Extending the third-party aggregator model from ATMs to Business Correspondents

Guest post: By Ignacio Mas and Abhishek Sinha

When you have two systems running in parallel, the hardest part is always managing the interface between the two. Customers don’t usually all migrate to the new system entirely and at the same time, so there is a need for the new system to offer backward compatibility with the older, more established system. Without that, the stakes to migrating to the new system may be too large, and adoption will lag.

So it is with money. The new electronic form of money must integrate as seamlessly as possible with legacy paper money if new-to-banking people are going to be at all comfortable in experimenting with and using it. That’s why the retail agent or Business Correspondent (BC) bit is the cornerstone of any branchless or mobile banking proposition.

But that is where the economics and operations of branchless banking ventures get really tricky. The technical bit is easy: as long as it’s about managing electrons and bits, scalable, low-cost systems can be put in place. But a cash in/out channel is an entirely different story: it needs to be carefully constructed bit by bit as a patchwork of stores. Each store needs to be vetted, supervised and supported. Each store needs to be fed with enough revenue day in and day out to justify setting liquidity aside and running to the bank to rebalance when liquidity runs out.

You don’t see many large-scale, branded retail chains in India in any sector (think groceries, pharmacies, agricultural inputs, whatever), and that’s for a reason: managing retail channels is really hard business in a country with such a disperse geography and where there are already so many local shops running on razor thin margins.

If that’s the case, why should banks, who have no experience operating beyond their own branches, be expected to succeed in creating their own networks of BCs? Some are trying hard, but how many can claim to have a sufficiently dense network of stores doing brisk cash in/out business every day?

You should let specialists manage retail networks, and let banks ride over them. Specialist store aggregators, operating under specific rules and guidelines issued by the RBI, could then offer BC service for any and all banks.

Think how such specialized shared BC networks could transform the problem. Entrepreneurs with experience in managing indirect channels would develop business where banks themselves are not willing to go. Banks would simply sign up whichever shared BC networks they feel are in relevant locations and offer good service to their clients. Individual stores would be able to offer service to all their clients, whichever bank they happen to bank with, in the same way as they sell a range of toothpastes to suit their clients’ various toothpaste preferences. Banks wouldn’t each need to deploy essentially the same systems to reach pretty much the same stores – a costly duplication that makes the already precarious economics of cash in/cash out altogether unachievable.

If this seems far-fetched, that is essentially what is happening today under the RBI’s new policy allowing third-party ATM networks. Why should banks themselves have to run with the operational hassles of installing and managing hardware and replenishing cash boxes? That can easily be delegated, as long as certain ground-rules are met, especially on aspects of technology platform and consumer protection. These are properly identified and clearly laid out in the RBI’s guidance on the topic.

A BC is functionally equivalent to an ATM. An ATM is essentially a point-of-sale (POS) terminal (the card reader, the screen, the keyboard) with a cash box attached. In a BC setting, the only difference is that the cash box is physically separated from the POS terminal (which might be as simple as a mobile phone), and the cash gets dispensed or accepted manually by the shopkeeper rather than automatically. But the transaction is governed electronically through a banking technology platform, because the POS informs the customer how much cash to hand over to or to take from the shopkeeper. What is important is that transactions always occur on a technology platform controlled by a bank (not the third party network manager) and hence under the clear supervision of the RBI, and that the network manager be bound by clear, specific consumer protection rules.

Under a shared BC model, each store might operate from a single bank account using the technology platform provided by one bank (we could term this the “acquiring” bank). Any transactions it performs on behalf of customers from other banks could be settled through the NPCI’s real-time mobile switch.

Creating third-party networks of shared BCs is the logical next step in the process of enabling scalable branchless banking services. Free up banks from the burden of managing the operational aspects of cash-in/out networks. Aggregate the cash in/out transactional volumes across all banks to make the business case easier for individual stores. Flash forward to the inevitable step of infrastructure sharing, like telcos have come to accept with tower sharing and banks with ATMs. And let banks concentrate on their core mission: developing, selling and managing a variety of electronic financial services that solve people’s broad financial needs.


Next stops in India’s excellent financial inclusion journey

– By Ignacio Mas, Bill & Melinda Gates Foundation

What a great financial inclusion journey India is on. Banks, government, NGOs, civil soviety and private sector businesses are jumping onboard as the train accelerates.

At the regulatory level, the Reserve Bank of India created a special category of reduced Know Your Customer (KYC) accounts five years ago that made it easier for any Indian to get a savings account near where they live and work. The RBI has also been providing increasingly business-friendly guidelines on Business Correspondents (BCs) and mobile transactions.

Some infrastructure pieces are now falling into place. The Unique Identity Authority of India (UIDAI) is building a biometric online authentication mechanism that can further drive mass account opening. It also offers an alternative secure transaction authentication mechanism which bypasses the mobile operator’s SIM card. The National Payments Corporation of India (NPCI) has created a mobile-enabled micro-transaction switch (the Interbank Mobile Payment Service [IMPS]) which potentially might allow any bank account holder to send money instantly to any of the other 45% of Indians who currently have access to a bank account, right from their mobile phone.

Pressure is also being applied to broaden banking services for the poor at the policy and budgetary level. The government’s Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) and other social welfare payment schemes have been key agents helping their recipients to open accounts, and have put substantial transaction volumes on the table. In the national budget there is a substantial sum set aside to encourage more people to open their own bank accounts. The Ministry of Finance and the RBI have set  financial inclusion targets for banks in rural environments, and have plans to monitor them closely.

Larger banks have been busy putting their extensive branch networks online in order to allow for real-time transactions between branches, which should allow them to offer innovative services much more easily. They have also been experimenting with a variety of new technology-enabled delivery models that extend beyond branches. The mobile operators, and even a leading handset manufacturer, have also been raring to go. They are now negotiating partnerships with banks to take the Business Correspondent model to scale.

The pieces are starting to come together. So what more can be done to stimulate the market? Three important things immediately come to mind, starting with account opening. No-frills accounts reduced the pain of opening bank accounts on the client side. Now there is a need to ease the burden on banks. Eliminate the need to transport account opening forms and paper copies of documents back to the branch.  This would significantly reduce account opening costs and create the possibility of immediate, all-electronic account opening through Business Correspondents. This will be necessary for the next few years, until national ID cards are widely available and taken up.

On electronic payments, the IMPS promises to add substantial value to people’s savings accounts by permitting secure, convenient and affordable money transfers to any other account. Accounts that combine store-of-value and means-of-payment attributes are much more likely to displace informal savings options and drive account usage. But that extra value of a savings account will be there only if banks promote mobile payments among their lower-value customers and agree to low interchange fees.

Cash in/cash out networks will be more ubiquitous and sustainable if retail outlets are able to serve the cash needs of any bank customer. As long as Business Correspondents operate on a prepaid, real-time transaction authorization basis, there is minimal financial risk involved with cash in/out transactions at BCs. A potentially huge side-effect of IMPS is that it might allow any retailer with a bank account to service the liquidity needs of any customer of any bank – with interbank settlement at the back end. BCs’ retail outlets should not be exclusive. More to the point: Business Correspondent networks could in fact be de-linked from individual banks and made to serve any bank customer.

There is a lot of energy and a palpable sense of possibility around financial inclusion in India. Let’s hope all these efforts do not fall short of the great hopes vested in them. An unsatisfactory outcome would be lots of new accounts and little usage – we’ve been there. We need to ensure there is convenience, value and liquidity on those accounts.

[Ignacio Mas is our featured guest blogger and is an expert on mobile banking and electronic payments. Click here to read his other blogs.]


Constructing new cash ecosystems through mobile money

This is the third of three-part series of blogs titled “Mobile money”. The authors explore and explain all about mobile banking and how it can make a difference to the rural population.

– By Ignacio Mas-Ribo, Deputy Director, Financial Services for the Poor, Bill and Melinda Gates Foundation

It sounds paradoxical, but the success of a mobile money scheme depends on how well it can handle physical cash. This is particularly true if it is aimed at the unbanked, for whom everything happens in cash. They need bridges between the cash economy in which they live today and the electronic money world that they are being wooed into. Those bridges are the retail stores acting as business correspondents (BC). How well those bridges work –how reliably these stores are able to meet customers’ liquidity needs, on-demand, conveniently near where they live and work— will in the end determine how customers judge the convenience and trustworthiness of the mobile money system.

Mobile money doesn’t make the cash problem go away, but it does make it a lot more tractable. BCs pool the cash requirements of the community they serve, and there will be some netting locally as deposits and withdrawals offset each other to some extent.  Moreover, the BC model turns the resulting net cash handling problem into a revenue-making opportunity for local businesses.

The liquidity of the system will depend on three things: (i) how matched customers’ cash in and cash out needs happen to be; (ii) how much support the stores get in managing their liquidity; and (iii) how incentivized the store is to hold an adequate stock of both cash and electronic value at all times.

The degree of cash in/out matching is likely to depend very much on the location of the agent (rural vs urban), by day of month or seasonally (payday, school fee due dates), and even by time of day (market traders cashing out in the mornings to retrieve their working balances and cashing in at the end of the day for safekeeping). In a recent study of 20 agents of M-PESA in Kenya, we found a large diversity of cashflow profiles. Mobile money providers can to some extent affect the overall degree of cashflow matching through appropriate product design and marketing, but that will never be perfect. For instance, we know that rural populations tend to be both net savers and net recipients of remittances; thus, local marketing can stress one or the other service depending on the net cash flows in the region.

An efficient BC channel structure is one which makes working capital available to stores, and provides them with a convenient way to buy and sell electronic money for cash. Typically an aggregator will either set up store routes to collect or deliver cash directly as required, or else will make available one or more bank accounts into which stores can deposit excess cash or which they can draw on if they are short of cash. This cash logistics ecosystem needs to be mapped across the territory – no simple task.

The incentive structure for BCs needs to result in enough reward at the end of each day to justify the extra staff time, working capital balances, security risk and trips to the bank that are involved with the BC business. To get the store to actively promote the service with its customers and maintain adequate liquidity, this is likely to have to be upwards of, say, USD 3 per store per day. If we want the transactions to be cheap enough –say USD 0.05 per transaction—this requires the store to conduct upward of 60 transactions per day. (All these are illustrative figures and will vary by country and location.) In the end, volume is what makes mobile money work, not only at the aggregate scheme level but also at the local, individual store level.

In the early days of a new mobile money system, most transactions are likely to begin and end in cash. Therefore, mobile money is about building a new cash merchant channel; the mobile phone is an instrument that enables the transactions to occur securely through this channel. It’s only later on, once people are used to storing value and paying for goods and services electronically, that the mobile phone becomes a channel in its own right.

In my two previous blog posts in this three-part series on mobile money I stressed the importance of marketing and branding, and the need to define an early use case that will drive an immediate willingness to try in customers’ minds. But that creates a set of customer expectations –on convenience and liquidity— which need to be fulfilled when the customer is at the local store and eager to transact. That’s where sorting out the cash challenge comes in.

[This concludes our three-part series “Mobile Money”. Read the first part and second part of this series.]


Kick-starting mobile money system with payments and transfers

This is the second of three-part series of blogs titled “Mobile money”. The authors explore and explain all about mobile banking and how it can make a difference to the rural population.

– By Ignacio Mas, Deputy Director and Dan Radcliffe, Program Officer, Financial Services for the Poor, Bill and Melinda Gates Foundation

Many mobile money payment schemes around the globe are treating remote payments and money transfers as the entry point for the unbanked. There is an underlying hypothesis that the need to make payments and transfers will lead people onto transactional savings accounts, and these in turn will lead them to more structured savings and credit products.

There are four main reasons why remote payments and money transfers may be a good way to kick-start a mobile money system. First, because mobile payments are completed in real-time, customers can test the system by calling recipients after sending the money. Trust can be built up experientially rather quickly: “I see that it works, I don’t really need to understand how it works.” Savings and other financial services require building trust over much longer periods of time.

Second, mobile payments address a key pain point of people living in a cash economy. The need for remote payments is often large, whether it is spurred by migrant labor remittances, informal support in networks of friends and family, entrepreneurs’ commercial transactions, or bill payments. And there is a degree of immediacy about the need, since people must make such payments with some regularity, and each such occasion represents an opportunity to try the new service. People need only be convinced to switch from current alternatives rather than to form new financial behaviors. Moreover, the benefit of the new payment mechanism relative to the alternatives (in terms of fees, proximity and convenience, delays in availability of funds at the receiving end, service reliability, etc) is readily apparent to users, which creates a willingness to pay for the new service.

Third, a focus on remote payments allows the mobile money provider to market more intensively among senders, who tend to be richer, more educated and financially aware, and more likely to be urban. This group is more easily addressed by normal marketing channels, and can be counted on to pull their poorer, more rural relatives whom they send money to, into the service. In other words, the provider can direct the marketing dollars to the higher-end customers, and let viral marketing do the job on poorer customer segments.

Finally, servicing customers’ gamut of electronic transactions is a way of capturing relevant information on customers’ habits, which may be useful to subsequently market appropriate products to them and evaluate their credit risk. Tracking payments may be the beginning of creating financial histories for poor people.

Of course, every market is different and what works in one context may not work in another. It’s incumbent upon the scheme operator to conduct market research to understand what service solves such a big pain point that potential customers are willing to try the new system today. In any case, we should not lose sight of the fact that the big opportunity from mobile money schemes is to fulfill people’s broad set of financial needs, not just to effect payments. Mobile money schemes should evolve from handling payments to driving full financial inclusion.

So what is the relevance of money transfers in the Indian context? The Institute for Financial and Management Research (IFMR) and the RBI College for Agricultural Banking recently interviewed 274 domestic migrants and their families along four migration corridors to estimate the total cost (in fees, travel costs to/from the payment outlet, bribes, etc.) of sending and receiving money through India Post, banks, informal hawala networks, and other payment channels. The full report will be published in November 2010. Their preliminary findings suggest that the most common mechanisms used by poor Indians to send and receive money – post offices and informal hawala agents – are also the most expensive – up to seven times more costly than transferring money directly through bank accounts. Giving poor Indian households a safe and convenient way to send and receive money would not only make their lives easier, but could be the “hook” needed to integrate them into the formal financial system.

[Read the first part of this series here.]


Mobile money: It’s all about marketing, branding and distribution

This is the first of three-part series of blogs titled “Mobile money”. The authors explore and explain all about mobile banking and how it can make a difference to the rural population.

-By Ignacio Mas-Ribo, Deputy Director, Financial Services for the Poor, Bill and Melinda Gates Foundation

Think about how hard it must be for a poor, undereducated person to get her head around mobile money. She is likely to be new to banking, and may never have used her mobile phone for anything other than talking into.

Now she is told that, to deposit money into this new type of account, she must go along to the corner shop where she buys her rice and cooking oil and which now seems to sport a flash new logo of a bank she may not have heard about, she must give the clerk her phone number and her cash, she must wait to get a text message on her phone, and then she can just walk away. When she wants to retrieve her money, she can just go back there, press buttons on her mobile phone, but this time she must remember a secret code (she needs to prove that the account really is hers), and the store clerk will give her the cash – really, he will!

In positioning a mobile money service with prospective customers, the provider faces four key challenges: explaining what it does, why it’s better than the alternatives, and how it works, all while reassuring them that indeed it can be trusted to work. All this without direct contact with the customer.

This is possible. M-PESA in Kenya signed up 9 million people, or 40% of the adult population, in just three years. (See this paper for an analysis of M-PESA’s success factors.) Here are some emerging lessons from the global experience.

Market the service on the basis of one or two very specific use cases that represent clear pain points in people’s lives (e.g. M-PESA’s “send money home” tagline) and avoid broad “bank in your pocket” or complex Swiss army knife type of propositions. Search not only for a customer need that is large but also immediate.

Customers need to hear the story from the mobile money service provider directly, through fairly pervasive advertising and promotional activities. Once customer interest is piqued, the local shops acting as Business Correspondent (BC) can step in and help them.

Incentivize retail shops acting as BCs amply to ensure they are hungry to promote the service and careful in explaining how it works to new customers. Give them a generous customer registration commission upfront to give them an early source of cashflow, but swap them over to transaction-based commissions over time so that they promote usage and not just registration.

Rather than scattering your BCs randomly through the territory, cluster them in busy locations where people congregate (main street, market square, bus station, road intersection). That will give users a stronger sense of convenience (“I see it wherever I go”) and choice (no lock-in to stores you may not like or trust).

Try to make the customer experience as tangible as possible, for example by having the BCs record transactions in log books. And make sure that it always feels like the same process at any BC outlet. Without consistency in the user experience, customers cannot build up and test their own expectations about the service, and hence cannot develop trust over time.

BCs need to be supported and supervised often. Beyond training, they need ongoing advice on how to optimize their agency business: how much cash and liquidity balances to hold, how to explain and promote the service, new service features. Visit them at least once a month, they’ll appreciate you wanting them to succeed.

Associate with brands that resonate with and are well trusted by the poor, unbanked customer segment. Mobile operators may be particularly useful here, since they already have many of these people as their customers, and it’s a lot easier to cross-sell into an existing customer relationship than to create entirely new ones.

Sure, there’s technology, call center and cash logistics to worry about too in mobile money deployments, but the success or failure will hinge on winning customers’ hearts and minds.