, or fail to accurately count notes dispensed. Branch-housed machines are repaired more quickly, but even there the error rate is reportedly 30%, according to a study by ShoreBank International. Consumers shy away from using ATMs, and banks’ investment in ATMs yields a diminished return, rather than cost savings they may have hoped for as customers are reluctant to give up the teller window for ATMs.

In Kenya, cash represents risk for ordinary people sending money home. Friends and bus companies are the preferred way to send money to family in other parts of the country, according to FinAccess, a nationwide survey of financial service behavior. However, Kenyans are quick to cite neither is perfect: money can too easily go “missing” with friends, and though bus companies are more reliable, the transit times are still long (often days). By contrast, clients of M-PESA, Safaricom’s mobile wallet service, say its cheaper for both them and their family, as there is often a Safaricom agent close by which will receive or dispense cash.

Cash can be costly for providers and clients alike. Moving transactions into electronic channels could make services more affordable to offer and use.

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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