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The Unrealised Potential of Mobile Wallets in Pakistan

Posted on by MSC

Currently, Over the Counter (OTC) transactions in Pakistan account for just over half (52%) of Branchless Banking Transactions[1] by value and less (42%) by volume. The vibrancy of OTC transactions could provide a stepping stone to mobile wallets. This, in turn, would enable the deepening of the digital financial ecosystem through advanced service offerings for saving, borrowing, and risk mitigation. Pakistan’s Financial Inclusion Strategy[2] makes this bet, relying on growth of digital transactions accounts (DTA), that is, wallet accounts, as one of the four main ‘drivers’[3] for financial inclusion, by enabling ‘access and use a range of quality payments, savings, credit, and insurance services which meet their needs with dignity and fairness’.[4] This blog seeks to provide an overview of the progress (or lack thereof) that mobile money providers in Pakistan are making towards driving mobile wallet ownership and promoting advanced usage

Strong Potential for Wallets – The Business Case

The recent introduction of regulations related to biometric verified OTC transactions[5] has had both positive and negative impacts. Yet for service providers, the increased cost of providing OTC services presents an additional pain-point, among other existing challenges. Because of the large investment required[6], providers are yet to provide BVS systems to over a third (38%) of agents. The rising costs of OTC also strengthen the business case for mobile wallets through cost savings on airtime distribution, greater customer loyalty, and lower commissions that result from increasingly self-initiated transactions.[7] Of course, to generate substantial savings, providers must encourage their customers to register, either independently or through agents and entice significantly more wallet customers.

The Challenges

Remarkably low wallet penetration

To date, however, mobile money account ownership among Pakistanis remains very poor (0.6%), compared to wallet markets in East Africa (67% in Kenya, 53% in Tanzania, and 38% in Uganda). This is in spite of growing number of agents who offer wallet registrations (34% in 2017, up from 21% in 2014). Although opportunities to register for a wallet account have been expanding, the ability or willingness of customers to sign up still lags. As a result, the proportion of Pakistani adults with a registered mobile wallet account grew just marginally over the past three years, from 0.4% in 2013 to 0.6% in 2016. [8]

Agent Capabilities

Only one-third[9] of agents currently offer wallet registration. While 46% of those who do not yet have this capacity want to offer this service, many lack the necessary permissions, whereas others are yet to receive the requisite training/education from the providers. In addition to a minority of agents who offer wallet signups, customer awareness and understanding of providers’ wallet service offerings hinder wallet uptake.

Customer Understanding

Of the 60%[10] of Pakistanis with at least some awareness of the different features of the wallet, only 0.11% go on to register and use the wallet services. The top reason for not using mobile money was not seeing a need to use the service, followed by a lack of understanding of what the service is or how it can be used.

Even many existing OTC users who already use the services for person to person (P2P) transfers and/or utility bill payments gave contradictory reasons for not registering for wallet accounts. A third of OTC users (33%) felt that they have no need for a wallet account and 14%  said they did not have enough funds for wallet accounts. In other words, a significant proportion of current OTC users believe that they do not need mobile wallets because they cannot identify any valuable use-cases for wallets. This is an especially serious concern for providers that seek to transition OTC users to wallets.

Agents also concur that the main reason[11] for the slow growth in mobile wallet uptake and usage seems to be a lack of awareness among customers, who either do not see or know about the use-cases and value propositions of wallets. This also explains why a significant proportion of registered accounts, about 52%[12], are still inactive.

Further education on wallets and other value-added services such as utility and insurance payments is therefore required to improve customers’ understanding of the advantages that using a wallet offers, which would, in turn, lead to increased uptake and usage. Other pull-factors will also play a critical role in attracting new customers and driving the uptake of wallet accounts. These include services like Government to Person Pauyments (G2P), such as the Benazir Income Support Payments (BISP) and Business to Person (B2P) transfers by organisations like microfinance institutions (MFIs) and other bulk payments.

Driving Uptake and Usage

Proactive Agents

Only about 40% of agents educate their customers about wallets, of which only half (21%) offer wallet registration. However, the ANA Pakistan study showed that mobile money agents who do educate customers about wallet accounts conduct 18% more wallet registration transactions and significantly more wallet cash-in (31%) and more wallet cash-out transactions (22%), than those agents who do not educate. This has the effect of boosting their own business and customer wallet take-up.

Moreover, agents who receive induction training within the first three months of joining are significantly more likely to educate customers about wallets than those who did not receive training (45% as opposed to 36%, respectively). Providers should induct agents consistently, and highlight the value and business opportunities unlocked by educating current and potential customers on wallets and wallet-based services as part of the curriculum. They may also consider introducing incentives to encourage agents to acquire new customers.

Agents Support and Better Marketing

Providers should consider rewarding agents, especially the top performers, for their education and marketing efforts related to wallet accounts and customer acquisition. Providers could offer additional training to graduate the agents into more aggressive ‘sales agents’, with additional compensation for specific wallet opening and activity targets, so that agents receive remuneration only for active wallets. Cost reductions that result from more intensive wallet adoption and use, referenced above, could offset such remunerative efforts. Moreover, providers’ should review their Above the Line (ATL) promotional and marketing materials to ensure that they enhance mobile money awareness and build an understanding of the relevance of wallet services in daily life beyond what is available via OTC.

The Next Frontier

In order to drive the National Financial Inclusion Strategy forward, encouraging the uptake of wallets through rigorous education, promotion, and registration efforts are key to creating a sustainable ecosystem with ‘a range of quality payments, savings, credit, and insurance services’ which meet the needs of all Pakistanis. The emergence and diversification of such services may also work conversely to encourage wallet uptake further.

Beyond the current offer of merchant payments, Government to Person (G2P) such as the Benazir Income Support Payments (BISP) and Business to Person (B2P) transfers, bulk payments, meaningful savings, and the eagerly anticipated credit and insurance products would facilitate both wallet adoption and meaningful financial inclusion in the country.

[1] State Bank of Pakistan – Branchless Banking Newsletter – April to June 2017 – http://www.sbp.org.pk/publications/acd/2017/BranchlessBanking-Apr-Jun-2017.pdf

[2] Pakistan Financial Inclusion Strategy http://www.sbp.org.pk/ACMFD/National-Financial-Inclusion-Strategy-Pakistan.pdf

[3] As per Pakistan’s financial inclusion strategy, the four main drivers are: 1- Digital Transaction Accounts 2- Access Points, 3- Financial service providers 4- Financial Capability.

[4] https://www.afi-global.org/sites/default/files/publications/2017-07/FIS_GN_28_AW_digital.pdf

[5] State Bank of Pakistan – Branchless Banking Regulations – July, 2016 – http://www.sbp.org.pk/bprd/2016/C9-Annx-A.pdf

[6] A BVS Enabled Machine for OTC Transfers costs between PKR 10,000 – 15,000 (USD$ 95–142)

[7] Mobile money profitability: A digital ecosystem to drive healthy margins – https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2015/11/2014_Mobile-money-profitability-A-digital-ecosystem-to-drive-healthy-margins.pdf

[8] Financial Inclusion Insights – Pakistan report 2016 – http://finclusion.org/uploads/file/Pakistan%20Wave%204%20Report%2019-July-2017(1).pdf

[9] Agent Network Accelerator 2017 – MicroSave-Helix – http://www.helix-institute.com/data-and-insights/agent-network-accelerator-research-pakistan-country-report

[10] Financial Inclusion Insights – Pakistan report 2016 – http://finclusion.org/uploads/file/Pakistan%20Wave%204%20Report%2019-July-2017(1).pdf

[11] In terms of a Relative ranking of supply side reasons for low wallet registration (as perceived by all mobile money agents) – Agent Network Accelerator 2017 – MicroSave-Helix – http://www.helix-institute.com/data-and-insights/agent-network-accelerator-research-pakistan-country-report

[12] State Bank of Pakistan – Branchless Banking Newsletter – April to June 2017 – http://www.sbp.org.pk/publications/acd/2017/BranchlessBanking-Apr-Jun-2017.pdf

Land record digitization-Exploring new horizon in digital financial services for farmers

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In the previous India Focus Note -#145, we highlighted some of the latest reforms in the land registration process and best practices being followed in states across the country. This IFN discusses a few potential opportunities and related usecases of digital land records. The Note emphasises how digital land records and its integration with DigiLocker can make the system more transparent and efficient. Moreover, it also delineates the prerequisites to enable such changes.

The Clear Blue Water on the other side of the digital divide

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In the recent MasterCard Foundation Symposium on Financial Inclusion in Accra, I was asked to participate in a debate, arguing for the proposition that “disruptive innovation is no longer relevant to the needs of the poor.” Not easy for someone who has been deeply involved with optimising the delivery of digital financial services (or electronic banking as we called it then) since 2004, and in the M-PESA beta and pilot-tests in 2005. However, in preparing for the debate, several of my growing concerns were clarified. It became clear to me that we really do risk setting up a digital divide – and that we need to be thinking about this now, both as a development issue and as a commercial opportunity.

Six Drivers of the Digital Drive 

To remind readers who have not read my original blog on this, here are the six key drivers of digital exclusion in emerging markets:

  1. In most rural villages there is inadequate infrastructure (electricity, mobile towers, etc.) to support fintech.
  2. Among poor households (including urban ones), there are few smartphones, and even the feature phones are largely owned by men.
  3. More than 1 billion people globally (spread across rural and urban areas) cannot read, write or understand the long number strings necessary to transact on mobile phones.
  4. Fintech providers have made little effort to tailor interfaces or use-cases for the low-income market.
  5. Furthermore, villagers value personal relationships – particularly when it comes to money. They will not trust technology that they do not understand for anything except very basic payments.
  6. Finally, it is quite clear that to date, the regulatory environment and consumer protection provisions remain too weak to provide security to the poor (and indeed many of the not-so-poor).

The 7th Overriding, Commercial Driver 

There is, of course, a seventh driver of digital exclusion: the commercial perspective. Financial service providers and fintechs – entirely appropriately, given their responsibility to shareholders – must focus on the easier-to-reach and more profitable market segments first. And because of the widespread problem of financial exclusion (even amongst relatively affluent people), there are many opportunities for them to do this. Indeed, it is possible to profitably serve under/unbanked customers in geographies and markets that do not present the six challenges outlined above – or at least not the first four. So we can expect the commercial players on which we depend to deliver scale to focus on these easier-to-reach market segments – doing so makes commercial sense

The Clear Blue Water Oppportunity

However, this focus away from the more rural and poor urban communities means that any providers that do make efforts to reach these market segments will be swimming in the clear blue water on the other side of the digital divide. These markets will sometimes (but by no means always, given the omnipresence of the oral segment) be more difficult to reach and serve profitably – but digital financial services are, in many ways, a volume game. So carefully managed scaling into these communities has the potential to allow deep-pocketed and patient providers to generate good returns in territory that is largely not competed. If providers develop products and channels that meet the needs of these people they will be repaid with fierce customer loyalty. This has been well-demonstrated in Kenya by the rise of Equity Bank from a client base of 109,000 to over 11 million over the past 16 years – despite its crowded banking halls and occasional system outages. And this could be very important as a plethora of providers compete in the red shark-pool of the easy-to-reach, literate markets. But it will require a longer-term vision than most providers seem willing to entertain.

Agents are Key

To address rural and poor urban communities, providers must focus on leveraging the agent networks that serve so many digital finance users. Agents are widely trusted members of the community (indeed they should be recruited on this basis or they will probably fail) and often important opinion leaders and sources of guidance. By way of example, and possibly as a result: In Kenya, even after a decade of M-PESA, about half of users (66 percent of women and 34 percent of men) still seek agent assistance with transactions. Furthermore, in more mature markets at least, the majority of agents operate out of markets and towns where there is both electricity and 3G coverage. For the urban oral and poor segments, access to agents is not a constraint, and rural people often go into these markets to trade, meet, pay bills and seek a range of services. Many of these services can be delivered by the agent, particularly if next-generation agents bundle a range of agricultural, heath, bill pay, e-government and other services.

Ultimately we do, of course, need to encourage “cash-lite” and maximum user-initiated transactions to keep money digital. But in the short/medium term, the oral segment (and many others) will continue to use agents to assist them, so the lack of 3G coverage in rural villages may, for now at least, be an irrelevant barrier. And by the time the oral segment can eventually afford smartphones and data, coverage may well have been extended, either by the MNOs or by the Silicon Valley giants such as Facebook or Google.

Tailored Tools and Services

In the interim, agents are uniquely well-positioned to deliver money management tools and services that are tailored to the oral and poor segments. This can be done through smartphones or (better still) tablets at agent outlets running apps that provide user interfaces that are intuitive for the oral segment and reflect the mental models they use to manage their money. Fintechs can play an important role in developing tools and services that work for this target market. But fintechs will, in our experience, need assistance to understand and respond to the needs, aspirations, perceptions and behaviour of the poor, as they typically lack the capacity or resources to do so. As a result, most fintechs tend to create solutions and then look for problems that these might solve. Transaction via agents will allow customers to use, and get used to, these interfaces so that when they can eventually afford mobile phones, they will be conversant with how to use the apps – and thus be more likely to conduct the user-initiated transactions that are so key to providers making money from providing digital financial services.

The Commercial Potential in the Clear Blue Water

To achieve penetration and a critical mass of transactions for the agents will be easier than we have previously assumed, assuming that agents are not “dedicated” and thus dependent solely on agency business for their livelihoods. However, to achieve this, providers will need to develop products that respond to the needs, aspirations, perceptions and behaviour of the target market, and then market them through agents and other opinion influencers and social marketing. The poor have more resources and propensity to save than might be expected: For example, the PMJDY accounts opened for the unbanked masses of (primarily) rural India, after about two years now have an average balance of Rs.2,237 ($34), and these relatively stable balances are growing over time. Furthermore, they also seem willing to adopt market-priced life and accident insurance policies, when these are adequately marketed. And, of course, the demand for credit can be taken as a given … the question will be how to modify existing products to tailor them to the rural poor, and enhance consumer protection. We at MicroSave remain convinced that modifying the current suite of products would be relatively easy to do – and that doing so would enhance digital credit provider profitability. And CGAP has already demonstrated that improving key elements of consumer protection, such as transparent terms and conditions, increases trust, uptake and repayment rates.

The blue water on the other side of the digital divide is a clear, deep and wide opportunity for providers with the proper strategy – and the courage and foresight to dive in.

The blog was originally published on Next Billion

Land record digitization-Exploring new horizon in digital financial services for farmers.Part 1

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The Government of India (GOI) launched the(Digital India Land Records ModernisationProgramme (DILRMP) in August 2008. DILRMP aimed to develop a modern, comprehensive, and transparent land records management system, which would provide conclusive title guarantee to landowners.

A first look at Indonesia’s emerging agent network

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Digital Financial Services (DFS) emerged in Indonesia in 2007, with e-money services targeted at the middle income and affluent segments rather than the unbanked and underbanked masses. In 2014, regulators allowed banks and e-money providers[1] to use individual agents, paving the way for the emergence of agent networks. Since then, financial inclusion has become an important development goal of the Indonesian government, with DFS delivered through agents being its key driver.

MicroSave/The Helix Institute of Digital Finance conducted the first round of Agent Network Accelerator (ANA) Indonesia research in 2014 when the branchless banking regulations had just been rolled out. Based on qualitative agent interviews, the research highlighted nascent attempts by providers to develop agent networks and issues related to agent selection/training and monitoring systems. In 2017, MicroSave completed the second round of research, which was a large-scale, nationally representative quantitative survey of 1,300 DFS agents. The study aimed to inform relevant DFS stakeholders on the progress and challenges of agent network development. It would also inform stakeholders on the opportunities to further expand and improve efficiency and quality of service delivery via this channel for digital financial inclusion in the country. This blog summarises the key findings of the ANA survey.

Two Service Providers Dominate the Market Presence

In three years, Indonesia has seen a rapid expansion of DFS agent networks. According to OJK data, over 400,000 DFS agents are serving over 10 million DFS accounts in the country. Despite such high growth rates, agent and customer dormancy remains high. MicroSave estimates more than 30% of DFS agents and 30%–55% of DFS accounts are dormant.[2] The agent network in the country is relatively young – 75% of agents have been in the DFS business for less than two years. Indonesia also happens to be the only ANA research country in Asia where women agents outnumber their male counterparts – 59% of DFS agents are women.

While more than 20 DFS providers currently offer DFS services, two banks – Bank Rakyat Indonesia (BRI) and Bank BTPN account for 80% of Indonesia’s DFS agent population. With a staggering 63% market presence, BRI is more dominant in Jabodetabek (Greater Jakarta) and rural areas but has a more modest presence (44%) in urban areas outside Jabodetabek.

Agent Network is Exclusive and Non-dedicated

In line with the existing regulations, virtually all (97%) of Indonesian agents are exclusive, serving only one service provider. However, one-third (33%) of exclusive agents expressed interest in serving more than one service provider. A common motivation for mandating exclusivity is to give the regulator clarity on who is responsible for agent training and monitoring, customer grievance mechanisms, and consumer protection. This appears to be the case in Indonesia. Nearly all agents (96%) are non-dedicated, meaning DFS is an add-on to their existing line of business. Non-dedicated agents are significantly more profitable compared to their dedicated counterparts. Only one-third (38%) of dedicated agents can break even or make profits

from their DFS activity, compared to 80% of non-dedicated agents. This is understandable given that the DFS market is nascent, transaction volumes are low, and regulations mandate exclusivity.

Service Offerings are Diverse, but Account Opening is Deprioritised

Although expanding access to a bank accounts is the cornerstone of the national financial inclusion strategy, at the moment, only 28% of agents offer account registrations. A cumbersome account opening process, ineffective incentive systems, and a lack of customer DFS awareness hinder wider registration offering. Similar to markets like Pakistan and Bangladesh, Indonesia is largely an Over-The-Counter (OTC) market, where money transfer and bill payment transactions dominate. Low average cash-in values (USD 8), as opposed to money transfer (USD 30), indicate that providers have yet to devise use-cases that would compel Indonesians to keep and use the money in their digital wallets/accounts.

Transaction Levels and Profitability is the Lowest Among all ANA Countries

Indonesian agents conduct a median of four transactions per day, the lowest amongst all ANA research countries. Agents in other OTC markets, such as Pakistan (15), Bangladesh (30), and Senegal (35) transact more. Exclusivity requirements combined with the nascence of the DFS market largely explain the low transaction volumes. However, agents in the Jabodetabek area are the busiest, conducting a median of 10 daily transactions, which is a figure comparable to agents’ transaction volumes for a single provider in Pakistan. This pattern is hardly surprising since the early adopters of DFS usually live in big cities. The agents in rural and non-Jabodetabek urban areas conduct five and three median daily transactions, respectively. The low transaction volumes result in low agent profitability. The median monthly profits from the DFS business is USD 6, significantly lower than in Senegal (USD 120), Kenya (USD 77), Bangladesh (USD 57), and Pakistan (USD 43). Surprisingly, despite low profitability, half of the agents are satisfied with their earnings from the DFS business, while 91% want to remain in the business for another year.

Internal Teams from the Providers Manage the Agents

Since regulations currently prohibit partnerships with third-party agent network managers, most service providers use in-house teams to recruit, train, monitor, and supervise agents. Strategies for agents monitoring and supervision varies: larger banks with deep rural presence manage agent networks through regular bank branch staff, while other providers have appointed dedicated teams to manage their agent networks. Despite providers’ efforts, most agents reported that they are only “somewhat” satisfied with provider support services.

Three-quarters of agents reported being trained within the first three months and virtually all the agents are trained by service provider staff. Agents in the Jabodetabek areas are less likely to receive training compared to their rural and non-Jabodetabek urban counterparts. The majority of agents (67%) depend on support staff to address grievances. Only around a third of agents use WhatsApp and call centres for support. Agents receive infrequent and ad-hoc support visits from the provider staff. Nearly half of agents (43%) do not receive visits at all, which translates into low product awareness, low compliance, and inconsistent customer service. As agent networks evolve and continue to grow, the processes of recruitment, monitoring, training and liquidity management challenges will likely intensify. Allowing service providers to partner with Agent Network Managers (ANMs)/Aggregators will help to scale agent networks effectively and avoid overburdening bank staff or bloating agent network servicing teams.

What’s Next?

Agent networks in Indonesia are nascent but evolving. The recent government push to digitise payments (G2P) can propel agent networks and drive the demand for customer registrations and consequently transactions. The DFS community can complement government efforts by investing more in consumer awareness drives to further boost the uptake and usage of DFS services. The next blog in this series will highlight measures that service providers and regulators can take to stimulate the DFS market along with best-practice from more mature markets.

[1] In Indonesia, the DFS offering fits in two broad categories: ‘Laku Pandai’ basic savings accounts, only offered by the banks and ‘Layanan Keuangan Digital’ (LKD) e-money services, offered by both banks and non-bank.

[2] Agent dormancy estimates are based on the mapping exercise during data collection. While there is no publicly available data on customer dormancy in DFS, based on internal MicroSave analysis, it is estimated that customer dormancy in DFS ranges anywhere between 30%–55%

Agent Network Accelerator Research: Nigeria Country Report 2017

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In 2014, MicroSave / the Helix Institute of Digital Finance, with the financial support of the Bill & Melinda Gates Foundation and the United Nations Capital Development Fund (UNCDF), launched the findings from the first wave of the Agent Network Accelerator Survey (ANA) Nigeria Country study.  This report focused mainly on operational determinants of success in agent network management specifically agent network structure, agent viability, quality of provider support,  provider compliance & risk.

This research is part of the Agent Network Accelerator (ANA) a four-year research project implemented in eleven focus countries, managed and conducted by the Helix Institute of Digital Finance. It is the largest research initiative in the world on mobile money agent networks, designed to determine their success and scale. Nigeria is among the eleven African and Asian countries participating in this research project.

The second wave of the ANA Nigeria study is focused on identifying strategic gaps and opportunities for scaling-up Digital Financial Services, with highlights on the implementation progress following the Helix Institute’s recommendations in the ANA Nigeria research conducted in 2014. Click the download button to read the full report.