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Survival of the fittest: The evolution of frauds in Uganda’s mobile money market (Part-II)

Posted on by MSC

In the first blog of this series, we outlined the evolution and increasing sophistication of fraud in Uganda. The ingenuity of fraudsters is impressive. But what about the MNOs’ response?

Have the providers set up systems improvements and processes geared toward checking such frauds?

Talking to the staff of leading mobile money providers in Uganda, they concur that eliminating fraud poses a serious challenge for them and note that they continue to build internal systems that audit and check fraud. Some have now incorporated the appearance the recipient’s name on the phone’s display to confirm the right recipient before completing transactions. This both reduces the number of remittances to the incorrect number and narrows the scope for fraud using spoof SMS and requests to reverse “erroneous” transactions – see Survival of the Fittest: The Evolution of Frauds in Uganda’s Mobile Money Market (Part-I).

The MNOs say they have increased the capacity of their customer helplines for mobile money with dedicated teams that quickly respond to fraud and other complaints. They have also set up separate helplines and call center representatives to service and support agents. They also continue to improve internal processes to frustrate fraudsters, including blocking of disputed mobile money accounts and quick resolution of reported fraud cases.

In addition to these system and process improvements, MNOs talked to say they continue to spend significant sums of money on above the line (ATL) awareness campaigns to educate customers and agents on how to safeguard themselves from fraudsters.

MNOs note that they also use their agent hierarchy channels of float distribution. This is through the use of their master agents commonly referred to as “float aggregators”. MNOs have trained these master agents on fraud detection, reporting and resolution processes. The master agents (who interface with agents on a daily) pass on this knowledge to their agents during their site visits for rebalancing and support.

MNOs have also used regional mass agent meetings across Uganda. See “How MTN Uganda Communicates To Its Network Of 15,000 Agents” for a description of MTN’s approach to this. At these regional meetings, agents air their grievances and highlight areas that require attention from the provider. Typical pain points include rebalancing issues, customer care response and efficiency on issue resolution, and marketing/branding. However, fraud is one topic that always appears in these agent meetings and MNOs come well prepared with key learnings and tips to avail agents on how to safeguard themselves from fraudsters. The challenge with these agent meetings is that they are not regular with some MNOs taking more than a year to organize them … and when they do, it’s a one-day event (of approximately 8 hours). Towards the end, there is a rush to complete the day’s agenda. And who knows … the fraudsters could also be in attendance disguised as agents!

Three of the MNOs add that in 2012, the GSMA Association held workshops in Kampala to bring MNOs dealing in mobile money together for the first time. At this workshop, the participating MNOs agreed to work together on pertinent issues that concern the industry – with fraud strongly at the forefront. The MNOs have since then had a number of consultative meetings with the regulator (Bank of Uganda) to come up with collective policies to protect the industry from fraud. They are however quick to add that the regulator is also on a learning curve on mobile money operations, so decisions go back and forth before being agreed upon. These lags provide leeway for fraudsters to become even more innovative and sophisticated in at their game.

So why does fraud continue to manifest and evolve within mobile money in Uganda’s market?

If we analyze the evolution of fraud in Uganda, it is evident that fraudsters have always been ahead of measures to curb their activities, with MNOs typically having to react to fraud. This is however not surprising, given that mobile money is a new in Uganda (it is close to six years since the first deployment) – the providers (and their agents) are on a steep learning curve.

However, there are some mechanisms that MNOs might usefully consider:

1. Frequent on-site visits to agents. From the 2013 Agent Network Accelerator survey for Uganda conducted by The Helix Institute of Digital Finance, of the over 2,000 agents interviewed, only 33% reported being visited, trained and monitored by MNOs. And 46% of agents were not visited at all and are thus left to learning from their peers, or by bitter experience, about the tactics commonly used by fraudsters. If this lacuna continues, is good news for fraudsters. MNOs should consider increasing their site visits to agents with a view of training them on fraud management thus increasing agent’s awareness of the evolution and increasing the sophistication of fraud. Since agents interface with customers, given knowledge on fraud prevention, and the time involved to resolve fraud related challenges, they will pass this on to customers.

2. Risk/Fraud teams within mobile money functions. MNOs in Uganda have employed staff with a banking background and fraud management experience into their mobile money departments. However, these staff is mostly concerned with checking and controlling internal system fraud. MNOs need to move beyond this and have dedicated staff who are on the lookout for trade/field fraud targeting their agents and customers. Such staff would be charged with fraud prevention KPIs, and not just with KPIs for responding to fraud cases.  Such staff could be trained to think like fraudsters so that they predict the next possible tricks and tactics of fraudsters. Basis these predictions, MNOs can run agent training and agent/customer awareness drive to prepare for the next generation of fraud in the market.

3. The use of agent themselves. In 2012, Ugandan agents formed a national association that is meant to represent agents’ interests and concerns. The association currently claims to have 30,000 members. Its activities have not been wholly welcomed or accepted by all MNOs, primarily as it has been lobbying against exclusivity clauses in agents’ agreements. However, this national agents’ association could play a very important role in fraud mitigation. MNOs can leverage on this by equipping the agents’ association with fraud prevention knowledge which they also pass on to the rest of the agents countrywide through an agent to agent visits or organizing agents’ meetings.

4. Collaboration. MNOs will eventually need to continue and deepen collaboration and information sharing on the emerging frauds in the country (and ultimately elsewhere too) to better address these. With the growing prevalence of non-exclusive agents, it is reasonable to hope that collaboration not just on information but also on agent training and monitoring will follow.

The role of the Bank of Uganda (BoU).

The role of the regulator is paramount in prevention and mitigating of risks in the DFS industry. In a bid to protect clients, BOU in October 2013 introduced mobile money guidelines which spelled out the role of each player in the ecosystem in preventing and mitigation of fraud.

The guidelines require providers to meet specific criteria, including providing a risk management proposal and putting in place appropriate and tested technology systems to detect anti-money laundering (AML) and terrorist financing. The guidelines require the providers to comply with requirements on consumer protection and also stipulate that providers train their agents (including training on fraud management).

The guidelines require agents to provide some KYC credentials (at the time of recruitment) that include proof of registered business with a physical address and to have an account with a licensed bank. The agent should also register and collect appropriate KYC documents from customers and deliver these to the provider. Agents are required to sensitize customers on PIN code safety, attend to their queries and of course service their transaction needs.

The guidelines forbid the agents to carry out customer transactions when the mobile money platform is down and it does not allow them to carry out transactions on behalf of customers through over the counter (OTC).

The guidelines advise the customer to exercise due care during transactions and note that it is their responsibility to keep PIN codes safe.

Is this enough from the regulator?

BoU says it works with other regulatory bodies with regards to mobile money because the industry cannot be looked at in isolation. Other regulators such as the Uganda Communication Commission have a role to play since they regulate the MNOs who are the major players in DFS. The BoU specifically regulates licensed institutions, especially the banks that work closely with the MNOs.  The BoU focuses on the effectiveness of the board of licensed institutions that provide mobile money. They also look at the policies, internal controls and IT systems of the organizations that are in charge of these accounts. They also carry out targeted inspections periodically and act on issues brought to their notice.

The BoU perceives mobile money as any another product in the banking system and has no separate or dedicated department to monitor operations of mobile money. It falls under the Directorate of Supervision for Commercial Banking, which has a Financial Innovations Sub-committee and an Agency Banking Sub-committee. This could be interpreted as suggesting that the regulator does not have the capacity to monitor and supervise mobile money activities at the agent level.

The BoU has recently issued full-page pull outs in newspapers with the intention of educating and explaining consumer rights and their bare minimum expectations from agents. This was done in English with a promise of making translations into different local languages and is an important positive step forward towards improved customer protection.

With the proliferation of mobile money services in the country, there is a strong case for BoU increasing its capacity to supervise agents as well as compliance with core banking requirements. After all, there are now nearly twice as many active mobile money accounts as traditional bank accounts. The hundreds of mobile money agents and users being defrauded each week deserve this protection. Ultimately, such supervision should increase the credibility of the industry and thus it will be in the interest of the providers too.

Does the new inclusion scheme risk adding a Rs. 1,000 billion subsidy burden?

Posted on by MSC

The Prime Minister is all set to announce a mega new programme on financial inclusion on India’s Independence Day. The Department of Financial Services, Ministry of Finance, is busy shaping the ‘Sampoorn Vittiyea Samaveshan (SVS)’ (Comprehensive Financial Inclusion) scheme in consultation with bankers. Anyone closely associated with the financial inclusion space will worry that without very careful engineering, the scheme may be found lacking. While it incorporates some of the lessons learned from the past, MicroSave worries that it may struggle to overcome many fundamental barriers that have stalled inclusion over the years, despite very many concerted efforts by the central and state governments, the RBI, banks and innumerable other agencies involved. So does this grand scheme risk having the fate that all the previous avatars1 of financial inclusion programmes ran into? Quite likely, unless the fundamental issues are understood well and appropriate solutions embedded in the scheme.

Enhancing the reach of financial services to the excluded population and targeted distribution of subsidies to low-income groups have been universal problems to which few developing or underdeveloped countries have found scalable solutions. India has been on this journey tirelessly for over seven years but has made limited progress. It is evident and well recognized that subsidies need careful targeting to have a real impact. Budget 2014 and subsequent announcements indicate the government’s willingness and resolve to overhaul the systems and design suitable mechanisms to achieve this. However, it will take a well thought through approach with intensive inter-ministerial efforts to find real workable solutions that can take us beyond the failed attempts of the past. It will be vital for the government to unearth the root causes of past failures, to learn from these and thus avoid another faulty design.

An approach paper on the scheme talks of six pillars that would comprise SVS. The government needs to be congratulated on several aspects that been addressed for the better. These relate to access to services through multiple channels (business correspondents, branches and ATMs); online transactions; the promise of adequate compensation to the correspondent banking agents/CSPs; provision of a healthy mix of financial products across savings, micro-credit, micro-insurance, and pension.

While many constituents of the scheme are laudable, I highlight major gaps that need attention. The first one is finding real solutions to the last mile delivery problem. According to various research studies including several by MicroSave, less than 0.5% of the business correspondents (the agents appointed to provide banking services) on the ground are in a state of readiness to offer services and earning more than Rs. 5,000 a month (minimum compensation that is being contemplated under SVS). In this situation, who will service the 200 million odd accounts or 2 accounts per household, proposed to be opened? How will the Rs. 5,000 overdraft per account be delivered? And more importantly who will collect the repayments to prevent them from becoming bad debts? 182 million accounts have been opened in the past and RBI’s own data states more than 50% of these are dormant; while a majority of the rest are accessed less than once in a quarter (that too mainly to draw government subsidy payments and not as a full-service bank account). As has happened in the past, we worry that there will be a rush from agencies wanting to make a quick buck from opening new accounts or reactivating existing ones; and from disbursing (and pocketing) the Rs. 200 billion (at a conservative Rs. 1,000 overdraft per account) and going to Rs. 1,000 billion if the entire overdraft of Rs. 5,000 is provided. But if there is no mechanism on the ground to collect the repayments or to service the accounts, these are likely to turn dormant as soon as the overdraft is disbursed. There is a high risk that the scheme leads to massive dole out of subsidies instead of assisting targeted distribution of benefits.  It is hard to comprehend how the arithmetic of using a leverage of 1:20 to set up a credit guarantee fund of Rs. 10 billion will be adequate and prevent credit defaults if the front line structures do not exist or are dysfunctional.

To address this issue, a sharp focus is required on drastically improving the last mile readiness through active business correspondents and operational ultra-small branches (USBs). This can only happen if it is market driven and commercially viable for banks and frontline agencies. It cannot be lasting if it is compliance driven, as we have seen very clearly over the last five years. The existing viability gap can be bridged in multiple ways. According to our analysis, for management and disbursal of government subsidy payments (MGNREGA, pensions, scholarships, LPG and so on) banks need to be paid 3.0%, of which at least 1.25% to 1.5% should go directly into the accounts of active BCs, to prevent pilferage by intermediaries,  including corporate BCs. This can be achieved through linking performance to metrics of account activity and service standards that can be measured easily and accurately, with further monitoring by DLCCs/SLBCs/district and state administration and independent agencies. Only services with a consumer pull will eventually sustain, and in that case, it is also important that consumers pay (at least partly) for these services. Time and again MicroSave has established rural and poor consumers’ willingness to pay a reasonable fee for quality, proximate services. Remittance services provide a great example of this. Most remittance consumers actually pay more than NEFT charges (paid by mainstream account holders) as they find value in instant and safe transfer of funds. Moreover, they realize a net saving compared to informal and alternate channels.

The second major gap, also leading to high cost and viability challenges, is a near-random distribution of villages to lead banks. The current distribution does not allow any bank to have a critical mass of villages to constitute suitable structures for sustained service delivery. A cluster of adjoining villages is often allocated to multiple banks, and in turn, all of them find it impossible to achieve economies of scale or scope. The net result is bare minimum efforts for compliance and not to operate commercial banking. The village and gram panchayat allocation need to be completely re-worked in consultation with participating banks. Forward-looking banks will be very willing to swap villages to have a win-win situation.

A third aspect is a sharp focus and aggressive efforts on consumer awareness and protection measures at all levels from national to panchayat. Financial literacy and credit counseling (FLCC) centers have been in existence in every district for many years, however, their role in enhancing awareness for the under-banked and un-banked has been rather limited. A vast majority of consumers interviewed by MicroSave are completely clueless about the accounts they have opened in the past. Consumer responses range from ‘opened account to get a free photograph’ to ‘getting a smart card that is a must to draw pension subsidy’. Unless consumers are well educated about the power of the bank accounts and their rights in terms of associated overdraft, insurance and so on, only the intermediaries will take advantage of the monies flowing through. There will also be a need to be wary of consumer fraud that is starting to gain momentum amongst the newly banked illiterate population in India. Countries ahead of the curve with the extensive scale of branchless banking and mobile money such as Bangladesh, Kenya, the Philippines, and Uganda are now struggling with the aftermath of incessant growth without adequate consumer awareness, to contain the consumer and channel fraud that is now increasingly common.

The scheme clearly has the right intent and does indeed address several design issues that have marred financial inclusion efforts since 2005. What is needed is meticulous attention to cover the potential pitfalls, some of which as described above, risk completely derailing the programme.

1 Refer MicroSave focus notes, case studies, and papers at www.microsave.net 

Survival of the Fittest: The Evolution of Frauds in Uganda’s Mobile Money Market (Part-I)

Posted on by MSC

Uganda has seen an explosive growth in mobile money adoption in the last few years, growing from 550,000 active users in 2009 to 5.2 million in 2012 (active on a 30-day basis) according to the Economic Regulation Unit’s Broadcasting & Telecommunications Market Review 2011/12. Now, the rate of mobile money account ownership outstrips bank account ownership, which stood at 3.6 million bank accounts in 2013.

However, the Uganda mobile money market has been a playground for fraudsters. Reportedly, on an average at least 100 mobile money users lose money every week, some lose millions of shillings. In an environment where there are 5.2 million active users, 5,200 cases of fraud per annum do not seem to be a very high prevalence. But many cases are likely to go unreported, and each and every case will be amplified by word of mouth and undermines trust in the mobile money system.  The 2013 Agent Network Accelerator survey for Uganda conducted by The Helix Institute of Digital Finance highlighted that the “risk of fraud” and “dealing with customer services when something goes wrong” were the two biggest challenges faced by agents. See “Challenges to Agency Business – Evidence from Tanzania and Uganda (Part- I)” for discussion of this.

We have already outlined the nature of many mobile money frauds and presented a generic framework broadly based on the Kenya market to understand these and their evolution with the maturation of the mobile money market – see Fraud in Mobile Financial Services. However, the Uganda market evolved differently to the Kenyan one, with multiple players entering the market over time and, most importantly, no national ID. These factors modified the evolution and sequencing of frauds, and in this blog, I highlight the six most common agent/customer level frauds in Uganda. The blog draws on my five years of my personal experience in the mobile money business in Uganda with Warid and Airtel during which I keenly observe the evolution of the mobile money market. As Zonal and then Regional Manager, I was able to watch and discuss frauds with agents across the country – indeed responding to fraud was a key part of my work.

The approaches to fraud executed by the con-men demonstrate their thorough understanding of the mobile money system and the lacuna in the processes in place. While the regulators and MNOs were busy fixing the leaks in the systems and processes, the fraudsters also learned and evolved their modus operandi to find new ways to cheat mobile money agents and customers. Their fraud mechanisms have become more sophisticated over the years.

In Uganda, the fundamental underlying problem is the country’s weak KYC norms. Currently, anyone can obtain a SIM(s) in different names and can operate under different identities.  This phenomenon is compounded by the lack of a national ID in Uganda. The registration process for a national ID just started 2 months ago. The typical identifications for KYC have been either a passport, work ID or local council ID. The latter is most common, yet easily obtained by fraudsters and in as many distinct copies as they want, typically by paying the local council leader a small sum of money (usually ranging between $ 2-3). The ease of securing a fake local council ID for SIM and mobile money KYC registration makes it difficult to trace fraudsters, Such SIM cards are registered for purposes of committing fraud and quickly thrown away after successfully achieving their purpose/objective.

So how has fraud evolved, manifested and become sophisticated in the DFS space 0f Ugandan market?

1.       Fake currency

During initial years the fraudsters took advantage of the low level of awareness by customers and agents through the use of counterfeit money to defraud unsuspecting victims. Fraudsters targeted busy agents in high traffic areas who did not perform due diligence in monitoring counterfeits, and in turn, agents also passed this fake currency to unsuspecting customers. Soon, agents became vigilant and many started to use ultra-violet lighting rods to detect fake currencies, resulting in a drastic decline with this tactic.

2.       Reversing “erroneous” transactions

Fraudsters then resorted to sending fake SMS messages to customers’ phones (alerting the customer of a P2P/cash in transaction on his mobile money wallet). Shortly thereafter, the fraudster would call the customer claiming to have erroneously sent money to a wrong customer number. Innocently, and before checking the balance on his mobile money wallet, the customer would make a P2P transaction to reverse the “erroneously sent money” from his account – thus losing money. This did not stop with registered customers, un-registered customers would also fall prey of the fake SMS and “send back” the erroneous money through OTC at the agent point. The fraudsters had a field day with this tactic.

In a bid to protect their customers, MNOs run above the line (ATL) campaigns and to send SMSs broadcasts to educate customers on how to differentiate between authenticated messages from mobile money payment systems and fake ones sent by fraudsters. Although this had moderate success, it called for the change of tactics from fraudsters.

3.       Facilitation fees for winners of the prize draw

The next evolution saw fraudsters introducing yet another tactic, this time using the MNOs’ marketing and advertising strategies to their advantage. Between 2010 and 2012, the Ugandan telecom sector was witnessing fierce fights for supremacy in revenue, customer acquisition, and retention. There were price wars, bonuses on airtime top-up and special prizes under loyalty programmes that included motor vehicles, bikes, money, etc. Winners would be called through telephone calls asking them to pick up their prizes.

The fraudsters responded quickly by creating their own “call centers”. Posing as staff from the MNO, they would call customers informing them that they were lucky winners and should come quickly to redeem their prizes. However, the fraudsters requested the customer (their “lucky winner”) to make an initial deposit of mobile money to facilitate the process of hand over of the prize, this would range from $45 to $400 depending on the magnitude of the “prize won”. For a motor vehicle, the “facilitation fee” would increase up to $1,000. Excited customers would quickly send this “facilitation fee” to a mobile money account provided to them by the fraudsters, only to wait in vain for the prize. On checking with the MNO, customers would then realize that they had been defrauded and the mobile money number to which they had sent the “facilitation fee”, had been switched off with no trace of ownership.

MNOs responded by ATL campaigns to increase awareness of their office phone numbers through which winners would be contacted. These numbers were publicized through TV, radio, newspapers and trade materials. Customer’s awareness of this fraud tactic increased and soon there was a drastic drop in its use.

4.       PIN Appropriation

Fraudsters were still thinking and soon introduced a new wave of fraud targeting mobile money agents – specifically those that were busy and highly liquid.  It was common practice for busy agents to initiate a transaction and then hand over his phone to the customer to punch in his number. The customer would give the phone back to the agent to complete the transaction by inserting in his PIN code.

Fraudsters took advantage of this. They would go to the agent point as normal customers wanting to conduct a transaction and followed the usual process. During this time, the fraudsters studied the buttons the agent pressed for his PIN code. After a few visits to the agent, the fraudsters could usually identify the agent’s PIN codes. The fraudster then went to the agent to transact. This time when the agent handed over his phone to the “customer”, the fraudster quickly punched in a phone number, inserted the agent’s PIN code and completed the transaction. The fraudster then started another transaction to cover his tracks and handed the phone back to the agent to complete it. The fraudster then walked away … never to come back. The agent was not aware that two transactions had taken place on his phone and had lost money ranging from $500 – $1,500.

Again MNOs had to intervene and they conducted awareness campaigns targeting agents advising them to:

  1. Make an end to end transaction by themselves and avoid customer contact with agents’ phones
  2. Keep the PIN codes safer and better still frequently change them to avoid anyone studying them
  3. Check and record their balance after every transaction is completed
  4. Record all transactions done so that a trail can be made
  5. Call helpline as soon as the loss of money is detected

These awareness campaigns forced fraudsters to adopt more sophisticated methods that required patience and careful study of the behavior of both customer and agents.

5.    SIM Replacement

Fraudsters now study behaviors of customers and agents to find out those who carelessly expose their PIN codes. The fraudsters do not need to get in contact with the customer or agent’s phone, all they need is the phone number and PIN codes of the customer or agent.

MNOs provide a four-figure PIN code when activating a mobile money account for security purposes. Yet customers and agents usually (perhaps for fear of forgetting their PIN codes), chose to have a similar 4 figure PIN code, for instance choosing to use the classic 1234 or 4444, 2222, 5555, or 1111. See Ignacio Mas’ excellent blog “My PIN is 4321” on this. This makes it easy for them to memorize the PIN at all times. They continue to use this simple PIN without changing it (even when advised by MNOs to frequently change their PIN codes), thus making the fraudster’s work easy. Once he knows these PIN codes, through guessing or observation, the fraudster gets a duplicate ID issued in his name. He then goes to a police station to report the loss of “his/her” SIM, for which he gets a police letter. He presents this police letter to the MNO’s customer care center and a replacement SIM is provided thus inactivating the original, correct SIM. As the fraudster knows the PIN code of the target customer or agent, he is able to withdraw the money using the replacement SIM.

MNOs are facing a challenge with this tactic because the police innocently provide a letter for loss of a SIM (of course fraudulently obtained), so it is their obligation to provide a replacement SIM. Interrogating the MNO’s database for information to confirm KYC information provided at the time of registration is an option. But this is often inadequate to ascertain if the customer seeking a new SIM is genuine because the fraudsters have done his homework well and are well equipped with relevant information of their target victim. The relevant information and frequently verified include the customers’ date of birth, parents name and next of kin – upon this information matching with that of the MNO’s database (for proof and authentication purposes), a replacement SIM is issued to the fraudster who goes on to defraud innocent customers.

6.       Reversals

In the latest round of frauds, the fraudsters have targeted the MNOs’ processes for the reversal of money sent to wrong mobile money accounts by customers and agents. Its common practice for money sent to the wrong recipient, to be sent back to the source account (after the MNO has received the complaint and done its due diligence investigation).

Fraudsters now go to a merchant to purchase an item for which they propose to pay using mobile money. Once the fraudsters have transferred the money to effect the payments, they leave the shop with the item and then call the MNO’s customer care center and ask them to block and reverse the payment on the basis that it was a wrong transaction. The MNO (following set reversal procedures) blocks the merchant’s account or the amount in a debate, then listens to both parties. However, the merchant in many cases has no proof that he is the genuine recipient and will be asked go ahead and settle the dispute legally. Clearly, this is not an ideal solution for a busy shopkeeper, and with the prospects of repeated visits to the MNO or lawyers for a reversal, he is left with no option but to agree to the transaction.

This blog examined the evolution of customer/agent-level fraud in Uganda by examining the six most common frauds in the market. In the next blog, we will examine how the MNOs have responded to the activities of fraudsters and how they might strengthen that response.

Upscaling MFIs into MSME Financing

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A larger number of microfinance institutions across the globe have realised the business potential of MSME financing. As the next big strategic move many of these MFIs plan to upscale to MSME financing. However, this strategic shift is filled with numerous challenges. This video talks about these challenges in preview of key business parameters of operations, marketing, financing and capacity building. The video ends with recommendations and a way forward.

Is There a Magic Stick to Manage Delinquencies? 

Posted on by MSC

Delinquency is a systemic issue in microfinance institutions, once it is detected a through system review is needed. There are few quick measures which can give immediate relief, if problem is detected at an early stage. However, system overhaul is essential to find long term solution. This video talks about general perception of MFIs regarding Delinquency Management and MSC’s experience working on Delinquency Management with one of its client in Sri Lanka.

NBFC-MFIs as business correspondents – What will it take?

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In the blog “NBFC-MFIs As Business Correspondents – Who Benefits? Part-I” we highlighted the range of benefits for both NBFC-MFIs and banks in arrangements under which NBFC-MFIs operate as BCs for banks. In“NBFC-MFIs As Business Correspondents – Who Benefits? Part-II” we discussed the advantages and disadvantages of the model for NBFC-MFIs.

But of course, the devil is in the details. So what will it take to make this happen in a way that is mutually beneficial for both MFIs and banks?

Built on years of experience of supporting MFIs (including some mass market market-focused banks) to plan for and operate as agent network managers, here is MicroSave’s step-by-step guide:

  1. Understand what you are getting into

There are four ways in which MFIs participate in a digital financial ecosystem. These include:

  • Building a digital financial system on its own (not a real option in India!).
  • Act as an agent/agent network manager for an e-money issuer (usually a bank or an MNO).
  • Using an established digital payments system (for example an MNO-run mobile money network) to deliver its own products and services.
  • Using mobile phones as an information sourcing (for example client enrolment and loan origination) and sharing mechanism (for example on repayments due and made) and for other non-cash purposes.
MicroSave will soon run its “Digital Financial Services for MFIs” workshop in India to assist interested institutions to set up DFS initiatives for NBFC-MFIs (if you are interested to pre-register please send a mail to Garimasingh@MicroSave.net). The workshop provides insights into the costs and benefits of digital financial service adoption in the context of microfinance and assesses the capability of individual MFIs to successfully rollout digital financial services. It will also provide useful information with regard to the opportunities and challenges of digital financial services for MFIs.

  1. Conduct analysis to assess demand and supply-side readiness

Conduct a baseline qualitative assessment to gauge the initial capabilities and ground situation of your MFI on key aspects that will have a direct bearing on the success of your efforts to effect the significant changes that participating in a digital financial ecosystem will entail:

  • Willingness of the client base to switch to digital financial services (DFS) channel to conduct loan repayment and savings deposit/withdrawal transactions. It will also seek to understand the extent of the processes that the clients will be comfortable adopting under the DFS channel. Essentially you will need to be able to answer all the questions highlighted in MicroSave Briefing Note # 101 Mobile Money – Questions That Your Clients Will Ask You.
  • Mobile literacy among the client base: to understand the mobile phone usage pattern and the level of comfort and acceptance in using various functions of a mobile phone among different client segments.
  • Institutional capacity assessment: to gauge the level of preparedness of the institution to adopt DFS-enabled operations. This will take into account staff’s understanding and level of comfort with DFS transactions, their opinions on client acceptance of DFS as a channel for loan transactions, back-end systems and staff skill capacities to manage DFS-enabled operations.

Supply-side assessment of the local DFS market: to gain a quick understanding of the various DFS solutions available in the states where your MFI operates and which of the available ones can be the best fit; also assess the capacity of the existing available DFS agent networks in terms of liquidity management, spread and density of agents to serve your client base.

  1. Conduct detailed strategic planning and financial modeling

Using the findings of the baseline assessment, the MFI should organize a workshop involving key personnel from each department and associated consultants. Representatives from potential DFS providers should also be invited to discuss possible terms of engagement – see MicroSave India Focus Note 80  Driving Viability for Banks and BCs. This workshop will aim to draw a detailed strategy for the pilot project and also to use the platform to communicate the idea to all the departments. The deliverables at the end of the workshop would be, but not limited to:

   4.    Operationalize agent network management

The cost and complexity of building and managing a sustainable cash-in/cash-out (CICO) agent network across a broad geography is consistently under-estimated by providers across the globe. MFIs will experience additional challenges not least of all because their processes are credit-focused and banks are likely to outline (but not detail) a series of process that their risk management/statutory compliance departments will require. In addition, MFIs may struggle to assess the risks involved in both the delivery of a wider range of products and in the use of digital channels to do so.

MicroSave’s Agent Network Accelerator project works with agent network managers in eight leading markets across the world to understand address many of these challenges.

Key decisions required from MFIs acting as BCs will include:

To get a really good handle on this, ideally MFIs should send participants to attend The Helix Institute of Digital Finance’s Core Agent Network Accelerator training workshop. This course is invariably hugely over-subscribed so if you want to pre-register, please contact Annabel@MicroSave.net.

How you will manage customer service and satisfaction – MicroSave Briefing Notes #129 & 130 Customer Support for E/M-Banking Users and Customer Service Through Call Centres .

  1. Plan, implement, monitor and evaluate a pilot-test

This phase will be focussed on establishing all the back-end systems and HR resources necessary for the rollout of the pilot phase. The key tasks during this phase will be the following:

  • BC Transformation Planning and Change Management – building on the strategic business plan’s KOGMA analysis, including a detailed timeline of major activities and roles/activities assigned to individual staff/ consultants.
  • Finalization of contracts with the mobile money (DFS) providers: The MFI will finalize the services to be availed/delivered and the applicable pricing/revenue/ commission systems with the DFS provider/banks. The resulting contract should describe in detail, among others: Each entity’s roles and responsibilities in the project,

  • Method and payment mode of commission/ revenue,

  • Service quality of software/ hardware platforms (service level agreement), and back-end support structure.

A detailed project implementation plan describing timelines and corresponding deliverables, etc. will be drafted jointly with the selected DFS/bank entity to ensure timely execution of the project activities. In addition, unless it is able to piggy-back on existing “pay bill” functions of providers, the MFI may need a separate USSD code. This will require careful negotiation with the MNOs.

  • Negotiation and contracting with IT providers, installation of the IT Module: In addition to DFS providers, software providers will also be listed to identify the solution provider for the IT platform the MFI will require for reconciling the DFS transactions on its back-end systems.
  • Decision on the selection criteria, and selection of branches for the pilot project.
  • Setting targets: both quantitative and qualitative to allow assessment and evaluation of the pilot and define criteria for judging its success (or failure) and thus avoid pilot-test decision drift!
  • Detailed definition of the processes and assessment of the attendant operational risks for the digital financial services that will be provided – including a detailed approach to the management of these risks to optimize the risk-efficiency trade-offs. See MicroSave Briefing Note # 115 Process Mapping for Mobile Banking Initiatives.
  • Definition of the marketing & communication strategy to promote uptake and usage of the new digital channel by end-users. See the MMT/MicroSave webinar on Marketing E/M-Banking Services for an overview of the issues and opportunities for addressing them.
  • Training of staff: on both the digital finance channel and how it changes their roles and responsibilities and on how they will market it to end-users.
  • Establishment of the monitoring systems and evaluation team for the pilot project.

If all this looks complex, it is. Moving to a digitally enable system will require detailed planning and painstakingly detailed execution, including a significant change management process.

But help is at hand, MicroSave has years of experience of work on exactly these issues with banks and MFIs across Asia, Africa, and Latin America – including in India itself where we have worked with or are working with the four largest mobile network operators; banks including HDFC, Axis ICICI, State Bank of India, Punjab National Bank and Bank of India; agent network managers including Eko, FINO, SAVE, Oxigen and many others; and MFIs including KGFS, Cashpor, Grameen Koota and Arohan.

Click here for more information on our DFS Capability Statement and Agent Network Management for MFIsbrochure or contact us on info@MicroSave.net.