Transformation of NGO models – Footprint Expansion through Branchless Banking

Written by Ali Akram

Marketplace in Tharparkar

Branchless Banking (BB), in its different forms and configurations, holds promise for expanding access of financial services. It has enabled financial institutions to break free from the conventional brick-and-mortar branch setup and has provided convenient access to financial services for those at the bottom-of-the-pyramid.

Pakistan has one of the highest per bank populations in the world, with roughly 15,000 persons per branch. At the same time, the limited banking network of 10,600 branches has greatly marginalised the rural population. Conventionally, Microfinance Institutions (MFIs) and Non-Governmental Organization (NGOs) have anchored their branches to those of commercial banks, which provide them essential services such as security, liquidity, and cash management support for micro-loan disbursements and repayments. Hence, the banks’ limited branch networks are also limiting the expansion of NGOs and MFI working for the uplift of communities in rural areas.

MFIs and NGOs in Pakistan started leveraging BB agents in 2011 and presently ten NGOs and MFI’s are utilizing the agent networks for disbursing and collecting micro-loan repayments. Transferring cash-handling out of their branches has allowed these institutions to improve transparency and reduce operating costs, freeing up resources to grow their deposit portfolios.

Footprint Expansion through Branchless Banking

A recent assignment took me to Tharparkar, one of the most desolate and impoverished districts of the Sindh province in Pakistan. Largely a desert, it is ranked as the most food-insecure district in the country by the World Food Program, with hundreds of lives being lost each year to disease, drought and famine. It is there that I witnessed branchless banking not only holding true to its promise of delivering financial services efficiently in a remote, underdeveloped rural area, but also aptly transforming the scaling model of NGOs and MFIs.

A MFI in Tharparkar had succeeded in breaking the barrier of the bank-branch centric operating model by leveraging BB agents to expand its operational footprint. Working with BB providers, the MFI has cultivated a sustainable network of agents that provide it with vital cash management services, thereby allowing the MFI to expand its operations beyond the reach of conventional banks.

Previously, clients would deposit loan repayments at the MFI’s branches and a manual receipt was issued to the client by the branch account officer. The officer would deposit the collected cash in the nearest bank the same day and prepare a recovery sheet which was sent to the MFI’s area office along with the bank deposit slip. These were consolidated, reconciled and entered in the MIS every day by a dedicated staff person at the area office.

MFI’s New Branch, Independent of Bank Branch

Having diverted 98% of all collections and disbursements to BB agents, the MFI has eliminated cash-handling, and digitization has eliminated the manual preparation and entry of daily collection records. By converting to branchless banking, the MFI does not require account officers at its branches and has reduced its operational costs to 12-14%, from a previous high of 22-24%.Cost savings were achieved primarily through reduced administration and personnel expenditures. Relying solely on BB agents for disbursements and repayments, the MFI has not only removed cash-handling at its branches, but also its existential dependency on bank branches. This change in practice is allowing the MFI to scale-up and extend the reach of its micro-finance activities into areas which were previously unserviceable. The agents have become an essential component of MFIs’ distribution channels and this transformation has also led to reduced risks thanks to the efficiency and transparency BB embodies.

Needless to say, the use of agents has immensely benefited clients as well. Enabling them to transact at the nearest agent location outside of normal banking hours provides them convenience and efficiency through reduced travel time and costs. One of the MFI’s clients professed:

“Almost a whole day would be wasted every month as I would have to walk fifteen kilometres to get to the nearest bank to make the loan repayment, now I do it at the merchant within my village on the way home after grazing my goats.”

Witnessing this transformation has greatly strengthened my belief in the potential for spurring development through this new model of banking, particularly in rural and remote areas. Meeting at the crossroads of finance and technology, banks, telco operators, merchants, and NGOs/MFIs are leveraging the best of what each has to offer through branchless banking. The service is allowing NGOs and MFIs to accomplish more with fewer resources and to increase outreach, providing them scale required for meaningful impact.


Where is the emerging markets’ Apple Pay?

Written by Khurram Sikander

The release of Apple’s virtual wallet, Apple Pay, has generated a lot of buzz in the FinTech industry. Payment innovations by Apple, as well as their competitors, are being built to integrate with the daily lives of millions of people who purchase goods and services through their platforms or devices.

Innovations such as Apple Pay are more easily deployed in ‘sophisticated’ markets because the systems and infrastructure are developed – customers have easier access to banking facilities, payment systems and channels, thus enabling innovation on the existing ACH and credit/debit card rails. These innovations are generally not focused on the structure itself, but rather the customer experience when interacting with financial institutions and retail merchants.

Storefronts on a street in Mexico

Storefronts in Mexico

In emerging markets, however, such infrastructure does not always exist. The challenge then is to first the build the structure in these markets – develop digital payment instruments to create access to the platforms, and change behaviors before broader financial services can be offered. So how do we encourage the same level of innovation and access to digital financial services in emerging markets?

Merchant payments may be one of the services that can help increase the customer base and volume and expand the infrastructure that makes investment in such innovations commercially viable.
Expanding the network of merchants in a market that accept mobile/ digital money would spur innovation by creating the incentives for private sector investment in digital payment / mobile wallet solutions.

Many initiatives have seen limited success, mainly because the majority of the services focus on airtime top-up, P2P, bill payments, G2P, and more recently advanced products such as savings, credit, and insurance. These transactions occur regularly but are low in frequency, therefore limiting the amount that can be generated through transaction fees. Additionally, due to customer ownership debates between banks and telcos, many mobile money deployments have resulted in fragmented structures, developed with closed loop networks and full service agents.

The cost of managing closed loop networks is high, and, coupled with the low transaction frequency of most current business models, does not motivate agents or sustain infrastructure investments. For the customer, the closed loop network complicates regular and sustained use of their mobile money account – lack of interoperability within networks, for example, often prohibits users from utilizing access points.

Digitizing payments for daily household purchases could address these barriers to innovation and scale because of the volume and velocity of these transactions. In most of the markets where Enclude works, annual household consumption of every day goods and services constitutes more than half of their spending budgets, almost all done as cash payments. The scale and frequency of these purchases provide a business case for further investments in this sector and a natural progression towards an integrated / interoperable ecosystem. Although some small to medium sized merchants may initially resist accepting digital / mobile money in order to avoid paying taxes, customer demand and push to use the technology will likely outweigh such concerns.

In addition to incentivizing innovation, digital merchant payments through the wallets would promote greater financial inclusion in emerging markets. The data generated by transactions allows providers to have a more detailed view of the customer and their spending habits. It would also generate valuable merchant sales data that can be analyzed – opening doors to cross-sell more advanced products with wallets such as savings, credit, and insurance products to customers and merchants based on usage patterns.

As the industry evolves, the merchant value chain of suppliers, distributors and wholesalers could be targeted by these providers. The digitization of this money flow, potentially from bank account to wallet and vice versa, could be the catalyst for the integrated ecosystem and we may see payment innovations like Apple Pay building off of mWallets and merchant rails in emerging markets very soon.

Dreaming of Digital Goats

Written by Jesse Fripp

Recently, my wife and I supported a client of hers, a Malawian woman, victim of trafficking, to make a trip home to visit her family for the first time in fourteen years. Her mother and family are low-income farmers who live off-grid in a remote area of the country. Upon her arrival, she reported that they were so thrilled at her return and our support for her that they wanted to send back a prize goat for us, as an expression of their deep appreciation.

My wife and I were deeply touched by their gesture, knowing that in much of the world a goat is a key element of a low-income family’s investment portfolio – an accessible, secure, reliable and generally very productive asset.

A young boy in Kyrgyzstan holds his family's goat

A young boy in Kyrgyzstan holds his family’s goat

However, it reminded me that the goat (and other such instruments of value in the informal economy) is the primary competition to the true success of digital and mobile banking in achieving financial inclusion. In a low-income, emerging-market environment, a goat is a prized “liquid asset,” with a good outlook for return and security.

Contrast this with the opportunity to put precious cash savings into a seemingly ephemeral “mobile wallet” savings product. There, the hard-won cash the matron of the family hands over at the local kiosk disappears into a notation in a passbook or lightly printed receipt, where it will earn a return (if at all), only marginally better than inflation or sometimes even less. The asset cannot be seen or felt, and can sometimes be difficult to access on short notice.  Complex and opaque fees of the agent, the mobile operator, bank partners, and others eat away at the value of each transaction. And ultimately, there is limited social satisfaction, nothing to point to or be secretly envied by neighbors as a result of her efforts.

However, if that same farm matron invests her savings in a goat, she is reasonably assured of a few things. She can keep an eye on the goat on a daily basis. The goat can produce valuable dairy products for consumption and sale. The goat has the capacity to literally pay dividends by reproducing and making a host of kids (little goats, for you city-slickers) who can be sold, raised for dairy and/or meat. The goat keeps the weeds down, and entertains the children. Aggressive male goats are even decent “guard dogs.” A tribe of healthy goats indicates village status. And when push comes to shove, the family can sit down to a nourishing meal of goat stew.

So, the financial inclusion answer seems clear. Enclude’s Digital Channels & Linkages team is certainly working hard on this one, with partners in Ethiopia, India, Pakistan, Nigeria and elsewhere.

Yes, a Digital Goat.

This electronic equivalent to real goat value could be an m-savings product explicitly presented in goat-value terms, benchmarking the return on a Kwacha invested in savings vs the risk-weighted average return of a goat – offering real return over time, linked to real objectives. Possibly even purchase of a pair of goats or other high-value household investments as the explicit marketing outcome.

Enclude’s current deployments in Ethiopia and India include a focus in the area of such out-of-the-box thinking around customer-centered products for smallhold farm households, as well as broader areas, such as incorporating partnerships with ag input providers to integrate payment and input distribution channels to provide a “one-stop” information, ordering, distribution and payment point for rural farmers. Not a goat, perhaps, but certainly feed for one.

And with the recent discussion by Bill Gates at Sibos (view a clip here) around the future of the financial sector, and mention of several specific examples of what this might look like, there may be more to explore. These include the potential of innovations like BitCoin (Gates also flagged long-time Enclude partner and client bKash as an example of what this future might look like). Does this open an opportunity to develop “GoatCoin” for rural emerging markets? Perhaps with a farmer-friendly customer interface and a national goat-based commodity index backing up value (a “Goat Standard,” so to speak). The farm matron might buy whole or partial “GoatCoins” on a periodic basis, which maintain and grow in value until she is ready to cash them out – either for currency or goats, perhaps. We will explore this type of innovation and others further in a future BBB blog.

Whatever the case, until we are able to offer a Digital Goat that can compete with the tangible value of a real goat, or the other informal payment and investment alternatives of the two-thirds of the world’s population that remains largely outside the formal economy, broad-based financial inclusion will remain elusive.

Country focus: Market trends and opportunities for digital financial services in Ethiopia

This post is written by Shital Shah, Enclude’s Global Strategy Group Coordinator. 

Photo Credit: Nienke Stam

Photo Credit: Nienke Stam

While Kenya’s mobile money success story continues to garner attention and showcase the promise of digital financial services, a different story lives right next door. In Ethiopia, a contrasting situation exists, given the nation’s history, geography, and infrastructure. The landlocked country has the second largest population in Africa, with most people living in rural areas in an economy driven by agriculture. A large portion of the adult population remains unbanked. In a country with a population of over 80 million, 45 million are of working age and 34 million are under the age of 14. However, 92%-95% of the adult population does not have access to financial services, despite the presence of 18 commercial banks and over 30 microfinance institutions.

In short, daily transactions are expensive and inconvenient for most Ethiopians. While neighbouring countries in East Africa are engaged in mass market efforts toward the digitization of financial services, Ethiopia still grapples with basic infrastructure issues that make building the “rails” of a digital platform challenging. Physical, electronic and financial infrastructure is weak and still developing in most parts of the country, especially in rural areas. At the same time, given the current state of financial services in the country, the need for a more efficient, reliable option is pressing.

Ethiopia is on the cusp of becoming an attractive market for mobile financial services. Its infrastructure is indeed weak, but improving at impressive rates, indicating that the “rails” necessary to build a mobile financial services platform will be largely in place in the coming years. Mobile network coverage is low – under 30% – but increasing rapidly as the state-run monopoly telecom provider, Ethio Telecom, aggressively builds out its network. Financial infrastructure, including ATMs and bank branches, is also still under development, leading to a heavy dependency on cash. Continue reading

Banking beyond conventional branches for financial inclusion

Photo credit: bKash

Photo credit: bKash

This post is written by Debbie Watkins, Head Implementation, Alternative Delivery Channels at SBI (Zeist/Washington), and reposted from Upsides. 

Banks in emerging and developing countries are increasingly recognising the potential of the low-income market segment. However, setting up and running a bank branch is an expensive business. This is where branchless banking comes in. Read the first article in an insightful series of three on how banking beyond conventional branches creates financial inclusion for all.

Low-income and rural populations are often inherently ‘bankable’ – they save for a wide range of different purposes, source both short- and long-term credit for capital purchases and business building, and demonstrate (often very sophisticated) financial management skills. The fact that most of their financial interactions are with informal channels is due to a number of reasons: banks may be far away from their homes or workplaces; may not be open during the hours they are not working; or may have prohibitively high minimum balances or monthly fees.

Logistical problems
Banks are increasingly recognising the potential of the low-income market segment. However, setting up and running a bank branch is an expensive business. The net cost to a bank of conducting a single over-the-counter transaction can be more than $1, and understandably banks are somewhat reluctant to have their branches full of clients conducting small transactions – the cost/benefit ratio just does not make sense. Establishing branches in rural areas also causes significant logistical problems – ensuring the branch always has sufficient cash on hand (but not too much), connecting the branch to centralised banking systems, and of course the fact that one branch covering what may be a catchment area of many square kilometres will still result in it being out of the logistical reach of a large number of people. Continue reading