Understanding Remittance Corridors: A Strategy for Driving Digital Financial Services Uptake

Written by Michael Adenuga

Understanding the nature and patterns of remittance flows between the banked and unbanked populations within a market can be critical to deciphering the challenges of digital financial services (DFS) uptake, especially in countries where branchless banking and mobile financial services (BB and MFS) are struggling to gain momentum. This is a particular imperative for providers in bank-led markets where senior executives of financial institutions (FIs) take quite a conservative stance toward funding BB and MFS initiatives, and where telecom operators are less supportive due to the fringe roles they are allowed to play within the BB and MFS ecosystem.

The general perception that uptake of DFS is most effective when driven from the banked to the unbanked customer segments, or from urban to rural areas, still holds water. For example, it is easier to sell mobile money to a banked customer on the premise that he/she may have an unbanked person within his network (relatives, employees, suppliers) with the need to receive money through mobile wallets. After all, most mobile money campaigns are built on remittance services such as person–to-person (P2P) transactions. While this tactic has been well-utilized by providers and in some cases overused, engaging more proactively with potential wallet customers at the receiving end of remittance flows can also yield efficiencies as well as additional market share.

E1ngaging customers at the receiving end of remittance flows is perhaps the most important factor in driving DFS transaction volume. Banked customers have at their disposal many channels which compete with their mobile wallet: electronic funds transfer (ETFs), debit/credit cards, mobile banking and internet banking, and even cheques.  However, for unbanked customers, the wallet is predominantly the only channel he/she has to make payments or transfer money.

Simply put, unbanked customers have more potential to drive wallet transactions through P2P, bill pay, and retail payments. For example in Kenya, in 2006, only 26.4% of adults in the country had access to formal financial services, but by 2013, the percentage of adults that are formally included had increased to 66.7%[1] – mainly driven by previously unbanked adults who are now financially-included via mobile wallets. Additionally, these newly included adults have contributed significantly to the $331M USD[2] mobile money industry which facilitated financial transactions to the tune of 37% of Kenya’s GDP in 2014. To put things in perspective, the revenue of the Kenyan mobile money industry is about 12%[3] of the country’s banking industry revenue. The message is clear: mobile money has become a key revenue driver and a critical source of competitive advantage.

The big question for providers is how to collect vital market intelligence that can aid the effective and efficient deployment of resources to build a competitive advantage in the market. Service Providers can benefit from critically dissecting remittance flow patterns and it is important to know that domestic remittances are not limited to urban-rural remittance flow patterns. Several other flow patterns co-exist, namely urban-urban, rural-urban and rural-rural. In addition, several factors often account for the nature of domestic remittances flow, including the level of economic growth in the country; the nature of geographical and population distribution; household income distribution among provinces; and regions and migration patterns. Providers must be able to understand how these flow patterns relate to the distribution of banked and unbanked populations and that useful insights can be derived from such relationships.

Recently, Enclude’s worked with one of West Africa’s leading DFS providers to understand the reasons for low activity rates among its customers and agents. A key finding of the project revealed that the provider gave more attention (in investment and management time) to agents in key urban locations (where the majority of the population is banked). Considerably less attention was given to agents in semi-urban and rural areas where the percentage of unbanked consumers is higher. Enclude also found that the majority of P2P transactions initiated from urban locations were sent to semi-urban and rural locations, and that poor service rendered in the rural locations greatly undermined customers’ confidence and trust in those locations, resulting in inactive accounts.  The negligence of the service provider to properly track its customer transaction (remittance) pattern resulted in management’s poor approach towards investment and management of its agent networks especially at the receiving end of customer’s remittance flow.

‘Big data’ approaches offer cost-effective insight and data on consumer behavior, and the mobile phone presents an interesting tool through which rich transaction data and other customer information can be collected. The data generated by mobile financial transactions can provide the basis for analyzing geographic concentration and distribution of consumers together with migration patterns, financial behaviors, remittance flows, consumption trends and so on. This information on domestic remittance flows can in turn aid the effective deployment of scarce resources for market development.

Within financial institutions, DFS departments compete for management resources with more lucrative departments like corporate & investment banking, institutional banking, and even small and medium scale enterprise (SME) banking. In order for DFS executives to get more management’s attention towards DFS, they should embrace a proactive but cost effective approach by leveraging intelligence from remittance corridors to inform their market strategy and resource allocation decisions. Examples of the type of information DFS executives can collect to understand remittance corridors include the following:

  1. Key Information on agents including type of agent, its location, and other formal financial services touch points around the agents
  2. Agent’s performance tracker which should collect performance indicators such as account opened, account activity rates, type of transactions conducted, failed transactions, and so on. The tool must also be able to conduct trend analysis on the performance indicators.
  3. Profiles of the sender and receiver of remittance transactions including information on other various channels used by the customer
  4. Information on reasons why the sender is transferring money and what the recipient of remittance utilize  collected funds for should be periodically collected through surveys and research2

This information should be stored and regularly updated in a central database where it can be easily retrieved by executives to identify customer-agent related issues, monitor and track transaction flow, understand demand for new products and services and inform the need for marketing and sales activities. Enclude’s Ecosystems Value Assessment (EVA) Tool is an example of such business intelligence tool that can collect and analyze critical information on remittance corridor for service providers.  Service providers must do more to understand remittance corridors used by their customers. It presents opportunities for service providers to learn more about their agents, customer and the overall market. This can help executives in making more informed decision in maximizing the little resources they have now.

Michael Adenuga (madenuga@encludesolutions.com) is a consultant, Digital Channels and Linkages at Enclude, you can also follow his twitter handle, @micolo123.

To learn more about EVA and our services contact Santhosh Thiruthimana, Practice Director – Channels and Linkages on sthiruthimana@encludesolutions.com or visit our website at www.encludesolutions.com

[1] Enabling Mobile Money Policies in Kenya Fostering a Digital Financial Revolution, GSMA 2015

[2] United States International Trade Commission; Enclude Analysis

[3]Eastern Africa Banking Sector, 2014 Ernst and Young; Enclude Analysis


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: data.gov.md

Photo Credit: data.gov.md

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