The early experience with branchless banking – a CGAP report

PayNET Recruitment 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 - below is part two of our three part series - ‘Uncertainties'.

Based on our observations, it appears that being an early mover in creating an agent network confers three key competitive advantages:
• Early movers are able to partner exclusively with the businesses that have the largest number of local retail outlets, thereby patching together a sizable agent network relatively quickly. Subsequent entrants are likely to find it more difficult to assemble an agent network of their own, particularly in areas with few retail establishments. The number of agents or physical locations is an easy concept to differentiate advertising, and hence it becomes a self-sustaining advantage for early movers.
• Early movers with larger agent networks can negotiate more favourable agreements with utility companies and various government agencies to distribute or collect payments on their behalf. As noted earlier, most banks realize that payments (from customers to utility companies and lenders, and from governments to welfare and pension beneficiaries) is the first product likely to move through this channel.
• A bank that is first to introduce banking services in a given geography is likely to capture greatest market share among the local population. The general manager of Banco Popular in Brazil explained that putting Banco Popular agents in unserved neighborhoods gave the bank a presence and the start of a relationship with local customers. As these communities develop and become increasingly banked, Banco Popular would be the bank whose name they would remember the best.

Most m-banking projects to extend market reach have been led by mobile operators. In the convergence of banking and telecommunication companies, who is taking the lead? It appears that while many banks are deploying m-banking capabilities to make banking more convenient for their existing customers, those ventures that have attempted to reach new client segments that are new to banking have usually been done in partnership with, if not been led by, a mobile operator.

In fact, none of the early branchless banking projects based on m-banking was bank led. SMART Communications in the Philippines and MTN in South Africa both constructed a branchless banking proposition using banks to maintain customer accounts. And GXI in the Philippines and Safaricom in Kenya designed m-banking initiatives without any bank participation at all. In the case of WIZZIT in South Africa, an independent provider packaged a mobile based branchless banking service using South African Bank of Athens as the holder of customer accounts - not mobile operator led, but not bank led either.

Consider the case of M-Pesa, which is close to signing its second millionth registered user within one year of launching nationwide. This amounts to a customer base that is almost one-half of the entire retail banking sector in Kenya. M-Pesa did it in part by building a network of 850 agent locations, a network larger than all bank branches (550) in the country. But this rapid growth is also a result of the head-start that Safaricom has in serving the mass market. Mobile operators in developing countries, including in Kenya, typically strive for rapid coverage of major population areas around the country and, in developing countries, see mass market, prepaid customers as their bread and butter. So a large number of poor and unbanked people are already their customers. On the other hand, banks in developing countries generally focus on the top 10-20% of the population, in economic terms. This situation may change in the future, as banks see the potential of mobile banking as a tool for developing branchless banking to extend reach.

Equity Bank in Kenya, Tameer Bank in Pakistan, and XacBank in Mongolia are now starting to pursue m-banking to extend reach. But the question remains: why have market-expanding m-banking based projects tended to be led by mobile operators rather than banks? We offer several reasons.

First, because mobile operators generally run a national infrastructure, they must market themselves very broadly and avoid niche strategies, however lucrative those niches might be. Hence, mobile operators may be better predisposed to the concept of branchless banking as a means of achieving mass adoption of (communications-based) financial services. Banks on the other hand, are more driven by specific customer and segment profitability measures within defined geographies and, thus, tend to view m-banking as supporting key segments rather than as a way of reaching new ones. More generally, mobile operators inhabit a far more competitive industry than banks in most developing countries.

Second, mobile operators have more experience running networks of third-party agents (airtime resellers). In fact, mobile operators may be running some of the largest retail franchises in-country. This ready-made agent network gives them a strong position from which to start branchless banking operations, or at least to negotiate partnering arrangements with banks.

Third, mobile operators have experience running high-volume, low-value transactional engines, in the form of prepaid platforms. However, they have found that their pre-existing prepaid platforms were not able to support general-purpose branchless banking accounts because of the higher transactional volume and accounting requirements of such accounts. Still, they had the vendor relationships and in-house skills necessary to upgrade their platforms.

Fourth, because mobile operators control the interface for m-banking (through the mobile phone itself and the SIM card), they can provide a more secure and appealing customer experience. The SIM card contains the operator's own security keys, which places the operator in the best position to authenticate the customer. The SIM card can store the security keys of other providers, including banks, but this needs to be done with the consent of the mobile operator. The SIM card also can house a SIM toolkit application that can be used to drive an extension of the standard phone menu that includes the m-banking application, for ease of use by the customer.

Because the SIM card's memory is controlled by the operator, this application needs to be delivered to the SIM card by the operator (either preloaded or over-the-air). Hence, without collaboration from the mobile operator, an m-banking provider would need to rely on user interfaces that are less user friendly, such as basic SMS, or with which users are less familiar, such as WAP browsing.

On the other hand, from a brand point of view, a survey CGAP conducted in South Africa suggested that fewer people would trust an m-banking service if it were backed by a mobile operator rather than a bank, but the difference was relatively small.

The main implication is that because mobile operators have controlled the ‘last mile' to the m-banking customer, very few branchless banking operations have been able to ensure interoperability across mobile networks.

Only WIZZIT among the major mobile-enabled branchless banking initiatives works across all networks in the country. But to standardize its service across operators it has had to force customers to remember a standard set of short codes to launch a standard WIZZIT menu, rather than providing a custom WIZZIT menu delivered by each operator.

If this trend continues, authorities will face important competition issues. The mobile industry is an oligopoly, especially in developing countries, where the smaller market size may justify only two or three competitors. Having these players dominate the branchless banking market may not be a palatable option for banking regulators and competition authorities alike.

On the other hand, there are attempts in several countries to establish shared mobile standards. An interesting project to watch is the mobile platform being established by Redeban in Colombia, which so far has two banks and all three operators on board, although the platform is not yet fully transactional. Similarly, the Maldives Monetary Authority is building a shared m-payments platform that will be interoperable across all operators and banks in the country.

M-banking providers have valued ease of implementation and adoption over richness of functionality, constraining the customer experience. Both banking and mobile communications are fundamentally about information. And yet there is widespread recognition that their convergence is fraught with challenges and risks for providers, customers, and regulators alike.

M-banking must achieve simplicity in its technical transaction platforms and in its user interfaces if it is to work for the poor and financially excluded. Today, many m-banking projects have been set up as a parallel banking system, with special-purpose prepaid accounts or ‘mobile wallets' offering limited banking functionality for the mobile user, rather than as a new channel into existing accounts. Besides being simpler technically, this design also makes it easier for poorer clients without a pre-existing bank account to sign up.

In the Philippines, SMART took this approach: its Smart Money service is based on prepaid accounts running on a platform operated by SMART but held by five commercial banks, including Banco de Oro. These accounts may be linked to normal current accounts at one of the partner banks, but all mobile transactions happen through the prepaid account.

For instance, customers who want to make an m-payment from funds sitting in their normal current account must first transfer these funds to their prepaid account, before sending them to the intended party from the prepaid account. This adds a layer of complexity for customers who may need to manage multiple accounts, but is easier for basic users who do not need regular bank accounts and greatly simplifies implementation by banks. When it comes to interfaces, providers want to minimize potential barriers to adoption by using the more prevalent channels.

For example, SMART Communications uses SMS to transfer Smart Money messages between the mobile handset and its own platform. Its m-banking application is built into every SIM card, so each SMART subscriber can see the m-banking offering as an extension of the phone's main menu. Any other way of setting up and using m-banking would be different for each handset, requiring SMART to educate its customers on how to launch the application. Mobile implementations of branchless banking have taken a very pragmatic, low-risk approach. But these choices constrain the customer experience and, hence, potential uptake.

Microfinance institutions (MFIs) are largely being left out. Most MFI-led branchless banking initiatives have been small pilots or have had only limited success. Even though MFIs have strong local knowledge, product development acumen, and the ability to manage small loans, most lack the stable core banking systems and specialized technical skill to implement branchless banking models or tap into existing platforms.

In the Philippines, an initiative to let customers of rural banks use G-Cash instead of cash to make deposits and repayments has been constrained in part by the poor quality of banks' core banking systems. Based on interviews with experts in the field and observations from our own visits, CGAP estimates that the vast majority of the approximately 750 rural banks will need an IT overhaul or major upgrade to participate.

In Kenya, an MFI that substituted group loan cash repayments with repayments in M-Pesa found a different problem. Group loan borrowers made fewer on-time repayments under the new system. Customers no longer attended the group meetings that had helped to keep up repayment pressure.

On the other hand, those relatively few MFIs that have the financial resources and skills to deploy branchless banking have been among the first movers. Microfinance banks, including Tameer Bank in Pakistan and XacBank in Mongolia, are developing their own m-banking channels and are partnering with mobile operators to reduce delivery costs and to reach unserved urban and rural areas.

Another way MFIs may get involved is as partners for banks seeking to expand their market among the unbanked. SKS Microfinance in India has developed an m-banking initiative in partnership with Andhra Bank, in which customers use designated SKS banking agents to deposit money into Andhra Bank accounts and use a mobile phone to repay SKS microloans.

Small MFIs and local community-based organizations can also play on the other side - as correspondents for other, larger banks. This ensures them a steady revenue stream in a synergistic relationship with the larger bank, as long as they target different population segments. An interesting case is the intent of the Andhra Pradesh State government in India to use up to 30,000 village organizations (local federations of self-help groups [SHGs]), to act as a cash agent for payment of social services, for SHG members under their umbrella, as well as for local banks.

Finally, MFIs are also tackling branchless banking as a group to overcome their individual limitations. In Ecuador, for example, the Red Financiera Rural association of MFIs and cooperatives is planning to contract a technology provider to build and maintain core banking systems and branchless banking channels on behalf of the group to minimize upfront costs and the expertise needed inside each member organization. This sharing of technology costs and expertise has perhaps the highest potential to bring MFIs onto payment networks and allow them to take advantage of mobile banking and other delivery channels they cannot implement alone.