Blog

Over the Counter (OTC) in Pakistan: The Challenges and the Way Forward

In the first part of this blog, Over the Counter (OTC) in Pakistan: Why It Works”, we examined the drivers behind the roaring success of OTC-based services in the country. This blog examines the challenges this success has bought, how the providers are responding and the prospects for the future of branchless banking in Pakistan.

4) What are the challenges for Providers?

  • Hefty Agent Compensation: Currently providers are spending top marketing dollars on additional bonus/commission in an attempt to grab market share in the OTC business – especially in money transfer and utility bills payment.
  • Push Strategy Vs Pull Strategy: Because of the agents’ ability to control which provider’s channel is used, branchless banking providers believe that targeting customers through agents is the best strategy. Most have largely stopped pulling customers through high budget ATL campaigns. This despite the Intermedia report’s finding that television was clearly the primary source of people’s awareness of the product, and that 83% of all respondents own a TV so this can be an effective outreach channel.
  • Liquidity and Cash Management: Providing liquidity (e-float) to the agents remains a big challenge for every player, particularly when the agent’s location is far away from their master agent/ distributor and from a bank branch. In these cases, not only does the cost of liquidity management increase (and is borne by the branchless banking provider), but also the chances of theft of the cash (which is common particularly in Karachi and remote rural areas) increases.
  • Agent Management/Engagement: With branchless banking providers (especially the new entrants to the market) offering a growing range of incentives/commissions to encourage agents to use their channel, agent churn is commonplace. This makes agent management and continuity of service a challenge – something that is leading to the rapid growth of shared agents. Some players are even using their sales force to engage with the key agents especially in the metro and urban areas. They visit on daily basis and spend as many as 2/3 hours with agents that serve large numbers of OTC customers. Sales staff educate the customers about the new services and also help agents with OTC transactions. This sales force goes by a variety of names “Distribution Officer” / “Business Development Executive”/ “MFS-BDO” etc. and typically work on an outsourced, contractual basis for the bank or telco. Hiring these sales staff allows providers (particularly those entering the market) to engage with, train and motivate their agents regularly, ensure that agents are well versed in any new procedures, convert customers’ preference from competitors, and help agents sending and/or receiving money transfers.
  • Shared Agents Instead of Exclusive Agents: The majority of the players are no longer establishing exclusive agent’s network but are, instead, now aggressively targeting other players’ agents. As highlighted in the 2014 ANA Survey of Pakistan, roughly a third of the 204,073 agents represent actual access points and the rest are shared arrangements in which up to 7 branchless banking service providers are sharing an agent. Though this can be taken as a positive development since it offers some form of basic interoperability at the agent level, some commentators worry that it is hindering growth of physical agent access points and hence limiting financial inclusion.

5) How are providers responding to these challenges?

In the current environment all branchless banking players have failed to respond effectively to these challenges. While the substantial expansion of account opening, an enlarged agent base and the introduction of the biometric verification system (BVS) is laying the foundation for a critical mass of mobile wallets, the industry is unable to convert these acquired wallets into active users.

Different market players are tackling cash management issues through different methods. Agents with high liquidity are being selected and used to provide liquidity support to smaller agents in the same locality and effectively being used as master/liquidity support agents.  For MNOs this function is performed by their respective franchises, which are even extended credit on weekends to support agents tagged within their defined boundaries.

6) What is the future for OTC and branchless banking in Pakistan?

Future of OTC in Pakistan looks bright, especially in the money transfer business, which is still growing.

Money Transfer Tranx and Volume Million Tranx Per Quarter (Million $) Per Month (Million $)
2nd Qtr 2014 26 1,068 356
3rd Qtr 2014 27 1,161 387
4th Qtr 2014 28 1,222 407

Pakistan has a large and growing population base where the overwhelming majority (86%) of the adult population is unbanked. However, the growth of brick and mortar banking is limited by the high cost of conventional banking as well as lack of awareness, the complexity of documentation required and a host of other factors. Another important element is the role and size of Pakistan’s informal economy which employs a significant portion of the labour force. This segment is largely excluded from conventional banking channels because it cannot meet the extensive documentation required to open an account.  Branchless banking can provide the platform that enables this segment of the society to make the first step towards becoming financially included, as it can offer convenience, easy access and reliability to this population.  Taking those served by the current OTC offering to the next level to provide them access to savings, insurance and merchant payments will require very significant and concerted effort by branchless banking providers and the government. Some efforts are underway, but we should not underestimate the scale of the challenge.

Mr. Ashraf Mahmood Wathra, Governor of the State Bank of Pakistan, recently announced at the 8th International Mobile Commerce conference in Karachi Pakistan, “The National Financial Inclusion Strategy, recently developed by the State Bank of Pakistan in collaboration with the World Bank envisions that the uptake of m-wallet accounts will cross 50 million over the next five years”

In 2015, additional initiatives have been taken to increase the transactions/penetration on m-wallets, including:

  1. National Database Registration Authority (NADRA) pledged to reduce verification charges for cellular phone companies to open up m-wallet accounts for the customers from $0.35 to $0.10 (78%).
  2. Easypaisa introduced free money transfers from m-wallet to m-wallet in order to incentivise customers to convert agent-assisted OTC transactions into m-wallet transactions.
  3. Another operator has recently launched free m-wallet opening facility to its biometric verified SIMs customers by dialing a simple command. Most of the information required to open an m-wallet were collected at the time of SIM verification (thumb impression, CNIC verification etc.), and so the remaining information to fulfil the KYC/compliance is collected through a verification call from their respective contact centre.

While the initial indications of the results of these initiatives look positive, they are on a modest base. M-wallet to m-wallet transfers increased from 43,848 transactions (of Rs. 46 million [<$0.5 million]) in July-September 2014 to 185,023 transactions (of Rs. 447 million [$4.4 million]) during the October-December 2014 quarter. This represents an important four-fold increase in the number and nine-fold increase in the value of these transactions in one quarter – so an exciting step forward (see a detailed discussion of this in Over the Counter (OTC) in Pakistan: Why It Works”

Nonetheless, agent-assisted OTC transactions are likely to remain dominant in the Pakistani market until all stakeholders support the unbanked population to open and use accounts by defining real use-cases and products to support them. Stakeholders will then need to increase marketing and communication to drive awareness of m-wallets, and their value of proposition. This must be backed by the provision of easy and convenient user interfaces to facilitate the conduct of m-wallet transactions, and the development of an eco-system across the country. Otherwise mobile wallet transactions will continue to work in different silos and will not achieve the SBP/World Bank’s goal and begin to convert Rs.2.73 trillion [$0.27 trillion] of physical cash into digital money.

SME Finance: Opportunities for Banks

In this presentation, Anup Singh domain leader of SME Finance domain at MicroSave highlights the key opportunities for the banks in enhancing access to finance to SMEs and also retaining customers through provision of non-financial services. Amongst other things, the focus is on use of automation to enhance efficiency in the processes of SME finance, lower origination cost and reduce turnaround time in expanding access to finance to SMEs.

Agent Network Accelerator Survey: Kenya Country Report 2014

Our second Kenya Country Report is based on over 2,000 mobile money agent interviews carried out in 2014 all over the country. The survey report highlights findings on the mobile money landscape in Kenya, covering agent profitability, transaction volumes, liquidity management and other important strategic issues, whilst comparing these insights to our 2013 Kenya Country Report.

Click here to read the full report.

Kenya Moves Beyond M-PESA

Since the launch of M-PESA in 2007 the story of digital finance in Kenya has been synonymous with that of the story of M-PESA.  However, data just released from The Helix Institute of Digital Financeshows that this now seems to be changing, which is exciting to watch, and also important understand. In 2013, The Helix Institute survey of over 2,000 agents in Kenya showed that  90% of the agents in Kenya were providing services for  Safaricom‘s M-PESA.  However, as shown in the below chart, that percentage has declined to 79% in 2014, a drop of 11%.  This means other providers in the market have been growing their agent networks at faster rates than that of M-PESA.  Who has been doing this and how, help us understand what this might mean for the future of digital finance in Kenya.

Phenomenal Transmutation

The first interesting insight is that the shift is not from one mobile network operator (MNO) to the other, which is most common in other markets given MNOs’ ability to scale quickly.  Airtel Money in Kenya only increased market presence by one percentage point between 2013 and 2014, and the rest of the top six providers are banks.  The shift is a transmutation of the network itself, from a network of almost purely mobile money agents, to one where bank agents also have a significant market presence. The below chart shows banks’ market presence grew threefold from 5% to 15% during the period.  This aggressive expansion has been led by Equity bank, which single handily improved its market presence from 1.3% in 2013 to 8% in 2014 as well as Co-operative bank and KCB.

Where and how the banks are expanding is also informative.  There has been an accentuated transmutation in Nairobi, where banks have increased market presence four-fold, jumping from just under 6% in 2013 to 24% in 2014.  Currently 50% of bank agents are located in Nairobi.  Further, while 73% of bank agents were exclusive in 2013, only 26% percent were in 2014, likely showing a new strategy to recruit existing M-PESA agents, as opposed to new retailors, which may have been a major catalyst for growth during that year.  However, banks usually manage agents from their bank branches and therefore recruit in areas surrounding them, and it is unclear now how much longer a strategy like this will be sustainable, as suitable agents near bank branches become harder to find.

What’s on the Horizon?

While some may think that Kenya is headed in the same direction as Tanzania, with multiple providers holding significant market presence, we think the story is more complicated than that, as eluded to above.  It does seem that banks will continue to grow larger agent networks in Kenya, and there was a similar trend in Tanzania of shared networks emerging first in the capital city and then expandingoutwards.  However, the big differences between what has happened in Tanzania, and what is happening in Kenya, is that the subsequent movers in Kenya are banks, while in Tanzania they are telecoms.  This is important because banks in Kenya have very different abilities for continued growth, and also a great potential to create a more sophisticated ecosystem of service offerings.

Are Past Gains Indicative of Future Growth?

Banks usually have different business objectives for building networks, are subject to more restrictive regulation, and tend to design their networks differently in Kenya, commonly using a hub-and-spoke model based on their branches.  In terms of business objectives, some banks just want to decongest their branches, and do not have the ambition for big scale that telecoms do.  Further, regulation often makes it harder for banks to register new customers, which is the fuel they need to sustainably grow large numbers of agents quickly.  Lastly, the hub-and-spoke methodology might work fine for a first tier of expansion around branches, however, expanding to the rest of the country becomes an issue at some point and requires a shift in strategy to scale further.  Therefore, while there was an impressive growth of bank agents relative to mobile money agents between 2013 and 2014, it is unclear if this trend can or will continue moving forward.

The Potential for Real Evolution

The other real difference with what is currently happening in Kenya, is that this market shift has the potential to be an actual evolution in the utility of the system as opposed to just having more players competing to offer the same services, to the same people, over the same channels.  The new bank players in Kenya seem to be expanding the transactional pie, as opposed to just further fracturing the existing one.  Kenyan bank agents offer a different array of services to customers through the agent channel, as shown in the chart below, and transactional data shows that bank agents conduct significantly higher transaction values than mobile money agents, which means customers are using them differently.  Hence, bank and mobile money agents do not necessarily compete.  Therefore, banks and MNOs might be able to find ways in which they actually prefer to complement each other to further increase available services in the ecosystem and reduce the costs of offering them.

Conclusion

The shift in market dynamics in Kenya is exciting given how long it has been the story of a single player.  However, it is still unclear if it will continue, but if it does, it seems that it will likely lead Kenya down a different more dynamic path than other countries which have multiple players competing.  Hopefully the new services banks are offering to customers will be seen as beneficial to a more digital ecosystem and partnerships as opposed to price wars will emerge.  There is hope for this given the recent partnerships between Safaricom and CBA to offer M-Shwari, Safaricom and KCB to offer KCB M-PESA Account, and Airtel and Equity on the MVNO.  Given the difficult strategic operations and expenses associated with managing an agent network, areas like liquidity management, agent training, and monitoring might be good places to extend partnerships, effectively spreading the spirit of co-opetition between banks and MNOs offering mass market finance in Kenya.

Can “Behavioural Science” Bell Scheme Design Cat? Insights from Exploratory Research on the Public Distribution System in India

Having tasted success with the Modified Direct Benefit Transfer for Liquefied Petroleum Gas (MDBTL) through Pahal (though sceptics have their doubts), the Government of India is dropping hints that it plans to expand the ambit of DBT further to other subsidy programmes. At about INR 460 billion ($7.4 billion), MDBTL seems to be huge, but it pales in comparison with subsidies through the “Public Distribution System (PDS)”, which are about INR 1,150 billion ($18.6 billion). The Shanta Kumar Committee, which was set up to look into the PDS system, has recommended “Direct Benefit Transfer (DBT)” for PDS. The committee believes that DBT can take care of many “ills”, the biggest of which is diversion of food grains – alleged to be to the tune of 50-60 per cent of entire stocks intended for distribution. The government has decided to pilot a few alternative distribution models, including:

1. Digitisation of the PDS beneficiaries’ database and digitised stocks of commodities – allowing commodities to be issued to individuals    on the basis of biometric identification – thus eliminating leakages to bogus beneficiaries.

2. Issuing food vouchers through which PDS beneficiaries can buy commodities from fair-price shops.

3. Direct benefit transfer of a certain amount of cash (fixed for a certain period, inflation-adjusted) to the bank account of individual beneficiaries to enable them to buy commodities from the shop of their choice.

While so much is brewing in this immensely large cauldron of pilot and implementation, one key stakeholder is conspicuous by his/her absence. The beneficiary, who should have been at the centre of design of all these programmes, has, again, been simply ignored. MicroSave has been quite vocal about this for long (see, for example, Communication: Achilles heels of DBT I and II).

Since its inception in 1998, MicroSave has advocated (and practiced) basing all product and delivery channel design on customers’ needs. The refined customer-centric approach through “Market Insights for Innovation and Design (MI4ID)” is core to MicroSave’s philosophy, to ensure that consumer insights drive design. Using this approach, anchored on behavioural sciences, we conducted research to explore: “What will make PDS beneficiaries opt for direct benefit transfer (DBT) of cash in PDS?”

We collected insights into beneficiary behaviour to understand: i) why, if at all, would beneficiaries shift to DBT from the current PDS system? and ii) how are they likely to use it?

We conducted the research with three different segments:

1. The poorest Antodaya Anna Yojna (AAY) beneficiaries are eligible to avail 35 kgs/month of food grains (rice and wheat) along with 3 kgs of sugar and 3 litres of kerosene for a total of Rs.180-190 ($3).

2. The Below Poverty Line (BPL) beneficiaries are eligible to avail 35 kgs/month of food grains (rice and wheat) along with 3 kgs of sugar and 3 litres of kerosene for a total of Rs.280-290 ($4.60).

3. The Above Poverty Line beneficiaries can avail only 2.5 litres/month of kerosene for Rs.45 ($0.73).

The research examined the drivers likely to shift beneficiaries under the current PDS system to the third alternative delivery model — DBT. The insights provide a glimpse into the design considerations that the Government will have to consider in designing/launching a DBT programme for PDS.

Challenges with the current PDS

Challenges with the current PDS are common for all, irrespective of the category they belong to: the service standards of PDS dealers are, almost universally, lamentable. The quality of food grains is, at best, sub-standard. The quality of rice is such that typically beneficiaries can consume it only after grinding it to powder form. Another major challenge is that, despite the all-day, every day opening hours mandated by the government, FPSs often open only for two-three days in a month – at the convenience of the FPS dealer. Beneficiaries unable to avail their commodities in the window when the FPS is open have to let go of their allotted rations for the month and are not entitled to get their forfeited quota in the next month.

Dependence on PDS ration is the anchor

Our research tells us that AAY beneficiaries, who are the most dependent on PDS, are anchored to the volume/value of their PDS benefit.​ Thus, they use this as their reference point when thinking about any proposed changes, because of the reassuring certainty of getting a specific amount of cereals, sugar and kerosene at a fixed and well-subsidised price. The BPL category customers, although they get a similar quantity and range of commodities at a marginally less subsidised price through FPS, are less dependent on the PDS given their better financial status. When it comes to APL, eligible to avail only kerosene through FPS on regular basis, there is no love lost for PDS. They are ready to shift to DBT immediately.

It is easy to conclude that as dependence on PDS goes down, inclination towards receiving the DBT rises. However, in order to make sure that all the categories of beneficiaries are ready to shift, it is imperative to move their reference points with regards to PDS. In case of AAY beneficiaries, the new reference point will be “choice” and “assurance”. It will be choice of shop from which to buy, and the assurance of being able to buy an equivalent quantity (unaffected by “leakage” or price fluctuations) and better quality of commodities. For BPL beneficiaries, the new reference point will be the ability to choose to buy the equivalent quantity/quality of commodities at a convenient time – without the fear of forfeiting rations because they are unable to visit the FPS in the brief window it is open. APL beneficiaries will be focused on the convenience of choosing the time and place to buy their kerosene without the hassle of standing in queues.

Thus, to make shift to DBT for PDS attractive to all beneficiary categories, the government will have to highlight the benefits that DBT offers. A carefully crafted communication campaign to this effect should highlight that with DBT for PDS, beneficiaries will have the choice of shop from which to buy, as well as the ability to select the commodity on which they spend the money. They will also be able to choose the quantity/quality trade-off on what they buy – all at a time, and in the shop, of their choice.

Take away for Government

PDS is a hugely important and sensitive programme given the large and vulnerable population dependent on it. Accordingly, it is essential that the government designs, tests and communicates the delivery of DBT in PDS engaging the end-customer at every stage – pre-design exploration, pilot-testing, launch and post launch! Looking at the complexities involved in PDS, it is imperative for the government to conduct a detailed market and behavioural research before changing the existing system. The proposed pilots are an important first step. However, the end user’s perspective is key to their success (or failure) – they are not passive recipients.

The Safaricom M-PESA Pilot Test

This Note highlights one of the least recognised success factors – the careful pilot testing of the M-PESA solution. This took place for an eighteen month period prior to the commercial launch of M-PESA in 2007. The Note highlights the key lessons learned through the pilot-test. The value and importance of operational testing and active lesson learning is not fully and adequately recognised by those seeking to replicate M-PESA’s success. Pilot testing remains as relevant to launching successful digital financial services today as it was for Safaricom in launching M-PESA