Microfinance with a Mission: Learning Together

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Microfinance with a Mission Learning Together
Branchless Banking for the Poor Agents, Mobile
Phones, Cash Cards and New Thinking
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Building Financial Systems for Low Income People
and EntrepreneursBranchless Banking for the
Poor Agents, Mobile Phones, Cash Cards and New
ThinkingBudapest, June 8, 2006
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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?

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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?

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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

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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

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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

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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)

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Frontiers of branchless banking

• Determinants
• Technology
• Infrastructure
• Regulation

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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
Access to microloans expanding rapidly where a
commercial bank teams up with traditional MFIs
as its retail agents
India
Collection costs for microfinance loans are 77
lower if paid via cell phone
Philippines
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Rewards for potential stakeholders

Facilitate access to financial services for
poorer/unbanked citizens
Government
ltlabelgt
Reach previously untapped markets and customers
Banks
Receive payments (for loans or bills) without
costly collection procedures, and with lower
default rates
Payees
Gain new customers and reduce customer turnover
earn fees for services provided
Mobile Telcos
Earn fees on transactions processed
Payment process agent
Increase customer traffic in store earn fees
Retail agent
Gain access to financial services that are more
secure and less costly than informal financial
services
Customer
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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
Payment Processing Agent (if applicable)
Bank
Retail Agent
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Services offered with bank-plus-retail agent model
Money transfer (P2P)
Loan/bill/tax payment loan disbursal
RETAIL AGENT OFFERS
Deposits withdrawals
Opening accounts issuing credit cards
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Risks categories with bank-plus-retail agent model
...
Reputation risks
Money laundering
Operational risks
Legal risks
Risks such as uncertainty of law or unexpected
changes in the law
Risks such as association with poor performance
of retail agents or agent fraud
Risks such as customer verification outsourced to
retail agent
Risks such as system reliability, data security,
risk of misuse and fraud
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
Bank
Retail Agent
Telco
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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
Credit risk
Money laundering
Legal risk
Bank (and supervisor) cannot directly observe
movements of customer accounts (i.e. account
management outsourced)
Risk of customer not being able to convert
e-money into cash
Does deposit-taking and pooling constitute
banking business?
Risks such as customer verification outsourced to
retail agent
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
  bank-plus-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 EntrepreneursThank you!