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Offline Payment Acceptance: A Puzzle and an Opportunity

Posted on by Parul Tandon

As Indians, we love cash, which is fungible and provides instant gratification – allowing us to buy anything across the country. Cash speaks one language, does not discriminate, and provides a seamless experience!

RBI estimates that 96% of all the retail transactions in the country are conducted using cash, leaving only about 4% payments on cash-less/digital channels. The situation in rural areas is even more pathetic, with less than half a per cent of payments being cash-less, and cash is the undisputed king. Cash is costly for the government to keep in circulation: the cost of printing, storing, safekeeping and transporting, all adds up. In the year July 2014 to June 2015, RBI incurred Rs. 3,760 crore (USD 578 million) on security printing alone. All the banking entities and RBI spend close to Rs. 21,000 crore (USD 3.2 billion) per annum to keep paper money in circulation according to a recent study on cost of cash.

Cash is costly even for individuals, and despite the growth of ATMs (please see table below), the study estimates that the residents of Delhi spend 6 million hours and Rs. 9.1 crore (US $1.4 million) to obtain cash. Hyderabad spends 1.7 million hours and Rs 3.2 crore (US $0.5 million) to do the same – about twice as high as Delhi when calculated on a per capita basis.

There are a variety of barriers to ‘cash-less’ and one of the most important one is the acceptance of electronic money by merchants. In a country where we have more than 20 million merchant establishments and close to 690 million cards, only 6-7% of the merchants (1.38 million) have infrastructure to accept electronic payments. Providing (mainly debit) cards, largely addresses the demand-side issues – so the mass distribution of RuPay debit cards with Jan Dhan accounts could play a very important role. With a healthy CAGR of ~20% for both PoS and ATM infrastructure, usage is spurred by transactions at PoS (though from a lower base than ATM transactions).

On the supply side, the current process has been fairly tedious and controlled by some of the entities.

As depicted in the diagram, transactions require a customer or card-holder and a merchant, with card acceptance infrastructure, who provides goods and services in return. However, at the back end, the card used by the customer has to be issued by an ‘issuer’ (typically a bank) and the merchant is to be acquired by some entity which could be an aggregator, payment service provider, or bank. The card-holder is charged for goods purchased and the merchant is paid for goods sold through their respective acquirers. At the back end, a card association (like Master, Visa and RuPay) licenses card-issuers and provides settlement services. This provides convenience to the customer as he/she is not required to carry cash, while the PoS terminal ensures adequate safeguards.

The merchant is able to service typically high-value customers, though at a cost known in payment parlance as MDR or Merchant Discount Rate. The overall cost is borne by the merchant and the proceeds are shared by the acquirer and the card-issuer as per terms of contract between them. If there are enough customers carrying cards, merchants have shown a willingness to be acquired and pay MDR to the acquirer. In the past, when carded transactions were in their infancy, many merchants insisted on 2% more (almost equal to MDR) when customers paid with cards. This practice has largely been curbed – at least in urban areas. However, some merchants like petrol filling stations, gold merchants, etc. still clearly display and charge extra for using cards. This leads us to believe that the other merchants either pay from their margins or have already factored the MDR into their costing. In the absence of credit risk, RBI capped MDR at 1% in June 2012 for debit cards. India is primarily a debit card market with close to 658 million debit cards outstanding (as of February 2016) compared to only 24.13 million credit cards. Over the last three years, both debit and credit card transactions have been growing rapidly; however, growth in the debit card segment has been higher.

Merchant-acquiring is an integral part of card-payment transaction processing. Acquirers enable merchants to accept card payments by acting as a link between merchants, issuers, and payment networks to provide authorisation, clearing and settlement, dispute management, and information services to merchants. The merchant-acquiring industry is dominated by a few large players across the globe, with the top 10 acquirers in the world handling nearly 50% of the global card transaction volume. In India, many banks have forayed into the merchant-acquisition process – with limited success, as it takes a fair amount of time and documentation to acquire merchants. The cost includes terminal infrastructure, which is in the range of US$ 150-200 and is generally paid for by the acquirer. The acquirer needs to be convinced that this expenditure is justified and more and more customers will indeed use the PoS terminal.

Currently, the cost of acquisition for the acquirer is high as a result of the device, paperwork, and the time involved; the cost to merchants is also high, given the operational costs of the card-acceptance machines and the MDR. To top it all, many customers typically carry cash and seem to be more comfortable in dealing with cash. For some people, it also helps that cash does not leave behind a trail in the way electronic money does, and hence allows the unscrupulous to evade taxation. With a growing number of debit cards issued, the focus of the government and of regulators is to grow the digital financial services ecosystem.

This requires a complete change in mindset in the way transactions are perceived and orchestrated. The 24×7 Immediate Payment Systems (IMPS) and Unified Payments Interface (UPI), managed by National Payments Corporation of India, which allow account-to-account (A2A) interoperability through a virtual or global (like Aadhaar) address, offer new opportunities. One option would be to effect P2P payments to any offline merchant (service provider), using UPI, an option that is now feasible since most households have a bank accounts and a mobile phone. This option allows a customer to easily pay (push) the amount to the merchant’s account using virtual address on UPI without requiring to share any sensitive details like account number, bank, etc. Alternatively, the merchant can collect (pull) the payment by sending a request using UPI, and the customer can then authorise this request for payment. This will not require any intermediation by any of the typical actors highlighted in the four-party diagram above. However, unlike a typical card transaction, it does not address dispute settlement between the transacting parties.

Furthermore, with IMPS and UPI in place, merchant Aadhaar and bank account details can be used to on-board all merchants en masse. It can be done leveraging the Lead Bank Scheme and service area approach for inclusive banking that makes the branches responsible for development of specific area, covering 15-25 geographically contiguous villages. Bank branches can easily identify merchants in their service area and on-board them. This would address the problem of lack of dispute settlement between the card-holder and merchant: banks would play the role of acquirers, whereas NPCI would act as card network service provider.

Another possibility to promote digital retail payment could be self-registration by merchants using Aadhaar as unique identifier through aggregators/intermediaries. These intermediaries can be new age financial technology companies (including Payment Banks), providing seamless processes at a very low cost, as compared to current MDR

These ideas may seem radical, but could be the future, given that incremental growth in PoS acceptance infrastructure is unlikely to lead to a cash-lite (let alone cash-less) India. To get to a level of large-scale acceptance infrastructure using IMPS and UPI, customer protection and dispute redressal mechanisms will require sharp focus and hard work.

That said for digital value transactions of US$ 10-50, these issues are really not that important. Most of these low-value transactions are conducted with both parties physically present; just as with a cash transaction. There is no intermediation between customer and merchant, and disputes, if any, are resolved on the spot.

If we look at the benefit to various stakeholders, these far outweigh the risk at this point of time. The merchant is not required to handle cash and pay MDR. Customers create a digital transaction history and can rely on their account for payments. The economy as a whole gets a boost from the lower cost of cash and possibly reduced costs of goods and services, as well as better tax compliance and a host of other benefits. Surely these benefits are worthy of radical, but low risk, change in procedures around merchant acquisition and offline payments?

Can Payments Banks Survive?

Posted on by Parul Tandon

The news that three of the provisional licensees,Cholamandalam Distribution Services, Dilip Shanghvi and Tech Mahindra, have decided not to seek a full Payments Bank license, has caused much debate. The reasons for their withdrawal are varied – and not all necessarily based on the challenges posed by the underlying business model. Despite this, the media is abuzz with discussions on just how Payments Banks can achieve profitability given the restrictions imposed on their business model by the Reserve Bank of India (RBI).

It is clear that developing a successful model will depend on the nature of the licensee’s core business. MNOs will build on their existing client base and agent networks, and use the Payments Bank services both to reduce churn, as well as to make money on savings balances and transaction data to inform third party lenders’ decisions. India Post will do the same, but can easily add physical distribution and payment collection to their model. Consortia like the State Bank of India and Jio have a wider range of options and opportunities to build on the bank’s brand and core business. Paytm has already made it clear that they will be looking to derive value from leveraging their massive client base and encouraging a cashless ecosystem rather than from CASA (current account and savings account) operations.

Irrespective of the diversified business models, all will depend on Payments Bank using technology and agent networks to reduce costs, and offering diversified services to serve the mass market. MicroSave has already calculated the type of savings that a full-fledged bank (even with legacy technology) might make at the aggregated level, concluding that the annual average cost of saving a customer through the branches (around Rs.400-500 or circa $8) could be slashed to Rs. 65-125 (circa $2).

In 2012 we were able to look at this on a detailed, disaggregated basis. Conducting sophisticated activity-based costing we were able to look at the relative costs of conducting different transactions through branches and through business correspondent (BC) agents. As can be seen from the graphs, most but not all costs decreased. It is important to note in this case that the agents were conducting traditional BC (cash in/out) transactions as well as business facilitator (BF) type transactions (selling to and referring potential loanees as well as fixed depositors (FDs), collecting loans and recovery of loans that had been written-off). Indeed, this combined BC/BF role may well be essential for agents to break even given the extremely low commissions paid to agents in India for cash in/out transactions.

While some of the cost savings come from credit operations, from which Payments Banks are barred, it is clear that their agents could, and indeed probably must, play an important role in making and recovering loans made by their lending partners – and be remunerated for doing so.

There are two core challenges facing Payments Banks seeking to implement effective business models: 1. optimising their distribution networks, and 2. creating real value for their customers.

In order to optimise agent networks, Payments Banks will need to rethink the current, often unstable, models currently used in India. To date, as the 2015 Agent Network Accelerator survey of The Helix Institute of Digital Finance highlighted, too many agents are both dedicated (financial services agency is their only business) and exclusive (they offer services on behalf of only one provider). Both of these impede agent profitability. Payment Banks seem set to replicate and extend this model, and establish agents trying to survive by offering financial services for one provider alone. This risks adding to the fragmentation and duplication across India and to further reduce the ability of agents to make enough money to continue in the business.

Success will lie in recruiting agents for whom financial services is but one part of their business, who offer services on behalf of a range of providers and who are well-trained and monitored to ensure that they offer high quality, dependable services that are trusted by their clients. A study by The Helix Institute and Harvard Business School noted, “We find that the presence of a tariff sheet increases demand by over 12% and the ability to answer a difficult question about mobile money policy increases demand by over 10%. We also find that highly knowledgeable agents reaped even greater rewards for their expertise in the face of competition.”

To create real value for their customers, Payments Banks will need to move beyond traditional financial services. In addition to better understanding the needs, perceptions, aspirations and behavioural biases of their target clientele, Payments Banks will need to package and present their services in ways that align with the mental models of the mass market.

Poor people’s need for appropriate products mean that they need a range of products (just as you and I do) to reflect their life cycle. They also need disciplined systems that break down their accumulation of lump sums into small manageable amounts (saving up, through or down).

The products used to accumulate lump sums should ideally be differentiated and ear-marked for specific needs, in the same way that poor people often earmark specific income streams for specific uses to help with their mental accounting. For example: savings for a bicycle, to buy some land and for old age are very different in terms of the time horizons and instalment amounts.

But within this framework, as Ignacio Mas and Vartika Shukla highlighted in their blog Making Digital Money More Relevant, More Often -Part 1, different market segments have different needs, aspirations and biases. “At the highest level, the mass market has a few typical characteristics: a large percentage of people do not have a regular fixed income; most do not have a defined (predictable) income flow. Because of the uncertainty which comes along with a variable income, people employ various methods to manage and organise their money. We can broadly classify people into the following three segments:

People in the ‘Survive’ category have unpredictable or uneven income. They are more concerned about meeting day-to-day needs. Their money matters usually have a very short time horizon since their objective is to ensure stability of income. They are constantly searching for liquidity and have to plan for what to do with money every time they receive it.

In the ‘Live’ segment, people have moved beyond daily survival and are looking at satisfying wants. The focus of financial behaviour shifts from fulfilling necessities to meeting aspirations and planned expenses. Income, even though much less uncertain may still be variable. They need to manage their available liquidity in order to meet their aspirations and are planning for these using monthly budgets.

The ‘Comfort’ segment consists largely of people with regular income. They seek to have more convenience in their lives and are building assets, particularly for their next generation. They do occasional financial planning to ensure that resources are directed to asset acquisition in order to keep their legacy secure.” These segments require different services, think about/manage their money in very different ways, and thus offer a wide range of opportunities for Payment Banks. Indeed, the success of Sahara and Life Insurance Corporation of India provide a small glimpse of the business opportunities offered by rural India – and they are servicing very specific needs.

Ultimately, Payments Banks will want to encourage and facilitate the cashless (or at least less cash) vision articulated by the Government of India. As Paytm has already clearly articulated: cash costs! A digital, cash-lite India leveraging Payments Banks’ technological capabilities offers increased efficiency, reduced corruption and a viable business model as the marginal costs per cash-free transaction is negligible.

Open Application Programming Interfaces (API): Purpose and Possibilities

Posted on by Parul Tandon

Application Programming Interface or API, a software programme, acts as a bridge between disparate applications. It performs the intended function when a set of instructions are provided through a user interface (UI). The front-end of UI is usually a website or mobile application.

The following diagram illustrates the basic architecture of any API-based business model:

Guided by the strategy of Open APIs, many companies like PayPal, Master card, Mobikwik, M-PESA, Eko, etc. have embarked on this journey for mobile money and payment services. Though a provider charges a fee for consuming APIs, it makes sense to a variety of user organisations on the basis of time-to-market and cost parameters. For many upcoming organisations, it is more feasible to use open APIs of a specialised company, in a particular service line, instead of building the same.

The second generation platform of M-PESA in Kenya  allows  partners to build on disbursements and services payments like automated payment receipt processing, payment disbursement, and payment reversals in case of failed transactions.

DBS, a Singapore-based bank, has announced a mobile-only bank in India. The digital bank would use open APIs to acquire, authenticate, and facilitate transactions for customers, using Aadhaar.

As part of Digital India, India Stack is a set of open APIs authorised by the government to create an identification, authentication, and transaction ecosystem across different sources. For payment solutions, National Payment Council of India (NPCI) has released its API for Unified Payment Interface (UPI).

 

Case Study – Eko’s Open API Platform

Eko India Financial Services is involved in the payments sector with a pre-paid instrument (PPI) licence* from RBI. Eko’s key customers include low- / middle-income customers and micro entrepreneurs earning less than Rs. 50,000 (US$ 770) per month. Eko provides technology platform for bill and merchant payments, peer-to-peer fund transfer, and agent-assisted remittancesEko provides open APIs to organisations interested in money transfer, and charges a fee for using its services and APIs. Eko’s open APIs allow partner entities to leverage Eko’s technology platform and connect with NPCI, UIDAI, banks, and aggregators, to build their own products. So far, Eko has released APIs for its domestic money transfer (DMT) business. This allows others to build their business models by consuming these APIs within the allowed boundary conditions. Besides providing superior UI/UX to their customers, partners have developed innovative payment and financial services use cases such as lending, money transfer, P2P transfers, and in-store and online payments.Open APIs have benefitted both Eko and its partners. Eko’s partners are able to scale rapidly and increase their distribution footprint. Through partners, Eko has been able to reach newer geographies. Eko is planning to expand its partner base, as well as introduce new APIs to provide more services through its ecosystem.The diagram below shows how Eko’s open API interacts with other embedded APIs to complete a money transfer transaction.
* Pre-paid payment instruments are payment instruments that facilitate purchase of goods and services, including funds transfer, against the value stored on such instruments.

CGAP has identified comprehensive documentation, stability, easy access, and tracking as important elements for success of open API ecosystems. Based on a recent study done by MicroSave on use of APIs with a client, users evaluate the effectiveness of the APIs based on the following parameters:

Benefits of open API

Properly designed APIs provide benefits to both providers and users, along with a positive impact on customers.

a) Providers: 

• New revenue stream: Providers can capitalise on their existing assets, i.e. software and hardware, by providing their APIs to other companies on payment of a fee.

• Increased outreach: They can reach out to a larger customer base, through partners, without incurring high costs of distribution.

• Better utilisation: Providers can use their hardware effectively and can reap benefit of economies of scale.

• Future proofing: It is difficult to accurately predict the future. Open APIs can help providers a piece of the pie, even on unknown trends, as highlighted by CGAP based on M-PESA’s open APIs.

b) Clients (API Users): 

• Time and cost reduction: A significant reduction in the time for go-to-market can be seen by riding on the existing stable platform, instead of developing the complex software. The users can not only reduce the cost of development, but also avoid sinking high one-time capital cost towards hardware.

• Scalability: Instead of worrying on scaling up of software and hardware, the clients can focus on distribution and scale quickly.

• Innovative solution: The clients have to build on the basic APIs exposed by the providers. This enables them to design and provide innovative solutions on top of the basic services provided by the API provider. Such customised solutions can provide unique services and experience to users, in line with local needs.

c) Impact on Customers:

• Convenience and experience: Properly designed and tailored services made available at the doorstep of citizens translates into convenience, and better experience. Even marginalised consumers will be able to choose providers and consume digital services according to their need.

Conclusion

Going by the global experience, a set of open, well-documented APIs provide enormous benefits to providers and clients. They also help improve customer experience.

API providers need to ensure easier integration, customer support, and scalability, while maintaining the security of financial transactions. Clients need to be sure of antecedents and capabilities of service providers as they scale up their businesses.

Today, there is tremendous amount of innovation around open APIs. The Government of India has taken early steps to fuel it through its ambitious Digital India plan. The possibilities of open APIs will only be limited by creativity, imagination, and business requirements.

Abhinav Sinha is co-founder, Eko Financial Services Pvt. Ltd

JAM – Using (Jan Dhan) Bank Accounts, Aadhaar and Mobiles to create new products and services, and new ways of doing things

Posted on by Parul Tandon

Jan Dhan Yojana, Aadhaar and Mobile or ‘JAM’ are creating a buzz in financial inclusion space, not only in India but across the world. JAM has been jamming newsrooms and social media after being coined in the Economic Survey 2015 and the Union Budget 2015.

The JAM trinity is seen as an important tool to curb leakages; strengthen financial delivery mechanisms and social welfare schemes; and enhance the efficacy of various Direct Benefit Transfer (DBT) Programmes.

Let’s examine the JAM recipe in light of my prior professional experience against each of its components.

‘J’ refers to bank accounts opened under the National Mission for Financial Inclusion, more popularly known as the Pradhan Mantri Jan Dhan Yojana (PMJDY). The scheme, launched in August 2014, mandated banks (both public and private sector) to open up at least one bank account for each household in the country. The thought behind this ambitious scheme was to link each family with the formal banking system.

Jan Dhan was not only about bank account opening and DBT. A bit of insurance (life and accident) and access to credit (overdraft) was inbuilt. This later evolved into market-priced, zero-subsidy insurance covers of life and accident (Pradhan Mantri Jeevan Jyoti and Suraksha Bima) schemes, at ridiculously low premiums. The beauty was that no fresh KYC was needed, auto-debit from bank account was done, subscription form was incredibly simple, and one could even subscribe by a simple SMS! The easy-loan scheme of Mudra also evolved out of good feedback from Jan Dhan overdraft component. So many things can piggy-ride on a bank account!

We see new age in banking emerging in the form of Payment Banks, Small Finance Banks and Fintech. We have an opportunity to leapfrog, provided we don’t kill them with heavy regulation and old-fashioned banker-style thinking. We need to totally redefine and reimagine terminologies, namely: What is a bank? What is a branch? What is a passbook? What is a cheque book? What is KYC? and What is a transaction? Traditional banking channels and software (RTGS, NEFT, remittances) are expensive and slow; telecom channels (mobile money, m-Pesa) faster and less expensive; internet based channels (bitcoins or blockchain-based digital currency zipping over Internet, undiminished in value) much faster and almost zero cost. Will we see a WhatsApp moment in banking? Or will we let it go past us? The traditional incumbents will try every trick to kill the new-age players. Just as WhatsApp and Skype faced roadblocks from existing telecom players, new Payment Banks will face many overt and covert challenges from existing players. I hope that new Payment Banks are not killed in the womb, by traditional treatment of KYC, passbook, cheque book and old-fashioned branch concepts.

Now, let us talk about ‘A’ in JAM, which stands for Aadhaar, the unique ID given to each individual in the country by the Unique Identification Authority of India (UIDAI). There are many good things possible with Aadhaar.

First is obviously cleaning and de-duplicating any database such as voter list, ration card list, driving licence or passport, pensioners’ list, and so on. Our databases are in dismal state, and linking with Aadhaar can bring some sanity, by removing duplicates, and by having uniformity of basic demographic and address metadata, thus making these databases “talk” to one another.

Second benefit of centralised Aadhaar database is anytime, anywhere, online verifiable identity check (e-KYC), working on open API methodology. This can let us leapfrog over many developed nations, provided we can change regulation accordingly. Telcos may be wasting thousands of crores of rupees every year in collecting and preserving paper-based KYC documents. e-KYC done at telecom franchises can result in instant SIM card activation and zero paperwork. Similarly, if a person does not want a cheque book, then banks don’t really need a wet signature, and the bank account opening process could be made paperless and e-KYC based, saving the banks hundreds of crores of rupees every year, apart from being convenient for the citizen.

The last component in JAM is “M”, which stands for mobiles

Almost every family in the country now has a bank account, Aadhaar and mobile. The “M” in JAM should not be restricted to mobile banking, but should stand for use of mobiles in various eco-systems. With over a billion cell phones in India, their reach is ubiquitous in the country – more than that of bank accounts.  Mobile wallets (Paytm leading the pack), mobile banking apps, SMS- based money transfers, *99# based services available on feature phones in multiple languages, etc. are gaining traction, but we all hope that the new Payment Banks and Fintech players will overturn many traditional concepts. The upcoming Unified Payment Interface (UPI), with open APIs, will make the electronic payment infrastructure quite seamless and is expected to enhance the acceptance infrastructure.

WhatsApp, Facebook, and e-commerce have taught many of our citizens the value of mobile-based transactions. They now demand government services to be available in the same convenient, faceless fashion. After the e-commerce, now health and education are the sectors witnessing disruption. With 2G/3G/4G expansion, and with prices of smartphones coming down (some say that 4,000 rupees is the tipping point, which already has been achieved – forget about the 500 rupees Ponzi!), we will see an explosion of Internet-connected smartphones, with private sector as well as government organisations offering a lot of stuff on mobiles!

Interesting days are ahead! Let us JAM!

The views expressed by the author are personal.

Are Mobile Money Wallets Really Customer-Centric?

Posted on by MSC

During the last few years, rapid uptake of digital financial services (DFS) can be seen globally. This growth necessitated the need to focus on protection of end customers by building mass awareness, conceptualising practices that are user friendly and mitigating customer related risk. This note focuses on the four critical areas significant to customer centricity of Mobile Money wallets, and looks at major barriers impacting uptake of MM in India.

Is the non-exclusive agent network model paying off in Senegal?

Posted on by MSC

Warimako ! – a Wolof expression translating to “Send me money”– is embedded in Senegalese vernacular, demonstrating the widespread adoption of Over-the-Counter (OTC) money transfers in this market. At the outlet level, agents are not only serving Wari but also other providers such as Joni-Joni, Orange and Tigo. The Helix Institute’s Agent Network Accelerator (ANA) Senegal Country Report, conducted in partnership with UNCDF Mobile Money for the Poor (MM4P), indicates that high levels of non-exclusivity (66%) among Senegalese agents offering competing products brings a great diversity of actors in a booming market. What are the advantages and challenges of the non-exclusive agent network model in Senegal?

The diversity of players

The Senegalese digital finance market is fractured between four major players. Wari is the market leader—in terms of its presence of agents—representing a little over a third of agents in the country (34%), but it certainly does not dominate the digital finance space. Joni-Joni, a third-party provider that launched in 2013, accounts for a quarter of the market presence, followed by two mobile network operators (MNOs) Orange (20%) and Tigo (11%). Financial institutions are thus far not as widely represented in the Senegalese agent network, as Microcred’s and Manko’s share of market presence is less than one percent each. However, this could change. Senegalese financial institutions can take their lead from Kenyan banks that have impressively increased their share of market presence from five percent to approximately 15% between 2013 and 2014, and offer additive—not competitive—services to the existing product suite.

The diversity of players observed in the Senegalese market is rare among ANA markets and is only comparable to Zambia where five major players –MNOs, financial institutions and third-party providers – are vying for a piece of the pie. This diversity is really a key difference between Senegal and leading East African markets such as Kenya, Uganda and Tanzania. In these markets, MNOs dominate the landscape most likely because they were able to leverage heavily on their existing distribution network and customer base and thus aggressively grow their market presence first, creating a higher barrier to entry to other players. However, in Senegal, MNOs did not initially leverage their distribution network which cleared the path for third party providers to embark on their journey quite successfully.

Figure 1. DFS Providers’ Market Presence of Agents 

The power of non-exclusivity 

Senegalese agents serve a median of three providers. In fact, the more providers an agent serves, the more transactions they conduct at the outlet level (figure 2). Senegalese agents conduct comparable transaction volumes to the leading East African markets, with a median of 35 daily transactions at the agency level.

Figure 2. Median daily transaction volumes by Exclusivity 

Not only do agents perform higher levels of transactions when they serve multiple providers, but they also earn higher profits. While exclusive agents make a median monthly profit of US$92 (PPP adjusted), non-exclusive agents make substantially more – a median monthly profit of US$146 (PPP adjusted), as the latter are able to diversify their revenue streams without increasing their operating expenses. Because most agents are non-exclusive in Senegal, they make the highest profits among all ANA research countries (figure 3).

Figure 3. Outlet Profitability among ANA Research Countries

Quite interestingly, ANA Senegal demonstrates that over time, agents actually tend to serve more providers. Given the recently issued regulation prohibiting providers to impose exclusivity, transactions and profit levels will most likely keep increasing at the outlet level along with non-exclusivity levels in the near future.

The challenges of non-exclusivity

In Senegal, providers rely on a profitable and dynamic agent network. However the stiff competition we witness at the outlet level means that providers will have to maintain a competitive edge at the agent level, while at the same time ensuring their products are pushed out.

Commission war: in a non-exclusive OTC market, agents have the ability to select which provider they conduct transactions for. This power dynamic puts providers under pressure to offer outstanding agent support and/or loyalty programmes, often in the form of monetary incentives, in order to motivate agents to sell their services and lure new customers to their network. This can inflate the commissions that agents receive from competing providers, and thus also have the adverse effect of increasing an agent’s expectation of their future profits. In fact, only 39% of agents are somewhat or very satisfied with the profit they receive from providers, despite being the most profitable—at the agency level—among ANA countries. This perceived expectation is a challenge that providers will need to tackle.

Ripple effect on tariffs: an agent’s increased commission translates to a steady decrease of a provider’s own margin. If providers keep investing a higher percentage of their revenues back into agent commissions, then this will likely impact cash-in and cash-out transaction fees paid by customers down the line. In a competitive market like Senegal, one in which providers are offering similar products, providers will not want customers to bear the brunt of the commission war and ultimately hurt the expansion of DFS in the country.

Quality of support: in addition to providing agents with monetary incentives, a provider’s ability to win an agent’s loyalty can hinge on the quality of service they offer. However, ANA Senegal data shows that providers have not yet succeeded in delivering efficient support systems – only one-third of agents receive regular monitoring visits. This means two things – firstly, that providers are unlikely to ensure agents are well informed, satisfied and provide a high quality of service to customers; and secondly that providers are blind to many aspects of how their agents operate, as well as what competitors are doing in the area. Improving on these aspects will help providers maintain a competitive edge over other players.

Now what?

The non-exclusive agent network model is paying off in Senegal: Senegalese agents make high levels of transactions and profits, which is typical of a competitive market in which each provider tries to stand out. As competition grows though, providers could consider the following strategies to ensure their competitive advantage—among both agents and customers: 1. Shift competition from the agent level to the product level. This can be achieved by designing a compelling value proposition that meets customers’ needs and preferences; 2. Collaborate on support services to improve the quality of support given to agents.

In our upcoming blog on the Senegalese market, we will examine the innovative approaches providers have employed to stimulate customer usage and draw on lessons learnt from other markets in East Africa and South Asia.

Sabine is a Country Technical Specialist, responsible for the implementation of the United Nations Capital Development Fund Mobile Money for the Poor (MM4P) Digital Finance country strategy in Senegal, Benin and Liberia. In this role, she collaborates with diverse stakeholders – regulators, governments, digital financial services providers – to accelerate the development of digital finance ecosystems and make financial services accessible to the low-income population, women and rural households.