Low Battery, beep beep beep, power down. It has happened to all of us, out and about during our busy daily lives, conversing with friends or business colleagues, when all of a sudden our mobile phone battery dies, and with it our ability to receive the latest tweet, SMS or Facebook status update. Now imagine that your cell phone is also your wallet and when it turns off so does your access to cash.

One of the benefits of a traditional wallet is that it will never display a “low battery” message and does not require an electrical outlet. A vital, if somewhat peripheral input in every alternative delivery channel (ADC) system is electricity. Without reliable, affordable access to electricity the advantages offered through mobile enabled financial services is severely restrained. If the path to improving access to financial services is tied to portable electronic devices then this path must also encompass issues surrounding access to energy.  Cell phone ownership has permeated most urban environments around the world but growth in rural areas is constrained by network coverage and access to energy. In rural areas where population density is low, villagers often must walk great distances to charge their mobile phones. Many of these cell phone users only turn on their phones when a specific need arises. In order to tap into the expansive amount of activity and innovation taking place in the “banking beyond branches” ecosystem, rural populations and financial service providers must find a way to overcome the charging challenge.

I was recently exposed to an example of this dilemma through my work with SBI in a remote region of Papua New Guinea.  While working with a microfinance client in a small village I was able to witness over the course of two years the change that took place after cell phone network coverage was introduced. We knew from client surveys that once the towers were in place several families were withdrawing money to purchase phones and airtime. While cells phones were relatively easy to purchase, finding a reliable charging source was another matter. Many of the areas inhabitants lived in small villages spread over a wide geographical region. Travelling by canoe and foot to the nearest generator added greatly to the cost of using their phone.  During one of my visits I decided to test the market demand for a line of small-scale solar systems produced by a social enterprise that designs and distributes solar lighting systems in emerging markets. The units were designed to provide high quality lighting and phone charging capabilities at an affordable price.  Within the first day, half the units I stocked were sold. The project demonstrated a strong demand for lighting and phone charging products.

Unfortunately, while the potential application for mobile phones grows each day — and with it the opportunity for ADC expansion — the reach and diffusion of cell phones in many emerging economies is quickly outpacing the growth of electricity infrastructure.  While a handful of social entrepreneurs are working to make solar systems available to low-income families, these companies have only made a small dent in reaching the estimated 1.6 billion people that do not have access to electricity. Which leads ADC practitioners to ponder one more uncertainty in the evolution of the financial intermediation landscape. The gap in electricity infrastructure creates the need for one more “foot bridge” to be built in the quest toward creating a commoditized financial platform.

Going forward, it will be important to find ways for ADC solutions to link with power distribution. In Papua New Guinea, the main mobile network operator (MNO) has already partnered with the government-run electric utility to allow customers to purchase units of power through phone credit. Perhaps power companies will join financial institutions (FIs) and MNOs as the third player or potential partner in the ADC landscape. It is not too hard to imagine a single agent network that provides cash in/out points, phone credit, and power units.

For now, electric utilities in most emerging markets can barely meet the demand in urban environments. As such, rural communities increasingly seek to to generate electricity through disintegrated power systems. My prediction is that as the price of petrol increases, these systems will increasingly rely on renewable sources and the companies providing these systems will likely seek to integrate with financial and telecommunication services. In many rural areas, the demand for cell phones is increasingly driving the demand for power.

In later posts we will explore what business models are emerging to overcome the charging challenge. How are power-companies currently collaborating with FIs and MNOs and what will their role be in the future of ADC evolution?

In November of 2010, following the Gates Foundation’s inaugural “Global Savings Forum,” Ignacio Mas spoke before a small breakfast crowd in Seattle. For over an hour, he described his vision of a new era of technology-enabled delivery channels for inclusive finance, where the “Golden Gate bridges” which control  the flow of conventional commercial banking and finance are transformed into a series of smaller “foot bridges,” built to the requirements of the billions of people currently locked out of the formal financial system. He underlined the well-known fact that nearly 70% of the world’s economically-active adult population does not have the ability to traverse the financial “stream” that will bring them along on the journey to asset growth, increased well-being, and increased security against life’s inevitable shocks.

Photo credit: Dreamstime

At one point, he drew a parallel between the decision process of a low-income consumer in purchasing a cup of rice, and deciding on a money transfer service provider on a mobile payments platform. With that comparison, he framed what may very well be the ultimate vision for success of the technology-enabled inclusive finance revolution currently underway – a phenomenon we may look back on in 25 years as the “commoditization of financial services.”

The cynic might say, “rice is rice.” You cook it, eat it, and are nourished. Even cash does not and will never have the same intrinsic value. The response to this is that small financial transactions, like cooking and eating rice, are a daily necessity for household and individual survival in much of the developing world. The promise of branchless banking – or as we prefer to call it, banking beyond branches – is that at some point in the not too distant future, a low-income client in Bangladesh can walk into her local kirana shop and choose from three different “brands” of savings account delivered on a common platform. Just as she chooses from three different brands of commodity rice sitting on the shelf, each will compete on razor-thin margins, with a focus on emotional brand response of the customer, packaging and scale to suit her household needs, and volume sales to drive the business.

This vision has tremendous implications for the future shape of our global, national, local and individual economic and social realities, few of which we have even begun to fully understand. Certainly, the prospect of bringing the excluded majority of nearly 2 billion economically active individuals into a formal retail framework has tremendous “creative destruction” implications for our current financial sector models and institutions, as well as our broader economic and social relationships.

From a financial inclusion perspective, the vision of ubiquitous, cheap, reliable, accessible “commoditized” financial services that put full decision-making and purchasing power in the hands of the low-income client would be the realization of an elusive dream. However, the realization of this vision requires answering to a number of key questions, such as how do we ensure adequate consumer protections for the hitherto unknown volumes of low-income entrants to the formal sector as the commoditization process takes hold? How do we avoid the “panacea” phenomenon that has affected in negative ways the public view of microfinance as a stepping stone in the inclusion process? And how do we ensure consistency in the infrastructure quality of a diverse network of “foot bridges” that replace the larger, traditional financial intermediation mechanisms going forward? These and other questions will be discussed in upcoming entries as the conversation continues.

Photo credit: Owens BPO

This post is written by Shital Shah, SBI Associate Consultant.

Making sure a mobile money venture is able to weather Death Valley and come out successfully while reaching clients and finding financial sustainability requires strategy, an understanding of the local context, and technical know-how.

SBI’s Alternative Delivery Channels (ADC) team works across regions and focuses on implementing innovative and sustainable projects with financial institutions and technology companies.  Across the ADC projects, SBI’s team of experts focus on any, or all, of the following components, which are really the main ingredients to any mobile banking venture:

• Strategic guidance, including financial modeling and business planning – by working with the executive management, experts are able to provide business insights and strategic guidance on issues such as regulations and partnerships
• Agent network management – experts that were involved in building up agent networks elsewhere in the world help figure out the nuts and bolts of channel management, from recruitment, selection, training, to management
• Cash/float management – managing liquidity with the agents is a critical factor in making the business work, and needs the right policies and procedures
• Technology – although technology is just one tool within the overall business, it does need to be well integrated and well functioning; the proper guidance can help secure core banking systems, integrate platforms, and meet business requirements successfully
• Customer uptake – insights through market research, appropriate product development, pricing structures, and effective marketing are all some factors in creating rapid customer uptake

A project is never working in silo and is part of a live, dynamic, and larger business – the components above are often only a small piece of a much larger structure. With an approach of working as “enterprise partners,” ADC projects do not work within restrictive black boxes; rather, it means working closely with a partner to step out of (or avoid) Death Valley by pairing international experts and local knowledge, along with a keen business sense. Designing, financing, and building ADC projects requires a combination of careful planning, innovative implementation, and flexibility to respond to ever-changing circumstances.  In future posts, we will share further insight from SBI’s direct experience and analysis of projects working their way through the mobile money life cycle.

Recently a client asked SBI’s Strategy and Execution Group for assistance in helping them understand the strategic implications of developing a mobile money solution. To help describe the costs, risks, rewards and opportunities associated with mobile money, we developed the graphic below.  In particular we wanted to highlight, for those who are not familiar with branchless and mobile solutions, why so few mobile money programs have been successful and the importance of developing and maintaining strategic focus.

As one can see below, the curved line represents the financial cost and returns associated with a mobile money program (negative at first, positive eventually) with the straight line serving as a hypothetical breakeven point. Labels which are red represents costs, green represents revenue drivers, black text represents break-even activities and the blue captures some of the terminology – I believe originated by our friends at the Bill and Melinda Gates Foundation – to describe the pitfalls that many programs have encountered. A more detailed explanation can be found below.

Capital expenditure – mostly IT – improvements and enhancements are commonly thought of as a major driver of costs. In reality, they are typically quite small. My colleague Malith Gunasekara estimates that capex is, at most, 15% of the overall project costs. Instead, what we have seen from projects is that the real drivers of costs are training, education, and marketing. These costs start immediately as the institution has to hire and train staff and recruit agents.

These costs are quickly compounded by a need to train and educate agents on the product offer and transaction process, while also engaging in mass marketing. Mass marketing as a major cost this early may sound surprising – and many interventions have failed to take this into account. However, a robust and energized agent network often requires this as the agent needs to know that they are signing up for something that is going to be successful and profitable for them. Remember, these agents are business people: they want to see that their partner in this endeavor is serious and, as such, they want to see the sponsor invest marketing dollars that is commensurate with their investment (which is often substantial). As such, from almost day one, the sponsor is likely spending significant sums on marketing.

Next, the system needs transactions. One of the more common ways to get activity on the network is through government to person (G2P) transactions. Unfortunately, these transactions often provide extremely limited margins. Why? Because the government is already doing these transactions somehow and the new mobile money system cannot be significantly more expensive than the alternative. Also, at this point, the sponsor needs to make significant expenditures for both mass marketing and agent and consumer education to ensure that payment recipients understand how the new system works. Consumer education is especially important as it’s often not immediately obvious why a consumer needs a new payment option or – in the case of financial institutions – a bank account. Meanwhile, the agent wants to start getting paid for all of this time learning about this system and advertising his offer. However, since we still don’t have many transactions, agent commissions quickly become a major cost.

This dynamic, the need to develop a network – and customers – while simultaneously rolling out product on that network, has been called the “chicken and the egg problem” and is one of the reasons why many networks have ended up in “Death Valley.” This is the dynamic where fixed costs have been spent on building the network, the variable costs are very high with marketing, education and commission expenses but there are still not the transactions, accounts (and revenues) necessary to support the network. And much like the famous Death Valley in California which was littered with the skeletons of those pioneers who tried to shortcut the hard work and planning on their trek to California, the mobile money Death Valley is littered with the failed programs of telecom operators, banks and others who tried to roll out inadequate solutions to a complex problem, without proper strategic focus, planning and investment.

So how does a sponsor begin to climb out? Unfortunately, there is not a one size fits all solution. Every project must respond to the unique regulatory, competitive, demographic and cultural constraints of their home country. However, the solution is almost always some combination of person to person (P2P) transactions, new accounts, partnerships with traditional competitors, and person to business transaction (P2B).

Most mobile money projects have focused on rolling out P2P payment solutions as soon as they receive the regulatory approvals necessary. In fact, for many projects, P2P transactions have been the only product envisioned. (This is perhaps one of the reasons why so many mobile money solutions end up never escaping Death Valley.) However, to successfully attract these transactions, sponsor organizations often have to spend significant sums in customer incentives to open and transact on accounts, educate customers on the utility of these transactions (usually through significant below the line marketing at agent locations) and conduct mass marketing campaigns.

To gain traction for mobile money solutions – especially those solutions offered by mobile money operators – sponsors have attempted to expand P2P transactions to include P2B transactions very early by targeting large businesses or those businesses that play a critical role in the value chain. The idea is that if they can convert these large businesses and the transactions they generate onto a mobile money network, this will create a trickle-down effect whereby smaller businesses sign up for the program because their biggest customer is on it. In our experience, this has not worked. Personally, I believe that small businesses will be resistant to accept mobile payments until customer demand forces them to change businesses practices. After all, despite the significant expenses that cash can create for a business, it does have a very valuable property in that it is hard to track and tax (a quality that is quite obvious to anyone who has ever owned a small business but is occasionally lost on development professionals).

This is one of the reasons that it is often not clear to small businesses and individuals why a cashless solution is superior to cash payments. Unfortunately, larger businesses and those further up the value chain have little capacity to bridge this education gap. Hence, solution providers need to work closely with agents and other stakeholders to provide this educational service.

One way to provide this educational service is to encourage account opening.  By opening up traditional deposit accounts on mobile payment networks, providers can provide branchless banking solutions that create stickiness on their networks by offering a valuable service (a safe place to store money and financial inclusion). These solutions also create more opportunities for consumers to get comfortable with concepts such as e-wallets and formal financial services. For sponsor organizations, these accounts also create a second source of income in the form of deposits or “float” (customer cash that is left on the network).

At this point in the project lifecycle, sponsor organizations typically hope to bring other financial institutions and third parties onto their networks. These agreements – often with traditional competitors – allow sponsors to really grow networks to scale by growing transaction volumes and increasing the profitability of networks that have already seen significant capital investment. These new accounts also create the type of consumer comfort – and demand – that encourages businesses to accept P2B payments. These payments create significant transaction volume, lead to widespread awareness and acceptance of mobile money and often generate significant float or deposits that sponsors can use to reduce their cost of capital and increase profitability.

Getting to this point requires a strategy that allows an organization to stay focused on the long term while remaining responsive to changing market conditions. However, as we recently explained to the client who engaged SBI to help them develop such a strategy, it must be accompanied by complete institutional focus to achieve the strategy. This combination of strategy and focus will allow the institution to keep employees motivated as they engage regulators, develop agents, inform and educate customers, develop products, make investments and, if successful, avoid Death Valley.

In Part 1, we discussed how alternate delivery channels (ADC) are currently being priced. What other services do FIs provide that they can charge for?

• Statement of account – They normally provide a fixed number of free statements as per contract, if the customer wants more than that they have to pay for it. Any postage and incidental charge incurred is also charged to the customer.
• Prepaid (pay on demand services) – Any remittance is pre-paid whether they are bank draft, banker’s check, money transfer and wire transfer, checks for collection or pressing a button transfer. Since these funds are not deposits and are not a part of financial intermediation, the banks can charge service charges and incidental expenses for these. In the electronic age a cash transaction is possible away from the parent branch and fees can be charged for this – as this is not mandatory for the FI and they have incurred additional establishment costs as a convenience to the client. However, if an Internet transfer within the same network is not chargeable, a cell phone transfer must receive the same status.
• ATM and Internet banking charges – these are not chargeable services as the banks put them up for their own convenience – though camouflaged as customer convenience. FIs save on expensive floor space and human resources (tellers) when clients transact away from branch premises. Clients actually do the work of the employee and not get paid for it!
• Any transfers that require an intermediation of a payment network will incur fees as banks have to pay this fee to be a member of the network or are charged on pay-per-use basis.
• Providing service outside official premises (at door) is chargeable as this is an additional convenience for the customer – but customer must have a choice to transact in the branch for free or away from the branch for a fee.

What services can FIs not charge for?

• Customer registration/opening of account – This is done for the purpose of intermediation and cannot be charged. The customer has a right to decline. It is a part of the bank’s process – the customer will be pretty happy to have an account without filling in an application form or getting a loan without it being processed. This is like charging a customer a fee for entering the super market and an exit fee for having entered the super market and not purchased an item. The entire benefit of customer registration accrues to the FI – the customer account is the very reason for its existence, and yet the client pays for it! Any incidental expenses like stamp duty, legal charges and opinions or any other expense which is to be paid out by the FI to an external agency may be charged to the customer. Definitely not for printing cost of the form in which customer data is captured. This expense is part of the operations cost of the FI and already captured in its interest spread.
• Cash deposit – A cash deposit when made into an account whether deposit or loan is a part of financial intermediation – it is the basic business of a bank and cannot be declined or charged.  The bank has a right to pay differential rates of interest for size and volume of deposits depending on how the funds can be utilized. So instead of charging a fee on deposit, they may reduce the interest paid or even have threshold levels for paying any interest – for example, interest may be paid only if the money stays for 30 days or more. Deposits can be hybrid of a current and savings account or notice deposit to be able to make such flexible interest payable arrangements.
• Electronic deposit – Similarly for an electronic deposit, if the bank pays any fees to the payment or electronic network, such fees maybe charged to the customer. There cannot be a fee for the deposit transaction itself. Interest may be paid as per cash deposit to take care of non-utilization of the demand liabilities.
• Cash withdrawal – a cash withdrawal is customer’s money back to them and no customer likes to receive less money than what their statement shows. This is probably the biggest drag for populating transactions at ADCs and what I call picking up the stick at the wrong end. Charging customers for returning their own money, which the bank used for its intermediation purposes to earn revenues is like stealing from the customers pocket. This could be the one big reason why transactions are not picking up at the ADC. What can be argued is that the charge is for the door delivery of cash outside the branch premises. Again fair comment – but here the customer must have a choice to pay for the door delivery or draw for free from the parent branch or an ATM.

Then why should an FI have ADCs?

First, the government will beat them with the right end of the stick. Apart from that, it is a part of their business to have accounts and build their portfolio. Smallness of accounts has nothing to do with the business side of assets and liabilities. Banks have high cost employees in the areas of treasury, liabilities and assets to take care of rationalized interest pricing issues to work towards making ADCs profitable. If the solution is to simply transfer the cost to the client, then there is no reason to have specialists – the MIS can do that. The banks have to take long term views similar to when they open a new branch. Most bank branches do not become profitable until after 3 years and there are many which continue to be in losses for ever – sometimes internal transfer pricing mechanism is used to camouflage this – for which the engineer that does the re-engineering ends up with a fat salary for juggling the numbers through complex mathematical exercises. Do they charge loss making branch customers for transactions?

The main reason FIs are looking to charge customer’s fees for transactions through ADC is because they have to make an immediate payment to the agent network for providing this service. In their internal accounting and transfer pricing, they do not know how to reflect this. Accounting and financial policies of banks do not mandate a transaction related expense outflow unless it is compensated by a matching inflow from somewhere. This is because they have two independent heads of income – interest and fee. The mismatch working through ADCs is that they are making a fee related expense for an interest related income. To obviate this glaring discrepancy in their financials they are insisting on matching fee expenses with fee income – and the ‘poor’ client is paying for this. Statistics worldwide has proven that an agent makes between $100-$200 per month and an aggregator makes another $100 per agent as its facilitator. Against this the bank saves on infrastructure and employee cost. Most bank employees – the lowest cadre – makes about $500 per month. How will the books of the bank look if they allocated salary of one staff to the aggregator per agent – and accounted the fees as salary instead of commission? If this was to be accepted, the banks will probably stop charging fees for transactions – because they will not know where to put a fee income against which there is no fee expense – probably in sundry deposits and earn the wrath of the auditors.

In conclusion, fees for ADCs need not be charged to customers, just because the Central Bank mandates it, or that survey results show that customers are willing to pay for it. Fees can be only charged when it is justifiable, equitable, and transparent with full disclosure. FIs whose reason for existence is financial intermediation, can only make revenues through judicious use of their assets and liabilities. Fee income is mandated for providing related services which does not result in intermediation. The same principle should apply to transactions through ADCs. It is hoped that such a change will lead to increase in volumes and transactions through ADCs and make branchless banking viable, otherwise this has the risk of being just a statistical exercise to meet Millennium Development Goals.

A cost and willingness to pay report by Microsave says that 70% of financially excluded potential clients are willing to pay for banking services. Will this lead to higher, lower or rational pricing for the end consumer? We will all remember that when similar surveys were published about microfinance clients’ willingness and ability to pay for credit, some companies went overboard, leading to the drowning of the whole sector. While survey results are well intended, it is often in danger of resulting in unintended consequences. They need to be analyzed in light of existing perceptions, whether well or ill placed. The real result of the survey will be when intervention is instituted on the basis of the first survey report with a control group and experiment group, and then new results are derived from a new survey of the same hypothesis with both groups. The control group will have no additional inputs from the first survey while the experimental group goes through a financial literacy exercise that explains the 5 W’s of financial charges through alternative delivery channels (ADCs). Choice by education – not assumption!

Photo credit: Leadpile

The most oft quoted reason for charging transaction related prices through ADCs is that those who derive benefits from the service must pay for it. Fair argument – but are they the only ones who must pay for the service, do they know why and what they are paying for (adequate disclosure), has there been enough research on the client’s desire to pay when they know the cost of transaction versus on assumption of cost of transaction that is supply led? Is the information flow about the transaction fees equitably balanced between user and supplier of services? Are the costs properly apportioned? What details are available in terms of the cost of acquisition of float from financially excluded areas through agent network and through branch network? Do clients pay for services if they have accounts in a loss making branch, if not, why should they be charged for the fees of the agent? It seems to me that good old banking and intermediation principles are sacrificed in calculating the cost of transactions for the financially excluded to keep them excluded – or if they don’t specifically pay to get included.

What is financial intermediation? When a financial institution (FI) collects deposits to lend, it is called financial intermediation. Such FIs are regulated under prudential regulation norms by the Central Bank of the country to ensure the safety of the depositor’s funds.  The spread between the aggregate cost of deposits and aggregate cost of loans is the revenue of the FI, which pays for its cost of operations and leaves a desired profit for the shareholders – as remuneration for equity and risk. That being so, when can a FI charge additional fees for a transaction? I would surmise, that any transaction or a part of the process of the transaction that does not result in financial intermediation is chargeable, because that is outside the mandate of the FI and is undertaken to benefit the client outside of that mandate. It is like a hospital that does not do pathology tests. They can have it done outside and charge the client or ask the client to get it outside and pay for it outside.

So which transaction results in financial intermediation? I will start an example here of a consumer of tea – the first cup in the morning. When I buy tea (let’s say bags for convenience sake), what am I paying for? I am paying for the opportunity cost of land that grows tea, the inputs that went into growing tea, the inputs that went into plucking, processing and transporting tea to the super market, cost of inventory and financing and sundries. I am also paying for the value additions, commissions and taxes that go into making a tea plant to produce my tea bag, including profits on the way to the super market counter. That’s it – I don’t pay to the producer/supplier for storing that tea in my house, for boiling water to make the tea, for drinking the tea, for disposing the tea bag or anything else. Now transpose that into a financial ADC. When the client makes the first transaction – here the commodity being money – they are not charged. Input costs of setting up a delivery channel, recruiting and training agents and all other costs are deferred until after the first transaction. After that they are charged for clicking a button to find out their balance, to transfer money, to pay for utilities, to pay for services and to draw out their own money. So, in my example, there is no charge for buying the tea, but there is a charge for everything else I do with the tea bags after I have bought it, including not consuming it in a fixed number of days. Unless I am a real tea addict – do you think I will buy and consume tea in the way I do, if those dynamics were to change in the way ADC pricing is currently done?

The key, therefore, is to exactly map which transactions and activities result in financial intermediation and therefore are locked into the interest rate. Any transaction that is a value addition or is provided as a convenience that does not directly result in financial intermediation or is paid to a third party on behalf of the client may be charged to the client – after disclosure and transparency norms are strictly adhered to. Just because the regulator has permitted us to charge is not sufficient reason to waive the principle of incidence of fees for a financial transaction that results in intermediation.

How are all financial transaction prices locked in? All deposit taking FIs have a balance sheet which shows customer liabilities and assets. Their liabilities are categorized as demand and time liabilities. Demand liabilities are those which do not have fixed duration and therefore can leave the system next day. Not much use to the bank to lend it away and face liquidity problems and therefore banks pay no or minimal interest depending on the trend study of how long such demand deposits stay with them and can therefore be utilized without concomitant liquidity problems. The time deposits are matched or deliberately mismatched on the asset side to get a spread and take care of liquidity problems – balancing risk with income. The FIs actually make more money in their demand side of the transactions than the time side of it – demand liabilities are the cheapest and demand assets are the priciest – compare current account with overdrafts and credit cards. Therefore to charge any fees on these transactions is a double charge to the client and laced with profit motive for the FI rather than providing service and being adequately compensated for that service.

The FI is meant to provide service at its location. Any service outside the location is an added cost to the service provider and may be charged to the customer. This is similar to transacting in another branch of the same bank. The ADC is not a branch office but an extension of the branch office. There could be a fixed fee for transacting at the ADC counter, which is aggregate of all its costs. However, the customer may be given a choice to pay a fee and transact at the ADC counter or make a visit to the branch and pay no fee. Once this choice is given, demand and supply forces will step in to keep the fees at a reasonable and affordable level. Currently fees are charged on a cost to FI for running the agent network – which is like picking up the stick at the wrong end. Why does the FI have to pass on the cost of ADC to the customer when it bears the cost of opening a branch in its own books through asset liability management? Does the FI use the ADC for its business for the customer only, or does it also have other reasons – a country’s social and economic policy, its own social responsibility, branding and marketing value, and asset and liability portfolio, for example. Currently, it seems that all the advantages that the FI get from ADC are accrued to the FI, while the disadvantages are passed on to the customer.

In part 2, we will discuss which services a financial institution can and cannot charge for, and why they should use alternative delivery channels.

As discussed in my first article, many implementations of ADC worldwide have failed to deliver. As a lot of these have been launched by commercial businesses rather than NGOs or foundations, they have been somewhat reticent to share their mistakes with others – which is a shame, as no one is perfect and if new projects could learn from what has gone before it would only be of benefit to the people we’re trying to serve.

However, a few on-the-ground contacts in various locations have been willing to share some of the real-world “lessons learned,” a selection of which are illustrated below.

Selling to the wrong people: A lot of time, effort and money was spent promoting a money transfer service to garment factories with the aim of recruiting their workers – who send money home on a regular basis. In the country concerned, though, the decision maker in the family was not the young, typically female worker but the father at the receiving end – who also dictated the money transfer channel she should use. No one spent any time talking to him!

Relying on securing partnerships that don’t benefit the partner: MFI field staff were identified by this company as “the perfect customer sign-up resource” – however, the pitch to the MFIs was centred around paying the field staff a commission for each signup. The MFIs rejected this as it would distract their paid staff from their paid role, and the company instead suggested that the MFI would be paid the commission instead – which would result in more work for the field staff and no ongoing benefit for the MFI after the initial commission. The offer was declined, with the exception of one MFI – who subsequently made a trading loss that year for the first time in its history and decided to suspend the arrangement.

Assuming a new product will work because you lead the market with other products: This market-dominant telco launched an agent-based bill payment service which enabled its users to pay household bills, in cash over-the-counter, at any of its airtime sellers.  However, the typical customer didn’t trust the typical agent enough to pay for something in cash without being able to immediately verify receipt of their purchase – and the SMS message they received wasn’t enough to convince them that their bill had actually been paid to the utility company.

Advertising that confuses the customer: Expensive and beautifully-designed billboard advertisements talked about having a “bank in your pocket” – and confused customers who did not understand what the product was or how it could be used. The choice of images and people in the ads looked great, but also portrayed mobile money as a premium service for high-end users.  (Point to note here: most ad agencies are more concerned with designing beautiful ads that get THEM more clients than they are with designing relevant ads that get YOU more clients).

The key message behind these and many other mistakes made by previous ADC implementers goes back to my previous articles – the value add equation and getting inside the customer’s head – and can be summed up as “assumption is a dangerous thing.”

Assumption making is egocentric. Assuming people will think or behave the way you do and designing a whole business on that basis could probably be described as uber-egocentric. Avoiding “obvious” mistakes (those ones that you kick yourself for later and end up in an article called “lessons learned”) requires a sociocentric approach to permeate all levels of your business. To be discussed in my next posting!

As it operates in a cash-dependent economy, the Palestine banking sector has been striving for the last two decades to reduce cash management costs and tackle cash movement obstacles resulting from a challenging political environment.

The banking sector is currently witnessing important shifts in Palestine, as banks started recognizing the growing viability of retail banking services due to having experienced growth in revenues and profitability. In turn, this led to the need for developing creative banking products, and adopting modern technologies for the delivery of such services to targeted existing and new consumers.

In Palestine, achieving this objective requires a joint effort to build the required infrastructure to strengthen the electronic payments industry. The mechanism proposed by SBI to achieve this strengthening is the formation of a jointly owned company, aimed at servicing the banking sector as a whole while leveraging economies of scale to reduce dependency on cash.

Over the past 5 months, SBI has been cooperating closely with the banks in Palestine, under the guidance of the Palestine Monetary Authority (PMA) and the Association of Banks in Palestine, to write the business plan and model the financial feasibility of a jointly held Banking Services Company (BSC). SBI found that it is indeed financially feasible for the Palestinian banking sector to build and operate the BSC.

The culmination of this effort was the presentation for this business plan and feasibility study to the PMA and banks in Palestine during early August 2011. The study addresses the market, technical and financial elements; however, it also defines a set of various benefits to consumers, merchants and banks.

The BSC envisioned as a standalone service provider to the banking sector, aimed specifically at providing the following services in the first phase of implementation:

• Interbank authorization and clearing of cash machine (ATM) transactions
• Interbank authorization and clearing of point of sale (PoS) transactions at merchants
• International transaction switching of ATM and PoS transactions
• Merchant management

The next steps in the process are for the banks to individually decide their participation in the initiative, and then commence with implementation of the initiative.

In SBI we believe it is necessary, indeed essential, at this stage to step forward with establishing the BSC to service all banks operating in Palestine based on neutrality, interoperability and cost-effectiveness.

Many organisations will use the services of an expert market research company when they need to find out “what people want” (and this is generally a better way than sending out in-house staff who think your proposed product is wonderful – refer to my previous article). The organisation tends to give a vague description of some questions they would like to be asked, then hands over a lot of money and waits for the results. The results, when they come back, will be represented in pie charts, bar charts and scatter diagrams in a range of colours. The organisation listens to the presentation and then goes ahead with what they were planning to do in the first place.

Photo credit: Audience Response Info

Sound familiar? And if so, how do you avoid it and get useful data that enables you to make informed decisions?

Rule number 1: Be totally, totally clear on what the big questions are you want answering. These could be something like: “what price should we charge our client?”; “where should we put our first 5/20/100 agents?”; “which products should we be offering and to whom?”

Rule number 2: Subdivide each big question into a series of small questions. The smaller questions should combine to give you a very clear answer to each big question.

Rule number 3: Ensure that the small questions include ones which allow for the answers to the big questions to be NOT what you want to hear. You’re not trying to make a case for your product here – you are ensuring that you don’t go out there and spend a lot of money launching something that no-one wants.

Rule number 4: Be very specific in determining who you want to survey – this includes by geography, socio economic class, occupation, age… and this should be as broad as possible. One thing you’re trying to find out from the research is who needs your product – if only 25-35 year olds in the city get asked the questions, you’re not going to have an accurate picture of the likely uptake of your offering to a broader market.

Rule number 5: When briefing your research company, make sure that they are aware that coming back with “negative” answers is not a failure on their part. I have seen a number of cases where researchers slant the questions or the way the questions are asked – or even make up the data – to produce a result that they think will make the client happy. Only output which doesn’t give you clear answers to the big questions in step 1 (one way or the other) can be viewed as a failure. Research that doesn’t give you the conclusions you hoped for has not “failed”: in fact, quite the opposite!

Next in this series:  Lessons learned from previous ADC implementations worldwide.

As we saw in Part 1, the banking sectors in CEE (particularly retail) were quick to innovate and expand distribution networks. To improve distribution and customer access, the new retail banks set out to integrate their channels—branches, ATMs, call centers, and, in the case of Handlobank, Internet and direct sales platforms. They used branches to get consumers to open accounts (the ATMs served as the lure), but they promoted call centers as a transaction point for payments. Handlobank favored high-traffic central-city locations; Millennium opted both for those locations and residential suburbs.  Both banks expanded nationwide (Lukas Bank largely focused on large cities).

What is the point of this history lesson?  There are several, I think:

• Velocity of change:  Once first banks were privatized and the logjam was broken, change occurred with astonishing rapidity in CEE.  I believe advances in technology and pent-up demand will conspire to promote even faster change in the many of the markets we serve.  The recent dialogue with our Pakistani client was far more advanced than anything I heard in CEE 10 years ago;

• Our clients’ customers want the same things CEE bank customers wanted:  They want to be treated with dignity and respect; they want products geared to their needs and preferences; they want convenient access to their money; and, they want their requests to be handled quickly.  The more time I spend in the inclusive finance industry, the more I see the issues we deal with as simply another iteration of a slate of issues the banking industry has looked at for decades.  In other words, it’s all just retail banking;

Change will be led by institutions; in many cases, larger ones.  Their chief executives might be motivated by idealism, but they seek primarily to create shareholder value.  The ones who recognize the profit-making opportunity represented by low-income segments will be the winners.  In addition, I suggest the ones with a tradition and culture defined by retail banking operations will have enormous advantages;

• Learn from experience:  We should not waste time trying to restructure institutions that will never be competitive.  In this respect, we should heed the lessons from the CEE experience.  In CEE, acquirers faced significant challenges: rampant overstaffing, employees unschooled in customer service, political obstacles to radical restructuring including powerful bank unions, inadequate IT systems, and less than optimal branch networks. Even so, acquirers saw the incumbent banks which already had large customer base provided an expedient way of entering the market.  This meant that they spent enormous time and money trying to restructure and transform banks whose cultures were denominated in terms of corporate banking and trade finance.  It was a long, hard slog, and, in many cases, a process whose outcome did not justify the effort.

• Innovation and risk-taking:  Thus, we should expect that, in some cases, existing institutions might not be the winners.  They won’t have the vision, the risk appetites, or the cultures to play effectively in this space.  New entrants, however, are not burdened with legacy IT systems, entrenched employee practices, dysfunctional back rooms, and poorly configured branch networks. They begin with a clean slate.  As we saw in the case of mBank in Poland, there is enormous scope for creativity and risk-taking that lead to successful greenfield ventures.

In a recent workshop with a Pakistani client, I was struck by the extent to which the dialogue recalled discussions I’d had in central and east Europe (CEE) 15 years ago.

The transformation of financial sectors in the CEE region began in 1995-96 when the first state-owned banks were privatized.  Bank privatization continued for the next decade with activity migrating from the Northern Tier accession countries (Poland, Hungary, Slovakia, and Czech Republic) to countries further east and south.

Several aspects of this process were notable:

In the first instance, the mix of acquirers was different from what many observers projected at the outset.  Absent at the top of the league tables were major German banks, the UK clearing banks, and other banks presumed to assign strategic importance to the region.  Instead, the major acquirers turned out to be smaller, second-tier (regional) European banks.

One of the most active banks in the privatization sweepstakes was Erste Bank from Austria.  Erste went into the new millennium as the third largest bank in Austria—a bank not counted among Europe’s 50 largest banks (its world ranking was 368^th).  Five years later, Erste had extended its home market into a regional banking empire comprising 8 countries (including Austria) and 12 million customers.

For Erste, franchise value was denominated in terms of numbers of customers, and largely for this reason, it targeted the large national savings institutions in respective countries.  CEE was a retail play for Erste, and it wasn’t alone.  All the major acquirers had strong retail operations in their home markets, and they were enthusiastic about leveraging the demand for retail banking services on the part of individuals (consumers) who had been denied access to retail products and services for five decades.

During the nascent phase of transformation, efforts by the acquirers to develop retail banking centered on fairly conventional savings and credit products.  Distribution was one-dimensional—the acquiring banks inherited networks largely defined in terms of brick-and-mortar (branches).  Customer service—speed, responsiveness, communication—was spotty.

However, the evolution of banking sectors throughout the CEE regional marketplace moved with impressive velocity, particularly in retail.  The pioneers were Citibank in card-based products and GE Credit in consumer finance.  In time, indigenous monocline companies challenged major banking groups in various consumer finance business lines.  The new owners of the privatized commercial banks responded by implementing strategies which had led to success in their home markets, e.g., bancassurance (KBC), direct banking (ING), Internet-based marketing (Citibank).

The discussion at the workshop that prompts me to reminisce about the CEE experience related to channels, in particular, how to structure agent networks, the utility of kiosks, and the use of technology.  In fact, channels management and the development of alternative channels was a dominant theme in CEE during the period 1995-2000.

Poland was the most competitive banking market among the accession countries; therefore, it is not surprising that some of the most innovative approaches to distribution and channels management were developed by Polish institutions.  For example, in 2000, mBank, a direct banking operation was launched as a de novo venture.  It based its strategy on leveraging technology effectively (speed), coverage (convenience), and simple products responding to customer needs and preferences (relevance).  In short order, the mBank model was duplicated by other greenfield retail banks, notably Handlobank and Lukas Bank. Today, mBank has over 2.5 million customers and is the third largest retail bank in Poland.

To understand how CEE retail banks went about integrating their channels and encouraging customers to open accounts, as well as how this connects to the evolution of mobile banking today, please stay tuned for Part 2.

We’ve all read the stories about how telecom-based mobile money services – such as M-PESA – are allowing new

Photo credit: WhyGo Business

players to shake up financial services in developing countries, besting banks and providing a superior alternative to cash. While there is certainly some truth to this, there is also a lot of hype. After all, with the exception of M-PESA, no telecom based offering has come close to achieving either the scale or the penetration of Safaricom’s mobile offering.  A question that many in the space have been asking is why. I propose that part of the reason may have to do with the fact that it isn’t mobile money that people want; it’s efficient, useful and inexpensive financial services.  Unfortunately, most MNO solutions are built on extremely expensive, awkward and limiting technologies: SMS and USSD.

SMS might be both the world’s most expensive way to send data and one of the least efficient. An SMS costs, on average about $0.10 per message, yet it only allows an individual to send 140 bits of data. USSD can transmit a bit more data and the costs are, usually, a bit lower. However, both technologies are absurdly expensive when compared to the cost data plans. In most countries, these are between $10-$50 for 2GB of data. 2 GB of data on SMS at 10 cents a message would cost a user $3,072,000. Even if USSD cost 1/10 of the price of SMS (which it doesn’t usually) it’s clear that both technologies are completely inappropriate for sending and receiving data.  They’re the equivalent of the compact disc: an expensive, awkward, and, eventually, obsolete technology for transmitting and storing data. As such, mobile money platforms built on SMS and USSD are expensive, awkward and limiting.

Luckily for consumers, the solution is here. It’s called the Internet. And, thankfully, due to the widespread expansion of 3G and 4G networks and increasingly ‘smart’ devices, the Internet is becoming omnipresent and creating opportunities for third parties to develop financial services that bypass the MNO and connect directly with customers.  We’re seeing this already with banks – who know a bit about moving and storing money (data) safely and securely – as they launch innovative platforms in Pakistan, Bangladesh, South Africa and India. I believe that this trend is going to continue as banks find value in leveraging their existing branch infrastructure, product knowledge, and regulatory advantages to leverage increasingly omnipresent internet access and extend banking services beyond the branch level.

At this point, I’m sure some readers are saying to themselves – “No way, it will take decades before the poor in developing countries have smart phones and access to the Internet!” Well, if you’re thinking that, you’re wrong for two reasons: Internet access solves one of the limiting factors of mobile money (the need for a mobile phone) and technology is moving very fast.

On the first point, why should a poor person have to have a mobile phone to access banking services? It’s not like only people who can afford mobile phones want banking services. In fact, a recent study we completed in Pakistan identified no difference in demand for “branchless banking” between those who own a phone and those that don’t. While it’s true that many people do own phones, many, many more have ACCESS to a mobile phone from either a family member, a friend or a neighbor. With Internet-based solutions, limiting identifiers, such as unique SIM cards, no longer matter. Instead, people can use a variety of existing identifiers to open accounts – much like we do in the U.S. with Social Security Numbers. This means that non-SMS systems can be more inclusive and serve larger populations than systems dependent on ownership of a mobile device.

As for technology, it’s already here:  Just check out the explosive growth in mobile enable data in emerging markets. It is also where the fastest growth for smart phones is occurring. The other objection is that smart phones will never be cheap enough for all of the poor to own them. On this front, only time will tell. However, if history is any guide, I have a feeling that our friends at these too will become as cheap – if not cheaper than – feature phones now.

So, what does this all mean: One, we should stop thinking about mobile phones as being a precondition of access to mobile money – it shouldn’t be. And two, we need to think about how we start encouraging the development of Internet enabled solutions that provide services and solutions – including financial services – to the poor. The technology to transmit and process data is already widely available. We need to start using it.

Photo credit: KeralaEvents

In our data driven world, how important is an integrated analytical framework for mobile financial services?  During a recent meeting with a pair of business school professors, we sat down to dissect an approach to framing business analytics in SBI’s mobile banking initiatives.  Business analytics, or data collection and analysis in general, hold several useful purposes:

-        A tool for business decision making

-        Assessing wider impact of service

-        Understanding the added ‘value’ for customers and agents

The business analysis will help companies navigate potential obstacles better – with real time data outputs and consolidated reports tracking tends and patterns, management will be understand what is happening with key areas of their operations. However, the analysis can also have a broader purpose. Many of these mobile money ventures are the first of their kind in these markets, which presents a unique opportunity to understand the role of financial institutions in building large scale transaction platforms.

In addition to analyzing business processes, there is also an effort to capture and analyze valuable data points from the experience of scaling a mobile money venture.  By capturing key data points, such as number of active users, number of agents, and transactions per agent, in a way that is not burdensome to the customer or agent, properly trained MIS/IT teams can analyze data that is informative and useful for management to make strategic decisions.

Investing time and resources into building a robust data capture system is no easy task for new ventures, but the value-add for the longer term health of the business is likely to contribute to its success.

One of the main pillars in implementing an alternative delivery channels project is the backend core banking system (CBS), which provides the necessary “rails” to support front end systems such as branchless banking, ATM systems, Internet banking and other delivery channels, as well as integration to other business and operational specific software such as treasury management, leasing, anti money laundering, credit scoring, data warehousing and mining to name a few.

Photo credit: Office of the US Trade Representative

Without a stable, time-tested, scalable and secured CBS that complies with international technical standards, implementation of ADC will pose challenges and risks that may result in failure.  Procurement of the base, the CBS is vital and is mission critical for any financial institution as it has the ability to “make or break” that institution.

The current statistics show that most financial institutions have changed their financial software or CBS more than once in 7-10 years. The reasons are many but most end up with unsatisfactory results due to the process and methodology adopted during the procurement process.

The first step in the procurement process is to review the FI’s business plan. In the absence of a plan, the management should define their business objectives for the next 3-5 years – and it is best to define these at a workshop where all participants have an opportunity to contribute. Most procurement processes have been carried out without agreement or identification of business objectives, which resulted in IT systems not meeting user requirements and being obsolete. These are costly mistakes amounting to millions of dollars, when all costs are included.

Identifying user requirements in detail is important and also defining or documenting them in a meaningful manner that the vendor or supplier can understand is equally important. Most FIs will not have internal resources and knowledge for new business areas and it’s best to contract such requirements to external experts. For computerizing existing business areas, it is key to include users. If not, the procured system becomes the “consultant’s system”.  User requirements should include all work and process flows, controls, audit, reporting (internal, external, operational and management), online info etc. in detail. Procurement Request for Proposals (RFPs) with 3-10 page user requirements are termed as a “recipe for disaster’ as they are not detailed enough.

Vendor proposals should be short listed based on an evaluation criteria. The short listed vendors should be invited to present their solution to a Procurement Team, which should include the management, internal audit, IT and users. Presentations should be simulation of the requested system and not PowerPoint presentations. If required, dummy data should be provided so that simulation would be meaningful.

These are only some of the dos and don’ts, but most are identified during the procurement process by experienced consultants and they ensure risks are mitigated during the procurement process. FIs should view consultants as facilitators to the procurement process and not decision makers for the FI.  Finally, before commencing implementation of ADC, the implemented CBS should be used in a live environment.

These dos and don’ts should provide a starting point for smooth implementation of core banking systems, to make any alternative delivery channels effort more streamlined.

On the evening of July 21, SBI, through its partnership with the Bill & Melinda Gates Foundation, had an opportunity to host a summer reception focusing on mobile banking and innovation for financial inclusion and featuring its partner in Pakistan, United Bank Ltd (UBL).  The event featured Abrar Mir, Executive Vice President & Group Head for Branchless and e-Banking, who was able to provide updates on UBL’s groundbanking branchless banking platform, Omni. UBL Omni is reaching beyond traditional bank networks and extending access to financial services to millions of unbanked Pakistanis, just a year after its official launch.

Humans have a propensity to label people, ideas or things based on our initial opinions of them. Ori and Ron Brafman, the authors of “Sway – the irresistible pull of irrational behaviour” term this the “diagnosis bias,” and it includes our inability to reconsider those initial value judgments once we’ve made them. Once a person is given a label (and even indirectly, a diagnosis), it’s hard for people to see other people in a way that isn’t biased by that label.

Here are some labels to think about: “Low income”. “Disadvantaged”. “Unbanked”. Typical biased diagnoses include “stupid” (a real conversation I have had with someone I worked with in the past was centred around their view that “if poor people were clever, they wouldn’t be poor, would they?”). The truth of course is generally entirely different – although often lacking in formal education, the “street savviness” of your typical ADC prospective client, and especially their ability to work out whether a new offering is a good deal for them, is pretty high…

Photo credit: Shadowbend Studios

The only way to be sure that your planned ADC offering will be embraced by the people you’re planning to offer it to is to get inside their heads. You need to understand their hopes (so you can help them be realised), their fears (in order to quell them) and their challenges (in order to overcome them). Once you have an offering that can meet these three basic needs (and you’re able to articulate it – but more of that another time), you know you have a value proposition.

The only way to get inside their heads is to get out there and talk to them. As we all know, you need to talk to a lot of people, and to ask them very neutral and non-leading questions, and then to see the patterns of what they’re saying. The big problem with this is – being neutral. You WANT this to succeed. You WANT people to want your great idea. (And you perhaps WANT them, just a little bit, to not be smart enough to decide that your offering has no distinct advantages over the informal/illegal channel they’re currently using).  And because you want this, you (often inadvertently) structure or phrase the questions you’re asking in a leading way, making it almost a selling exercise. It’s easy to make people give you almost any answer you want, if you ask it in a certain way. So the first part of “meeting the customer need” is to be true to yourself.

Next in this series:  Getting research data that speaks to you

With a 1.2 billion strong population, of which about 300 million live less than a dollar a day, India has a long way to go to bring everyone out of poverty. Financial inclusion has been recognized as a priority area in fighting poverty, but the typical large scale schemes envisioned by Indian policy makers haven’t resulted in actual financial inclusion. The key issue with many of those schemes is that they are top down mandated approaches. This combined with the policies of a highly conservative Reserve Bank of India resulted in big schemes such as the much celebrated ‘no frills accounts for all’ failing. However, as of late, there are signs of a change in attitude with the Indian government and regulators. The new Inter-bank Mobile Payment Service (IMPS) is one such step forward – a big step, actually.

After lagging behind its neighbors, India is catching up in regulations and infrastructure to promote branchless banking.

Photo credit: GTI Computers

The National Payments Corporation of India (NPCI) is a company that provides the inter-bank mobile payment service (IMPS). It provides an any time instant money transfer service through mobile phones to any other person registered for the IMPS service in any of the participating banks. The IMPS service is the first of its kind in the world, which allows fund transfer between individual bank accounts through mobile phones. Now, the majority of such inter-bank funds transfer is done through national electronic funds transfer (NEFT). But the main issue with these transfers is the time lag, as this is not a real time service and transactions are settled in batches, meaning money transfer might be affected at the end of the day or even the next day. India does have a Real Time Gross Settlement system that completes transactions in real time, but that is mainly used by banks for bulk interbank transactions, and there is a lower limit of Rs. 200,000 for transactions through RTGS.

The importance of IMPS comes to focus when we look at the staggering number of mobile phones in the country – more than 600 million. This is almost equal to the adult population in the country. Now there are several new mobile money initiatives that will allow people to use mobile phones and agent networks to start bank accounts and operate them. The IMPS infrastructure is a real boost for such initiatives as people will have instant utility by opening an account for mobile banking. This can act as an incentive for more people to sign up for mobile banking initiatives.

It seems like NPCI thinks the same. It wants to encourage banks and customers to use IMPS more. Hence, it has reduced the switching fee for mobile money transfers using the inter-bank mobile payment service (IMPS) to 10 paise ($0.002) from the proposed 25 paise ($0.005) for a successful transaction to the remitting bank. It would be effective from April 1 until the end of the next fiscal year. Clearly, such a low fee will be an incentive for people to switch to mobile based money transfers. Hopefully, this incentive will be strong enough for people to actually go to a bank or mobile money initiative, register themselves, download the mobile money application to their phone, get a Mobile Money Identification number (MMID) and PIN, and start using it. There are some signs of uptake until now as NPCI has issued nearly 6.6 million MMIDs in a span of 6 months. By March next year, NPCI thinks it will have 50 million customers using IMPS.

However, IMPS will be only one element in the Indian mobile banking ecosystem. In order to deliver value to the customers and to bring the vast unbanked into formal banking through this channel, banks and other players in the ecosystem will have to up their efforts. Efforts to develop an agent network that is present in every village, awareness campaigns and appropriate products from banks (apart from money transfer that is promoted now) are key in scaling up this ecosystem. If that happens, mobile money can become a real alternative delivery channel for banking services. Hopefully regulators, governments, private investors and donors will allocate enough resources for such a scale up. Otherwise, IMPS will end up as just another channel for the few currently banked customers in the vast country of 1.2 billion people.

“Every network evolves around delivering value to the core constituents who are currently using the network.  Networks also evolve around a business and revenue model, as a network matures value evolves out from the process of coordinating transactions to managing interactions.” (HBR Where Value Lives, Jan 2001)

The first step in achieving The Goal is being clear about your business model (i.e. what you’re going to charge, how and when), your Unique Selling Point and the value proposition to your customers. For many ADC implementations, the customers are likely to be low income people – notoriously difficult to sell to, as money is of course tight and there are many other demands on their hard earned cash. Somewhere along the line you’ve recognised the opportunity for an ADC implementation – perhaps as a new channel for your existing financial institution, perhaps as a startup business, perhaps as a diversification for your mobile network. You will also (hopefully by now!) have a general idea of what you’re expecting this deployment to achieve – be it transaction-based revenue, increased stickiness of your existing clients/reduction of churn, or new clients that you can cross-sell your other products to (and are able to express the benefit of ADC to your business in financial terms -whether tangible or intangible). And your model will likely include agents as cash-in cash-out points. All in all, an evolution of an existing network.

But here’s one thing to think about: If a bank offers ADC, it’s not actually the banking that’s evolving. If an MNO offers mobile money, it’s not actually the mobile service that’s evolving. It’s the financial services that are available to the people you’re trying to sell to. They are the core constituents. The network that’s evolving is the channel they currently use. It must be remembered that whatever you’re offering is not “new” to them; it’s an alternative to what they’re using already. You are not going to single-handedly invent money transfer – your target market has been doing it ever since they discovered that more work was available in urban areas i.e. a very, very long time. Informal, illegal, whatever – it’s there, it’s working, and you have to improve on it.

Next in this series: the three golden rules of making it work – research, research and research.

Photo credit: Psychology Today

This post is written by Debbie Watkins, SBI Resident Adviser for the bKash project in Bangladesh.

You may or may not have read the underground classic “The Goal” – a novel by Eli Goldratt that manages to make Just-in-Time manufacturing both understandable and entertaining. In the book, the main character, Alex Rogo, is a production manager whose plant is facing closure. A chance meeting with a previous associate, Jonah, and their subsequent long-distance discussions, enables Alex to identify the root of the problems and thus turn the plant’s fortunes around.

Jonah provides guidance not by giving answers, but by asking Alex questions – and by working through the answers to these questions with his colleagues, he is able to gain a deep understanding of the way in which demand-driven manufacturing works, and where his plant is failing. One of the first questions that Jonah asks him is, “What the goal of your company?” After a few false starts, Alex finally realises that the goal of his business is not to make things, or even to sell things – but to make (more) money.

The same is true of any business – even social enterprises, created to benefit society, must make a profit in order to realise their aims. Any activity, purchase or decision that a business undertakes should be consciously focussed (either directly or indirectly) on helping it achieve The Goal.

So what does The Goal have to do with Alternative Delivery Channels (ADC)?

The deployment of ADC should theoretically be a no brainer for anyone wishing to offer financial services to a large volume of people while simultaneously achieving their Goal. ADC, being lower in cost than setting up thousands of physical outlets, and enabling outreach to possibly millions of customers, have the potential to realise returns far higher than the initial investment in their creation.

Note the use of the words “should theoretically” – because, as has been seen in countless pilots and implementations around the world, deploying ADC has often been extremely expensive, very time consuming, and resulted in no discernible benefit to the financial institution or mobile network operator concerned. Significant expense, minimal incremental revenue – The Goal in reverse.

Many implementations have not only failed to show signs of recovering the costs involved in getting them running – they have also failed to be taken up by the market which they were intended to serve. Why has this happened? And indeed, why has it continued to happen? Can this trend be reversed – so that deploying Alternative Delivery Channels for financial services show ongoing returns that exceed the cost of their implementation, and simultaneously offer measurable benefits for the low income clients who they are intended to serve?

During a series of posts over the coming months I’ll be raising questions, encouraging discussion and hopefully providing some insight into real-world considerations that make the difference between success and failure – those of relevant and workable technology solutions; business models that make sense to both the financial institution and the consumer; implementation strategies that reflect the culture and geography of the country concerned.  If you are a financial institution or mobile money business that’s looking to deploy ADC offerings which achieve these objectives, then stay tuned!

Picture credit: SodaHead

This post is written by Shital Shah, SBI Associate Consultant.

The advent of M-PESA, a successful mobile money deployment in Kenya, raises the question of why such efforts have difficulty replicating in countries that are seemingly ripe for the use of mobile phones to increase access to financial services. If a large chunk of the population has a mobile phone in their hands, but they don’t have access to bank accounts, then they should be able to link the two together and solve the problem. This sounds reasonable in theory, but financial services are not offered in silo – they are primarily informed by regulations and a legal framework, which varies from country to country.

One reason why M-PESA may be a one hit wonder is due to Kenya’s regulatory environment with regard to mobile money, which was non-existent when Safaricom, the largest telecom operator in the country, first started M-PESA. As a result, regulations in Kenya were created as a reaction to a telecommunications company offering banking services, rather than a proactive central bank guiding the development of a banking innovation. By the time regulations came out of Kenya, M-PESA had reached scale. The likelihood of a similar trajectory happening in other countries, where banking industries may be more active in influencing policy or where regulators are proactively putting in place measures to control financial services beyond bank branches, is slim.

SBI’s South Asia team handles active projects in Bangladesh, India, and Pakistan, and all three countries are seeing exciting developments in mobile banking. Interestingly, the three countries also have different regulatory environments, and this leads to the creation of varied business models. Pakistan’s progressive financial regulatory environment has a central bank at its helm that is encouraging banks to roll out branchless banking services. Banks are responding enthusiastically and are looking to link up with new channels. Bangladesh, after a period of ambiguity, is now offering payment systems operator and payment system provider licenses to banks and third-party financial service providers. In both these countries, telcos will not lead, but may be a key partner as banks develop mobile banking channels.

The Reserve Bank of India has had a more cautious approach by first allowing banks to use third-party business correspondents (BCs) to deliver financial services outside bank branches – but for a long time, had restrictions on nonbanks accepting funds from the public and did not allow e-money issuance and transfer by nonbanks. That has changed more recently, allowing even for-profit entities to become BCs. On top of that, India has the Inter-bank Mobile Payment System (IMPS), a switch which allows transactions from one bank account transfer to an account from another bank via a mobile phone. India will see a whole different set of businesses pop up around aggregating these BCs and linking them back to banks.

An M-PESA clone is unlikely to plant itself in a country outside of Kenya, but that does not mean innovative use of mobile technology to offer financial services cannot play itself out in new ways. As we see with our partners in South Asia, banks and financial services providers are adapting business practices to match the country’s regulatory framework and offer an exciting proposition to bank customers via their mobile phones. M-PESA may be a one hit wonder in terms of its genesis and model, but the potential to achieve similar scale and reach out to a large population of previously unbanked clients will stick. We will have to stay tuned to see how regulations both shape and react to the development of mobile banking around the world.

Mobile money practitioners are a diverse lot. We hail from dozens of countries – both developed and developing – some of us are older, with decades of experience, while others are fresh out of school. Some practitioners believe in the power of markets and are distrustful of government regulation, while others view the market as a force that must be closely regulated. Some practitioners think that conventional banks are the problem, while many believe they are the solution. However, what all of us share is a core belief that improving access to financial services, improves lives. We believe that a safe places to save, improved access to credit, and secure means of transferring funds allows people to live more comfortable, secure and productive lives.

Most of us also believe that the financial system, as it’s currently configured, doesn’t do this – especially in emerging economies. While there are nearly as many bank accounts in the world as people – 6.2 billion – there is in unequal penetration of these accounts. With nearly 3.2 accounts per adult in developed countries – equating to 81% of the population – but only .9 accounts per adult in developing countries — and only 28% banked. Since we know that bank accounts are positively associated with development and physical infrastructure, improving access to the formal financial sector is a priority. (http://bit.ly/qLYZtd)

So, how do we improve it? Unfortunately, there isn’t one clear answer. Certainly, competition is probably a good thing: more players bring more products, lower prices and push to serve more customers. Competition also breeds innovation. The widespread expansion of microfinance over the past two decades focused the attention of many banks in developing countries on the profit potential of serving the poor and unbanked. Similarly, many of those in the development finance “industry” are now looking at the new service offerings of non-banks, such as telecom enabled “mobile money”, to create a viable alternative to banks and provide further innovation, products and financial services to the billions that are still excluded from the formal financial sector.

However, as my colleague Jesse Fripp pointed out in his post last week, there is a tendency to focus on the potential of one solution – in his case mobile payments – to solve a series of intertwined and complex problems – in his example, the lack of financial services for the poor. This isn’t necessarily a bad thing; some developments, of course, are transformative. And, mobile money may seem like it might be one of those developments. Certainly it is easy to get excited about the possibility of tapping into what is certainly a transformative technology – mobile telecommunications – to offer transformative services. However, that process of developing the services and products that are being enabled by mobile telecommunication networks will not be easy. Financial products are relatively easy to design, they are significantly more difficult to market, distribute and service efficiently. Hence moving banking – or financial services – beyond the branch network will certainly require a host of perspectives, innovations and unique developments in markets throughout the world.

As such, one of SBI’s motivations for launching Banking Beyond Branches was to create a forum where practitioners, both those who work with SBI and who work in the field broadly, can share their experiences, highlight significant innovations, and debate the merits of various approaches to the challenge of moving banking beyond branches. Over the next couple of weeks, a series of posts on this site will begin to highlight these challenges – from the complex regulatory environment of India, to the managerial challenges of launching a branchless banking solution, to a discussion of technology infrastructure. Between these lines of discussion, members of the SBI team will also be sharing their thoughts on broader trends in the industry. Of course, we also invite others to comment and share their perspectives as we seek to provide a forum for the industry to present their work, challenge the status quo and, together, move banking beyond branches.

Low income people, like these day laborers in Bangladesh, are typically working away from home and will be paid cash-in-hand at the end of the day. They may be based in a location far from a bank branch – and yet need a safe place to keep their money and an effective way of sending money home to their families.

Small but trusted local stores, like this one in Rangpur, Bangladesh, are ideally placed to be branchless banking agents. The store is centrally located, and due to its popularity will typically have the level of cashflow necessary to ensure it is able to meet the needs of customers.

Mobile banking has come to refer to everything from texting account balance updates, conducting bill payment, money transfer and even mobile top-ups – in short, just about everything short of actual financial intermediation. In the thick of the frenzy and excitement around the promise and potential of mobile technologies, it might be easy to miss one area that mobile banking does not yet reliably cover – the core activities of value-adding and the regulated financial intermediation that truly drives financial inclusion. Allowing middle-income and poor families to make payments faster, more safely, and more conveniently certainly is a significant social and economic benefit, and these successes should be celebrated. However, payment facilitation is only the most basic function of banking services – and does comparatively little to expand economies or build assets and employment.

MNOs have brilliantly identified the low-hanging fruit of mobile payment facilitation as a powerful marketing tool to reinforce and strengthen their core business model of selling commoditized airtime. Mobile payments are truly the “killer app” of the MNO business model – building brand and customer loyalty, reducing churn, smoothing liquidity management for agents, and even potentially building a marginal but profitable sideline business line that leverages the sunk cost of their core telco infrastructure. This is a brilliant example of private sector innovation, driven by commercial incentives, and with a tangible social benefit, and should be applauded as it has been.

That said, MNOs will never be, and should never be, banks. Banks serve a core function in an economy and society – transforming public deposits into asset-building investments while ensuring that public deposits are safe through compliance with sound prudential regulation. An economy without banks will never grow sustainably, and there is no more efficient mechanism for financial intermediation than through a well-regulated and soundly managed banking system. It is worth reminding ourselves of this basic fact, even as we are dazzled by the power and potential of the new technologies emerging around us on what seems to be an almost daily basis.

There exists a real danger that well-intentioned, but poorly defined, “deregulation” allowing non-bank commercial entities – including but not limited to MNOs – to effectively hold public savings, can create a dangerously unprotected parallel financial system. Even with small-balance savings, the recent crisis on the credit side in the Indian microfinance sector shows how catastrophic an unregulated systemic crisis can be – which might be the prospect in a major MNO bankruptcy, for example. Are we certain we are not unintentionally moving down the path of creating a “second class” financial system for the world’s poor and unbanked?

Fortunately, a number of initiatives are working toward realizing a customer-focused mobile banking ecosystem that leverages the best capabilities of the telco “rails” and the banking “locomotive.” Commercial bank United Bank Ltd in Pakistan has deployed its versatile Omni e-money platform that can interface with any MNO network, and also supports a range of other branchless technology solutions, including currently supporting millions of G2P transactions and rapidly moving into account opening. BRAC Bank Ltd and a group of technology innovators including the architects of M-PESA and GrameenPhone have teamed up to launch the bKash e-money platform in Bangladesh. And Indian inclusive finance innovator BASIX has launched an innovative “agent aggregator” model known as Sub-K, which facilitates linkages between several banks and several telcos to forge a fast-expanding e-money platform in one of the most elusive and highest potential markets of the world. SBI is pleased to be an implementing partner for all of these ventures, and there are many more emerging in other markets around the world. In short, while “mobile banking” today doesn’t live up to its name, the unbanked may yet be able to look forward to a truly inclusive system that is focused on their requirements, and incorporates appropriate safeguards, without the same prohibitive costs and barriers to use that have kept 2.4 billion of the economically active poor in the developing world from enjoying the benefits of financial enfranchisement.

Through this portal, we look forward to learning as well as sharing our work, insights, and analysis – both from the latest happenings in the markets we operate in and from the perspective of the international experts that make up SBI’s team. We welcome your feedback, questions, and discussion along the way.

SBI is in the business of innovation. Whether the objective is to ensure rural access to finance in a country with no existing banking system, to mobilize savings in institutions that historically focus only on lending, or to help leading financial service providers reach previously underserved populations, SBI develops solutions that apply flexible, creative, and responsive approaches to local market realities. You can read more about SBI from our website. You can also follow SBI on Twitter.