A ‘local’ answer to financial inclusion

Written by Santhosh Thiruthimana

A small ‘local area’ bank and a Business Correspondent (BC) company in India may be showing the way forward in using agent channels to provide savings services to low-income clients.

Around the world, policy makers are talking about financial inclusion and how, through connecting people to the formal banking system, it is a tool to end poPicverty. The G20, World Bank, and UN agencies are all working towards bringing access to finance to low-income populations. However, in our work, we often hear about the lack of a business case for the provision of low value savings, or other services by banks to low-income people – not only in India, but all over the world. Yet, our work has also shown that the path towards financial inclusion can be profitable for those willing to travel it.

Most mobile financial services (MFS)/ branchless banking (BB) service providers make profits on remittances and bill pay products that they facilitate, earning money per transaction. On the other hand, savings products are generally considered as a ‘push’ product, for which a lot of additional investments, in terms of financial education and below the line (BTL) marketing, is required to drive adoption. This has been proven through  many initiatives by banks and mobile network operators (MNOs) and other payments service providers.

However, KBS bank in India, a Local Area Bank that works only in two states of India, Andhra Pradesh and Karnataka, may be proving that with the right mix of agent channel, products, marketing, and customer service, savings products can be successfully delivered to low-income people, while also generating revenue for the bank as well as the payments service provider – in this case, Sub-K, a company that uses mobile technology and agent networks to provide branchless banking services to low-income people.

As can be seen from the chart below, KBS bank’s deposits grew from Rs. 140M ($2.3M) to Rs. 210M ($3.5 M) through the agent channel provided by Sub-K in 2013-2014. This is a huge growth of Rs. 70m ($1.2M) in savings for the bank, which is helping the bank to fund all its assets from its own funds, thereby lowering cost of funds and increasing its profitability. For any agent network or bank, generating Rs. 70m in deposits within a year is a substantial amount, but for a bank that is limited to very few districts and two states, and focusing only on low-income people, as the achievement is quite significant. It is interesting to note that the steady growth in outstanding savings portfolio is not a short term ‘bump’ due to focused marketing activities for a short period, but rather a steady and sustained growth that can be observed over a year-long period. For reference, the total deposits of KBS is at Rs. 1.46 billion. [1]


How did KBS and Sub-K achieve this? Enclude assisted KBS to develop new savings products and expand BB channels through a project from 2009 to 2011 – channels that the bank have been nurturing and further developing after the close of the project. Since the bank has a core focus on providing services to low-income people, it developed savings products that match the cash flows of low-income people, allowing people to save on a daily, weekly, or monthly basis. The bank also made sure that people do not have to travel long distances and spend time to save at the bank by providing field agents (now Sub-k agents) where customers live and work.

To  enable this expansion, the bank had to invest heavily in technology and agent network development using own capital and a grant from Bill and Melinda Gates Foundation, managed by Enclude (formerly ShoreBank International). All those investments in technology, products and channels are generating dividends, in the form of profits and customer satisfaction, and the bank is now able to serve a larger population of low-income clients that are not served by other banks.

The key learning for Enclude and the Sub-K team was that it is possible to provide access to savings and other services profitably to low-income people, and that a DFS or BC company can make money in this business as well. To expand in new markets or customer segments the key ingredients for providers are a long term view, focus, risk appetite and patience.

[1] The bars indicate total amounts, in Lakhs of Rupees. One Lakh is 100,000 Rupees.

Branchless Banking in India: Ready for Take-off?

Written by Sachin Bansal

Customers in India using branchless banking

Financial inclusion seems a top priority for the newly elected Government of India (GoI). The Reserve Bank of India (RBI) recently announced the establishment of Payments Banks to provide payment services and deposit products to small businesses and low-income households, and it allowed non-banking financial companies (NBFCs) to function as Business Correspondents (BC) – a move that was long awaited. The Prime Minister, on the other hand, has announced the ambitious ‘Jan Dhan Yojana’ (PMJDY, or ‘Prime Minister’s People Money Scheme’), which aims to bring financially-excluded people into the banking system by providing them with bank accounts that have integrated insurance cards and debit cards.

Mobile companies have also been persuaded by the government to share their infrastructure to facilitate basic banking services through cell phones. Fund transfer, balance inquiry, change of PIN, mini statement, cheque book request, and other account services can now be initiated with simple text messages from ordinary handsets and without accessing the internet. Most of the telecom companies have signed an agreement with National Payments Corporation of India (NPCI) to facilitate the service. It will operate on Unstructured Supplementary Service Data (USSD) channel of telcos — a simple interactive messaging system. As such, the National Unified USSD Platform (NUUP) was successfully launched by NPCI recently.

Nonetheless, the journey towards full financial inclusion in India will not be easy. There is a big push by the government and the banking regulator to expand the traditional boundaries of banking in India to make financial services available to un(der)banked people. With a view to achieving greater financial inclusion, the RBI has been taking various initiatives to provide access to financial services for as many people as possible. In November 2005, banks were advised to make available a basic banking ‘no-frills’ account, either with ‘nil’ (0) or very low minimum balance, as well as very low or no service charges.

As per the Mor committee report (from the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, set up by the RBI in September 2013), only 36% of the adult population in India holds a bank account (the figure for urban India is 45% and while in rural India it is 32%).

It is alarming that this is the state of financial inclusion in India, the country that hosts 17.5 % of the world’s total population. Highlighting the problem, studies show that close to 50% of the existing bank accounts in India remain dormant. A major chunk of these dormant accounts include the No Frills Accounts (NFA), where dormancy is as high as 80%, suggesting that many low-income customers aren’t making use of their accounts.

There has been considerable growth in developing alternative delivery channels for financial services in past eight years. The framework for the BC model was created in 2006, helping to accelerate a gradual shift from traditional branch banking models to branchless banking options, such as BC outlets, Ultra Small Branches, ATMs and Kiosks operated by private players. The latest in these efforts is the RBI’s decision to allow two special classes of banks: “payments banks” and “small finance banks”. Released guidelines allow telcos, payments service providers and pre-paid card issuers to apply for payments bank status while existing NBFCs or MFIs can apply for Small Finance Bank license. Both of these initiatives are keeping financial inclusion as the core objective and it is believed that this new class of banks may provide the needed boost to financial inclusion in India.

There are some encouraging signs of progress. According to RBI statistics up to March 31, 2014, the number of banking outlets in villages has increased to nearly 384,000 (at least one outlet for every two villages); the total number of BC outlets in urban locations has increased to 60,730; the total Number of Basic Savings Bank Deposit Accounts (BSBDAs) stand at 243 million, and; nearly 328 million transactions were carried out through BSBDAs during the last year.

In the current regulatory scenario, it is not difficult to open a basic bank account with the relaxed Know Your Customer (KYC ) guidelines for low-income customers. India’s system for providing a unique government ID, called Aadhar, has also played a key role in overcoming KYC challenges. Customers can now open a bank account through a BC at any agent outlet in their neighbourhood. Such accounts are not only serviced by banks but also by BC companies like Sub-K, FINO, Eko, and others.

The biggest challenge now is to encourage people to use this huge network created over past 8 or 9 years. There are a lot of challenges but there are signs that India is on the road to financial inclusion. What we now need now is to leverage the existing infrastructure, along with financial education, to make this network realise its full potential.

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.