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

Successful interoperability: Maintaining a long-term view

This post is written by Ali Gross, SBI Senior Business Analyst.

Photo Credit:

Photo Credit:

To encourage the development of more agent and branchless banking networks, donors and policymakers are emphasizing interoperability and institution-agnostic platforms, as opposed to a bank or MFI opting to roll out its own agent network.  They often stress the importance of avoiding duplication of efforts and of promoting interoperability as a way to increase efficiency and scale as well as customer access and convenience.

However, despite these efforts, financial institutions want to develop their own agent networks in their efforts to implement alternative delivery channels. The financial institution rationalizes that this will result in increased control over profit and agent quality and lower risk of losing existing customers to the competition.  Often, what financial institutions fail to account for is not only the amount of time, money and effort required to roll out an agent network, but also what is best for the customer.  For instance, in the U.S., most customers would prefer access to an interoperable switch that allows a Wells Fargo client, for example, to withdraw from a Bank of America ATM.  Would clients in emerging markets not prefer the ability to visit one agent that represents a variety of financial institutions resulting in greater flexibility and less confusion about which agents they can visit?  As increasing client choice and convenience of accessing financial services becomes increasingly important, the question becomes, how can financial institutions begin to look at interoperability in a way that is mutually beneficial, rather than solely competitive?  Continue reading

Demand for mobile financial services in Nepal

Debbie Watkins, SBI’s Head, Implementation for Alternative Delivery Channels, was one of the key speakers at the Mobile Financial Services Summit hosted in Kathmandu, Nepal in June 2012.

The conference was organized by USAID Nepal through its Nepal Economic, Agriculture and Trade (NEAT) program in order to “set the stage for an interactive dialogue on how Nepal can successfully develop its mobile financial services sector and encourage further innovation in mobile money and branchless banking.”

Nepal, with a population of 27 million and a per capita income of less than US$650, is one of the least developed countries in the world. The country has seen modest development progress over the past 15 years: poverty rates have declined steadily; child mortality and tuberculosis infections have been reduced by half; and 90 percent of children are now initially enrolled in school. This development has also been reflected in the growth of the Nepalese financial sector – aided by recent developments in banking technology which have expanded banking from the traditional brick-and-mortar infrastructure of staffed branches to a system supplemented by channels such as automated teller machines (ATM), credit/debit cards, internet banking and online money transfers.

However, despite significant improvements, access to basic financial services is still restricted only to certain segments of the society. For the financially excluded, opening and maintaining bank accounts in Nepal can be complex and time-consuming due to lack of awareness, geographic inaccessibility, and low availability of targeted products. Continue reading

The next phase of developing agent networks in Pakistan

This post is written by Khurram Sikander, Senior Lead, SBI ADC Implementation Group & Gerald Rasugu, Global Lead, SBI Agent Network Group.  Khurram is based in Karachi, Pakistan and Washington, DC, USA, and Gerald is based in Nairobi, Kenya.

Photo credit: State Bank of Pakistan

SBI, at the behest of the State Bank of Pakistan (SBP), hosted a branchless banking workshop focusing on agent network development last quarter. The workshop attracted key stakeholders from the branchless banking industry, including financial institutions, technology and telecom companies. Several points were covered regarding the success of branchless banking and its dependence upon the quality of banking agents in the market. Among the opportunities identified as imperative critical factors pertaining to branchless banking is the strength of its agent network. A well-developed banking agent network is undoubtedly the most efficient way of penetrating the un(der) banked segments of the population.

The main purpose of the conference was to understand the nature of challenges encountered when institutions deploy branchless banking initiatives and identify opportunities as branchless banking initiatives evolve beyond the implementation stage. Continue reading

Creating brand and product loyalty among those who really matter

This post is written by Khurram Sikander, SBI Resident Advisor for UBL Omni in Pakistan.

During the last couple of months, the SBI Pakistan team has had the opportunity of meeting various stakeholders in the branchless banking arena in Pakistan. A lot of interesting conversations took place about the roadmap of the industry and how new players entering the market would shape the path of financial inclusion for the 90% unbanked population. From our experience of working with different initiatives in Pakistan and analyzing the State Bank of Pakistan’s branchless banking quarterly reports, we have observed that over the counter (OTC) transactions remain the most popular service used by customers. OTC domestic remittances and bill payments form a major chunk of the branchless banking business and are a source of consistent revenue for agents, as well as service providers.

The State Bank data as of December 2011 shows that 80% of the transactions are being conducted OTC. Agents favor OTC over account-based transactions since they view the former as sustainable revenue on top of their core business.

In the present environment, branchless banking service providers have been discovering that when a walk-in customer requests to pay a bill or transfer money, the agent chooses the platform that provides them the best commission. This theme has resonated in numerous agent surveys we have conducted over the last 18 months. The revenue earned through walk-in customers may provide existing service providers a false sense of security that the agent network can be sustained around OTC payments. As new service providers start offering OTC services through organically built agent networks or start cannibalizing agents, institutions will realize that the agents are as loyal to the brand as the next best incentive. Continue reading

What lies ahead for Peru’s branchless banking sector?

This post is written by Ali Gross, currently an MA student at Johns Hopkins University School of Advanced International Studies and an ADC intern at SBI. 

Within Latin America, Peru is generally considered a relative success with regard to expanding financial services to the poor.  In addition to a strong microfinance sector, branchless banking has grown rapidly since regulation changed in 2005 to allow banks to offer financial services through third-party agents.

Spending time working in Peru’s branchless banking industry, it became apparent that banks (particularly industry leaders like BCP, BBVA and Interbank) have much larger agent networks than MFIs and cajas municipales.  In addition to banks’ large agent networks, third-party platforms, such as GloboKasNet, have emerged to link various banks, MFIs and cajas to a common payment platform, meaning that one KasNet agent may offer services on behalf of multiple financial institutions.

In addition to the entry third-party platforms, the regulatory environment for branchless and mobile banking in Peru has been steadily improving, providing a huge opportunity for the expansion of financial services to the poor.   Until recently, regulation required new clients to open accounts in a formal bank branch, prohibiting the creation of new accounts by agents.  Recently, however, regulation changed to permit agents to open simplified accounts which have maximum account balances and low daily withdrawal limits.  Continue reading

Marketing or education – it’s not always the same!

This post is written by Zain Bhatti, Deputy Resident Advisor for SBI’s project with UBL Omni, and Zara Naeem, SBI Business Analyst based in Pakistan.

Photo credit: Emergence Marketing

We were recently travelling from Karachi to Lahore on a 20 hour bus ride. While driving from a metropolis to remote rural locations, one cannot help but notice the billboards and signs of prominent branchless banking services. The amount and frequency with which these signs are on display today provides us with a fair estimate of the sheer size of advertising capital flowing into marketing domestic remittances, bill payments and branchless banking account services. This is especially true if the service is backed by the muscle of a telecom marketing budget. However, despite this onslaught of marketing, the growth in the number of financially included in Pakistan remains nominal at best. This begs the question that whether branchless banking’s marketing muscle is even being put to the right use or not.

Branchless banking providers are currently marketing products such as bill payments and domestic remittances, which they believe will drive people to adopt the wider range of financial services they have to offer. In light of the slow rate of absorption of low cost bank accounts as a result, it would be worthwhile to examine if these campaigns are effectively addressing the basic question of how having access to a bank account can assist a financially excluded individual in better managing his finances. Or more importantly, to examine if the financially excluded have started asking themselves this very question. Continue reading

Whose “bottom” line is it anyway?

This post is written by Vijesh Nair, SBI Associate Consultant.

Photo credit: Inkart, Michael Halbert

Earlier this week, some of us in the Alternative Delivery Channels (ADC) team at SBI were engaged in a discussion with an investor who was contemplating investing in a branchless banking venture in South East Asia. The topic of the discussion was not so much about whether the venture will succeed or not but more so about how to tell success from failure when it does present itself. Success or failure, as one would imagine, is very subjective. The challenge lies in marrying the varying (and at times) even conflicting objectives of people at the bottom-of-the pyramid, who see branchless banking as their first shot to gain access to mainstream finance, to that of the profit-seeking financial institution/telecom operator/agent/investor who see this as a lucrative business opportunity.

Additionally, identifying a comprehensive list of measurable indicators which will suggest whether the objectives of each of the stakeholders involved in a branchless banking venture are being accomplished makes the challenge even more unique. It is imperative that we narrow in on a standard set of “Key Success Indicators” for such branchless banking projects and we do so while our memories of the Andhra Pradesh microfinance crisis are still fresh. Some of the Key “Success” Indicators in the pre-Andhra Pradesh microfinance crisis era were gross loan portfolio and the number of customers acquired, and clearly, it was these indicators that set MFIs on the course for failure (quite contrary to its name!). I don’t dismiss the importance of these numbers in measuring the (operational/financial) performance of the venture, but assuming that performing well on these indicators denotes success is being narrow-minded. The MFIs in question did just that; in their blind efforts to increase their market share and their bottom line in the process, they lost sight of the fact that success of their ventures was contingent on all their stakeholders achieving their objectives.

It is critical that we do not repeat those very mistakes as we usher in this new generation of banking. It is also critical that our Key Success Indicators are not focused just on the bottom line because, frankly, whose bottom line do we want to measure?

Please follow this space for more articles on this topic. Meanwhile, I would love to hear your thoughts or comments on this.