The early experience with branchless banking – a CGAP report

MPW recently read a report by CGAP (Consultative Group to Assist the Poor). The report is so thorough that I had difficulty editing it down without leaving large and highly relevant tracts of information out. As such I have decided to publish the report in three different issues which break down as ‘Observations', ‘Uncertainties' and ‘Predictions' as set out in the original text.

Branchless banking has great potential to extend the distribution of financial services to poor people who are not reached by traditional bank branch networks; it lowers the cost of delivery, including costs both to banks of building and maintaining a delivery channel and to customers of accessing services (e.g., travel or queuing times).

In Brazil, customers open bank accounts, make deposits, and pay bills at lottery houses and small retail outlets. In the Philippines, urban migrants send money to their families in rural areas using mobile phones. Both of these cases can be described as branchless banking. Branchless banking entails substantially all of the following elements:
• Use of technology, such as payment cards or mobile phones, to identify customers and record transactions electronically and, in some cases, to allow customers to initiate transactions remotely,
• Use of (exclusive or nonexclusive) third-party outlets, such as post offices and small retailers, that act as agents for financial services providers and that enable customers to perform functions that require their physical presence, such as cash handling and customer due diligence for account opening,
• Offer of at least basic cash deposit and withdrawal in addition to transactional or payment services,
• Backing of a government-recognized, deposit-taking institution, such as a formally licensed bank,
• Structuring of the above so that customers can use these banking services on a regular basis (available during normal business hours) and without needing to go to bank branches at all, if that's what they choose.

This paper reviews seven key observations CGAP has drawn from its advisory work and research on branchless banking and, particularly, from its support of branchless banking projects around the world over the past year. Each element and player in the branchless banking delivery chain, including customers, financial service providers, agents, products, and technology platforms, is addressed. Most of the observations apply equally to the use of mobile phones to handle remote transactions (or m-banking) and card based branchless banking networks. However, lessons from m-banking are emphasized because of its newness relative to card-based networks.

Given the early stage of development of branchless banking solutions, these observations are offered as a tentative state of play. We also discuss four key uncertainties - as yet unresolved issues that may significantly affect the pace of development and the degree of customer acceptance of branchless banking offerings. Finally, we offer four predictions that appear to emerge from the key insights we identified.

Based on early experiences, branchless banking has a large contribution to make toward financial inclusiveness in developing countries. Policy makers and regulators are demonstrating keen interest in this topic, although in most countries regulation continues to constrain the emergence of branchless banking.

Where regulation permits, exciting new branchless banking initiatives are being developed by a plethora of market participants. But the fact is that branchless banking has yet to demonstrate pro-poor, pro-growth impacts for households, communities, and national economies. There are still some major obstacles to widespread adoption beyond purely legal enablement.
Observations

1. 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% less than 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 m-banking. In the Philippines, a typical transaction through a bank branch costs the bank $2.50; this would cost only $0.50 if it were automated by using a mobile (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 $0.85, while the same transaction at an agent would cost $0.32. Tameer Bank in Pakistan estimates that, in the Orangi slum of Karachi, the setup cost of a bank branch would be 30 times more than the setup cost per agent, which is about $1,400. Monthly running costs average about $28,000 for a branch, compared with $300 for an agent, but also, a much larger share of monthly running costs is variable for an agent than for a branch.

2. Branchless banking channels are used mainly for payments, not for savings or credit. 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% of the 1.53bn 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% reported using banking agents to pay utility and other bills, only 5% reported opening a bank account at the agent, and less than 5% said they had made a cash deposit into their bank account at an agent. Indeed, 87% 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 1.2bn transactions worth $4.7bn through the first three quarters of 2007 via its 70,000 ‘cash acceptance' points, mostly for prepaid airtime, television, internet, and other utilities (CGAP forthcoming).
• Each month, the average m-banking customer of WIZZIT (a mobile phone banking provider in South Africa) bought airtime 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 anywhere in Kenya,' andWIZZIT'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 m-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. 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% 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.

3. Few poor and unbanked people have begun using branchless banking for financial services. Having examined several branchless banking ventures around the world, it appears that less than 10% 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 airtime, or withdrawing government cash benefits). In its study in Pernambuco (a particularly poor state in Brazil), CGAP found that only about 5% 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 1m m-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 m-banking for more than payments or transfers. And in Colombia, typical cash transactions through agents are in the range of $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 m-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 debit or credit card. SMART's customer base at year-end 2006 mainly included segments it knew well: 4m subscribers had signed up for Smart Money, and of the 900,000 active users, nearly all were businesses distributing SMART's prepaid airtime.

Globe Telecom's GXI, which offers the G-Cash m-wallet service, estimates that nearly all of its 500,000 active users are individual subscribers in urban areas. In fact, the company moved beyond the pilot phase of registering outlets to accept or dispense G-Cash in rural areas as late as early 2007.

To date, just over 100 agents are registered in rural provinces, compared to the 3,000 airtime resellers that Globe Telecom has signed up nationwide directly and the 700,000 airtime resellers that buy and resell Globe airtime.

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 m-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.

4. Financial services providers view agent networks as key to achieving their business strategy. 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 13m 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 m-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 NetCash in Sao Paulo State and the Brasilia Federal District and PagFacil 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.16

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 into 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.

The Early Experience with Branchless Banking