Being Able to Make (Small) Deposits and Payments, Anywhere

28 Pages·2008·0.26 MB·English

by  Ignacio Mas

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Being Able to Make
(Small) Deposits and
T
Payments, Anywhere
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Inthispaperweputforthavisioninwhichpeopleare to be credited? CGAP has been in the forefront of
abletomakesmalldepositsintotheirbankaccount ensuring an adequate regulatory framework for such
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through a variety of cash handling outlets right in activities;wedonotminimizetheseconcerns,butseek
their neighborhood. In fact, buying and selling toaddressthem(Lyman,Pickens,andPorteous2008).
deposits(i.e.,depositingandwithdrawingmoneyfrom
your current account) is just another product your It is unlikely that banks will ever achieve
local store or supermarket offers you, along with ubiquitous banking by deploying branches
toothpasteandmobileprepaidcards. ubiquitously, so they must take advantage
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of existing retail distribution networks.
Retailbankingoutletsworkforallbanks,andpeople
spread their business across these outlets based on Currentapproachestobranchlessbanking,whatwe
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thequalityandreliabilityoftheircashhandlingservice, call“version1.0,”arebasedondeposit-takingbanks
thefeestheycharge,andperhapstherangeofother enteringintocontractualagreementswiththirdparties
products(bread,milk)theycanbuyatthesametime. toserveastheirretailchannels.Butevenwherethis
Neitherdepositorsnortheirbanksneedtohaveapar- model has been developed furthest—first in Brazil,
ticularleveloftrustintheretailoutlet,beyondwhat thenincountrieslikethePhilippines,Peru,andColom-
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theywouldnormallyexpectwhenbuyingtoothpaste bia,andsooninBolivia,Mexico,India,andPakistan—
oramobileprepaidcard.Banks,likeColgatewithits bankingregulationsrequirebankstoretainlegaland
toothpaste, can concentrate on product quality and financialresponsibilityfortheactionsofallitsretailers.
marketing(i.e.,branding)andcanleaveretailopera- Bankscanoutsourceoperations,buttheycannotalso
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tionstothirdparties.Banksholdingthesedepositsdo delegateresponsibilities.Infact,regulationsinmost
notneedtohaveanycontractualrelationshipwiththe ofthesecountriesrequirebankstoenterintoexclusive
retailoutletsthemselves. contractswithretailfranchisees,andofteneachand
everyfranchiseeneedstobelicensedbythebankreg-
There is a growing interest in what has been called ulatoryauthority.
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“branchlessbanking.”Itisunlikelythatbankswillever
achieve ubiquitous banking by deploying branches Thisnaturallytendstodiminishbanks’appetiteforen-
ubiquitously,sotheymusttakeadvantageofexisting teringintosucharrangementsandfragmentstheuni-
No.45 retaildistributionnetworks. Thereiscommercialactiv- verseofretailersintoexclusiveretailbankfranchises.
April2008
ityeverywhere—astore,astall—sohowcanthesebe Banks may achieve lower costs, but these retail
recruitedintheserviceofbankstochanneltheirwares arrangements do not transform the nature of the
to all customers, whatever their circumstances and problem.Itremainsdifficultandcostlyforbankstogo
IgnacioMas
wherever they may be? Regulators worry justifiably after business where the volume of deposits is rela-
about trust at the retail interface: what happens, for tivelylow,eitherbecauseoflowpopulationdensityor
instance, if the depositor hands over his cash at an lowincomelevels.
outlet,buttheretailoutletdoesnotcausetheaccount
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This Focus Note presents an alternative, systemic ingtransactions.Therealsoneedstobeapayments
approach to branchless banking, a “version 2.0,” networkthatallowstheretailoutlet’sacquiringbank
under which there is no need for a bank to have a toaccountforandsettletransactionswithallpartici-
contractualrelationshipwithanyofthehundredsor patingissuingbanks.Provensecuretechnologiesex-
thousands of retail outlets through which it is istforbothoftheseaspects.
absorbingdepositsormeetingliquidityneedsofits
customers. This happens within a more fragmented Fromaregulatorystandpoint,v2.0requiresthatbanks
ecosystem where each actor is playing a more beabletooperatethroughshared,third-partyagent
specializedrolesuitedtoitscommercialcomparative networksthathavetheappropriatetechnologicaland
advantages,butwheretheactors,together,areable consumerprotectionsafeguardsinplacetominimize
tohandletransactionrisksmoreefficiently.Withthe theexposureofbankclientstoagentrisk.Addition-
appropriatemixoftechnology,businessprocess,market ally,thegovernmentmightcreateaparallelnetwork
conduct,andconsumerprotectionregulations,trust of trusted agents (composed of municipal offices,
maynotneedtobevestedintheretailoutletbyeither schools,medicalcenters,etc.)whocanperformcus-
depositorsortheirbanks.Theendresultisthatbanks tomerduediligenceonbehalfofallbanksinremote
can create retailing strategies that are much more areaswhereitwouldbetoocostlyforbankstodeploy
flexible. theirowninfrastructure.Thereshouldbearenewed
emphasis on bank regulation that focuses on pre-
Therequirementunderpinningv2.0isthateachretail serving the value of customer accounts, while loos-
outletmusthaveabankaccountagainstwhichallits eningregulationsoncustomerinterfaces.
clientcashtransactionscanbeoffsetinrealtime.We
calltheoutlet’sbankthe“acquiringbank,”whichmay Fromacommercialstandpoint,bankswillneedtore-
or may not be the same as the clients’ (“issuing”) assesstheopportunitiesthatarenowavailable,thanks
bank.Aretailoutlettakinginacashdepositseesthe to new technology, to unleash the full potential of
sameamounttakenoutofitsaccountbyitsacquiring branchlessbankinginprovidingaccesstoaffordable
bankinstantaneously.Likewise,aretailoutletpaying basic financial services to everyone. Shared agent
out a cash withdrawal to a client sees the same networks, combined with appropriate product de-
amountautomaticallycreditedtotheretailoutlet’sac- sign, effective marketing campaigns, and low-cost
countbyitsacquiringbank.Inthisfashion,theagent’s transaction processing platforms, can lead to viable
financialpositionwithrespecttotheclientandhisis- solutions to target low-income populations. But for
suingbankisimmediatelyassumedbytheagent’sac- banks to be comfortable in sharing their agent net-
quiringbank.Thisinsulatestheclientandtheclient’s works, they will need to understand the power of
issuingbankfromtheagent’screditrisk.Thisnowbe- broadreachoveroperationalcontroloffeweragents
comes a normal interbank transaction and hence is andtherequirementofcompetingonthebasisofsu-
fullywithinthedomainoftheregulatedbankingsystem. periorproductsandserviceratherthanattemptingto
establishexclusivegeographiczoneswithhighbarri-
Fromatechnicalstandpoint,v2.0requiresthatthere- erstoentry.
tailoutletanditsacquiringbankhaveasecure,real-
time transaction processing capability, either online Thesystempresentedinthispaperisunproven:there
usingwirelessorInternetconnectivityorofflineusing isnoexampleofbranchlessbankingv2.0inoperation
smartcardscapableofupdatingbalancesandrecord- anywhere in the world today. Yet most of the ele-
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mentsarealreadyinplace.VisaandMasterCardare education, vaccination programs, sewerage, clean
examplesofcardpaymentnetworksthatseparatethe watersystems,andsoforth.
roleofbanksthatservecustomersandretailoutlets.
Thepopularityofcardandautomatedtellermachine This paper is concerned fundamentally with those
(ATM) networks demonstrates the power of sharing whocannotavailthemselvesoftheservicesofformal
infrastructure that allows customers to withdraw financial institutions because of “supply-side con-
money from their account or pay for goods at any straints”: lack of proximity to a bank branch, incon-
location. Achieving this for deposits is trickier, venience(e.g.,longqueues,feelingofintimidation),
because the payout from customer to retail outlet orhighcosts.Weusetheterm“bank”inthebroad-
exposes clients and their banks to agent credit risk. estsense:anyinstitutionthatisformallyauthorizedto
This is the specific problem this proposed solution takedepositsfromthepublic.Thefocusofthispaper
addresses. is entirely on “transactional” accounts, which have
threebasicfeatures:
Themainchallengesinrealizingthisvisionwillbe(i)
putting in place the appropriate regulatory frame- • Theyareprefunded(i.e.,notcreditaccounts).
workthatallowstestingofnewbankingdistribution • Balancesareavailableondemand.
models suited for low-income and rural populations • Theyareenabledprimarilyforelectronicpayments.
whilestillensuringthepolicyobjectivesofconsumer
protectionandpreservationofconfidenceinthebank- Thus,intheirmostbasicform,thesetransactionalac-
ing system; (ii) convincing banks of the benefits of countswouldnotincludeanoverdraftfacilityorcheck-
sharingtheiragentnetworksinareaswithlow-income writing privileges and could be sold as “bank ac-
andruralpopulationsand,consequently,ofcompeting counts”or“prepaid”accounts.Transactionalaccount
on product and service quality rather than on geo- holderscanaccumulatebalancestheycandisposeof
graphic footprint; and (iii) developing a business freely at any time (up to certain limits based on the
model that adequately rewards all players while still levelofcustomerduediligenceundertaken),aswellas
delivering low-cost solutions for low-value transac- sendandreceivepaymentselectronically.Thispaper
tionalandsavingsproductsfortargetsegments.While doesnotaddressmoresophisticatedsavings,credit,or
these issues remain under discussion, policy makers insurance products, which involve a greater need to
would be well advised to take pragmatic steps that understand customer attributes and which raise a
allowthemtotestvariousapproachestobranchless broaderrangeofconsumerprotectionissues.Buthav-
banking. The vision laid out here may be more a ing a transactional account can serve as a “gateway
destinationthananimmediatesolution. product” that supports the provision of these other
financialproductsbylinkingthemelectronicallytothe
transactionalaccount.Atimedepositoraccountora
Scope and Approach
loancanbefundedfromorrepaidinto,anditsbalance
canbeaccessedthrough,atransactionalaccount.
Only about one-third of people living in developing
countrieshaveanyformoffinancialsavingswithfor- Theterm“deposit”isusedthroughoutthispaperto
mal institutions. In many countries, this statistic re- meanacustomer’ssurrenderofcashatabankingout-
mainsstuckatalevelthatisfarbelowthatofotherin- let,whetherforthepurposeofstoringvalue(savings)
dicators of socioeconomic development: access to or conveying value to another party (transaction).
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Bothofthesewillgothroughthecustomer’stransac- cantimplicationsthathasforallthepartiesinabank-
tionalaccountand,hence,areanalogousintheirtech- ingtransaction.Wethenaddresscurrentapproaches
nicaltreatment. to branchless banking and the barriers that prevent
theattainmentofourvision.Nextwepresentindetail
This paper focuses on retail banking channels: the a proposed solution to overcoming these barriers.
points through which customers interact with their The final section discusses the implications for bank
bank. This element of the bank delivery chain intro- regulation.
ducestheoperatingrigiditiesandthehightransactions
coststhatgiverisetomostofthe“supplysidebarriers”
The Power of Distributed,
to access referred to above—including the sheer
Third-Party Retail Networks
absenceofpointsofserviceinmanyareaswherepoor
peoplelive.Trustistherealissueinretailbankingthat
gives rise to these problems, not the need for local Mostbusinessesintheworlddonothavetheirown
retailinfrastructure.Aswedevelopanewapproachfor retail stores. Rather, they choose to sell their wares
bankretailoperations,wewillbelookingateachofthe through a range of third-party sales outlets so that
thingsthatcangowronginaretailtransaction,where theycanleverageexistingfacilitiesandcustomerre-
trustcanbebreachedbyeitheromissionorcommission, lationshipsinanopportunistic,highlyreplicablefashion.
andwewillexplainhowtheseissuescouldbesolved Ratherthanincurringlargefixedcostsinanown-store
inarelativelystraightforward,low-costfashionwiththe infrastructure, their selling costs (commissions) are
useofappropriatetechnologies. drivenentirelybysales.Indeed,mostbusinessesare
“wholesalers”;havingaretailstoreistheexception.1
Inouranalysisofalternativecommercialandregula-
toryapproachestobanks’retailactivities,wedrawon Consider two examples of how successful indirect
several analogies. Coca-Cola and prepaid mobile distributionmodelspropelcompaniesandtransform
cardsareusedtoillustratethepowerofdistributedre- markets.
tailnetworks.Wealsoconsiderhowtelecomregula-
torsusethenotionof“networkunbundling”tofocus Coca-Cola
regulationasnarrowlyaspossibletothespecificac-
tivitiesthatgiverisetoidentifiedregulatoryproblems. WhydoesCoca-Cola,aglobalcompanywithanannual
turnoverofUS$40billion,takeituponitselftopush
Alloftheseanalogiesareaboutspecialization:distrib- Cokecansandbottlestowithin15minutesofevery
utingretailfunctionsflexiblyacrossarangeofplayers, person on the planet? And why is it that financial
circumscribingtheregulationsaspreciselyaspossible institutionslikeBarclaysandWellsFargo,withsimilar
towhereprudentialormarketconductrisksarise.This revenues, wouldn’t even think about providing that
allows a reorganization of banking functions across levelofserviceacrosstheglobe?Leaveasidecredit
various players who can come together through the and checks and all the customer repayment issues
normalinterplayofmarketforcestodeliverawiderset around that: why don’t such solid banking brands
ofoptionstoabroadersetofpeople. conspiretotaketheglobaltransactionalsavingsmarket
bystorm—preciselywherecompetitionisweakest?
Thenextsectionofthispaperlaysoutourvisionfor
sharedbankingretailoutletnetworksandthesignifi-
1 Evenbusinesseswiththeirownstoresoftentreatthemasmarketingflagshipstosupporttheirwholesalebusiness.Manybrandedclothesmanufacturers
placeahigh-profilestoreonmainstreet,butexpecttomakethevolumeofsalesthroughthird-partychannels,suchasdepartmentstores.
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Bigbanks(whethernationalorinternational)doappear storetobuyarefreshment.Beingarelationship-based
tohaveoptedoutofmanylocalmarkets,leavingthe business, it ought to be easier for banks to achieve
field open to a plethora of smaller players. Why? goodcustomerprofitabilityfromsmall-denomination
Doesitneedtobethisway?HereiswheretheCoca- transactions.
Colaanalogymaybeinstructive.TheCoca-Colacom-
panydoesnotignorepoorpeople,wherevertheymay Finally,onecouldarguethatsavingsfulfillsamorebasic
be,whomightfindvalueinoneofitssoftdrinks,sowhy need, and hence customers might have a higher
dolargebanksappeartoneglectthemascustomers? willingness to pay for the service or to put up with
inconveniencetogettheservice.3
Conventionalwisdomisthatthemarginsondepositsare
really too small to entice established, formal players. So what is preventing the “Coca-Cola-ization” of
Again,whyshouldthisbe?Therearefourreasonswhy banking services? One possibility is that the lack of
savingsproductsshouldbeatleastasprofitable,ifnot bankingissimplybecauseofaweaknessinunderlying
moreprofitable,thansellingCoketopoorpeople. demand.4Buthowcanthatbe?Wedon’twanttoget
hung up on the Coke analogy, but the use of the
First,thetransactionvaluewouldbesmallerforasoft expression “Coca-Cola-ization of banking” is not as
drinkthanforatypicaldepositinmostcases.2Hence, frivolous as it might appear. By “Coca-Cola-ization”
transactioncostswouldneedtobethatmuchmore we mean the design of a scalable business model
streamlinedforCoca-Colasellingasoftdrinkthanfor thatcandeliverthenecessarylowcostanddensityof
abanktryingtoattractthatextradeposit. distribution.Thisischaracterizedfundamentallybya
fullydevelopeddistributionmodelthatisbasedona
Second,Coca-Colahasabulkyphysicalembodiment, web of (multi-product) distributors, which in turn is
whereas savings products do not—they are just supported by a highly structured value chain that
information, an IOU from the bank, which may be clearly delineates how value gets distributed across
recordedonpaper(receiptorpassbook)orjustelec- thebrandowner,thebottler,thedistributor,andthe
tronically. Providing savings products does require localmerchant.5Andallofthishappensinadistributed
taking cash, which is costly to keep safe and move fashion, with no direct contract between Coca-Cola
around,butbuyingaCokehasexactlythesamecash andeachretailoutlet.
managementrequirementsformerchants.
Mobile prepaid cards
Third,theCokesellingmodelishighlytransactional,
with repeat buying and customer loyalty achieved Mobile technology has experienced an adoption
onlythroughhard-earnedbrandingandproductdif- ramp-up that has been unprecedented in its speed
ferentiationefforts.Bankingisarelationshipbusiness: and extent of population coverage. Although with
Iamextremelylikelytogivemysavingstodaytothe somedelay,thisprocessisalsohappeningindevel-
sameinstitutionthatIgavemysavingstoyesterday. opingcountrieswithsimilarimpetus.Thisphenomenal
IdonotquestionmyloyaltytothebankeachtimeI adoption speaks to the benefits mobile technology
depositasum,thewayImighteachtimeIgotothe bringstopeople.Customersimmediatelyunderstand
2 Here’saback-of-the-envelopecalculation.Considerafamilylivingon$2adayperperson—lowbutnotthemostdestitute.Ifhalfthefamilyworks(i.e.,
notcountingtheveryyoungorelderly),theaverageeffectivedailywageis$4.ACokecosts(say)50cents.Thus,buyingaCokeisequivalenttomaking
adepositof12.5%ofadailypersonalwage,whichisnotunreasonable(andrememberthatthiscomparisonbetweenaCokeandasavingstransactionsis
basedonthewageearnerdepositingeveryday).
3 WearenottryingtopositionamoralargumenthereabouttherelativevalueofconsumingaCokeandbuyingsavingsproducts.Butifyouarelikeusand
believethataccesstofinanceisaroutetopersonalandeconomicdevelopment,thenyoubelievethatpeoplewouldembracefinanceatleastasstronglyas
theywouldaCokewhengiventhatoption.
4 Manypeopleciteproximatecausesforlackofaccesstosavingsproducts:bankbranchesaretoofar,thequeuesaretoolong,theydon’tmakemefeellikeI
belongthere,Idon’ttrustthem,etc.Butalltheseareendogenouscircumstances;surelyifbankshadactivelywantedtoseekoutthesecustomers,they
wouldhavefoundwaystoovercomethesecustomerpurchasebarriers.
5 Inadditiontoitspowerfullocaldistributionnetworks,Coca-Cola’sproductdifferentiationstrategyisaimedatmeetingtheneedsofvarioussegmentsand,
increasingly,adaptingtolocaltastes(byvaryingthecompositionofcoreproductsoracquiringordevelopinglocalproductsandbrands).
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thevalueproposition.Butifthereisonesingleevent created.Whycan’tthebanksseetheopportunity,or
that enabled an acceleration in the adoption curve, whycan’ttheyactonit?
itwastheriseofprepaidcards.
Onethingholdingbanksbackfromretailubiquityis
Mobileprepaidcardswereinitiallyconceivedpurely regulatoryconcernsaboutpreservingcustomertrust.
asanalternativeformofpayment.Butitturnedoutto WhetheryoubuyaCokeoraprepaidcardfromone
bemuchmorethanthat:itwasa“productization”of storeoranother,itmakesnodifferencetothevalue
theservicethatallowedittobedistributedthrough you attach to your enjoyment of the product. If you
normal retail channels—here was a package, with a buy a savings product from a store, you’ll want to
fixedprice,thatcouldbeputonshelvesanywhere.6 knowwhichbankisbehindtheproductandthatthe
Freed from contracts, operators no longer had to store is, indeed, operating under the bank’s direct
trustdealerstocollectthenecessarycustomerinfor- tutelage.7BankingsurelyisnotlikeCoke,andregu-
mationtoruncreditchecksandtoprocesspaperwork. lators do not allow such loose distribution arrange-
And customers were actually comfortable paying a ments. Without a flexible distribution model, banks
premiumforit(relativetopostpaidcontracts). pick their locations carefully; beyond that, they just
don’tdistribute.
When a new service with a great value proposition
metmainstreamretailchannels,salesandpenetration Indeed,whenbanksselldeposits,theyselltrust—the
took off. Freed from the dual requirements of promiseoffuturedeliveryofcash.Becausebanksare
contractual commitment by the consumer (which complex,notverytransparentinstitutions,depositors
required a more intensive sales model) and credit may not be in a good position to assess the trust-
checksbytheoperator(topayforthehandsetsubsidies worthiness of banks. Regulators help to ensure
that typically supported the contract sale), prepaid deposit-taking institutions have the wherewithal to
cardsenabledtheproducttobeunshackledfromthe deliverontheirpromises.Regulatorsseekto“bond”
operators’ own-driven channels. It became easy to bankerstothepromisestheymaketotheircustomers
buy;customersfeltmoreincontrol. byensuringthatsomeofthebankers’ownmoneyis
atstakethroughcapitalrequirementscommensurate
withtherisks.Regulatorsalsoholdbanksaccountable
The Branchless Banking Frontier
for any operational risks at the customer interface
itself, at the point when the cash is turned over,
Banksdonotretaillikethat.Theyowntheirdistribution and those promises are recorded or extinguished.
networks—branches—ormightsharephysicalorvirtual Regulations on branches may run many pages in
POS devices through which limited transactions can regulatorybooks.
takeplace(payingforgoods,cashwithdrawals).They
sellonlytheirownproductsthroughtheirdistribution Deposit taking in particular creates the primary trust
networks.Thisapproachisnotscalable,ifyourdefinition issueforbanksandtheircustomers.Interestingly,alot
of scalability is being within a 15-minute reach of of the microfinance industry has developed as micro-
everypersonintheworld.Inthatvoid,aplethoraof creditratherthanmicrosavings.Bothproductsareabout
small, local institutions (microfinance institutions, clients making many small payments against a larger
credit unions, moneylenders) may—or may not—be receiptoffunds,onlytherelativetimingofthesediffer.
6 Inadditiontoanalternativemeansofpaymentandanalternativedistributionstrategy,mobileprepaidcardshavebeenusedbymobileoperatorsasa
segmentationdevice.Inparticular,mobileprepaidcardstypicallyhavebeentargetedtowardyoungerandlessaffluentpeople,forwhomthefinancial
freedomtheyofferandthemassmarketretailingareparticularlyattractive.
7 OnefurtherdifferencebetweenhandingovercashatastoretobuyaCokeversusmakingadepositisthat,intheformercase,thereisaphysicaltwo-way
exchange:cashforproduct.Customersthereforeknowinstinctivelywhentohandoverthecash:whentheCokeisonthecounter,readytobebagged.
However,thereisnophysicalexpressiontoadeposit,socustomersmightbeconfused(ormisled)astowhentheyshouldturnoverthecash;theymaydo
sowithnoproofofthedeposittakingplace.Thisisexploredfurtherlaterinthispaper.
8 Foranexpositionofthemainissuesandcountryexamplesonbranchlessbanking,seeIvatury(2006)andLyman,Ivatury,andStaschen(2006).
9 Thishastraditionallybeenreferredtoas“mobilebanking.”Toavoidconfusion,inthispaperwereservethistermforbankingdonethroughmobiletelephones.
7
This may seem counterintuitive at first: if it is already Branchless Banking v1.0:
inherently costly to offer small transactions to poor Outsourcing Retail Operations
people,whywouldafinancialintermediaryalsotakeon
additionalcreditrisk?Whynothavetheclienttrustyou There has been substantial channel innovation by
(by having the customer deposit in advance of with- banks.Mostoftheseinnovationshavebeenenabled
drawals) rather than you having to trust the client (by bytechnologicaladvances.Inroughorderofappear-
givingmoneyupfront,againstfuturerepayments)? ance,theseareasfollows:
Partly,thisstemsfromabeliefthatpoorpeoplelackthe • ATMs—bankbranchesinabox.Youcandoallthe
resourcestosave.Also,creditisdeemedtobemore basic transactions you would normally do at a
profitablebecauseitcommandshighercommissions. branch,butthroughamachineratherthanateller.
But it is also in part because deposits create greater • Banking vans—a branch on wheels.9Vans (or, in
cash management challenges: loan repayments are somecountries,boats)equippedwiththeappropriate
scheduled,whiledeposits,inprinciple,canbemadeat informationtechnology(IT)andcommunicationssys-
anytime.Intheabsenceofubiquitous,flexiblecashing temsandstaffcanserviceabroadareabytravelingto
pointsattheirdisposal,microfinanceinstitutionshave several towns. This is used in low-density environ-
preferredtosetupcashcollectionmechanismsaround ments,whereitistoocostlytomaintainapermanent
scheduled payments—credit—as a way to mitigate bankinginfrastructure.
cashmanagementcosts. • In-store POS systems—cashless payments. This
is used to pay for on-the-spot physical purchases
Onlyifthecashdepositandwithdrawalretailoutlets and,morerecently,forcashwithdrawalfromyour
canbesetupandmanagedasastandalonebusiness, bankaccount(“cashback”).
without being restricted to serving individual banks • Internet banking—virtual POS. This enables
withwhichtheyhaveadirectcontractualrelationship, remotetransactionsandremotepurchasesofgoods
can a truly systemic branchless banking solution (forimmediateonlinedeliveryorsubsequentphys-
emerge. This is where there is a set of specialized icaldelivery)butobviouslywithoutcashcapability.
value chain players that operate independently of • Bankingagents—outsourcedbranches.Bankscreate
each other, but in combination fulfill all the banking a set of contractual relationships with established
needs of the community they serve. Technology retail franchises or specific outlets, at which they
makes it possible to eliminate the retail outlet from deployPOSsystems.Customerscanmakedeposits,
thetrustequation,sothatanyonecanmakeadeposit inadditiontothepaymentsandcashwithdrawals
tohisbankaccountthroughtheretailoutlet,without they would be able to make using a regular POS.
eithertheclientorthebankhavingtoknow,certify,su- • Mobile (telephone) transactions—POS in your
pervise,orotherwisetrusttheretailoutlet. pocket.Thisenablesthesamesetoftransactions
youcoulddowithInternetbanking.Butthemobility
ThedrivingvisionbehindCGAP’sbranchlessbanking elementallowsyoutodothetransactionfromthe
initiative has been to harness a range of solutions store, hence it can also be used as a functional
that,together,allowscustomerstointeractwithbanks alternativetothein-storePOS.
without banks having to roll out their own physical
infrastructure.8Buthowcloselydocurrentbranchless
bankingpracticesmirrortheseexamples?
8 Foranexpositionofthemainissuesandcountryexamplesonbranchlessbanking,seeIvatury(2006)andLyman,Ivatury,andStaschen(2006).
9 Thishastraditionallybeenreferredtoas“mobilebanking.”Toavoidconfusion,inthispaperwereservethistermforbankingdonethroughmobiletelephones.
8
Eachofthesechannelshasbeenproveninthemarket- propositionisseverelyweakenedifanyoneelementof
placeandisusedtovaryingdegrees.Insomecases, thesolutionisnotproperlyprimed.Indeed,thecom-
these channels have induced channel substitution mercial arrangements between the parties are what
(i.e., shifted transactions that would otherwise have holdsthesystemtogether.
gone through a bank branch, whether because of
greater convenience or lower cost to the user). As Moreover, the mobile payment services pushed by
noted, traditional POS systems do not accept Globe,Smart,Safaricom,andWIZZITarecomplicated
deposits;Internetandmobilechannelsbythemselves becauseoftheplatformnatureoftheservice:
havenocashtransactioncapability;andbankingvans
may not come around often enough to meet some • They operate in a two-sided market. In the early
customers’ needs. Hence, these channels cannot stages, they may get caught in the vicious circle
individuallyreplacetraditionalchannelsaltogether. betweensigningupagentsandsigningupcustomers:
customers are not interested while there are few
Infact,thesechannelsaremostpowerfulwhenused options for cash or POS transactions, and agents
incombinationtoreachnewcustomerbases(whether won’tsignupwhiletherearefewcustomers.And
geographically or by socioeconomic stratum) that raisingagentcommissionsinordertosignupnew
werenotpreviouslybeingservedatall.Weareseeing agentsmaydiscouragecustomeracquisitionifthat
thattoday:(1)amobilephoneenablingremotetrans- makestheservicemoreexpensiveforthem.
actions(2)thatisusedasanin-storePOSdeviceby • Theyaresubjecttonetworkeconomies.Thevalue
merchants(3)linkedtoanetworkofagentsthathandle toagivencustomerdependsonthenumberofcus-
cashtransactionsforcustomers. tomersonthenetworktowhompaymentscanbe
made (keeping the number of agents constant).
ThisiswhatmobileoperatorSmartCommunications Many potential customers may adopt a wait-and-
hasimplementedinthePhilippinessince2001:amobile see attitude and sign up only once the system is
phone/card combo that allows transactions from/to a “bigenough.”
combinationofbanks,accesstoanyMasterCardPOS,
cashinandoutatanetworkoflocalagentssignedup Theseretailpaymentsystemsmaybedifficulttogrow
bySmart—allfromaprepaidaccount.WIZZITinSouth initiallybecauseofthesereasons.Butonceasystem
Africa has a similar service, one that works with any reachesacertainsize,theremaybeatippingpoint,
mobileoperator,althoughwithasinglebankandfew andthesystemtakesonapracticallyunchallengeable
nonbankcashagents.Othermobileoperators,suchas holdonthemarket,creatinganti-competitiveissues
GlobeTelecominthePhilippines(GCash)andSafaricom forauthorities.
inKenya(M-PESA),haveimplementedmobilephone-
onlysolutions. Branchlessbankingv1.0involves“outsourcing”certain
functions to specialized players, but still within the
These solutions can be seen as replacing the bank context of one player being both the “leader” and,
branch functionality with an ecosystem of players— ultimately,legallyandfinanciallyresponsibleformany
involvingsomecombinationofbanks,mobileoperators, oftheactionsoutsourcedtopartners.
merchants, and cash agents. They are hard to build
because they require strong multiparty orchestration, Butdoesitneedtobethisdifficult?Couldallthedif-
inprinciplespanningseveralregulatorydomains,andthe ferentplayerscometogetherthroughnormalmarket
9
interactions,guidedbytheinvisiblehand,ratherthan InBrazil,some90,000retailoutletshavebeensigned
through heavy-handed orchestration by a leading up by banks to serve as cash-in/cash-out points for
player?Inotherwords,canwethinkofa“de-layering” their banking services. However, these agents can
of the banking process, whereby a set of specialist serveonlycustomersofbankswithwhichtheagent
playersnaturallycollaboratewithoutnecessarilyaset has a direct contractual relationship. In Kenya,
ofend-to-endcontractstyingalltheplayerstogether, Safaricom is using its network of prepaid card
butpurelyoutofself-interest? distributorstoactasagents.InthePhilippines,mobile
paymentoperatorsSmartandGlobehavedeveloped
Branchless Banking v2.0: Creating a theirownnetworkofagents.
market for retail operations
3. The store owner’s banker is focused on small- and
Here is a specific vision of a transformed banking middle-scaleenterpriseclients.Helikesdealingwithre-
environmentthatworksforpoorpeople,andtherole tailstoresorfranchisesbecauseofallthesuppliercredit
technologycanplayindeliveringit. they take and all the transactions they generate. The
bankerhassignedupthestoreasacashoutletmanaged
Consider the following vignettes. In each case we byhisbank,enablingthestoretobeacashdepositand
first state the vision, then we state (in italics) some withdrawaloutletforanybankinthecountry.(Thesecash
real-lifeexamplesthatrelatetothevision: transactionshappenagainstthestore’sbankaccount.)
Thebankerhasahappier,moreloyalcustomerandgets
1.Onherwayhomeafteradayofsellingherproduce a cut of the transaction commissions earned by the
atthetownmarket,avillagerstopsbythelocalstoreto store. Indeed, for the acquiring bank, these accounts
deposit20pesossheearnedthatdayintoherbankac- representatransactionalengine—volumesofcashgo-
count.Everytimesheearnssomemoney,shelikestoset inginandout,butallprefunded,nocreditinvolved,no
aside10percent—rightaway,intoherbankaccount.She harddecisionstobemadeatthecustomerlevel.
likesdoingherbankingatdifferent shopsatdifferent
times—storeownersarenotoriousgossips,nosensein ThisisentirelyanalogoustohowVisaandMasterCard
anyoneofthemknowingallaboutherfinances. operate their acceptance networks. The acquiring
(merchant-facing)andissuing(customer-facing)banks
InGhana,thesusucollectionsystemallowsvillagers donothaveanydirectrelationshiptoeachother,but
toputawayafixeddailyamountwithacollectorthat theyarebothpartoftheVisaorMasterCardnetwork,
visitsthemattheirhomeorplaceofwork.10Butthese hencetheycanserviceeachothers’clients.
depositcollectionsystemsremaininformal,andbook
keeping is entirely paper based, so that customer 4.Anotherbankmanagerdecidestodoanaggressive
trustistotallyvestedontheindividualcollector.11 customer acquisition campaign in a poor, periurban
area.Heoffersabasictransactionalsavingsaccount
2.Thestoreownerlikesthevillagertocomeindaily toall;customersneedonlyshowproofofidentity.No
tomakeherdeposit.That’sextracommission,andit credit checks, no minimum balances, no account
increases foot traffic into the store. And as people openingfees,nostampdutiesontransactions—easy
come back to withdraw from their savings, it allows for the customer. This account is entirely funded by
himtounloadtheexcesscashhe’spickedupinthe thecustomer.Nochecks,nooverdrafts,nomonthly
courseofdailybusiness—it’ssaferforhim. statements—easy for the bank. The bank advertises
10Underthetraditionalsususavingssystem,susucollectorstravelthroughoutthevillagecollectingafixedamountdailyfromeachclientfor31days.Atthe
endofthemonth,thecollectorreturnsalltheproceedslesstheamountforoneday,whichhekeepsaspaymentforhisservices.
11Informal,paper-basedarrangementsarevulnerabletoabuse,inawaythattechnology-basedonesmaynotbe.Itisreportedthat40%ofsaversinGhana
losttheirmoneytorun-awaydepositcollectors.SeeAryeeteyandGockel(1991).
10
this product heavily; customers find out more and Globe,thecompanybehindtheCGashmobilewallet
eventuallysignupbycallingthebank’scontactcenter. product in the Philippines, is partnering with rural
(Asdiscussedlaterinthispaper,customerduediligence banks to support their entire product range with
procedures can be performed by a government- GCash’stransactionalcapability.
sponsored network of trusted agents shared by all
banks.)Thebankthenwatchesthedepositscomein The main benefits for all the key players relative to
daily,weekly,withoutbeinginvolvedinthecashcol- branchlessbankingv1.0areshowninFigure1andcan
lectionprocess—it’salldonethroughlocalstoreswith besummarizedasfollows:
whichthebankhasnodirectcontractualrelationship.
Thebankmanagerdoesn’tcarewhetherthelast$10 • Customers will be able to spread their banking
thatcameinoriginatedfromonerichercustomeror transactions across a larger set of retail outlets,
from 10 individual customers—all dollars are equal. increasingconvenienceandmitigatingprivacycon-
cerns.
SuchaccountshavebeenintroducedinBrazil(“sim- • Retail outlets benefit from better economies
plified accounts”)12 and in South Africa (“Mzansi becausetheycanserve(competefor)thecustomer
accounts”)13asprimetoolstoincreasebankadoption. ofanybank.
Theyhavebeenassociatedwithmostmobilebanking • Poolingliquidityattheretailoutletlevelresultsin
systems(e.g.,M-PESA,GCash,SmartMoney,WIZZIT), lowerprobabilitythatcustomersmaynotbeableto
under the guise of “prepaid accounts,” as a way of complete their (deposit, withdrawal, or payment)
avoiding the regulatory burdens and operational cashtransaction.
complexitiesofregularbankaccounts. • Bankscancompeteeffectivelyinremoteormarginal
areas,withouthavingtoinvestinlargelocalinfra-
5. A microcredit institution wants to loan a villager structures.Moreover,bankswillnotfindthemselves
money for her microenterprise. Credit checks are running“localmonopolies”inthecaseswhereonly
done; the loan is approved. The villager finds the theyhaveapresence;hence,theywillbeencouraged
money in her bank account and knows to make toconcentratecompetitivedifferentiationeffortson
repayments from her account to the microcredit productandbrand.14
institution’saccountatthelocalstore—theloanoffi-
cer doesn’t need to touch any money. The transac- This model becomes particularly powerful if it is
tionalaccountisindeedyourentrypointintoafuller deployedinconjunctionwithmobilepaymentsplat-
setoffinancialproducts.Customerscanpurchaseterm- formsbybanks.Inthiscase,customerswouldhavefull
based or programmed savings accounts, as well as access to payments and savings services remotely,
loans and credit lines—from the same or from a withouthavingtogotoretailoutletsatall.Ineffect,
differentfinancialinstitution.Theseareentirelyseparate the mobile channel allows customers to transact di-
accounts:theymaynotbesoliquid(higheryielding rectlywithhead-officesystems.Inadditiontocashing
savings accounts), and they may not be prefunded inandout,customerswouldbeabletomaketransfers
(credit).Asaresult,openingthesetypesofaccounts tootherusersoraccounts,paybills,viewbankstate-
may bear additional requirements. But once these ments,andsoforth.Thebranchlessbankbecomesa
accountsaresetup,theycanbefundeddirectlyfrom reality.
thetransactionalsavingsaccount.
12Brazil’ssimplifiedaccountswereintroducedin2003.Afeaturethathelpsreducetheircostisthatwithdrawalscanbemadeonlybycard(i.e.,atanagent
butnotatabranch).Transactionsarefreeuptocertaintransactionlimits.BalancesarelimitedtoR$1000,andconditionsforopeningabankaccountare
simplified,withouttheneedforproofofincome.
13IntroducedinNovember2004,thenumberofnewMzansiaccountsopenedreached3.6millionbytheendof2006.Finscopesuggeststhatthereareonly
about2millionusers(notcountingduplicateorinactiveaccounts),andofthese,1.2millionwerepreviouslyunbanked.SeePorteous(2007).
14Thismirrorstheexperienceinthemobiletelephonysector.Intheearlydaysofnetworkbuildup,competitionwasbasedalmostentirelyonphysical
networkcoverage.Asallnetworksattainednear-ubiquity,thecompetitivebasisfortheindustryhadtoshifttoproductdifferentiation,qualityofcustomer
care,andloyaltyschemes.Inthisfashion,thebroaderneedsofcustomersarebettermet,andthereisahigherlevelofproducttargetingbasedon
customersegmentationstrategies.Thisiswhatbankswillneedtogothroughiftheywanttocompeteeffectivelyindownscalemarkets.