56628 FOcus nOTe Microfinance and Mobile Banking: The Story So Far L ate one night in November 2007 Aleksandr Kalanda, chief executive officer of Opportunity Bank in Malawi, sat in his office reviewing strategic customer convenience. In theory, mobile phones could be used to reach many more customers at a lower cost than any existing delivery channel. Yet despite plans for 2008.1 The commercial microfinance bank this potential, in the vast majority of countries there had doubled in size once again in 2007, and now had is not yet an existing m-banking service that MFIs can more than 150,000 customers.2 In a country where leverage. M-banking to date has largely been driven 80 percent of the people live in rural areas with little by MNOs and, to a lesser extent, by some large banks. infrastructure, Opportunity Bank knew that traditional MFIs have by and large not played a significant role in models of microfinance would not bring scale fast the implementation of m-banking services. enough. The bank had already used technology to develop alternative distribution channels like There are fundamental reasons why MFIs are biometric automated teller machines (ATMs), mobile generally not positioned to get into m-banking early vans, and kiosks in marketplaces equipped with point- on. Most m-banking deployments provide transfers, of-sale (POS) devices.3 a service that very few MFIs provide. Indeed, MFIs and successful m-banking businesses occupy different As Kalanda pondered the bank's plans, he decided that worlds today. The MFI world is focused on credit these initiatives were not enough. Every Opportunity and maybe some savings, while the m-banking Bank branch was already congested with customers world is focused on transfers and payments. The MFI from the moment the doors opened until they closed. world largely uses unsophisticated backend systems New branches were taking too long to break even, while the m-banking world uses some of the most up to 18 months, due to the high costs of building sophisticated backend systems we know today (even materials and training staff. Kalanda had heard about better than some banks). The MFI world focuses on the enormous success of M-PESA in Kenya, and he creating low-cost, human-driven infrastructure, while saw mobile phone banking (m-banking) as the way the m-banking world is tied into and uses payment forward. Mobile banking is the delivery of financial systems infrastructure. It is not surprising then that services outside conventional bank branches using these two worlds have not yet aligned. mobile phones and nonbank retail agents. M-banking could allow the bank to serve existing customers better These gaps mean that many MFIs are considering and reach new customers. Meetings with the national m-banking, but find themselves in the same situation mobile network operators (MNOs) suggested that they as Opportunity Bank in Malawi: m-banking promises were not planning to bring an m-banking service to a revolution in customer outreach and service at a Malawi in the short term. Building a service from scratch very low cost; their customers and potential customers would be challenging, but Opportunity Bank already already have mobile phones; but there is no m-banking had experience with complex technology projects. service available. What should MFIs in these situations No. 62 After some deliberation, Kalanda finally decided do? This Focus Note aims to do two things: (i) explore July 2010 to dedicate significant resources for developing an the various roles that MFIs can play in m-banking m-banking channel in the strategic plan. and (ii) explore the potential benefits MFIs and their Kabir Kumar, customers expect to gain from pursuing m-banking. Claudia McKay, and Sarah Many microfinance institutions (MFIs) globally are Rotman facing the same challenges Opportunity Bank faced. The role that MFIs can play largely depends on the In the past decade or so, they have experimented with presence or absence of widely available m-banking alternative delivery channels to reduce costs, facilitate services (called mobile banking infrastructure in greater outreach to hard-to-reach areas, and increase Figure 1). 1 Information on the case of Opportunity Bank in Malawi is from email and telephone exchanges with management of the bank (including the chief executive officer, the chief operations officer, and the head of marketing) between October 2009 and April 2010. 2 Banking regulations in Malawi do not have a separate category for microfinance banks. Therefore, Opportunity Bank is licensed and regulated as a commercial bank but has an explicit mission to serve poor, previously unbanked customers. 3 For more information on Opportunity Bank's alternative delivery channels see http://technology.cgap.org/2009/12/03/in-malawi-biometric- atms-confront-traditional-ways-of-moving-money/ 2 Figure 1: Typology of MFIs in m-banking MFIs in countries with no existing MFIs in countries with existing CONTEXT: mobile banking infrastructure mobile banking infrastructure Use m-banking Use phones for system for loan Act as agent ROLE OF Build mobile data collection disbursements/ on behalf of MFI: banking system and other non- repayments bank or MNO cash purposes and/or deposits In a country without an existing m-banking benefits for an MFI and its customers? This section infrastructure, an MFI must decide whether to explores three key questions: develop its own service or wait until the service and infrastructure are created. Developing an m-banking 1. Can m-banking help MFIs serve existing customers service takes a significant amount of planning, time, better? financial investment, organizational and operational 2. Can m-banking help MFIs reach new customer change, technical expertise, and persistence and is an segments? option only for MFIs with significant resources and a 3. Can m-banking reduce costs for MFIs and for stable infrastructure. Other MFIs in this context can customers? still use mobile phones to reduce costs and enhance customer service, for example, by sending automatic Should an MFI in a country SMS messages for repayment reminders and allowing without any existing m-banking customers to check balances via their phones. The infrastructure create its first section of this paper explores how MFIs in this own m-banking system? context are responding. Let's return to the story of Opportunity Bank of Malawi The second section looks at the options available to and its decision to develop an m-banking service in an MFI if it is in a country with an existing m-banking the absence of an existing m-banking infrastructure infrastructure. The most obvious option is to use in the country. How did this small microfinance bank the m-banking network for loan disbursements, fare in the midst of the various challenges involved in repayments, and deposits. As an alternative, MFIs setting up an m-banking service? can act as agents on behalf of the m-banking service. This may allow the MFI's management, staff, and Unfortunately, as Opportunity Bank discovered, customers to gain familiarity with the service and earn setting up an m-banking service is complex, time- additional revenue for the MFI through commissions. consuming, and expensive. Most m-banking services used by commercial banks focus on existing (often The third section of this paper addresses questions upscale) customers who want more convenience, as that MFIs may have about m-banking. While many opposed to bringing the unbanked into the financial see the potential of m-banking, what are the actual system.4 Developing an m-banking service from 4 Offering a cell phone banking channel is becoming common for many banks in Africa and elsewhere in the developing world. For example, all four of south Africa's major banks and 13 of the largest banks in Kenya now advertise cell phone banking. similar to Internet banking in developed markets, this channel lets existing customers conveniently access their accounts at any time. However, the typical cell phone banking offering is often limited to basic informational services like balance enquiry, airtime top-up, and mini account statements. 3 an entire systems upgrade--a process that took Box 1. Main Messages a year and cost more than $100,000 to complete. · Developing an m-banking system is expensive, XacBank, a microfinance bank in Mongolia, time consuming, and complex; very few MFIs invested even more than this to upgrade its have the significant financial, technical, and core banking system before developing its own managerial capacity that is required. · Most MFIs should use mobile phones in ways m-banking service.5 Second, the phone's interface that increase customer convenience (e.g., with the bank (e.g., SMS, USSD, STK, etc.) must automatic loan reminders) and strengthen the be selected. Important factors influencing this institution so that it will be ready to link to a decision include security, ease of use, ability system when it is developed. to function on unsophisticated handsets, and capabilities of the MNO.6 Opportunity Bank scratch that effectively reaches the unbanked is not developed a USSD interface that it felt was secure easy. In the first months of 2008, Opportunity Bank and would work on even the cheapest phones. discovered many regulatory, technological, and Finally, the interface or middleware between the operational hurdles. It hired external consultants to management information system (MIS) and the help develop an appropriate plan that focused on the customer-facing application must be developed. following four activities that are required for any MFI Institutions can purchase an off-the-shelf solution developing an m-banking service. or develop their own, although both options are expensive. 1. Develop a strategy and business plan. MFIs 3. Create and manage an agent network. To use must be clear about how m-banking addresses an electronic channel, such as mobile phones, their core customer value proposition. In an for financial services, customers have to convert industry with as much hype as m-banking, it is cash to electronic value and vice versa. This can easy to get carried away with enthusiasm without be achieved through networks of retail agents, fully understanding the benefits and costs. such as airtime resellers, post offices, and small MFIs must identify the problem they are trying store owners. MNOs have a distinct advantage to solve and determine how exactly m-banking in this area because their national-scale networks will solve that problem. Are there alternative for airtime distribution often involve distributors solutions available? For example, is the primary and thousands of retailers. Building and managing purpose of the service to improve satisfaction an extensive agent network from scratch is and retain existing customers? To reach new considerably different than running an MFI. The customer segments or new geographic areas? business processes involved include identifying To reduce congestion in branches? To reduce and training agents and ensuring an effective, transaction costs (which ones)? Are ATMs, kiosks, continuous system of liquidity management and or mobile banks a better solution? MFIs should quality control. In light of this, Opportunity Bank be as specific as possible about what they want decided to partner with a major agricultural to achieve before committing to developing a supply store in Malawi that had shops in many system. Malawi towns. Doing so leveraged the national- 2. Develop a technological solution. Developing scale infrastructure of the agricultural supplier and a technological solution is time consuming and eliminated the need to manage individual stores. expensive. First, the bank's own banking software 4. Negotiate partnerships with one or more MNOs. must have the ability to be integrated with an An MFI or bank cannot develop an m-banking m-banking platform. Opportunity Bank had to do service without the cooperation of at least one 5 XacBank's m-banking project received technical advice and funding from the cGAP Technology Program. 6 For a more detailed explanation of the types of technical choices defining the mobile banking platform, see Mas and Kumar (2008). 4 MNO. An important aspect of the service is secure money laundering and combating financing of and reliable data flows between the MFI's banking terrorism rules adapted to the realities of remote software and the MNO's platform. The MNO transactions conducted through agents.7 must have the technical expertise to manage the 5. The MFI has substantial financial resources to pay m-banking application, which may not be in place not only for the technology solution but also for if m-banking is new to a country. Furthermore, if employing capable human resources, building and an MNO is considering launching its own system, managing an agent network, re-engineering some it may not want to partner with an MFI. Finally, branch processes, training staff, and launching a because MNOs are volume-oriented businesses, significant marketing campaign. MFIs that have they will likely negotiate only with MFIs that have embarked down this path have spent anywhere enough customers to make their investment from a few hundred thousand dollars to more than worthwhile. $1 million to develop the actual system. 6. The MFI has sufficient transaction volumes to The following checklist can help to determine if an allow the upfront costs to be recouped faster. MFI in a country without an existing m-banking service is well positioned to build an m-banking system. Only in rare cases will MFIs meet all of these conditions. Given the complexity and expense of 1. There are no plans by MNOs (or third-party developing an m-banking system, only the strongest mobile payment companies) to build a service and biggest MFIs should attempt it. As more MFIs in the foreseeable future. If an MNO is planning experiment with m-banking and as more technology to launch a system, it is probably better to wait vendors develop appropriate off-the-shelf solutions and leverage that service after it launches (see at lower prices, this may change. Furthermore, discussion in the next section on how MFIs have we expect more MNOs to be offering m-banking done that). products that MFIs can leverage. 2. The MFI has defined the strategic objective of the m-banking service and is convinced Some MFIs have overcome these obstacles in that m-banking is the best way to address the interesting ways. Tameer Microfinance Bank (120,000 institution's particular issues. In addition, the MFI customers, $23.6 million portfolio outstanding, and has a supportive board and, ideally, a strong $17 million in deposits) in Pakistan did meet all of management team with the proven ability to the criteria listed and has launched an m-banking implement complex technology-based projects. service (called easypaisa) that shows promise of The MFI may outsource some key functions but reaching scale.8 In the first six months after launching, not all of them, so there must be strong internal easypaisa processed well over 1 million transactions. capacity. 3. The MFI has a strong core banking IT infrastructure The bank started its m-banking process on its that is able to handle large volumes of data flow. If own without an existing m-banking infrastructure. the MFI has substantial issues with its current MIS, However, it did not bring the product to market those need to be fixed first. on its own but rather it worked closely with one of 4. Regulatory conditions in the MFI's country are Pakistan's leading MNOs to do so. In 2007, Tameer favorable. Two "necessary but not sufficient" Microfinance Bank started negotiations with Telenor, regulatory conditions must be in place: the second largest MNO in Pakistan. The regulator authorization to use retail agents as cash-in/cash- in Pakistan required an MNO to develop m-banking out points and development of risk-based anti- services in collaboration with a bank. As such, Telenor 7 For more information on regulations specific to branchless banking see Lyman, Pickens, and Porteous (2008). 8 Tameer Microfinance Bank's m-banking project received technical advice and funding from the cGAP Technology Program. Information about easypaisa was obtained from a telephone interview with Abbas sikaner (group executive director of Tameer Microfinance Bank) in February 2010. 5 needed a bank partner. Tameer wanted to leverage will be more likely to offer a value proposition that Telenor's customer base (30 million at that time) and is worth considering. its network of 180,000 resellers and franchisees, as · Wider talent pool. It might be difficult to find well as its national advertising and marketing reach. all the skills required in a single MFI but pooled across several MFIs there will be more people with A year later, Telenor purchased a 51 percent share various skills. in Tameer Microfinance Bank. Over the next year · Wider network of agents. The collective branches the two organizations worked together to create the of the MFIs could constitute a basic agent network easypaisa brand for their m-banking service. where customers of the m-banking service could cash-in/cash-out. Several MFIs working together Although Tameer's history of serving low-income will be able to negotiate better deals with people in Pakistan with financial services is important, networks like post offices or grocery stores. the future success and scalability of easypaisa will · Financial resources. If several MFIs share the probably depend largely on Telenor. The joint costs to costs associated with m-banking, it will be much prepare easypaisa for launch (including the technical more affordable on a per institution basis. system, agent network, cash management system, call center, branding, etc.) was around $7 million. The Rural Bankers Association of the Philippines­ However, post-launch, Telenor is still spending more Microenterprise Access to Banking Services (MABS)9 than $100,000 a month on advertising. program in the Philippines is a good example of cooperation among organizations.10 This USAID- Most MFIs can't expect an MNO to invest in them assisted program organized a group of 60 rural banks, the way Telenor invested in Tameer. Another option which used their ties with more than a thousand for MFIs in countries without an m-banking service small business customers to serve as resellers for might be to partner with other MFIs and smaller GCash, a mobile payments solution developed banks to tackle m-banking as a group. Of course, by GXI, a subsidiary of Globe Telecom. Although strategic alliances come with many challenges. The GCash already existed, it was not present in rural coordination required among all the participating communities in the Philippines. A network of GCash institutions can take enormous amounts of time and resellers (similar to check cashing businesses) was energy, especially at the senior management level. built up in these communities thanks to the support However, several smaller MFIs working together to provided by the rural banks. In addition, several develop an m-banking service could bring advantages thousand employees of rural banks and other that they would not achieve independently, including businesses use these merchants to cash-out their the following: salaries.11 On its own, each rural bank was too small to be attractive to GXI. But as a collective association · Scale. Due to the high set-up costs and low with over 2,000 branches and millions of potential revenue/cost saving per transaction, large scale customers, the small banks provided a significant is essential for the cost­benefit analysis to favor business proposition for GXI. m-banking. If several smaller MFIs each paid only part of the initial investment, their collective scale Tameer was bought by an MNO and launched could justify the investment. easypaisa. The 60 rural banks in the Philippines · Ability to negotiate with MNOs. MNOs are helped create the agent network for GCash, a service focused on large-scale ventures that can bring by an MNO. What happened to Opportunity Bank in profits quickly. If MFIs negotiate as a group, they Malawi? 9 http://www.rbapmabs.org 10 Information on MABs is from an interview with project leader John Owens in november 2009 and email exchanges in April 2010. 11 http://www.mobilephonebanking.rbap.org/article/archive/15#tas and http://blog.mobilephonebanking.rbap.org/index.php/2009/05/21/ gcash-paves-the-way-for-pr-banks-micro-financing-success/#more-126 6 Opportunity Bank spent most of 2008 upgrading BancoSol, a leading microfinance bank in Bolivia, its MIS and developing a business plan. In 2009, it started its mobile phone strategy with basic SMS built the technology solution, secured regulatory information services for customers before introducing approvals after many meetings with the Central more complex m-banking transactions. BancoSol's Bank, and did customer research to form the basis nearly 400,000 customers can use their mobile phones of a marketing plan. It began pilot testing its service to check account balances, receive information on the (called Banki mmanja or "bank in your hand") with date and amount of their next loan installment, and staff and launched the product in May 2010. transfer funds from one of their accounts to another. BancoSol wants to understand how its customers Only time will tell whether Opportunity Bank made interact with this technology before launching full the right decision to spend the time and money to banking services via mobile phones.13 MFIs can develop its own m-banking system. It took more lower costs through automatic text messages that than two years to develop the service. According to notify customers about upcoming payments or loan Opportunity Bank, if at least 10 percent of existing disbursements or warn of late payment notices. This customers sign up for the service by the end of service is relatively simple to implement and will save the first year and each customer does at least two loan officers time and will reduce phone bills. Even if transactions a month, Opportunity Bank will make using text messages saves each loan officer an hour a profits on the service by the middle of the second day, it can add up to cost savings for the MFI. These year.12 While Opportunity Bank was developing its types of additive services won't bring the institution service, the MNO Zain announced that it would launch large numbers of new customers, but they can be its m-banking service called Zap (already in place in useful for both existing customers and the institution. other African countries). Despite this development, Opportunity Bank decided to go ahead with its plans. Second, m-banking is less than 10 years old and is a Zap could develop a much larger agent network than rapidly changing industry. If there is no m-banking the Opportunity Bank network, and Opportunity Bank service in a country now, there will be one soon. may eventually link into this system to gain access to And, just because an m-banking service exists does more agents and remain competitive. not mean that an MFI is ready to take advantage of it. MFIs with strong management teams, solid MIS, What should MFIs do? Most MFIs are in countries and effective internal controls will benefit the most. that do not have an existing m-banking service, and Strengthening these areas are good for the core most MFIs do not fulfill all the criteria that would mission of any MFI anyway, and they will make the make them strong candidates to develop their MFI that much more ready to adopt m-banking when own m-banking service--so what are their options? it does become available. Reaching previously unbanked people with a network of retail agents and mobile phones is ideal. However, In summary, although some large, stable MFIs may using cell phones as a distribution channel is not an implement m-banking services successfully on their all-or-nothing proposition, and many banks are using own, the majority of MFIs should focus on developing phones to increase customer convenience, lower the strength and capabilities they will need to take costs, and earn extra revenue. MFIs can do this as advantage of m-banking services when they do well. become available. 12 The cost includes both the depreciation over five years of the initial investment of $200,000 as well as ongoing costs. However, the amount budgeted for advertising in the first year ($54,000) is very low compared to other m-banking services with a national scope, which tend to run in the millions of dollars. 13 Information on the case of Bancosol is from an interview with Gustavo sanchez, national manager of IT and Process for Bancosol, november 2009. 7 Box 2. Main Messages What Role Can an MFI Play in a Country with Existing Mobile · MFIs can use existing m-banking systems to Banking Infrastructure? facilitate both loan repayments and deposits. This does not necessarily increase credit risk, although the impact on group cohesion must Can mobile banking be used to collect be carefully managed. loan repayments and deposits? · MFIs can also act as agents on behalf of a bank or MNO's m-banking service. This can help both the MFI and its customers to There are several options available to MFIs in a become familiar with the system and bring in country with an existing m-banking system. The additional revenue. first and most obvious application of m-banking is to facilitate loan repayments and deposits.14 As we explain in this section, MFIs that have done this What happened at Faulu Kenya? In addition to some report lower risk and costs for themselves and their technological challenges, Faulu was not ready for the customers from handling and transporting large M-PESA service to be used for loan repayments. Its amounts of cash. customers found M-PESA so easy and convenient that there was no compelling need for group meetings. Although everyone interested in m-banking has Regular attendance at group meetings was a core heard of M-PESA, many don't know that M-PESA component of Faulu's methodology, and there was actually started as a pilot to facilitate microfinance concern among both loan officers and management loan repayments with the MFI Faulu Kenya.15 that a reduction in group interaction would lead to a Originally, Safaricom (the MNO) wanted to breakdown in repayment discipline. As a result, Faulu combine its connectivity, brand, and distribution and Safaricom mutually agreed that Faulu would not network of airtime resellers with Faulu's low-income be a part of the service post-pilot. customer base to enable customers to receive loan disbursements and make loan repayments using However, the story does not end there. In May mobile phones. The two organizations ran a pilot 2009, Faulu became the first deposit-taking MFI in for six months in 2005 during which time Faulu Kenya. Faulu saw little risk in allowing its new deposit customers used the service to repay loans. While the customers to deposit via M-PESA. In December intent of the pilot was loan repayment, customers 2009, Faulu launched a service to link M-PESA with used the service in all sorts of creative ways that were Faulu savings accounts. Being able to move their very interesting to Safaricom. They used it to pay money from M-PESA into Faulu accounts offers for goods and services between pilot participants customers the added benefit of being able to earn and to convert the e-money to airtime that could be interest and develop a good savings record that can sent to relatives in other parts of the country. As a lead to eligibility for loans. Four months after the result of this pilot, Safaricom altered its strategy and launch, about $60,000 is transferred between the developed the key marketing message of M-PESA, two institutions each week, and 30,000 customers are "Send Money Home," and went on to launch the using the service. most successful m-payments service in the world. Deposit mobilization via M-PESA is low risk for both customers and MFIs. But does Faulu's experience 14 Regulation in most countries prevents unlicensed institutions from taking deposits. However, both the prevalence of regulations facilitating MFIs to take deposits and the number of MFIs with such licenses is increasing each year. For example, the Kenyan Microfinance Act of 2008 allows the central Bank to license and regulate "deposit-taking microfinance businesses." In 2010, slightly more than 50 percent of all MFIs reporting to MIX Market offer some form of voluntary deposits. 15 Information for the Faulu Kenya case study is from Hughes and Lonie (2007), as well as from interviews with Lydia Koros (then managing director of Faulu Kenya) in October 2009 and Anne Kimari (head of Finance) in May 2010. 8 mean that loan repayment via M-PESA is too risky? business and impact of the loan. There is no strict Probably not. In 2005, the service was the first of its meeting schedule as there is for group loans. kind. The emphasis of the pilot was on the technology itself, and little thought was given beforehand to the One MFI that is using m-banking for individual loan impact on group cohesion. repayments is Tujijenge Tanzania.19 Tujijenge has over 12,000 customers as of March 2010. Most of them Using external technical assistance,16 Small and Micro are in the Dar es Salaam area. Tujijenge launched a Enterprise Programme (SMEP) in Kenya was the first pilot in 2009 with 30 individual loan customers who MFI to link into the M-PESA platform for group loan used M-PESA to make loan repayments. Customers repayments. Following a 2008 pilot with 200 group were able to pay from anywhere in Tanzania and loan customers, the service was rolled out to all of could make repayments in any amount at any time SMEP's 51,000 customers in 2009, allowing them to instead of waiting for the specific repayment date. make loan repayments and savings contributions.17 The pilot was successful, and Tujijenge now makes SMEP customers pay through M-PESA before the all repayments via M-PESA compulsory for individual meetings, and the loan officer verifies at the meetings loans below $1,800. that the loan payments have been received. In May 2010, M-PESA and Equity Bank in Kenya Kenya Women's Finance Trust (KWFT) is doing announced the most integrated product offering something very similar.18 With more than 300,000 so far--a low-cost, low-entry microsavings account active borrowers and a loan portfolio of nearly $140 called M-Kesho.20 With this account, Equity Bank million outstanding, KWFT is probably the largest MFI hopes to convert the majority of M-PESA's 9.4 million using M-PESA for loan repayments today. Similar to users into account holders at the bank and plans SMEP, KWFT has all members of a group repay the to offer microinsurance and microloans in addition loan via M-PESA (using M-PESA's bill pay functionality) to savings accounts. Very few institutions have the at least two days before each group meeting. negotiating power of Equity Bank to achieve this, but Attendance at group meetings is still compulsory, this joint venture has the potential to extend access and loan officers arrive with a printout indicating to formal financial services to millions of currently the actual loan repayments already made by each unbanked individuals. member. Group meetings used to be dominated by cash collection, but there is now more time to discuss As M-PESA and services like it become more business problems and financial education--and less widespread, groups are creatively using it to facilitate time is needed for group meetings. savings and loans both with and without formal MFI linkages. For example, Village Savings and Loans Some MFIs are still worried about group cohesion and Associations (VSLAs) in Tanzania (trained by CARE are starting to use m-banking services for repayments International) will be using M-PESA to store excess for individual loans only. With individual loans, once group liquidity as well as save for specific purposes a loan is disbursed, loan officers visit their customers like bulk purchases of fertilizer.21 There is currently no from time to time to monitor the performance of the formal link with a financial institution, or special price 16 Triple Jump Advisory services developed the m-banking system for sMeP. Triple Jump Advisory services is developing m-banking for VFc Rwanda, a deposit-taking institution, that will allow its customers to make savings deposits using Rwanda's MTn Mobile Money. 17 Interview with George Kinganjur, consultant and project manager for sMeP, May 2010. 18 Information on the KWFT case study comes from an interview with Gichimu Waweru (general manager, Marketing) in May 2010. 19 Information on the case study of Tujijenge is taken from interviews with Tujijenge management in november 2009 and subsequent email exchanges, as well as interviews with Triple Jump Advisory services. 20 see http://www.businessdailyafrica.com/company%20Industry/safaricom%20roils%20the%20market%20with%20phone%20based%20 savings%20account/-/539550/921044/-/4fj674z/-/index.html 21 Information on cARe VsLAs' use of M-PesA is from an interview with Mark staehle, project director, save up (cARe usA Access Africa Program) in March 2010. 9 with M-PESA, but the benefits of storing money in a more comfortable with this option. It can also help secure location (versus in a locked box in members' MFIs differentiate themselves from the competition homes) are so strong that CARE believes VSLAs will and bring enhanced liquidity into their branch be willing to pay the normal price. locations. When people who have never had access to a bank VisionFund's partnership with WING Cambodia account before experience a nearly ubiquitous illustrates this point.24 VisionFund Cambodia has been m-banking service like M-PESA, they figure out ways operating in Cambodia for more than a decade. By through trial and error to use it to meet their money the end of 2009, it had 98,000 customers and more management needs. MFIs should observe customer 22 than $21 million in loan portfolio outstanding. WING behavior and work closely with customers during this Cambodia is a new mobile phone banking service time to continue to figure out the best way to make with over 100,000 customers that launched in January loan payments and deposits via m-banking services 2009 and is sponsored by ANZ Bank. safe and convenient for both customers and MFIs. As WING sought to develop an agent network where When should an MFI consider being customers could conduct cash transactions, it faced an agent in an m-banking system? many challenges. Cambodia does not have national retail networks, such as post offices or convenience Even with mobile payments, cash needs to get in and stores, that can be used as agents. Because of this, out of the system. Agents, operating out of existing WING partnered with MFIs to provide this service. retail infrastructure such as grocery stores and post Originally, WING thought its service could be used as offices, act as "human ATMs" and convert electronic a mechanism for loan repayments and disbursements, value into cash and vice versa. Any m-banking but like Safaricom it quickly realized that this would implementation must have a critical mass of agents involve additional complications and delay the time to attract enough new customers for the business to market. The MFI customer base was used to the model to be viable. As discussed, MFIs that create 23 high touch and community re-enforcement that is their own m-banking service have the extra burden inherent to loan repayment methods. Instead, WING of creating an agent network, while those MFIs that used VisionFund outlets as WING Cash X-press points piggyback off existing services pass this responsibility for cash-in/cash-out.25 onto the m-banking provider itself. From VisionFund's perspective, the partnership If an MFI does not initially use an m-banking service allows it to differentiate itself from other MFIs in for loan repayments and deposits, it can be involved the market. According to VisionFund, customers in the service in other ways. Working as an agent for see it as innovative. VisionFund is not licensed to an MNO or bank that has launched an m-banking take deposits, but it can now offer customers the service can be a good way for an MFI to learn about opportunity to store value using the WING service. how the service works without high investment costs. On the revenue side, VisionFund receives income This strategy also allows customers to gain exposure from transaction commissions and has an opportunity to the system, perhaps increasing the likelihood that to cross-sell products. But there is also a cost side if the MFI eventually decides to offer loan repayments of the equation. VisionFund initially invested in 10 and deposits over the mobile channel, they will feel additional staff to serve as WING Pilots to register 22 For example, see Morawczynski and Pickens (2009). 23 For more information on cash handling through agent networks see Mas (2008). 24 Information on the case of VisionFund was taken from interviews with Brad Jones (then ceO of WInG cambodia) and Veasna chumsam (business initiatives manager at VisionFund) between October 2009 and April 2010. For additional information, see http://technology.cgap. org/2009/04/15/mobile-banking-cambodia-and-the-financial-crisis/ 25 http://allpaynews.com/content/mmt-explained-wing-cambodia-an-operator-agnostic-mobile-money-service 10 new customers, and it trained new and existing staff likely their customers) in the area. With 2,500 BRAC on cash-in/cash-out procedures. It estimated that branches currently in Bangladesh, there is potential each dedicated staff needed to open 100 new WING for extensive reach. The main motivation for BRAC accounts a month to break even. to serve as agents is to attain a cheaper source of funds. If BRAC could manage liquidity issues and use After six months, it became apparent that the 100 the excess cash for lending, it could make additional account threshold was not being reached. Through revenue on the spread and benefit from a cheaper negotiations with WING, VisionFund transfered the cost of capital. costs of the WING Pilots to WING directly, while still housing the WING Pilots in its branches. VisionFund An MFI working as an agent on behalf of an still directly provides the WING Cash X-press points m-banking provider can be a win­win situation for for cash-in/cash-out. Therefore, even serving as an both organizations. For the m-banking provider, agent for an m-banking service involves costs that there are several benefits. First, providers need to MFIs must consider in addition to the extra revenue. find agents that will be patient in seeing commissions as the customer base builds and transactions start Both VisionFund and WING Cambodia hope to use to flow through the system. This can often take WING for loan repayments and disbursements for some time, and many agents that have a pure profit MFI customers in the future, but they want to ensure motivation may not stick around long enough to that this is done carefully. Both sides see the current see positive results. MFI networks are unlikely to arrangement as an appropriate way for VisionFund be serving as agents solely for the revenue, so they to take advantage of m-banking, while providing are more likely to be patient as the scheme builds. WING Cambodia with much needed cash points for Second, m-banking providers have the most room customers in rural areas. for growth when they target the poor, unbanked customer segment. MFIs already have access to this Another example of an MFI that is considering the customer base, and they can provide good visibility role of an agent for an established m-banking service for the m-banking provider within these communities. is BRAC, one of the largest MFIs in Bangladesh and MFI staff are also financially astute and can explain an industry leader. 26 Bangladesh still has relatively the products well to new customers unfamiliar low mobile penetration, and therefore using mobile with banking services. Third, MFIs with significant phones for loan repayments is not a priority for BRAC. presence throughout a country offer a network Mobile penetration among group customers is even of agent locations at one time to the m-banking lower than the national average of around 30 percent, provider, significantly reducing the time it would according to BRAC. While it is considering m-banking otherwise take to sign up agents one by one. for individual loan customers with an average loan size above a certain amount, only 300,000 out of For the MFI, there are also several benefits. Serving BRAC's 6.3 million active borrowers are individual as an agent for an m-banking service will differentiate customers. it from its competitors. Second, doing so will familiarize MFI staff and customers with the service Instead, BRAC is much more interested in its branches before the MFI invests more time and resources into being used as agent locations for other branchless linking into the service for loan repayments and other banking initiatives. Though this has not yet been transactions. Third, while MFIs may earn commissions initiated, BRAC branches could serve as agents that from the transactions they handle, the experience of manage a whole network of smaller agents (most VisionFund shows that it may just be enough to cover 26 Information on the case study of BRAc is from an interview with shameran Abed, adviser at BRAc, in March 2010. 11 their costs. If MFIs can stay ahead of their competitors the loan officer now involve quick verification of the and learn about a new m-banking service without transaction, which allows the customer to return to losing money, it is worth the effort. her business faster.27 While the m-banking platform has not brought new customers to SMEP (at least, What Benefits Can MFIs not yet), SMEP reports that it has increased customer Expect to Gain by Using satisfaction for its existing ones. Mobile Banking? One indication of the value of the service to existing Can m-banking help MFIs serve customers is their willingness to pay a fee in order to existing customers better? repay via M-PESA. M-PESA treats microfinance loan repayments as bill payments. Customers pay $0.25 MFIs around the world see m-banking as an per transaction, and MFIs pay from zero to $1.25 opportunity to reach new customer segments and depending on the value of the transfer. Customer grow faster. Mobile phones can expand the reach of willingness to pay depends very much on the previous MFIs that struggle with the high costs associated with cash collection method used. In the case of SMEP, servicing extremely hard-to-reach rural customers. where the cash transport responsibility lies with However, evidence suggests that the first benefit that customers, customers are very willing to pay a small results from m-banking for MFIs is improved customer fee to have heightened security and save hours every service to existing customers. week. Lydia Koros, former managing director of Faulu Kenya, says, "Does the cost deter customers? No. This has been the experience of SMEP in Kenya once We have educated our customers to look at the total it linked into the M-PESA platform for repayment cost of making a transaction--including bus fare and services for its customers. Before M-PESA was used, the opportunity cost of the time spent traveling and a SMEP customer had a lengthy repayment process. waiting in queues versus running their business. They She would carry her cash to the group gathering realize that if they walk one block to deposit quickly location. Meetings would be long as each customer's at an M-PESA agent, the $0.25 is much cheaper than cash was counted and recorded by the loan officer. taking a bus ride to the nearest Faulu branch." In this This can take a particularly long time in Kenya since case, the primary benefit to MFIs is greater customer fake bills are common, and the treasurer must inspect satisfaction. every note to make sure it is genuine. If she was the group treasurer, she would then have to take all of the On the other hand, many MFI loan officers in other group's cash to the bank, wait her turn at the bank, countries collect cash at group meetings and travel and finally deposit the money. As a small business with the cash to an MFI branch office or a partnering owner, she would spend a significant amount of time bank branch. These MFIs benefit significantly from away from her business. In addition, she incurred m-banking through a reduction in security risk and substantial security risk walking and taking the bus fraud risk. However, customers who are used to with large amounts of cash. Now with M-PESA, the "free" cash collection at their doorstep may not process is simple and safer. At any time during the immediately see the benefit of taking responsibility repayment period, when the customer has the cash for their own loan payments through an m-banking flow to make her repayment (or even a portion of the service. Even $0.25 to transfer funds to the MFI may repayment), she can walk to a nearby M-PESA agent, seem high. In this case, MFIs may consider subsidizing load money into her account, and send the electronic the cost for customers (still a cost savings compared value to the SMEP account directly. Meetings with with associated costs of cash-carrying loan officers) 27 The customer experience is based on discussions with cameron Goldie-scot, former Triple Jump Advisory services consultant who worked on the launch of sMeP's m-banking service, and George Kinyanjui, consultant and project manager for sMeP. 12 The fact that m-banking may just help MFIs provide an Box 3. Main Messages extra benefit to current customers should not detract · Mobile banking can help existing MFI from its appeal. Providing customers with flexibility customers save time and money, experience in when they make their payments, shortening group greater security, and manage their cash flows meetings, and decreasing cases of theft or fraud are with more flexibility. · There is little evidence to suggest that mobile benefits that MFI customers highly value. Ultimately, banking will help MFIs reach new customer MFIs also benefit when they have a loyal and satisfied segments since microcredit methodology customer base. relies heavily on human interactions. · Early evidence suggests that m-banking can reduce operational costs for MFIs and that Can m-banking help MFIs reach these costs can be passed on to customers in new customer segments? the form of lower interest rates. While serving existing customers better may be an and gradually educating customers on the benefits of extra benefit of m-banking, many MFIs often assume being able to make loan repayments when and where that it will enable them to expand their customer it is convenient for them. base. Nevertheless, there is little evidence thus far to demonstrate that m-banking has helped MFIs (or XacBank in Mongolia began its m-banking project indeed banks) grow faster. with the expectation that it would bring new customers to the institution.28 The Mongolian KWFT does not expect its link with M-PESA to help it environment epitomizes the challenges many expand its loan customer base significantly, but KWFT MFIs face in reaching more customers in difficult does expect M-PESA to help it mobilize new deposits environments. Mongolia has a population of 2.7 easily and cheaply. KWFT's loan methodology-- million people spread over a vast territory of 1.5 like that of most MFIs--is based on a high level of million square kilometers. Much of the population is human interaction. Loan officers are well known in semi-nomadic, presenting even further challenges in the communities in which they operate, and frequent how best to reach more customers. Therefore, while face-to-face meetings are essential to strengthen the XacBank saw m-banking as offering more convenient social capital on which the methodology is based. services to its 62,000 active borrowers, as well as its Even if clients can make loan repayments far from 140,000 depositors and 80,000 card holders, it also a KWFT branch (via agents), the loan officer still considered m-banking as one channel in its strategy needs to be close to both a branch and his clients. to reach more people. Geographic expansion with this methodology will not change dramatically with m-banking. According to XacBank, the vast majority of the 35,000 customers registered so far for the m-banking service However, deposits are a different product. There are are existing customers. Interestingly, XacBank is not no appraisals, group meetings, or strict repayment using the service for loan repayments, although schedules. It is a flexible product, and customers can this is planned to begin in June 2010. The service is deposit any amount they wish whenever they wish. predominately used for person-to-person transfers KWFT has just received a license to accept deposits. and links a customer's XacBank current account with Converting its current branches into branches that are his or her mobile account. capable of accepting deposits is expensive as there 28 Information on the case of XacBank is from an interview with a XacBank staff in november 2009, along with a project plan prepared for cGAP in May 2007 as part of the Technology Program's project portfolio. For more information on XacBank's m-banking project see http:// technology.cgap.org/2010/01/20/mongoila-mobile-banking/ 13 are high structural and infrastructure costs. Thanks the customer via the mobile phone already in the to M-PESA, KWFT will convert only its regional hubs customer's pocket, costs can be greatly reduced--or into deposit taking branches and will use M-PESA so the idea goes. to accept deposits from customers everywhere else in the country. In this way, m-banking will help it Early evidence suggests that m-banking can reduce to reach new customer segments for the deposit operational costs, and several MFIs have already product. reduced or have plans to reduce interest rates as a result of m-banking. However, the size of cost The case of Tameer Microfinance Bank provides reduction will vary for each institution, depending on an example of successful new customer acquisition a variety of factors, such as scale and methodology. through m-banking. But the Tameer business case is very different from that of most MFIs. The easypaisa MABS has used m-banking as a way to decrease costs service allows people to send transfers and pay bills for rural banks in the Philippines. The Philippines has through Telenor's vast agent network. In the six been a front runner in the branchless banking area, months following the first payment product launch in with both GCash and SMART Money established October 2009, Tameer processed well over 1 million several years ago by the two leading mobile transactions on behalf of approximately 500,000 operators. MABS has helped 60 rural banks, with customers. Since launching the mobile account in over 885 bank branches, identify customers that February 2010, there have been 29,000 new account have businesses that are suitable to serve as GCash openings. In both of these cases, all transactions resellers. Rural bank customers use these small have been carried out by new customers of Tameer merchants to make loan repayments and deposits. Microfinance Bank, not by its existing customer base. When the cost of traveling to the bank (which ranges Tameer is not yet using its m-banking service for loan- from $0.20 to $2.40) exceeds the cost of converting related microfinance transactions among existing cash to GCash ($0.20 or 1 percent, whichever is customers. higher) bank customers are willing to pay the GCash conversion fee instead of the cost of traveling to the It is possible that as more MFIs experiment with rural bank branches.29 m-banking, some of them will reach new customers and grow into larger institutions. But until this One rural bank, Green Bank, has also realized that evidence is available, MFIs should consider m-banking it is much cheaper to encourage customers to make as a way to serve their existing customers better. MFIs loan repayments via Text-A-Payment using GCash should continue with their original growth strategy, instead of sending collectors to collect the payments. while taking into consideration how to integrate an Green Bank calculated that, by reducing the costs m-banking service. of field-based collection, it would be able to pass on the benefit directly to the customers to make it Can m-banking reduce costs for cheaper for customers to pay via GCash. In response, MFIs and for customers? it agreed to reduce interest rates from a flat monthly rate of 2.50 percent to 2.00 percent, as well as reduce Frequent, direct contact with people in hard-to- its service charges from 3 percent to 2.5 percent. reach locations makes microcredit expensive. But if Taking into account the cost of the GCash fee and loan disbursements and repayments, and even some SMS costs, this converts into a total savings to the monitoring, can be carried out by both the MFI and customer of $5.30, based on an average loan size of 29 http://blog.mobilephonebanking.rbap.org/index.php/2008/09/25/mobile-phone-banking-services-expands-access-in-rural-communities/ 14 $400.30 For the bank, taking into account the reduced Bank in Andhra Pradesh, and using A Little World cost of collection as well as the reduction in the as its technology provider, SKS ran a pilot for 1,500 service fee and interest income, it is able to save $16 customers over three months where customers were for a loan client with an average loan size of $400. able to open accounts, deposit and withdraw cash, and send funds through a small network of local The rural banks also use an SMS gateway platform to shops. Although customers were initially excited remind customers about upcoming loan payments. about the project, the overall customer experience This saves the banks money by not having to call was discouraging, and few customers became active customers to remind them about payments and has users of the service.34 proven effective at reducing late payments. When a text message is sent before or on the payment Despite these obstacles, SKS is still intent on rolling date, repayment rates improved significantly with late out m-banking once regulation allows it. While its payments dropping by almost 30 percent. Using SMS reasons are financial, the aim is more about revenue to remind customers to meet contractual savings generation than cost savings. SKS estimates that goals has also proven effective.31 loan officers can save about 15 minutes per meeting through m-banking. This is not substantial when total The example of SMEP in Kenya shows that there travel time and relatively low loan officer salaries are various ways that MFIs can save money through in India are factored in. SKS could hire more loan m-banking. Credit officers spend less time in officers for less money than the cost of implementing meetings, allowing them to reach more customers an m-banking solution. quicker and increase their productivity. Triple Jump Advisory Services estimates that there is a significant So why does SKS still want to go ahead? Instead reduction in travel time and costs for loan officers, of using m-banking for customer transactions, SKS resulting in a doubling of capacity of a loan officer would serve as an agent for a bank, allowing SKS to as more and more customers adopt the m-banking access a new revenue stream. With its high numbers system. For institutions that still handle cash, this can of customers, SKS expects the commissions involved reduce the time loan officers spend in bank branches to be significant. In fact, SKS expects that the new and the risks associated with cash handling. revenue generated by acting as an agent for a bank will be worth 10 times any potential cost savings. Some MFIs that have conducted a detailed cost­ The end result could be reduced interest rates for benefit analysis have concluded that m-banking customers. will not dramatically reduce costs, as was the case with SKS in India.32 With more than 5 million active The stories of MABS, SMEP, and SKS demonstrate borrowers, SKS is the largest MFI in India today. that interest rates for customers can perhaps be reduced through m-banking, whether through SKS conducted a small m-banking pilot in 2007 for cost savings or additional revenue generation. learning purposes; SKS knew it would not be able However, this will not necessarily happen with every to roll out a full offering given the current regulatory organization and depends on many factors, such as constraints in India.33 In partnership with Union methodology and the relative costs of technology 30 These calculations are based on an average loan size of 17,755 PHP (us$400) with a 124-day loan term for all borrowers within or outside a 3 km radius. 31 http://www.slideshare.net/MABsIV/using-s-m-s-technology-to-encourage-savings-and-loan 32 Information on the sKs case study is from a presentation by Paul Breloff, then vice-president of Business Development for sKs, in new Delhi, India, in October 2008 at the Microfinance and new Technologies summit. 33 The Reserve Bank of India restricts who can act as agents for banks. 34 sKs identified three challenges: (i) illiteracy as a challenge to the technology interface; (ii) customers' unfamiliarity with personal identification numbers, causing the security of the system to become vulnerable; and (iii) lack of a clear value proposition for customers to switch from cash to mobile banking 15 and labor in a particular market. In particular, this the MFI and the customer. MFIs can also consider will depend on scale. Many MFIs have a small working as an agent in an m-banking system. This customer base and low volumes. The cost savings per can be a good way for an MFI to learn more about transaction or customer will be relatively low, and so how m-banking works without high investment costs. the economic justification for this new channel rests It allows customers to gain exposure to the system, on high volumes of transactions. Each institution must helps MFIs differentiate themselves, and brings do a thorough cost­benefit analysis to understand its enhanced liquidity to their branch locations. key cost drivers and whether and how m-banking can help to reduce these. What benefits can MFIs expect to gain by using m-banking? Conclusion · Can m-banking help MFIs serve existing In the coming years, m-banking could very well customers better? The first and most obvious revolutionize the way people manage their money benefit of m-banking for MFIs is better customer in developing countries across the world as it has service. M-banking can provide existing customers begun to do in Kenya. Many MFIs have spent decades with flexibility in when and where they make loan training and equipping their customers to use payments and deposits, shorten group meetings, financial services like savings and credit. Naturally, and decrease cases of theft and fraud. they are eager to take advantage of the potential of · Can m-banking help MFIs reach new customer m-banking to bring convenient and low-cost access segments? Although reaching new customer to financial services to customers' fingertips. In segments (often in rural, hard-to-reach locations) this paper, we asked several questions facing MFIs is a commonly stated goal of MFIs embarking considering m-banking. on m-banking, there is little evidence so far to demonstrate that this will happen, especially for Should an MFI in a country without any existing microloans. With more experimentation, some m-banking infrastructure create its own m-banking MFIs may reach new customers, but MFIs should system? Early experience suggests that developing not base an m-banking business case around this an m-banking system is expensive, time consuming, proposition. and complex. There are many pieces to put in place · Can m-banking reduce costs for MFIs and (such as an agent network) beyond the technical for customers? Early evidence suggests that solution. Only MFIs with significant managerial, m-banking can reduce operational costs for MFIs technical, and financial capacity should consider this and that these costs can be passed onto customers option. Very few MFIs have the right capabilities to in the form of lower interest rates. The degree of create their own system. cost savings (or additional revenue generation), however, will depend on factors such as lending What role can an MFI play in a country with existing methodology and the relative costs of technology m-banking infrastructure? Early experience suggests and labor in a particular market. that MFIs can effectively use m-banking services to facilitate both loan repayments and deposits. This As MNOs and large banks take the lead in developing does not necessarily increase credit risk and can m-banking services in the coming years, there will make the transaction process more efficient for both likely be many more examples of MFIs using these No. 62 July 2010 services in different ways. Both MFIs and their Mas, Ignacio, and Kabir Kumar. 2008. "Banking Please share this customers will benefit from the intersection on Mobiles: Why, How, for Whom?" Focus Note Focus Note with your of m-banking and microfinance, and these 48. Washington, D.C.: CGAP. colleagues or request extra copies of this benefits will be greatest for MFIs who prepare paper or others in strategically and consider carefully the timing Morawczynski, Olga, and Mark Pickens. 2009. this series. and method of their involvement. "Poor People Using Mobile Financial Services: Observations on Customer Usage and Impact CGAP welcomes References from M-PESA." Brief. Washington, D.C.: CGAP. your comments on this paper. Hughes, Nick, and Susie Lonie. 2007. "M-PESA: Owens, John. 2009. "The Role of Partnerships All CGAP publications Mobile Money for the Unbanked." Innovations and Strategic Alliances to Promote Mobile are available on the CGAP Web site at (Winter/Spring). Phone Banking at the Bottom of the Pyramid." www.cgap.org. MicroSave Briefing Note #68. Lyman, Timothy, Mark Pickens, and David CGAP 1818 H Street, NW Porteous. 2008. "Regulating Transformational WING Money Social Impact Report 2009. MSN P3-300 Branchless Banking." Focus Note 43. Washington, DC Washington D.C.: CGAP. 20433 USA Tel: 202-473-9594 Mas, Ignacio. 2008. "Being Able to Make (Small) Fax: 202-522-3744 Deposits and Payments, Anywhere." Focus Note 45. Washington, D.C.: CGAP. Email: cgap@worldbank.org © CGAP, 2010 The authors of this Focus Note are Kabir Kumar, Claudia McKay, Services for their very useful insights. The Technology Program at and Sarah Rotman of CGAP. In addition to the many people from CGAP works to expand financial services for the poor using mo- each of the organizations profiled here who participated in inter- bile phones and other technologies and is co-funded by the Bill views, the authors would like to thank external reviewers Matth- & Melinda Gates Foundation, CGAP, and the UK Department for ias Adler from KfW and Carol Caruso from Triple Jump Advisory International Development (DFID). The suggested citation for this Focus Note is as follows: Kumar, Kabir, Claudia McKay, and Sarah Rotman. 2010. "Microfinance and Mobile Banking: The Story So Far." Focus Note 62. Washington, D.C.: CGAP.