The challenges ahead for mobile financial services in Myanmar

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Written by Sachin Bansal

Myanmar has been receiving lot of attention recently. As a result of its increased openness with the global community, there have been many articles written on the country, its people, and many are looking at Myanmar to take great strides in the coming years. As a result of the increased dialogue with international players, there has been significant foreign investment in various sectors of the economy. The country is now moving towards a market-oriented economy, a change that is helping the government-driven economy to be more efficient and competitive. As an example of the increased competitiveness, entry of new players in the telecommunications space has brought down the cost of SIM cards from as high as $2,000o to $1.25 today, making it more accessible to the population. This fall in price has resulted in increased mobile penetration in Myanmar, 54.6% as of March 2015. The Ericsson Mobility Report of November 2015 states that 87 million new mobile subscribers were added globally in the Q3 2015, of which Myanmar contributed 5 million – ranked fourth globally of the fastest growing markets.

The Central Bank of Myanmar is eager to leverage this now omnipresent tool to expand financial services to the un(der)banked citizens of Myanmar. In July 2015, it issued draft Mobile Financial Services (MFS) regulations and the final regulation is expected soon. In spite of all the efforts being made by the government, central Bank, financial institutions and telecom companies, the journey to launch MFS will not be easy in Myanmar. There are several challenges facing uptake and usage:

Lack of trust in the banking system: 

There is a very high level of mistrust with the banking system in Myanmar and most people still do not have bank accounts. The lack of trust is so ingrained that several big institutions pay their staff in cash, as the employees are not willing to accept a bank transfer. This lack of trust in banks can mainly be attributed to the 2003 Myanmar banking crisis but there have also been several recent rumours of banks failing, leading to people withdrawing all their money from the banking system. The MFS players will have to work very hard to overcome this challenge to change people’s perception.

Low level of perceived risk for carrying cash:

People in Myanmar do not perceive carrying large amount of cash on their person as a huge risk, unlike in other countries. This lack of risk is evident in the country as you can see money changers sitting on the roadside of Yangon streets, with minimal security arrangements, counting large US Dollar bills out in the open. As the perceived risk of carrying cash is low, people may be unwilling to pay fees/charges to store their money in MFS wallets for just safety reasons.

Low pricing of existing formal channels of money transfer:

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Money Transfer Charges of Myanmar Post

Most successful MFS offerings have person-to-person money transfer (P2P) as their core product offering as it is cheaper than transferring money through a bank. In Myanmar, however, the money transfer service offered by many formal institutions has a very low transfer fee. The Myanmar Post Office, for instance, has an extensive presence throughout the country and offer money transfer service in 335 of their branches. The fee is lower compared to other countries at 0.05% to 0.5% of the amount remitted plus fees. Indian Post Office by comparison charges 5% on low-ticket money order service. Establishing a business case to compete with such low pricing is going to be a challenge for MFS players in the near future. However, there is limited geographical coverage of such formal services available to the citizens and customers may be willing to pay for convenient services if the price was appropriate.

Prevalence of Hundi system (informal remittance channel)

There are several informal channels , such as the Hundi system, that also offer money transfer services to citizens of Myanmar.  The Hundi system has been used and trusted for several decades. As per The Economist, people migrating outside the country perceive the traditional hundi system to be cheaper, quicker and safer than anything the banks can offer. The new MFS offering will have to beat the advantages offered by such informal systems.

To launch successful MFS operations in Myanmar, the providers will have to work on an innovative business model and develop customer-centric products that learn a lot from the informal offerings. Pricing will also play an important role as customers may be willing to pay for accessibility and convenience.

 

Adopting an Omni-channel Strategy

Written by Trica Cuna Weaver

A UBL Omni pop-up in Pakistan

A UBL Omni pop-up in Pakistan

In 1995, an essay in the ABA Banking Journal argued that “the banking industry will suffer the same fate as the dinosaur within the next five years unless the brick and mortar branch banking system is cast off in favor of more nimble delivery alternatives.”[1] As we move forward into 2015, the delivery of banking services around the world is certainly different than it was twenty years ago. Back then, I remember being fascinated by drive-through bank tellers (a service commonly available at U.S. banks branches), sitting in the back seat of the family minivan, watching as canisters stuffed with checks zipped through tubes and back with deposit receipts. Fast forward to today, I now rarely issue or receive checks, and when I do, I snap a picture of it with my smartphone and it’s deposited to my bank account in a manner of seconds. From drive-through bank tellers to mobile banking, the customer banking experience has changed dramatically.

This significant shift to digital has characterized financial services not only in developed countries, but also (and in several cases, perhaps more so) in emerging markets. Branchless banking and digital financial services[2] are not new concepts in banking; in the late 1970s, for example, Citibank pioneered the roll-out of ATMs to reduce the operating costs of manual cash disbursement at branches. In the financial inclusion space, discourse on digital and mobile financial services has also moved beyond debates on relevance to discussions on tailored applications in sectors such as agriculture and clean energy. Globally, usage of digital channels has increased rapidly in recent years; a 2014 survey found that retail banking customers in 21 countries (in both developed and emerging markets) handled more than 70 percent of their banking interactions through mobile (smartphone, tablet), online, and ATM channels.[3]

Nevertheless, the pressure on banks to expand their delivery channels, as well as the products and services offered through these channels, has intensified due to the exponential rate of financial technology innovations offered by non-bank actors (such as mobile network operators and payment service providers), which increasingly compete in the traditional banking space. From Pakistan to Kyrgyzstan to China, Enclude’s microfinance and retail / commercial bank clients have invested substantially in online, mobile, and card-based channels to improve operating efficiency, more effectively mobilize deposits, expand customer outreach, and, in the case of China, rival Alibaba’s Alipay.

As banks push to “go digital or bust,” however, it is critical to keep the customer experience at the core of any growth strategy. This requires a true understanding of customer preferences – which may vary across customer segments such as industry, geography, gender – and how their banking experience may be enhanced through both digital and physical channels. The emphasis should not be on developing a siloed, electronic banking strategy, but rather, an integrated “omni-channel” strategy that provides customers with a seamless experience across their interactions with a bank teller, call center, online platform, mobile application, branchless banking agent, and/or ATM. According to Wells Fargo & Co., a leading bank and financial services holding company in the U.S., “high-intensity” customers, or those who frequently utilize multiple channels, are 1.7 times more profitable and own six more products on average than low-intensity customers.[4]

Alternative channels are also being utilized to acquire new customer segments. For example, in India, the central government has taken on the task of providing country-wide and universal access to financial services, starting with the opening of a bank account. Over a span of eight months, the program enrolled over 150 million registrants, including over 90 million from rural areas.[5] While similar government initiatives had faltered in the past, the recent success of Pradhan Mantri Jan -Dhan Yojana came in large part due to the mobilization of over 125,000 Bank Mitra (business correspondents) assisting in bank account enrollment camps and conducting transactions via phone and computer from their respective corner shops.[6],[7]

Particularly in the markets where Enclude works, physical channels, such as branches and call centers, will continue to play an important role in the delivery of banking services. Their role, however, must evolve to reflect the particular needs and preferences of customers. In Kenya, for example, Musoni, a microfinance institution (MFI), has taken advantage of the well-developed mobile money and mobile payments infrastructure and conducts all of its transactions (such as loan disbursements and repayments) entirely through mobile money accounts. Nevertheless, while Musoni’s operations are cashless, they are not branchless; Musoni does have a number of branches, recognizing the importance of channels that provide face-to-face interactions with clients. Since the branches are cashless, however, they are less costly for Musoni to operate, which also improves the MFI’s ability to open more branches in rural areas.[8]

In this context, branches are not doomed to the fate of dinosaurs. Nevertheless, banks must determine how their channels must evolve to be nimbler, less costly, and more integrated in order to expand customer access and outreach, and to enhance the customer banking experience.

[1] Fowler, Judge W, and John P. Hickey. “The Branch Is Dead! Long Live the Branch!” ABA Banking Journal 87.4 (1995).

[2] Digital financial services is defined here as financial services (such as credit, savings, investments, insurance, transfers, and payments) offered through digital instruments (such as debit, credit, and pre-paid cards and mobile wallets) and digital channels (such as ATM machines, point-of-sale terminals, mobile phones, tables, and computers)

[3] “Customer Loyalty in Retail Banking: Global Edition 2014.” Bain & Company, 18 Dec. 2014. Web. 4 Jan. 2015. <http://www.bain.com/publications/articles/customer-loyalty-in-retail-banking-2014-global.aspx&gt;.

[4] Huang, Daniel. “Mobile’s Rise Poses a Riddle for Banks.” The Wall Street Journal 18 Dec. 2014. Web. 5 Jan. 2015. <http://www.wsj.com/articles/mobiles-rise-poses-a-riddle-for-banks-1418945162&gt;

[5]Department of Financial Services. PMJDY website, Progress Report. <http://pmjdy.gov.in/ArchiveFile/2015/4/29.04.2015.pdf&gt;

[6] Narendra Modi’s personal website. “FM: Record Number of 11.50 Crore Bank Accounts Opened Under Pradhan Mantri Jan Dhan Yojana (PMJDY) as on 17th January 2015 against the original Target of 7.5 Crore by 26th January, 2015,” January 20, 2015.<http://www.narendramodi.in/fm-record-number-of-11-50-crore-bank-accounts-opened-under-pradhan-mantri-jan-dhan-yojana-pmjdy-as-on-17th-january-2015-against-the-original-target-of-7-5-crore-by-26th-january-2015&gt;

[7] Rama Lakshmi, “India pushes bank accounts  for the poor in bid to share benefits of economic growth,” October 18, 2014. The Washington Post. < http://www.washingtonpost.com/world/asia_pacific/india-pushes-bank-accounts-for-the-poor-in-bid-to-share-benefits-of-economic-growth/2014/10/17/62e153ff-e295-4dc7-80fa-addf9db498ef_story.html&gt;

[8] Pénicaud, Claire, and Arunjay Katakam. “State of the Industry 2013: Mobile Financial Services for the Unbanked.” <http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2014/02/SOTIR_2013.pdf&gt;.

Mobile Money in Uganda

Written by Paul Newall

Discussion between Khurram Sikander (KS) and Paul Newall (PN)

The recent ruling in Uganda to declare mobile money illegal has surprised many and caused quite a commotion in the digital financial services (DFS) space – and much conversation in the Enclude offices. I talked with Khurram Sikander, Enclude’s Global Group Lead for Digital Payments, to discuss some of the major topics and gain his insights on the matter.

PN: The recent ruling in Uganda has thrown into uncertainty one of Sub Saharan Africa’s most promising mobile money environments. What are your initial takeaways?

KS: I do not believe that the views shared by Member of Parliament Katunu and Justice Madrama are entirely correct. While the regulations in Uganda could be more clearly articulated and could include a more comprehensive set of guidelines, they do mandate that mobile money operators (referring to non-bank providers such as MNOs) partner with financial institutions to apply for a license. It is then the responsibility of the financial institution to carry out due diligence on the mobile money operator, including proof of financial position; and review of the operator’s business plan, risk management proposal, technology system, and AML/CFT measures. Once approval from the Bank of Uganda (BoU) is obtained, mobile money is treated as a financial institutions business regulated under the Financial Intelligence Authority.

PN: There does seem to be some recurring confusion with how the money is reconciled between the two parties in this relationship. This confusion has led the MP and Justice to consider MTN a financial institution. Can you expand upon that – once transferred, how is the money reconciled between the bank and the telco?

KS: The regulations clearly state that the mobile money operators have to hold, in an escrow account in their partner financial institution, the equivalent value of the mobile money / wallet they sell to their customers. The parties are expected to reconcile the balances of the escrow account and the mobile money accounts to ensure the net effect is always zero. Negligence in this area is where the fraud often takes place.

PN: This all seems like a misunderstanding of the regulations. Keeping in mind how successful Uganda’s mobile money market has been, why do you think the MP and Justice took it upon themselves to declare it illegal?

KS: It seems that there is a fundamental lack of clarity from those reviewing the regulations. In any case, I do not see the government suspending a $6 billion per year business (as of 2014) and a large source of tax income anytime soon, and in fact, the BoU has responded to the situation by issuing a statement confirming that mobile money is lawful and secure.

What drives usage of branchless banking and mobile financial services? Three lessons from the field

Written by Vanina Vincensini

Digital financial services, or services which use electronic platforms to expand the reach of banking, have shown promise to contribute to financial inclusion in emerging markets. However, not all initiatives are met with the level of success seen as deployments like M-PESA in Kenya or bKash in Bangladesh. Finding customers who make usage of the service, and, in particular, regular usage of the service, is the goal of every provider in this business that relies on large transaction volumes to be sustainable. There are some barriers to usage that can and cannot be lifted by the providers. With our recent work in different regions of the world, we have learned a few key lessons which, despite being simple, are often overlooked by providers.

  1.  Addressing a customer need or solving a customer pain will yield greater usage

Easier said than done! Too often, we’ve seen providers replicate a model that they have seen elsewhere without conducting proper analysis of the local environment and customer behavior. Actually, the local environment is generally well known by the provider (e.g. what the regulator allows them to do or not), but what the customers do with their finances, or what they like and dislike about a current service, is not always studied in dept1h. One of the success factors of M-PESA was to listen to its customers during a pilot phase and really understand the behavior and value they saw with respect to the original service that was proposed to them, which led to recognize that there was a bigger opportunity with a virtual money transfer service than the original concept. Similarly, bKash in Bangladesh incorporated in-depth market and customer understanding throughout the product development cycle, before launch, post launch, and regularly since then, in order to always stay abreast of behavioral developments and attitudes towards the service amongst Bangladeshis. Thus, launching a “copy paste” money transfer service in a country where the population is not used to sending money to family members will likely not take up. Encouraging formal savings amongst a group that has never saved before will take time, awareness raising campaigns, and a good incentive for the customer to change behaviors. On the other hand, focusing on a habit, and improving the experience of comparable alternatives is often more successful than trying to create a new habit or a need. In essence, placing the customer at the center of the product development process is a winning strategy for our partners.

  1. Proper customer segmentation is key

Whether they are urban or rural, young or older, male or female, customers of digital financial services will have different attitudes and usage patterns of the service. Oftentimes, the customer segmentation considered by providers is limited to these basic demographic characteristics, while there are many more dimensions influencing the behavior of customers. After all, does separating customers amongst males and females create homogenous groups? Not necessarily. Segmenting customers in terms of behaviors and attitudes, as opposed to simply along demographic characteristics, can make a lot more sense to understand the different profiles of customers (super users, influencers, receivers, senders, etc.) and target them with offers that are meaningful to them. Looking at one dimension of the customer is rarely the best way to understand their behavior. In a recent project, our client asked whether gender was an important factor that would differentiate customers’ usage of the mobile money service. In fact, it is a common belief that women will be worse off than men with technology or financial services. When we concluded our analysis, we actually disproved this hypothesis by showing that there was not much difference in behavior and usage between men and women. Other elements characterizing customers can be much more important to explain their level of engagement with the service, in particular how they receive their main source of income (in cash or on a bank account), whether they are senders or receivers of money transfers, and whether they have their own business or not. Data mining of the customer database can yield precious information to better understand the drivers of usage and barriers to more frequent usage of the service.

  1. Trust in the channel plays an important role

Whether it is the agent, the ATM, or the mobile phone, the issue of trust is very important in driving usage of branchless banking and mobile financial services. It is common that banks are perceived by the banked and unbanked as trustworthy institutions where the money is safe. However, their agents, the mobile phone, and other means of electronic transaction are less favorably perceived. In Brazil, where banked and unbanked can make payments in cash at ATMs, customers who prefer to stand in line at the bank branch to perform the same transaction say they are afraid the machine will “eat” the bills and not confirm the transaction. Others mention they fear that the person in charge of counting the bills will not be as supervised as the teller is, and could easily steal a few bills. In Nigeria, customers prefer to transact at the bank even though they enroll in a mobile money program, because they feel it is safer than at the agent. The agent, or the shopkeeper who represents the bank, does not always offer the same privacy as a bank branch, for example. Therefore, providers should endeavor to build more trust and explain more clearly to their customers where the money goes after it is deposited at one of the available alternative channels.

Although there are many more lessons from the field that we could present here, these three lessons all have to do with the way in which the customer makes decisions to use a service or not. Providers should pay more attention to the different kinds of customers they are dealing with, and focus on customers’ habits and what can be improved compared to their current experience. Thus, understanding and listening to your customer is a central strategy to drive usage of branchless and mobile financial services up.  We’d be interested to read your experience with drivers of service usage in the comments to this blog post.

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]

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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.