May 13 2008— With the right market conditions, mobile banking could reach large numbers of poor people who are outside the formal financial system, predicts a new report from CGAP, the global microfinance body. “The Early Experience with Branchless Banking” is based on the research and observations of CGAP’s work in technology and microfinance, and identifies a need for the following:
- Payment systems that can work with many providers, rather than in a closed system;
- Regulating transactions in a way that is proportionate;
- The creation of networks of third-party cash-handing agents (such as a post office or local merchant) that can work with many providers, rather than the closed networks that exist today in countries such as Brazil.
“Market forces are driving down costs. In the Philippines, we see that a transaction on a cell phone or at an ATM costs one fifth that of a traditional visit to a bank branch,” says Gautam Ivatury, manager of CGAP’s Technology Program and co-author of the report.
Despite the cost savings, the full potential of mobile banking for poor people has not yet been realized. “Globally, we estimate that fewer than one in ten mobile phone banking customers are poor, new to banking, or doing anything more than payments and transfers,” he adds.
Transfers v. Savings
The report finds customers use payments and transfers rather than more complex banking services, such as credit and savings, in part because providers focus their marketing efforts on payments and transfers.
Mobile operators, in particular, prefer to market payments services rather than the ability to virtually store money because payments services are a closer fit with their traditional revenue model (per minute or per SMS). Some mobile operators argue that if they did advertise the ability of their mobile banking services to take deposits, they would run afoul of the approvals they’ve received from banking regulators.
“When it comes to reaching poor people who live outside the formal financial sector, the reality of mobile phone banking doesn’t match the potential, much less the hype, at least not yet," says Ignacio Mas, CGAP advisor and co-author of the report.
”We see opportunities for service providers who move quickly to create new products, especially if they can establish shared networks of cash-handling agents to cover that ‘last mile’ of service delivery.”
Opportunities for Growth
One alternative to develop branchless banking is based on using shared agent networks. Relying on shared agent networks would "liberate" banks from location constraints, allowing them to compete for customers anywhere based on product design, marketing, and branding.
Instead of using exclusive agents to handle customer liquidity needs, the liquidity at all agents in one location would be pooled to serve any customer, making this banking model more efficient and with minimal credit support.
Without this added layer of benefits, providers are not likely to find branchless banking viable. This is particularly true in rural areas, where agents are few and cash transportation is costly.
However, making this a possibility will require changes in bank regulation, industry business models, and commercial strategies by individual financial service providers.
Current challenges to the growth of branchless banking include a reluctance on the part of banks to get involved, as well as outdated or inadequate regulations, according to the report. This is true despite the benefits of branchless banking: convenience, better security, and lower costs for customers. For example, a bank branch in Pakistan costs US$28,000 a month to operate, while a corner store agent that does cash-handling on behalf of the bank costs only US$1,400.
A Role for Policymakers
In cases where market conditions aren’t driving broader banking services, such as credit and savings, there may be a role to play for policymakers and those who advocate for increased financial access.
“It is not surprising that poor people are not usually early adopters of technology. This is often because of personal experience, as well as the fact that they create lower revenue potential for providers,” says Ivatury.
“This makes the job of governments and donors who are targeting poor people with financial services much harder,” as they seek to improve lives through increased access to finance.
Mobile Banking Conference
The issues addressed in “Early Experience” will be presented at a global conference on mobile phone banking this week in Cairo, Egypt. This is the first global gathering focused on delivering financial services via mobile phones and will draw 500 leaders from finance, telecom and the development community. The Mobile Money Summit is co-organized by CGAP, GSM Association, which represents more than 700 mobile network operators, the UK Department for International Development, and IFC (the International Finance Corporation).