Joint MFC-EMN Conference

Microfinance with a Mission: Learning Together

Branchless Banking for the Poor: Agents, Mobile Phones, Cash Cards and New Thinking

Building Financial Systems for Low Income People and Entrepreneurs

Branchless Banking for the Poor: Agents, Mobile Phones, Cash Cards and New Thinking
Budapest, June 8, 2006

Agenda for the workshop

 Overview of branchless banking concept  Two promising models using retail agents  bank-plus-retail agent model  non-bank-plus-retail agent model  Four countries regulatory approach to unleash branchless

banking
   

Brazil India The Philippines Kenya (pilot)

 Branchless banking in the region  ATMs and cash cards already a reality  What prospects for other branchless banking?

What is branchless banking?

 Delivery of financial services outside traditional

bank premises (branches)  Exponential expansion of access possible through information and communications technologies (ICTs)  Challenges for policy makers and regulators:
How to adapt or apply existing regulatory norms to new branchless business models? Any new risks to consider?

Why does branchless banking matter?

 Transaction costs of small-scale financial service

delivery (i.e., microfinance) are inherently high (because costs dont vary proportionally with transaction size)  Costs of traditional bank branch networks too high for remote, sparsely populated areas  ICTs have potential to cut transaction costs dramatically

Examples of branchless banking

 Internet banking  ATMs  Bank-issued payment cards and point of sale (POS)

devices  Banks working through retail agents outfitted with POS devices or other ICTs  Mobile phone telcos working through retail agents  Prepaid card issuers working through retail agents outfitted with POS devices or other ICTs

Which hold greatest promise for expanding access?

 Internet banking a distant dream for many low income

people and microentrepreneurs  ATMs:

 Getting cheaper but still expensive  Restocking challenges  Will customers trust ATMs to take their cash?

 Approaches best suited to expanding access to low

income people and microentrepreneurs?

 Cash cards & POS technology  Banks working through retail agents  Telcos working through retail agents

Branchless banking in the region and the world

 The region - examples

 Central and Southeastern Europe: ATMs and cash cards  Russia, Armenia: ATMs and cash cards  Belarus: mobile phone banking for certain cardholders

 Exciting examples from abroad

 North America and Western Europe  Japan and Korea  Brazil and India  The Philippines  Kenya (pilot)

Frontiers of branchless banking

Determinants:
Technology Infrastructure Regulation

Technology and branchless banking

 ICTs permit real-time (or close-to-real-time)

settlement of transactions  ICTs allow for detailed transaction records (at tiny per-transaction cost)  Improving data security (and comfort from wide-spread use in developed financial systems)

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Infrastructure and branchless banking

 Falling costs and rising availability of relevant

ICTs (especially mobile phones)  Low cost of tapping into existing retail distribution channels, such as
 Post offices  Lottery kiosks  Cell phone airtime retailers  Supermarkets  Potentially any retail outlet with cash on hand
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Regulation of branchless banking

 Traditional banking regulation not necessarily

well-suited to branchless banking models  Policy makers and regulators need to understand new transactions and relationships (and adjust regulatory thinking)  Importance of retail agents as cash in, cash out point:
What needs to be externally regulated and how?

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Why use agents in branchless banking?

Some Illustrative Figures

Municipalities without access to banking services: As of 2000: Over 1,600 As of 2003: 0

Brazil

India

Access to microloans expanding rapidly where a commercial bank teams up with traditional MFIs as its retail agents

Philippines

Collection costs for microfinance loans are 77% lower if paid via cell phone

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Rewards for potential stakeholders

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Government Banks Payees Mobile Telcos

Facilitate access to financial services for poorer/unbanked citizens Reach previously untapped markets and customers Receive payments (for loans or bills) without costly collection procedures, and with lower default rates Gain new customers and reduce customer turnover; earn fees for services provided Earn fees on transactions processed

Payment process agent

Retail agent Customer

Increase customer traffic in store; earn fees

Gain access to financial services that are more secure and less costly than informal financial services 14

Models for agent-assisted branchless banking

 bank-plus-retail agent model  Brazil  India  non-bank-plus-retail agent model  The Philippines  Kenya (pilot)

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Bank-plus-retail agent model how it works

Customer Retail Agent Payment Processing Agent (if applicable) Bank

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Services offered with bank-plus-retail agent model

Money transfer (P2P)

RETAIL AGENT OFFERS:

Loan/bill/tax payment; loan disbursal Deposits & withdrawals Opening accounts; issuing credit cards
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Risks categories with bank-plus-retail agent model

...

Operational risks Risks such as system reliability, data security, risk of misuse and fraud

Reputation risks Risks such as association with poor performance of retail agents or agent fraud

Money laundering Risks such as customer verification outsourced to retail agent

Legal risks

Risks such as uncertainty of law or unexpected changes in the law

Need for regulation? At which level?

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Bank-plus-retail agent model external regulation

Brazil
Banks may contract agents to conduct banking correspondent activities (defined as doing banking business on behalf of a bank; risks must be assumed by contracting institution) Agents must be authorized by Central Bank Banks are held fully responsible for actions of its agents Central Bank has full and unrestricted access to data from retail agents Customers can recover from either retail agent or bank in case of fraud, negligence, etc. Banks must establish internal controls to provide for systematic monitoring of activities performed by agents

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Bank-plus-retail agent model external regulation

India
Banks held fully responsible for actions of their retail agents; banks assume all operational, legal, and reputational risks Banks strongly encouraged to perform full due diligence on potential agents and to monitor their performance Banks held responsible for ensuring that agents meet AML/CFT requirements (more flexibility for poor customers) Bank remains responsible to customer in case of fraud, negligence, etc. by retail agent (but Grievance Redressal Officer and Banking Ombudsman also available) Agreements with customers must clearly state that bank remains responsible to customers for agents actions

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Non-bank-plus-retail agent model how it works

Customer Retail Agent Telco Bank

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Non-bank-plus-retail agent model services offered

Money transfer (P2P)

Loan/bill/tax payment TELCO OFFERS: Cash-in/out

Item purchase

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What is different when theres no telco?

 The non-bank-plus-retail agent model also

works with prepaid card issuers and networks of card-reading devices at the retail agents  Differences:
 Technological method of communication among

parties (card scanners versus text messaging)  Without a telco, customer must visit a retail agent for each transaction

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Risk categories with non-bank-plus-retail agent model

Liquidity risk Bank (and supervisor) cannot directly observe movements of customer accounts (i.e. account management outsourced)

Credit risk Risk of customer not being able to convert emoney into cash

Money laundering Risks such as customer verification outsourced to retail agent

Legal risk Does deposittaking and pooling constitute banking business?

Need for regulation? At which level?

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Non-bank-plus-retail agent model external regulation

The Philippines
Most experience with telco-based model to serve previously unbanked clients Retail agents are stores, cell phone outlets, etc. Central Bank circulars require telco to obtain Central Banks approval (as payment processor) before launching new service Approval based on detailed description and projections Central Bank can require changes in services if deemed too risky Money laundering regulations apply to cell phone company (as payment processor)

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Non-bank-plus-retail agent model external regulation

Kenya
Piloting with telco (Vodafone affiliate) under watchful eye of the Kenyan Central Bank (safe) Prepaid card issuer (SmartMoney): no regulation (so significant risks)

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Branchless banking in the region

 ATMs already common  Cash cards increasingly common (prepaid

cards, debit cards and credit cards)  But what is needed to roll out either the bankplus-retail agent or the non-bank-plus retail agent model?  EU members are governed by EU E-Money Directive (so non-bank model is limited)

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What about your country?

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Building Financial Systems for Low Income People and Entrepreneurs

Thank you!

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