Enterprise Solutions to Poverty Interim Report on Alternative Channels and Products for Inclusive Finance

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1 Enterprise Solutions to Poverty Interim Report on Alternative Channels and Products for Inclusive Finance August 2014

2 Forty financial and related institutions are participating in the ESP survey on channels and products for inclusive finance with 20 analyzed in this report Commercial banks 17 Banco do Brasil Brazil MFIs continued CreditEase China Bradesco Brazil Basix Group India Caixa Economica Federal Brazil SKS India Banco Estado Chile Related, partner organizations 10 Bancolombia Colombia Servientrega-Efecty Colombia BCSC Colombia Sura Inversura Colombia Citi Colombia Fincomun Mexico Banamex Mexico Globokas Peru Banco Azteca Mexico Alibaba China Bancomer Mexico Banco Continental Peru F-Road China BCP Peru EKO India Scotia Bank Peru FINO India HDFC Bank India IFMR Trust India ICICI Bank India Safaricom MPESA Kenya SBI India Resource institutions 6 Equity Bank Kenya CFI Accion USA MFIs 7 CGAP USA FMM Colombia MicroSave India Compartamos Mexico Women's World Banking USA CrediScotia Peru Asobancaria Colombia Financiera Edifycar Peru ABM Mexico

3 High Medium Low Leading banks and MFIs indicate that they are motivated to take advantage of a large, untapped, profitable market; help low income people and small businesses build income and assets, and cross sell products to a promising client base. Taking advantage of a large, untapped profitable market opportunity Helping a substantial number of lowincome clients build income and assets Helping micro and/or small enterprises build their businesses, income and assets Building a promising new client base, with opportunities for growth and cross-selling a range of financial products and services Responding to mandates or strong signals from government and/or regulators Moving down market, since traditional FI markets are becoming saturated and/or highly competitive Bank MFI High Medium Importance Low

4 Among leading banks, patterns differ but for most, BCs and mobile banking are growing more rapidly than are branches and ATMs Banco do Brasil Bancolombia Banco de Crédito del Perú Branches Branches ATMs ATMs BCs Banco Caja Social ATMs BCs Mobile (thousands of customers) Banco Estado BCs Mobile (thousands of customers) ICICI Bank Branches Branches Branches ATMs BCs ATMs BCs Mobile (thousands of customers) ATMs BCs Mobile (thousands of customers)

5 In Brazil, Mexico, Colombia and Peru, growth in branch and ATM outlets and transactions is low relative to BCs and e-banking--but these channels dominateinn most countries Brasil Mexico % of total outlets Branches ATMs BCs 4% 29% 67% 12% 4% 2% 28% 2% 7% 4% 35% 9% 16% 15% 33% 48% 3% 2% 47% 7% 3% 3% 76% 48% % of total transactions Average annual growth rate (2008 to 2013) E-Banking Branches NA 12% 57% NA 38% Colombia 26% 4%.3% NA 13% 1% NA 25% Peru 35% 10% 1% % growth outlets % growth transactions ATMs BCs E-Banking 21% 67% NA 25% 10% 3% 3% 56% 64% 46% NA 20% 26% 61% NA 33% 16% 17% 26% 36% 35% 6% NA 30% Share and growth % > 50% 26% - 50% 11% - 25% 0 10%

6 For inclusive finance, financial institutions see top management commitment, a range of products tailored to needs of target client segments and lower cost, alternative distribution channels to enable cost effective outreach as important Measures to succeed Bank MFI Strong top management commitment to build inclusive finance Providing a range of products payments, savings, insurance and/or loans tailored to needs of the target client segments Building lower cost, alternative distribution channels beyond the normal branch infrastructure--e.g. banking correspondent agents, ATMs, mobile payments and banking to enable cost effective outreach to clients Using mobile channels to get transaction costs down, particularly for low income, more remote and/or low transaction volume clients Providing payments services G2P, P2P and/or P2B as the basis for building profitable inclusive finance Providing services through alternative channels to all interested clients poor and non-poor Building lower cost branches, mini-branches, bank owned points of sale to reach underserved client groups and to facilitate cash in-cash out with non-traditional retail operators/points of sale Offering inclusive finance products, with each product designed to be profitable Building cost effective financial literacy and/or product education programs to build sustained use of inclusive finance products Offering a range of financial products, with the product mix designed to be profitable even if individual products are not

7 Banks consider G2P payments, enterprise loans, and small scale deposits to be high value products for low-income clients. Most leading banks indicate that they have found effective and profitable ways to provide loan payments, inurance and e-wallet Payments G2P Enterprise loans Small scale deposits Loan payments Domestic remittances Savings accounts 1,0 2,0 3,0 4,0 5,0 Life/funeral insurance Gold loans-pawn broking Flexible savings e- wallet Home improvement loans Credit life insurance Health insurance 1,0 2,0 3,0 4,0 5,0 Consumer loans Balance inquiry Bill payments Programmed savings Debit cards Credit cards Foreign remittances Pensions/mutual funds Value of products to low-income clients Orgs. effectively and profitably provide product

8 Most banks indicate moderate to high profitability in BC functions on: P2P payments, bill payments, cash withdrawals, savings, and loan products. Product or service Colombia Bank 1 Colombia Bank 2 Méxican Bank Peruvian Bank Kenyan Bank Indian Bank G2P payments P2P payments Bill payments Cash withdrawals Savings accounts Insurance products Loan products Balance inquiries

9 Most banks surveyed are planning to expand BCs relative to branches to reduce costs and expand their client base, with low focus on multi-product offerings Expansion or contraction of branches Plans to expand or contract Reasons for expansion or contraction Build platform for multi-product offerings Expansion of BC retailers Plans to expand or contract Reasons for expansion or contraction Reduce establishment costs Reduce operating/service costs Increase or maintain control Expand client base Build platform for payments Build platform for multi-product offerings BBVA Bancomer Contract Expand radically Banco do Brasil Expand marginally Reduce establishment costs Urban Rural Reduce operating costs Urban Rural Increase or maintain control Expand client base Urban Rural Build platform for payments Expand marginally Banco Caja Social Expand marginally Expand marginally Banco Estado Expand marginally Expand radically

10 Leading FIs see BCs as effective channels for low income clients in providing payments and basic financial services to low-income customers. Bank strategy BC agents in established markets provide a means to serve lower priority customers at lower costs, by providing an alternative to branch services MFI strategy BC agents are a profitable and effective means to provide payment services to low income and more difficult to reach customers BC agents are an effective means to provide basic financial services to low income customers BC agents are a cost effective means to mobilize small amounts of savings from a large number of low income customers BC agents are effective in providing a convenient way in which low income people can save BC agents can be cost effective in offering microinsurance products in origination, premium payments and/or claims procedures BC agents are helpful in micro-lending, in loan origination functions and in providing a convenient place for customers to repay loans

11 Products offered Value for client Most banks focus on payments in their BC model, while some banks have succeeded in building robust multi-product offerings through BCs Model focused on payments Offers to client payment services and simple transactions Convenience Inclusion Superficial Deep Basis of efficiency and profitability Types of agents required Alignment of incentives Significant number of necessary daily transactions Economies of scale Small stores Ensure that agents have other sources of income Incentives per transaction, with minimum number Complexity Low High Scalability Easy to use with small stores, collaborations with corporations or use of intermediaries Model focused on multi-products Offers a variety of products: savings, insurance, loans, remittance, pensions, financial education, etc. Increase in income, assets, and economic security Cross-selling Dense economies: serving a group focused on low-income and high class clients in the same area Useful to have agents, mini-branches, or mobile advisors with time to manage a variety of products Incentives based on number of products per client and levels of activity in different products More difficult. Requires more bank involvement and more capability in agents

12 Some banks and MFIs are successfully migrating to inclusive finance through the offer of multi-products, with an increased focus on building income, assets Current Movement to Product and geographical focus Banking or inclusive financing through banks Microcredit through specialized institutions Payments: Bill payments Government subsidies Remittances Mandatory savings accounts More urban focus Loans Urban focus in Latin America, more rural in Asia and Africa Financial services to increase income and assets of low-income people. Short, medium, and long term savings Payments Loans to micro-businesses, farmers, and consumers Life insurance, health insurance, and crop insurance Micro-pensions and mutual funds Urban and rural focus

13 Many banks build BC network profitability based upon payments and then build out other products on the BC platform. Most MFIs have established profitability based on loan portfolio Platform with profitability based on payments Etapa Stage 1: 1: Establish Establecer profitability rentabilidad Stage Etapa 2: Approving 2: Aprovechando the platform for multi-products plataforma para multi-productos Products Payments that can be included: G2P, B2P, P2P* Institutions Used by banks working with small stores, cell phone agents, and companies that produce consumer goods Mutual funds > commissions Micro-pensions commissions Loans to consumers interest Savings resources Insurance commission * G2P: payments from gov. to consumer B2P: from business to consumer P2P; from consumer to consumer Keys for success: Training Agents with time and incentives to introduce more complex products

14 Three main BC models: bank working directly with retailers, bank collaboration with companies with distribution networks, and banks working with intermediaries specialized in creating BCs. T Structure Bank T T T Models Examples Pros, cons and keys to success Bank working directly with small stores Pros: Bank has direct relationship with points of sale. Small shops are in lowincome areas Cons: Difficult to identify and deal with many independent agents. KSF: Specialized bank team for BCs. Bank Bank T T T Specialized company Bank collaborating with companies with wide distribution channels Bank working with companies specialized in creating BC networks Pros: Banks can use large retail networks for rapid growth. Cons: Stores may not be in lowincome areas. Can be difficult to align incentives KSF: Close collaboration on selection, training, agent support Pros: Tap companies specialized in building BCs; can reduce costs. Cons: Bank can lose control of strategy, with Company focusing on short-term profitability. KSF: Bank should control BC selection, products and incentive structure, outsourcing technology.

15 Brazil s Bank Correspondent Distribution Model is Extensive Brazil has an extensive BC network led by Bank of Brazil, Caixa Economica Federal, and Bradesco. G2P and bill paying dominate, providing the platform for profitability Why Brazil is leader in banking agents: 16 years of supportive regulation encouraging BC and creation of networks Banks are required to handle boletos, installment payment systems 1 in 4 households receives monthly G2P payments Number of BC agents 41,023 (16,440 active) 36,451 46,427 Total 375,315 Partnerships 6,261outlets with Brazilian Postal Service and MaisBB 33,500 CAIXA AQUI and lottery outlets Supermarkets, drugstores, and other retail chains Every one of the 5,564 municipalities in Brasil is now reached by a bank branch or a BC 25% municipalities only receives services from BC Bill payments 75% of volume 1.2 billion) Rural BC agents focus on deposits and withdrawals: 38% vs. 8% for urban agents Some specialize in loan payments, credit cards and auto loans Source: Banco Central de Brasil BFA 2013 Focus Note Do Agents Improve Financial Inclusion

16 In Brazil, rural BC agents perform fewer transactions but Agents: provide not a a wider unique array solution of services and are more profitable than urban agents In Brazil, rural agents perform fewer transactions but are more profitable than urban agents % 80% 60% 40% 20% 0% $18 $ $77 Urban Semi-urban Rural Rural agents are more active with deposits and Transactions withdrawals per while day urban Daily agents profits focus on payments 88% 4% 5% 3% 6% 14% 8% 71% 21% 20% 18% 40% Urban Semi-Urban Rural Bill payments Deposits Withdrawals Non-financial Account opening Combination of two types of agents: 6,000 Banco Postal offices 14,000 Bradesco Express sale points: branches and agents managed 15 different integrators MOTIVATION Independent agents: income Small stores: increase in clients and income Post offices: commission

17 In Mexico, Banamex originally utilized independent stores, but now focuses on corporate collaborations and partnerships with CB aggregators Focus on Model 1 Focus on Model 2 Focus on Model 2 and 3 Stopped offering remmitances to avoid money laundering risks 4,500 BCs 17M transactions Existing clients 13,500 BC 60M transactions + OXXO, Postal service Transactions Payments Deposits Withdrawals Transfer account (e-wallet) 18,000 BC 100M transactions + Barared Geography, scope Eight regional offices to promote services among the population Very strong urban coverage, relatively weak rural presence Partnered with CB aggregator (Barared) to increase Banamex aqui reach Focus on getting to stores before other banks - strong first mover advantages for service payments No cash withdrawal offered in OXXO, due to operational constraints and risks Believe that their role in the channel should be mainly transactional BC network supports loan payments for Banco Compartamos, large MFI with wide reach in community microcredit Source: ESP Team Study

18 In Peru, financial institutions have distinct distribution models including network of retailors and partnerships with specialized BC aggregator Distribution Model Development of BC s own network Partners of large chains and small businesses Demand of exclusivity on the part of the BC Mixed network between outsourced and owned Outsourced network to Globokas (KasNet) No exclusivity demand for BC Owned network with separate brand (Agente Express) BC network outsourced to Globokas (KasNet) No exclusivity demand for BC Key partners 5700 agents, 32% of total agents in Peru Most agents are mom and pop stores with some retailers 52% of agents located in Lima Total BS at 2000 Globokas (1,500) Main Globokas client so high degree of negotiation power Limited to Globokas network Due to small size, low negotiation power with supplier Benefits and challenges + Control over selection and operations of BC Better positioned to introduce new products Higher initial investment Required dedicated team Limited fixed cost Only one partner to deal with Limited Control on selection and operations of BCs No fixed cost Only one partner Limited Control on selection and operations of BC Low level of price/service negotiation power with supplier -

19 Bancolombia uses small stores for transactions in multi-products but has its own mobile advisors for the origination of products BC Banking Correspondent Operates in a BC terminal Manages and is responsible for cash Travels to the branch when amount of cash exceeds the limit (US$10,000-20,000) Prohibited by law to attract new customers or sell new products Receives fixed commission per transaction Bank branch BC Mobile advisor Mobile advisor CB Located in areas far away from branches Originates new clients Sells new products Manages the relationship between BC and client Divides time between BC and clients Bank employee Fixed salary with quarterly bonuses Population BC Deposits Withdrawals Advances in cash Loans/Insurance payments Transfers within the network Bill payment BC w/ mobile advisor <10,000 20% 27% 10,000-50,000 50, , , ,000 49% 59% 7% 5% 8% 5% > 500,000 17% 4% Available transactions

20 Banks succeeding in inclusive finance cite several leading products which lower barriers, facilitate transactions and use alternative channels Product Product features Channel features BBVA Bancomer Debit cards Receipt and disbursement of government payments Ability to open account without visiting a branch, low fees Debit cards for social programs, low commission Easy to open accounts Easy to receive government payments Balance inquiry Via SMS Mobile service for cell phones Banco do Brasil Consumer loans Credit cards Pre-approval, immediate availability, modifies to various channels Payment plans, home delivery of products Payments Banco de Crédito del Perú Payments with a card, extensive network through which to use Savings accounts Low fees, limited transactions in high cost channels, no minimum beginning balance, low interest rates Easy access to products and services, electronic operations, customer service available through phone and online Flexible customer service hours, electronic payments, and customer service available though phone and online Flexible hours of availability Availability of low cost customer support channels

21 Banks succeeding in inclusive finance cite several leading products which lower barriers, facilitate transactions and use alternative channels Product Product features Channel features ICICI Bank G2P payments Domestic remittances No fee to open account, no maintenance fee, accessible through biometric information Immediate fund transfer, minimal fees, minimal KYC requirements Adaptation and automation by government Areas with high concentration of immigrants Savings accounts HFDC Bank Savings accounts Debit cards Balance inquiry Minimal KYC requirements, introduction done through BCs, zero cost to open and maintain account, accessible through biometric information Zero balance, up to 8 free transactions Maestro debit cards that work at any BC point of the bank, and any ATM SMS alerts, can be checked via mobile BC networks can perform basic operations Door step service, instant account opening, relaxed KYC Instant issuance Automatic SMS alerts

22 FIs consider the most important BC functions to be electronic bill payment, cash in-cash out, accepting of savings deposits, receipt and disbursement of G2P payments, and loan repayments Product or service Bank MFI Electronic bill payment Cash in-cash out with savings accounts Cash in functions for products offered 4.5 n/a Accepts savings deposits Cash out functions for products offered 4.3 n/a Receives and disburses government payments Domestic remittances-cash in and cash out Accepts loan repayments Opens savings accounts, within simplified KYC requirements of regulators and bank Receives insurance premium payments Originates loans-helps in paperwork, recommends Balance inquiries Handles e-payments Originates insurance products paperwork, rec International remittances-cash out

23 Banks, MFIs and partner organizations consider optimum phase 1 offerings by BCs to include P2P payments, bill payments, balance inquiry, loan payments and savings products Product or service Financial institutions Financial institutions focused on low-income clients BC partner organizations P2P payments Bill payments Balance inquiry Loan payments Savings products G2P payments Insurance products Loan origination Most institutions consider second phase product offerings by BCs to include loan origination and insurance products.

24 The introduction of multi-products needs to be phased, to generate profits for the bank and to respond to needs of low income clients Focus on building shared value with low income clients Need to develop product offerings which include: payments, loans, savings, insurance, mutual funds, micro-pensions Need to create client focused information systems, with databases and with systems which help the bank identify clients eligible for cross selling of other products. To accomplish the transition from a transaction model to a wealth-generating model, it is necessary to Tailor products Increase the range of products offered Train agents It is important to design simple products with features or marketing tailored to the particular needs of different client segments eg loans against jewelry, money market mutual fund Expansion of the range of products based on ability to pay Phase 1: Payments products. Transition from liquid savings products to long-term products, recognizing demand for longer term savings among low income customers r Phase 2: Move from services centered on transactions to more complex services focused on wealth creation and risk mitigation: loans, insurance, pension products Orientation and training of agents, with cost effective approaches to financial literacy

25 In building effective BC networks, leading FIs see importance of bank engagement in BC selection, product priorities and design, and incentives structures. These FIs see need for specialized staff dealing with BC arrangements and selection of capable BC partners. FI needs to be engaged in selection criteria of BCs, product priorities and monitoring results regardless of the BC arrangement. Bank MFI FI should have specialized staff dealing with BC arrangements FI needs to structure win-win-win-win incentive structures which are aligned to ensure that the bank, BC network organizer, BC agents and clients view the BC arrangement as profitable. FI needs to design product offerings which are tailored to the needs of lower income, harder to reach BC clients. FI needs to push the envelope on moving to e-transactions, using mobile technology, with cash-in, cash out functions, if the costs of providing financial services to low income customers are to be lowered enough to enable profitable solutions. FI needs to ensure that the BC network provides cost effective education of clients on product features, values and use. FI needs to ensure that its BC network partners whether retail chains or specialized intermediaries are capable of doing the BC retail selection, training and ICT integration with the retailers and the FI

26 FIs cite modest constraints to BC development in government push to offer unprofitable products, regulations, and difficulties developing profitable products beyond payments Constraints to growth in BCs Bank MFI Push by government and/or regulators to develop products for low income customers, for which there is inadequate demand or which are very expensive for the FI to provide Regulatory constraints on what a BC can do and/or on what time of organizations can be BCs Lack of profitable product opportunities beyond payments services in which BCs can add value Low interest by retailers in devoting the time needed to educate potential customers on product features and to do the work needed by a BC Inadequate commitment and resources from FI senior management to build channels for low income, harder to reach customers Difficulty finding retail chains with adequate numbers of outlets to create efficiencies in building BC networks Inadequate focus by the FI in building the selection criteria, training and/or ICT systems to build out successful BCs Lack of adequate intermediaries specialized in organizing BC networks

27 Leading banks plan rapid expansion of mobile and internet banking with more modest expansion of BC networks and ATMs. Bank planned expansion MFI planned expansion Internet banking Mobile banking/e-wallet BC retailers - smaller cities BC retailers - major cities ATMs/kiosks-major cities ATMs/kiosks-smaller cities Full branches in major cities Full branches in smaller cities or rural areas Banks plan to maintain or contract branches in major and smaller cities. Financial institutions focused on low-income clients indicate plans to more radically expand BCs in major and minor population center, mobile banking and ATM

28 Three major e-wallet models: one bank-one telecom, one bank-multiple telecoms, and multiple bankstelecoms Structure Models Examples Bank Tel Com C C C C One bank, working with one telecommunication company to reach multiple customers Bank Tel Com Tel Com Tel Com C C C C One bank, working with multiple telecommunication companies to reach customers Bank Bank Bank Tel Com Tel Com Tel Com C C C C Multiple banks (all financial institutions), working with all telecommunication providers Peru Model - WIP

29 Bancolombia s Ahorro a la Mano is aimed at the unbanked BOP population with a focus on increasing savings and simplifying P2P transactions Main purpose: savings Main Characteristics Four Carriers: Movistar, Tigo, Claro, Uff Linked to mobile phone free transfers to any Bancolombia account Variable interest payments depending on balance No minimum balance, no management fees Hospitalization insurance for accounts with > USD175 How does it work? Fees Cost (USD) Open: Easy process using internal SIM card menu Cash in: Deposits in Bancolombia branches and BCs Salaries paid electronically by employers International money transfers Cash out: ATM (without a card), Bank branches, Bank agents Mobile transfers to third parties Invoice payment with partner companies Opening Fee Free Management Fee Free Transfer fee Free Deposits - Branch and BC Free Withdrawals - ATM and BC $0.5 Balance Inquiry (Mobile) Free Source: ESP with Bancolombia data. Exchange rate: $1 USD = $ COP 29

30 The advantages of Ahorro a la Mano model for customers and growth trends and potential opportunities going forward Source: ESP Study Advantages to customers Low cost access to banking services, including mobile access Broad network of cash-in and cash-out points Interest payments for savings Safe e-transfers of salaries, remittances Easy transfers to other account holders Easy e-payment for services Potential cross-selling of insurance, loans Growth and opportunities Achieving social impact: 41% of account holders are below poverty line Aggressive growth projections for 2014 to reach 420,000 accounts by year end Average account balance has grown from US$6 to US$31, with continuous efforts to build trust and account balances Only 4% of account holders now qualify for hospitalization insurance, due to requirement that have US$175 account balance. Need more marketing by existing and new rural personnel, and increased education

31 Banamex Transfer is a transactional platform backed by major players in the banking and telecom sectors Main Characteristics Main purpose: transactional Banks: Banamex (18% MS) and Inbursa (5% MS) Carrier: Telcel (70% market share) Account linked to mobile phone with optional debit card Money transfer to any Telcel mobile phone or other banks (via SPEI) How does it work? Fees Cost (USD) Access: by calling from a Telcel mobile phone Cash in: deposit with bank branches, bank agents and transfers. Cash out: ATM (without a card), bank branches, bank agents, P2P and payment at retail establishments Opening fee Management fee Source: ESP Team analysis with information of Transfer and CNBV Exchange rate: $1 USD = $ MXN Free Free Transfer fee $0.08 Deposit with bank agent $0.54 Withdrawal without ATM card $0.54 Balance inquiry(sms, CB, ATM,) Free 31

32 Banamex has generated a large number of account openings but transactions and account balances remain low. Pros include the ease of making payments and increased access. Performance to date and forecasts Banamex Opened Accounts (000 s) 473 Inbursa +218% 1,502 1, * * Active accounts While total active accounts remain at high levels (~80%), accounts that were opened in the first months have a lower percentage of active accounts (~70%) Source: ESP Team analysis with information of Transfer and CNBV Transactions per account and average account balance 2 Transactions per account per month Average account balance is less than $60 USD Pros and cons: current customers Easy transfers to other account holders Increased convenience, ATM without debit card Additional services not provided, loyalty not rewarded Pros and cons: new customers Lower cost local remittances Open accounts at remote locations Low cost access access to banking, though high relative transaction costs Safe electronic transfer, e-payments and other account holders Potential cross-product selling of insurance and credit-but not yet offered

33 BBVA Bancomer s Cuenta Express in Mexico is a transactional platform that use Dinero Movil to transfer money to any person without having a bank account or a particular carrier Main Characteristics Main purpose: transactional Bank: Bancomer (18% MS) Account linked to mobile phone with debit card Transfer to any person, regardless of whether account holder, using Dinero Movil service Cuenta Express How does it work? Fees Cost (USD) Open: only at bank branches Cash in: bank branches, bank agents and transfers. Opening Fee $3.85 Management Fee $1.15* Transfer fee Free Cash out: ATM (without a card), bank branches, bank agents, P2P and payment at retail establishments Source: ESP with Transfer and CNBV data. Exchange rate: $1 USD = $ MXN Deposit with Bank Agent Withdrawal without card ATM Balance Inquiry(SMS, CB, ATM,) Free Free Free 33

34 The number of account openings under Cuenta Express is declining. The number of active accounts three months from opening is less than 50% of accounts opened. Transactions are migrating to bank agents. Performance to date and projections Opened Accounts vs Active Accounts (000 s) Transactions per channel and average account balance M 3M 1S1 2 2S1 2 1S Other Teller Bank Agent Source: CNBV and BBVA Bancomer Account Balance Average: USD 39 34

35 In Mexico, BBVA Bancomer has launched a cardless money transfer service that encourages the unbanked to get closer to banking services How does it work? Good for one-time and recurring P2P payments: 1) Account holder sends money from ATM, online banking or m obile app 2) Sender receives a 4-digit confirmation number Shares it with receiver 3) Receiver receives a 12-digit withdrawal key 4) Receiver withdraws money from any BBVA Bancomer ATM by typing in confirmation number and withdrawal key. No plastic card needed. Exponential growth in use since launch in October 2012 Leverages on large ATM blueprint: more than 8,000 ATMs Average transaction = $100 MXN, about USD 80 Has not been monetized yet waiting to reach critical uptake mass Can be used for B2P and G2P payments--salaries and money transfers Potential to offer other products to unbanked population by understanding product usage Product aimed at financial inclusion in unbanked BOP, but proving to be useful for higher income segments due to simplicity Source: ESP Team Study

36 Peru s e-wallet initiative aims to increase population within the financial system by creating a mutliplatform, multibank solution Main Characteristics Main purpose: increase outreach to unbanked and under-banked customers. Aim is to reach 1 million users in the first 18 months. Banks: All banks within the financial system Three carriers: Movistar, Claro and Nextel Linked to mobile phone free transfers to any account within the system Platform Manager Banks Service Provider TBC TelCo s How does it work? Open: at exclusive bank correspondents (40 to 50,000) nationally and at bank branches Cash in: deposits in any bank branch or BC, free for customer, paid by banks Cash out: at any bank branch or BC, cost per transaction Product sold: mainly basic saving accounts, with S/.1000 maximum (~$370) Source: ESP Team interviews in Peru Fees Opening Fee Management Fee Transfer fee Deposits - Branch and BC Withdrawals - ATM and BC Balance Inquiry (Mobile) Cost (COP) Free Free Free Free TBD Free 36

37 Main risks and risk mitigating mechanisms for Peru s e-wallet initiative Telco Negotiation Consumer adoption Business model Cash incash out BC model Experience elsewhere indicates that telcos may increase prices as e- wallet solutions expand Telco s launch of e-wallet products may undercut Fis Negotiation 37 with regulator seek prices in line with int l levels Low bank penetration and use of financial products No familiarity with e-money and distrust among customers Participants budgeting high market spend for financial education Cost distribution formula among banks not fully determined in January Profitability expected to come from new customers to financial system and cross selling Pilots to be conducted to test business strategies Rate of expansion of BCs, needed for cash in-cash out, projected to be 50,000 BCs in Year 5, may limit outreach SBS reports 21,000 BCs, but may be double counting due to nonexclusivity Source: ESP Study

38 Safaricom M-PESA, the first and largest mobile money transfer system, has successfully fostered financial inclusion in Kenya M-PESA provides five different payment services to individuals and businesses Customer-tobusiness (P2B) for merchant payment of goods and Person-toperson (P2P) for services domestic and cross border remittances M-PESA account holder Bill payment (electricity, water, school fees) ecommerce for online purchases Business-tocustomer (B2C) M-PESA, launched in 2007, is used by over 18.2 million Kenyans, or more than two-third of its adult population. In addition, around 25% of Kenya s GDP flows through this system. FY12 FY10 FY08 Number of M-PESA accounts 2,1 6,1 9,5 14,9 17,1 13,8 Individuals and businesses use M- PESA for micro payments 77,3 Per month value of transfers (Ksh. bn) 9,9 7,6 P2P C2B B2C M-PESAs success in Kenya has seen the service launched in other markets 2008: Tanzania by Vodacom 2008: Afghanistan, Vodafone partnered with Roshan mobile operator 2010: South Africa, Vodacom partnered with Nedbank 2011: India, Vodafone India partnered 38 with HDFC Bank and ICICI Bank

39 M-PESA has expanded and evolved its basic model by introducing innovative products, the latest being M- Shwari, the first paperless banking service geared to providing savings and lending services M-PESA partnered with Commercial Bank of Africa (CBA) to launch M-Shwari in 2012 to deepen financial inclusion M-Shwari is a paperless financial service provided by M-PESA The M-Shwari account can be operated using mobile phones via M-PESA without the need to visit a bank As little as Ksh. 1 can be deposited; interest earned ranges from 2% to 5% Micro loans for a minimum Ksh. 100 can be availed, with instant credit into M-PESA account. M-Shwari does not require an application form, and has no ledger fees, limit on the frequency of withdrawals, minimum operating balance or fees to transfer money between M-PESA and M-Shwari account Nov. 2012: launched Mar. 2013: 1.1 million active customers Sep. 2013: 2.5 million active customers Loans disbursed: over Ksh. 7.8 billion Deposits received: over Ksh. 24 billion Enables small, informal sector businesses to borrow small amounts Maximum loan amount: Ksh. 20,000 for small, working capital credit and personal requirements Facilitation fee charged: 7.5% based on a 30-day loan To me, M-Shwari is just a new year's gift. With it, I am sure I will be able to achieve my 2013 goal to expand my business and rent a stall where I can operate. --Michael Maina, artisan who bakes and sells bread, Nairobi, Kenya

40 In China, distribution of G2P and P2P payments and regulatory changes are driving branchless banking. BCs and other innovations are emerging Drivers of branchless banking Government transfer payments and subsidies. Medical insurance subsidies require government to reach 900 million people. High account penetration, 64% of adults, and the ease of opening account 1,600 townships are branchless Regulatory framework for branchless banking is evolving to support wide range of activity. This includes new institutions to serve low-income clients, and regulation to encourage innovations like the use of electronic payments, debit cards, and mobile money in rural areas. BC agents 500,000 currently. Total agents peaked at 620,000 after the People s Bank of China started project in Key players People s Bank of China developed policy driving BC agents, and acts as regulator of branchless banking project Rural Credit Cooperatives, Agricultural Bank of China and Postal Savings Bank of China are the companies most active in BC agent networks Organizations developing approaches to reach underserved population Commercial banks Credit cooperatives Mobile network operators E-commerce companies Third-party payment companies Microfinance institutions China Union Pay provides interoperable POS systems to BC agents Challenges Low transaction volumes Demand for deposits and other services, not just payments

41 F-Road SIM overlay technology allows banks and customers to access secure, SMS based system provided by banks and is usable on 97% of mobiles SIM technology, Installation and training Fee per user Secure, easy to use m-banking system, bank distributes SIM Bank clients Rural credit cooperatives (RCCs) and rural commercial banks that serve unbanked or underbanked, RCCs serve 77 million customers Benefits No investment in creating own technology No need to partner with mobile carrier Fee per text As of March 2013 Bank partners 1,100 Customers, million Typical services available Payments, including intra and inter account, bills Balance checking Loan disbursements and repayments Customers, estimate end 2013 Presence Monthly transaction volume 7 million 27 of 31 provinces $ 11.3 billion

42 TaoBao, 2013 AliFinance provides SME vendors on TaoBao an online shopping platform, access to finance through the use of data to assess creditworthiness. Vendor members 16 million SME vendors 14.4 million Largest online shopping platform in China with 70% share of e-marketplace Vendors have access to loans through AliFinance. Creditworthiness is assessed through platform data, including revenues, transaction data, user ratings, usage levels and repeat buyers AliFinance, 2013 Borrowers 410,000 Outstanding portfolio $17.2 billion Average loan size $3,250 to $4,870 Default rate Under.1% Presence Nationwide AliFinance is the first financing available to many SMEs operating on TaoBao. Large amounts of data allow AliFinance to accurately assess creditworthiness resulting in very low default rates, while originating and collecting loans at low costs by avoiding traditional financial processes.

43 350 million Chinese use mobile platforms and apps to bank but few commercial banks currently target or effectively serve low-income segments. Large and medium commercial banks are serving current clients with mobile banking. However this may change as the technology becomes widely dispersed and lower cost. Mobile banking customers at major Chinese Banks, 2013 Bank Mobile banking Annual mobile Online banking Total customers growth customers customers China Construction Bank 117m 38.90% 291m 291m Industrial and Commercial Bank of China 100m 49.50% 390m 432m Agriculture Bank of China 83m n/a 320m 320m Bank of China 52m 24.60% 101m n/a *Shrader and Duflos, A New Paradigm in Branchless Banking? CGAP Mobile user transactions totaled $768 billion in Q4, 2013 Factors driving mobile banking 1.1 billion mobile phone subscriptions, 84% of the population 280 million smart phones Only 5% of the rural population 564 million internet users 420 mobile internet users Regulatory restrictions on e-wallets, $160 per year in transactions, limit mobile network operator opportunities

44 Leading banks do not see major barriers to expanding mobile banking Constraints: 5 considered major constraint, 1 considered not a constraint Bank MFI Telecom companies see their mobile offerings and agent networks as the dominant source of value add and insist on too high a margin to make it worthwhile for the bank. Most customers, particularly low income customers, are not willing to retain value in e-money, meaning that most mobile banking business is likely to be limited to money transfers and that Over the Counter OTC approaches are likely to be more successful than e-wallet approaches. Telecom companies do not see mobile payments and banking as sufficiently profitable to make the needed investments and build partnerships with banks. There are inadequate numbers of BC agents for mobile-agnostic mobile banking to work for cash in, cash out. Regulations on BCs and/or e-money prevent or undermine the introduction of mobile payments and banking. The costs of mounting a mobile payments and banking platform are too high relative to the uncertainty of the volume and profitability of the business which would be generated. Banks are not sufficiently committed to a major expansion in financial services to low income people, and therefore have not invested in building viable models. Banks are not willing to share margins with telecom companies and agents. 3.8 n/a

45 Lack of confidence in bank services by low income people is a barrier to increasing financial inclusion According to ABM and others, a strong focus on providing financial literacy will be essential if the low income population is to be integrated to the financial system. There cannot be financial inclusion without having education at the core of any strategy. Some concerns of the unbanked population which need to be addressed to increase financial inclusion: Why do I have to pay a commission to handle my money? What benefit do I get by having my money in the bank? Not only is my money illiquid when in the bank, they also charge me for storing it!" The government will be monitoring me closely if my money is in the bank. I rather stay out of the system. Source: ESP Team Study

46 To widen and deepen financial inclusion, many leading financial institutions see financial education of BOP customers as key. Some lessons from India. Successful financial education models should be scalable, self-sustaining and impactful. Traditional classroom methods are too costly. Product specific vs. general financial education is more effective in increasing demand. Banks have the incentive to pay for cost effective financial literacy: clients with financial education are more likely to use multi-products and are less risky. BC agents can be important vehicles for financial educations, particularly on product benefits. Technology can lower costs of financial education through SMS messages to clients and BC agents-enabling ongoing vs. one time training, found to be more effective. Messaging should be simple, with core principals and simple descriptions of product attributes. Ideally banks should do client segmentation enabling targeted messages. Need to incentivize BCs to gather customer segmentation data and to provide sustained financial education-not one time sale of products Incentives to customers important in entry and use of products and in some cases can substitute for financial education. Mass media can be used to provide general financial education-comics, TV and radio

47 Most Fis indicate that regulations support BC development in performing cash in-cash out functions, receiving and disbursing savings, enabling a range of institutions to operate as BCs and integrators, bank oversight of agent selection, operations. Incentives Regulatory impact on key functions of BCs Bank MFI BCs can disburse cash payments BCs can accept and disburse savings in client s saving account The range of entities which can be BC agents e.g. independent stores, chains, telecoms, MFIs, ambulatory agents BCs can receive cash payments Bank liability for and oversight of agents operations 4.8 n/a Compensation of BC networks and BC agents Criteria and due diligence in the selection of BCs BC engagement in KYC, client identification, id verification Banks can work with specialized BC network managers, integrators BCs can open savings accounts in the banks name, with conditions Allowing non-bank led and bank-led models for BC networks The determination of which entities can issue e-money 4.0 n/a Ability to use specialized managers of BC networks BCs required to be exclusive to one bank BCs allowed to be exclusive with one bank BCs allowed to be involved in loan origination, pulling together paperwork, recommending loans Criteria for location of BCs Application of domestic AML/CFT rules to BC agents, with less burdensome treatment for small accounts BCs can make small loans within agreed parameters BCs allowed to operate insurance products origination, payments

48 The future New combinations of technology and touch are emerging. Still difficult to predict speed of development of electronic banking but this is likely to be ultimate answer for profitable financial transactions with BOP BCs, ATMs, mobile and internet banking will be important channels for transactions with some roles in account origination Relationships, repayment push and algirithms for lending Banks need to challenge themselves to deliver on where see potential with low income customers: multi-products including payments, savings, loans, other to increase value Strong, mission driven financial institutions focused on serving low income entrepreneurs have an important future if they can build strong risk management on lending, create multi-products for borrowers and nonborrowers, forge effective collaborations with banks, corporates and telcos and if they stay focused on productive finance.