Inclusion rides on m-banking
Over the last two weeks, we explored the need for financial inclusion and the policy initiatives taken so far to enable a well regulated expansion of financial services. What comes after identification of a need and a SWOT analysis concerning the fulfillment of that need? Action, of course. We now examine the action that has been taken to fill this needs gap by looking at some initiatives on financial inclusion (FI) to see what measure of success they have achieved in India so far.
Financial inclusion is a generic problem that affects most developing countries, where the proportion of unbanked is very high. It is, therefore, unsurprising that inclusion models have been deployed in various forms in many countries. Some, of course, have done better than others and we shall also subsequently explore a few models abroad to learn from what they have done right.
India has had a fair number of initiatives in the FI space, and we cover a select few of them that are involved in m-banking and cards-issuance.
SBI and Eko India Financial Services (which is a CGAP grantee) entered into a venture in February 2009 whereby SBI is the issuer of accounts and Airtel is the telecom supplier. Customer authentication is made possible through a mix of one-time passwords and user-selected PINs. These accounts are not reliant on SIM cards and so are open even to non-Airtel customers.
The scheme had managed to get 55,000 customers as of May 2010, which went up to 180,000 within 18 months of starting operations and was focused primarily on the remittance corridor between Bihar and Delhi, though it is branching out too. It was operating at an average of 80 customers per agent, and the average account balance was Rs 170, both small numbers indeed.
However, it was opening 400 accounts on average each day, its transaction value had exceeded Rs 7 crore within a year and it had processed Rs 100 crore by October 2010.
The scheme is currently lacking in a national distribution infrastructure and therefore, its opportunities to scale up are slim. But the CGAP grant seems to have been well spent as this pilot helped the RBI get comfortable with the basics of m-banking. Additionally, it is well placed with respect to pricing, when compared with international players as seen below.
* Obopay-Nokia-Yes Bank-Fino
This team launched a range of mobile money services with Obopay as the technology and back-office provider. Fino was the business correspondent (BC) since prevailing regulations required the BC to be not-for-profit. In this initiative, they capitalised on the retail network of Nokia. Operations commenced in February 2010 and were limited to Pune through the 40 Nokia stores there. The scheme was primarily aimed at facilitating payments, not at delivering financial services. Since then, Nokia has launched pilots in Chandigarh and Nasik, and soon plans to go commercial.
* Paymate-Corporation Bank-Tata-PCO
In December 2009, Corporation Bank and Tata Teleservices launched a service called Green Money, which targets the domestic remittance market. It works on all Tata phones with a Paymate mobile money platform. The BC is the Association of Public Call Offices and has a retail network of over 400,000 outlets. It works through the mobile accounts of retailers, and not individual customer accounts. A sender hands over money to the retailer, who transfers it through his account to an agent at the destination village, where it is collected by the recipient. As of March 2010, this scheme had 10,000 customers across the states of Maharashtra, Kerala and Karnataka.
SBI tied up with A Little World for this m-banking venture. In this card-less biometric approach, BCs are given phones with fingerprint readers and a small printer. The customer authenticates his ID through a fingerprint matching against a database on the phone. ALW uses a multi-bank payment network called Zero, and was the first BC in India, by tying up with SBI in 2006.
ALW had helped banks attain 6 million no-frills accounts through 10,000 branches by October 2010. The main drawback of this venture is that the database is stored on the individual phone of the BC. Therefore, customers are tied to one BC. However, the accounts are thus independent of the mobile service providers (MSPs), ensuring a broad access. SBI-ALW also has a card-based deployment. In October 2010, SBI acquired a 20% stake in ALW for Rs 80 crore.
Besides, Airtel has entered into a JV with SBI where it holds a 49%-stake and Vodafone has got into a deal as a BC for ICICI, both in January 2011, to extend financial services to the poor by leveraging on their networks. Though there is no concrete development in these ventures yet, just due to the sheer size of these companies and their rural penetration (each MSP has 1.5 million retail points), it is worth watching out for what eventually transpires.
Financial Inclusion and Network Operations (FINO) started operations in 2007. It is partly owned by ICICI and the International Finance Corporation, and functions as a payments platform through tie-ups with 23 banks including SBI, PNB, ICICI etc.
As of April 2010, it had 26,000 BC locations and six million bank accounts and four million were solely for government payments. By December 2010, it had over 11,000 transaction points at 36,000 locations. This month, it has tied up with Kotak Mahindra Bank to scale up FI initiatives in Gujarat and its current enrolment stands at a healthy 27 million.
This card-based deployment was also started in 2007. As of April 2010, it had 8,000 BCs and three million customers. It worked exclusively for SBI, but was cash strapped and unable to grow. It currently has tie-ups with 15 banks across the country including SBI.
The M-Pesa scheme was developed by Vodafone and implemented by its Kenyan affiliate Safaricom in March 2007. It managed to achieve scale because Safaricom was the market leader with 80% market share, which means it had a lot of customers, large retail network, strong brand recognition and larger budget.
M-Pesa is an electronic payments store of value system accessible through mobiles. Customers get an individual e-account linked to their phones that is accessible through a SIM card application. They can transact by exchanging cash for electronic value at a network of retail stores/agents. The values in customers' accounts are backed by highly liquid deposits in two commercial banks, but customers aren't paid interest on these deposits.
The retail stores are paid a fee by Safaricom for each cash to e-value conversion. They are not allowed to collect any charges from customers, in a measure to reduce abuse.
M-Pesa's initial offering was person-to-person (P2P) payments and remittances, which were earlier handled largely informally. A 22% urbanisation ratio in Kenya had led to a high need for a proper remittance channel, since 17% of households depend on remittances as their primary income source.
Customer transactions are capped at $500. Their registration and deposits are free and there is no need for a minimum balance, a measure to prevent any adoption barriers. But there is a fee for all other transactions, a flat fee and not a rate to ensure simple and transparent pricing. The user interface is simple and has a message encryption facility to remove security fears.
M-Pesa customers can also send money to non-users, making it an account-to-cash service. Further, the remittance charge is applied to the sender, not the recipient, and is higher when transferring to a non-customer. This encourages adoption by recipients, particularly at the behest of the senders.
As of July 2010, M-Pesa had 12 million registered customers, 31% of the country's population. Its P2P transfers totalled up to 17% of Kenya's GDP. Half these transactions were for values less than $10, when the average transaction size was $33, implying a high extent of reach amongst the poor. Less than 1% of the accounts had balances greater than $13, and the average balance was $2.70.
Now, M-Pesa is also open to institutional payments. Seventy-five companies use M-Pesa to collect payments, including utilities firms. Another 27 use it for bulk distributions of payments.
In May 2010, Equity Bank and M-Pesa created a joint venture called M-Kesho, which permits users to move their money between their M-Pesa account and an interest-bearing bank account at Equity Bank. This initiative has witnessed a very strong initial uptake.
Now, from February 2011, M-Pesa agents can acquire unsecured bank loans from Kenya Commercial Bank for business expansion, which may be repaid at a subsidised rate.
M-Pesa has successfully leveraged mobile technology to extend financial services to the unbanked, due to the ubiquity of mobiles. It has managed to work on a usagerather than float-based revenue model, so critical to inclusion. This usage-based model is the reason behind high mobile penetration in developing countries, and the best argument for deploying m-banking in other countries.
M-Pesa has thus prompted a debate on the optimal sequencing of FI strategies, demonstrating in favour of a payments-led rather than savings-led or credit-led approach.
The challenge still remains for M-Pesa to become a channel for delivery of a broader range of financial services, for which the Central Bank of Kenya (CBK) is framing regulations to allow non-bank platforms to formally accept deposits etc. The CBK has good relations with Safaricom, which is why the latter had regulatory space to design M-Pesa, and it did so in a way to maintain the prudential comfort of CBK.
M-banking is expected to be a $22-billion industry across Africa by 2015, which probably explains why the second success story is also from an African country.
Wizzit began in July 2008 as a provider of basic banking services for the unbanked in South Africa, which numbered 16 million or 40% of the population. It is based on the use of mobile phones and a Maestro debit card issued upon registration which can be used at any ATM or retailer. The users don't need bank accounts, of course.
Wizzit partnered with the ABSA Group and South Africa Post Office to serve as banking agents. It also partnered with the fashion retailer Dunns to act as an agent for account opening.
Wizzit charges per transaction fees and does not require a minimum balance. It also does not have any transaction limits, and works across all MSPs.
It has a policy of recruiting only unemployed young people as its sales agents and this is a big part of its promotion strategy. It does not advertise in the mass media, but promotes itself through these 'Wizzkids'.
Wizzit had an estimated 250,000 customers in the end of 2008, with pilots for expansion in Zambia and Romania. The current subscriber numbers are not available, but it is certainly a profitable venture.
Easypaisa is a joint venture by Tameer bank and Telenor, a Norwegian MSP, which is the second largest mobile operator in Pakistan with a 23% share.
Tameer bank handles the financial product design, regulatory compliance and KYC verification; Telenor oversees the marketing campaign and cash in/out network. It has invested heavily in the roll-out with a national above-the-line campaign.
The conditions were ripe for Easypaisa's launch in late 2009. Pakistan's 60% of the population (102 million) lived on less than $2 a day (UNHDI 2009), 89% of the adults were unbanked, but 60% had access to a mobile phone (Finscope survey 2006).
Further, airtime commissions were low, meaning resellers were likely to promote mobile money services.
The central bank, State Bank of Pakistan (SBP), was very committed to furthering financial inclusion. In March 2008, it introduced regulations for branchless banking, concerning the outsourcing of functions and agent network management. They allowed mobile operators to purchase controlling stakes in microfinance banks, coming under fire from the banking lobby.
In December 2009, Easypaise launched its deployment with an OTC bill payment and domestic transfer facility. Over one million transactions took place in the first five months.
In February 2010, Easypaisa launched a mobile wallet account to store funds in an interest bearing bank account and transfer them in/out through Easypaisa agents. In six weeks, they got 22,000 accounts with an average balance of $0.50, suggesting a strong uptake. However, by the end of September, only 153,000 accounts had been opened, and even those witnessed low usage.
This trend of low usage has many reasons. Customers cannot open these m-wallet accounts through retail outlets due to pressure on the SBP to enforce strict KYC norms. Accounts can only be opened at one of 305 service points (including Tameer bank branches) to ensure cost-efficient compliance, though these service points are expected to rise to 1,800 by March 2011. Further, 14% of Pakistanis do not have the requisite computerised national identity card for verification. Initial customer registration fees of $0.65 and ID verification fee may also have slowed adoption of the m-wallet.
While Easypaisa has done well in the first year of its operations, and has received regulatory support, it needs to ensure continued uptake through a few critical measures. It needs to ensure an optimum size of agent network. Further, people should be encouraged to use these accounts rather than have them lying dormant.
India has been active in trying to expand inclusion, but none of its initiatives have as yet achieved the scale of M-Pesa or Smart Money in the Philippines, or received the committed regulatory backing of Easypaisa. These are not perfect initiatives themselves, and need much work to ensure sustained growth, but their regulatory promotion and well-thought out strategies suggest that much can yet be done in India to further the cause of financial inclusion, and that once the right measures are deployed, tremendous successes can be quickly achieved.
The writer is an economist at the Centre for Financial Inclusion, Indicus Analytics. You can reach him at email@example.com