The provision of banking services is very vital for the long-term sustainable development of any country. In India, it has been a constant endeavor of the regulators and the policymakers to achieve financial inclusion with the objective extending financial services to the large hitherto un-served population of the country to unlock its growth potential. Our policy makers have been more keen on achieving inclusive growth by making financial services available to the masses (mainly the last mile).
RBI made a policy announcement on Financial Inclusion by Extension of Banking Services in January, 2006, allowing banking services through agents, known as Business Facilitators and Business Correspondents (BC). This was expected to accelerate the journey towards financial inclusion through digital channels to hitherto excluded segments. In September 2013, Reserve Bank of India (RBI)also set up the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, chaired by Dr. Nachiket Mor, with a task of framing a clear and detailed vision for financial inclusion and financial deepening in India. Key recommendations of this included measures for improving the viability of the BC model.
Towards achieving this august objective of financial inclusion, there have been sustained efforts by the Government of India and RBI over the past few years. Some of the initiatives undertaken by the Government and RBI are: Expansion of bank branch and ATM network in the country, increased focus on opening bank branches in rural areas, expansion of BC network, Direct Benefit Transfer (DBT) to beneficiary accounts, providing RuPay card, Pradhan Mantri Jan-Dhan Yojana (PMJDY) which includes aspects of credit and insurance and more recently the differentiated banking licenses to payment banks and small finance banks.
However, despite being operational for almost a decade, India’s BC model has been relatively unsuccessful in achieving the goal of effective financial inclusion.
This Policy Note explores some ideas and thoughts which can help the policy makers and regulators to achieve their vision of complete financial inclusion. This Note presents a few compelling out-of-the-box ideas in terms of having ubiquitous agent points, employing white label business correspondents, accepting eKYC documents, harmonising KYC documents, bringing in better liquidity management processes and coming up with effective agent training methods etc.
Of the remaining eight provisional Payments Bank licensees, four involve mobile network operators (MNOs): Airtel, Idea, Vodafone, and Reliance Jio.
This is not surprising, since successful Payments Banks will require a large footprint to serve a massive customer base, as it will be a volume game. MNOs’ existing customer base and extensive agent networks provide an important springboard to achieve and service the volumes required to break even.
MNOs have several significant advantages as Payments Banks:
They have established multi-layer distribution networks, with many thousands (in India’s case 1.5 million!) of retailers selling airtime and providing extensive urban and rural coverage.
The MNO business model is based on usage (those high volumes of small value transactions), and, therefore, more aligned to the willingness and ability of the poor masses to pay in small sums; unlike the traditional bankers’ business model that is based on float. SBI’s collaboration with Reliance Jio was, in this sense, visionary – Jio can leverage the SBI brand and ability to lend, while managing the voluminous transactions on behalf of the bank.
Mobile pre-paid platforms that manage high volumes of low-value electronic recharge are very synergistic with the needs of digital financial services. These platforms also allow the ability to offer highly customised and relevant products (supplemented with capabilities for fine segmentation and analysis of usage trends).
MNOs have high levels of brand awareness amongst poor and rural customers that can be leveraged well for cross-selling financial services. MNOs also invest regularly and extensively in marketing and promotions to create channel and consumer awareness.
Telecommunications is a well regulated service industry, similar to banking. Thus, mobile retailers acquiring new subscribers are well equipped to handle the Reserve Bank of India’s regulatory and compliance requirements of Payments Banks, as well as KYC norms and service activation processes.
Telecommunications is also an investment-intensive and long gestation business. Thus, mobile operators have the capability to source funds, and make large investments with long-time horizons for returns.
MNOs work through extensive partnerships, aggregating third-party products seamlessly into their offerings – essential for the success of digital financial services.
As we concluded in a 2013 blog, Can India Achieve Financial Inclusion without the Mobile Network Operators? “MNO-led systems therefore have a hugely important role to play to create the market – to build people’s confidence in digital financial services and local agent-based systems – and thus lay the foundation for digital financial inclusion.”
When MicroSave examined the business case for MNOs as Payments Banks several additional opportunities and issues emerged. We used MicroSave’s extensive market research on the low-income segments, plus public domain documentation of MNOs in India and elsewhere, to develop detailed projections on the likely opportunities, revenues, and costs. This allowed us to build up a detailed model to examine the business case.
First, we examined the likely adoption patterns of key market segments (see diagram below).
On the basis of this, we mapped products for each of these segments that encompassed:
Savings and goal-based saving
Commitment/time deposits
Current accounts
B2B payments
DBT and other G2P payments
Utility and other bill payments
Airtime top-ups
Premium payments (for insurance product)
Short-distance remittances
Long-distance remittances
International remittances
Overdrafts against savings balances
Credit products: working capital, term loan and bill discounting
Credit score based loans
We then assessed the likely transactions, balances and other revenue sources from each of these by segment in order to build up a clear picture of the contribution of each and, thus, where MNOs should focus their efforts (see diagram below). Intra-state migrants, self-employed and traders, wage and salaried segment, and farmers are expected to yield the most revenue, but some of the initial work would be focused on students and inter-state migrants to drive adoption of these larger market segments. Thus, a carefully sequenced marketing campaign will be essential, and those MNOs already servicing the inter-state remittances market will have an important competitive advantage.
On the basis of our analysis, we expect around 90–95% of revenue to come from transactions, and only 5–10% from float. Of the 95%, the largest revenue source is likely to be remittances, transactions on basic savings accounts and shared interest on loans offered, backed by credit-scoring customers’ “digital footprints” (each around 20%). Other revenue sources will include G2P/direct benefit transfer payments and utility payments (around 10%). Airtime top-up is only expected to yield around 5–7% of the bank’s revenue, but would, of course, result in substantial savings for the MNO, in terms of both distribution costs and reduced customer churn.
We then examined the operational imperatives for an MNO to build a successful Payments Bank, including the IT, branding and marketing, call centre and core employee spend, as well as the costs of agent selection, on-boarding, training, monitoring and, of course, commisions. Perhaps unsurprisingly, agent commissions and distribution operational expenses were the largest costs (in the range of 40–45% and 16–20%, respectively), followed by sales and marketing and HR costs (around 10% each).
On this basis, we built a comprehensive financial modelling of the potential for a relatively modest-sized MNO to achieve financial break-even (without factoring in the value of the expected reduced customer churn). We found that, with conservative estimates, a mid-sized MNO should break even in year 5, with an ARPU of around Rs.700–800 per customer. Importantly, the Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) margin grows rapidly from year 5 and is estimated to be 30–35% by year 8. We estimate the total payback period will be around 8 years, and that the internal rate of return will be 12–15% in the first 10 years.
So can mobile network operators make it as Payments Banks? There is clearly a long-term business case for MNOs to open and run Payments Banks. But, as many commentators (and indeed the Reserve Bank of India) have said, it is a long-term play, requiring significant investment. This is no different for a more traditional mobile money offering like M-PESA, MTN Money or hundreds of other mobile money offerings across the globe. Indeed, as GSMA has pointed out, seriousness of intent and significant investments are required to ensure that mobile money systems flourish and yield profits. Indeed, this is the key differentiator between mobile money deployments that “sprint” and those that “limp”. But as a Payments Bank, MNOs have significantly more options to derive revenue, particularly from transactions on, and to, the savings accounts they offer – if they are able to build and maintain a robust technological infrastructure to gain the trust of the mass market.
This blog was first published in EconomicTimes on 17th August, 2016.
Targeted Public Distribution System (TPDS) is the largest social security programme in the world but has been bogged down with heavy diversion and leakages. To address diversion, the government started digitisation of PDS supply chain, ensuring subsidised grain access only to the Aadhaar authenticated beneficiaries. However, the income and revenue of Fair Price Shop owners has come down drastically as one of the outcomes of digitisation. This note highlights the importance of FPS sustainability and details options to ensure its continuity. It thus becomes imperative to cross-subsidise FPS operations to ensure service availability. The note suggests two methods to ensure FPS continuity. The first method is to deliver TPDS through social organisations such as NGOs/cooperatives/Self-Help Groups. The second method is for FPSs to sell items other than only subsidised food grains, as is currently the practice. We give examples of cooperative-run FPS networks (Chhattisgarh and Madhya Pradesh) and public-private partnership model in the form of Annapurna Bhandar Yojana in Rajasthan.
KYC harmonization study was undertaken to analyze the existing Know Your Customer (KYC) practices of first-time customer on-boarding by service providers (Banks, Mobile Network Operators, Mobile Money Operators, and Pre-paid Payment Instrument issuers) with respect to the prevailing regulatory landscape.
“Fintech” – an intersection of financial services and technology – is taking the traditional financial world by storm. Indonesia is no exception, with a fast-evolving ecosystem that includes a host of financial services offered by new generation fintechs.
The diagram below, by no means exhaustive, highlights a few of the fintech players covering a myriad of financial services like payments, credit, savings, insurance, and financial management.
Indonesia – Perfectly Placed to Reap “Fintech”
Indonesia is the fourth largest mobile market in the world with 339.9 million connections – a SIM penetration of 131%! 43% of Indonesians already own a smartphone. Furthermore, Indonesia is going “mobile-first” with 64.1 million out of a total of 88.1 million users accessing Internet through mobile devices. This is fuelling social media usage by platforms such as WhatsApp, Facebook, Blackberry, Line, Path, etc. This trend is also leading to explosive growth in electronic and mobile commerce, with big names such as Alibaba, Softbank, Sequoia, Rocket Internet, and Temasek backing local ventures. In contrast, only 36% of 250 million Indonesians have access to formal financial services.
Keeping these technological advancements in context, Indonesia is well placed to leverage “fintech” towards the cause of financial inclusion. Fintech innovations are providing a range of new opportunities to dramatically change four main financial service areas – payments, remittances, credit and deposit-taking.
Leveraging Savings
Without access to formal financial services, many poor Indonesians continue to utilise informal services such as Arisan (ROSCAs), package saving schemes, and savings with individual agents.1 The bank deposit-to-GDP ratio in Indonesia (an indicator of deposit mobilisation) stands at 34.55% – much lower than Malaysia (130.25%), Cambodia (42.97%), and the Philippines (54.38%). This presents a big opportunity to all financial service providers, but especially new fintech players.
If we look at examples from other countries, Equity Bank in Kenya is one of the best examples of deposit mobilisation through digital banking services. After starting agency banking in 2011, the bank now mobilises 20%2 of its total deposits through a channel network of 25,388 agents, spread across the country. A dedicated team focusing on agency banking business and a client-centric business model based on the philosophy of “listening to customers” has made this possible. Other examples include, M-Pawa’s interest-bearing savings account in Tanzania, developed in collaboration between Vodacom and CBA and the Lock Savings Account offered to M-Shwari users in Kenya, where clients can move money from their M-Pesa account to save through a fixed deposit account that earns higher rates of interest.
Other examples include rural banks in the Philippines which were one of the first financial service providers to offer SMS reminders for commitment savings that allowed for dramatic increases in savings rates.3 This has been followed by new fintech players supporting banks to support increased savings behaviours in low-income customers such as Juntos. Similarly, there is also a significant potential to utilise SMS technology and/or messaging platforms to support goal-based savings in Indonesia. A case in point, is the common practice of saving to meet expenditures for major religious events like Ramadan.
Enabling Payments
A booming e-commerce sector, fuelled by large international investors, needs an intuitive online and offline payments infrastructure. However, a 2015 Bank Indonesia study documented that 89.7% of the transactions in Indonesia are in cash. This provides a tremendous opportunity. Consider the following payment process for purchase through a leading e-commerce portal for those with bank accounts:
Navigation through multiple websites makes the payment process clumsy, leading to poor user experience. In addition, it limits payment options to those with bank accounts or provides cash-on-delivery options which are costly to operators. Using mobile/electronic wallets for payments, an option available for leading e-commerce portals such as Tokopedia and Elevania, can provide seamless experience to customers and reduced expenses for operators.
Further, offline payments through mobile/electronic wallets also present a significant use case. Kopokopo―a leading merchant aggregator in East Africa with more than 10,000 merchants―is a successful example of providing a mobile-based small value merchant payment platform. Apart from acquiring merchants, the organisation focuses on providing value-added services such as merchant cash advances, transaction analysis tools, and merchant/customer engagement initiatives to ensure merchants remain active. Easypaisa in Pakistan and PayTM in India are other notable examples for merchant payments. Closer home – players like TCash, Tapp Commerce and Dimo Pay are catching up fast. The idea is to integrate the payment and financial service habits of users through a single e-wallet/account. This could then be used for a variety of payments whether making purchases online, pay for Gojek/Uber, restaurant bills, or bill payments.
Easing Remittances
Remittances–both domestic and international–are a big market in Indonesia. However, most domestic remittances are largely informal and cash based. In a research conducted by Gallup, 50% of the Indonesians said that they sent money to their family or friends in the preceding 12 months, in “cash”. An average of US$ 87.40 is sent about 1.6 times a month! Evidently, a huge untapped market waiting to be facilitated via fintech players. This is especially relevant to mobile/e-money users where 71.5% of all transactions (by value) are person-to-person transfers.
Indonesia provides a US$10.5 billion international remittance market – an opportunity for new fintech players to add value to a market heavily dominated by money transfer operators such as Western Union. This is especially the case with remittance prices, averaging 5% to 8.60% of the amount sent.4 Notable fintech players in this segment such as WorldRemit have already partnered with Dompetku – a mobile money service offered by Indosat Ooredoo. However, there is a compelling need for focused players to cater to Indonesian migrant workers, predominantly based in Malaysia, Taiwan, Saudi Arabia, Hong Kong, Singapore, and the United States.
Access to Credit
The World Bank estimates that only 13.1% of the Indonesians have borrowed from a formal financial institution. Further, domestic credit to GDP ratio in Indonesia is 43.5%, lower than its neighbours including Malaysia (140.5%), Vietnam (113.8%), the Philippines (55.8%) and China (169.3%). Online, fintech-based lending can play a pivotal role in narrowing this credit gap. Micro and MSME loans based on alternate credit assessment models are growing across the developing world.
Mshwari in Kenya offers small/instant loans in collaboration with Commercial Bank of Africa (CBA). Credit assessment is built on data generated on the basis of airtime usage, M-Pesa usage, length of association, etc. Tigo Tanzania (Tigo Nivushe), MTN Ghana (Mjara loans) and Equity Bank (Eazzy loan) are other examples of this model.
Given the market size in Indonesia, there is huge scope for growth. Following global cues, fintech credit players such as Uang Teman, Mekar, and Modalku have already emerged in Indonesia.
Going Forward – Think Global, Act Local!
As the Government of Indonesia looks at rapidly expanding financial inclusion, we see that innovations can help to leapfrog toward this goal. With the continued growth of mobile users, the growing shift to smartphones and the advances of fintech solutions, we see opportunities to provide value-based financial access and services for all Indonesians. New technologies that are driving savings adoption, access to credit, faster payments and cheaper remittances across the world, can also drive financial inclusion across Indonesia at a much faster rate than over the past several decades. It is up to the government, policy-makers, regulators and the industry players to embrace and enable these new developments in order to help Indonesia to become one of the fastest growing financially inclusive markets in the world.
Based on over 2000 agent interviews conducted between March and April 2016, the ANA Bangladesh report, funded by the Bill & Melinda Gates Foundation and the United Nations Capital Development Fund (UNCDF) highlights findings on the DFS agent landscape in Bangladesh covering agent profitability, transaction volumes, liquidity management and other important strategic considerations.
The findings highlight that Bangladeshi providers continue to offer superior liquidity and agent network management services and agents are more profitable and optimistic than they were in 2014. The number of DFS providers has increased, however, the market is still anticipating sophisticated products. Though the market is in nascent stages, third party agent network managers are performing well on operational metrics such as training and service downtime. The newly introduced bio-metric identity registration of SIM cards, which has initially decreased DFS accounts, will likely influence agents’ behaviours towards the illegal over-the-counter (OTC) transaction methodology and customer enrollments. This may spur changes in providers’ agent network management practices. Please click the download button to read the full report.
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On the basis of our analysis, we expect around 90–95% of revenue to come from transactions, and only 5–10% from float. Of the 95%, the largest revenue source is likely to be remittances, transactions on basic savings accounts and shared interest on loans offered, backed by credit-scoring customers’ “digital footprints” (each around 20%). Other revenue sources will include G2P/direct benefit transfer payments and utility payments (around 10%). Airtime top-up is only expected to yield around 5–7% of the bank’s revenue, but would, of course, result in substantial savings for the MNO, in terms of both distribution costs and reduced customer churn.
