Blog

Beware The OTC Trap

Posted on by MSC

At MicroSave we are often asked to advise mobile network operators (MNOs) and banks on their “go to market strategy” for digital financial services (DFS). A growing number of MNOs are thinking that pushing an over the counter (OTC) led strategy will be the most effective. They could be right … and wrong.

If one looks at the explicit customer needs, it’s clear that the largest, most obvious “pain points” are two types of transactions: remittances and bill payments. Remittances because a large percentage of people are migrants and need to send money home; and bill payments since, the billers will not provide credit and are likely to disrupt supplies if not paid on time. Therefore, it’s getting clearer by the day that remittances (and possibly bill payments) are emerging as the most common “anchor” products for mobile money deployments worldwide.  And, of course, in some markets G2P payments (benefit transfers, salary payments etc.) can also play this important role.

We are seeing that MNOs and banks are increasingly trying to go the OTC route in the developing world – look at Bangladesh, Pakistan, Ghana and India. The burning question is, why? There could possibly be several reasons, the needs of the MNOs, the needs of the banks, and the needs of the customers. 

Let’s first look at the needs of the MNOs. Mobile money business has three drivers: (1) scale; (2) throughput and (3) yield. Very few MNOs (out of 219 deployed so far) have witnessed a hockey stick growth with mobile money deployments (see MMUs deployment graph on the left from State of the Industry 2013 Mobile Financial Services for the Unbanked).

 

So the mobile money business is growing at rates much slower than expected by most MNOs, and the active base is far smaller than the total customer base. 

The second most important driver for their business is throughput. The fastest way to get higher throughput, given that customers are not yet transacting themselves, is to open up OTC for larger value transactions like remittances. Here the customer just walks in and hands over the cash, pays a fee (usually higher than a merchant subvention fee) and the cash finds its way to the receiver. Once you have the OTC agents at the right location, the value of the business just grows by leaps and bounds. This is quite evident from what happened in Pakistan, and Bangladesh. Early deployment of mobile money in Bangladesh has opened a lot of accounts but still experiences significant levels of OTC use. “Despite being a relative newcomer in the mobile financial services arena, Bangladesh, which entered the market in 2011, is already making its mark. There are about 13 million registered mobile banking accounts in Bangladesh as of January 2014 and nearly $900 million in transactions per month through about 150,000 agents (Bangladesh Bank).” – Pial Islam in – Transitions from OTC to Wallets: Evidence from Bangladesh

In Pakistan too, OTC has been the preferred deployment strategy. “The service of OTC remittances is the dominant activity for EasyPaisa as well as in Pakistan’s overall mobile phone banking services industry, which processed forty-one million transactions, worth $1.6 billion in the first quarter of 2013 (State Bank of Pakistan). Only 2.4 million customers have mobile phone wallets equipped with EasyPaisa accounts , though we have collected the unique names of another 5 million unique users who use EasyPaisa for OTC payments” – Nadeem Hussain in “The “EasyPaisa” Journey from OTC to Wallets in Pakistan”

Since the mobile wallet is not yet interoperable, OTC appears like the only way to get to the competition’s customers. This often misleads the senior management, somehow alluding that the business is getting better, at least on two parameters: throughout and yield! 

Alas! This is the beginning of the OTC Trap. The operations staff hopes against hope that somehow the customer will see value and move to self-initiated transactions himself. MNO sales staff also finds itself less pressured, as it just needs a better incentive structure for the agent to get him to push the transactions through their system – as opposed to that of their competition. The customer does not care which system the agent is using, as long as the money reaches and is on-time. He trusts the agent. Both targets met, quite easily!  

Banks also often promote OTC since that’s the way they’ve always done business. This simply means no change in behaviour for either the bank or the customer. The only thing is that the transaction has moved away from the bank branch to the agent location. Very often the OTC agent is quite close to the bank branch and actively attracts bank customers – the bank does not mind at all – it is “de-congesting” its branches, allowing higher value customers to access the branch. The current market pricing highlights that the banks want this business, as the pricing offered by the bank appointed OTC agents is already much lower than the 5% being charged by India Post. 

Price Comparisons, based on MicroSave field research (all prices in Rupees)

 Trx Amt. Yes Bank BOI – Shmart SBI Kiosk Banking
P2B P2B P2B
Rs. 2,000 30 30 40
Rs. 3,000 45 30 60
Rs. 5,000 75 30 100
Rs. 10,000 150 60 100

This has led to a very competitive environment in the metros – see Remittances: The Evolving Competitive Environment

For the customer, OTC has many advantages. First, the customer does not need to change his behaviour or learn a new, possibly intimidating, technology. The OTC transaction looks/feels much like a purchase of airtime top-up, with which people are familiar. Second, he still does not understand, why is a MNO pushing him to open an account especially when he lacks the understanding of how opening a mobile wallet can improve his life. The customer is often attracted to OTC as a result of a combination of factors:

  1. not having proper KYC documentation, 
  2. a lack of trust in the new methodology, 
  3. fear of technology, 
  4. the maze of forms and processes required to open a wallet, 
  5. the confusing multiplicity of products and charges, 
  6. perceived difficulty of usage, 
  7. poorly designed user interfaces and, most importantly, 
  8. the required change in his behaviour. 

Also, the mobile wallet entails extra steps, usually the agent is required to facilitate cash-in or transfer so why should a customer make the extra effort to do the transaction themselves?  

This just goes to say that all stakeholders (MNO, banks, agents, and customers) appear happy with OTC, but are they really?

We’ll cover that in the next blog, watch this space! 

Improving access to finance for women-owned businesses in India

Posted on by MSC

The facts are hard-hitting when the focus of financial institutions in the country is shifting towards MSME financing. There are several factors driving this scenario that are discussed in detail in this IFC study.

Agent Network Survey: Tanzania Country Report 2013

Posted on by MSC

The Tanzania Country Report is based on a national representative sample of over 2,000 mobile money agent surveys carried out in 2013 all over the country. The report paints a picture of a dynamic and competitive mobile money market in Tanzania with profitable agents, focusing on the country’s operational factors of success and persistant challenges.

Key findings from the report:

– Agents are overwhelmingly profitable, with 49% earning at least $US 100 per month in profits, compared to only 40% in Uganda.

– Over 70% of Agencies are ‘new’ (having been in operation for a year or less) demonstrating aggressive growth in the market, however the small percentage of ‘old’ agencies suggests they have a short life-cycle.

– Rapid growth and the non-exclusivity of agents is putting pressure on agents’ liquidity, with 5 transactions a day being denied due to lack of float

– Competition is resulting in better support, with 79% of agents receiving training, but improvement are still needed in targeted areas.

To learn more, read the report in full. You may also be interested to read our summary blog highlighting the key findings from the report: Highlights from The Helix’s Agent Network Accelerator (ANA) Survey of Tanzania

Highlights from The Helix’s Agent Network Accelerator (ANA) Survey of Tanzania

Posted on by MSC

The Helix Institute of Digital Finance’s second Agent Network Accelerator (ANA) report based on a nationally representative survey of 2,052 agent networks in Tanzania, coupled with extensive qualitative interviews across the country, provides extraordinary insights into agent networks in Tanzania.

The survey includes all providers offering agent banking or mobile money services, taking special interest in the country’s three main providers: Vodacom, Airtel and Tigo.  These three providers absolutely dominate the market and continue to grow at quite robust rates, pioneering a unique model for developing agent networks which can be used as a paradigm for providers around the world. The data also shows where providers need to focus their energies in order to improve the quality of the agent networks in the country, which is imperative at this juncture when many providers are looking to stack more sophisticated services (like banking products) over them.

Uniquely Non-Exclusive Agents:

If an agent offers services for more than one provider, it is considered “non-exclusive” and in markets like Kenya, and Uganda where there is a clear market leader, the majority of agents are only able to serve the leading provider.  However, most markets do not have that dominance, and Tanzania is a better model for them.  In Tanzania, about half of all agents are non-exclusive, and in the capital of Dar es Salaam, it is 84%.  This means agents are able to conduct transactions for and earn commissions from multiple providers, leading to a very small number of agents being unprofitable (4%), and agents earning a healthy median profit of $US 95 per month.

It is however, noteworthy, that almost two thirds of agents in rural Tanzania are still exclusive. This is an artefact of Vodacom being the first to aggressively expand beyond urban areas, but now competitors are following suit and therefore we expect it to be increasingly non-exclusive in the future.

Agent Liquidity Shortages:

While the high levels of non-exclusivity of agents buttresses profits, it also causes liquidity shortages for the agents (agents are forced to manage separate liquidity pools for different providers since systems are not interoperable). This is compounded by agents who are not motivated to actively manage their liquidity, preferring to wait in their shops until customers make transactions which gives them the needed liquidity instead of traveling to a rebalance point.

This has many effects on the character of the agent network.  For providers, it means that it is hard for them to maintain agents where rebalance points are far away (rural areas). In the paper, Where’s The Cash? The Geography Of Cash Points In Tanzania, Ignacio Mas and Agathamarie John found that 83% of Vodacom agents are located within five kilometers of a bank branch. The Agent Network Accelerator (ANA) report highlights that 69% of agents take 15 minutes or less to reach their rebalance point, reinforcing the finding that agents are still tethered to rebalance points, and it is constraining the expansion of agent networks to rural areas.

Insufficient liquidity further damages the business model and reputation of agents where they are located.  The ANA report emphasizes that lack of liquidity at the agent level causes the loss of an median of five transactions per day (14% of median transactions per day), and of course will damage agents’ reputations as dependable and trustworthy service provider complicating the future ability to offer banking services through these networks.  Clearly there is a huge potential for providers to help improve liquidity management at agents – through the use of master agents (commonly called aggregators in Tanzania) and, in the longer term, interoperable systems that will eliminate the need to keep multiple liquidity pools. In the meantime agents are setting up informal arrangements with other agents and shopkeepers in their locality to try to mitigate the liquidity challenges.

The Future of Digital Finance in Tanzania

Tanzania has certainly crafted a unique and impressively successful ecosystem for mobile money.  It is much more developed than Uganda in terms of the quality of agent support, and the profitability of agents.  It is even leading Kenya by pioneering the non-exclusive agent network model.  However, the Agent Network Accelerator report shows that fraud is still plaguing its network, liquidity management issues are rife, and it is still having trouble with account opening for new customers.

Tanzania is full of potential, yet really still in its infancy with product development.  While agents in Tanzania mainly only provide cash in/out services for people’s mobile wallets, there is a lot of talk about deeper integration with banks to offer services like savings and loans, and there is already the beginnings of a merchant network being built where people can use mobile money to pay at retail outlets.  However, these frontier innovations will continually be stifled by some fundamental operational issues in the agent network that need to be addressed in order to support these and other more sophisticated services to be offered across the country.

To read our ‘Agent Network Accelerator Survey – Tanzania Country Report 2013‘ in full click here

To read our ‘Agent Network Accelerator Survey – Uganda Country Reporty 2013′ in full click here

Financing WASH: Key Considerations for MFIs

Posted on by Parul Tandon

Attracting household savings and private sector investments will speed up WASH coverage and can be considered to be one of the most cost effective public health interventions. Microfinance can play a catalytic role in increasing the uptake of WASH improvements by poor households. But WASH financing differs from the generic income generating loan (IGL) product significantly, and there are several other strategic issues that determine the suitability for rolling out WASH finance. MFIs have to consider these issues carefully before embarking on a WASH product development exercise. In this Note we explore some key strategic issues that determine the potential for a WASH finance portfolio including ecological factors, the public good nature of WASH, usage level of existing WASH infrastructure, capital for WASH financing, collaborations with WASH product/service providers and awareness amongst potential WASH financing customers.

Why Is financial inclusion in India not improving? New numbers, new approaches

Posted on by MSC

No one really disputes the idea that both financial inclusion (defined by the Reserve Bank of India (RBI) in a recent report as “the spread of financial institutions and financial services across the country”) and financial depth (which India’s central bank describes as “the percentage of credit to GDP at various levels of the economy”) are important, necessary—and very possibly in trouble.

At least in India. Others around the globe, including of course the World Bank, agree that formal banking and related services may help improve economic prospects for the estimated 2.5 billion currently unbanked. They also readily acknowledge the problems involved.

Almost none of these others, however, have quite the same daunting numbers and demographics that India must deal with—269.3 million, or 22 percent of the population, living below the national Planning Commission’s poverty line of Rs.26-Rs.33 (45-55 cents) per day, depending on the area, already far less than the $1.25/day World Bank norm for “extreme poverty”.  And approximately double the numbers politically-defined as “poor” are still unable to read a bank statement.

In the past five years, RBI has worked harder than many central banks in developing countries to offer at least limited financial services, especially in rural villages, and to coerce retail banks to comply with financial inclusion directives. Nevertheless, RBI’s recently released Mor Committee Report, referred to above, reveals new and worrisome realities:

–          Almost 90 percent of small businesses in India still have no links with formal financial institutions

–          60 percent of the rural and urban population do not have a functional bank account.

–          Bank credit to GDP ratio in the country as a whole is 70 percent, but in a large, very poor state such as Bihar, it is dramatically less at 16 percent.

–          Savings, even for the not so very poor, are declining and, in certain areas, moving away from financial to physical assets. And less than fully regulated savings often include less than fully scrupulous providers.

  • Reasons cited for this trend include lack of positive real return and difficulties in quick, direct access to savings accounts.
  • Savings as a proportion to GDP have fallen from 36.8 percent in 2007-08 to 30.8 percent in 2011-12 (most recent figures available) and household financial savings declined from 11.6 percent of GDP to 8 percent during the same period.

–        Credit and access to equitable financing for low-income households and small businesses is, in very poor areas, even less encouraging.

  • Many retail banks fail to comply with RBI’s Priority Sector Lending (PSL) guidelines, which require a full 40 percent of their lending to these sectors, for the simple reason that their non-performing assets (NPAs) are almost double.

For more on Mor Committee, please see MicroSave’s blogs:

Independent, external sources fail to paint a rosier picture. The World Bank’s Global Findex pegs India’s unbanked at 65 percent, not 60, and note that only 4 percent use formal bank accounts to receive welfare payments. In theory, all beneficiaries of India’s many, various welfare and pension must have a basic savings account. The reality is that many districts still use CICO (cash in/cash out) agents for distribution. A MicroSave overview explains some of the reasons why.

Of the 182 million-plus such accounts that are on RBI’s books, at least half—possibly far more—are either dormant or “pass-through” accounts only. (Beneficiaries pull out their full government disbursement each month and fail to save in small increments or invest in micro-insurance policies).

So, if full financial inclusion is NOT happening in India, and probably not even progressing by most important metrics, why is this the case and how might things improve?

MicroSave has spent the last several years trying to answer these questions by talking directly to the financially excluded all over India, to the bankers required by RBI to serve their needs, to the “business correspondent” managers and agents in both urban and rural locations who actually do serve their needs, and to the RBI and other policy-makers who are in fact trying hard to make this work.

Our research indicates the following key culprits:

–         Skewed incentive structures for the agents that only rewards account opening, not transactions and active account use;

–           The wrong products and services for this clientele who need, and are willing to pay for,  more “normal” services such as ATM cards and limited, short-term credit;

–       Poor and wrongly targeted marketing and promotion efforts for the few such as recurring flexible savings deposits and remittances which do seem viable. More corporate marketing strategies—like the campaigns one sees everywhere in India for soft drinks and mobile subscriptions—would work more effectively for these targets.

–          Lack of CICO agents, despite the claims of widespread networks by the banks, in reality very few CICO agents are functional and able to transact.

–          All made worse by customers’ limited trust in the few CICO agents that actually exist (who run out of cash, cope poorly with bad technology, and can’t resolve even simple grievances), and their—usually correct—perception of disrespect and equally inadequate service at bank branches.

–        Banks’ limited enthusiasm for low-net-worth customers and most aspects of financial inclusion (please see “Credit” and NPAs above and related MicroSave research on this topic).

This is the short list. For the much longer litany of woes, please visit MicroSave’s online library and type in “financial inclusion” or whatever keywords best suit your needs.

India is not alone in needing to address these and related problems—and, no, technology, mobile operators, and global credit-card brands are not the all-purpose solutions some would have us believe. As the world’s largest democracy and second-most-populous nation, India has a certain responsibility to think more creatively and implement more effectively for full financial inclusion. If and when it does, the rewards will also be that much more noteworthy and gratifying for all involved.