Archive for: Branchless Banking

Mobile banking is just one of the reasons India is a place to watch for innovations in financial inclusion. This short film profiles one such innovation, Eko, to see how businesses chasing the fortune at the base of the pyramid are serving the needs of poor customers in India.

Five years’ ago, Abhishek and Abhinav Sinha created a software program that allows migrant workers in cities across India to send money to their families using a cellphone. Now their company, Eko Financial Services Ltd., is working with two major banks, the State Bank of India and ICICI, India’s second largest bank, to offer financial services to poor and low income customers using local corner stores, pharmacies, and airtime resellers as agents. By harnessing the huge potential of domestic remittances as an anchor product, Eko hopes to tap a huge potential market in India, where three quarters of the 1.25 billion people live on less than $2 a day.

The challenge to make Eko a success isn’t the technology—it’s the business model. When you see the long queues at the banks it’s clear that the demand exists to make a profitable business based on tiny margins if the right business model and regulatory environment can be created. “It’s a volume game,” says Eko marketing executive Purva Gupta. “But at the same time we need a particular ecosystem for the Eko business to sustain and to grow.”

Agent networks are the main issue that mobile operators and banks need to get right if they are to turn branchless banking into a sustainable business. The Reserve Bank of India recently removed restrictions on agent exclusivity, so customers can now transact at customer service points of one bank even if their accounts are held at another bank. Such interoperability should mean greater efficiency and lower costs across the system.

In February, the Government of India released a task force report on a unified payments infrastructure linked to the biometric Aadhaar number that proposes electronic payments for government-to-people payments as a means to cut costs for the government and bring added convenience to welfare recipients.

These two important moves by the government suggest that new momentum around branchless banking will shape the financial inclusion agenda in India. Domestic remittances and government payments are driving the electronic money market. If these payments can be translated into banking that goes beyond basic bank accounts—offering savings, insurance, and loans—they will make a major impact on financial inclusion in India.

——– Jeanette Thomas is the Director of Communications at CGAP.

We believe that the key barrier to financial inclusion for the poor is one of design—of how financial products are created and positioned in the market, which consumers are targeted and how delivery channels are utilized. As a channel alone, mobile banking offers significant opportunities for banks and mobile operators to reach down-market. But the poor will only benefit from this channel if they can access appropriate and affordable products. This can only happen if providers in this sector approach the problem of financial inclusion like service designers, and look at the current experience of banking in poor communities.

In a country like Uganda, the typical experience for a villager of going to the bank usually starts with a long and often expensive journey to the nearest town center. Upon arrival, the villager will likely be made to wait in a long queue. Upon reaching the teller, he may be surprised to hear that his balance is lower than usual, and the teller is usually too busy to explain that a slew of fees have wiped out his balance. The villager would then withdraw the remainder of his cash, and he will not inform the teller that he has no plans to come back.  He knows that the closing fee would eat up the remainder of his balance. He leaves frustrated and wonders why he decided to open an account in the first place. Like customers everywhere, he advises his peers not to make the same mistake. Read the rest of this page »

 India is on a Financial Inclusion roll. In the last couple of months alone, the Government has decided on several policy and regulatory changes that have the potential to significantly accelerate financial access to the more than half of Indian households who remain financially excluded. In the meantime, the private sector continues with a range of promising experiments to better understand client needs and provide a broader range of services at lower costs.

In the budget for the new Indian fiscal year that started this week on April 1, the Ministry of Finance announced an accelerated shift of Government social transfer payments from cash or in-kind to direct deposits through the financial system.  The primary aim is to ensure more targeted and leakage-proof distribution of the more than $40 billion worth of subsidies, but from a financial inclusion perspective this provides for many poor families for the first time an access point to the formal system.  The Government is also shifting more of its pension and salary payments to electronic distribution. Read the rest of this page »

A few weeks back Bill Maurer (of IMTFI) and I wrote a short piece for the PYMNTS.com website’s end of year round-up of issues in the payment space. In it we predicted domestic payments in Africa was a neglected topic, likely to come up more often in the future. As evidence, we cited new Gallup data that showed that a month before the survey over 124 million people transacted in the 8 countries we analyzed, mainly in cash, indicating a large and underserved market (at that point we didn’t have all the data, we now find 134m in the 11 countries mentioned in this post).[1]

I believe that payments are an optimal gateway product for financially underserved households. Unlike credit, insurance, and savings, payments do not require trust by either party. Providers don’t have to screen clients either (as with savings) because anyone willing to sign up is profitable for providers. Payments are needed by a large number of households (over 50% of the adults in the 11 countries did one or more transactions in the past 30 days) and represent a significant pain point. Willingness to try and pay are high on the client side as well (out of all transactions, roughly 50% were in cash, many in person – highly inefficient ways to move money.)

Payments are a good way to get large numbers of previously unbanked people on the system in a hurry, without slowing down to figure out who is a good credit or insurance risk, who is going to save above a certain amount, or who to trust with hard earned savings money.  But which approach should we take in developing the market for payments services? There are different paths, and it looks like they are not all equal.

One of the things the data shows is just how different one market is from the next, both in the level of activity but also in the channels through which money is sent, reflecting the different options on supply from the financial sector in each country.[2] And it turns out that not all channels are equal when it comes to serving the poor. Besides revealing a wide diversity of markets, another interesting finding is that  even in the markets where banks have the  most outreach (evidenced by having a larger share of transfers) they are still not reaching the poor, whereas in Kenya, Uganda, and Tanzania, where mobile money systems are at scale or scaling up, a much higher percentage of mobile transfers are initiated by poor people.

 First, let’s look at how transaction volumes vary by country in the figure below. Kenya is clearly an outlier, with 46% of adults reporting sending a domestic remittance in the last 30 days. Then there is a group of reasonably active countries with 18-23% of adults report sending (Uganda, Sierra Leone, Tanzania, Botswana, Nigeria, South Africa) and a second group (Zambia, DRC, Rwanda, Mali) with roughly half that level of activity at 7-15%.

Now let’s look at how they move money.

Most of the time, people bring money in person. 21% of adults in the 11 countries had sent or carried money to someone else in the past 30 days and of those nearly 2/3rds (13 percentage points) had carried money in person in cash. Carrying cash is a common way to get money around and reflects the lack of better options for the poor as well as the non poor. It’s not clear how many of these trips were initiated just to carry money (a very costly way to move, given time and transport costs) versus how many were more opportunistic, bringing money along while traveling for some other reason. Opportunistic money sending can also be very inefficient since waiting for another reason to take a trip could imply a significant delay and extra risk of robbery.

In general, among those who said they sent money rather than carrying it in person, cash again was the most popular channel (43% of senders). About one-quarter (26%) of respondents transferred money through banks or financial institutions. Two in ten (21%) sent money by mobile phone and one in 10 (10%) used money transfer services such as Western Union.

Yet as the figure below shows, the usage of these channels also varied widely across the 11 countries. More than eight in 10 of those respondents who sent money domestically in Mali (89%), Rwanda (83%) and Sierra Leone (83%) used cash. While just 7% of Kenyans sent cash.                 

In fact, there appears to be roughly three types of markets. “Bank-led” payments markets (not to be confused with a bank-led regulatory model) have middle levels of activity and a significant bank presence. The Bank-led markets include South Africa and Botswana – 50% and 47% of senders respectively used banks – and to a lesser extent Nigeria – Nigeria has just over 50% of cash-based but also 44% using bank transfers. “Mobile-led” payments markets with middle to higher levels of activity, dominated by mobile transfers including Kenya  – over 90% of senders used mobile – Uganda (68%), and Tanzania (60%). And “limited” markets – those dominated by cash, and characterized by low levels of activity including DRC, Mali, and Rwanda.  Zambia probably belongs in this last group, in that it has some bank activity but there is also a nascent mobile presence and a strong over-the-counter presence implying Zambia is not purely cash, bank, or mobile based.[3]

So, to expand financial inclusion, which type of market should we steer toward – the bank-led or the mobile-led models?

 If our initial goal is leverage the power of payments-as-gateway (discussed above) to bring large numbers of poor people into the system, should we focus policies to expand the supply of bank-based services, or the supply of mobile-based? We can get a picture of what might happen if we grew mobile or banking sector by looking at those markets where either sector is already developed.[4]

In the mobile-led markets 21% of those sending mobile based remittances were poor people. Here poor is defined as the lowest two income quintiles. Hence, we would expect 40% if the poor were represented equal to their share in the population. In the three bank-led markets, only 8% of those sending bank-based remittances were poor. Thus if we were to grow the banking sectors in the more limited markets to the level of the bank-led markets, it seems likely the market would skew toward serving the rich much more than if we were to grow a vibrant mobile sector in each of these markets.

—— Jake Kendall is a Program Officer in the Financial Services for the Poor initiative at the Bill & Melinda Gates Foundation.

Electronic money is intangible, and that makes it intrinsically a lot more discreet than piles of cash or physical forms of savings such as jewelry or livestock. One can be more “circumspect, unostentatious” (an online dictionary’s definition of ‘discreet’) with electronic money, and that makes it potentially safer and more private.

But when money is handled electronically as pure numerical information, it also becomes a lot less discrete: it is jumbled into a single quantity within a continuous scale of value that we call our balance. It makes it harder to keep things “separate, distinct” (the dictionary’s definition when you drop an ‘e’). It may be mathematically convenient to handle money electronically, but it makes the act of planning and saving more difficult for many who are not used to it.

Consider a parable of traditional savings: livestock. Every chicken, goat, pig or cow represents a discrete value, and this helps the saver in three ways. It presents clear proximate investment targets (“I want another cow”); it presents clear investment strategies (“I’ll accumulate ten chickens which I will then exchange for a goat”); and it invites assignment of ultimate purposes to each savings vehicle (“the goat is to pay for school fees, the pigs help pay for durable assets like a motorcycle, the cow is for marriages and funerals”). This kind of savings fragmentation helps discipline and planning. Read the rest of this page »

A few weeks ago, CGAP CEO Tilman Ehrbeck blogged about the various roles that governments can play to create financially inclusive ecosystems. One such role was that of a driver of transaction volume, and he specifically mentioned that one of the government’s most powerful tools to drive such volume is through government-to-person payments (G2P). G2P payments include the spectrum of social cash transfers, wages and pension payments paid by governments to its citizens. Because many of these payments, especially social cash transfers, are specifically targeted at the poor, this presents a huge potential to bring financial services to the unbanked by linking these payments to financial accounts.

But this is often easier said than done. The link between financial inclusion and G2P payments must take into account the interests and needs of three main constituencies:

• The governments that are providing these payment funds whose main focus is cost reduction and increased efficiency
• The financial providers that are making the payments to recipients whose main focus is the business case for such activity
• The recipients whose main focus is the convenience of the payments process and the functionality of the financial products offered to them

The challenge is to align these incentives in a way that brings the poor, unbanked G2P recipient into the mainstream financial system of a country.

There are two main barriers that make this difficult: the prevalence of cash and the lack of proximity to recipients. This is exactly where new business models based on alternative delivery channels such as branchless banking can play a powerful role. What good is it if a payment lands into the bank account of a recipient when the bank is located 100 kilometers from where the recipient lives? How will banks ever seriously take up this business and offer small-balance accounts to a new client segment if their only option is to use expensive channels such as branches to service them? How can governments reduce costs and increase efficiency when they are forced to truck cash around to rural parts of the country? The  use of new technologies and new distribution channels such as cash-in and cash-out agent points can provide the enabling infrastructure for greater financial inclusion for G2P recipients.

Recent CGAP research looked at four countries where this linkage is happening at scale (Brazil, Colombia, Mexico and South Africa). The results provide important lessons on implementing financially-inclusive G2P payments. Here are some of the main headlines:

• When the Ministry of Social Development in Brazil started making Bolsa Familia payments directly into the bank accounts of recipients held at the state-owned bank CAIXA, government costs decreased by 31% (compared to payment on a prepaid debit card with no store of value).
• The South African Social Security Agency pays a fee that is 54% lower when a recipient receives her payment into a mainstream financial account held at a commercial bank.
• The switch to electronic payments in Colombia turned out to be more expensive for the government than previous payments in cash since the agent distribution network had to be built from scratch, as opposed to leveraging existing networks in Brazil and South Africa.
• Recipients welcomed the convenience of electronic payments over cash. However, few recipients automatically used the new bank account to save or for much else beyond withdrawing benefits.
• The business case for the banks depends on receiving a regular fee from government. If this fee is at an adequate level, the business case can be attractive. But generating revenue on float or from cross-selling additional products is simply not a viable option for banks at this point in time.

What should we take away from this data? When the payment arrangements use existing financial infrastructure, such as agents and ATMs in Brazil and South Africa, the cost of making payments into bank accounts will be lower than the alternatives. However, if dedicated infrastructure need to be set up only for the purposes of paying cash transfers to program recipients (as in the case of Colombia), then the cost will likely be higher. Likewise, an efficient widespread branchless banking agent distribution network is the key factor for banks in reducing cost of opening accounts and servicing G2P client transactions.

The path most likely to reduce cost and improve efficiency is one that builds on and supports the development of a country’s general retail payment system. Social cash transfer programs can function as a stepping stone in the move from cash to electronic and on to fully-inclusive formal financial services.

Read the full research here or a 3-part blog series on the research on the CGAP Technology Blog.

The sheer magnitude of the financial inclusion gap –70% of households in developing countries are unbanked— calls for pretty radical solutions. We need to overcome an access barrier (last mile infrastructure), a relevance barrier (right-sized products and services) and a usability barrier (friendly and intuitive customer experience). The problem is that we tend to think of these separately, or at least we think we can tackle them sequentially. Read the rest of this page »

The Pacific has not been a hospitable place for traditional microfinance.  Challenging terrain, great distances, dispersed populations and absent infrastructure make labor-intensive operations difficult and “brick and mortar” service points impractical.  What the Pacific lacks in strong MFIs and roads, it makes up for in strong regional banks, a few rapidly expanding mobile network operators (MNOs) and a cadre of open-minded central bankers committed to financial inclusion, all of which have become the Pacific Financial Inclusion Programme’s (PFIP) primary partners to address this market failure.

Working with commercial actors with multi-million dollar balance sheets is incredibly rewarding and can be very different from interactions with traditional MFIs.  Some lessons we’ve learned may ring true with others:

“Are you talking to me?” 
In the beginning we noticed that large corporations see international organizations through the prism of non-profits and NGOs, expecting to be asked for donations and technical support rather than offered it.  It was important for us to make our purpose clear and a case for the partnership, in business terms.  Our ability to offer to share the risk and cost of groundbreaking financial inclusion projects and to engage at a technical level have been important to build our relationship.   Read the rest of this page »

Public funders have been instrumental in promoting and developing the microfinance industry; close to 70% of cross border public funding going into microfinance comes from public sources.  Currently, the financial inclusion world is abuzz with excitement about branchless banking and the potential of services like M-PESA in Kenya to dramatically reduce costs and increase access to financial services. Yet branchless banking is a new delivery channel mainly implemented by private stakeholders such as for-profit mobile network operators or commercial banks.  With significant momentum and increasing private resources invested in this space, what meaningful role can public funders play?

To answer this question, we spoke with the public funders that already have been active in this space and developed case studies to understand what role they played and why. The results can be found in CGAP’s new Focus Note ‘Emerging Lessons of Public Funders in Branchless Banking.’ Read the rest of this page »

CGAP and the Alliance for Financial Inclusion (AFI) just cosponsored the first branchless banking seminar for Francophone Africa in Dakar. The seminar was for high-level policymakers, and featured delegations from Burundi, Cameroun, Côte d’Ivoire, Democratic Republic of Congo, Madagascar, Mali, Mauritania, Niger, and Sénégal. The first day of the two-day seminar was also open to the private sector and included representatives from mobile network operators, banks, MFIs and technology providers.
 
This seminar was a timely one given the flurry of activity going on in the region. Orange Money is now active in Côte d’Ivoire, Sénégal and Mali. MTN Mobile Money is available in Côte d’Ivoire and Benin. Société Générale is on the verge of offering some type of branchless banking service in Sénégal. Zain is preparing to launch Zap in Burundi.  All three mobile operators are knocking on the central bank’s door in Madagascar. And there are three technology companies (in Sénégal, Côte d’Ivoire and Burkina Faso) that have been given the approval of the regional central bank (the BCEAO) to function as electronic money issuers. It is clear that the subject of branchless banking is on the minds of policymakers in Francophone Africa.
 
The last session of the seminar was a forum for debate among policymakers regarding specific issues of branchless banking which had been discussed and presented over the course of the seminar. The questions guiding the debate were:

• Does financial regulation and financial inclusion always go together?
• Should regulators be one step behind market innovators?
• Are the objectives of AML-CFT and branchless banking always compatible?
• Are non-bank based regulatory models more advantageous to clients than bank-based regulatory models?

For most of the questions, the policymakers were somewhat divided. Some people saw a conflict between financial regulation and financial inclusion, while others were convinced that the two always went hand in hand. Some participants eloquently argued that policymakers should not “regulate simply for the sake of regulating” and therefore should respond to innovations in the market.  But others argued that there was danger in trailing the market. Most participants were confident that the objectives of AML-CFT were compatible with branchless banking, but doubt remained in a few specific cases. Finally, while some policymakers were willing to argue that non-bank based regulatory models may be more advantageous for clients (in terms of ease of access and use), many were not comfortable with the model unless a bank had a stronger presence.
 
The regulatory questions around branchless banking are often not black and white, but usually gray. What is quite clear, however, is that the private sector is raring to go in many Francophone African markets, and policymakers need to be informed now more than ever on the appropriate ways to respond. The recent seminar in Dakar was hopefully one step closer to getting there.