The transformative role of Mobile Financial Services and ... · PDF fileand the role of German...

The transformative role of Mobile Financial Services and the role of German Development Cooperation

2 Imprint

Published by Deutsche Gesellschaft fürInternationale Zusammenarbeit (GIZ) GmbHPostfach 518065726 EschbornT +49 61 96 79-0F +49 61 96 79-11 15E [email protected] www.giz.de

Author Aiaze Mitha

Responsible Sector Project Financial Systems DevelopmentDr. Brigitte Klein

Sector Project Information and Communication Technology for DevelopmentPierre Lucante

Contact Person Federal Ministry for Economic Cooperation and Development (BMZ)

Kim Nguyen

Editors Achim Deuchert, Karl von Klitzing, Thomas Rahn, Thorsten Scherf

Design Barbara Reuter, Oberursel, E [email protected]

Eschborn, Januar 2011

Photos on the front cover: left: © GIZ, Stefan Erber | right: © GIZ, Nikolas NapiralaPhotos on the back cover: left: © GIZ-ProFi | from top to bottom: Martin Egbert, © GIZ,; © KfW

3Table of Contents

Table of Contents

Acronyms and abbreviations 5

Executive summary 7

1 0 Introduction 9

1.1 Background 9

1.2 German activities and branchless banking 10

1.3. Document purpose 11

1.4. Document structure 11

2 0 Definitions and concepts 12

2.1 Branchless banking 12

2.2 Mobile banking 13

2.3 Transformational branchless banking 13

3 0 Global perspective on branchless banking 14

3.1 Branchless banking models 14

3.2 Focus on mobile banking models 15

3.3 Economies of scale in branchless banking 21

3.4 Branchless banking experiences to date 24

4 0 Transformational banking: key enablers and challenges 34

4.1 Enabling environment 34

4.2 Business model and service design 36

4.3 Partnerships between FIs and MNOs 39

4.4 Targeting specific market segments 41

4.5 ICT requirements for financial institutions 41

5 0 Case studies 43

5.1 Case study 1 – Rural banks in the Philippines 43

5.2 Case study 2 – Roshan’s m-Paisa in Afghanistan 46

5.3 Lessons learned from the case studies 49

4 Table of Contents

6 0 Role played by development cooperation 50

6.1 Development players involved in branchless banking 50

6.2 The specific case of German Development Cooperation 50

6.3 Real-life examples of donor involvement 51

6.4 Some lessons learnt 54

7 0 Recommended roles for German Development Cooperation 55

7.1 Needs and gaps in branchless banking 55

7.2 Possible strategies to address these needs 57

7.3 Recommended roles for German Development Cooperation 58

7.4 Implementation structure 61

7.5 Critical success factors 61

8 0 Concluding remarks 62

Bibliography 63

5Acronyms and abbreviations

Acronyms and abbreviations

AML Anti-Money Laundering

ANZ New Zealand Banking Group

ARIES Afghanistan Rural Investment and Enterprise Strengthening program

ARPU Average Revenue Per User

ATM Automated Teller Machine

BCC Banque Centrale du Congo

BSP Bangko Sentral ng Pilipinas

CFT Combating the Financing of Terrorism

CGAP Consultative Group to Assist the Poor

DFID Department For International Development (UK)

FI Financial Institution

FMFB First MicroFinanceBank

FOSS Free and Open Source Software

ICT Information and Communication Technologies

IDB Inter-American Development Bank

IVR Interactive Voice Response

ID Identification Document

KfW Kreditanstalt für Wiederaufbau

KYC Know Your Customer

MABS Microenterprise Access to Banking Services

MFI Microfinance Institution

MMU Mobile Money for the Unbanked

MNO Mobile Network Operator

MTN Mobile operator in South Africa and other African / Middle Eastern countries

PIN Personal Identification Number

PIOJ Planning Institute of Jamaica

POS Point of Sale

PPP Public Private Partnership

6 Acronyms and abbreviations

RBAP Rural Bankers Association of the Philippines SIM

SMS Short Messaging Service

STK SIM Tool Kit (SIM-card based application)

TAP Text-A-Deposit

TAW Text-A-Withdrawal

USAID United States Agency for International Development

USSD Unstructured Supplementary Service Data

WAP Wireless Application Protocol

7Executive summary

Executive summary

This document presents a ‘’state-of-the-art’’ review of branchless banking. It examines existing trends, extracts insightful lessons from past experiences and articulates the main challenges ahead with regards to the transformative role of branchless banking.

It is also designed to link developmental objectives with market player interests, thus paving the way for a meaningful intervention of German Development Cooperation in the branchless banking space. In many aspects, it will try to bring the market player perspective into the dialogue with public development cooperation.

Branchless banking

Branchless banking refers to the distribution of financial services through technology-enabled non-bank retail agents, and typically involves the following three elements:

Non-bank retail outlets acting as customer touch points on behalf of an authorized service provider.

The use of technology (either cards or mobile phones) to authenticate the customer and facilitate transactions.

An electronic stored value account, in which monetary value is held and through which transactions flow.

Global branchless banking experiences

The last years have seen a dramatic increase in branchless banking experimentations. New models have emerged in diverse geographies and various regulatory environments. In Africa, mobile-based initiatives predominate due to low levels of banking penetration and significant adoption of mobile phones. In Latin America, card and point of sale (POS) based approaches (banking agents equipped with POS terminals where customers can use their bank cards, generally prepaid) are flourishing, propelled by the early adoption of agency banking by most countries. In Asia, where regulatory environments concerning financial markets significantly differ from one country to another, third-party led models (independent technology providers acting as a national multi-party hub) have found home (either card or phone based), often operating under the license of a partner bank.

Around the world, experimentation is still at an early stage and initial outcomes are uneven: very successful experiences in Kenya, highly promising developments in Brazil, more modest achievements in the Philippines and South Africa, not to forget difficult take-ups in other markets, in West Africa for instance. A number of failures can already be listed but many new projects are in the making, a sign of a widespread industry believe, that the delivery of financial services to the low-income segments is now seen as a profitable business.

The involvement of microfinance institutions remains fairly limited, mainly due to operational readiness on the microfinance side and lack of interest/understanding on the mobile operator side.

8 Executive summary

Overall, initial results are encouraging: there is a clear potential and an indubitable opportunity, but there are also challenges to be addressed. The challenges ahead look immense: from regulatory concerns to business model challenges and customer education issues, branchless banking providers still have way to go to seriously impact financial inclusion. Success will require building partnerships between mobile operators, financial institutions, retail organizations and other ecosystem members, and establishing new delivery models. It will require building a corpus of knowledge, sharing lessons and leveraging all resources that are available. Most importantly, it will require organizational commitment and sharp execution by service providers. Only then will branchless banking be truly transformational.

Microcredit in Indonesia | Photo: © GIZ

Mobile phones | Photo: © KfW, Thomas Klewar

9Introduction

1 0 Introduction

1 1 Background

One of the latest innovations in mobile telecommunications is the increasing use of mobile technology for the cost-effective delivery of financial services to the low-income households. In developing economies, where access to finance remains limited, particularly in rural areas, mobile devices have entered the homes and daily lives of millions. This has created an unprecedented opportunity to leverage the mobile network as a new channel to reach the currently excluded from the formal financial system. More generally, various players in a number of geographies are increasingly using ICT in order to facilitate expansion of banking services into rural areas with no prior banking presence.

International experiences have already shown that the benefits that could be derived from mobile banking can be many-fold:

i. Reduced costs of service delivery make financial services more accessible to the poorest segments living in remote areas. The cost of transaction, seen from a customer standpoint, consists of two elements: The price charged by the provider and the cost to the customer of physically accessing the service. The use of ICT technologies combined with a granular agent network can positively impact both cost elements. In theory, mobile banking has the potential to advance access to finance by providing services at much lower cost.

For instance, a costing exercise conducted in the Philippines has shown that the cost to the bank of a financial transaction carried out at a bank branch was approximately $2.50 while the cost of the same transaction, if undertaken from a mobile phone, would only be $0.50. That gives the provider an opportunity to pass on some of the savings to the customer and apply better pricing. However, experience so far shows that prices are not always dropping as significantly as cost saving potentials would let expect.

The ‘’hidden’’ costs that impact the actual opportunity cost to the customer in traditional branch banking (travel expenses to reach the branch, time spent queuing at the branch) can also be lowered by bringing in proximity through the right mix of technology and agent services.

ii. Support of income generating activities: access to working capital in the form of remittances or micro-loans enable people living in rural areas to build assets for themselves. Advancing the access to domestic and international transfers can leverage their impact on health, business activities or education. In particular, enabling migrants to transfer money from economically active areas to disadvantaged areas balances economic disparities and potentially reduces social tensions.

Studies conducted in Kenya have shown the positive impact of M-Pesa on village communities, which have started investing in better housing and common welfare goods such as water pumps etc.

10 Introduction

iii. Security of cash: In environments where security is an issue and handling large amounts of cash is a major risk, a mobile-based electronic store of value (mobile wallet) could well become the safest way to carry money around.

As an example, during the post-election riots in Kenya, thousands of Kenyans emptied their socks to deposit money into their M-Pesa accounts, considered a safer place than their homes to store their cash. Similarly, microfinance organizations in Afghanistan are leveraging the mobile channel to disburse loans and collect loan repayments, for reasons of increased convenience and security.

iv. There are other benefits, directly linked to the range of services that can be enabled via the mobile channel. Early experiments have only begun to unfold the possibilities of mobile enabled branchless banking and theoretical analysis shows promising potential.

In contrast to these obvious and already well-known benefits, there is less knowledge on the transformational impact of branchless banking. There are still many open questions: how truly transformational is branchless banking in practice and what are the main achievements so far? What are the early successes, if any, and what challenges remain to be addressed? What role can international development organizations play to support this nascent industry? What stance should regulators take in order to control for unwarranted flows of capital. Indeed, the industry has just begun to organize itself to tackle the challenge of financial inclusion.

It is in this context that German Development Cooperation aims at reviewing existing branchless banking experiences, assessing their transformative impact, extracting insightful lessons, identifying challenges and outlining opportunities for actions going forward.

1 2 German activities and branchless banking

German Development Cooperation promotes capacity building, financing and staffing in order to put forward complex reforms and policy change management processes, often under difficult conditions. Its objective is to improve people’s living conditions on a sustainable basis.

German Development Cooperation is pursuing a proactive approach and is exploring ways to best support the nascent branchless banking sector, with a view to advance responsible financial inclusion and ultimately contribute to economic development in various parts of the world. Indeed, it is in these early days of formation of a new sector that opportunities for impact are the greatest.

1 3 Document purpose

This document presents a state-of-the-art of branchless banking. It provides a framework for German Development Cooperation to set priorities and make informed decisions in terms of how to best support the development of branchless banking models. It is designed to analyze current experimentations and closely link challenges and opportunities with German Development Cooperation’s mandate and priorities.

11Introduction

It will guide German Development Cooperation’s branchless banking efforts by:

Reviewing existing branchless banking models and providing an assessment of the transformative potential of branchless banking;

Analyzing whether transformative potentials vary depending on the business model, the competitive environment, the regulatory setting, and other factors;

Identifying the challenges and hindrances to the transformative role of branchless banking;

Discussing relevant case studies and involvements of development cooperation with branchless banking initiatives;

Discussing possible roles for German Development Cooperation; and

Presenting concluding thoughts on “how transformational branchless banking” is and recommending roles that German Development Cooperation could play.

1 4 Document structure

The document consists of 7 main sections:

Definitions and concepts – defines branchless banking, mobile banking and transformational branchless banking for common understanding.

Global perspective on branchless banking – provides a review of global experiences and derives specific insights from selected deployments.

Transformational banking: key enablers and challenges – identifies some key enablers and challenges faced by branchless banking for future discussion.

Case studies – discusses two case studies about the Philippines and Afghanistan, presenting the lessons learnt.

Examples of roles played by development cooperation – provides examples of roles that can be played by development cooperation.

Possible roles played by German Development Cooperation – discusses various roles that German Development Cooperation could play in the branchless banking space.

Concluding thoughts – summarizes the key findings and draws conclusions concerning the transformative potential of branchless banking.

12 Definitions and concepts

2 0 Definitions and concepts

2 1 Branchless banking

Branchless banking is increasingly used to refer, in a broader sense, to a variety of retail-based and technology-enabled financial services delivery models, whether there is a linked bank account or not (CGAP, Gates Foundation).

The following exhibit, introduced by Mas in ‘The Economics of Branchless Banking’ (Ignacio Mas, 2009) classifies branchless banking projects according to the relationships between the users and the various players in the service delivery chain:

Branchless banking

Criteria Leading examples

Non-Bank retail stores are used as customer interface for transactions no ➧

Traditional bank branches; branches within retail stores e. g. Banco Aztexa Mexico, Banco Ripley Chile

yes The agent has a contract with and acts on behalf of the financial/payments service Provider (not the customer)

no ➧"Comisionistas" in Mexico

yes Technology, such as payment cards or mobile phones, is used to authorize transactions in real time and record transactions electronically

no ➧Hawala (informal clearing network & record-keeping

yes Customers must have an elektronic account or store of value no ➧

Western Union (cash-to-cash); bill payment services e. g. GTech

yes The accounts are issued by licensed an regulated banking institutions no ➧

M-PESA in Kenya & G-Cash in Philippines (mobile operator-only)

yes Accounts are managed and maintained directly by the issuing institution no ➧

Smart Money in Philipines, MTN Banking & Wizzit in South Africa (outsourced banking operating)

yes

Cajas Vecinas in Chile; BCP et al Peru; Bancolombia et al Colombia

Our definition of Branchless Banking

Source: Ignacio Mas (2009), p. 60

For the sake of this report, branchless banking refers to the distribution of financial services through technology-enabled non-bank retail agents. Branchless banking typically involves the following three elements:

13Definitions and concepts

Non-bank retail outlets acting as customer touch points on behalf of an authorized service provider. These agents usually perform a range of customer-facing activities, from account opening (when regulation permits) to transaction processing and cash in / out of the accounts.

The use of technology (either card or mobile phones) to authenticate the customer and facilitate transactions.

An electronic stored value account, in which monetary value is held and through which transactions flow. The electronic account platform manages the accounts and the service logic, also authorizing individual transactions.

2 2 Mobile banking

M-banking is actually branchless banking with a mobile phone as the underlying technology.

In the traditional sense, m-banking refers to a self-service channel that is accessible through the mobile phone for traditional banking services. It implies that the user is a banked customer equipped with a mobile application that allows access to informational services (balance enquiries, SMS alerts & notifications) as well as transactional services (bill payment, account to account transfers). In that respect, m-Banking complements other channels and is comparable to online banking but with less sophisticated services.

For the sake of this report, m-banking is used in its broad meaning to include alternative approaches allowing customers to access a variety of financial services from their mobile phones. These rely on the following three elements: (i) an electronic stored-value account (mobile wallet) linked to each user’s mobile phone; (ii) a mobile phone application that allows users to manage their accounts and undertake transactions; and (iii) a network of retail outlets where users can deposit and withdraw money from their account. This type of banking does not require the users to have a bank account.

2 3 Transformational branchless banking

Transformation can be defined in different ways. For the sake of this report, branchless banking will be considered transformational if it radically impacts the following areas:

Existing value chains and financial services delivery models; Efficiency of service delivery by existing financial institutions; Output of the resulting financial system in terms of financial inclusion.

As discussed later in this report, existing branchless banking experimentations have had some impact in one or several of these areas. The intensity and sustainability of this impact, and the extent of its spread across all the areas, provide a reliable measure of how transformational these experimentations truly are.

In other words, transformational banking is a form of banking that disrupts existing models. It involves new technologies and new partnership models, organized in a way that each player in the value chain has an incentive to support the service at minimal cost, in order to cater to previously unbanked customers in a commercially viable and sustainable manner.

14 Global perspective on branchless banking

3 0 Global perspective on branchless banking

The last years have seen a dramatic increase in branchless banking experimentations. New models have emerged in diverse geographies and various regulatory environments. In Africa, mobile-based initiatives predominate due to low levels of banking penetration and significant adoption of mobile phones. In Latin America, card and POS based approaches are flourishing, propelled by the early adoption of agency banking by most countries. In Asia, where regulatory environments significantly differ from one country to another, third-party led models have found home (either card or phone based), often operating under the license of a partner bank. Around the world, experimentation is still at an early stage and few initiatives can be acclaimed as global benchmarks.

Indeed, one of the complicating factors is that branchless banking relies on a whole new set of technologies, partnerships and business models to deliver financial services that are commercially viable, secure and accessible to all. Success requires a number of elements to be in place, some of which, for instance the sustainability of the model, can only be observed over time.

This paper aims at reviewing existing branchless banking models and further discussing some experiments with potential for transformational impact.

3 1 Branchless banking models

Two main branchless banking models have been identified and largely discussed in the industry to date (Porteous, 2006):

Bank-led model: The service provider is a licensed financial institution. Customers, non-bank retail agents and financial institutions are all interconnected to the same platform through the use of appropriate technology (mobile phones or POS devices equipped with card readers). The financial institution issues and maintains customers’ accounts while agents act as customer touch points and facilitate cash in / out of the accounts as well as financial transactions. Where regulation permits, agents also open customer accounts on behalf of the financial institution. In the specific case of mobile phones as the underlying technology, customers can initiate most transactions themselves without the need of an agent. This model is fundamentally a banking model and supposes that customers open a bank account.

Non bank-led model: The service provider is not a licensed financial institution (it can be for example a mobile network operator or a stored value card issuer) but is authorized by the regulator to issue and maintain virtual accounts for its customers. The service provider relies on a network of retail agents to register customers and perform other customer facing activities such as account opening, cash in / out of the accounts and customer service. Rather than transacting in cash, customers exchange cash (at the agent location) for “electronic money” that is stored in their virtual account. A user application can then be used to access the account and undertake a range of transactions including transfers, remittances, purchases and payments. The virtual account can also be used to receive payrolls, government benefits and mobilize savings. Electronic money can be converted back to cash at any time at a participating retail agent outlet.

15Global perspective on branchless banking

3 2 Focus on mobile banking models

The potential for mobile phones to revolutionize access to financial services in growing economies is increasingly recognized:

In November 2010, the G20 launched the Global Partnership for Financial Inclusion at the Seoul Summit in Korea, focusing on innovative ways to enhance financial inclusion, including branchless banking. The GPFI integrates the Access Through Innovation subgroup, concentrating on best practices in branchless banking, bringing in, the proportionality of regulation, advance ments in information and communication technologies and private public partnerships such as those between mobile network operators and microfinance institutions.

International development agencies and funding institutions such as the Bill and Melinda Gates Foundation, the GSMA MMU fund, CGAP, the Clinton Foundation, the German Development Cooperation, DFID and USAID are actively supporting mobile financial services programmes around the globe.

In September 2010, at the Alliance of Financial Inclusion Global Policy Forum, about 100 policymakers from more than 40 countries met in Bali, with more than eighty central banks and financial supervisors, hosted by bank Indonesia, to share knowledge and experiences in expanding access to financial services. The Forum was held in close cooperation with the G20 Financial Inclusion Expert Group.

GSMA and CGAP have analysed that 120 new mobile financial services projects have gone alive by the end of 2009, a number set to increase throughout 2010.

To date, a number of initiatives have seen the light around the world, driven by the specific business objectives of the service provider: whether targeted at banked customers or reaching out to the unbanked, these approaches are primarily designed to fulfill a specific strategic goal. In the case of mobile operators, the main drivers are churn reductions and, to a lesser degree, increase in ARPU, customer acquisition and market differentiation. In the case of banks, the main motives are outreach expansion, customer acquisition, cost reduction and traffic diversion from bank branches. All stakeholders have had a strong business incentive to embark on mobile banking, and this has resulted in a variety of models.

Looking forward, it can be expected that mobile operators and third-party companies will play a dominant role in the delivery of mobile financial services. However, based upon the regulatory environment, the market power of each player and key technology choices, banks may play some leadership role in specific contexts.


The following diagram depicts the three main m-banking models. These are further discussed in the next section.

Three main m-banking models

Bank AccountBank Reconciliation Bank Reconciliation

ServicesServices

Services ServicesMobile Access

Bank-Led Model Non Bank-Led Model Hybrid Model

Mobile Access Mobile Access

Bank Account

Mobile Wallet Mobile Wallet

Source: Aiaze Mitha (2011)

3.2.1 Bank-led model (traditional m-banking)

Traditional m-banking has mostly developed in comparatively sophisticated markets. It is generally operator-agnostic and builds on a fairly straightforward business model: mobile operators supply the access pipe while financial institutions provide their customers with a convenient interface to traditional banking services.

The choice of interfaces varies from one country to another. In markets where data plan penetration is high and sophisticated mobile handsets are pervasive, banks offer web or WAP based interfaces to their customers. Indeed, these require limited or no involvement from mobile operators and offer increased flexibility and control to banks. In that model, mobile operators receive revenue from traffic that is generated on their network by m-banking users. In markets where high-end handsets are scarce, like in most developing countries, banks have addressed this issue by developing SIM-based applications (SIM Tool Kit or STK) or building on SMS/USSD channels. SIM-based applications are typically stored on a 128K SIM-card, offer a high level of security and are compatible with most handsets, thus ensuring service ubiquity. The downside is the dependence on mobile operators to pre-load the STK on their SIM cards. To accomplish this, banks usually need to enter into commercial relationships with the MNOs and pay a fee against that service.

These models are operating under existing banking license, which would limit their transformative impact in the absence of specific arrangements.


3.2.2 Non bank-led models

Simultaneously, environments with low banking penetration and comparatively high mobile penetration have seen a range of innovative (and sometimes disruptive) business models emerge with an aim to enable large scale distribution of financial services. Mobile operators often lead this model.

The following diagram depicts the various roles that mobile operators play in these business models, depending on the functions that they fulfill and their key strengths.

Non bank-led models

Telecoms business Banking business

Co-marketing, co-branding Own marketing, branding

Retail distribution network (for cash transactions)

Role of mobile operator in delivering financial services

Secure communicationsMobile wallet (presentation) services

Account hosting & transaction authorization

Account issuance

Examples of who is doing it

Any bank doing WAP

WIZZIT (+ Bank Athens + all mobile operators, S. Africa)

Barclays (+ all mobile operators, India)

Smart Money (Smart + Banco de Oro, Philippines)

MTN Banking (MTN + Standard Bank, S. Africa)

G-Cash (Globe, Philippines)

M-PESA (Safaricom Kenya)

M-Paisa (Roshan, Afghanistan)

Key mobile operator strengths

Ubiquitors wireless network

SIM security

Control of user interface

Handset provisioning

Familiarity with realtime prepaid platform

Cash in/out points

Large customer base

Brand, customer trust

Solid financials

Value to mobile operator

Driving additional data traffic (support core Business)

Creating customer stickiness (churn reduction)

Generating additional service revenues

Branding innovation

Business diversification (entry into adjacent sector)

Potential risks for operator

Network security breach

Unsatisfactory customer experience

Handset security breach

Accounting error, fraud

Breach of client data confidentiality

De-focusing

Investment risk (loss of value of accounts)

Application of banking regulations

Source: CGAP

Understanding where the cursor is going to be (based on the comparative advantage of banks and mobile operators) also defines the main characteristics of the model.


In the following, we discuss the main non-bank models, which are further subdivided into two models: operator-led and operator-centric.

Operator-led model:

This model predominates in environments that present limited banking penetration, high mobile adoption rates, strong trust in mobile operators’ brands and a favourable regulatory environment that allows the operator to both issue/maintain electronic money accounts and mobilize its distribution network.

In that scenario, the mobile operator is allowed to take deposits in trust for the customers and enables them to temporarily store monetary value in an electronic account linked to their SIM card and accessible from their mobile phones. In turn, the mobile operator deposits all the funds stored by its customers into a pooled account at a licensed bank. The bank plays a relatively minor role (cash management services) and the mobile operator performs both account issuance and account management functions in addition to providing financial services to its customers.

Another characteristic is that the mobile operator’s dealer network is used for customer facing activities such as customer registration (including KYC, which is the process of identifying customers and verifying their identity on registration), cash in and cash out.

Mobile operators need to obtain authorization from the Central Bank, in the form of a written approval (as is the case of Safaricom’s M-Pesa in Kenya and Globe’s G-CASH in the Philippines) or a specific licensing regime (money service provider license as in the case of M-Paisa in Afghanistan). However, in many cases, the power of the central bank to regulate mobile network operators providing financial services is limited, due to a lack of appropriate and adapted laws. In all cases, the central bank aims to exercise monitoring oversight, often retaining the right to audit operations. Also know-your-costumer (KYC) procedures, anti money laundering (AML) limits and reporting requirements are generally negotiated and agreed with the Central Bank.

Lastly, provision of the service relies on an underlying bank account (pooled account or concentration account) that strictly mirrors the total amount of electronic money in the ecosystem. Daily (sometimes several times a day) reconciliations are carried to ensure that there is strict adequacy between the cash in the bank account and the total amount of electronic money.

The services that are provided are mainly payment and transactional services (peer-to-peer transfers, merchant payments, loan repayment, salary deposit, airtime purchase). Money is not meant to be stored on the card over a long period of time but rather used for transactions and payments. Mobile operators cannot offer core financial services such as savings and lending, which require partnering with a licensed financial institution.


Operator-driven model:

This model prevails in environments where mobile operators are not allowed to issue accounts but can leverage their distribution networks. In that model, the operator relies on a partner bank for regulatory aspects and cash management services. In this sense, a publicly regulated institution bears responsibility.

Typically, account issuance rests with the bank and account management rests with the operator. All other aspects are similar to the operator-led model. This is the model that has been adopted by Orange across their operations in 18 countries. It allows financial institutions to be more involved and, as such, ensures them a better revenue opportunity.

3.2.3 Hybrid models

In certain environments, hybrid models have emerged. They generally consist of joint ventures between mobile operators and banks, but are sometimes also driven by new non-Bank non-MNO players in the value chain.

Joint Venture model:

In this model, a bank and a mobile operator join forces. This model generally results from regulatory restrictions but also from a clear drive on the mobile operator side to fully integrate within the existing financial system and offer a richer set of financial services. Also, the service is often co-branded or neutral-branded, jointly distributed, and both operator agents and bank branches/ATMs can be used to service the customer. Furthermore, a bank card (generally prepaid) can be issued by the bank and linked to the electronic stored value account (mobile wallet) to offer even greater convenience to the user. The customer is usually a client of the Joint Venture (i.e. the new commercial entity established jointly by the mobile operator and the bank) and does not necessarily need to have a bank account with the partner bank. However, where the customer is already a customer of the bank and has a bank account, that bank account can also be used as a funding source for the mobile wallet.

This model has been implemented by SMART in the Philippines (totalling now 6.5 million users), in a country that was already fairly plastic card driven (loyalty cards, gift cards, private memberships, bank cards, etc.). It has also been implemented by MTN in South Africa and in other African markets. However, these examples have known relatively limited traction at consumer level, mostly due to inadequate business models, unnecessary complexity (linked bank account and attached card) and KYC restrictions.

The greatest benefit of this approach is that it builds on the existing financial system and leverages existing investments. It offers a greater role to the banks, since some of the transactions are fulfilled by the banking infrastructure. It also makes the transition from a mobile wallet to a bank account more seamless to the end customer.


However, for these models to be truly transformational, bringing in more unbanked into the system, a balance needs to be found between richness of functionalities and simplicity.

Third-party model:

In some countries such as Indonesia or South Africa, third parties have emerged that operate under a banking license and build an entire ecosystem around their platform, including the agent network. Perhaps the two most well known examples are Wizzit in South Africa and Celpay in South Africa, the Democratic Republic of Congo and Zambia. The former acquired its fame from its innovative approach towards turning unemployed young men and women into a street sale force (called Wizz Kids). The latter is known for being one of the earliest interoperable platforms in Africa, initially designed to process government salary payments.

In Indonesia, MVCommerce is an independent third-party that has tackled the gigantic challenge of forming partnerships with multiple market players, each one planning their own initiatives separately and having their own interests, and obtaining necessary regulatory approvals. While regulatory approval is still pending, MVCommerce has managed to secure some interest from both the MNOs and a partner bank.

The main benefit of the hybrid approach is that it strives at being operator-agnostic and bank-agnostic. All participants in the ecosystem are interconnected to the same central platform, which makes the system interoperable by design and prone to larger volumes more easily.

However, the drawback is that the model dilutes first mover advantage and creates competitive equity in the market. To date, these models have had very limited traction in the market.

3.2.4 Summary of the models

The following chart provides a visual representation of the models discussed previously.

There is a whole range of complex considerations that come into play when attempting to categorize and describe these models. We have opted for a simple categorization based on the opportunity for the involved MNO to:

Obtain regulatory clearance for the issuance and maintenance of e-money accounts

Obtain regulatory approval to use its distribution network


Although this approach is debatable, it provides a useful visualization of the models.

Hybridmodel (Joint Venture)� Service co-branded ans co-distributed by the operator and the bank

Non-bank model (MNO-led)� Service entirely distributed and managed by the operator under its own license and own brand

Bank-led model� Mobile Channel is only seen as an access channel (bearer) fo banking services

Non-bank model (MNO-driven)� Service distributed and managed by the operator under a partnering bank‘s license

Hybrid (3rd party)

+

+ - Regulatory barrier to issue/maintaine-money accounts

Lim

itat

ions

on

the

dist

ribu

tion

sid

e

Source: Aiaze Mitha (2011)

From a regulators view, it should be clear, that most countries are hesitant, even reluctant to let mobile operators provide e-money. Mobile operators are structurally very different from fully licensed and publicly regulated financial institutions. If their financial service operations become large, they might impose risks to the financial system. In contrast, banks already provide e-money and do not need any specific regulatory approval. In this sense, bank-led models will always face lower regulatory barriers than non-bank led models.


3 3 Economies of scale in branchless banking

Branchless banking, like any financial system, can be divided into three main components:

The non-bank retail outlets, where transactions are originated

The payment system, over which transactions are fulfilled

The account platform, which provides the service logic

Each one of these components offers opportunities for economies of scale, provided that certain trade-offs are made. The following discusses some of these opportunities and trade-offs, in a high level.

3.3.1 The non-bank retail outlets

Agent outlets are where customer transactions are originated; also, density and capillarity are a key element of any value proposition. The denser an agent network is, the more convenient the service is for the customers as they have more choices and more locations to go to in order to transact. On the other hand, agent networks also represent a huge cost to the service provider (commissions paid to agents for performing required services, cost of staff, cost of the outlet, regulatory compliance costs etc.), and one may reasonably seek to minimize the number of outlets, thus also maximizing the number of transactions that are handled by each individual agent and achieving economies of scale.

This is the main trade-off that each branchless banking provider is faced with: density of the agent network versus economies of scale. Indeed, by seeking to achieve economies of scale, the provider also ensures that each agent will handle more transactions and therefore, will have a consistent revenue stream. Agent network health is indeed a crucial component of any branchless banking initiative. As a reference, an average-size M-Pesa agent in Kenya handles close to 100 transactions per day.

3.3.2 The payment system

The payment system enables the fulfillment of the transactions. Depending on the branchless banking model that is adopted, the payment system that is going to be used is either the mobile network, or the banking system, or a combination of both.

The payment system also offers opportunities for economies of scale. Indeed, serving the unbanked supposes processing large numbers of low-value transactions, and is therefore a low-margin business by design. As a result, scalability of the service is a crucial objective in order to recover the cost of the initial investment, among which the payment system costs. Scalability is achieved by increasing the number of transactions, either by getting more users to use the service, or by stimulating the number of transaction per user. Generally, questions around scalability raise questions around interoperability: how much scale can a closed loop payment system achieve? And is scalability going to be easier if the payment system were open for all ecosystem members to use?


Offering a closed loop payment systems presents some advantages, especially in environments where the service provider is a dominant market player and alternative options are very limited. This was typically the case of Safaricom in Kenya. The main benefit derived from a closed-loop payment system is competitive advantage. On the other hand, opening the payment system to all players in the early stage can generate more traction in the market and make the model more quickly viable while diluting competitive advantage.

Also, each branchless banking provider is faced with the same dilemma: competitive advantage versus economies of scale.

3.3.3 The account platform

Core banking platforms are designed to serve the specific needs of high-value sophisticated bank customers. This often results in high complexity and cost.

The needs of the unbanked may not require the same level of sophistication. Consistent with their business model of serving large masses of unbanked customers, providers often look less for complexity and more for scalability. They look for simple and cheap options, or in other words, something close to a one-size-fits-all solution.

A platform that is simple, scales well, caters for the needs of various types of unbanked customers and can be easily shared between different players, could result in significant economies of scale. The trade-off is that the supported services would be less sophisticated.

Man in Senegal | Photo: © KfW, Bernhard Schurian


3 4 Branchless banking experiences to date

Recent years have seen a significant increase in branchless banking experiments around the world. The following chart provides an indication of the magnitude of this phenomenon.

Region Provider

Asia and Pacific

Bangladesh Grameen Phone and two banks have proposed mobile banking services. Regulations still pending.

Cambodia Mobile banking services being planned. (compare Vietnam)

India There are many pilots involving many technologies. Regulatory framework still unfolding, with uncertain outcome.

Maldives Nationally interoperable mobile banking system being developed by Central Bank.

Mongolia XAC Bank is rolling out a mobile banking system for rural areas.

Nepal Bank of Kathmandu is proposing a branchless banking solution.

Phillipines Two leading operators have mobile money schemes, one with and one without a bank.

Sri Lanka Dialog/NDB Bank launched mobile banking service.

Vietnam Mobile banking services being planned. (compare Cambodia)

Europe, Caucasus and Central Asia

Afghanistan Mobile M-Paisa service launched by Roshan.

Pakistan Telenor/Tameer Bank rolling out a mobile & POS-based banking service.

Russian Federation Operator Beeline and Tavrichesky Bnak rolling out mobile banking platform.


Latin America and Caribbean

Bolivia Banks experimenting branchless banking; regulations already issued.

Brazil Major banks have estensive POS-based agent networks, led by public banks. Postal bank set up as JV of public post offices and a private bank.

Caribbean Operator Tigo proposing mobile money services. (compare Paraguay)

Chile BancoEstado has large network of POS-based agent network, associated with basic account and microfinance unit.

Colombia Leading banks are rolling out POS-based agent networks.

Government program to subsidize banks to set up agents in unserved municipalities.

Mexico Public telegraph offices retail banking services for 4 banks. Many banks have mini branches in retail spaces. Branchless and mobile banking regulations are being issued.

Paraguay Operator Tigo proposing mobile money services. (compare Caribbean)

Peru 4 leading banks are rolling out POS-based agent networks.

Maghreb and Middle East

Egypt Orange mobile banking services to follow after Ivory Coast. (compare Senegal and Jordan)

Iraq Reliance on mobile banking during war.

Jordan Orange mobile banking services to follow after Ivory Coast. (compare Senegal and Egypt)

Sub-Saharan Africa

DR Congo Early Celpay mobile service by operator Celtel.

Ghana Txt-N-Pay service. Zain piloting Mobile Money.

Ivory Coast Orange launched mobile services. Senegal, Egypt and Jordan to follow.

Kenya Succesful M_PESA service by Safaricom. Equity bank rolling out POS & mobile banking service. Mobile operator Zain launching mobile banking servicesas Zap Money (as Sokolele). (compare Tanzania, Uganda, Madagascar)

Madagascar Mobile operator Zain launching mobile banking services as Zap Money. (compare Kenya,Tanzania, Uganda)

Nigeria Moneybox Africa introduced mobile money.

Senegal Mobile Operator VeriFone and to transaction switching companies deliver mobil money. Orange mobile banking services to follow after Ivory Coast. (compare Egypt and Jordan)

South Africa Several mobile banking projects launched, led by banks, mobile operators and an independant provider.

Tanzania Vodacom introduced M_PESA service: Z-PESA launched by Zantel. Mobile operator Zain launching mobile banking services as Zap Money. (compare Kenya, Uganda, Madagascar)

Uganda Operator MTN testing Mobile Money. Mobile operator Zain launching mobile banking services as Zap Money. (compare Kenya,Tanzania, Madagascar)

Source: ‘The Economics of Branchless Banking’, Ignacio Mas, 2009


This section aims at discussing in more detail selected branchless banking experiences and their transformative role. It will also aim at extracting key lessons in terms of the conditions to for branchless banking to realize its transformational potential.

3.4.1 Microfinance experiences

Advancing financial inclusion and serving the unbanked does not solely rest on using the appropriate technology, laying down the adequate banking and telecommunications infrastructure and figuring out the best business models. It also requires the right set of products for the right people. In that area, microfinance organizations have a strategic advantage: they are often the closest to the so-called ‘’base of the pyramid’’, understand their clients well, and have a history of developing products that have customer relevance at the grass-root level.

The main challenge faced by microfinance organizations with regards to their participation in transformational banking is two-fold:

Operational maturity: most MFIs are still transitioning from the small, understaffed, lightly regulated, highly subsidized, and informally-run organizations into more regulated, process-oriented, technology-driven and commercially focused financial institutions. That transition has not been without effort and has required full attention from each MFI. However, few MFIs were prepared to seize mobile banking opportunities when they presented themselves. Those who did were the ones that benefited from external support and expertise, as was for instance the case for the rural banks in the Philippines with GCASH (supported by USAID) and the rural banks in Indonesia with MVCommerce (supported by German Development Cooperation). But the situation has changed and more MFIs seem now ready to participate.

Lack of interest from MNOs: On the other hand, few MNOs have shown interest in the microfinance opportunity in the early days of mobile banking initiatives. This is partially due to the fact that MNOs have a limited understanding of microfinance, but also because they are more comfortable emulating their own business model: Their model is fundamentally a transactional one and it is easier for them to focus on services that are close enough to this model (for instance person-to-person money transfer) than venturing in unknown territory with MFIs. Accordingly, a few MNOs did engage with MFIs but from the perspective of ensuring third-party cash supply to their agent network rather than enabling the core MFI business. Of course, some MNOs have supported MFIs with micro-lending and savings enablement over the mobile channel, among which we can mention Globe and Roshan.

Despite early challenges, recent developments are promising. In Egypt E-Masary, a third party provider, has established itself as an enabler for microfinance institutions to expand their outreach and deliver financial services over the mobile channel. In Kenya, some banks are looking at going down market and leveraging both M-Pesa and agents to offer services to low-income segments. In Kenya again, Musoni is the first MFI in the world to go 100 percent mobile, bringing service delivery efficiency resulting in savings to their clients. In Indonesia, rural banks are just about to pilot with MVCommerce and its MNO partners. Companies like RentBureau are bringing innovative technologies to be able to evaluate credit risk and score clients based on prepaid usage history. And these are just a few examples. All around the world, new initiatives are flourishing and new companies are supporting this new industry.


! At this stage of development of the microfinance and mobile banking industry, new opportunities seem available for creative partnerships. For the benefits to materialize, third-party intervention seems needed, at least to provide the initial impulse.

3.4.2 Bank-led experiences

A number of bank-led initiatives have attempted to democratize banking services and make them available to a wider public. This section describes some of the most known initiatives.

The South African experience

Two compelling examples of m-banking can be found in South Africa, a country with 48 million people, 35 million mobile users and a relatively sophisticated banking system: 36 banks are competing to serve a total of 20 million customers through nearly 3,000 branches and 17,000 ATMs. It is also a highly regulated environment, where new entrants such as Wizzit and MTN have changed the operating paradigms.

In that market ABSA Bank was the first to launch mobile banking in 2000, providing both a SIM application and a WAP interface to nearly 4 million customers. ABSA Bank’s offering was articulated around a simple proposition: Informational services (balance enquiries, mini-statements), bill payments, inter-account transfers with the possibility to link multiple users to accounts, along with a simple remittance product enabling peer-to-peer transfer from a mobile, and ATM or internet (including to non South African Residents). The uptake of the product was remarkably good (50 percent increase in total transacted value in 2007 alone), with mobile airtime purchase as the primary driver.

Following closely, First National Bank launched their mobile banking product over SMS, USSD and WAP. By the end of 2008, almost all transactions were undertaken over USSD, with a marginal but increasing share of transactions initiated by using a WAP interface. In 2007, FNB generated revenue for MNOs in excess of $1.5 million.

These developments, soon joined by others, have constituted a revolution for mobile banking in South Africa, with over 100 million messages sent by m-banking users each month. As a result, m-banking has become a significant transactional channel for all banks, playing a major role in customer retention.

! However, a large majority of users are already banked and therefore not new to banking. Consequently, these approaches have had limited transformative impact, concerning the integration of the unbanked into formal finance.


The Latin American experience

Latin America is a continent where agency banking has been embraced early on. As a result, technology-enabled agent models have propagated in a number of countries.

These models are based on two premises:

The use of non-bank retail agents for increased accessibility

The use of cards/POS devices for customer verification and transaction processing

This is a model that has been driven by commercial banks in Colombia (Bancolombia, Citibank), in Peru (Banco de Credito) or in Brazil (Bradesca, Caixa Federal) for instance (Mas, 2009). But these are just a few examples of what seems to have become a growing trend across Latin America.

Perhaps Brazil is the country where the development of agency banking has been the most spectacular. The Brazilian model was built on a unique set of country-specific characteristics that may not be found elsewhere:

The government has long enforced the use of bank accounts to receive government benefits, driving the take-up of bank accounts among large number of beneficiaries

The national post-office was auctioned off to banks for use as banking agents, which stimulated the establishment of banking agents across the country

As a result, millions of people have been brought to banking. According to available research, the country now boasts almost 130,000 outlets acting as banking agents and serving some 13 million new bank customers added since 2002, in all municipalities (Mas, 2009).

As powerfully epitomized by the Brazilian experience, these types of models have the potential to advance financial inclusion by expanding access to rural areas that had no prior banking presence and, as a result, by lowering the opportunity cost to the customer. However, a few limitations remain that constrain customer experience and probably constitute an obstacle to faster adoption of banking services. Some of these limitations are found in the financial regulatory space:

In Peru for instance, agents are allowed to process transactions but they are not allowed to open accounts on behalf of banks. This restriction is based on security reasons as the service quality of agents needs to be controlled and guaranteed either by the bank itself or by another monitoring institution. As a result, customers have to travel to distant branches to open an account before transacting at agents. Besides, KYC requirements remain at bank-level, which also imposes eligibility constraints on certain customer segments.

In Brazil, agents are allowed to open specific types of low-balance accounts with reduced KYC requirements, but the bank needs to physically see and review application documents before the account can be opened. This increases service quality and financial security. However, it may also introduce further delay in account opening, which in turn may hinder customer adoption.

Other challenges are also found at the business model level: On the one hand, fixed charges for account maintenance and other fees incurred are usually a hindrance to larger mass adoption; on the other hand, POS equipment costs and card printing / maintenance costs are prohibitive when it comes to serving the base of the pyramid. Mobile technology certainly has a role to play in further reducing transaction costs of service.


! All in all, these models present an inherent ability to be truly transformational. However, for them to achieve their full potential, the following conditions would be required: Adapted regulatory barriers to further enhance customer ease around registration process and transactions at agents; innovative technologies to reduce provider’s fixed costs and, as a result, lower unit transaction costs in order to serve the base of the pyramid in a commercially sustainable way.

3.4.3 Non Bank-led experiences

One of the latest innovations in mobile telecommunications is the increasing use of the mobile channel to deliver financial services to the poor. Mobile operators have embarked on the mobile financial services journey as soon as in 2001 in the Philippines. Other countries quickly followed in Africa and other parts of the world. Later, third-parties tried to gain traction by establishing their own ecosystems and developing interoperable models.

This section discusses and reviews some of the most well-known examples.

Smart Money: the first of its kind

Smart Money is one of the most well-known MNO-led mobile banking initiatives, primarily because it was the first. Indeed, Smart Money was developed in 2001 as a settlement mechanism for the mobile operator’s prepaid airtime distribution network. Using Smart Money, airtime resellers were able to instantaneously pay their airtime purchases directly from their mobile phones through an attached bank account. It significantly simplified money flows within the airtime supply chain, which largely contributed to the exponential growth in the airtime reseller network in the Philippines.

Building on that success, Smart Communications has integrated Smart Money to its product portfolio, enabling customers to purchase telecom services and products via Smart Money. In that respect, Smart Money can be seen as a precursor of m-commerce in the Philippines.

Today, Smart Money totals 6.5 million customers, many of which are members of its airtime distribution network.

Unfortunately, mass-market use of Smart Money has remained fairly limited, possibly due to the following reasons:

Service design issues: the linkage of mobile wallets with bank accounts as well as the double use of the mobile interface and the bank card seem to have made it complicated for certain users. For reference, MTN has been facing similar issues in their markets.

Agent network limitations: Smart has not succeeded well in converting its airtime resellers into cash in/cash out agents. Indeed, airtime commission to the shop is 12 percent whereas in comparison, commissions for cash services are closer to the 1 percent mark, providing little financial incentive to the shop owners. In addition, the Central Bank of the Philippines initially required all agents to follow an AML certification training centrally held in Manila, further discouraging agents from investing.


Smart is currently attempting to resolve the agent business model issue by focusing on other retailers that present more favourable characteristics and for which Smart Money could be a profitable service. In addition, Smart is also exploring higher margin products that will enable proper compensation of participating agents. Accordingly, Smart has recently partnered with a mobile microfinance organization backed by Planet Finance to offer lending and savings services. By design, these products will enable Smart to take a strong position in the consumer finance space and will generate higher margins that will in turn result in more attractive agent remuneration and enhanced sustainability, in addition to better serving the base of the pyramid.

! While it is still early to draw firm conclusions on how transformational the Smart model is, there is a long way to go before the current model expands access to finance to rural masses. However, the recent partnership in the microfinance space indicates a change of direction which will be interesting to follow.

M-Pesa in Kenya: a promising start, to be developed

The potential for mobile operators to revolutionize access to finance is best exemplified by the success story of M-Pesa, Safaricom’s mobile transaction service in Kenya.

M-Pesa is a mobile payment solution developed by Vodafone and is also implemented in Tanzania and Afghanistan. It allows users to load money into an electronic stored value account (M-Pesa wallet) that is issued and maintained by the mobile operator. Users can deposit and withdraw money from their account at authorized agents, undertake payments, purchase airtime, receive salaries and transfer money to friends and relatives.

Only two years after its launch, Safaricom already counts close to 8 million customers transacting at about 9,000 agent outlets. To date, in excess of $1.7 billion have been transacted through the system.

Among the key success factors for the take-up of the service was Safaricom’s ability to capture the sizeable domestic remittance opportunity. Indeed, Kenya has seen increasing rural-urban migration flows over the past years but the urbanization process was slow enough for migrants to maintain strong ties with their homeland and rural communities. As a result, many urban migrants regularly remit money back home. In a context where existing alternatives are underdeveloped, ineffective and sometimes risky, M-Pesa managed to impose a new affordable, secure and convenient system through strong branding and targeted marketing: ‘Send money home’. In 2008 alone, Safaricom has spent close to 50 million Euros in marketing only.

Of course, support from the regulator has been instrumental to success, and so was Safaricom’s ability to execute on the opportunity and leverage its agent network. However, the regulator’s support was largely in the form of being tacit and hands-off. Today, M-Pesa agents process in average 100 cash transactions per day, which is essential to the sustainability of the service. In fact, the agent business has proven to be so lucrative that it created significant traction in the retail sector, with more and more outlets applying to become M-Pesa agents. The viral effect is happening both in the consumer space as well as the retail space.

Last, Safaricom’s market size (almost 75 percent of the market) at the time of launch has definitely enabled them to build the critical mass that is required to meet the economies of scale for serving low-income customers.


However, it is interesting to note that 70 percent of Safaricom’s initial customer base was composed of banked customers. Indeed, banked customers, because they are financially literate, will often be early adopters of new financial services. Over time and as Safaricom’s M-Pesa customer base grows further, it is expected that more unbanked will be joining in.

The recent decision by Safaricom and the Central Bank of Kenya to enable existing financial institutions to interface their core banking systems with Safaricom’s payment system is another positive step in the direction of offering a richer set of core financial services to M-Pesa customers. It will also enable banks to develop creative strategies to expand their customer base beyond current reach and leverage the M-Pesa wallet as a new channel.

! All in all, M-Pesa presents all the ingredients that can lead to real transformation in Kenya: Popular technology; a viable and sustainable business model in which each party has a financial incentive to support the service; a supportive but hands off regulator, market traction through viral propagation; and ability to offer core financial services via bank partnerships. This combination makes M-Pesa unique and so far the most transformational among the existing models.

Wizzit in South Africa: an independent player striving for volume

Wizzit is an independent third-party targeting the estimated 16 million unbanked in South Africa. It does not require customers to have a bank account and works on almost every handset. In addition to enabling domestic remittances, it also provides account holders with a Maestro debit card that can be used at any ATM or retailer. This is another example of integration with the existing banking infrastructure.

Wizzit presents a number of specificities that make the model particularly interesting. First, there is no minimum balance required and there are no monthly fees for account maintenance. This makes the service particularly attractive to the unbanked.

Second, Wizzit has an original ’grassroot’ approach towards distributing the service: close to 800 Wizz Kids have been contracted as a sales force. These are typically unemployed university graduates from low-income communities: In addition to selling the product, they also advocate it in their local communities.

To date, Wizzit has managed to attract 300,000 customers. However modest this may seem in comparison to Smart Money or M-Pesa, it is quite an achievement for a third-party that does not have the resources and the marketing muscle of a mobile operator.

Maybe the main challenge of Wizzit is that it has not managed to build sufficient scale and drive significant volumes so far. Although there are no studies available as to why Wizzit’s take-up has been limited to date, there is some indication that volume is a critical element of success in a low-margin business such as providing financial services to the unbanked. Wizzit will be measured against its ability to achieve that element of its business case. On the other hand, Wizzit has managed to build a cost-effective variable-cost distribution model, which requires limited fixed cost investment. This should make the model quite robust and sustainable.


! All in all, Wizzit will need to rapidly scale up and gain more traction in the market. Otherwise, its transformative impact is bound to stay limited.

3.4.4 Summary

The previous section aimed at presenting selected initiatives and discussing their transformational potential. The following table summarizes some of the findings:

Metrics of transformationInitiative

Approach Impact on value chain and existing delivery models

Efficiency of service delivery by existing financial institutions

Advancement of Financial Inclusion

Mobile Banking(South Africa)

Mobile as an additional self-service channel to access traditional banking services

No major impact on the value chain

High impact on delivery efficiency through mobile channel, but limited to the financial institution that offers the service

Low impact on the unbanked (customers have to be banked)

Branchless Banking(Brazil)

Correspondent banking model, i.e. bank agents equipped with POS terminals and connected to the Banks’ infrastructure for greater outreach

High impact on the value chain through the extensive use of agents and POS technology

High impact on delivery efficiency

Medium to high impact on financial inclusion

Smart Money(Philippines)

Greater outreach through the use mobile wallets with a linked card combined with the MNO agent network

Medium impact on the value chain and delivery models: use of agents still needs to be developed

High impact on delivery efficiency for partnering banks

Low impact to date, but positive developments underway

M-Pesa (Kenya)

Greater outreach through the use of mobile wallets combined with the MNO agent network

High impact on the value chain through the extensive use of agents and mobile technology

High impact on delivery efficiency for Safaricom

Medium impact on delivery efficiency for banks only due to limited bank partnerships

High impact on financial inclusion

Need for core financial services such as savings

Wizzit (South Africa)

Use of a sales force of unemployed youth to enroll low-income unbanked customers

High impact on the value chain through the extensive use of Wizz Kids and mobile technology

Medium impact on delivery efficiency

Low impact due to limited customer base


This table gives an indication that, depending on an appropriate business model (particularly regarding the agent network), the mobile operator led model has a good potential for transformation, mainly due to the powerful executing drive that mobile operators can display. On the other hand and from a supervisor’s point of view, considerable macro- and microeconomic risk regulations, as well as consumer protection and money laundering issues, have to be put in place that might outweigh these potentials.

A number of other deployments are currently underway. All major operators (Orange, Telefonica, MTN, Zain, QTEL, Etisalat, and Millicom) are working on similar initiatives and looking at the best ways to partner with financial sector players.

In addition, the previous section has also highlighted a number of learnings:

Regulatory enablement is central to transformational banking. Where regulation does not facilitate customer registration and ease of transaction, take-up suffers.

Building a model that is commercially viable and sustainable is a strong requirement.

Volume is crucial. Unless a given model manages to achieve critical size, its chances of success are limited.

The use of mobile technology is a critical component to reduce costs.

It is not about execution only: Country-specific factors should also be kept in consideration.

Paper money in Indonesia | Photo: © GIZ

34 Transformational banking: key enablers and challenges

4 0 Transformational banking: key enablers and challenges

Building on the previous discussions, this section aims at further discussing the key enablers and challenges for transformational branchless banking.

4 1 Enabling environment

Branchless banking does not develop in a vacuum but rather needs a context. To be successful, it requires the right environment with the right set of pre-conditions. In other words, it requires an enabling environment.

Based on the previous review of international experiences, it appears that an enabling environment can consist of a number of elements including: Existing demand, market position of the service provider, existing retail environment, existing regulation and policies. The following aims at discussing two of these in more detail.

4.1.1 Importance of a principal demand

Safaricom’s success did hinge on a Kenya-specific factor: An unmet demand for domestic remittances fueled by the uneven structure of the national economy. The vast number of citizens receiving government welfare payments supported the development of branchless banking in Brazil. In Cambodia, WING launched a mobile money service in partnership with the textile industry to deliver payrolls to the workers. In Afghanistan, Roshan started M-Paisa in partnership with both microfinance institutions (to enable loan repayment) and government agencies (to enable salary payment). Each branchless banking initiative has had to identify the principal demand that they were trying to meet. Each country has unique specificities that need to be properly understood in order to determine what opportunities they present for mobile financial services and which service will primarily drive adoption.

That demand can be of different kinds: domestic, regional or international remittances; institutional payments (utility, loan repayment but also payroll deposits and government benefits); or savings for instance. Identification of the right demand also requires thorough assessment of existing alternatives that customers may use. These alternatives may be formal (post offices, banking services), semi formal (bus companies, taxi companies) or even informal (airtime transfer for instance). The quality and range of these alternatives will in turn condition the relevance of the primary product.

One of the challenges existing branchless banking initiatives are facing lies in the prior identification of this demand. This assessment is crucial for effective marketing and relevant service design. In the case of M-Pesa, Safaricom filled a gap left by existing formal services and tied to a market demand. This enabled them to position an attractive offer supported by a simple but strong marketing message.

! New entrants into that space would certainly greatly benefit from a comprehensive opportunity assessment toolkit.

35Transformational banking: key enablers and challenges

The importance of regulation cannot be understated. All branchless banking initiatives are significantly affected by regulatory restrictions or limitation. Indeed, regulation can for instance:

Limit the degree of freedom of the mobile operator in structuring the business model

Impose constraints on agent model development (trainings, certifications, licensing…)

Impose constraints on the service and impact customer ease around registration and transacting at agents.

Indeed, the use of retail agents introduces new risks that policy makers are often concerned about. Also, although agents are used in many countries, there is great diversity as to which functions agents are allowed to perform, what types of entities are permitted to be used as agents, etc.

As an example, any retail establishment can act as a bank correspondent or agent in Brazil, and agents are allowed to perform a broad scope of activities, including receiving documents for account opening and handling deposits and withdrawals. By contrast, India only permits a narrow range of cooperatives, non-profit organizations and the postal office system to be used as agents. In Kenya, Safaricom has been free to select any type of agents based on their business judgment alone, given the reputational risks involved. These approaches have had different implications on the roll-out of agents in these countries.

On the other hand, regulation can also help build trust in mobile money schemes and support their adoption by the market. For instance, this is the case when regulators impose price transparency or certify service providers, giving them market credibility.

While many pieces of regulation shape branchless banking initiatives, the most important ones relate to: (i) issuance and management of electronic money accounts; (ii) AML/CFT and KYC requirements; (iii) the use of agents for customer facing activities; and (iv) customer protection aspects. These are the ones that are likely to have the highest impact on branchless banking initiatives. Other regulatory aspects of interest include payment systems regulation and competition among service providers. With regards to the latter, regulators and policymakers can intervene and mandate the interoperability of branchless banking systems ex ante or ex post, based on the perceived risk of market failure. However, until today, there are no known examples of regulations specifically requiring MNOs to enable the transfer of money to networks of other MNOs.

For a more comprehensive discussion on regulatory issues related to branchless banking, please refer to CGAP Note 43 ‘’Regulating Transformational Branchless Banking’’.

The impact of regulation can be best appreciated in the light of some of the most stringent KYC requirements that are in place in certain parts of the world, typically driven by regulators’ concerns over money laundering. Indeed, customer registration can become particularly cumbersome if customers are required to fill in multiple forms and wait for weeks for the account to be opened. In turn, this would significantly impact service take-up.

Also, one of the key elements in M-Pesa’s success was the ease around the registration process: Customers only have to provide minimal information such as customer name, ID number, date of birth, occupation, district of residence and mobile number. The agent, who can directly process the registration online and instantaneously get the account open, does most of the work. This


contributed to smooth and massive take-up of the service. This is not necessarily the case in other countries where agents are not allowed to open accounts (like in Peru) or where account opening is not instantaneous (India for instance).

For branchless banking to successfully bank the masses, it is essential that regulatory requirements be aligned with the daily context of these masses. For instance, requiring a national ID in a country where 90% of the population does not have an ID is a clear hindrance to customer acquisition. Requiring agents to perform customer due diligence and verify the declared address of residence in person, as was the case in Ghana in the early days, is another limiting factor. Branchless banking regulation needs to be enabling but at the same time proportionate.

! The biggest challenge branchless banking initiatives are facing remains regulation.

Many initiatives are aiming at flexible anti-money laundering, know-your-customer requirements and agency banking regulation. In this respect, some crucial questions emerge: Are intermediaries going to be able to act as a channel? Can they act on behalf of operators? Can they open accounts? Can they cash in and cash out? Regulators are in the challenging position to find a compromise between enabling environments for transformational branchless banking and legitimate concerns of supervisory entities with responsibility for the whole society and economy.

! Providing regulatory advice to supervisors, concerning the adaptation of their regulatory environment for save mobile financial services could help to enhance investment decisions of private service providers.

4 2 Business Model and Service Design

For a branchless banking initiative to be successful, it has to offer financial services that are affordable, safe and convenient. Achieving that goal requires building a robust model that is commercially viable, secure, trusted and ubiquitous. It requires meeting the economics of each element of the value chain.

4.2.1 Getting the business model right

Distributing financial services to the unbanked involves large numbers of small size transactions, low margins and significant investments. Making that business viable and sustainable requires building a scalable and robust model that will support large volumes. The ability to scale has to be built in each element the delivery chain, and more specifically:

Agent network commissioning model:

At the agent network level, the typical trade-off can be formulated in terms of density/capillarity versus economies of scale. Because branchless banking is about offering a convenient and accessible service to customers at affordable costs, reducing opportunity costs becomes essential. Providers will need to roll out an agent network that is sufficiently dense to meet the opportunity cost objective.


On the other hand, providers will always have the temptation to concentrate transactions at certain locations to generate economies of scale and lower their average cost per transaction. As a result, agents would get higher volumes of transactions resulting in higher compensation, and would support the service more happily. While there is no universal answer to that question, it seems reasonable to assume that financial inclusion would be better achieved through the scheme that will capture more customers, i.e. the scheme that offers more capillarity in the agent network. This in turn would require higher volumes of transactions to ensure sustainability.

Achieving volume through an agent network that is relevant to the end customer is one of the biggest challenges service providers are facing. Indeed, it requires balancing agent distribution (with a view to reduce cost of accessing the service to the customer) with economies of scale (with a view to reduce cost to the provider of offering the service). Besides, it has to be supported by the adequate agent compensation model. The agent compensation model is fundamental to the success of any mobile money initiative. If agents do not have an incentive to participate in and support the business, the service is unlikely to gain traction at the consumer level (that was the case of Smart Money, but also many MTN implementations, Tigo Cash in Paraguay etc.).

As a matter of fact, the success of M-Pesa was also largely due to the successful agent model that they managed to develop. Each agent had a clear incentive to participate in and support the service. From customer acquisition bonuses (in average $1 per customer) to commissions paid for cash services, the compensation scheme was designed so as to be meaningful to the agents. But it is not all just about the compensation model, it is also about the choice of the right agents. In Kenya, because airtime commission at the outlet is 5%, a 1% commission for cash services is meaningful enough. In countries where airtime commissions are much higher (for instance the Philippines), the airtime distribution network may not be the best place to recruit agents.

! All in all, building a meaningful, relevant and sustainable agent network is, along with regulation, undoubtedly the biggest challenge service providers have to face.

Adequate support (in the form of a toolkit) to service providers in their efforts towards building an agent network would add great value to the industry.

Payment infrastructure interoperability and integration strategy:

At the payment network level, the main trade-off is formulated in terms of interoperability versus competitive advantage. Driving down the cost per transaction would require larger volumes: you need to have as many customers as possible and undertake as many different transactions as manageable. Obviously, this is easier for Safaricom, with a 75 percent market share, but might be difficult for new actors on the market with no substantial market share.

Small players with limited market share may want to seek interoperability: Opening the network to other players and giving up some of their competitive advantage in exchange for additional transactional traffic. This is the typical approach most third-parties are following, which do not have the marketing muscle of the big players. They need to be interoperable from the start in order to drive volumes.


Interoperability and integration could bring along some benefits. For instance, integration with the existing financial infrastructure could add value to the customer proposition. In that spirit, Safaricom has partnered with Paynet to enable M-Pesa customers to withdraw cash from any Pesa-Point ATM. Other MNOs such as MTN have partnered with financial institutions to enable funding of the mobile wallet from the bank account. Ultimately, the goal of such partnerships is to maximize ways in which customers can get money in and out of the system, so as to increase the number of transactions. Of course, this has to be done in a sensible and gradual manner so as to avoid the trap of service complexity.

! Unfortunately, most players do not properly recognize the trade-offs that need to be made to ensure sustainability. Some prefer to preserve competitive advantage by maintaining closed loop systems, while others open up their infrastructure too quickly, diluting competitive advantage. Others again do not leverage the strength of existing infrastructure. Of course, each case is specific and would require a tailored approach.

Importance of partnerships in the value chain:

The economics of the unbanked are way too challenging for a single player to meet all of them. Effective service delivery models will require creative and sustainable partnerships to ensure that the economics of each element of the delivery chain are optimally met.

These partnerships can be built at many levels. For instance, agent network management can be partially or totally outsourced; payment infrastructure building can be shared; account issuance and management responsibilities can be split; product development can be shared with multiple parties, including existing financial institutions etc. Examples are many.

! Building commercially meaningful and sustainable partnerships is the cornerstone of the success of any mobile banking enterprise.

4.2.2 Optimizing service design

Getting the agent compensation model right has to be further compounded by intense transactional activity in order to lower unit transaction costs. Transactional volume can be achieved through either a larger number of transacting customers or a larger number of transactions or both.

Accordingly, it is crucial to develop the right set of services but equally crucial to identify a principal service that will drive initial adoption. Indeed, every mobile banking/branchless banking provider is faced with the same ‘’chicken-and-egg’’ problem: How to build a meaningful and sustainable agent network without customers? On the other hand, the question arises of how to ensure customer relevance if there is no proper agent coverage? The longer this dilemma is allowed to stay, the more difficult it becomes to overcome. The solution to this problem lies in the quality and speed of execution, which is directly related to both service design (including principal product) and marketing message.


Indeed, it is essential to build viral effects early on and this is best achieved through a ‘’killer application’’ and a very clear message. In the case of M-Pesa, the principal product was the ability to transfer money to anyone anywhere in Kenya, which met a clear customer demand, and the simple message was ‘’Send money home’’. This simplicity has been instrumental to viral propagation and early adoption.

Of course, usability of the service is essential. The design of the menu, the choice of the relevant user interface, this all contributes to a positive customer experience. In countries with high illiteracy rates, the service provider may opt for voice-based systems to enhance customer experience (this was for instance the case of Roshan in Afghanistan, which developed an IVR system supporting the main national languages). In other markets with heavy SMS usage, SMS-based solutions may be preferred (as was the case in the Philippines with GCASH). Ultimately, choices will have to be made in full consideration of local contexts and security versus complexity trade-offs.

At last, customer education should be ’built-in’ in the service design process. For any service to take root and gain traction, it is essential that the customers understand this service. Creative and innovative approaches remain to be developed in that field.

! All in all, service design and usability as well as customer education are key drivers for exponential customer adoption and hence, for transformation.

4 3 Partnerships between FIs and MNOs

Key among the partnerships that are required to enable the delivery of relevant financial services over the mobile channel is the partnership between financial institutions and mobile operators. Indeed, these types of partnerships are often crucial to the success of a mobile banking initiative for a number of reasons among which:

Regulatory permission: In countries where regulation does not allow non-financial institutions to offer financial services to the public, banks become the only possible licensees. Also, mobile operators are required to define a suitable partnership model with banks.

Customer relevance: Transformational banking is not just about offering payment and money transfer services to the unbanked. It is rather about providing prior unbanked people with an opportunity to save small amounts, or giving them access to small working capital. Financial institutions (whether banks or microfinance institutions) are the best placed and only ones licensed to offer these services. Also, MNOs will need to seek creative partnerships with these institutions if branchless banking is to be truly transformational.

In an ideal scenario, such partnerships should be built on a realistic assessment of the comparative strengths of MNOs and banks in a given market and should be informed by the following:

Identification of risks and opportunities related to the outsourcing of key core banking functions based on the comparative strengths of both parties

Clear definition of service operation roles (customer registration, product development, back-end technology, branding/marketing, customer service, liquidity management, cash in/out, risk management, regulatory compliance etc.) and related risks


Identification of mobile money risks and how they can be best addressed

Definition of risk/reward schemes that are fair and provide enough financial incentive to both parties

However in reality, there is a great deal of variation in the terms of agreements between banks and MNOs and different schools of thought about how such deals should be structured.

! Guiding both parties in these negotiations by making the range of available options clear and suggesting best practices when possible could be of value.

The table below proposes a sample risk matrix in relation to the core banking functions (agents, payment system and account management) but also from the perspective of the end user:

Risk area Description Responsibility Comments

1 End user Users unable to register to the service due to inability to prove identity

Account provider and its agents

In all these cases, Regulatory policies and control play a significant role in risk mitigation

User identity stolen and used fraudulently

User

User’s account security credentials released

Account provider Account providers can also be required to provide effective consumer protection measures

User charged unauthorized fees or unavailability of agents or denial of service by an agent

Account provider and its agents

2 Agents Agent cannot liquidate e-money inventory

Account provider In all these cases, regulatory policies and control play a significant role in risk mitigation

Agent is robbed Agent

Agent received or provided counterfeit cash

Agent

3. Payment system Government enforces its own payment system

Regulator Regulatory policies and control play a significant role in risk mitigation

4. Account provider Employee defrauds the system Account provider In all these cases, regulatory policies and control play a significant role in risk mitigationAccount provider does not

meet regulatory complianceAccount provider

System unavailability Account provider

Liquidity issues Account provider and agent management organization


4 4 Targeting specific market segments

In a search for critical mass, many mobile banking rollouts have attempted to successfully target the mass market. However, in certain cases, informed focus on specific market segments has helped in driving service adoption and take-up.

For instance, WING (in Cambodia) has been focusing on the garment industry right from the early days. Paying the wages of all the employees and workers in this industry has proven to be a daunting task. Also, WING’s mobile banking initiative started as a mechanism for salary payment into a mobile wallet. In Afghanistan, M-Paisa has taken the same approach, enabling Afghan police officers to be paid via their mobile phones. In Kenya, one of the banks is looking at distributing financial services to farmers living in remote rural areas over the mobile infrastructure.

These examples show that targeting specific segments can sometimes spur adoption. However, identifying the right segments requires an in-depth understanding of specific segments, sometimes triggered by intersections with other programming lines of development cooperation (fight against corruption, microenterprise development, agricultural development, rural development, etc.).

! Correlating these programming lines with branchless banking initiatives could be of value.

4 5 ICT requirements for financial institutions

One of the pre-requisites for financial institutions to be able to participate in mobile banking ecosystems is having the right infrastructure in place. Indeed, one of the benefits of mobile banking comes from the end-to-end automation of transactions, resulting in increased efficiencies and operational costs reduction.

This end-to-end automation supposes that participating financial institutions have proper back-end systems and front-end tools in place, in other words, that they have an adequate ICT infrastructure. Furthermore, it also requires them to have the necessary knowledge and capabilities (computer literacy) to effectively use the technology and to ensure the maintenance of hard- and software equipment.

Before supplying those needs, a strategic decision in terms of the technology of choice is inevitable; as German Development Cooperation tenders high amounts to be invested on IT-related products and software, proper consideration should be given to Free and Open Source Software (FOSS). Indeed, FOSS approaches would solve the problem of the strong dependence on external software suppliers (also called “proprietary lock-in”), which is a key for sustainability of the IT-system. A strategy based on FOSS and open standards would also entail several ancillary benefits: (i) local economic development, as a new local service industry would grow as local companies get contracted, and resources would remain within the local economy; (ii) the creation of public goods by public finances; (iii) the strengthening of cross-organization policy coherence, as open standards are backed not only by German national initiatives and institutions (Federal Parliament, Ministry of Foreign Affairs) but also by implementing agencies, NGOs and international experts.


Many experts see FOSS as a cost-effective solution, particularly in view of scaling up of ICT solutions and regular software upgrades. The MIFOS financial software by the Grameen Foundation is a good example of these benefits http://www.mifos.org/about/open-source-technology. As a testimony to this trend, existing software vendors for mobile wallet platforms are also increasingly looking at FOSS as the next major paradigm in their industry and are starting to develop FOSS strategies.

Of course, proper interconnection of rural MFIs or agents to national infrastructure and databases is also a key challenge. Generally, internet access or data services are sufficient for that purpose. Partnering with organizations that expand access to internet to rural areas could pay off in terms of providing that infrastructure.

! Assisting small financial institutions with enhancing their ICT infrastructure and elevating their ICT maturity level is a need in most emerging countries.

,

Microcredits in Indonesia | Photo: © GIZ, ProFi

http://http://www.mifos.org/about/open-source-technology

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5 0 Case studies

This section proposes to discuss two specific case studies and highlights some of the key lessons learnt.

5 1 Case study 1 – Rural banks in the Philippines

5.1.1 Background and environment

In 1998, with support from USAID, the Rural Bankers Association of the Philippines launched the Microenterprise Access to Banking Services (MABS) programme with technical assistance and implementation provided by Chemonics International. This initiative was designed to accelerate national economic transformation in partnership with the Philippine rural banking industry to significantly expand access to financial services for micro entrepreneurs and other lower income groups. The MABS Program provided training and technical assistance to participating rural banks in the Philippines to develop their capacity to profitably provide financial services including loans, deposits, and money transfer services to microenterprises in the Philippines.

5.1.2 Objectives

In 2004, the MABS Program decided to go the mobile route and partnered with G-XChange, Inc. (product name: GCASH), a wholly owned subsidiary of Globe Telecom, in the development and implementation of mobile phone banking applications and mobile commerce services for rural banks and their clients. Approved by the Bangko Sentral ng Pilipinas (BSP), rural banks can now offer electronically driven financial services in the comfort of their homes, business or offices. These services include Text-A-Payment (TAP) for loan payment, Text-A-Remittance (TAR) to transfer money domestically and abroad, Text-A-Deposit (TAD) for remote deposit mobilization, and Text-A-Withdrawal (TAW) whereby clients can withdraw electronic money directly from their savings account to their mobile wallet.

5.1.3 Approach

The model

The approach relies on a mobile-operator led model and on the GCASH wallet, a service provided by Globe Telecom’s G-XChange subsidiary. However, it is worth noting that the adaptation of the GCASH service to the context of the rural banks has been the result of a very close partnership and collaboration between Globe Telecom and the Rural Bankers Association, with constant support from Chemonics. Indeed, the willingness of the MNO to develop extra features to accommodate the service requirements of the rural banks has been instrumental in this success.

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The business case for the mobile operator and the rural banks

The benefit to GCASH is many-fold: on the one hand, GCASH is able to generate additional fees from the transactions undertaken by the rural banks and their customers; on the other hand, rural banks directly contribute to the awareness and overall increase in GCASH penetration in remote areas; lastly, some of the rural bank customers can also be used as agents to serve local communities with cash in/out services. All in all, GCASH will derive increasing benefits from their association with rural banks as more and more of them embrace mobile banking.

To the rural banks, the benefit is more immediate. A recent cost/benefit analysis performed by RBAP-MABS for loan repayment showed that for a rural bank with an average loan size of 17,755 Pilipino Pesos (~USD $390), the total income after collection costs is twice as much with mobile banking (~USD $33) as it is with standard collection processes (~USD $17). Indeed, mobile banking significantly reduces the cost of pick-up collection, as illustrated in the table below:

Costanalysis Items Cost/Benefitanalysis for loan repayment (Pesos)

Collection with pick up service Mobile banking

Loan details Average loan size 17,755 17,755

Average loan term (days) 124 124

Average number of visits (in weeks) 18 4

Fees Service fee 3.0 % 2.5 %

Interest rate (flat monthly) 2.5 % 2.0 %

Service fee income 533 444

Interest income 1,755 1,420

Average cost for Pick up collection per account visit 1,510 352

Toteal income after collection costs 798 1,512

Source: RBAP-MABS Program, supported by USAID in the Philippines

Benefits to rural banks are expected to increase as a broader segment of their customer base adopts mobile banking for repayments.

In summary, both parties in this model have a strong incentive to support and promote the partnership, as benefits will only be accrued when sufficient scale is reached. In fact, developing a customized set of applications had some costs implications on the mobile operator side and so did adapting existing systems and processes at participating rural banks. In both cases, the MABS Programme has been of significant help, but recovery of initial investment will require critical mass for both parties.

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Donor support

In this particular case, the project was funded by USAID, with Chemonics being the technical assistance and implementation arm. The programme started in 1998, has already gone through multiple phases and is now in its fourth phase, which will end in March 1, 2013. Donor funds were mostly used to support the overall programme, assist the rural banks with their mobile banking approach and with the discussions with the mobile operator to define the right set of applications and rural bank relevant features, as well as the adaptation of rural banks systems and processes. Throughout the process, technical assistance (including program management) was provided by Chemonics, the execution arm. Donor funds covering only a small part of the total costs incurred.

Implementation challenges

Along the way, MABS has encountered several implementation challenges. The biggest challenge has been the technology maturity of some of the rural banks and their willingness to embark on this journey. Indeed, participating rural banks needed to have some sort of back-end systems to fully reap the benefits of an m-banking approach. Besides, full integration of the mobile-wallet front-end with the back-end system was required for greater efficiency. In that regards, MABS has been instrumental in guiding the rural banks with their ICT infrastructure and supporting the development of a software interface between front and back-end.

The second area of challenges was the roll-out of the agent network and the availability of relevant cash in/out locations, especially in the remote areas where the rural banks were operating. In that regards, MABS has contributed to implementing innovative approaches relying on individuals in these remote locations, providing them with training to convert them into cash-in/out agents.

Client education has also been a challenge, however less problematic. Indeed, customers have seen a clear benefit in the opportunity cost reduction.

Key success factors

Public-Private Partnerships

MABS has developed several strategic private sector partnerships, which have resulted in the mobilization of $65 from the private sector for every $1 of USAID funding. For example, from October 2007 through June 2009, the total private sector funding amounted to more than $230 million. Those partnerships have included: Rural banks, Globe Telecom, SMART Telecom, Nokia Philippines, MicroSave, private insurance companies etc. That approach has significantly contributed to the sustainability of the model and has increased the impact.

Enabling environment

MABS has been working very closely with the Rural Bankers Association and the Central Bank to lobby for appropriate laws and regulation to support microfinance operations of rural banks and to further enable mobile phone banking. This has resulted in the gradual creation of an enabling environment for m-banking for rural banks.

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Technical support with ICT developments

MABS has provided continuous technical assistance to the rural banks, developing the suite of mobile phone banking applications such as Text-A-Payment and Text-A-Deposit, consistently strengthening the ties between the MNO and the rural banks, and assisting in developing interface software between SMS-based e-money transactions and the back end system of rural banks.

5.1.4 Results

Since 1998, the MABS Program has helped more than 330 rural banks/branches expand their services and outreach throughout the Philippines.

Among other results, the following can be highlighted:

Through November 2009:

572 participating bank branches (88 % increase from April 2008) 675,470 cumulative new borrowers

Through December 2009:

US$108 million cumulative value of mobile phone banking transactions (381% increase from April 2008)

5 2 Case study 2 – Roshan’s M-Paisa in Afghanistan

5.2.1 Background and Environment

Roshan is the leading mobile operator in Afghanistan, nearing 42% market share in a sector that is becoming increasingly competitive with four mobile operators competing for the same customers. Afghanistan has a very weak banking infrastructure (17 banks, 290 branches and only 38 ATMs) and 97% of the Afghan population that does not have access to banking services. In addition, there is a very limited trust in the banking system.

Moving cash throughout the country is risky and expensive due to the conflict situation and the many “checkpoints” on the main highways. The home-grown semi-formal channels such as Hawala process large amounts but the system is unreliable. Banks and MFIs have very limited outreach, particularly into rural areas. In Afghanistan, the 45 MFIs only had about 150,000 clients in 2006.

Also, in 2006, Roshan decided to investigate the opportunity of launching mobile financial services with a view to fill the financial infrastructure gap in Afghanistan, in addition to facilitating money movement in the country.

5.2.2 Objectives

Roshan selected Vodafone’s M-Pesa product as its technology of choice in Afghanistan. The initial aim was to facilitate money movement in the country and to enable the MFI industry to process the payment of salaries to the government employees using a transparent mechanism.

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5.2.3 Approach

The model

The model that was implemented in Afghanistan is a pure-MNO model, similar to what Safaricom has implemented in Kenya. Roshan has taken up the challenge of putting the entire ecosystem together by itself, and in that regard, has had to extend comprehensive support to all ecosystem partners. In particular, Roshan has extended extensive support to its microfinance partners to enable them to participate in the ecosystem.

Donor support

This project has not been directly supported by any donor. However, Roshan recently received a grant from the GSMA MMU fund to further develop M-Paisa in Afghanistan.

The business case for Roshan and the MFIs

Due to Roshan’s strong social orientation, its decision to work with microfinance organizations was not driven solely by business case but by larger development concerns. However, the partnership nonetheless benefited Roshan in many ways: Roshan was able to generate additional fees from the transactions undertaken by the MFIs and their customers, although in limited numbers; on the other hand, MFIs became instrumental in developing awareness about M-Paisa and educating customers, in addition to providing cash in/out services. Perhaps it is the MFIs that have benefited the most from the partnership. In a mountainous region like Afghanistan, expanding outreach based on a brick-and-mortar model is prohibitive and makes frequency of customer interaction a real issue. In that context, M-Paisa enabled MFIs to ‘’virtualize’’ some of their customer interactions and reduce them to essential meetings only, resulting in significant operational cost reduction. As a result, some of the MFIs such as First Microfinance Bank have decided to pass on the savings to their customers, dropping their interest rates by a few percentage points. This is a significant achievement for the development of microfinance in Afghanistan.

Implementation challenges

Afghanistan offers its own unique set of challenges. Maybe the most important challenges have been setting up a sustainable and healthy agent model, alongside with educating the customer in financial matters.

Setting up a sustainable agent model relies on reaching a critical mass of users to keep the agents motivated. In the case of Roshan, because the approach initially focused on salary payment and loan repayment, the critical mass was not assured. Also, carefully managing the agent roll-out against customer acquisition forecasts and developing relevant incentives have been a challenging exercise.

Educating the customers has been another challenging activity, especially in an environment without trust into formal financial systems and with a very high illiteracy rate.

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Key success factors

Enabling environment

From the early days, Roshan has engaged with the regulator to ensure that regulations for m-banking would be enabling. Roshan has taken a lead role to help shape and create the right regulatory framework for mobile money in Afghanistan. Also, the quality of the relationship between Roshan and the central bank along with the transparency of the process, all these facts helped develop a trust relationship that enabled the take-up of mobile banking in Afghanistan.

Technical support with ICT developments

Roshan has been supporting ecosystem partners with their ICT/business process challenges. In particular, Roshan has significantly contributed to the business process development for partnering MFIs, which was key to their ability to participate in a pilot.

5.2.4 Results

Roshan has done a loan repayment trial and a salary payment trial. Limited data is available on the current results. However, the following trends/partial results can be underlined:

As far as the salary payment is concerned, results are as follows:

Salary disbursement trial was successful with 49 police officers

Salaries paid were between $100 and $420

Officers were paid in full and the trial is now expected to extend to full-scale launch

On the microfinance side, it is worth highlighting:

The trial was performed on a sample customer base of FMFB, the partnering MFI. Close to 500 clients were selected.

The partnering MFI (FMFB) has achieved operational savings by leveraging the mobile channel as opposed to MFI personnel. As a result, FMFB has passed on some of the savings to the end customer.

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5 3 Lessons learned from the case studies

The main lessons that can be drawn from the two case studies are the following:

Promoting an enabling regulatory environment is vital for success. This can be achieved through tight dialogue with the regulator. Such approaches have produced favorable results both in Afghanistan and in the Philippines. This is an approach that German Development Cooperation can support actively.

Supporting various partners with their ICT and process requirements has been instrumental to their successful participation to the ecosystem. Playing a significant role in that space is desirable for faster ecosystem development. This is a further area that German Development Cooperation should consider facilitating.

Public-Private-Partnerships have been instrumental to the take-up of the service in both places. Combining public and private forces eases market entry, early adoption and promises financial sustainability of the projects.

Financial sustainability is critical: For the project to be viable, commercial sustainability for all partners is crucial. Had it not been for its strong social orientation, Roshan would have had limited incentives to work with MFIs from the outset.

Microfinancebank in Kabul | Foto: © GIZ

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6 0 Role played by development cooperation

6 1 Development players involved in branchless banking

The branchless banking space has attracted significant interest and investment over the last years, especially from the public sphere. Indeed, donors have started getting increasingly involved as synergetic intersections, integrating branchless banking into their other programming lines.

Besides, there are good reasons for focusing on branchless banking and specifically on m-banking at this point in time:

In low-income countries, m-banking will enable technology leapfrogging, saving the cost of rolling out higher cost financial infrastructure

In addition, m-banking brings new models and enables value chains to disaggregate, creating room for players like MNOs to play a significant role in reaching out to the unbanked,

M-banking is still at an early stage of development, and therefore the potential for influencing the models that will be adopted is greater at this point in time

As a result, a number of donors have been involved in supporting mobile banking initiatives in diverse geographies. Among the most active donors in that space, one can mention: DFID, IDB, KfW, GIZ, USAID, World Bank/CGAP/IFC.

Their involvement has been of different type: From advisory services and technical support to the establishment of Public-Private-Partnerships (PPPs), donors have found different ways to support mobile banking initiatives and meet their overall development objectives. However, success stories remain scarce and review of existing experiences highlights a few conditions that can increase chances of success.

6 2 The specific case of German Development Cooperation

German Development Cooperation has traditionally focused their efforts on the following areas:

Good Governance: Democracy and rule of law, decentralization, corruption, public finance, etc.

Rural development: Rural economic development, management of natural resources, land management, rural services, food security, etc.

Sustainable infrastructure: Energy, construction, transport, water.

Social development: Health and population, education, HIV/AIDS, social protection.

Environment and climate change: Climate change, environmental policy, institutional development, management of natural resources, urban and industrial environmental management.

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Economic development and employment: Economic policy, vocational training, private sector development, ICT for development, financial systems development, etc.

Cross-sectoral themes: Gender, crisis prevention, youth, HIV/AIDS, emergency aid, poverty, food and nutrition security, Rio+10, PPP, social and ecological standards

German Development Cooperation treats branchless banking as an increasingly strategic area of focus. Indeed, branchless banking not only advances financial inclusion, but also has the potential to support other strategic areas of German Development Cooperation.

The following table illustrates strategic alignment between German Development Cooperation initiatives and branchless banking.

Branchless banking needs

Topic that branchless banking can support

Example of application

Good governance Fight against corruption Salary payment to government employees, military, police officers

Rural development Rural economic development Access to microfinance for rural entrepreneurs

Sustainable infrastructure Payment infrastructure Use the mobile network as a payment infrastructure integrated with banking infrastructure

Social development Social protection Payment of governmental benefits

Economic development and employment

Agricultural development Financial services to enable the cash flows in farmer’s businesses

Cross-sectoral themes PPP Public-Private Partnerships between donors and vendors for customer education for instance

6 3 Real-life examples of donor involvement

The following discusses a few examples in which development cooperation has been substantially supporting the mobile banking agenda (alphabetically ordered according to country).

Afghanistan – USAID, Gates Foundation, CGAP

USAID has invested approximately $5 million to support the central bank’s efforts (Da Afghanistan Bank) towards developing an enabling environment for mobile banking in Afghanistan. Particularly through the ARIES project, USAID has provided direct technical assistance to Da Afghanistan Bank and supported MFIs such as FINCA in preparing mobile banking pilots. Recently, the GSMA MMU (Mobile Money for the Unbanked) has allocated a grant to Roshan, the leading mobile operator in Afghanistan, and CGAP has also provided technical assistance to support the piloting of salary payments for the Afghan police. The grant was used for building a meaningful agent network and interfacing with the governmental systems. In this case, a key success factor was the convergence of multi-donor efforts fueled by range of individual objectives: Control of corruption, good governance, infrastructure building, and economic development. Indeed, active multi-donor implication has contributed to creating a momentum, focusing national attention on mobile banking. Furthermore, the commitment of the Central bank and the willingness of a pioneering market player to invest upfront have undoubtedly positively shaped the course of the events. Lastly, the specific focus on the national police has clearly provided the ground for an important ’quick win’.

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Cambodia – IFC

In January 2009, the Australia and New Zealand Banking Group (ANZ) launched WING in Cambodia, with a view to enable easier and more effective processing of salary payments within the garment industry. In addition to the garment workers, WING has also targeted microfinance institutions.

WING benefited from IFC’s support since the early days of planning and preparation, including in the discussions with the National Bank of Cambodia. The assistance received by WING, mostly on the regulatory side and for business design, has been instrumental in securing the right approvals and getting things off the ground. In this particular case, the focus on the needs of a specific industry also played a key role in the take-up of the service.

DRC – CGAP

In 2009, CGAP has been supporting the Banque Centrale du Congo (BCC) in developing an enabling environment for mobile banking services in the country. A seminar was held in Kinshasa with representatives of the BCC and various stakeholders from the public and private sectors (government officials, banks and MNOs). Recently, the US Department of State held a similar conference to follow up on that matter, with a view to enable the payment of the UN military forces’ salaries . Currently, the existing framework does not cater for transformational banking nor does it allow non-financial institutions to play in that space. However, the convergence of interests and the existence of a clear application that has immediate benefits may stimulate rapid change.

Ghana – KfW

The Bank of Ghana has initiated the implementation of a nationwide branchless banking model, with the overall goal to provide access to banking services particularly to the rural population of Ghana. The “e-zwich” project is an electronic payment system, using Point of Sale (POS) devices. At the same time banks are issuing biometric pre-paid smartcards using the finger print of the customer as means of authentication. Thus, the system facilitates money transfers (e.g. savings or salary and pension payments) as well as cash-in and cash-out transactions in a secured manner. Also the Ghanaian government is intending to use the system for their own payments to decrease fraud through more transparent payment methods while at the same time increasing the efficiency of revenue collection and payments.

KfW is going to finance a main part of the e-zwich infrastructure in order to set up a sufficient network and is providing accompanying measures to ensure a sustainable implementation.

Indonesia – GIZ

Since 2008, GIZ has been closely involved with the rural banks in Indonesia to help them develop innovative products over the mobile channel and prepare a mobile banking pilot. The support included the establishment of an m-banking working group, acting as a ’think tank’ for the rural bank industry; field visits to the Philippines to learn from their experience; discussions with Bank Indonesia for regulatory enablement and workshops with market players to identify potential partners and develop a framework for a pilot. To date, MV Commerce has emerged as the third-party technology provider of choice, interconnecting all MNOs and all banks to the same central platform. Regulatory approval is still pending, but the microfinance angle is likely to be a motivator for Bank Indonesia to grant permission.

53Case studies

Jamaica – IDB

In 2009, in conjunction with the Planning Institute of Jamaica (PIOJ), IDB has supported Bank of Jamaica with a full review of the existing legal and regulatory frameworks in order to identify the required adjustments to best support mobile banking in Jamaica. A detailed assessment was performed and a road map was set up. Results were shared with all stakeholders. However, for the lack of resources or expertise, Bank of Jamaica has not yet acted on implementing these changes. Sustainable support from IDB or other donors will probably be required to implement the road map.

Philippines – USAID and GIZ

Since early 2004, USAID has been involved in supporting mobile banking services in the Philippines through the MABS (Microenterprise Access to Banking Services) project. MABS has provided technical assistance to rural banks for developing mobile banking products over the mobile channel and has been instrumental in bringing Rural Banks and mobile operators together. GIZ has also played an important role in supporting some of the Rural Banks with enhancing their maturity level and preparing themselves for mobile banking. To date, the Philippines case is considered a global benchmark and its success seems to have relied on a number of factors including: (i) Consistent support from the central bank of the Philippines; (ii) buy in from all the stakeholders in the ecosystem; (iii) consistent and sustainable support from the involved donors, over several years. The last point has indeed been crucial in gaining traction in the market and building momentum.

Senegal – KfW

In late 2009, the Ministry of Finance of Senegal and KfW have jointly embarked on a mobile banking study aiming at identifying the opportunities offered by innovative ICT technologies for the distribution of financial services to people living in remote rural areas in Senegal. In particular, the study included a detailed opportunity study for an interoperable multi-MNO, multi-financial institution project. The study resulted in detailed recommendations in terms of the operational set-up of the new venture, services to be offered, partnerships to be established, initial funding needs and projected revenue forecasts. The approach envisages a public-private partnership and the partial subsidization of a private mobile banking operator. The operator will, among other things, build a nationwide agent network with a strong focus on rural areas. The ultimate objective is to dramatically develop access to financial services to the people who are currently excluded. The next step will be to select an organization that runs the project by delegation.

Woman in Senegal | Photo: © KfW, Bernhard Schurian

54 Case studies

Tanzania – DFID

After the success in Kenya, DFID has decided to support the development of mobile banking also in Tanzania. In 2009, the Bill and Melinda Gates Foundation also provided a grant to leverage the Postal Bank’s network to reach low-income rural populations through a combination of agency banking, mobile technology and Point of Sale (POS) devices. Vodacom also received some support from the GSMA MMU fund to develop and introduce M-Pesa in Tanzania. Somehow, the case of Tanzania shares similarities with Afghanistan: Multiple donors being involved and supporting various elements of the value chain to build a sustainable and strong ecosystem.

Zambia – USAID

In Zambia, USAID has focused on supporting the cotton value chain by facilitating the use of a mobile payment system to lower the transaction costs for buyers paying farmers. In addition to enabling cash flows between buyers and sellers, the system also improves the overall tracking of transactions, of the prices the buyers pay, of the quality and quantity of cotton that they receive from each farmer, improving the way buyers run their businesses and their overall performance. Similar to the case of WING in Cambodia, the clear focus on a specific industry has paved the ground for a successful deployment of a mobile banking approach.

6 4 Some lessons learnt

The following part summarizes some of the lessons learnt from experiences of donors with mobile banking so far.

Involvement with regulators was often required, and has yielded positive results under the following circumstances:

It was a long term and sustainable involvement over time There was a strong commitment or a clear incentive (political, image, economic) for the regulator

to make the required changes Time of the essence: The more sustainable the involvement, the higher the chances of success.

Support activities that are not followed-through will eventually lose their momentum. Multi-donor approaches have also proven to be helpful, as they create momentum and traction

in the market. Identifying specific segments or industries and correlating mobile banking support with other

programmes are strategies that pay off, as they help overcome existing reservations and/or fears. Funding private commercial projects may serve the overall agenda if the project is designed to

have an ‘’emulation effect’’ in the industry and serve the less profitable segments.

All in all, best approaches seem to have involved the following ingredients: (i) Sustainable and comprehensive support; (ii) multi-donor focus; (iii) clear quick win or focus segment; (iv) strong correlation with other development programmes; and (v) public-private partnerships to support inclusive initiatives.

Market in Tanzania | Photo: © KfW, Rolf Obertreis

55Recommended roles for German Development Cooperation

7 0 Recommended roles for German Development Cooperation

7 1 Needs and gaps in branchless banking

The following table provides a ranking of the most important issues and bottlenecks in mobile banking:

Need Key enablers it supports

Why? How?

1 Regulatory advice Enabling financial regulation

Business model / partnerships between FIs and MNOs

Regulation remains the biggest challenge for branchless banking initiatives. Regulatory advice, both to market players and regulators, is still required

Issues such as partnerships between FIs and MNOs, interoperability, competition need to be better addressed and will shape market approaches

Regulatory advice to policy makers through seminars and direct engagements

Awareness building for market players through papers, seminars, development of toolkits

2 ICT infrastructure for MFIs

ICT requirements of small financial institutions

Business model/partnerships between MFIs/MNOs

MFIs need support to develop the right infrastructure and become sustainable ecosystem partners

They need the right strategy to ensure their investment is effective

They need to build capacity to operate and run their ICT infrastructure

Develop a FOSS approach and ecosystem to support MFIs

PPPs that aim at developing a local ICT industry to service the MFIs

Training and capacity building programmes

3 Information collection and

Enabling environment/market assessment

Business model/agent model

Partnerships between FIs and MNOs

Although more and more literature is available, it is still not broadly disseminated and does not address specific issues such as agent model, partnership models between FIs and MNOs etc.

Complementing these papers with practical toolkits that can be used by market players would add significant value

Develop a cross-agency information portal

Produce papers and research that is actionable, complemented by toolkits and on-the-ground advice

4 Better synergies with existing programming lines )

Better market assessment

Identification of specific targets

Understanding the market in detail and identifying key use cases for specific segments is key to the success of branchless banking. Synergetic approaches with other programming lines would create efficiencies and lead to that result

Identify other programming lines that could benefit from branchless banking initiatives

Develop a cross-programming plan to create more synergies

56 Recommended roles for German Development Cooperation

1 Regulatory advice:

Regulation remains the biggest challenge for branchless banking initiatives to date. Regulatory advice, both to market players and regulators, would be of value.

In particular, there is an opportunity to shape the types of partnership models that will emerge between financial institutions and mobile operators, thus significantly influencing the course and development of branchless banking.

German Development Cooperation already has significant involvement in the regulatory issues of telecommunication markets in Sub-Saharan Africa. This could be leveraged to address early on the electronic transactions aspects that could have implications for branchless banking (validity of SMS and e-signatures, encryption, etc.)

2 ICT infrastructure for financial institutions:

Assisting small financial institutions in enhancing their ICT infrastructure and elevating their ICT maturity level is a need in most emerging countries.

There are synergies to be leveraged with German Development Cooperation’s FOSS efforts. A FOSS strategy could prove to be of particular relevance to the MFI industry, in addition to supporting the development of a new local service industry and bringing positive economic impacts.

3 Information collection and dissemination:

In spite of all existing attempts at consolidating and disseminating knowledge in this nascent industry, some critical gaps still remain to be addressed at a more operational level.

For instance, the development of a successful agent model requires know-how and capabilities that could be developed and disseminated in the form of papers and tool-kits for market players to use. There is an opportunity to build a central pool of knowledge that need not be replicated each time but that can simply be used by market players, hence creating efficiencies.

4 Linkages to broader development policy objectives:

Correlating existing programming lines with branchless banking can add significant value to existing initiatives while supporting the branchless banking agenda. This is crucial at times of financial constraints, where programmatic synergies become more important.

Besides, coupling branchless banking projects with other development efforts could result in more refined segmentation of the market, new sets of use cases and more relevant service design to meet specific transactional needs (for instance, trading between farmers and buyers). Overall, this inclusive approach can be beneficial to branchless banking programmes.

These needs are going to be more salient over the coming couple of years, as branchless banking experiences matures, and German Development Cooperation could be playing a vital role in supporting some of them, consistent with German Development Cooperation’s strategic priorities.


In selecting markets and areas of intervention, the following criteria should be kept in mind:

What is the potential impact on the unbanked and the poor?

Is the support going to be additive and non-duplicative or are other agencies already providing the same support?

Are there synergies with other German development activities?

What is the gestation period? It is advisable to go for projects that have a shorter gestation period and can be then scaled up if the model proves successful.

7 2 Possible strategies to address these needs

There are two main strategies that can be pursued by German Development Cooperation:

Direct support to market players. In certain markets, direct support may help pioneers start-up a new business and significantly contribute to the development of branchless banking.

- Generally, challenge-fund models (CGAP is an example) work well, as they invite applications and select the best initiatives. However, this approach requires significant capital, along with the expertise to select the most promising projects.

- It is also worth highlighting that MNOs and Banks are generally not the ones in greater need for funding, at the exception of small players or in small markets. Also, funding these players may not result in the most effective fund allocation. Rather, funding small Financial Institutions or MFIs to help them build their ICT infrastructure and leverage the mobile channel may be more useful, which in turn would require a deep knowledge of local markets.

- A middle path approach could consist in funding pilots to support innovation, combined with regulatory support and knowledge dissemination.

Indirect support through the creation of an enabling environment. This would mainly consist of improving the informational, policy and regulatory environments, thus enabling new models to emerge.

- For instance, a research programme could be devised to fill knowledge gaps by systematically analyzing the emerging models, in particular in terms of the partnerships between banks and MNOs or the set-up of innovative agent networks. As these evolve, it would be interesting to track their comparative performance against initial expectations.

More efficient information dissemination is also key to this indirect approach, and may involve multi-party partnerships with other agencies.

All in all a combination of indirect and direct approaches, involving the development of an enabling environment combined with some form of pilot funding seems to be the optimal approach at this stage of development of this industry.


7 3 Recommended roles for German Development Cooperation

The proposed strategy for German Development Cooperation in branchless banking does not stand in isolation. It shall closely align with the larger development-level priorities discussed above, as well as with the identified needs and gaps in that industry.

The main roles that could be played by German Development Cooperation are described in the following. They derive from an understanding of both industry needs and the overall priorities of German Development Cooperation. The identified roles are as follows:

Advisor in the financial regulatory arena

This is, as discussed before, a critical need in today’s branchless banking space. It should address all the core aspects of branchless banking regulation, along with the issues of interoperability, competition and partnerships between financial institutions and mobile operators. Core concepts such as electronic money and use of agents are now becoming increasingly familiar to policy makers. Regulating interoperability and ensuring fair competition in the market however remain unfulfilled challenges.

The German intervention should support efforts that aim at realizing an overall conducive framework for branchless banking and that policymakers and market players alike understand all related implications.

In particular, German Development Cooperation should leverage its current involvement with telecom regulators to ensure that telecom regulations with influence over the development of branchless banking (electronic transaction regulations, universal access obligations for ICT infrastructure etc.) are supportive of branchless banking objectives.

In order to be fully effective, this role should be sustainable over time and combined with an attempt (by German Development Cooperation or other donors) at strengthening the ecosystem, either by developing PPPs with the private sector or by advising financial institutions on their ICT infrastructure development. It is to ensure that ecosystem members move at the same pace as the regulator, thus maximizing the chances of positive outcome.

Attention should be paid to making sure that there is no conflict of interest between German Development Cooperation’s involvement with the regulator and its possible implication with the private sector.

Partner for private initiatives

German Development Cooperation could become a partner of choice for private initiatives and act as a catalyst between microfinance institutions, banks, mobile operators but also technology vendors. Funding small private commercial projects can have an effect in the market, especially if these projects are designed to be interoperable by nature and to serve less-profitable segments. Furthermore, it may even make sense in certain contexts to support a dominant player or a monopoly, with a view to build and strengthen successful payment system initiatives that will later be available for all other market players.


No other player than Safaricom could have achieved what has been done in Kenya. For this reason and regarding the ancillary benefits that resulted from M-Pesa’s success, funding Safaricom’s project would have been a wise choice ex-post. Similarly, a number of large commercial organizations have received support from the Bill and Melinda Gates Foundation (via GSMA MMU Fund) to develop for instance new services in conjunction with microfinance institutions, to roll-out a denser agent network or to develop services that will involve banks in the early stage and target the ‘base of the pyramid’. This has for instance been the case of Roshan, TIGO, SMART or Orange.

These market players, including the most commercially viable ones, are in search for funding. Branchless banking projects have a long pay-back time and initial investments are high. As a result, financial support is often required, especially if the player is expected to develop a significant outreach and target less profitable customers with the aim of financial inclusion. The financial support need becomes even more critical in the case of small start-up mobile banking companies aiming at developing interoperable services. The benefits brought by such initiatives can potentially be very high, but the required investment is challenging. This is where German Development Cooperation can play a significant role. In addition to funding, other types of support could be considered.

Recommended support includes: Product design support for specific segments; ICT enhancements for microfinance institutions; funding of pilot projects and start-up projects; technical support for third-party technology providers building a scalable platform; and support in setting up viable agent networks.

In particular, developing a FOSS strategy for small financial institutions and supporting the MFI industry with their ICT infrastructure is a key task that German Development Cooperation would be well positioned to undertake and which would add significant value. This can be optimally complemented by capacity building in the area of computer literacy and maintenance and running of hard- and software. Furthermore, implementation of ICT-solutions also needs to be complemented by organizational changes and should be part of a larger process of change management, which can also be supported by German Development Cooperation.

Another area that would also benefit from German Development Cooperation’s involvement is the setup of an agent network. German Development Cooperation could provide a stimulus to the start-up of new businesses setting themselves up as agents for a branchless banking provider, or alternatively provide support for the large scale training of agents or simply develop a set of agent management tools that can be made available to ecosystem players. There are many ways to get involved with the private sector and the final choice will depend on German Development Cooperation’s appetite for private ventures as well as ability to ensure long-term commitment and support.

Ultimately, such involvement with the private sector also addresses other development objectives. Mobile money transfers, just by enabling money to move from economically rich areas to poorer areas, can be an engine for rural development.


All in all, partnership opportunities should be consistently selected in line with the national strategy and priorities of the German Development Cooperation. For instance, where the priority is corruption eradication, German Development Cooperation should focus efforts on working not only with the private sector but also with government entities to pilot salary payments; where the focus is rural development or agriculture efficiency, German Development Cooperation could focus on partnerships to address that specific community with relevant services. In that process, developing an in-depth understanding of the specific segments is vital and could be supported by German Development Cooperation.

Also, as far as the selection process is concerned, specific focus should be given to the following aspects:

1. Does the project advance financial inclusion?

2. Does it offer a sound base for immediate (or future) interoperability?

3. Is it going to be commercially viable?

4. Will it create traction for the industry at large?

5. Is there a strong local investor involved to support the project?

6. Is there public support?

7. Does it support other development objectives?

Resource center

Without necessarily trying to duplicate what is already available in the market, German Development Cooperation could positively impact in branchless banking by developing a resource center that bridges existing knowledge gaps. In particular, beyond traditional research on existing models and successful experiences around the world, this database should provide practical sets of tools to support market assessments, agent network sizing and development, segmentation etc.

Support governments in leveraging branchless banking

This is a new role that should be further investigated. Branchless banking can bring along a number of additional benefits that governments should be prepared to leverage. For instance, the fact that previously informally operating businesses are adopting formal channels can have significant impact on tax revenues. Further benefits can also be the way the government conducts its disbursing, for instance the way social pensions or public transfer payments are being disbursed to constituencies. Also, specific advice to governments to ensure that these benefits are leveraged could be desirable. In particular, Government-to-Person payments are becoming an increasingly important topic in all emerging countries and a number of initiatives have started flourishing, unlocking new opportunities. However, it seems more important to focus resources and efforts on actual initiatives that will see the light.


Linking branchless banking to other development policy objectives

This should be a priority for German Development Cooperation. Cross-programme synergies are in fact good way to optimize resources and achieve multiple objectives in one go. Besides, international experiences show that branchless banking initiatives targeting specific segments are more likely to gain traction as multiple interest groups focus on the same segments and as specific use cases and services are developed for these segments.

It also provides a more cohesive framework for German Development Cooperation strategy in each country. Also, the approach undertaken may vary from one country to the other, but the principle of alignment of multiple programmes to achieve better performance remains valid across geographies and over time.

7 4 Implementation structure

All previously mentioned roles can be seen as totally independent roles although there would be clear benefits in keeping them together.

Since there is incremental value in a coordinated approach, it is important to determine how this may be structured. In the first instance, a new programme involving multiple German Development Cooperation implementing agencies with a specific focus on branchless banking seems to make sense. In particular, this would ensure increased synergy and creative interactions between implementing agencies. However, this would need to be further investigated before a decision can be made.

7 5 Critical success factors

We have identified the following most important success factors:

Balance support: Where resources are available, provide long-term technical assistance; where resources are scarce, focus on advisory services and toolkit development.

Regulatory support: Do not focus solely on central banks. It is equally important to support the ecosystem at large and specific players in particular.

Multi-area and multi-year support: Provided support must be comprehensive and offer a multi-faceted approach so as to address multiple programming lines. Bridges between development policy objectives are essential to the efficiency and long terms sustainability of such initiatives. Also, it is crucial to identify these synergies early on.

Segmented approach: In difficult environments, identifying specific segments that will benefit from branchless banking services is a wise approach. This segmentation often results from the synergetic approaches discussed above.

62 Concluding remarks

8 0 Concluding remarks

Existing branchless banking experimentations have produced uneven outcomes across geographies: Successful experiences in Kenya, highly promising developments in Brazil, more modest but developing achievements in Philippines and South Africa, not to forget difficult take-ups in markets such as Ghana, Cameroon, Cote d’Ivoire, Indonesia or Cambodia. Microfinance involvement remains fairly limited, mainly due to operational readiness on the microfinance side and lack of interest/understanding on the mobile operator side.

Already, a few failures can be recorded but many new projects are in the making: The profitability of the ’base of the pyramid’ has finally been demonstrated and an entirely new industry is structuring itself around the delivery of financial services to the low-income segments.

At this stage of the genesis of this industry, it seems difficult to draw firm conclusions on the actual impact of existing experimentations, let alone the outcome of new ones. But initial results and accompanying lessons are encouraging. There is clear potential and indubitable opportunity. There are also some challenges.

The challenges ahead look immense: Uncertain market opportunities that can lead to uninformed decision-making; regulatory difficulties constraining service delivery; complexity of business models that are required to serve low-income segments in a viable manner; disaggregation of the value chain and multiplication of new players in the ecosystem; centrality of the customer in service design choices; importance of the identification of a principal demand; need for creative customer education approaches.

All these challenges will need to be overcome by market players for branchless banking to fulfill its promises and become truly transformational.

Within this context, German Development Cooperation has a great opportunity for impact. There are many different ways German Development Cooperation can support this industry, and among all of these we have identified the following roles as being the most relevant:

Advisor in the financial regulatory arena: This remains a major area of intervention

Partner for private initiatives: This is the area that presents the highest potential. There are many ways in which public sector and private sector can partner towards achieving common development goals. While these projects need to be commercially viable in the long run, they will also need financial and other support in the short term.

Resource center: Bridging existing knowledge gaps to avoid future failures is critical at this stage as more projects will be initiated soon

Supporting governments in leveraging branchless banking: Governments could significantly benefit from branchless banking developments. Enabling them to reap the fruits of these initiatives will result in increased global interest in branchless banking.

Linking branchless banking to other development objectives: German Development Cooperation has the opportunity to achieve a greater impact by linking branchless banking to other development objectives. This should be definitely explored.

63Bibliography

There are already very good examples of such involvement by for instance GIZ or KfW. More systematic approaches and clear implementation structure will be required to maximize the impact of German Development Cooperation’s involvement.

Bibliography

Armendariz, Beatriz & Murdoch, Jonathan (2005). “The Economics of Microfinance”, MIT Press.

Anyanzwa, James, The Standard Online Edition (2008) “Banks panic over M-Pesa”, Sokotele

Bankable Frontier Associates, with Neville Wishart (2006). “Mobile Banking: Knowledge Map & Possible Donor Support Strategies”, Report commissioned by the Department for International Development (DFID) and the Information for Development Program of the World Bank (infoDev).

CGAP/DFID (2008). “Branchless Banking Diagnostic Tool”, http://www.cgap.org/p/site/c/template.rc/1.26.1475

Hoffmann, Jenny (2006). “Issues in Mobile Banking: Regulatory and Technical issues”, MicroSave Briefing Note #52.

Ivatury, Gautam & Mas, Ignacio (2008). “The early experience with branchless banking”, Focus Note 46. Washington, DC: CGAP.

Lyman, Timothy R. (2007). “Technology and Microfinance: Where Do MFIs Fit in the New Branchless Banking Models?”, MFC, Sofia, June 1, 2007.

Lyman, Timothy R., Pickens, Mark & Porteous, David (2008). “Regulating Transformational Branchless Banking: Mobile Phones and Other Technology to Increase Access to Finance”, CGAP Focus Note n°43. Washington, DC: CGAP.

Mas, Ignacio (2009). “The Economics of Branchless Banking. Innovations”, Volume 4, Issue 2 (Boston, MA: MIT Press, Spring).

Mas, Ignacio and Morawczynski, Olga (2009). “Designing Mobile Money Services: Lessons from M-Pesa. Innovations”, Volume 4, Issue 2 (Boston, MA: MIT Press, Spring).

Porteous, David (2007). “Just how transformational is m-banking? South Africa: FinMark Trust”.http://www.finmarktrust.org.za/accessfrontier/Documents/transformational_mbanking.pdf

Porteous, David (2006). “M-banking: a knowledge map”, Washington DC: Infodev / Worldbank.

http://www.cgap.org/p/site/c/template.rc/1.26.1475

http://www.finmarktrust.org.za/accessfrontier/Documents/transformational_mbanking.pdf

Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH

Dag-Hammarskjöld-Weg 1-565760 Eschborn/GermanyT +49 61 96 79-0F +49 61 96 79-11 15E [email protected] www.giz.de

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