Uganda-Solutions to Affordable Banking
Transcript of Uganda-Solutions to Affordable Banking
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Completing the payments system:
An Industry Solution To Affordable Banking Services InRural Areas
June 21, 2006
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About Genesis Analytics
Consulting firm based in Johannesburg,provides strategic advice & guidance tobanks, financial institutions & publicsector bodies.
Clients include major Middle Eastern, African & South African banks &brokerages, MFI’s, corporates, local &international law firms, multilateral
organizations aid agencies, financialsector regulators & capital markets.
Areas of expertise:
strategy, financial economics banking & capital markets;
competition & regulation.
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Objective
Find solutions to access to transactional bankingservices in Uganda through:
Understanding rural demand for financial services
Understanding rural supply for financial services
Identifying key impediments to transactional bankingservices penetration in rural areas of Uganda
Identifying innovative / low cost solutions for financialservice providers to reach potential rural customers
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Situation/Context/Demand
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95% of Uganda’s population lives outside Kampala
I
K A M P A L A
G U L U
M U K O N O
K T GU M
LIRA
AP A C
M A S I N D I
P A D E R
M O R O T O
H O I M A
AR UA
B U G I R I
R A K A I
K O T I D O
K A L A N G A L A
K A A B O N G
M PI G
K U M I
M A S A K A
M A Y U G E
K I B O G A
K I B A A L E
N E B B I
M U B E N D E
K A M U L I
K I R U H U R A
S O R O T I
K A S E S E
B U S H E N Y I
N AKAPI R I P I R I T
K Y E N J O J O
W A K I S O
Y U M B E
AM UR IA
N A K A S E K E
I G A N G A
M O Y O
AD JU MA NI
K A B I N G O
K A T A K W I
N A K A S O N G O L A
K A B A L E
L U W E E R O
K A M W E N G E
S E M B A B U L E
M B A R A R A
MIT
0 - 50
51 - 100
101 - 150
151- 200
201 - 400
401 - 500
501 - 45000
Open water
Int’l boundary
District boundary
Division boundaryPopulation density
(Persons per km²)
50 out of 56 districts havemore than population densitiesof over 200 per Km
These districts support small
towns, the focus of Tier III &Tier IV banks, but lack accessto the payments system
Most Ugandan’slive beyond theformal payment
system
Tier I FI.s have
reduced costs byusing ATM’s buthave only deployed ATM’s in the main
towns
(Map: FSDU)
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Only 6.3 mill people are employed* – most are poor,earning less than $2 a day (+-UGX60,000)
14%
14%
9%
13%
12%
7%
UGX20,000
UGX40,000
UGX60,000
UGX100,000
UGX200,000
Active labour forcePercentageTotal in range‘000s
1,281
1,262
806
1,212
1,104
679
Financial servicescoverage Cellphone coveragePre & postpaid
Tier I – full to limitedtransactional banking
Tier II & III – limited to notransactional banking
Monthly incomeUGX, 2004
UGX0
2,917 32%
* Excludes individualsemployed in unpaid
domestic labour
Source: UBOS, 2004; interviews with variousbanks & mobile phone providers
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But most rural Ugandans believe that saving is important
2%
6%8%
12%
18% 19%23%
43%47% 48%
F o r f u t u r e p u
r p o s e s
S a v e f o r a
f u n e r a l
S a f e w a y t o k e e p
m o n e y
T o b e a b l e t o a c c e s
s l o a n s
B u
i l d i n g o r i m p r o v i n g
h o u s e
P
u r c h a s e b u s i n e s s
a s s e t s
S a f e w a y t o k e e p
m o n e y
F e a r o f u n f o
r e s e e n
c i r c u m s t a n c e s
M e d i c a l e m e r g
e n c i e s
S c h o
o l f e e s
Question: Reason why would save money?Percentage of respondents reporting issue as important
I n c r e a s i n g p er c en t a
g e of
r e s p on d en t s
No. ofrespondentsreportingissue asimportant
Source: USAID/Rural SPEED, 2005
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And want service providers to ensure security & tobe accessible …
7% 8% 9%14%
20%
2%
13% 14%
29%
9%
21%
34%
41%
2%
15%
60%
F r e e a c c e s s t o f u
n d s
L o w t r a n s a c t i o n
f e e
B a n k c h a r g e s
O p e
n i n g b a l a n c e a m o
u n t
H i g h i n t e r e s t r a t e s
T r a n s a c t i o n s p e e d s
E a s y p a p e r w
o r k
C a t e r s t o s m a l l c l i e n t s
A c c e s s t o l o a n s
L o n g o p e n i n g h o u r s
D i s t a n c e t o b r a
n c h
C
o n v e n i e n t w i t h d r a
w a l
A c c e s s i b
i l i t y
B O U r e g i s t r a t i o n
G o o d r e p u t a t i o n
S e c u
r i t y
Service costs12%
Value added
services15%
Accessibility26%
Security of funds26%
I n c r e a s i n g p
er c en t a g e of
r e s p o
n d en t s
Averagescore
No. ofrespondentsreporting issueas important
Source: USAID/Rural SPEED, 2005
Question: What is an important factor when choosing a savings account provider?Percentage of respondents reporting issue as important
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But most importantly financial services take-updepends on income levels & affordability
2% 6%8% 12%
13%19% 20%
27%
42%
85%
F e a r o f p e n a l t i e s
B u
r e a u c r a t i c p o l i c i e s
L a
c k o f i n f r a s t r u c t u r e
L o w i n t e r e s t r a t e s
D
i s t a n c e f r o m b a n k
L a c k o f k n o w l e d g e
L a
c k o f t r u s t i n b a n k
s
H
i g h b a n k c h a r g e s
T o o m a n y o t h e r
n e e d s
L o w i n c o m e
Question: why do you not save?Percentage of respondents
Source: USAID/Rural SPEED, 2005; Genesis research
Research globally indicated that 2% of income is the maximum individualswill spend on transactional banking services
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Financial services take-up depends on affordability
The 2% in Uganda suggest that if maximum monthlytransactional bank fees & charges can be reduced to aroundUGX1,200 3 million people can be brought into the paymentssystem
Monthly income Maximum bankcharges
Estimatedmarket,
thousands
UGX 100,000 UGX 2,000 1,782
UGX 60,000 UGX 1,200 2,994
UGX 40,000 UGX 800 3,800
UGX 20,000 UGX 400 5,062
Demand for transactional banking servicesBased on 2% affordability cut-off
Source: USAID/Rural SPEED, 2005; Genesis research
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Many rural Ugandans also receive remittancesfrom relatives abroad & in urban areas
It is estimated that between 19.4& 30 million transactions ofbetween UGX 50 and UGX 100Kcould be intermediated per year,
Many currently occur in informalchannels due to;
high cost
low access to paymentinfrastructure
Domestic remittancesfrequency of transactions per year
200
1,800
500
1 2 to 11 12
No. of
individuals(thousands)
Source: Discussions with market participants, UBOS, Genesis calculations
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Many individuals banking needs reflect theirinvolvement in SME’s
Source: Interviews with distributors, Genesis Analytics
FMCG manufacturer
Rural Distributors
Wholesaler Wholesaler
Dukka Dukka Dukka Dukka
Customer Customer Customer Customer
Customer Customer Customer Customer
Many Ugandans (Income Ush50K &Ush150k) are involved in the “dukka”business
Dukka’s are the lowest point in the FMCGdistribution networks – NB contributors to
GDP in rural areas
Their business banking needs means thatthey may have a higher desire to be banked
74%
39%34%
3% 1%1%1%
F a r m i n g
L
i v e s t o c k
W h o l e s a l e
& r e t a i l
M a n u f a c t u r i n g
T a i l o r i n g
T r a n s
p o r t a t i o n
B a r b e r
Question: Economic activities engaged in?Percentage of respondents
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The FMCG networks are “ cash accumulators” that canplay a role in the payments system
FMCG manufacturer
Rural Distributors
Wholesaler Wholesaler
Dukka Dukka Dukka Dukka
Customer Customer Customer Customer
Customer Customer Customer Customer
Payment method: Bank draftValue: >UGX10 millionTransactions (p.d.): 2500
Payment method: CashValue: +-UGX5,000 – 40,000Transactions (p.d.): +-157,000
Payment method: CashValue: UGX50 – 1,000Transactions (p.d.): >1million
Banked>Ush10 mil lion
Not banked
>Ush2.5 mil lion
Not BankedUsh40-100,000
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Larger rural businesses have high cash handling coststhat detract from core businesses - banking opportunity?
Most rural businesses part of casheconomy
Banked businesses benefit from
Reduced cash floats
Lower cash handling costs
Convenient, (relatively) instant paymentof suppliers, labour & other costs
Businesses currently do not bank
becauseBank POR are far away
Depositing cash in banks is cheap noincentive to pay through an EFT
Distributors accept cash as payment
Dukkas pay in cash
Margins allow for the cost of carryingcash
FMCG manufacturer
Rural Distributors
Wholesaler Wholesaler
Dukka Dukka Dukka Dukka
Customer Customer Customer Customer
Customer Customer Customer Customer
C l i B ki d d ld b i ifi t i
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Conclusion: Banking demand could be significant inrural areas if banks provide a value proposition at 2%of income or UGX1000 pm
Bank charges
need to be meet2% affordabil ity
Lower the cost ofaccessing banks
Closer PORreduce cost oftransportation
Accessible Secure VAS Affordable
Improve the value
proposition forcustomers &providers
Access to credit
Easy payment ofschool fees
Understandableproduct
Customersbecome confusedby bureaucracy ofbanks, chargingprofiles etc.
Securi ty in
savingProvide readyaccess toinformation on
savings tocustomers
Securi ty intransacting
Provide securemeans fordepositing &withdrawingfunds & making
payments
Account acquiring
Low cost way toacquiring newcustomers in ruralareas
Transactionacquiring
Banks need toprovide easy accessto accountsthrough low costPoints ofRepresentationcloser to customers
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Furthermore..
There are significant FMCGwholesalers bursting with cash
that are crying out for asolution…
FMCG manufacturer
Rural Distributors
Wholesaler Wholesaler
Dukka Dukka Dukka Dukka
Customer Customer Customer
Customer Customer Customer Customer
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Factors affecting supply of payment services
Only Tier I/II banks offer transactional banking services
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Only Tier I/II banks offer transactional banking services- Tier III / IV not part of the payments infrastructure
Tier I
Tier IV
Tier III
Tier II
1.7 mil
500,000
400,000
400,000
ATM
Branch
Savings,
Transactional,
Lending
Remittances
Branch
Savings,
Transactional,
Lending
Remittances
Customers Channels Product
Branch
Branch Savings,
Lending
Lending
+-1.7 mil
Transactionalbanking
Source: Interviews with Tier I/II/III banks,BOU, Genesis Analytics
Tier III / IV players could benefit from joining the payments environment
Tier I banks use expensive delivery channels not
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Tier I banks use expensive delivery channels, notviable in low transactions environments (rural areas)
Full branches cost at least$100-150k per branch, addrunning costs & between10,000 to 15,000 fee basedtransactions per month = UGX2000 + per transaction
Branches not viablesolutions for poor, low
transaction environments
*Not incl.: mainframe hosting fee & license feesModel assumes network of 100+ ATMs
°Estimate based on margin of between 20 & 70%
ATMs provided a lowercost alternative, but fullcost of transactions may
stil l be unaffordable tomany
Current
Channel
focusUsh
0
500
1000
1500
2000
2500
Branch
teller
Teller
terminal
ATM POS Mobile
Cost to financial insti tution per transaction
ATM economics work differently when you provide
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ATM economics work differently when you provideservices for other banks customers
If a bank is migrating customers from branch to ATM it saves money during the
conversion. To encourage migration banks under-price ATM transactions
However when banks provide ATM services to other bank customers pricing shouldreflect the full cost + a profit & some margin to the issuing bank
At the current price to customers, no banks can justify extending the network beyond
the needs of their own customers
ATM charges should rise to between UGX600 – 800 per “ on-us” transaction &up to Ush 1000 for “ off us” transactions!
*Not incl.: mainframe hosting fee & license feesModel assumes network of 100+ ATMs
°Estimate based on margin of between 20 & 50%
403
82
137 - 320
112
55
Infrastructurecost
Acquiringbank switch
Nationalswitch
Margin toacquiring
bank°
Issuing bankswitch
Total on-ustransaction
cost
595 - 778
Totalissuing
bank
Inc. margin
1,000<‘On’ & ‘Off-us’ transactions cost of ATM,
UGX
Currentprice to
customers
The cost of running an ATM is closely related to its
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Issuing bank Acquiring bank
Inter-operability is the only wayto maximise all participants
revenues
Low revenue per ATM results ina tragedy of the commons
CustomersMore likely to maintain highbalance on account & transactmore frequently when ATM/POS devices are ubiquitous
Infrastructure providers Achieve higher utilisation ofcostly infrastructure when
available to all bankcustomers
ATM transact ions per month & costUGX
Industry leader(non Bankom)
1000
7000
Small Bank(Bankom)
The cost of running an ATM is closely related to itslevel of utilisation. Everyone benefits from “ traffic”
5,400
403Cost per
transaction
Low transactions per ATM are primarily attributable
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Low transactions per ATM are primarily attributableto proprietary networks & a lack of inter-operabili ty
There are“effectively” 2
interbank switchescovering less than27% of all ATMinfrastructure
Stanbic’sproprietaryinfrastructureaccounts for over
50% of all ATMsdeployed
• DFCU
• Nile• Orient• PBU• CMF• Cairo Bank
• Barclays• Citibank• Standard
Chartered
• Allied Bank
• Baroda• CERUDEB (35 ATMs)• Crane (20 ATMs)
• Diamond Trust
• Stanbic (150+ ATMs)
Banks with a link to an interbank switch
Bankom,50 ATMs (live)
Visa International24 ATMs
Banks with proprietary infrastructure
Networked
ATMs - 74
Proprietary
ATMs – 205+
Low levels of interoperabil ity = few transactions = ATMs even more loss making!
Pricing in the Ugandan market is wrong: local switching
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g g g gcosts are too high, & local interchange too low..
Interchange Issuing bankcost
Switching fee
82
Domesticswitch
Internationalswitch
Internationalswitch
Domesticswitch
Domesticswitch
‘On’ & ‘Off-us’ transactions cost of ATM,UGX
Internationalswitch
1,800
450
1,882
450
900
Recomm.rate
850
Switching Fee
InterchangeFee
Source: Visa, MasterCard, Bankom,Genesis calculations
Recommended
90
760
Total
Customers can get charged between UGX 400 and UGX 5000 per transaction
Visa members switch local transactions at international rates
T ti b h i d t i i !
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Transacting behaviour responds to pricing!
• Globally demand for ATMtransactions peaks ataround 5.5 per month(regardless of income orfees).
• At the bottom end demand isdirectly related to price.
• Price elasticities estimates
for the US range from -1.5 to-2.2
• SA Finscope data confirmsthis relationship
A T M t r a n s a c t i o n s
P e r m o n t h
Income per month (Ush)
Source: Finscope South Africa (data converted to UGX)
ATM transactions against IncomeUGX, per month
0
1
2
3
4
5
6
7
5,000,000 10,000,000 15,000,000
Non – fee revenue from balance on account is proport ional to numberof transactions..
T ti b h i d t i i !
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Transacting behaviour responds to pricing!
Source: Finscope South Africa (data converted to UGX)
Elasticity estimates suggest that a 50% reduction in price should leadto a more than 75% increase in transaction volumes, if theinfrastructure can be affordably provided…
Affordable / number of transactions per months
Customer fee per transaction
111135Ush 500Ush 50 K
223455Ush 1500Ush100K
455555Ush3500Ush
200K
900700500400200100Monthly spend for
payments (afteraccount hosting
costs of USh500)
Monthly
Income
Customer fee per transaction
111135Ush 500Ush 50 K
223455Ush 1500Ush100K
455555Ush3500Ush
200K
900700500400200100Monthly spend for
payments (afteraccount hosting
costs of USh500)
Monthly
Income
Tier III & IV players are not even in the game, serve
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Tier IV
Tier III
p y g ,poorest customers through most expensive channels!
Tier III & IV service poorer customers in rural areas = need to adopt lower cost solutions,but lack the scale to implement their own ATM or POS network, or card issuing platforms
Current
Channel
focusUsh
0
500
1000
1500
2000
2500
Branch
teller
Teller
terminal
ATM POS Mobile
Future
Channel
focus
‘On’ & ‘Off-us’ transactions cost of ATM,UGX
Conclusions: The current supply of f inancial
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services fails on many levels..
Tier I banks are beginning to migrate customers to lower costchannels (ATM), however:
Bankom interchange fee to ATM channels is too low to stimulate furtherroll-out
System wide ATM utilisation is low due to a lack of inter-operabilityThis is exacerbated by high switching cost
Given customer income levels this reduces demand
Lower volume of customers & cost per transaction make it in-feasible to
provide ATM’s beyond the main towns
Tier II/III/IV banks have not become part of the paymentsinfrastructure
Poorer customers are served with the most costly infrastructure resultingin low levels of demand, & an inability to provide appropriate savingsproducts
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Proposed solutions for banks & customers
Best practice in other markets can be applied across the
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Issuing Transacting AcquiringRisk mgmt.& KYC
Card managementsystems allow forreal-time MIS
Linking card tomobile phone furtherverification – reducing fraud risks
Card with PIN moresecure than paper(cheque/ passbook)for identification.
Deploy low costcash-in/out devicein cash rich ruralFMCG wholesalers
Support mobile-commerce solutionsto acquire cardtransactions in low
infrastructureenvironments
Ensure fullinteroperabilityand multi-functionality
Reduce the costof switching
Issue easilyavailable starterpacks
Low KYC flowlow balances
transactional banking value chain to decrease transactions costs,increase availability of infrastructure, reduce time spent at banks
& increase demand in rural areas of Uganda
New low cost issuing technologies reduce cost
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NO KYC atapplication - BUT
Transaction valuelimits or use limited toUganda
A/C can be upgradedto full function withformal KYC process
Instant activation at
ATM / mobile phone Capture mobile
number to link tocustomer
Option 1: Blister pack with: card (debit), PIN,instruction manual
Option 2: Bl ister pack with: card (debit orcredit), manual, no PIN (remote activation)
Case & instruction manual
PIN
Debit card (Maestro)
Case
Instruction manual
Debit card
Credit card (MasterCard)
Distributionstrategies
Branch
Bank Agent
Retailer
Key SuccessFactors
White label cards– larger banks monitor smaller banks / MFI’s
Issuing Transacting Acquiring Risk mgmt.& KYC
of customer acquisit ion
Interoperable cards create value for customers & banks
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Issuing Transacting AcquiringRisk mgmt.& KYC
The card is thekey to a range of
acquiringinfrastructure
Interoperable cards create value for customers & banks
Switching
Tier I BankTier II Bank
Interoperable cards allow customer to benefit from the full range of paymentchannels, allows some banks to focus on infrastructure and the others to focus onissuing (improves the scale economies for all).
Cards association branded cards create value for
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Issuing Transacting Acquiring Risk mgmt.& KYC
customers & banks
Card association branded cards allow customers and banks to access all Card Association Product solutions, and access card association branded acquiringinfrastructure.
All financial institutions should seek to issue card association branded cards,smaller institutions could be assisted to absorb the cost, and can benefit fromlarger institutions investments as principle members
Cross border remittances = Card 2 Card
Access to largest Ugandan network = Stanbic
Access to third party products = Airtime top up
Access to risk management solutions = Pre approved suppliers
Cross border util isation = Global networks
Lowest cost switching allows banks to acquire more
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transactions / customers
High switching costs make inter-operability prohibitively expensive
Banks need to be free toselect the lowest cost providerto make transactions
affordable; or,
a sustainable (profitable)solution needs to be found to
reduce cost of Bankom switch
Switching costs to banksUSD, Transaction value UGX100,000 to 500,000, POS
Source: Interviews with switches*ATM°incl. quarterly assessment fees charged by cardassociations
$0.00
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30
Bankom* Visa (dualmessaging)
MasterCard(dual messaging)
MasterCard (singlemessaging)
20 – 26c
4.7 – 13c
10 – 30c
8 – 15c
Issuing Transacting Acquiring Risk mgmt.& KYC
Switching Economics
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Switching Economics
Volume of Transactions (millions per month)
P r i c e p
e r
T r a n s a
c t i o n s
( U G X )
0.5 1.0 1.5 2.0
70
450
100
200
2.7
Internationalswitch usingdomesticsettlementpricing
Bankom switchsustainablepricing
Current position
Desired position
Issuing Transacting Acquiring Risk mgmt.& KYC
New low cost infrastructure options can extendt k b d b
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Issuing Transacting Acquiring
Risk mgmt.
& KYC
networks beyond urban areas
ATM wont work for rural areas!
Low cost devices provide the
platform to drive access inrural areas
Operate profitably at lowertransactions volumes
Do not require extensive manualintervention, minimisingmonitoring costs
Transact electronically allowing
centralized reporting & monitoringas well as minimizing fraud
Can do a significant proportion oftransactions done in a branch orat an ATM
0
500
1,000
1,500
2,000
2,500
Branchteller
Teller terminal
ATM POSMobile
Transaction cost on each channelUGX
FutureChannel
focus
Source: BAI, Genesis calculations
Rural
Channelfocus
POS devices have become more versatile..
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TypeVirtual voucher
dispenser Retail POS Mini-ATM
Transactionssupported
Virtual vouchers (mobiletop-up; public transport;events etc.)
Retail card acquiring;balances; mini-statements;top-up; 'cash-back'
Retail card acquiring;balances, mini-statements;'cash advance'; cash deposit;top-up; remittance
CommunicationDaily - vouchers are
uploaded onto the device
Real-time - using fixed or
mobile phone links
Real-time - using fixed or
mobile phone links
Interface withdevice Manual Card + PIN/Signature Card + PIN
Cost of device $50-100 $200 - 800 $1,000 - 2,000
Issuing Transacting Acquiring Risk mgmt.& KYC
POS transactions can be low cost in lowvolumes areas
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volumes areas
POS infrastructure can be 20% of the cost of ATM infrastructure
POS can also operate in transactions environments of 1000 p/m above
POS transactions typically also attract lower switching fees than ATMs But debit at POS is only likely to work for large single purchases (petrol
stations)
277
76
55
82
55
Infrastructurecost
Acquiringbank
switch
Nationalswitch
Issuingbank
switch
Totaltransaction
cost
*Not incl.: mainframe hosting fee & license feesModel assumes network of 1000+ POS’
‘Off-us’ transactions cost of POS,
UGX
Issuing Transacting Acquiring
Risk mgmt.
& KYC
Mini-ATM’s offer similar low costs to POS with morefunctionality
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functionality
329
128
55
82
55
Infrastructurecost
Acquiringbank
switch
Nationalswitch
Issuingbank
switch
Totaltransaction cost
*Not incl.: mainframe hosting fee & license feesModel assumes network of 1000+ Mini-ATMs
POS infrastructure can be modified to a more customer friendly Mini-ATM
Mini-ATMs can be configured to offer multiple services– i.e. cash advance; cashdeposit
Mini-ATMs can operate in transactions environments of 1000 p/m above
‘Off-us’ transactions cost of Mini-ATM,
UGX
Issuing Transacting Acquiring
Risk mgmt.
& KYC
Mini-ATM’s low infrastructure cost means that interchange could bemuch lower than ATMs: ‘Off-us’ = UGX449; ‘On-us’ = UGX258
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much lower than ATMs: Off us UGX449; On us UGX258
Cost to Acquiring
Bank
Cost toIssuing
Bank
Cost toswitch
transaction
Infrastructurecost
Acquiringbank switch
Nationalswitch
Issuingbank
switch
Interchange Issuing bankmargin*
258
128
55
Acquiringbank
margin*
73
82
55
Cost tocustomer
Total
44956
Source: Card Associations, Genesis calculations*Margin = 40% of cost
Issuing Transacting Acquiring
Risk mgmt.
& KYC
Savers need to be able deposit easily otherwiseaccounts remain empty = less transactions
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accounts remain empty = less transactions
Acquiring infrastructure in wholesaler locationsneeds to make sense for wholesalers
Merchants may need to be incentivised to handledeposits
Internationally this has been achieved by
Paying merchants for cash deposits
Charging merchants for depositing cash – merchants
then accept a merchant discount
Proposed solution:
Banks acquiring strategy should include
incentives for merchants to accept cash depositsusing a Mini-ATMs
Banks consider raising cash deposit fees forbusinesses..
FMCG manufacturer
Rural Distributors
Wholesaler Wholesaler
Dukka Dukka Dukka Dukka
Customer Customer Customer Customer
Customer Customer Customer Customer
Issuing Transacting Acquiring
Risk mgmt.
& KYC
Mobile phone can be used as a powerful low costchannel
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channel
Customer 2Merchant Account
Customer 1 Account
MerchantCash
CustomerCash
-100 +100
+100 -100Deposit/P2P
Non-CashP2PPayment
Merchant Account
Customer Account
+100 -100
SMS
Confirm
SMSConfirm
Cash
Acc Transfer
Acc Transfer
Withdraw/Payment
Reverse of Above
Mobile Payments canreplace three
cornerstones oftraditional retailbanking:
Cheques,
ATM’s/POS/Card
Branches & branchIT infrastructure
Issuing Transacting Acquiring
Risk mgmt.
& KYC
Mobile banking can mean a range of different things,with different technological complexity & investment
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with different technological complexity & investment
Key challenges:How to achieve maximum penetration & functionality with least set up costs & complete inter-operability
Riskiness oftransaction Simple/ low risk Intermediate risk High risk
Types of
transactions
Balance enquiry
Airtime purchaseSimple queries
Inter-account payments Person to person
Remittances
Level of interbankparticipation needed
Single bank solution Single bank solution Multiple bank solution
Note Low risk – low valuepayments,reversibletransaction through
partners
Higher risk - butcontained within onebank system
High risk - value transferacross banking system
Issuing Transacting Acquiring
Risk mgmt.
& KYC
Rethinking the architecture
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SwitchingOtherBank
First Generation Architecture?
Second Generation Architecture?
View phone as another channel, the card is the key totalk to devices & phone enables card to cardpayments
Switching
Bank 1
How to get the phone to talkto other devices & otherbanks?
Bank 2
M-commerce solutions can be up to 60% cheaper thantraditional ATM costs
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traditional ATM costs
‘on-us’ transactions using a M-commerce provider could be as low asUGX258 – compared with UGX595 for ATM transactions
‘off-us’ transactions become similarly cheap in comparison to ATMs
Combined with access wherever there is mobile phone coverage, mobile
banking provides a compelling value proposition for rural customers
160 - 210
8243 - 185
55
Infrastructurecost
Acquiringbank switch
Nationalswitch
Margin toacquiring
bank°
Issuing bankswitch
Total on-ustransaction
cost
258 - 450
Totalissuing
bankInc. margin
320<
‘On’ & ‘Off-us’ transactions cost of M-commerce channel,UGX
55
750<
Recomm. ATM ‘of f-us’
cost
Different Mobile payment strategies have had variedlevels of success
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levels of success
Keys to successful card acquir inginfrastructure
Low transactions costLow cost of adoption – no additional costto consumer or specific entry requirements
Cross channel & bank interoperabili ty
User friendly – easy to use & easy to signup
Multifunctional – B/E, P2Card, Airtime
Secure
Cost less than other channelsNo special phones, no need to purchasenew sim card
Able to interact at low cost with cards &other bank account
No need to re-register at branch, simple touse
Sufficient products to add value
Different levels for different tasks, mostsecure required for P2P between bankaccounts
Issuing Transacting AcquiringRisk mgmt.
& KYC
‘Cash advance’ can be achieved through a range ofchannels in rural areas
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ATM POS Mini -ATM Mobile
Least Transactions cost UGX 403 UGX 76
Cash advance is easy to manage by bank
UGX 128 UGX 154
Low cost device, maintenance, deployment
Operates in a low transactions environment
Cash advance has low impact on traditional channelrevenues
Overall score
Deal breaker
Difficult to manage
Ideal
Issuing Transacting AcquiringRisk mgmt.
& KYC
New solutions increase security and reduce paperbased fraud
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based fraud
Enhancing supervision Debit card systems subject to lower
levels of fraud than credit cards, Avoid parallel systems “double dip”
Proposed solution
Integrate card into branch through
Teller Value Terminals Customers are best custodians of
their money (SMS)
Card management systems havebuilt in MIS to facilitate clientmanagement
Card association switches clearinstantly & settle daily
Online solutions provide for increased surveillance & better controls on customers
Controlling Money Laundering In Uganda, identification is difficult – no
national ID & alternatives open to fraud Many rural inhabitants do not have
addresses or access to alternative formsof identification apart from LCs
Proposed solution
Offer a restricted use account with noKYC limiting
Individual (& monthly) transactionsvalues
OR use to within Uganda only
Upgrade to full account functionality withproper KYC process
Issuing AcquiringRisk mgmt.& KYCTransacting
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Benefits: Potential market for transactional banking
Transactions profile – pictorial
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Transactor
Type
Basic (savings)
Transactions
Per month
Total Cost
Farm laborer
Subsistence farmer
Mobile phone• Balance inquiry - 1
Mini-ATM• Deposit – 0.5• Withdrawal – 1POS• Purchase - 1
Mini-ATM• Deposit – 1• Withdrawal – 0.5
Mobile phone• Mini-statement – 1• P2P transfer – 1
Mini-ATM• Withdrawal – 1
UGX 745
UGX 1,245
UGX 1,425
Assuming the lowest cost switch new customers could reach2.65 mill ion supported through 2,600 POS/Mini-ATM devices
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UGX20,000
UGX40,000
UGX60,000
UGX100,000
UGX200,000
Total in range‘000s
1,281
1,262
806
1,212
1,104
679
Tier I – full to limited
transactional banking
Monthly inc.UGX, 2004
New customers*‘000s
909
1,121
Total Net Revenue Annual, UGX, million
UGX2,859
UGX2,858
UGX8,585
Source: UBOS, Genesis calculations* Based on a cut-off of 2% of total income
Total transactions
POS/Mini-ATM(mobile)Monthly, million
1.36 (0.90)
1.68
3.34 (1.51)2,333
303 UGX1,295 0.30 (0.61)
Transactor Type
Subsistence
Farm laborer
Basic
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Concluding remarks
Concluding remarks
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Uganda’s current transactions banking environment isrestricted to higher income consumers in major urban areas,mainly Kampala
About 74% of the 6.3 million monetized working population do nothave transactional bank accounts
This is mainly as a result of:
The high cost of infrastructure used by banks to acquire transactions(ATM’s & branches)
A lack of interoperable bank networks & high switch costs whichreduces transactions on infrastructure, increasing transactions costs
Concluding remarks
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Banks could change this situation, increasing access to afurther 2.6 mil lion individuals (41% of the monetizedworkforce) by:
Reducing cost of account opening by issuing ‘starter packs’ withlow KYC
Promoting debit card usage and issuance across all Tiers ofinstitutions
Ensure full interoperability by agreeing appropriate interchangeand tackling high costs associated with switching
Deploying low cost acquiring infrastructure – Mini ATM andsupport low entry cost mobile commerce
Intermediating cash into accounts through Mini-ATMs located at cashrich wholesalers
USAID/Rural SPEED has indicated that it would bewilling to support the development of solutions
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USAID/Rural SPEED aims to support access to financialservices in rural areas in Uganda
USAID/Rural SPEED has undertaken to support initiativesdesigned to achieve the goals set out in the presentation
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Thank You