Distribution Networks for M-Banking

CGAP Technology Program

28/Sep/2009

Serving the BOP is a different game: Different customer, different

product

• Stable income

• Purchases multiple products ($$ for

bank)

• Basic literacy – rational decisions

• “Close” relationship (speak same

language)

• Unstable income

• Limited „spare‟ cash – bank has to

compete for share of pocket

• Low literacy – rational and irrational

decisions (only numeric literacy

presumable)

• Relationship through third party

• Frequent interaction with telecom

retailers (usually pre-paid)

“Regular” Bank Customer BOP segments

Understanding customers is critical since how they use the

product drives profitability of the *channel*

Average Balance

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500

Ave

rage

Tx

/Mo

1 -4 -2 0 3 5 7 10 12 14 17 19

2 -9 -7 -5 -2 0 2 5 7 9 12 14

3 -14 -12 -10 -7 -5 -3 0 2 4 7 9

4 -19 -17 -15 -12 -10 -8 -5 -3 -1 2 4

5 -24 -22 -20 -17 -15 -13 -10 -8 -6 -3 -1

6 -29 -27 -25 -22 -20 -18 -15 -13 -11 -8 -6

7 -34 -32 -30 -27 -25 -23 -20 -18 -16 -13 -11

8 -39 -37 -35 -32 -30 -28 -25 -23 -21 -18 -16

9 -44 -42 -40 -37 -35 -33 -30 -28 -26 -23 -21

10 -49 -47 -45 -42 -40 -38 -35 -33 -31 -28 -26

Salaried

Self-Empl

Student

Business

Estimated profitability of accounts at SBI (on a variable-cost basis)

Rupees/ Month /Account

• Small balance accounts do

not generate income for the

bank, and input/output

transactions make it

expensive to operate

• Getting users to bring

money to the account is

often the basis for attracting

them to use servicer

• Total profitability will depend

on patterns of usage

• However, even successful

products make only small

margins it‟s a game of

scaleBills

payments

(future)

Remittan-

ces

Gov’t

programs

(future)

P2P

transfers

(future)

X%

+XX Rs/Mo

X%

+XX Rs/Mo

X%

+XX Rs/Mo

X%

+XX Rs/Mo

Organizations that serve the poor, setup distribution networks

with distinctive characteristics

Example of Telco distribution network

Telco

Regional

Agency

Area

Manager

Deployment supervisor:

• Coordinate training/recruiting

• Deploy product changes

Sales supervisor

• Relationship management (visit 30-50 points

/day)

• Push sales targets

• Liquidity monitoring

• Identify potential new agents

• Investigate issues in compliance, fraud

Roaming customer support

• Technical support to end-customer through

agencies and retail points

x N

X N

x5

x100

x40

• 22 Million customers

• 2 Mn Retail points

• Visit all retail points 1/month

x3

Own B&M distrib agencies:

• Direct sales, promotion in high traffic areas

• Customer service

• Liquidity management

Key features

• Depth

Reach everywhere leveraging

third parties

• High touch relationship

management with agents

• Scaleable Structure Can

grow steadily by adding new

points

• Micro-liquidity management

(frequent dispensing,

proactive control)

• Close supervision of field

operations (training,

compliance, fraud)

A bank can do this by itself, or it can leverage third-party networks

• 3rd party agent managers HAVE MORE INCENTIVES for

scale:

‒ It is their core business

‒ Scale is only way to recoup investment

• 3rd party agent managers CAN BECOME MORE EFFICIENT:

‒ High focus on efficiency of operations

‒ Often develop internal knowledge (IP) and best practices

Total Cost

Volume (# of

accounts)

Avg Income/

Account

Challenge in running a network – Sample case

Cost as a function of volume

Who is

more likely

to drive

scale

effectively?

Cost/

Account

EXAMPLE

1. Reach minimum

scale for

profitability

2. Be able to scale network

to really achieve impact

in the P&L

Bank or 3rd Party?

Regardless of who

does it, business will

be driven by scale

Case 1: EKO – India

EKO

State Bank of India

(SBI)

S&D

network

Mer-

chant

Mer-

chant

Mer-

chant

Mer-

chant

Mer-

chant

Mer-

chant

Mer-

chant

Mer-

chant

Airtel

S& D

network

Original Airtel

Distribution Network

converted into agent

network

New agents setup

by Eko

(future)

Branding by EKO *

* Branding currently driven by SBI/EKO but in process of changing to a form where EKO will be the primary brand, followed by co-

branding banks.

• Product:

‒ Savings account, opened in the

bank with “mobile number” as a/c

number; transact via mobile

‒ Follows simplified account rules

• Agent:

‒ Opens accounts

(collects forms, performs

1st level KYC)

Mer-

chant

Mer-

chant

Mer-

chant

Mer-

chant

S& D

network

• Started as independent

agent integrator

• Partnered with Airtel as

strategy to build network

• Partnered with SBI to offer

agent network

• IT/NGO structure to comply

with regulation on BC

Part of Airtel‟s

unconverted

S&D network

Other

Banks

(Future)

Case 1: EKO – India (cont.)

EKO

SBI

Mer-

chant

• Agent:

‒ Opens accounts (collects formats,

performs KYC)

‒ Gets fixed fee per transaction

‒ Gets incentive fee on account opening

• Airtel:

‒ Gets fee in return for

“sharing” / supervising

distribution network

‒ Gets normal fee from SMS

messages (certain

transactions)

• SBI pays EKO:

‒ Account:

‒ Opening account fee

‒ Yearly Account

Maintenance fee

‒ Transactional fee (% of

transacted amount)

‒ Services (remittances)

‒ Fixed transactional fee

• User pays:

‒ No cost for withdrawals and deposits

‒ X Fee for remittances

• Contract between Airtel /

EKO: Based on SLA

• Offers “banking grade” operations

(compliance, supervision)

• Back-end services: form collection

and management

• Call center operations

• Agent training

• Remunerates distribution (trade) as

well as all partners

* The choice of a distribution partner should be led by depth of current distribution and efficiency of supervision. Adoption of this

product within the Dist. Org. as a critical product with dedicated sales supervision is critical to success

Case 1: EKO – India (cont.)

Key aspects to highlight:

• Was able to bring together two giants to work on something

that individually, each of them couldn‟t achieve

‒ This talks about the strength of the value proposition to

both institutions

• Has created a new platform not only to reach but to

understand customers based on their use of the account.

• Important two parts of their Intellectual property:

‒ The User Interface (text-based, security method) that can

work on all cell phones

‒ Methodology to convert MNO outlets into bank agents

(training, supervision, IT solution, etc)

• Because interoperability is mandated in India -> service has to

eventually be open to all MNO‟s

Case 2: Monitise – UK

Monitise platform

Banks(HSBC, NatWest, Royal

Bank Scotland )

Mer-

chant

Mer-

chant

Mer-

chant

Mer-

chant

S& D

network

Monitise distribution

network (partners with

existing MNO, retail

chains, etc)

Branding by Monitise

* User can open any M-Wallet (all will appear in the menu on the phone), but if it‟s an MNO

wallet, then he can only open a wallet with his mobile operator.

• Agent:

‒ Opens accounts

(collects forms, performs

1st level KYC)

• Invididual non-bank

electronic accounts

Other:MFIs

Retail chains

MNO’s(T-Mobile,O2,

Vodafone,…)

• Pooled

account

• Marketing (pull)

• Mobile wallet (

‒ Bank branded

‒ MNO branded

(exclusive per phone

users)

• Cash-in /out

• Payments (P2P,

purchases)

• Remittances

Branding by Monitise,

but once the wallet is

opened, then it is the

wallet‟s brand

Multiple M-Wallets

All M-Wallet available

for user to choose

from*

Case 2: Monitise – UK (cont.)

Key aspects to highlight:

• Has managed to setup an interoperable platform in the UK ,

but (probably) largely dependent on market conditions (for

MNOs)

‒ Still not clear that this solution can be adopted by market

actors in environments with large dominant players

• Solution is based on mobile wallets rather than mobile bank

accounts. However, it opens the possibility to have

individualized bank accounts managed by a 3rd party

• Taking up a larg(er) space in mobile payments in developed

markets (UK, US).

‒ Visa has minor equity stake

‒ Recent partnership with Metavante to form Monitise

Americas

Some markets (i.e. Brazil) have seen a major evolution in third

party agent networks

Basic

• Banco do Brasil with

some of its AM

• Bradesco

• Banco do Brazil

with Banco Lemon

(new setup)

Value-added

• Banco Lemon with some of

its sub-agents

• VisaNet for Banco do Brasil

• GTech with HSBC

Bank as agent

manager

• Caixa Economica

Federal and

lottery points

Source: Analysis by Eduardo Diniz and Martin Jayo; Fundacion Getulio Vargas; Sao Paulo, Brazil, 2009

3rd Party Agent Networks

4 51

Bank managing agents

Outsourcing

some activitiesIntermediating

the value chain

Mer-

chant

Mer-

chant

Mer-

chant

Mer-

chant

Bank

• Banco do Brazil

with chain Pao do

Azucar

• Bradesco with

Postal network

Chain becomes

agent for bank

(exclusive)

2

Mer-

chant

Mer-

chant

Mer-

chant

Mer-

chant

Chain

Bank

3rd party managing

bank’s agents

3

Mer-

chant

Mer-

chant

Mer-

chant

Mer-

chant

Bank

AM

Mer-

chant

Mer-

chant

Mer-

chant

Mer-

chant

AM

Bank

Mer-

chant

Mer-

chant

Mer-

chant

Mer-

chant

AM+

Bank

What would make sense for Colombia?

Setup a

Shared Bank

Agent

Network?

Service points vs Transaction points

• What is required to reach the poor?

Both?

Economies of scale vs presence at the

POS

• What kind of brand presence would be

needed at the POS?

Competition/ branding

• Who takes the lead?

• How would banks compete?

Fragmentation vs Concentration

• Is there space for multiple networks?

• The case for agent commissions

What actors

are likely to

become agent

managers?

Issues to think about:

Other

options?

Non-banking actors

• How to involve them

• What role will they play / Incentives to

play?

Advancing financial access for the world’s poor

www.cgap.org

www.microfinancegateway.org