Banking Beyond Branches: An Interim Report Card

With an estimated 70% of the population in developing countries untouched by the formal financial system, financial inclusion represents a huge development challenge. Banks are simply not helping the majority of poor people to stabilize their daily expenditures in the face of erratic income streams and unexpected shocks, or to invest in devising paths out of poverty such as through education, adoption of new agricultural technologies, microenterprise, or searching for better job opportunities.

Big challenges require bold visions. Banking beyond branches (aka branchless banking) is certainly a big idea that has been gaining momentum. It entails giving people direct access to electronic transactional channels (based on cards or mobile phones) that are linked to store-of-value accounts, supplemented by a relatively dense network of retail stores acting as cash in/out points. Banking beyond branches refers to new channels (rather than products) and hence addresses primarily the issues of distance and cost of service delivery.

Under a variant of banking beyond branches, it is the mobile operator rather than a bank that rolls out the basic transactional capability. The institution backing it and the technology used may differ across implementations, but the business logic is similar.

So much for the vision. How are these ideas faring in practice? Here, I express my personal views on that. To make it concrete, I have rated global progress against five key related areas, on a totally subjective basis. The intention is simply to trigger a reflection on what is working and what is not: To what extent do we need to adjust the vision or our expectations of it?

1. Industry awareness/excitement. I would score this a solid 9/10. Few people (regulators as much as practitioners) today question the need to take financial transactions out of bank’s brick-and-mortar infrastructure to make the economics work for both providers and clients. The basic notions have gained wide currency. Dozens of banks and mobile operators have been moved to at least test solutions. Even the G20 is championing the issue. Dozens of papers have been written on the topic. The Economist is reporting fairly regularly on mobile money in Africa.

2. Enabling regulation. There has been good progress here, though much still needs to be done to spread the ideas across all developing countries. I would score it a middling 5/10, but rising. The Consultative Group to Assist the Poor (CGAP), a resource center for microfinance housed at the World Bank, and the Alliance for Financial Inclusion (AFI), a peer network of banking regulators from developing countries, have been helping regulators come to grips with the specific opportunities and risks presented by banking beyond branches. The Financial Access Task Force (FATF), the international standard-setting body on financial integrity matters, is cognizant of the impact that anti-money laundering rules can have on financial inclusion, and has put enhancing financial access on its agenda. Still, regulatory practices tend to be fairly restrictive in most countries; many countries still don’t allow banks to offer services through retail outlets or to connect with mobile non-bank money platforms. Moreover, there are few countries that permit non-banks to issue store-of-value (or e-money) accounts involving no intermediation of funds, and fewer still permit immediate account opening with minimum requirements for entry-level accounts.

3. Replication of mobile money platforms at scale. Big disappointment here: I would score it 4/10. Four years into the spectacular success of M-PESA in Kenya, no other system even comes close to showing that kind of customer adoption and usage path. There are some encouraging signs: M-PESA by Vodacom in Tanzania has crossed the one million active accounts mark, and there is good take up of MTN’s MobileMoney in Uganda and Telenor’s EasyPaisa in Pakistan. But it is becoming clear that operators in most countries do not have a sufficiently dominant market position to harness by themselves the network effects that are required to offer a really useful money transfer service to their customers and to build dense retail cash in/out networks. Operators will need to experiment with different paths to that charted by Safaricom in Kenya: While M-PESA has remained largely a “closed loop” payment system, others with less scale will need to interconnect their platforms nationally; and while M-PESA focused on domestic remittances, others may need to chase after different transaction pools to drive take-up and volume.

4. Delivery of financial services on mobile money platforms. That’s the other big disappointment with mobile money: I score it 2/10. There is little evidence that people are using their mobile money accounts for anything other than peer-to-peer or utility bill payments, and not much money sticks in the customer accounts. At the same time, there are scant examples of mobile money platforms hooking up with banks or microfinance institutions to offer anything more than a basic transactional account at scale. The first problem is that mobile money platforms are still too expensive for banks to use as a transactional front-end; by the time you add the mobile money fees to the bank’s own fees, services are priced out of the market. More fundamentally, banks and mobile operators haven’t yet developed collaboration models that make each comfortable in maintaining their value-add and desired customer relationships. The industry needs tried and tested models for bank-mobile operator partnerships.

5. Banks developing their own (mobile operator-independent) branchless banking solutions. Outside of Latin America, banks have been very slow at building their own branchless banking solutions in competition with mobile money operators: I score this 3/10. There has been substantial progress in Latin America following the Brazilian example, especially in Peru but also more recently in Colombia, Chile, Bolivia, and Mexico. But even there, except for Peru, the activity is largely dominated by bill payments. In Africa, banks haven’t been very active in this space (in some cases due to regulatory restrictions), though a few such as Equity Bank in Kenya and UBL in Pakistan are now aiming to get back into the game.

A simple average of these scores produces an overall grade of just under 5/10—a marginal passing grade. Maybe the current models are too complex; there is a need to develop simplified paths for mobile operators and banks alike to get on the inexorable road to banking beyond branches.

What do you think? Do you agree roughly with these scores? And do these make you want to ease up on talking up the vision or to re-double your efforts to make it work?

Read more stories by Ignacio Mas.