Frugal Finance: How Eko HelpsIndia’s Migrants Move andManage Money

IBGC Working Paper 14-01Nikhil Joseph and Benjamin D. MazzottaOctober 2014

Frugal Finance: How EKO Helps India’s Migrants Move and Manage Money

IBGC Working Paper 14-01 Nikhil Joseph and Benjamin D. Mazzotta

October 2014

Remittances in India

EKO is one of India’s leading business correspondent (BC) firms. Business correspondents are intermediaries that offer financial services on behalf of banks to customers who, either by virtue of their place of residence (far from a bank branch) or their circumstances (small savings, illiteracy, poor identification documents), are expensive to service. In order to meet regulatory requirements on financial inclusion, banks appoint BCs, such as EKO, to reach such customers and help them open accounts, make deposits and withdrawals, and send remittances.

Remittances represent a significant amount of transaction value, especially as the rural population migrates to urban areas. The following chart shows a state-by-state comparison of remittances received.

Exhibit 1: Top Domestic Remittance Receiving States in India

State Household remittances

(₹, Crores)

State share of national total (%)

Interstate share of state total (%)

Share of NDP (%)

Rural Urban Total Rural Urban Total Rural Urban Total

Uttar Pradesh 5,468 923 6,391 21.5 13.2 19.7 77 66 75 2.1

Bihar 3,686 361 4,047 14.5 5.2 12.5 89 40 85 3.9

Rajasthan 2,953 605 3,558 11.6 8.7 11 71 49 67 2.3

West Bengal 1,920 652 2,572 7.5 9.4 7.9 54 55 55 0.9

Tamil Nadu 967 1,046 2,013 3.8 15 6.2 37 49 43 0.7

Orissa 1,425 306 1,731 5.6 4.4 5.3 63 62 63 1.6

Kerala 1,338 340 1,678 5.3 4.9 5.2 56 71 59 1.2

Maharashtra 1,116 549 1,665 4.4 7.9 5.1 14 42 23 0.3

Jharkhand 808 234 1,042 3.2 3.4 3.2 70 62 68 1.7

Andhra Pradesh

620 349 969 2.4 5 3 35 37 36 0.3

Karnataka 595 312 907 2.3 4.5 2.8 25 35 28 0.4

Haryana 639 225 864 2.5 3.2 2.7 71 62 69 0.6

All India 25,444 6,975 32,419 100 100 100 63 53 61 0.8

Source: Tumbe 2011. NDP refers to Net Domestic Product. Average exchange rate in 2008

was ₹40.13 per US. 1 crore is equal to 10 million.

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The Remittance Market: Meet Jaiswal

Jaiswal is one of an estimated 100 million domestic migrants who regularly send money from where they work to where their families live. The value of these domestic transfers was estimated to be $10 billion in 2007-08. Eighty-percent of these transfers were directed to rural areas and 60% across state boundaries. Like many young men from India’s northern countryside, Jaiswal

1 moved

to Delhi in search of a better life. Delhi is India’s fastest growing metropolitan region and, after Tokyo, the world’s second biggest urban agglomeration with population of over 22 million. The city-state of Delhi has a per capita income about four times the average that of neighboring states such as Haryana, Uttar Pradesh, Rajasthan, and Bihar. Jaiswal, a migrant from a village in one of these much poorer states, works in a factory in West Delhi. He lives in a rented room with three other factory workers. Every month, he gets paid in cash and has to decide how much to save and how much to send back to his family in the village. Keeping money in cash for any significant length of time, he will tell you, means that it will get spent quickly. This was before he heard of EKO, which let him open an account, make small deposits, and send money to his family, all from his local convenience store.

A majority, about 65%, of Indians, do not have access to modern financial services such as a savings account, a credit card or electronic money transfer facilities. Even among many of those who do, such as Jaiswal who has a bank account, account dormancy is widely prevalent.

Data from the Centre for Microfinance (CMF), a think-tank in Chennai, India, may explain why Indians seem to rarely venture inside a bank. CMF surveyed 274 migrant workers in 4 major ‘migrant corridors’ across the country to understand how these migrants were sending money and at what costs (Gopinath, Oliver, & Tannirkulam, 2010). They found that there were six main channels for the migrants to send money home—banks, post offices, hawala couriers, cash couriers, friends, and self-transfers. Of these, only two, banks and post offices, count as formal channels. Only 43% of the respondents reported using these channels—the rest used informal

1 Jaiswal’s story is based on a field account reported in Nandhi (2012).

0%

5%

10%

15%

20%

25%

30%

35%

40%

Account at aformal

financialinstitution

Debit card Checks usedto make

payments

Electronicpayments

used to makepayments

Mobilephone usedto receive

money

Credit card

Po

pu

lati

on

Access to financial services

Access to Financial Services

All Female

Bottom 40% Rural

Source: World Bank Findex

Exhibit 2. Access and Use of Financial Services in India

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methods, especially hawala couriers. Hawala couriers are a network of informal money brokers who accept and discharge payments across the country. They offer no promissory guarantees and transact entirely on trust.

Respondents to the CMF survey payed a median cost of ₹80 for a remittance of ₹2000 ($32.50), or 4% of the transfer amount. However, the cost of transferring money, CMF data shows, is a relatively minor concern for migrants, with only 17% citing it as their most important concern. By far the greatest concern was security (mentioned by 72%) followed by speed of delivery (mentioned by 37%).

Despite the extremely low direct costs of an inter-bank electronic transfer, about ₹ 2.5 ($0.06) for

up to ₹10,000 ($250), banks often involve various indirect costs that domestic migrants must take into account. Workers lose wages by visiting a bank during business hours. They pay to travel to a bank, either across town or sometimes from outside the city. Recipients must pay symmetric costs to obtain the remittances. For many Indians, though, the most expensive indirect costs are official documents that prove identity and place of residence. Despite having a bank account, Jaiswal used to save his money in the room he shared with three other tenants. Saving money in cash was far more convenient than going to a bank branch, filling out forms, and standing in a queue just to make a deposit. The CMF study found that once you add these indirect costs, the cost of

remitting a sum of ₹2000 through a bank is about ₹ 60, or about 3% of the transfer amount. The average transaction cost on the informal hawala network is about 4.6% on average. The most expensive way of remitting money turned out to be the Post Office, which charged on average 6% of the total transaction.

The Reserve Bank of India (RBI), India’s central bank, sees this state of affairs as unacceptable and has identified financial inclusion as one of its most important strategic objectives. It has identified four financial services in particular as essential for every Indian (Chakrabarty 2011). These are: a savings account with an overdraft facility, a remittance product for electronic benefits transfer (EBT) and other remittances, a pure savings product, ideally a recurring deposit scheme, and entrepreneurial credit in the form of a credit card.

0%

5%

10%

15%

20%

25%

30%

35%

40%

Account at aformal

financialinstitution

Account usedfor business

purposes

Account usedto receive

governmentpayments

Account usedto receive

remittances

Account usedto receive

wages

Account usedto send

remittances

Po

pu

lati

on

Access to financial services

Account Usage Breakdown

All

Female

Bottom 40%

Rural

Source: World Bank Findex

Exhibit 3. Use of Financial Accounts Among Vulnerable Populations

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The RBI has concluded that its decades-long efforts to prod India’s big banks to show greater enthusiasm for its inclusion agenda—involving, among other things, forcing banks to lend to ‘priority sectors’ such as rural businesses, and mandating the number of branches a bank must open in designated underbanked areas—have largely failed. In 2006, it announced that BCs will be allowed to act as intermediaries to banks in offering financial services to last-mile customers that are costly to reach through traditional banking channels. This strategy has led to more success in expanding the penetration of financial services in formerly unbanked rural areas.

Despite the many cost efficiencies that BCs offer over brick and mortar bank branches, their business proposition is still precarious. In the RBI’s own words (Chakrabarty 2011), “while access to financial services has improved, the usage of the financial infrastructure continues to be tardy.” Essentially, though BCs have succeeded in opening the first bank accounts for many, people do not seem to be using them much. This, the RBI notes, “reduces the viability of financial inclusion activities for banks and BCs. The reduced viability, in turn, impacts the scalability of the model, thereby hampering financial efforts.”

Data from industry analysts bears this out. Kapoor and Shivshankar (2012) of Microsave, an international consulting firm focused on inclusive finance, surveyed India’s leading BCs and concluded that the business proposition for BCs becomes viable only “once customers start to use two or more products on an average.” More than half of the BCs surveyed in the study reported difficulty in recovering their costs.

The EKO Story

The Sinha brothers, Abhishek and Abhinav, co-founded EKO India Financial Services in February 2008. This was the second startup venture of the entrepreneurial brothers. In 2006, Abhishek co-founded 6D Telecom Solutions, a telecom value-added services company, which Abhinav later joined to lead its online recharge platform. While developing mCommerce solutions at 6D, Abhishek was puzzled at why industry participants were focused on just a minuscule segment of the market and ignoring the rest, i.e. the millions who neither had a bank account nor a payment card of any sort. The big idea behind EKO was to deliver basic financial services to unbanked Indians through the use of mobile-enabled, low-cost technology and still make a profit. Banks, which had to meet RBI targets on opening a certain number of no-frills accounts for people were

0

50000

100000

150000

200000

250000

300000

2010 2011 2012 2013

Bank Outlets Opened In Unbanked Rural Areas

Other Modes

BCs

Rural Branches

Source: RBI 2013

Exhibit 4. Going Where No Bank Has Gone

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ready to pay a commission to BCs to do so on their behalf. The challenge was twofold. One, demonstrate the value of putting money, even very small amounts, in a savings account among individuals who were convinced they earned too little to be able to save anything worthwhile. And two, build a network of retail outlets, or customer service points, in locations convenient to EKO’s target demographic. EKO started slowly, opening around 10,000 new accounts a month.

Strategically, EKO’s focus shifted from being a BC that opened accounts for people to being a payments company that processed remittance transfers for migrants who may or may not have a bank account. Abhinav candidly describes this changed strategic pivot as a fluke. Abhinav and his brother did not envision becoming a remittance focused player when they started out. The move was inspired by the State Bank of India (SBI), EKO’s most important bank partner. In August 2010, SBI launched its Tatkal scheme enabling EKO customers, whether they had an account or not, to transfer money over the counter and immediately to any SBI account holder. At the backend, once a customer handed her money to the EKO agent the agent would initiate an interbank electronic transfer from EKO’s cash-float account to the specified recipient’s bank account using either an SMS-based mobile application, or an internet account. A significant policy change that enabled all of this was the RBI decision to relax KYC (Know Your Customer) norms, which previously required documentation attesting both proof of identity and address, for all money

transfer transactions less than ₹10,000.

EKO’s initial marketing push had a simple message: khata kholo har darwaza kholo, a Hindi phrase that roughly translates to “Open an account, open every door.” Working with an extremely frugal marketing budget, EKO reached out to its potential customers in their neighborhoods through fliers, street plays, and street signs. Additionally, the local convenience store merchants they recruited to join their network demonstrated EKO’s product to their regular customers and coaxed them to give it a try.

Exhibit 5: EKO’s SBI (State Bank of India) Savings Account Pricing Model

Urban and Metro Rural and Semi-urban

Account Opening Fee ₹ 100 ₹ 25

OkeKey Booklet ₹ 10 ₹ 10

Account Maintenance (monthly)

₹ 4 ₹ 4

Deposit fee

(₹1 min., ₹6 max.)

0.25% 0.25%

Withdrawal fee

(₹2 min., ₹12 max.)

0.5% 0.5%

P2P and Outstation withdrawal fee

(₹2 min.)

1% 1%

Outstation deposit fee

(₹25 min., ₹100 max.)

2% 2%

Source: EKO’s website [http://eko.co.in/product/banking/sbi/]

Exhibit 6: EKO’s Money Transfer Pricing Model

Transaction Size Fee

₹ 1 to ₹ 1,249 ₹25

₹ 1,250 to ₹ 4,999 2% of value

₹ 5,000 to ₹ 10,000 ₹ 100

Source: EKO’s website [http://eko.co.in/product/banking/sbi/].

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While building an initial mass of customers, EKO did not charge a fee to open an account or make deposits or withdrawals. By around September of 2010, EKO introduced two pricing plans—

basic and premium. Both entailed an initial account opening fee of ₹ 100 (~$2 at the time), and

paid an interest rate of 3.5% on an account balance greater than ₹ 500.2 The premium plan

required a flat fee of ₹ 100, which enabled the customer to make as many transactions as they

wished in a year. The basic plan, on the other hand, charged a fee of ₹ 2 per transaction—be it deposit or withdrawal. In June 2011, EKO dropped its dual pricing strategy to adopt a single variable pricing model. It has stuck with this model since then, with minor adjustments.

Offering a service for free and then asking people to pay for it after they adopt it, will have ramifications for customer retention, especially when the target segment is extremely price sensitive. EKO’s decision of introducing a dual pricing model for their service in 2010 was no exception. An independent survey of EKO customers by a microfinance researcher reveals that one third of the respondents sampled, all of whom were EKO customers, discontinued using EKO’s services (Nandhi 2012).

From EKO’s point of view, this was unavoidable; their pricing structure was mostly decided by their partner banks. Relying on commissions for opening bank accounts, and small, irregular deposits, and withdrawals was unsustainable given the fixed costs of maintaining and building a retail network.

A Moment of Crisis

In 2011, EKO had to change its pricing structure again. When it opened for business in 2008, the firm had no fees for new accounts, for deposits or withdrawals. Its revenues relied solely on the commissions it received from its bank partners—a conscious decision to quickly grow its customer base. In 2010, the company asked its customers to swallow some modest changes to fees, but at a heavy price in attrition. One survey of its customers in Delhi reports that one-third of EKO’s customers had abandoned the service in response to this move (Nandhi 2012). Now, EKO wanted to abandon the dual price model it introduced in 2010, with a basic pay-per-use plan and premium annual subscription plan, in favor of a simple variable rate for money transfers (remittances). This was in line with its strategic shift in focus to being a facilitator of remittance payments, rather than just an agent to its bank partners that opened accounts and relied on commissions and account usage fees for its revenues. How would the customer base react?

Just when it had identified a promising new focus for its operations, EKO was faced with mini-crisis of sorts in May 2011. A number of its retailers went offline en masse. The reason was that EKO was unable to deliver the commissions due to them as it had exhausted its working capital. Until then, EKO’s policy was to settle its dues to retail agents on a daily basis. EKO was unable to do this because their partner banks were slow in clearing commissions they had due. Just at the height of the cash crunch, customers found local EKO retailers to have gone offline. Worse still, finding replacements took up to three months. A detailed picture of EKO’s financial health is presented in the Appendix.

This crisis could have proved debilitating for a company that relies on the trust of people who have little to spare. Abhinav credits their recovery to the efforts of their sales team, which proactively reached out to their retail network, and met them everyday to rebuild confidence. Lack of direct competition in the remittance space, at the time, also helped. EKO’s management to switch from clearing retail agent commissions on a daily to a monthly basis. This has given them significant flexibility and has put them in a much stronger position given their occasionally volatile cash flows.

2 Individual accounts are limited to INR 10,000 daily value.

Exchange rate was ₹ 64.42 to the dollar August 24, 2013.

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Prospects and Challenges

EKO’s pivot to remittances, from being a traditional BC that simply opens accounts for banks, has proved tremendously fortuitous. Its remittance service accounts for over 75% of its gross

transactions. It processes, on average, transactions worth ₹6-9 crores daily. In total, it has served over 3 million customers through its retail network. According to Abhinav Sinha, the volume of remittance transactions EKO is processing is growing at over 100% year on year. The size of an average transaction ranges from Rs2000-5500.

Abhinav describes EKO’s short to medium term goal as expansion into India’s top 20-30 urban markets in the next two years and aggressively compete for the remittance market. EKO’s goal is to be present wherever the migrant who needs to send money home is present. In each new territory, EKO builds a presence in migrant enclaves. EKO’s transformation from traditional BC, one that the RBI would like to see establishing banking channels in disparate villages, into a Western Union-like remittance focused player, seems complete. EKO aims to transfer money, instantly and conveniently from down the street from every urban migrant’s residence, to any bank account in India. As long as the recipients at the other end have reasonable access to an ATM, or a bank branch, or even the customer service provider of a more traditional (and perhaps less astute) BC, the EKO model seems to be a winning proposition.

The last point of the remittance process, where the money is received, can, open up EKO to competition from powerful and new players. Telecommunications firms, long kept away from the payments space by a wary RBI that continues to place its faith in a bank-led push towards financial inclusion, have finally made a foray into the scene. Two of India’s biggest GSM operators, Airtel and Vodafone, have launched mobile wallet services in partnerships with banks, who seem agnostic as to which channel enables them to meet their financial inclusion targets. Vodafone, incidentally, has in the first half of 2013 launched in India its iconic M-Pesa brand, which pushed Kenya to the forefront of mobile banking. It has tied up with ICICI Bank for this and allows customers who are able to produce requisite KYC documents, to start an open loop wallet from which they will be able to deposit, withdraw and transfer at will. The recipient of an M-Pesa transfer need not even be a Vodafone subscriber. The recipient receives a transaction ID through text message and the sender passes along a secret code by, say, calling up the recipient. Upon presenting both these pieces of information to a local Vodafone retailer, the recipient can withdraw her money. Withdrawal is contingent on a two factor authenticated transaction that does not require a either a card or biometrics.

The question is how soon the sender and the recipient can adapt to make this largely self-assisted payment transaction. For the local telecom shop operator, adding this service imposes little additional cost and offers another potential revenue earner. Telecom firms in India have already built a formidable retail network of over 1.5 million outlets, and are battle hardened operators in a highly competitive market that serves a subscriber base of over 800 million in a low margin-high volume environment.

EKO’s astonishing growth clearly suggests that there is a huge market to be tapped, one that is growing annually. Given the size and diversity of India’s market, there’s reason to believe there will be enough of the pie to go around for competing models. EKO’s task going ahead will be to build on the value proposition it offers its customers who recognize and value its unique brand of service.

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Reference List

Chakrabarty, K. 2011. “Financial inclusion: A road India needs to travel.” LiveMint.

Gopinath, S., Oliver, J., & Tannirkulam, A. 2010. Putting Money in Motion—How Much Do Migrants Pay for Domestic Transfers. IFMR and Reserve Bank of India College for Agricultural Banking.

Kapoor, R., & Shivshankar, V. 2012. State of Business Correspondent Industry in India – The Supply Side Story. Microsave.

Nandhi, M. A. 2012. Impact of EKO’s SimpliBank on The Saving Behaviour and Practices of Low Income Customers: The Indian Experience. IFMR and Microfinance Researchers Alliance Program.

Tumbe, C. 2011. “Remittances in India: Facts & Issues.” IIM Bangalore Research Paper No. 331.

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Exhibit 7: Eko India Financial Services Pvt Ltd - Key Financial Information

Fiscal Period ($, Thousands) 2010 2011

Total Operating Revenue 937 945 Growth over prior year (%) N/A 96.42 Net sales revenue 937 945 Growth over prior year (%) N/A (3.42) Operating profit (EBIT) (348) (2153) Growth over prior year (%) N/A 591.57 EBITDA (329 (2116) Margin (%) (35.12) (223.90) Net Profit (Loss) (365) (1,311) Margin (%) (39.01) (231.45) Total Assets (122) 130 Growth over prior year (%) (98.21) (105.45) Total equity (401) 130 Growth over prior year (%) 1,207 (32.04)

Source: Emerging Markets Information Services (EMIS)

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Exhibit 8: Eko India Financial Services Pvt Ltd - Income Statement

Fiscal Period ($, Thousands) 2010 2011

Income Statement (₹, Thousands) 2010 2011 End date of reporting period 31-03-10 31-03-11 Operating Income 900 900 Net Sales 900 900 Other Operating Income 900 900 Total Income 900 900 Administrations & Other Expenses 1300 3100 Remuneration 100 100 Total Expenditure 1300 3100 Operating Profit (300) (2200) PBDT (300) (2200) Profit Before Taxation & Exceptional Items (400) (2200) Profit Before Tax (400) (2200) Provision for Tax (900) Deferred Tax (900) PAT (400) (1300) Profit Balance B/F (300) (700) Profit Available for appropriations (600) (2000) Appropriations (600) (2000) Profit & Loss Balance C/F (600) (2000) Consolidated net profit (400) (1300) Other General Expenses 1200 3000 Total Gross Sales 900 900 Directors' remuneration 100 100 General Admn Exps 1300 3100 Adjusted EPS (3400) (9100) Adjusted Book Value (3600) (1200)

Source: Emerging Markets Information Services (EMIS)

Notes: • Exchange rate used for currency conversion in 2010 and 2011 are 47.72 and 45.61

respectively

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Exhibit 9. Eko India Financial Services Pvt Ltd – Balance Sheet

Balance Sheet ($, Thousands) 2008 2009 2010 2011

End date of reporting period 31-03-08 31-03-09 31-03-10 31-03-11 Share Capital 300 200 200 300 Equity - Authorised 500 400 400 400 Equity - Issued 300 200 200 300 Equity - Subscribed 300 200 200 300 Equity - Called Up 300 200 200 300 Equity Paid Up 300 200 200 300 Face Value 2,500 2,000 2,200 2,200 Number of Equity Shares Paid Up (₹, Thousands) 261,759 205,348 235,988 321,852 Number of Equity Shares Subscribed (₹, Thousands) 261,759 205,348 235,988 321,852 Share Application Money 300 Total Reserve (100) (200) (600) (500) Securities Premium 0 0 100 1,500 Profit & Loss Account Balance (700) (2,000) Other Reserves (100) (300) Reserve excluding Revaluation Reserve (100) (200) (600) (500) Shareholder's Funds 200 0 (400) 100 Unsecured Loans 100 300 Other Unsecured Loan 100 300 Total Debts 100 300 Total Liabilities 200 100 (100) 100 Gross Block 100 100 100 100 Computer Software 0 0 100 100 Capital Work in Progress 0 200 Investments 100 Currents Investments 100 Unquoted 100 Mutual Funds Units 100 Sundry Debtors (Debtors) 0 400 Debtors Others 0 400 Considered good (Debtors Good Others) 0 400 Cash and Bank 0 100 100 300 Balances at Bank 0 100 100 300 With Scheduled Banks 0 100 100 300 In Currents A/c (by Defaults) 0 100 100

300 Notes: Exchange rate used for currency conversion in 2008, 2009, 2010 and 2011 are 39.97, 50.95, 45.14 and 44.65 respectively