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Great business for banks – So why are they slow to build agency banking?

Posted on by MSC

MicroSave has been advocating that banks need to get into agent-based banking as a high potential business for several years now … as well as warning why most banks are so slow to do so.

Earlier in the year we highlighted the remarkable progress that Equity Bank has made as it rolls out its agency banking, and how more transactions are now performed at agent’s than in the bank’s branches. This blog presents data from work done by MicroSave in 2012 to look at how agent banking worked for a bank in India. This bank runs its own agent network, supervised from, and working closely with, the branches as a “distributed banking” system. MicroSave has already calculated the type of savings that a bank 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). Similarly Kabir Kumar and CGAP concluded that in Latin America, “Transaction costs at agents range roughly from $0.27 to $0.58 per transaction and are 50% the transaction costs at branches and ATMs”

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.

Furthermore, we calculated that the activities that could be undertaken by the BC agents were currently taking 51% of bank branch staff time as shown in the diagram below.

This means that if BC agents are deployed efficiently, a large part of the staff time could be freed up to focus on conducting high value-low volume transactions, as well as marketing to and servicing high net worth individuals. This, of course assumes that there is scope in the market for growth in services to high value customers. In the relatively remote area of rural India where we conducted the analysis, these customers were indeed present and a combination of the efforts of both branch staff and their BC agents yielded spectacular increases in business at both the branches and through the BC agents.

As a result the BC agents were earning an average of Rs.5,716 (circa $100 ) a month – five times the national average for BC agents in India. And the 20% most successful agents were earning more than Rs.10,000 (circa $175) a month.

As highlighted above, three quarters of this revenue comes from two key activities: marketing loans, doing the initial paper work and referring loanees to the branch for final review and authorisation; and marketing/ servicing deposits (in particular fixed deposits).

Yet despite the clear business opportunity to serve the low income market segment, most banks remain reticent and unwilling to commit to agency banking.

  • Is it because banks are still unable to see the business potential or believe that the returns are higher elsewhere?
  • Or is it that banks are fundamentally uncomfortable with a distributed banking model and running an agent network?
  • Or is it that bank’s key management bandwidth is fully occupied with the battle to serve the higher value market and the burgeoning middle classes?
  • Or is it that the lowest quality staff is assigned to financial inclusion and agency banking as it is typically viewed as a corporate responsibility or mandated requirement.

Who knows – but the first banks to wake up and sieze the opportunity have the potential to dominate the urban and rural mass markets … as Equity Bank is demonstrating.

Choice Pyramid: A Microinsurance Strategy Tool

Posted on by Parul Tandon

Any organisation faces three main dilemmas while strategising for microinsurance. These are:
What product type is best suitable for the market?
What does the client want in the product? and
How should the product be delivered?
Though these questions are common to any industry, in microinsurance, these questions are particularly strategic in nature since each one demands a decision that is often tied with substantial investment and/or commitment. The Choice Pyramid offers a framework to analyse and resolve these issues. The Choice Pyramid framework takes us through three-stages – Environmental, Market and Organisational Suitability for microinsurance implementation. Each of these three stages leads to a decision point for financial institutions to address one of the key questions discussed above.

Virtual money is virtually ageless

Posted on by MSC

I’ve been arguing for a while that the mobile phone shouldn’t just be a payment instrument: it should be a planning or accounting tool. A mechanism that captures how people keep tabs of their various pots of value, goals, and amounts due is more likely to then, in turn, capture the transactions that derive from them. That’s what triggered the Money Management Metaphors (Metamon) work I did with MicroSave earlier this year. I thought I was making a somewhat original point. It turns out that I was just echoing millennia of practice. Or so I have learned from David Graeber’s fascinating and provocative Debt: The First 500 years.

Having been trained as an economist, I assumed the logical sequence of events has everywhere and always been: first barter, then currency, then credit systems, finally double-entry book-keeping – a natural evolution towards higher levels of abstraction and complexity in trading arrangements. I am now informed that there is no evidence that human societies ever worked on barter. In the beginning, there was debt, as people variously shared, gifted and loaned each other stuff. The fabled “coincidence of wants” problem that makes barter so impractical (the fact that at the market you and I can only transact if I want your chicken and you want my goats) was solved by separating transactions in time (now I take something from you, later you’ll take something from me), developing simple debt tracking devices (such as the tally stick), developing various moral codes to guide the sizing and fulfillment of these dues, and periodically netting out the various debts across people in the community.

In Graeber’s words, “abstract systems of accounting emerged long before the use of any particular token of exchange.” The primary need was to create common notions of value, not necessarily to harmonize how value got stored or passed around. So in the beginning money only fulfilled a unit of value or accounting function; means of payment and storage of value came later, much later.

The startling conclusion is that “there’s nothing new about virtual money. Actually, this was the original form of money.” Yet here we are now worrying about whether poor people in developing countries can make the transition from hard cash to dematerialized electronic money. Might this begin to explain why it is that, given the right conditions, mobile money can just take off as it did in Kenya?

Think about it: people everywhere seem to have no problem managing the “artistry” of gifting – an even more intangible and convoluted practice than exchanging digital money. You can see generosity and balanced reciprocity leading to mutual insurance. But you can equally see dependence and charity preserving hierarchy. In Graeber’s eloquent words, gifts “are usually fraught with many layers of love, envy, pride, spite, community solidarity, or any of a dozen other things.” There’s nothing simple about that, but somehow people work out a proper response to gifts (whether they are an honor, a provocation, or a form of patronage) intuitively.

So there is no reason to believe that dealing with abstract notions of (mobile, digital) money should, in itself, be a barrier for ordinary people who are used to informal debt and reciprocity arrangements. The real challenge will be the formalization of finance: making them accustomed to reducing financial arrangements to a bunch of numbers and financial relationships to impersonal arithmetic.

Removing the social context from transactions may obliterate much of the intuition and survival strategies people have developed around money matters for centuries. As Susan Johnson vividly explains, the social dimension of informal finance allows for much more open-ended negotiability of resources in case of exceptional need. And it’s not all casual: reading the typologies of informal financial mechanisms documented by Stuart Rutherford, MicroSave and others, one wonders at how inventive and recurring certain structures are. Those can only be the result of a natural evolutionary process based on variation (fed by the inherent flexibility of social arrangements) and selection (the disciplinary and insurance benefits they bring).

With formal finance, all that is replaced by binding credit limits, inflexible terms made up by someone, and an imposed moral requiring you to repay your debts on time (the “criminalization of debt [non-repayment],” to use Graeber’s graphic if hyperbolic language).

The core problem of digital finance for poor people is then not how intangible it is, but rather how explicit everything becomes. Being more discreet may be an advantage, but must it all become so discrete too? To end with Graeber: “When matters are too clear cut, that introduces its own sorts of problems.”

“Why rob agents? Because that’s where the money is”

Posted on by MSC

(with apologies to Willie Sutton, US Bank Robber, 1901-1980)

One of our staff was nearly lynched recently. People were piling up tyres and bringing petrol to burn him alive. He was only rescued by a series of frantic calls and the intervention of the police and the Regional Manager of the mobile network operator with whom we were working.

What was his crime? He was conducting an interview with a mobile money agent for MicroSave’s new Agent Network Accelerator project (see at the end). With the persistent questioning, the agent became alarmed … not least of all because one of his colleagues who operated a similar agent outlet nearby had been shot dead during an armed raid on his premises the day before.

He is not the only agent to be shot – in Uganda in the first five months of 2013 alone five agents have been killed and robbed. And our interviews with agents in Tanzania also showed a growing, pervasive fear of being violently robbed – a concern that is far greater than worries about being defrauded.

Our research shows that a growing number of agents are feeling insecure – indeed M-PESA agents in Kenya are already “fortifying” their outlets to counter growing and often violent robbery. “Armed criminals stormed a mobile money shop and ordered the operator to hand over cash. Although the agent complied with their demands, the gun-wielding criminals shot him dead.” – The Nation, May 9th, 2013. With an estimated $18 billion of transactions going through mobile money systems in Kenya in 2012, perhaps we should not be surprised that agents are being targeted. (The prolific bank robber Willie Sutton was said to have commented, “Why rob banks? Because that’s where the money is”).

Even as early as 2011, in its Agent Management Toolkit, CGAP noted that, “One aggregator for M-PESA reports that 10 per cent of agents were robbed in 2009. In Brazil, 93 percent of agents interviewed by CGAP report that being an agent increases the risk of being robbed, and 25 per cent say they have been robbed at least once during the past three years.” This significantly increases the cost of doing business. They have to invest in physical security and keep lower amounts of float (which of course reduces their ability to meet demand for large transactions and often requires them to visit the bank to “rebalance” more frequently).

Violent robbery is not the only problem that agents face. A recent MicroSave publication “Fraud in Mobile Financial Services” listed a growing array of schemes and scams designed to dupe and steal or extort money from agents. These frauds encompass the predictable efforts to pass counterfeit notes to agents, through to relatively sophisticated phishing or spoofing SMSs by customers; as well as frauds perpetrated by agents’ employees under-reporting balances.

Nonetheless, in April 2013, Safaricom noted that, “Losses to customers [on M-PESA] are at around 0.002 per cent while fraud losses to agents stand at about 0.007 per cent. The key form of fraud used is trickery.” This is of course, impressively much lower than the 3-5 per cent rates associated with credit cards … but also implies that agents lose “only” $1,260,000 each year. And, of course, often these losses will be concentrated on a sub-set of the 60,000 agents currently offering cash in/out services for M-PESA. But the good news is that MNOs, banks and agent network operators can take, and are taking, measures to manage fraud – unlike violent robbery, it is a challenge that is within their control.

While robbery and fraud do not seem to be slowing down the numbers of agents signing up, the industry needs to consider is how to keep more money digital, reducing the need for agents to carry significant amounts of cash. The growing costs for the agents threaten to significantly diminish the business proposition to act as cash in/cash out access points for digital financial service providers … and thus the commissions that agents will require to remain in the cash in/out business. This could have a debilitating effect on already fragile, nascent markets for digital financial services.

Digital financial service providers will need to work with central banks to establish central information exchanges to counter frauds. But other government ministries (Home, Law etc.) will have to move quickly to respond to the rising tide of murder and robbery if digital financial inclusion is to succeed. The question is what can/should they do?

Suggestions would be greatly welcome.

How to improve small business and its very small success rate

Posted on by MSC

MSME is a term which covers a very wide range of businesses—from micro, the first ‘M’, to medium, the second ‘M’, with S(mall) in the middle. They share two things in common in developing markets:

  • The first is the essential role they play in terms of local employment (up to 45%) and contribution to both Gross Domestic Product and Gross National Product. (“D” is location of production; “N” is ownership. MSMEs can account for up to two-thirds of GDP/GNP in some of the emerging countries.) Strong MSMEs mean a growing economy and more jobs.
  • The second is a dearth of readily available and affordable financing. In some areas, almost two-thirds of all such enterprises lack sufficient capital and access to finance, according to an IFC-McKinsey report.

The middle is always easy to overlook. Multinationals and established businesses seeking to enter emerging markets have no difficulty obtaining favourable loans, tax holidays, and beneficial foreign-exchange agreements. Most readers of this blog are also well aware of the micro-credit and funding options available to capable low-income individuals who hope to establish tiny enterprises and the success stories that require more capital to expand and diversify. This takes them into the MSME domain, which is also referred to as the missing-middle because financial products and delivery channels have not evolved for this segment.

MSMEs with less impressive balance sheets still need capital to survive. These are not an unlucky few; they comprise an estimated 365-445 million units (considering the informal enterprises, the numbers increase substantially to 900-950 million), and up to 60% of local businesses in Southeast Asia and Sub-Saharan Africa. The total unmet need for small-business credit in the formal and informal, emerging market sectors ranges from $2.1-2.5 trillion, according to a recent McKinsey report, “Two trillion and counting”.

This is a lot of money, in fact approximately the same amount the UN estimates global natural disasters have cost governments, banks, insurance companies, and individuals since 2000. The reason governments and insurance/re-insurance providers in particular might want to note the correlation is that less developed countries are invariably the most vulnerable to drought, famine, floods, earthquakes, and other disasters that will only increase with climate change.

Successful small businesses help ravaged landscapes recover more quickly and effectively. And in the aftermath of the global financial crisis, which many of the weaker emerging markets are still struggling with, the role of small businesses becomes even more important to the local economy and job creation. If two-thirds of MSMEs are already strapped for cash, however, reconstruction in both scenarios will take a lot longer and the poorest segments of the population will suffer even more.

Both banks and MFIs are coming to understand that strong MSMEs are in fact essential to economic growth and stability. Nevertheless, the key question that remains for both is, what’s necessary and how difficult is it for banks to downscale and MFIs to upscale to serve MSME segments?

Issues they must both address are:

  • MFIs have traditionally served the low-income customers under the group-lending model. This model fails to address the credit needs of MSMEs.
  • Microfinance institutions have also had their fair share of bad publicity and problems with individual loans in recent years. Trust may be an issue for some MSME clients. (For in-depth analysis on this topic, please see MicroSave’s research papers and related materials).
  • Banks, in turn, rely on collateral for their lending model. Most perceive MSMEs with no/low attachable assets as too high a credit risk.
  • To change, and to support MSMEs, banks will need new credit assessment and risk methodologies, new training for their staff, new marketing, and better “last mile” connections and availability for remote MSME customers.

Neither banks nor MFIs are known for their nimble ability to adapt and change. It will take time for MFIs to expand both their credit assessment and their credit offerings to better fit small enterprises. Banks will need to rethink how loans to micro and small businesses can work without hard collateral guarantees and in remote areas their branches do not usually serve.

The rewards will still outweigh the risks in most cases. Financial inclusion does not just mean more individuals with more active bank accounts. It means a flourishing economy with formal banking and loan services for even the very poor and the very small business enterprise.

Why do (some) MNOs sprint and (most) banks limp?

Posted on by MSC

A previous MMU blog “Can India Achieve Financial Inclusion Without the Mobile Network Operators?” concluded “MNO-led systems therefore have a hugely important role to play to create the market – to build people’s confidence in digital financial services and local agent-based systems – and thus lay the foundation for digital financial inclusion.”

All well and good… and of course MNO-led mobile-money models have been more successful than bank-led models in several parts of the world. This is in part because mobile money is a more natural “fit” to MNOs’ high volume, low value transaction and agent-based business. But also the business case for MNOs is based on reducing customer churn and digitising payments for airtime, in addition to the revenues for managing payments transactions.

Furthermore, payments are inter-spatial transfers that can be confirmed either by receiving the money, and/or with a simple call by the sender to the receiver – thus building instant trust. These factors (together with MNOs’ natural advantages as first movers in this market) put them in the perfect position to make the market for digital financial services.

Conversely, banks are much more comfortable handling low volumes of high value transactions in their own premises (and certainly not with dispersed agent networks). And the business case for banks is primarily based on offering a range of products. Furthermore, since many of these products (for example insurance and savings) are inter-temporal (as opposed to inter-spatial) in nature, immediate confirmation and thus trust in the new digital financial system is much more difficult to achieve.

But …in markets where the Central Bank insists on bank-led models and prohibit MNOs from issuing e-money, are MNOs likely, or able, to play the market making role for digital financial services? The moves from Airtel with Axis Bank and Vodafone with ICICI Bank in India suggest that (after many false starts) MNOs will indeed play a very significant role as agent (or business correspondent) network managers.

Why? Well, MNOs have several significant advantages as agent network managers:

  • They have established multi-layer distribution networks, with many thousands (in India’s case 1.5 million!) of retailers selling airtime and providing extensive urban and rural coverage.
  • The MNO business model is based on usage (those high volumes of small value transactions), and therefore more aligned to the willingness and ability of the poor masses to pay in small sums; unlike the traditional bankers’ business model that is based on float.
  • Mobile pre-paid platforms that manage high volumes of low value electronic recharge are very synergistic with the needs of digital financial services. These platforms also allow the ability to offer highly customised and relevant products (supplemented with capabilities for fine segmentation and analysis of usage trends).
  • MNOs have high levels of brand awareness amongst poor and rural customers that can be leveraged well for cross-selling financial services. MNOs also invest regularly and extensively in marketing and promotions to create channel and consumer awareness.
  • Telecommunications is a well regulated service industry, similar to banking. Thus mobile retailers acquiring new subscribers are well equipped to handle KYC norms and service activation processes.
  • Telecommunications is also an investment intensive and long gestation business. Thus mobile operators have superior capability to source funds, and make large investments with long time horizons for returns.
  • MNOs work through extensive partnerships, aggregating third party products seamlessly into their offerings – essential for the success of digital financial services.
  • Last, but quite importantly, in many countries there is severe competition, price-wars, and commoditisation of voice and basic services, so MNOs are highly motivated to offer stable, diversified value-added-services that promise substantial upsides in terms of reduced churn, decreased airtime distribution costs and increased revenue.

Digital financial services in one of the few industries that has a clear first mover disadvantage. Building the trust of low income people in electronic money, the systems that manage it and the agents that provide the cash in/out services is a very challenging proposition. But MNOs are, in many ways, better placed than banks to meet these challenges – they are likely to be essential to achieve digital financial inclusion, even in India and other bank-led model markets.