The Inexorable March of Branchless Banking

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ImageThere are two ‘coming of age’ tests for bold new ideas. The first, still in the realm of the market for ideas, occurs when the concepts become entrenched as conventional wisdoms, when you no longer need to justify them as ideas. The second is when they gain traction in the marketplace, when you no longer need to justify them as a business proposition.

The ground has shifted massively on both counts since I wrote about the opportunities from branchless banking in this blog more than two years ago. Few now would dispute that a key step to achieve much broader financial inclusion is to take banking transactions outside of banking halls and into everyday retail establishments that exist in every village and every neighborhood, and that financial service providers need to put technology in the hands of customers (in the form of cards or, better still, mobile phones) to increase the convenience and security of those transactions.

Commercially, branchless banking took off first in Brazil starting a decade ago, spurred chiefly by two large state-owned banks and a unique partnership between private bank Bradesco and the national postal service. This became a regional model for Latin America, and has been replicated most successfully by Banco de Credito del Peru, Bancolombia and Banco del Estado of Chile. Over the last 3-4 years, global attention has shifted to Africa, as mobile operators have sought to emulate the success of M-PESA with mobile-based money transfers in Kenya. M-PESA is a classic case of leap-frogging to new technology-based solutions, where customer needs are starkest, where alternatives are not very good but equally there are few encumbering legacies.

South Asia could become the next focal point for branchless banking.

Pakistan has done great strides in this area. The State Bank of Pakistan has issued a full set of regulations that lay out clear and practical guidelines around branchless banking and mobile payments. Different models are taking root, including one led by United Bank Limited and another one by mobile operator Telenor tying up with microfinance bank Tameer.

Recent moves by the Reserve Bank of India have substantially eased the ability of banks to appoint retail outlets as business correspondents, and we expect further important steps to be taken in the months to come. The Unique ID Authority of India (UIDAI) has revitalized a vision around universal financial inclusion. Most of the larger banks have conducted numerous pilots with business correspondents over the last 2-3 years. Many technology companies such as FINO and A Little World have emerged ready to take on the challenge of operating networks of business correspondents. Yet for the most part these deployments remain at relatively small scale, experience high customer inactivity rates, or are otherwise not commercially sustainable at current pricing. With learnings from these pilots, it is only a matter of time before scalable and sustainable propositions are taken to market, for the benefit of the poor.

In Bangladesh, the central bank is in the process of thinking through and clarifying the regulations for branchless banking. Mobile operators Grameen Phone and Banglalink have a live mobile money service focusing on bill payment and remittance distribution respectively, but due to regulatory restrictions they cannot support either store-of-value or person-to-person transfers. Several influential banks and NGOs are actively looking at opportunities too.

There are several factors that make South Asia such ideal grounds for branchless banking. There is a huge market of poor people who are currently not benefiting from basic payment and banking services. Across these countries there is a clear government focus on financial inclusion, with strong awareness that it can serve strong economic development and political needs. Governments themselves have huge micro-payment needs, given the large-scale social welfare programs they operate, such as the National Rural Employment Guarantee Scheme in India and the Benazir Bhutto Income Support Program in Pakistan. Thus government stands to be one of the biggest beneficiaries from branchless banking schemes. These countries enjoy a reasonably extensive bank branch infrastructure that offers a good ‘backbone’ to support retail-based agents. There is also a substantial base of technical know-how to carry it out. In India, moreover, there are well managed, large state-owned banks with well known brands that are trusted by the public.

Microfinance remains hampered by high transaction costs, relating to the high cost of collecting and disbursing small amounts of cash to a large number of people – whether these small payments are for savings, credit or insurance. Transaction costs can be reduced most effectively by pushing the conversion of cash into electronic value as close as possible to the customer. That is the promise of branchless banking: leveraging the neighborhood store as the point for cashing in and cashing out, and using appropriate technology to make these transactions secure. Bring micropayments innovation to South Asia and we can expect a second microfinance revolution.


Ignacio Mas

Consultant on Mobile Money

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