56623 Scenarios for Branchless FOCUS NOTE Banking in 2020 T he growing use of branchless banking channels1 over the coming years is inevitable in most countries. But it's far less certain whether large end of the next decade. Wiring electronic payment highways is a worthwhile goal for the decade. But it is not sufficient. To ensure that poor people use numbers of the unbanked poor will use these branchless banking and to create opportunities that alternative channels for financial services beyond could help alleviate poverty, both governments and payments, such as savings and credit. CGAP and providers should track adoption patterns closely and DFID undertook a six-month scenario-building understand customer needs. Private sector players project in which almost 200 experts from more than should recalibrate their return expectations: achieving 30 countries helped answer the question "How can robust, scalable branchless business models will take government and private sector most affect the uptake time, most likely longer than expected. Government and usage of branchless banking among the unserved activism can be a powerful force for encouraging majority by 2020?" wider and broader reach of branchless services if regulators successively enable innovation by making We identified four forces most likely to shape the markets for financial services competitive through answers: stages of development. In addition, governments can promote financial inclusion by ensuring that their · The changing demographics of users own welfare and salary payments are delivered via · The actions of increasingly activist governments branchless channels. · Rising crime · The spread of Internet access via data-enabled Introduction phones even in poor countries and communities Branchless banking today bears little resemblance to We also isolated four key uncertainties with important what it looked like 10 years ago. In 1999, the dotcom effects but uncertain outcomes: bubble was at its most inflated, and some suggested that the bank branch was obsolete--that "clicks" · Which types of entities will be allowed to provide would soon replace "bricks."2 While some pioneering branchless financial services? firms, especially in Europe, had introduced early · Will providers craft viable business models for mobile payment services, only 8 percent of the world's services beyond payments? population had mobile phone subscriptions (Mas and · How will competition play out? Rotman 2008). Low-income countries in particular had · How will consumer, business, and regulator very few users of either Internet or mobile.3 When it confidence be affected by the inevitable failures came to banking and the poor, all eyes were on the that will happen? emergence of a range of microfinance institutions (MFIs) that relied on personal contact with clients. No. 57 We created four scenarios that interweave these forces October 2009 and uncertainties in different settings to produce very What a difference a decade can make. The dotcom different trajectories over the next 10 years. bubble deflated in 2000, and the bank branch is Mark Pickens, not dead. In many countries, the number of bank David Porteous, Notwithstanding recent hype, branchless banking branches has increased in absolute and even and Sarah Rotman for the poor is at an early stage of development. It per capita terms over the decade. And MFIs have is conceivable that a majority of those who today continued to grow--by some measures serving close do not have access to formal financial services may to 100 million active loan customers at the end of have access to electronic payment instruments by the 2008 (Gonzalez 2008). 1 CGAP and DFID define branchless banking as the delivery of financial services outside conventional bank branches using information and communications technologies and nonbank retail agents, for example, over card-based networks or with mobile phones. 2 "The banking industry will suffer the same fate as the dinosaur within the next five years unless the brick and mortar branch banking system is cast off in favor of more nimble delivery alternatives" (Fowler and Hickey 1995). 3 Mobile penetration figures from Wireless Intelligence. Internet penetration figures from ITU: "Internet indicators: subscribers, users and broadband subscribers" 1998­2008 at http://www.itu.int/ITU-D/ICTEYE/Reports.aspx# 2 The unexpected success story of the past decade or will it fizzle out because of lack of take up or has been the speed and extent to which mobile unviable business models? What factors have the telephony usage has spread. More than 80 percent most potential to affect how branchless banking of the world's population is now within mobile will evolve in coming years? What actions should coverage. In 2009, the GSM Association (the GSMA) be taken now to influence the outcome? This paper reported more than 4 billion mobile subscriptions describes the results of a six-month scenario-building globally, with 80 percent of new connections in project that sought to identify strategies in branchless emerging markets and mostly by lower income banking that can lift or depress the trajectory of consumers.4 Branchless banking has emerged as financial inclusion globally. a promising new approach to accelerate financial inclusion. By changing the costs and risks of The driving question that guided the project was distributing financial services, channels outside "How can government and private sector most affect the branch have enabled large commercial banks the uptake and usage of branchless banking among and new entrants like mobile network operators the unserved majority by 2020?"6 Between February (MNOs) to contemplate reaching large numbers of and August 2009, 194 people from over 30 countries unserved people. participated in workshops in Kenya, South Africa, the United Kingdom, and the United States; a series In recent years, no example of branchless banking has of in-depth interviews; and an online predictions done more to stoke enthusiasm than M-PESA, the market through which participants placed "bets" mobile payment service offered by Safaricom, Kenya's on the future of branchless banking. Participants largest MNO. Since its commercial launch in March included senior managers from MNOs, banks, 2007, more than 7 million people--approximately MFIs, technology firms, and more than 60 financial one in four adult Kenyans--have signed up. Largely sector and other regulators. A core team conducted (though not only) due to M-PESA, the proportion additional analysis and synthesized findings from of Kenyans considered to be formally financially the process. included has almost doubled to 41 percent in just three years (FSD Kenya 2009a). M-PESA sometimes In this Focus Note, we follow the standard structure overshadows the success of a different approach to of a scenario-building process to report our findings.7 branchless banking found in Brazil that relies not on The first section describes the salient features of mobile phones but on point-of-sale (POS) devices today's landscape in branchless banking. The next two deployed at agents. Following a ramp-up of agents sections highlight four forces and four uncertainties by state and private banks, Brazil could claim by that will likely shape how the sector will evolve in the 2005 that every municipality in the country had a next decade. We then construct four scenarios that financial service point, changing the geography of are not predictions of the future, but rather stories financial inclusion. Based on these and several other that show how forces and uncertainties can weave promising pioneers, donors are investing large sums together to produce varied outcomes--some familiar, into branchless banking.5 some surprising. The scenarios enable readers to reflect on their own strategies for branchless banking. These examples suggest that the trend toward the The conclusion seeks to consolidate broad responses use of branchless channels is strengthening. But is as to how best to shape the future direction of growth of branchless channels inevitable? Will the branchless banking as a means to improving poor use of branchless banking channels continue to grow, people's access to financial services. 4 The GSMA; Wireless Intelligence. The GSMA is the global trade association for the mobile communications industry. 5 The Bill and Melinda Gates Foundation focuses in part on strategies to "lower costs and increase value for providers and the poor through technology-enabled business models." DFID has proposed a new Challenge Fund to promote the roll out of innovations linked to mobile telephony (DFID 2009). Technology is one pillar of CGAP's strategy to advance financial access for the world's poor. 6 This question reflects several deliberately chosen components. The reference to private sector and government is a recognition that both have a critical role to play. The phrase "most affect" leaves open the possibility of both negative and positive effects from their actions. The addition of "usage" stresses that mere account opening is a poor measure of financial inclusion if not paired with data showing that customers use them to fulfill their needs. "The unserved majority" is a broad reference to the large number of people, most of them poor, who today do not have access and/or do not use convenient, safe, and affordable financial services. 7 Kelly (2005) describes scenario building as "a disciplined form of story-telling about possible futures. These scenarios are not predictions. Rather they are alternative, equally plausible, and quite different hypotheses about what might happen. They are designed to stretch our thinking, challenge our assumptions, and help us prepare for multiple possibilities instead of assuming a single future or simply waiting...to react to whatever the fates might throw our way." 3 Current Reality of Branchless Technology has played a role in this expansion, Banking though we should not overstate its role to date. Information technology has primarily helped to enable expansion through more conventional banking Main Messages channels, such as branch and ATM. For example, · Financial inclusion is growing in most in growing from 0 to 8 million deposit customers countries, but often as a result of the in five years, Mexico's Banco Azteca used a robust expansion of conventional banking channels, electronic banking system to connect a large network such as branches and automated teller of mini-branches in stores of its parent Elektra, a machines (ATMs). large seller of consumer durables, and other retail · Bricks-and-mortar growth is inherently limited chains (Rhyne 2009). For Equity Bank in Kenya, the by its cost. However, branchless banking, ongoing rollout of conventional and vehicle-mounted though cheaper, has only modest reach to mobile branches combined with a rapid deployment date in most countries. of ATMs has fuelled tremendous growth: from fewer · Where branchless banking is occurring, than 100,000 customers to 3.4 million in less than several of the following factors are usually at a decade.9 Both banks serve primarily a middle- work: (i) industry belief in future profitability; and lower income clientele. South Africa's Mzansi (ii) enabling regulatory change; (iii) a dramatic account is a debit card bank account that is used fall in connectivity costs; (iv) the creation mainly at ATMs. The country's largest banks designed of cash-handling agents using existing the account to be affordable and appropriate for networks. the unbanked, and the take-up has been very high: · Current hype about the potential of branchless since launch in 2004, more than 6 million accounts banking is running ahead of reality. Massive have been opened, mostly by people who had never sustained success in reaching the unserved previously had a bank account (Bankable Frontier majority requires inter alia better informed Associates 2009). insights on poor people's financial needs and adoption behavior. This is only now starting At a country level, too, the proportion of conventional to accumulate. bank touch points--branches and ATMs--has risen in low-, middle-, and high-income countries alike. In Kenya, the number of ATMs has increased seven-fold Almost 4 billion people are unbanked--more than and bank branches almost doubled since 2003 (FSD two-thirds of the population in the world's low- Kenya 2009a). In Brazil, the combined ratio of ATMs and middle-income countries.8 They are the huge and branches per 100,000 people grew from 62 in unserved majority today. In recent years, there 1999 to 99 in 2009 (Banco Central do Brasil 2009). has been growing effort and interest in measuring This happened at the same time as a massive increase financial inclusion, but as yet we have no globally in the number of branchless banking agents in Brazil. consistent datasets that can give us a clear sense Conventional banking channels are far from dead. of how this proportion has changed over the past decade. However, evidence from countries like Brazil, However, future growth of conventional channels South Africa, India, and Kenya strongly suggests that faces inherent limits. After a decade of increasing there has been an upward trend (FinMark Trust 2003 the number of its branches, Bank of America recently and 2008; FSD Kenya 2009a; Kumar 2005; World Bank decided to close 10 percent of its U.S. network, citing 2008a). In many developing countries, consistent changing consumer preferences toward new channels economic growth over the past decade has brought such as Internet and mobile (Wall Street Journal new wealth and demand for financial services while Market Watch 28 July 2009). Equity Bank believes liberalization has led to increased competition in it may soon reach a ceiling on the number of viable retail financial services in many places. As a result, branches and ATMs. The investment required for the reach and coverage of the formal financial sector developing countries to reach the level of deployment has grown. per capita of conventional touchpoints in more 8 CGAP, the GSMA and McKinsey analysis using data from the World Bank (2008a). The World Bank's classification of countries is available at http://go.worldbank.org/K2CKM78CC0 9 http://www.equitybank.co.ke/, www.themix.org 4 developed countries is prohibitive. For example, for We were able to identify few providers today using Kenya to reach middle-income levels of branches mainly branchless channels who meet two criteria: and ATMs at current costs, it would require capital serving more than a million active low-end clients and expenditure of some US$2 billion. This figure is six making a profit through doing so. One of the few is times the pretax profit of the entire Kenyan banking the Mobile Banking business unit of First National sector in 2008. Searching for lower cost channels is Bank (FNB), a large South African commercial bank critical for senior bank managers and policy makers that has explicitly sought to make mobile payments responsible for financial inclusion. the prime channel for serving underserved or marginal customers. FNB Mobile emphatically claims The essential proposition of branchless banking10-- profitability on a fully cost-absorbed basis (FNB 2006). that financial providers can reduce fixed costs by Despite its large numbers and soaring revenues, using existing facilities and devices, whether owned the chief executive officer of Safaricom, Michael by the customer (e.g., mobile phones) or by agents-- Joseph, stated in May 2009 that M-PESA had not yet has caught the attention of providers. However, the become profitable on a standalone basis, although record to date has been modest. the unaccounted benefits of savings on airtime commissions and customer churn undoubtedly make Recent surveys of customers of branchless channels the overall financial picture for M-PESA compelling in Kenya, Brazil, the Philippines, South Africa, and (Wireless Federation 7 May 2009). India are starting to build a picture of clients and their usage patterns. Today's customers are primarily This lack of large robust models is hardly surprising, not the unserved majority, although unbanked and given their recent appearance: branchless banking poor people are starting to use branchless channels for the poor is still by and large a "young" business. nonetheless: 30 percent of M-PESA users were Only in Brazil has branchless banking been underway previously unbanked in 2008 (FSD Kenya 2009b), and for a whole decade, triggered by a 1999 change 26 percent of Filipino mobile money users live on in agent regulation (see Box 1) (Banco Central do less than US$5 per day (Pickens forthcoming). These Brasil 2009). findings confirm research in 2006 that more than one-third of clients of South African mobile banking The rollout of branchless banking to date has been service WIZZIT were previously unbanked (Ivatury and driven by four underlying factors: Pickens 2006). In the Brazilian state of Pernambuco, 90 percent of people in the three poorest segments · Industry belief in future value. The shortage of use banking agents to pay bills (CGAP 2007). profitable large-scale business models today has not discouraged new entrants who see value Box 1: Brazilian agency regulation Brazilian banks have used agents (correspondentes) financial institution was now permitted to engage since the 1970s. However, it was not until 1999 that agents. The use of agents has grown steadily since. the central bank expanded the way in which banks The total number of agents tripled from 36,474 could use agents--permitting agents to open bank in 2003 to 117,000 in 2008. Payments and bill accounts, handle deposits and withdrawals, and collection dominate in both transaction volume (1.6 facilitate bill payments. Using the new opening, billion transactions in 2007) and value (US$93.3 Caixa Economica, a state-owned bank, concluded billion). However, agents are also used extensively a deal to convert 9,000 lottery kiosks into agents. for operating bank accounts: 398 million deposit The following year, the central bank lifted a prior and withdrawal transactions worth US$39.6 billion restriction that had limited agents to municipalities were done at agents in 2007, accounting for one in without bank branches. Caixa quickly expanded every five transactions and 30 percent of all value to cover all 5,600 municipalities in Brazil. A third flowing through agents. set of regulations was issued in 2003, motivated by the government's financial inclusion policy: any Sources: Banco Central do Brasil, FEBREBAN 10 See Ivatury and Mas (2008) and Mas and Siedek (2008). 5 from the sheer numbers of potential customers as Internet commerce in the dotcom era, when a high in the unbanked majority. Up to 120 mobile degree of certainty about market potential fuelled banking services could go live in 2009, according the development and entry of new technology--but to a survey of MNOs, vendors, and others in the in that case providers had a clearer sense of how to mobile banking space conducted by CGAP and profit from the opportunity.13 the GSMA with McKinsey in April 2009 (Pickens forthcoming). Success in branchless banking ultimately depends · Enabling regulatory approaches. These have on offering customers a service proposition that is allowed new models to start up, although they superior to existing options. To date, branchless may also have affected their growth. Following channels meet this standard only for some clients. the example of Brazil, the Reserve Bank of India High initial adoption can be followed by high (RBI) allowed banks to appoint certain types dormancy rates or infrequent usage, which indicates of agents from 2006. This change provided that the service offering is not as useful as it first enough opening for new providers, such as appears. Some 40 percent of Mzansi basic bank FINO (a financial services technology provider), accounts in South Africa have become inactive, and an to emerge. In little more than two years, FINO even higher proportion of registered users of Filipino has reached 5.8 million poor clients with various mobile money may be inactive. Indeed, the rate of financial services on behalf of banks. inactivity of Mzansi accounts exceeded the inactivity · Rapidly declining costs of real-time connectivity. rate on prepaid airtime subscriptions in South Africa, Mobile data channels, which are now widely which is already considered high (Bankable Frontier used to connect POS and ATM networks, are Associates 2009). at least 50 times cheaper than the fixed-line communications options available in 1999 Ultimately, poor people in the unserved majority will and are much easier to deploy. The increasing use new electronic services when these services meet availability and falling cost of connectivity has real needs. One way of segmenting need is according enabled real-time connections that previously to livelihood. Figure 1 does this for the 2.6 billion were not viable. poor people in the world (using the $2 per person per · Harnessing existing distribution networks for day poverty metric). Several large groups stand out in cash handling. The commissions paid on prepaid their distinct needs for financial services: airtime have fuelled rapid growth in widespread distribution reaching even small villages through · Youth. The largest segment at 800 million, young small merchants. New branchless models have people 16 and older, may lack regular income sought to use the fact that this network already and rely more on receiving transfers from family handles cash. M-PESA now reports more than members--meaning that they offer low revenue 11,000 agents (four times the combined number potential in the short to medium term. However, of bank branches and ATMs in the country).11 they are more likely to exhibit early adopter characteristics. In terms of market development, branchless banking · Elderly. This is also a large and, in many countries, in an increasing numbers of countries is taking off with growing group that may be receiving some form many new providers clamoring to enter the market of social pension as a small regular income on and often simply copying the models of the few early which other extended family members depend. pioneers without having their own clear business · Smallholder farmers. This very significant group model.12 This parallels stages in other markets, such (610 million) has diverse needs for financial 11 Safaricom for number of agents (http://www.safaricom.co.ke/index.php?id=749). Number of bank branches and ATMs from FSD Kenya (2009a). 12 M-PESA, for example, has met with less success in Tanzania. Though it has not taken off as quickly as in Kenya, it may still find success, just on a longer timeline. See http://technology.cgap.org/2009/08/18/mobile-banking-in-tanzania-concluding-thoughts. 13 Indeed, there are several interesting parallels between one of the dotcom success stories--PayPal, with 184 million accounts globally that did not exist in 1998--and M-PESA today. Both needed multiple iterations before finding a profitable business model, faced uncertain regulatory environments as a new kind of player, and built competency in electronic fraud management. 6 services that range from many payments (to from being an agent (US$5.01 per day) than selling suppliers, from customers ranging from other airtime (US$1.55 per day). This requires high average poor individuals to large agribusinesses), to transaction volumes. M-PESA agents average some insurance, credit, and savings products that help 86 transactions per day, but agents in other countries, to address the cyclicality and uncertainty of this such as the Philippines, see far fewer customers and income stream. struggle to earn sufficient revenue. Against the · Microentrepreneurs. Numerically, this is a smaller revenue flow, agents must incur costs, such as the segment (180 million) than smallholder farmers costs of maintaining an adequate float of electronic but one that is economically active and also has a money (e-money), which necessitates frequent range of diverse financial needs, including credit time-consuming trips to a bank branch. There is still of multiple kinds, short- and long-term savings. considerable work to do to understand how to build They are likely to be active senders and receivers and manage viable agent networks.14 of remittances. In summary, there are rising expectations that Successful branchless business models must work branchless banking will prove a cost-effective way of not only for providers and end clients, but also for reaching large numbers of unserved customers. But agents. Providers depend on the energy of agents that expectation fails to take into account the fact that for customer acquisition and for managing liquidity to date branchless channels have had a limited role in so as to support cash withdrawals and deposits. In reaching large numbers of lower income customers fact, successful providers view their agents as an on a sustainable basis. To assess the role that important category of customer, rather than a passive branchless banking will play in reaching the unserved channel. These schemes have inter alia structured majority, we need to look beyond the current reality their commissions to make being an agent pay well. to understand the forces and uncertainties in play For example, the typical M-PESA agent in urban and see how they will affect the rollout of branchless slums and rural areas earns 4.3 times greater profit banking. Figure 1: Segmentation of the Poor, by Livelihood 3,000 2,500 200 2,000 800 40 40 1,500 100 180 2640 300 1,000 370 1640 500 610 0 Smallholder Casual Low Wage Micro- Unemployed Artisinal Pastoralists All Working Youth Elderly Total Poor Farmers Laborers Salaried entrepreneur Poor Fisherman Age Poor Workers Source: Oliver Wyman (2007). 14 Pickens, 8 Sept. 2009 blog post at http://technology.cgap.org/2009/09/08/understanding-what-drives-profits-for-agents -m-pesa/ 7 Four forces shaping the future of Is the financial crisis of 2008­2009 a force? branchless banking To be sure, the effects of the financial crisis originating in the United States and the United Kingdom have Main Messages been severe in many countries. However, in most · Demographic changes--including a greater instances the worst predictions have not come to number of younger consumers coming into pass. We are confident in saying the financial crisis the market and greater mobility at least itself has generally not led to the kind of long- within countries--will be favorable for the lasting impacts on branchless banking that would adoption of branchless banking. be necessary for it to qualify as a force over the next · Activist governments will play a greater role decade. But the financial crisis could nontheless as regulators of the financial sector, providers exacerbate other forces and have an indirect effect. of social safety nets, and providers or For example, if fiscal stimuli were to fuel further encouragers of the rollout of low-cost bank inflation, already a force squeezing the poor through accounts and financial infrastructure. This rising food and energy prices (World Bank 2008b), expanded role may be helpful for financial this would erode the disposable income of the poor inclusion. yet further, constraining their ability to afford new · While security concerns about cash crime will financial instruments and undermining the real value continue to drive the adoption of electronic of formal savings. At the same time, if inflation is transaction channels, the rise of electronic high enough, it may also drive demand for efficient crime will affect consumer confidence and test real-time payment instruments and systems. This the risk management of financial providers. latter factor fuelled the growth of electronic payment · Internet browsing via mobile phones will systems in Brazil in the 1980s. reduce costs of financial transactions and enable new players to offer financial More certain is the effect the crisis has already had on the services. role of government. Governments will likely regulate the · The global financial crisis will have indirect financial sector more closely, showing more skepticism effects on branchless banking through toward innovative approaches and new players. strengthening the role of government and However, from our engagements with regulators, fuelling inflation. we have been impressed by how strong the goal of financial inclusion remains in developing countries. This objective may temper some of the reaction from the Forces are akin to the headwinds or tailwinds that crisis. Governments are also already responding to the affect a long haul flight. They may change in strength, global economic downturn by investing more vigorously and sometimes may cause a very turbulent ride, but, in extending social safety nets. We discuss these factors although invisible, they are always present and always further as part of the second force. affect the speed and comfort of the journey. In this section, we identify four forces affecting branchless Force 1. Demography is changing banking that may act either as tailwinds, boosting such that the overall trend of financial inclusion over the next 10 years, or headwinds, slowing it down. While in 1.1 there will be a greater number of younger this section we consider each force in turn, in reality consumers in most developing countries and in the scenarios section that follows, the forces 1.2 there will be more people moving to cities and interact, causing uncertainties about the outcome. across countries The following forces were distilled from a much longer list of forces arising from the research. Demography is an ever-present force in most scenarios15--with high impact and certainty. After all, users of branchless banking in 2020 are already alive today. Clients in 2020 will include a large number 15 See previous outcome of CGAP Scenario project Financial Inclusion 2015 in Littlefield et al. (2006). 8 Figure 2: Developed and developing country demography Developed Developing 100+ 90­94 80­84 70­74 60­64 2010 50­54 2020 40­44 30­34 20­24 10­14 0­4 ­200 0 200 400 600 Millions Source: U.S. Census Bureau International Data Base of today's youth, as Figure 2 shows. Young people young people use new technology and migrants have limited capacity to spend on new services, but demand reliable, convenient, and affordable ways a higher propensity to adopt new technology. to make remote payments. Another seemingly unstoppable demographic force is Force 2. Governments will become more the movement of people--both within countries as a activist in this space by result of continued urbanization, and across countries through international migration. The UN Population 2.1 extending the safety net through cash transfers Division (2007) expects that the developing world will or cash for work be 51 percent urban by 2020, up from 45 percent 2.2 increasing the intensity of regulation on already now. This alone will fuel rising demand for improved regulated financial institutions ways to transfer money remotely from urban areas 2.3 encouraging availability of low-cost banking and back to family in the countryside. financial infrastructure International migration patterns are harder to Pushed by the crisis, governments will be increasingly anticipate. Demand for labor in developed countries active in three domains that affect the viability of combined with internal displacements in developing branchless banking: extending the social safety net, countries will likely promote ongoing cross-border regulating more intensively, and at the same time migration, even as formal barriers to immigration pushing for formal financial inclusion. However, grow. The nature of these barriers will affect whether government actions will likely be driven from a the formal remittance market grows as rapidly as it has variety of motives and different agencies, not over the past 10 years--quadrupling to over US$300 necessarily guided by a coherent strategy to support billion per annum (World Bank 2008c). For example, the extension of branchless banking. Some of these the legal status of workers has a material impact on motives will be related to the desire of governments their ability to satisfy customer due diligence (CDD) to serve (or be seen to serve) poorer citizens through procedures to qualify for access to formal financial redistribution to mitigate the most dire poverty; services in the host country. others to use the regulatory power of the state to manage risks in financial markets; and still others The force of demography in its various mani- related to government interest in encouraging or festations creates a strong positive pull toward requiring providers to make basic products and faster adoption of branchless banking, as more services widely available. 9 Figure 3: Social Transfer Programs Launched (1999­2009) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 China Colombia Argentina Brazil Bangladesh Cambodia Bolivia Haiti Burkina Bangladesh Faso Jamaica Bangladesh Ecuador Kenya Colombia DRC Indonesia Guatemala Kenya Turkey Cambodia Mexico Pakistan Dominican Malawi Swaziland Nigeria Pakistan Republic Chile Zambia Peru El Salvador Pakistan Yemen Philippines India Panama Peru Paraguay Source: Pickens, Porteous, and Rotman (forthcoming). The continued rollout of new and expanded On the supply side, governments will shape the social programs will create strong demand from extent of the opportunity through their policies governments for branchless payment infrastructure toward provision, whether using state-owned banks that can safely pay funds cost effectively to recipients (as in Brazil), by moral suasion and prescribing fee with less instances of fraud or corruption. Over the limits (as in India), or tendering more generally (as in past 10 years, cash transfer programs have become South Africa). The large numbers involved in social an important part of the public safety net especially protection schemes may make low-cost business in middle income developing countries (Fiszbein models viable. The pressure on banks to serve low- and Schady 2009). More than 60 countries have income customers is growing as financial inclusion such a scheme (World Bank 2009), a majority of becomes more important as a policy objective in which have been launched in the past eight years developing countries. More than 1 in 10 countries (see Figure 3). Some reach broad swathes of the already require financial institutions to offer basic bank population: for example, one in four families in accounts.16 Banks typically view these accounts as Brazil and 22 percent of households in South Africa. unprofitable, and they have had mixed results so far as Globally, the reach of government payments to the a tool of financial inclusion. Since the RBI introduced poor is impressive: at least 170 million poor people its policy to encourage "no frills" accounts in 2005, worldwide already receive a regular payment of Indian public and private banks have opened 15.8 some type from their government (Pickens, Porteous, million accounts (Ramji 2009). However, a recent study and Rotman forthcoming). determined that, in some districts at least, more than 85 percent are dormant, primarily due to distance But making these payments alone will not lead to from bank branches, low financial literacy, and poor broader financial inclusion. Governments may be marketing by banks (Thyagarajan and Venkatesan persuaded that providing financial services to recipients 2008). South Africa's experience of the Mzansi basic can be a win­win­win strategy for governments, bank account is a more positive example of response beneficiaries, and financial institutions. Recent tenders to moral suasion, although issuing banks claim to lose for payment of social transfers in Colombia and Kenya money on each Mzansi account, making the product promoted financial inclusion by requiring providers unsustainable in the absence of the suasion (Bankable to offer a basic savings product to beneficiaries. Frontier Associates 2009). Card-based bank accounts are already widely used by millions of beneficiaries in India, South Africa, and Governments also function as regulators of the Brazil (Pickens, Porteous, and Rotman forthcoming). financial sector. The global financial crisis has been More evidence is needed on how recipients will use attributed in part to lax regulation and inadequate accounts if they are provided. consumer protection, and it seems likely that 16 In a recent survey, 19 of 139 countries reported requiring basic bank accounts (CGAP 2009). 10 regulators will be more wary about supporting, Force 3. Crime of various types will condoning, or approving new financial institutions continue to rise. and innovative products. The forms and extent of this backlash against financial liberalization will The risk and cost of cash crime is an important force differ across countries, but both developing country on the demand side--driving customer adoption of regulators and regulated entities interviewed as electronic forms of payment--as well as affecting the part of the scenarios process expect the intensity business case of providers. Crime varies greatly in its of regulation to increase. This will affect the ability manifestations and incidence across countries. Two to innovate, although innovation often thrives in types are especially germane to this analysis: "cracks" even in strict regulatory regimes. 1. Cash crime, where individuals or institutions Some governments may take more vigorous steps (such as banks or merchants) who are known to to push the pace of financial sector development. carry cash are vulnerable to robbery For example, regulators' power over payment 2. E-crime, where new forms of crime target systems is growing as more countries pass national electronic delivery channels payment legislation to cover what has heretofore been an unregulated area if not conducted by Cash crime drives up the cost of holding cash (which banks. Regulators may use new powers to require is often perceived to be "free" by consumers) relative that new payment systems are interoperable, or they to other alternatives. In Kenya, for example, the cost may create central bank-owned national switches to of insuring cash and transporting it has risen materially enable this (World Bank 2008d). Some governments in recent years, in part due to central bank regulations may even try to accelerate the arrival of a cashless mandating increased security after a series of high- society. Malawi and Singapore provide cautionary profile armored car robberies.17 In South Africa, ATM tales of direct government involvement in these bombings have increased dramatically since 2005-- spheres (Box 2). with the effect of frightening and deterring customers from using the machines.18 As long as cash crime Box 2: Big leaps forward? Malswitch and SELT In an attempt to accelerate interconnection, the (BCCS) announced its intention to replace cash with Reserve Bank of Malawi launched Malswitch in 2002 an electronic legal tender, Singapore's Electronic as a national payment switch that is able to connect Legal Tender (SELT). The government hoped to all bank clients to an ATM and POS network. reap large savings. An Asian Banker survey found Malswitch also issues biometric smartcards to the cash cost Singapore US$656 million in 1998 and public, in part as a means to bank the unbanked. projected the costs to exceed US$1 billion by 2006. However, larger private banks balked at joining, The government aimed to have SELT in place by because they saw Malswitch's card issuing business 2008. However, widespread resistance from the as direct competition. They also expressed doubts public (who saw cash as easier to carry) and lack of a about the cost of the proprietary smartcard well-developed e-money platform have put SELT's technology. By 2007, only four smaller banks had future on hold. Even in a small, wealthy society like signed on and a small number of cards--90,000-- Singapore, the transition to electronic channels has were then active. Banks have since developed proved much slower and harder than expected. Visa-certified platforms to interconnect. With low transaction volumes, Malswitch requires ongoing Sources: CGAP interviews with Malswitch, Reserve subsidy from the government. Bank of Malawi, Ministry of Finance and Malawian banks, Kok (2001), Papadopoulos (2007), Van Hove The government of Singapore went further. In 2001, (2003). Singapore's Board of Commissioners of Currency 17 Interview with Ron Webb, managing director PayNet (2008) 18 SABRIC statistics for 2008, available at https://www.sabric.co.za/ 11 remains a factor, which seems certain over the next some to fail. We discuss this in the next section as decade in most places, this will boost demand for one of the four key uncertainties for the next decade. electronic channels. Undoubtedly, the competence to manage electronic fraud will determine which providers survive and However, while robberies are still the most visible succeed over the next decade. form of crime, looking ahead, emerging forms of e-crime are at least as worrying to providers and Force 4. Internet browsing via mobile increasingly to consumers. The spread of e-commerce phones will change the competitive has opened new opportunities for criminals, enabling landscape. fraud to be committed more quickly, at larger scale, and across borders (Glaessner, Kellerman, We have taken for granted here that the rollout and McNevin 2004). The early days of e-commerce of mobile communications will continue, albeit at a showed both how quickly e-crime can innovate declining pace as even low-income markets become in response to the vulnerabilities in new channels saturated. It is likely that there will be few people to rise quickly as a threat, but also how it can be outside the reach of wireless communications by managed. The ability to manage e-fraud risks was 2020, and few who do not have connectivity to a major factor in PayPal's early survival and success wireless communications in some form. Indeed, the (Jackson 2004). lack of reliable and affordable energy sources is today increasingly a greater constraint on development Branchless banking in developing countries is at in poor and remote areas than is communications. the very early stage of experiencing e-crime, simply Devices like mobile phones, which require less energy because the amount of usage has not warranted than PCs and ATMs and which can be recharged the attention of syndicated criminals who have the by windup or solar power,19 are an increasingly resources to make this more than a nuisance to the important part of any rollout of branchless channels system as a whole. However, as usage grows, so too to off-grid areas. will e-crime. In July 2009, South African newspapers reported on fraud involving the interception This much seems obvious. So we have chosen instead and fraudulent use of Internet banking one-time to highlight a different force, which is yet not fully passwords sent to clients' mobile phones (The Citizen recognized by all of today's branchless banking 12 July 2009). providers. Today's successful payment services in developing countries have been built using certain Senior managers of branchless banking schemes mobile-specific channels20 that even basic handsets interviewed as part of this project displayed a keen could support. sensitivity to the threat of crime, particularly if a massive single episode or a chronic condition of However, over the next 10 years, the spread of fraud and threat led to loss of consumer trust. One affordable data-enabled phones in developing interviewee described it as "the nightmare scenario," countries will increasingly enable consumers to have and the only thing they could imagine derailing the direct access to the Internet. This is made possible by growth of mobile financial services. Laws that limit the a dramatic fall in the price of mobile devices with basic liability of customers arising from unauthorized use of Internet browsing (see Figure 4) and falling prices of credit cards and other electronic accounts have played data services, which are also available on a prepaid an important part in creating consumer confidence basis. Such "enhanced" phones are increasingly the that has accelerated the spread of e-commerce in basic handsets of tomorrow. As Figure 5 shows, countries like the United States. Similar laws may they already make up half of all phones shipped to be warranted and necessary to promote branchless emerging markets in 2009. Faster speeds and falling banking elsewhere. A key uncertainty is how well prices of both data-enabled handsets and data-over- consumer confidence will weather an almost certain mobile networks will mean greater usage of data rise in e-crime in new channels that may even cause channels on these phones, effectively making Internet 19 Such as the new handset launched in 2009 by Safaricom in Kenya priced at US$35 (Basu and Karimi 2009). 20 Such as SMS and USSD, which are two different types of mobile technology standards for transmitting data. See http://en.wikipedia.org/wiki/ Short_messaging_service and http://en.wikipedia.org/wiki/Unstructured_Supplementary_Service_Data 12 Figure 4: Real Cost of Phones21 Microsoft recently announced OneApp, an application that enables phones with slow processors and low $400 $358 memory to surf the Web like more powerful handsets. $350 Users will be able to access a dozen sites initially, like Facebook and Twitter.23 In August 2009, Nokia $300 announced its intention to provide widespread mobile $250 payment services as part of its desire to promote pervasive Internet that "connects people" (Young $200 2009). In short, there is much work being done today to make Internet over mobile more widely available in $150 developing countries. $100 $47 What does this force mean for branchless banking? $50 First, Web interfaces will improve the user experience compared to today's services running over USSD or $0 SMS bearer channels, which typically require customers 1999 2009 to input alphanumeric sequences or navigate relatively Figure 5: Handset Sales in Developing Markets22 unsophisticated menus. Improved usability could make branchless banking more accessible to a wider swathe 100% of low-income consumers, for example by enabling Smart Phones (feature) more icon-based menus for low-literacy clients. Also, 80% as Internet use expands in general, consumers will Smart Phones become more comfortable with using their handset (entry) 60% for increasingly sophisticated purposes, which should Enhanced also bolster adoption of electronic channels for 40% Phones financial services. Basic Phones 20% Second, access to the Internet will enable providers to offer solutions that do not depend on the security 0% solutions offered using the chip (SIM card) in the 2009 phone. Applications resident on the SIM card can provide end-to-end security for messages but require access via mobile pervasive in many developing the cooperation of the MNO. While there is some countries during the next decade. debate whether java applications24 can provide similar levels of security to applications resident on the SIM Few branchless banking services have been offered card, they are likely to provide higher security than over mobile Internet in developing countries (yet), but today's USSD and SMS-based services. This will social networking content is already driving uptake reduce barriers to entry for new players who are among segments such as youth. In South Africa, the not MNOs--whether banks or others. The growth mobile instant messaging service MXit has attracted of the mobile Internet may cause a boom in a new more than 13 million users who send more than 250 generation of branchless banking providers, raising million messages per day (in a country of 47 million) substantial questions about risks to consumers, as well (Vecchiatto 2009 and Lombard 2009). Hardware as the future shape of the competitive landscape, one barriers to Internet access are also decreasing. of the uncertainties taken up in the next section. 21 Devices in Figure 4 are the RIM 850, which went on the market in 1999 with basic browsing, and the Samsung B100, one of today's cheapest handsets with GPRS and JAVA. Sources: GSM Arena, PC World (2000), RIM.850 specifications at blackberry.com. 22 In Figure 5 "developing markets" is defined as countries in Africa, Asia (excluding Japan), Latin America, and the Middle East, "Smart Phones (entry)" is defined as entry-level phones. Data from Gartner (2009). 23 http://blogs.msdn.com/oneapp/archive/2009/08/24/microsoft-introducing-oneapp.aspx 24 Java is a computer programming language that can be used to develop software deployable across many computing platforms, including mobile phones at the low end up to supercomputers at the high end. http://en.wikipedia.org/wiki/Java_%28programming_language%29 13 Four uncertainties regulated e-money issuers such as the European Union and, from March 2009, the Philippines and those that restrict e-money issuance to existing Main Messages financial institutions only (e.g., South Africa and We isolate four key uncertainties that will shape India). This issue has obvious significance for the branchless banking over the next 10 years: entry by entities, such as MNOs, that often have stronger business cases for going down market · Which entities regulators will allow to with basic financial services than do conventional provide financial services, and under which banks. conditions. · Whether private sector providers will develop The extent to which regulators make more "access robust models for financial services beyond friendly" decisions will be determined by their payments, and whether consumers will adopt degree of confidence about whether the risks of them. innovation are manageable. This will be shaped by · Whether rising competition will spur more experience of branchless banking businesses over services, greater innovation, and lower time. The lobbying power of private sector actors prices. may also affect the outcome. The loudest voices, · Whether and how large-scale failure(s) of traditionally banks for financial regulators, may lobby branchless banking services will affect the for being less open to new players and services to confidence of consumers, other providers, protect their franchises. At the same time, there is a and government. growing constituency for financial inclusion in many countries that will also try to influence regulators to allow some forms of innovation, provided that We considered a large number of uncertainties before these do not place the money of poor customers at selecting four main ones. risk. Finally, regulators rely heavily on the canon of regulatory solutions acceptable to their peers in other Uncertainty 1. Who is allowed to play? central banks. Increasingly, on issues like branchless banking, the leading edge of regulatory innovation Regulators will make key decisions that will determine is in developing countries, and central bankers are which entities can legally provide branchless banking looking to south­south dialogue as an important part services and also which business models are viable. of shaping their decisions. Two of these decisions will be especially important: Uncertainty 2. How much will branchless · Can financial service providers use agents for banking go beyond payments into account opening and cash handling? A recent savings and other banking services for CGAP survey of regulators in 139 countries unserved people? reported that 40 percent of jurisdictions allow banking agents. But of those that do, only one- Branchless banking schemes to date largely have third permits agents to open bank accounts been built around payments and domestic remittance for customers, including conducting know your services. More than half of M-PESA customers use customer (KYC) checks (CGAP 2009). KYC the service primarily for remote person-to-person regimes will affect the cost of acquiring new payments; payments to businesses make up three customers. In regimes in which agents are not quarters of transactions at Brazilian correspondents. allowed, branchless banking that relies on agents cannot take off at all. However, services beyond payments are already on · Can nonbanks issue e-money? Most countries offer and are used by low-income customers. In less today do not allow nonbanks to take savings than five years, Banco Azteca has opened 8.1 million deposits. This is unlikely to change, given the deposit accounts and 8.3 million loan accounts and regulatory caution toward innovation that is part has sold 11 million insurance policies, largely to lower of the second force described above. However, income Mexicans (Rhyne 2009). Likewise, in addition there is increasingly a division between countries to basic banking and paying social transfers, FINO in that make explicit provision for a new tier of India offers health insurance services.25 14 Even the payment-only models are being manipulated It is possible that the traditional paradigm around by customers to serve purposes beyond payments. the bank account is changing. Whereas in developed For example, 21 percent of M-PESA users say they countries banks offer a checking account as a loss- use the service to store money (FSD Kenya 2009b). leading product because it is highly "sticky" enabling And the demand for these services is strong. In the sale of other profit-making services, this may not the Philippines, when asked about additional uses be true in developing countries.26 In the prepaid of mobile banking, savings ranked as the most services world (for electricity, water, as well as popular among the unbanked, with 53 percent of mobile) in which most poor consumers live, services unbanked mobile money users saying they would are provided as part of a pay-per-use relationship consider trying a mobile-based savings service between provider and consumer. Where there are (Pickens forthcoming). multiple providers, there is high churn; this limits the ability to cross-sell, but also makes the cross-sell more Conventional wisdom suggests that consumers important for the business case. climb a ladder of financial products that starts with payments such as remittances and airtime sales as The ability to cross-sell will be determined in part the first rung. Using these creates the appetite for by regulation. The ability of banks to intermediate moving to the next rung--a bank account--and deposits is almost universally denied to e-money eventually further up to formal credit and insurance. issuers for example, denying them the credit margin. There is ample evidence to support this expectation of Few would argue against this restriction. But without increasing demand in the more traditional client­bank this margin, business models for small savings will relationships with better off consumers. However, have to be highly cost efficient, therefore, given the there is also reason to believe it is much weaker with economies of scale around IT platforms and networks, branchless banking and the poor. For example, the probably also very large scale. This factor will affect experience of Mzansi--with just 11 percent of clients competitive dynamics. so far buying another financial product from their bank--suggests uptake of additional services is far from automatic (Bankable Frontier Associates 2009). Figure 6: Declining operating margins and prices for banks and remittance companies and consumers 35% $28 30,000 32% 31% Cost $ Remittances 30% 29% 28% $25 $ mn (right- 27% 25,000 26% 26% Western scale) 25% 24% $22 Union 20,000 20% U.S. Banks $19 17% 15,000 15% $16 10% $13 10,000 5% 4% $10 5,000 1999 2000 2001 2002 2003 2004 2005 2006 2007e 0% Sources: Western Union (2008), FDIC, World Bank remittance prices database for U.S.-Mexico corridor 25 Interview with Manish Khera of FINO (2009). 26 Schäfer (2008) found that in the EU bank accounts were very sticky, with average churn rates of 7.6 percent and average ages of nearly 10 years. 15 Uncertainty 3. How will competition and pressures created by the forces listed earlier, play out? such as market potential and the rising use of data phones. Uncertainties such as who is allowed to play Competition for customers and agents is likely to grow will shape just how contestable the financial services as more entrants join the field. The germane question market of the future will be. for this scenarios exercise is whether competition will spur more services, innovation, and lower margins Uncertainty 4. How would the failure of and prices as it has in the past decade for banks and a large branchless banking model affect remittance companies (see Figure 6). market confidence? Early electronic and mobile business models (such As is common with other new services, customer, as Google, PayPal, and even M-PESA) suggest provider, and regulator confidence in branchless success comes from leveraging scalable platforms channels is still fragile. A high-profile failure could and widely recognized brands. Early success can diminish the trust of consumers to adopt, the appetite lock out competition. In sectors such as banking and of industry to enter, and the openness of regulators communications, market structure is changing as to enable. Consumers, even poor consumers, appear a result of consolidation, even before the financial willing to make the transition to using electronic crisis exacerbated this trend in the banking sector of channels as long as they trust the provider. Trust in affected countries. Among MNOs, for example, the the brand of the ultimate provider may be sufficient. largest 20 groups today control more than 70 percent Users of branchless banking may not even have to of subscribers.27 trust the agents (Moracynski 2007). Greater scale of providers is not necessarily harmful. As a side effect of pervasive communications, news It can help reduce costs, which can advance and rumors spread faster than ever. A 21st century financial inclusion if these savings are passed onto bank run could happen in hours instead of days as clients. However, scale in itself may bring greater customers learn of problems and move their money operational risk. For example, fewer independent electronically. Recently, the Kenyan news reported payment platforms may mean greater risks when one the effects even of a short-term disruption of the malfunctions or collapses. M-PESA service: "A technical hitch in the M-PESA money transfer service caused anxious customers Further, scale has implications for continuing to crowd at service outlets to have their accounts innovation in branchless banking. Comfortable updated.... Customers had initially been barred from incumbents are unlikely to be the source of innovation accessing the premises on safety fears after their in their own market. They may also grow big enough demands for an up-to-date reflection of their accounts to crowd out potential competitors, particularly in got boisterous. Several administration police officers smaller markets where a big early lead in market share were deployed to the centre to boost the efforts of could appear insurmountable. This situation may lead private guards in calming the angry crowd" (Business new entrants eventually to seek out new pools of Daily 4 August 2009). unserved customers or financial needs not met by providers who are already established in the market. As branchless banking schemes scale up, the It may also lead to greater calls for interoperability. potential ripple effects of failure grow, too. Nonbank Shared IT platforms and infrastructure may enable e-money models, such as M-PESA, depend on smaller providers with niche business models to start aggregating wholesale deposits within the banking up and function on the front end, sharing access to system. In this sense, they redistribute liquidity existing infrastructure. within the economy--taking thousands or millions of small balances and consolidating them into one However, in all but a few markets, an increasing or a few large deposits at banks. This aggregation number of players will offer branchless channels process may increase liquidity risk for the wholesale because of the combination of market opportunities bank, which is more vulnerable to the movement 27 CGAP/DFID analysis using operator-reported figures collected at http://en.wikipedia.org/wiki/List_of_mobile_network_operators. 16 of a large wholesale deposit account. Hence, even Four Scenarios for Branchless failures of nonbank-based models can spill over to Banking in 2020 the banking system. Scenarios do not predict the future, but rather illustrate Because branchless banking is relatively new, we plausible stories arising from the often complex have yet to witness the effects of a major failure on interaction of multiple forces and uncertainties over domestic users, firms, and regulators. In the field time. The outcomes may be expected or unexpected, of mobile banking, the closest example of this may but the act of storytelling reveals the hinge points be the failure of SK Telecom's Moneta Cash service along the path that may be open to influence. Readers in South Korea in 2002 (Mas and Rotman 2008). can use these stories to test the robustness of their Notwithstanding this early high-profile failure, South own strategies. We have developed four scenarios to Korean consumers remain, along with the Japanese, illustrate different trajectories and outcomes from the among the foremost adopters of mobile banking present until 2020. channels worldwide, indicating that consumer confidence can recover. Scenario 1. Bharatia: New generation linkages for traditional microfinance? Apart from these four major uncertainties, we also acknowledge the possibility of low-probability, high- Main Messages impact events--wildcards or "black swans"--such as the following: Told in part by a customer, this scenario describes how a start-up firm--Bharatia Services Limited · War. If a global conflict were to erupt, it would (BSL)--is forced to look for an untapped likely be fought in part in cyberspace by opportunity because competition for agents as bill disrupting telecommunications infrastructure, pay points has increased commissions and reduced banking systems, and even governments. On the the viability of traditional branchless payment positive side for branchless banking, some have services. Following extensive market research, proposed the need for "expeditionary banking" BSL develops a more flexible loan and savings to provide rapid rollout of payment systems in offering for self-help group (SHG) members who, post-conflict societies to deliver humanitarian later this decade, have easy access to cell phones. aid, kick-start commerce, and enable government We enter the story just as BSL is realizing the value payments (Kunkel 2008). of the opportunity it has uncovered. · Pandemics. Global pandemics may accelerate the need for remote payment systems to avoid face-to-face contact during shutdown periods. "The self-help group28 is very important to me," The systems would need to be considered Madhu says to the moderator of the focus group. essential infrastructure if they are to continue to "Yes, I was a member before and quit. But I came operate during a health crisis. back last year because the loans and savings are so · Can a society eliminate cash by 2020? The flexible now. I can't say I really understand how the ability to place cash close to consumers in many accounting system works over Priya's mobile phone, distributed service points (agents) is a defining but the results are very, very good." feature of branchless banking. But what if one or more governments succeeded in banning cash Ashok Bose looked on through the one-way mirror and substituting a fully electronic currency? The at the women in the interview room where the focus Maldives hopes to reduce cash, Nordic countries group was meeting. This was the fourth session he have banned checks, and Singapore hopes to had attended today in his role as vice president of substitute a fully electronic currency for paper strategy for BSL. "Yes," he thought, "we are really notes in the near future, though its experience onto something here. And our competitors don't illustrates that challenges to going cashless are even know it!" The four sessions had brought growing still quite strong (see Box 2). certainty that BSL's mobile-delivered accounting 28 An SHG is a member-based financial intermediary usually comprised of 10­15 local women. Savings contributions from the members are aggregated until there is enough to offer group lending. 17 system--M-COUNT--was a hit with SHG members. were building is trapped in the notebook. "Yes, we Although he was familiar with the raw numbers of have brought the SHGs from the 19th century straight loans to group members and deposits into mutual into the 21st," he thought. funds, the focus groups revealed what was really going on. Ashok turned his attention back to the The technology was actually the easy part. Designing women in the interview room. the M-COUNT platform was relatively cheap--even with more flexible terms for loans and the link to a "So what was it like before M-COUNT?" the moderator basic choice of mutual funds, what SHGs did was asked the women. Madhu piped up again. pretty simple compared to any bank. And the market research BSL did in 2015 showed that in a lot of "Oh, it was so strict, so rigid. I could get a loan of SHGs, at least one member had access to a mobile only a certain size, on a set interest rate, and always phone. No, the hard part had been first convincing for the same length of time. It was the system. And his CEO that BSL should even look at SHGs. if I wanted to get out of the group, I was told I had to wait until the end of the cycle when everyone got Ashok remembered the dinner with his CEO last June. their money back. It was too hard for us to do all the "We can make a lot of money, Vijay, if we can link to calculations. So we followed one way of running the the SHGs. You know there are 35 million members group. Almost like a religion!" right now." His CEO raised the objection that others had tried direct lending to SHGs before, with some "And now?" asked the interviewer. success, and others had also tried to automate SHG operations through POS devices. Wasn't this already "Oh, it is so different now," said Madhu. Other tried? Besides, the real play was in agents processing women nodded their heads enthusiastically. "We bill payments. That had taken off in a huge way since enter the information about what repayments and the central bank liberalized the rules around allowing deposits each group member makes, what new loans merchants to serve as agents. people want to take, and just like that, the phone tells us what interest rate to charge, the length of the loan. "No, Vijay. The bill pay space is saturated," Ashok said Our group leader, Maya, says the phone is talking to to his boss. "The banks and their network managers a computer in Hyerani. I don't really understand, but are now competing for agents in the cities, stealing it seems to work and we now get the kind of loan we them from one another with higher commissions. want. The phone also offers us options on what to The cost of being in that game is going to keep do with our savings. Maya has all hers in something going up. The place to be is in the countryside, and called a mutoo fund." with something that earns a lot higher margins-- loans and investments. If I can get even one-tenth "Do you mean mutual fund?" intervened the of SHG members, those 3 million loans will make us moderator. one of the biggest single players in microfinance in Bharatia." "Well, it's something like that. But she says it's safe. She's made a lot of money. I will wait to see how it "So how do we do this?" the CEO had asked. goes for her. If she doesn't lose it, I'll put some into this mutual fund, too." Ashok jumped in, "I've been thinking the way to do this is simply to give them a better accounting system, On the other side of the mirror, Ashok mused, "The and then we soak up the demand for bigger, longer big thing we've done here is create flexibility." SHGs loans that so far has been unserviced, by funneling have been around for eons, largely because they are in new capital from a bank. At first, we'll probably so simple. They are typically relatively easy to run, have to agree to take a share of any loan losses, but I with transactions recorded in a small notebook with bet we can create electronic credit histories on these a pencil. But the price of simplicity is extreme limits. women pretty quickly. Let's also connect to a mutual There is usually one kind of loan, one kind of savings. fund adviser to run a pooled investment on behalf of What's more, all the financial history these women the SHG members." 18 Now, six months later, the pilot was going well. Very This transformation in Telmar did not happen well. Something drew Ashok's attention back to the overnight. While the 2008 global financial crisis may interview room. seem like a distant memory, in many ways it was the catalyst for financial inclusion in Telmar. In early 2010, "The women in the next village came over last week partly in response to the financial crisis, a new global asking us how they also could get M-COUNT," said financial access working group issued a statement Madhu. "They heard about it from us." calling on banks and MNOs in the Pacific to address the low levels of financial access in many of the poor "Wow. This is going viral," thought Ashok. Pacific island countries, in particular the post-conflict country of Telmar. "We knew that Telmar would be Scenario 2. Telmar: Leapfrogging to a perfect demonstration country in which to show scale in a small, marginal market governments, donors, and the private sector that in the Pacific? banking the poor was the right thing to do," says Eduardo Vargas, then the Brazilian representative to the working group. "In particular, we targeted the two Main Messages largest financial and communication providers in the Even small, post-conflict countries should not region that had the capacity to deliver such services, be overlooked in their potential for branchless Pacific Trust Bank (PTB) and Surfcel, respectively." banking. In the Telmar scenario alignment of the government, international donors, and the private Surfcel CEO Anderson Machen described his initial sector leads to banking the poor using branchless reaction to the working group's proposition. "I channels. In this case, two large traditional service thought they were crazy. Why would I want to enter providers (a bank and an MNO) are offered a small, volatile, and poor market like Telmar? My incentives to form joint ventures on a regional team and I spent hours crunching the numbers, and basis to reach places where they would not go we could not find a way to make a profit from the alone. They successfully bid to offer government venture." PTB management felt the same way. payments to citizens on a widespread basis. However, the management of a complicated But in late 2010 three things changed the proposition partnership between the bank and the MNO also for PTB and Surfcel. brings challenges. In the end, openness of the regulators ultimately leads to ongoing innovation First, the working group decided to work with PTB that endures, such that formal financial inclusion and Surfcel to roll out branchless banking schemes becomes widespread. in the entire Pacific region, not just on the island of Telmar. By having a regional focus and thus a broader customer base to tap into, the bank and MNO were Dateline: 16­22 August 2020, Telmar suddenly much more interested. The working group also committed to providing the necessary support Few outsiders would suspect that a small, post- to work successfully with each country's regulators conflict island nation like Telmar has a vibrant and to make such a rollout a reality. inclusive financial sector. Yet that is exactly what your correspondent found on a recent visit to the capital, Second, the Telmar government announced a Moya, and the surrounding countryside. The MNO concession that would award one company or Surfcel's banking agents offering its FastPay service consortium of companies the opportunity to seem to be on every corner here. Stores are filled with deliver all of the social transfers, such as to war customers wanting to make transactions on the simple veterans and displaced people, which at that time phones in their pockets. "Why would I pay for the bus reached approximately 200,000 out of 1 million to take me to the bank branch 10 km away when it will Telmar citizens. be closed already?" asked a woman waiting in line. She had just closed up her market stall and wanted to Third, an international donor agency responded to deposit her earnings from the day into her account. the working group call by announcing its own Global Fund for Branchless Banking to support the provider that would ultimately receive the Telmar government 19 concession for government-to-person (G2P) payments its electronic wallet to a bank account serviced by PTB to offer more inclusive products. After the tender so that clients could transfer funds in and out. "Don't process ran its course, the government awarded the underestimate the level of effort it takes to make a concession to PTB and Surfcel. partnership properly function between a bank and an MNO in branchless banking," advises Keppling. "It is By January 2012, PTB and Surfcel were finally ready a tricky business." Yet despite this bump in the road, to begin delivering G2P payments through Surfcel's the number of customers reached with some sort of FastPay service, which linked to a simplified savings branchless banking service in Telmar increased to account with PTB. The process had taken longer than 325,000 within the next three years. expected, because the project team comprised of PTB and Surfcel officials had found it very hard at In 2018, in consort with other regional regulators, the first to work together--"those telco guys just spoke Central Bank issued another amendment to regulation, another language--they thought that payments were allowing agents to open accounts for customers on as easy as phone calls. We bankers had to teach them behalf of banks. "We were relieved since this new a thing or two," one anonymous source said. regulation clearly played to our advantage, making it easier for PTB and Surfcel agents to open PTB bank Notwithstanding the delays, which led to threats to accounts through which customers could transact cancel the contract, the outcome pleased the Telmar using Surfcel's FastPay service," explains Keppling. government. "We were thrilled with the immediate increase in efficiency this brought--less fraud--and And so you have it. The number of customers the people liked it, too," said Lourdes Silva, head of has today reached 400,000. Telmar has made the Social Protection Ministry of Telmar. Following considerable progress toward financial inclusion the regional proposition presented by the working for its population. "It's really amazing the progress group, PTB and Surfcel also began similar mobile that has been made over the last decade in terms of banking services in the surrounding island countries financial inclusion. I am confident in saying today that of Baki, Waponi, Erusea, and Tanah Masa, serving a branchless banking has a bright future in Telmar," market of 2.2 million potential customers. says Silva. Your correspondent readily agrees. After attending a conference for regional regulators Scenario 3. Ballooning branches and in March 2015, the governor of the Central Bank data-enabled phones in Amazonia? of Telmar made a significant change in regulation that allowed nonbanks to issue e-money accounts. Main Messages In terms of this new regulation in Telmar, Surfcel was able to make an even larger splash in the market by The story of Amazonia relates how even a successful offering an electronic wallet. Not only G2P recipients, branchless banking regime may be vulnerable but any Surfcel customer could now carry out person- to disruption. Seen through the eyes of a large to-person transactions via his or her mobile phone. state-owned bank, Banco Federal, a court decision This service had huge appeal to the growing youth makes branchless channels much less attractive population in Telmar. "How great is it to have a and creates perverse incentives to build new way to easily send money to my girlfriend in Moya branches and find new services for agents to offer, essentially from my pocket!" says the young man your such as credit, to compensate for lower profits on correspondent cornered in an agent outlet. Given transactional business. However, underlying forces, the continued concern over crime and security in this including crime and the cost of moving cash, make fragile post-conflict country, people were also eager these branch-intensive strategies unviable. At the to carry less cash. same time, the spread of data phones enables new competitors to eat into market share, especially But as PTB CEO Michael Keppling notes, the bank among young consumers. was not particularly happy with this turn of events. "We felt like, after helping to get the show on the road, we at PTB were now being pushed out of Roberto Barbosa began sweating as the minister serving a segment of the unbanked population." of Finance grilled him about the performance of After much negotiation, Surfcel finally agreed to link his bank. The head of the state-owned Banco 20 Federal had been under fire recently due to his "Those costs are necessary, Minister," Barbosa increasing costs and the apparent lack of results. retorted. "You know how bad crime is. Getting cash In the past two years the bank had lost large sums, to our outer branches and ATMs has become more requiring a sizable injection of new capital from the expensive than we anticipated because of the cost government. Even more important, the bank had of security. The bank surely can't be blamed for lost over 600,000 customers. `wasting' money on crime prevention, can it?" "Why do we continue to fund your operation?" "It isn't the crime prevention I'm worried about, Mr. Minister Lupi inquired. "Over the past eight years Barbosa--it's the credit problems you've created. we have invested over $350 million in building new In three years, you grew your lending by almost 50 branches and ATMs--which you said was the only way percent, most of that in loans made by agents to to reach our Financial Inclusion Initiative goals. But workfare recipients who are guaranteed a minimum what have we gotten for it? Even fewer customers?" number of days of work per year. Didn't you learn anything from the Americans about the consequences Barbosa knew this was unfair. The minister was of mortgage brokers making loans to people who blaming him for things that were out of his control. can't pay them back?" "We still have the most customers in the country, and we can still break even. After all, we now have our The minister seemed to be making things personal. own branches and ATMs in almost all of our 6,000 In reality, Barbosa had no choice but to issue the municipalities. We still service all the government's loans, or he would have faced the loss of even more social transfer programs. The $350 million has been agents. spent on more than just branches and ATMs. Please remember, Minister, once the court decision of 2011 "After the court decision, our agents needed extra made our agent business unprofitable, we had to revenues to pay their staff, and we all agreed that increase their compensation to maintain our ability credit was the way to do this--not to mention the to pay the Citizen Grant to all eligible people within expectations of the clients who re-elected this the national norms." government back in 2015." The last sentence was tinged with some asperity--just how did the minister The court decision was a sore point for Barbosa. think he got elected? When the judge gave in to labor union pressure, the ruling had essentially mandated higher minimum "That was shortsighted to say the least, Mr. Barbosa, pay for front line staff of nonbank agents, such as and it's not true that yours is the only solution out small retail shops performing banking functions, from there," the minister said. "PeerPay seems to be $200 to $800 per month. Agents demanded higher doing very well. They are stealing your customers compensation, but Banco Federal's already tight and making money at the same time." margins meant that Barbosa could not compensate them enough to make up for the increased costs. Over Barbosa knew this was coming, but it still annoyed 20,000 of the smaller agent locations closed within six him that the minister reveled in his competitor's months, leaving nearly a quarter of municipalities in success. In 2015 when the Central Bank began the country without access to the bank. In response, allowing nonbanks to issue e-money, PeerPay, an Barbosa had launched an aggressive building electronic commerce business that allows payments program, founding 1,000 new branches and locating to be made through electronic alternatives, such as still more ATMs, which brought banking back to the the Internet, entered the Amazonian market. It began people. He had enjoyed a period of favorable media by allowing small merchants to accept other banks coverage as "The People's Banker." credit cards without a POS device. As the number of data-enabled phones grew to a critical mass, and No longer. "But you're losing customers, consumers became comfortable with them, PeerPay Mr. Barbosa. How can you invest $350 million to started steadily cutting into Banco Federal's core lose customers?" market, mass consumer financial services. Its link with 21 social networking site Orput was a master stroke. It Scenario 4. MpayZ: Victims of success in put PeerPay in front of everything young people did the transition to less cash? on the Internet. And young people were the very ones increasingly moving into the workforce. Main Messages "PeerPay has done well, yes, but they still do not offer MpayZ is a successful mobile payment company our level of service. Their Mobile Student Account with a strong agent network that is grappling to has attracted a lot of young people with its bells understand why its previously expanding agent and whistles, but at the end of the day they have network is now showing signs of shrinking. MpayZ no branches as we do. They're lower cost but lower had set the bar for good practices in branchless service, too." payments: good commission structures for agents, comprehensive market research, regular customer "It doesn't seem lower service to me, Mr. Barbosa," surveys, and strong branding. It had a strong and the minister declared. "Even I use their service on my widespread agent network that provided services phone, and it works well enough for me--take a look." to highly satisfied MpayZ customers. Over time, The Minister took out his Blackberry and activated the more payment functionality was added to MpayZ's PeerPay application, noting, "I can transfer money to services, and as more and more customers began my daughter's account for her to buy books. Even her using these services, the need to convert into cash uncle and all of her friends on Orput can contribute through the agent network slowly decreased, to her college book fund savings account. And all of depressing agent commissions. Therefore, while this for free--that doesn't seem like lower service to MpayZ continues to see rising customer numbers me. When I want cash, PeerPay's merchants seem and higher transaction volumes, the number of happy enough to give cash back for free--why can't active agents has begun to decrease. MpayZ shifts the bank do this?" from extensive growth to cultivating fewer agents with a broader range of high-quality services. "Minister, if the bank had a global payment network and a huge user base like theirs, we could do that, too. PeerPay acquired merchants by giving them Nana Mbuga paged through the thick report access to their network and allowing them to accept prepared by her staff. Later that day, she would chair Visa and MasterCard. Because their touch points an Executive Committee meeting to discuss how were deemed to be merchants, who acquired MpayZ, the Kasanian mobile payment company she transactions, not agents who handled cash in terms headed, should respond to the declining number of of the old correspondent law, they did not fall under active cash-handling agents. the old salary rules. So they were not affected by the court ruling. We simply can't subsidize those This alarming trend had been spotted only six basic services to the extent that PeerPay can because months before. Until then, it had been concealed by their merchants are cheaper to them than our the fact that the conventional agent indicator--the agents." Barbosa bristled at the minister's ignorant absolute number of registered agents--had started accusations. It was obvious that the end of the to decline only recently and at a moderate rate. But interview was in sight. as her head of strategy pointed out, inactivity on the part of agents was a leading indicator of future "Hasn't the government subsidized your services terminations. If agents were not turning over more enough? That will be all, Mr. Barbosa." than the minimum level of 100 transactions per month, it hardly made business sense for them to maintain "Thank you, Minister." the float deposit required, let alone take the risks of handling cash. Before long they would be likely to cancel their agency agreement and request the cash back. The trend was alarming because MpayZ's success had been built on providing incentives to 22 and managing its agent network. It had always paid to worry about holding the cash in the garage until generous commission levels for agents to sign up he could bank it. Equally, his five employees had new customers and to carry out cash-in and cash- been willing, even eager, to receive their wages out transactions. This type of responsiveness to weekly via MpayZ. They, too, apparently found an agent needs meant that MpayZ's competitors had increasing number of merchants who would accept struggled to break into the Kasanian market, since it payment this way. Other survey evidence confirmed was hard to lure away MpayZ agents. This distribution that these new smaller merchants typically had little advantage explained the company's early success interest in carrying more cash and serving as MpayZ with customer acquisition. agents themselves. MpayZ's success was widely recognized beyond the Of course! The pieces suddenly clicked together. African country of Kasania in which it first launched MpayZ was experiencing the natural, but nonetheless its service way back in 2008. Nana took pride in the unforeseen, consequence of its own success, and the fact that a sizeable majority of all customers remained innocent "victims" were cash-handling agents. The active, transacting at least once every month. Since agent business proposition was based on recruiting the early days, MpayZ had invested heavily in market more and more customers who would generate research to understand the various segments of its more and more cash-handling transactions, which client base, and customer satisfaction levels remained would lead to fee income for the agent. But once the as high as they had been in the earliest research. It service had become pervasive and trusted, the need was no surprise then that MpayZ's brand was now to actually convert to cash had started to decrease. one of the most valuable retail brands in Kasania. Instead, electronic value was now circulating continuously in the system, as shown by the rising The analysis now in front of Nana had been thorough. number of transactions per user. Even worse for The file contained results of a large survey of agents, agents, many of whom had been airtime sellers, logs of complaints about agents from customers, and more and more customers bought airtime directly detailed transcripts of meetings with larger agents as from their MpayZ account, eliminating this important part of the Kasanian Agents of MpayZ Association. source of additional commission income to agents There was also analysis of some eight years of data and diverting it to MpayZ . on trends and patterns: customer numbers had continued to rise although at a declining rate, and Her next insight quickly followed. Once this tipping transactions volumes were rising. But then there was point had been reached, the decline in the number of the worrying decline in active agent numbers from agents would now be quite rapid. Less access to cash the peak in 2015. drove even more need for electronic transactions in what for MpayZ was an increasingly virtuous cycle. But In the summary of results from customer interviews, this was not virtuous for the agents. So what should Nana noted that more and more customers reported MpayZ do about this? Nana knew that, despite the using their balances to buy goods and services, rapid growth in number of customers, there were which had been allowed by regulators back in 2012. still many in Kasania who did not have the means Furthermore, a majority of customers were now of electronic payments. The transition to a cashless loading their MpayZ accounts directly from bank society was still a long way away. There seemed accounts. They had increasingly used the functionality little point in accelerating the decline in agents introduced in 2013 when an increasing number of further by squeezing their fees, for example. In fact, banks began allowing customers to generate an if the network declined too fast, the inconvenience automatic recharge of their MpayZ wallet from a factor could rise, providing an advantage to MpayZ linked bank account. competitors. The report of a focus group discussion included No, Nana concluded, the right strategy for MpayZ the story of a small businessman called Dan who was in fact to ensure that there would remain a solid operated a motor repair shop. He found that his core of well located, secure agent outlets that offered customers increasingly wanted to pay their bills good service. These businesses could be paid slightly using MpayZ. Indeed, he even encouraged this by higher fees than others to counteract the effect of offering small discounts, since then he did not have the fall off in cash transactions. Fewer but larger, 23 well located, more secure outlets with better trained dominance with ongoing concern for customers and staff? This sounded to Nana like a new network agents. In each of the other markets, an unexpected of bank branches, just with more of them. "Is this player appeared on the scene (Bharatia Services Ltd., really the net result of our eight-year journey?" Nana Surfcel, PeerPay). In fact, the comparative advantage questioned, "to find we are bankers after all?" in agents today of one provider (Banco Federal) was eroded in the face of new competitors (PeerPay) and Conclusion: Some answers to the decisions by government authorities. The baton of driving question innovation may well be passed to new players over the coming decade. Each of the scenarios describes a different trajectory of development for four very different market Who picks up the baton will be determined to a large contexts. Figure 7 depicts a headline indicator of measure by the forces and uncertainties highlighted financial inclusion (the percentage of adults formally earlier in this paper. For example, who will be allowed included) in each of the countries--Bharatia, Telmar, to play in this new market? In Bharatia, the government Amazonia, and Kasania--described or implied in revised its restrictions on who could serve as an agent. each story. Telmar offered a concession for all government payments to make a small marginal market into an While the trajectories differ, in each case, the end attractive one, though the decision by the bank and point is higher than the starting point. This reflects MNO to operate a regional platform was also critical our conclusion that the spread of branchless to making the business case. The decision to allow banking is all but certain in most markets. Under nonbanks to issue e-money in Amazonia opened the right circumstances, this is even possible in the door to an entirely new player--a multinational small, post-conflict countries like Telmar. But the electronic commerce company riding the wave of speed and depth of that spread--across countries mobile Internet later in the decade. and population segments, especially the unserved majority--is not certain. For example, Bharatia and One similarity among the "winners" in each scenario Amazonia experienced bursts of rapid acceleration, was their success in identifying and tapping into a rich but also periods of fall off or flatter growth. And vein of underserved demand. Bharatia Services Ltd.'s only in Kasania did the market leader in 2010 remain story hinges on realizing the weaknesses in present at the top of the pile in 2020, buttressing its early models of how poor people access credit and savings Figure 7: Trajectories of inclusion 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Bharatia Telmar Amazonia Kasania 24 and how technology could bring flexibility without customers over time will inform better policy and destroying popular elements in the informal groups. business models. For example, customer complaints PeerPay hitched itself to the surge in popularity of are an important data source both for regulators the Internet and demand for safe, convenient, and (to inform consumer protection measures) and for affordable ways to pay. And MpayZ kept abreast of providers (to improve their service). the needs of its agents, treating them as a special kind of customer who had specific needs and interests. To be sure, while some of the information needs of government and private sector will overlap, others will We also pointed to factors that could depress the be distinct and require different collection approaches. trajectory of usage by significantly reducing the Few developing countries have yet measured the attractiveness of new channels to providers and cost of cash relative to electronic instruments for consumers. In Bharatia, competition for agents different parties--consumers, merchants, banks--and bid up the price of their services, squeezing profit for society as a whole. Central banks and academics margins of providers that depended on low-margin in developed countries undertake these studies bill payments alone. This was a natural outcome of regularly.2 9 While not easy to do when data are not competition, and eventually led BSL to search for readily available, this measure can be a key policy a new opportunity outside of this product space. indicator as societies seek to promote electronic The Amazonian court decision also squeezed the channels. agent model, but from the agent side because of higher personnel costs. Without a clear and stable Providers will do well to set realistic expectations of legal regime for the growth of channels, disruption their time horizon and potential return. The usage is still possible even (or especially) when the channels of new platforms can accelerate dramatically, but reach large scale and threaten other interests. In rapid takeoff may not be the norm. Even when this Telmar, Surfcel and PTB's partnership went through takeoff happens, adoption alone will not necessarily troubled periods, due in part to a clash of cultures result in adequate financial return--consistent usage between the worlds of the MNO and the bank. One is necessary to generate revenues. Overcoming could easily imagine an alternate ending where the customer caution and resistance to change will take consortium fell apart, notwithstanding the incentives patience and experimentation. Business models to make it work. that find ways to serve the youth market profitably may well achieve more rapid adoption. Models that These scenarios enable us to return to where the depend on agents will thrive if they actively serve and scenario project started: seeking answers about how cater to the agent channel, rather than treating it as a government and private sector can maximize the passive or inferior means of distribution. This is likely spread and depth of branchless banking among the to require a multi-channel approach, which includes unserved majority. While branchless banking channels mobile Internet access in some form. And providers will become increasingly available, the speed at which that build the competence to manage the risk of branchless banking reaches poorer customers and electronic fraud early on, not as a "nice to have" but the breadth of services offered are subject to actions a "need to have," will be more robust. taken and decisions made by these two parties. Governments have several tools at hand to promote To inform these decisions, both government and wider and broader usage of branchless channels for private sector will benefit from gathering and closely financial services. Their activism can be channeled tracking key information. Current information systems in ways that enhance opportunities for branchless do not always capture all the right indicators for channels to be deployed. First, as policy makers, new business models, as in the case of MpayZ, or they can shape their regulatory environment so as to for measuring their impact on an economy. Better enable experimentation in early stages and increase understanding the patterns of usage and the resulting their control and oversight through different phases impact from new services on the lives of unserved of market development. In each phase, providers 29 For example, financial authorities in the Netherlands, Norway, and Australia among others have researched the relative cost of cash in recent years, as have academics, such as Garcia-Swartz et al. (2006) in the United States. 25 will benefit from the certainty provided when policy responsible for social payments and those responsible makers carefully sequence their proportionate for financial inclusion. Such coordination will require response to risks and opportunities. In all cases, there balancing the government's desire as paymaster to is a need to encourage providers with the intent and reduce the short-run cost of making payments, with capability to sustain low-value, high-volume services the objectives of financial inclusion, which may justify over time. While banks continue to have an essential higher payments in the short-run to cover the costs of role, especially for taking savings and providing credit, issuing new instruments to unbanked recipients and nonbanks also have a range of vital roles. They can creating the infrastructure to serve them. serve as hosts of payment platforms (e.g., MpayZ), providers of retail payment instruments (e.g., Surfcel), Futurist William Gibson has said, "The future is already and managers of agent networks (e.g., Bharatia here. It's just unevenly distributed." This describes the Services Ltd.). Regulators that seek to maximize state of branchless banking today. Today's pioneers outreach actively attempt to understand, engage, in places like Brazil and Kenya, the Philippines and and even encourage these providers. Changing South Africa, provide clues to what the world of technology will continue to challenge regulatory 2020 may look like. For the first time in history, it is boundaries and definitions, so regulators will do conceivable that a majority of people in a majority well to build the capacity to engage and maintain an of places, including low-income countries, will have active, experimental approach. Ongoing sharing with access to modern electronic payment services. If this peer regulators about emerging experiences will help alone is the measure of financial inclusion, then we the learning process. face the decade with optimism. Allowing experimentation through no objection Wiring the electronic retail payment infrastructure is a or specialized regulation can create add-on space worthwhile goal for the decade, but it is not sufficient. for innovation. However, this openness will need Microfinance was founded on the idea that the use to be consolidated into coherent law in a timely of appropriate financial services, in particular, savings fashion. Otherwise, this creates a risk of Amazonian- and credit, can transform the lives of unserved people style disruption. While branchless banking is and create pathways out of poverty. The fragile and about enabling new channels, it carries important narrow business models of early pioneers may well implications for the regulatory approach to "old" constrain the breadth of financial services on offer. channels such as branches. Bank branches remain And existing regulatory frameworks may not enable a lynchpin in the overall distribution of cash in any providers to expand beyond offering these services economy and will still be needed in any branchless or allow other providers to access the new electronic scenario, though how many and where may change payment highways. over time. Regulators will need to be flexible in how they regulate traditional bank distribution channels, Compared with the past decade, financial inclusion even as they enable branchless channels like agents. may face more "headwinds" in the next 10 years as a result of factors we have highlighted here. However, In addition, governments can exert their procurement the increasing use of branchless channels will help lift power to accelerate financial inclusion. As social the trajectory of inclusion. 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All CGAP publications are available on the CGAP Web site at www.cgap.org. CGAP 1818 H Street, NW MSN P3-300 Washington, DC 20433 USA Tel: 202-473-9594 Fax: 202-522-3744 Email: cgap@worldbank.org © CGAP, 2009 The authors of this Focus Note are Mark Pickens (CGAP), David like to acknowledge the research input and advice of the core Porteous (Bankable Frontier Associates) and Sarah Rotman (CGAP). research team, which included Johann Bezuidenhoudt and David The Steering Committee of Anu Bajaj of DFID and Tim Lyman and Kim of Bankable Frontier Associates, Paul Makin of Consult Hyperion, Steve Rasmussen of CGAP provided invaluable guidance throughout Gautam Ivatury of Signal Point Partners, and Mark Flaming of Frontier the project. In addition to the many people who participated in Ventures. The CGAP Technology Program is co-funded by the Bill & interviews and workshops in different countries, the authors would Melinda Gates Foundation. The suggested citation for this Focus Note is as follows: Pickens, Mark, David Porteous, and Sarah Rotman. 2009. "Scenarios for Branchless Banking in 2020." Focus Note 57. Washington, D.C.: CGAP.