99074 MARCH 2015 ABOUT THE AUTHOR JOHN GUTIN Breaking Free of the Branch: is an Operations Officer working on microfinance advisory and Designing Alternative Delivery Channel Projects for Microfinance Banks in Africa investment projects with the Financial Institutions Group in Sub Saharan Africa. He is based in Johannesburg, South Africa. Nearly 80 percent of adults in Sub-Saharan Africa do not have an account with a formal financial institution. Despite recent well-publicized successes in APPROVING MANAGER Greta Bull, Manager, FIG Advisory, increasing financial inclusion in a small number of African markets, such as Sub-Saharan Africa and Latin America. Kenya, hundreds of millions of African adults still lack access to affordable fi- nancial services. In response to this need, IFC and The MasterCard Foundation partnered to introduce alternative delivery channels in IFC’s key microfinance partners in Africa. Although the partnership is still at an early stage, this Smart- Lesson distills some general lessons from two of the first alternative deliv- ery channel engagements. These lessons may be useful for other IFC teams in structuring such projects with microfinance clients. Background During the past seven years, IFC focused mainly on closing the access gap by supporting retail microfinance banks, which provide a strong platform for increased outreach. Until now, these banks have generally replicated the traditional branch-based banking model, an approach that is inherently slow and expensive to deploy in challenging African frontier markets. To achieve the necessary transformational outreach, IFC and our microfinance clients recognize that alternative delivery channels (ADCs)—including agent and mobile banking—are potentially powerful tools to scale outreach in the face of these unique challenges. However, because of a combination of low capacity, inherent risks, and high upfront costs, Partnership for Financial Inclusion, with most microfinance banks operating in the goal of bringing financial services underserved markets have not yet taken to an estimated 5.3 million people advantage of the ADC model. previously without banking services in Sub-Saharan Africa—within five years. In January 2012, IFC and The MasterCard The program aims to develop sustainable Foundation launched the $37.4 million microfinance business models that SMARTLESSONS — MARCH 2015 1 can deliver large-scale low-cost banking services. Box 1: FINCA DRC To accelerate the development of low-cost mobile financial services, the program provides advisory Although FINCA DRC’s alternative delivery channel strategy is assistance to mobile network operators, microfinance still ambitious, it is modest in scope compared to FINCA’s initial institutions, banks, and payments-systems providers.1 proposal during due diligence discussions with IFC. In addition to developing an agent network, FINCA DRC’s original plans included the following: Through the partnership, IFC aims to scale up eight to ten of our strongest African microfinance clients— • a costly branch expansion ($200,000 per branch in infrastructure investment alone) that would almost including key partners FINCA and MicroCred—by double the physical branch infrastructure; supporting the development of innovative new products, expansion into hard-to-reach locations, • a mobile banking channel, with the aim of directly especially rural areas, and the deployment of new integrating FINCA with the e-wallet of a mobile network operator; and cost-effective alternative delivery channels. • a card-based channel—likely in partnership with a bank— Lessons Learned to give FINCA clients access to one of the Democratic Republic of Congo’s proprietary ATM networks and to allow them to transact when abroad (mainly for clients Lesson 1: Upfront support is crucial for success. running trading businesses). The IFC Africa microfinance team intended its initial The proposal was clearly overly ambitious and likely to pull approach to microfinance channel engagements FINCA DRC in too many directions. In response, IFC provided specialist consultants to work with FINCA for two weeks to be a relatively light-touch process: a full IFC onsite to develop a narrower plan that would reflect FINCA’s team composed of the project leader and relevant real priorities. The resulting project, with a focus on building specialists would conduct a due diligence mission and the savings outreach and an aggressive but realistic expansion aim to get most of the way toward a detailed project of FINCA’s agent network, has thus far exceeded the initial targets. As of May 2014, FINCA already had 173 agents implementation plan within a few days. However, the operational, $21 million in deposits mobilized, and 51,000 approach has changed substantially following lessons transactions processed through FINCA agents monthly. learned from our first ADC engagements under Based on this early success, FINCA DRC has committed to an ambitious new target of becoming the Democratic Republic the partnership—including with FINCA DRC. After of Congo’s first true mass-market financial institution and just one day of due diligence meetings with FINCA, reaching over 1 million customers within five years. the IFC team realized that even relatively mature microfinance clients such as FINCA DRC lack basic capacity when it comes to a channel project—which necessary to implement a project, as with FINCA is understandable considering the nascent state of (see Box 1) or 2) overly conservative, as the client is branchless banking globally. unwilling to commit to specific targets, given a lack of direct experience with the ADC. As a result, most Initial proposals from microfinance clients thus microfinance institutions will require substantial tend to be either 1) overly ambitious, as the client expert input and upfront advisory support well underestimates the level of resources and capacity before beginning to draft an implementation plan. They will need assistance in defining the magnitude of the project, the broad strategic priorities, and the specific activities to be covered under the project, as well as in thinking through the practical aspects of the plan in detail. As a result of these early lessons, IFC now uses a revised client-engagement strategy for channel projects that incorporates significant early-stage advisory support: before even conducting initial due diligence, the IFC project team now asks the client to complete a detailed questionnaire that helps the client think through the necessary strategic, financial, and operational aspects of mobile and agent channel development—and to ultimately be more prepared 1 For more information, go to to engage with the IFC team during due diligence. www.ifc.org/financialinclusionafrica. 2 SMARTLESSONS — MARCH 2015 Depending on client capacity, IFC may also provide Box 2: IFC’s Channel Partnership with MicroCred in significant support—after the due diligence but Africa before implementation—in developing the business case for the channel, including financial and The following factors characterize the IFC-MicroCred channel operational projections. For FINCA, this involved partnership in Africa: sending a team of specialist staff and consultants for • The relationship leverages one of IFC’s key greenfield two weeks following the due diligence to develop a network partners in Africa. MicroCred Senegal and more realistic business case by working through the MicroCred Madagascar, two of IFC’s strongest greenfield market-size and client-uptake assumptions, agent clients, were selected through a competitive process by an IFC team composed of Advisory Services and network rollout plan, and budget. (See Figure 1.) Investment Services staff. Lesson 2: Keep your eye on the ball. • In addition to support in business modeling and providing performance-based grants, IFC is delivering advisory services in the areas of strategic planning, agent network The novelty of channel implementations can make it management, and network optimization. easy for both IFC and the client to lose sight of the ultimate goal, and technical complexities can quickly • The partnership includes significant investment in capacity at the MicroCred Holding level—including overwhelm the client and dominate the design phase a global director of channel development, who is of the project. In both the FINCA and MicroCred responsible for the performance of all of the alternative projects, the IFC team spent significant time discussing delivery channels and will make lessons learned in the technical questions, such as point-of-sale Senegal and Madagascar available across the MicroCred network. solutions, switches, and integration with third-party payment providers. Also, both FINCA and MicroCred initially focused heavily on the channel potential for right mix of products, promotion, places, and field direct revenue from fees or other charges during due activities—so the client can realize the core business diligence and follow-up discussions. (See Box 2.) benefits of the channel. The IFC team has reinforced this message during due diligence discussions and However, it is equally important to remember that, for preimplementation advisory assistance; that’s microfinance banks, an alternative delivery channel is when discussions of the business case and financial a means to an end and generally not an end in itself. projections provide a good forum for debating While the channel itself has naturally been an area various scenarios and assumptions regarding the of significant focus in our discussions with clients, impact of the channel on the overall business of the it is equally critical to give sufficient attention to bank. the bank’s broader business strategy—and product overhaul, if relevant. Lesson 3: Partnership is key. The discussions and project implementation plan There is a reason why “partnership” is the first word in should address the following key issues: which clients the name of the IFC-MasterCard Foundation program. the bank wants to target with the channel; what type As already noted, branchless banking is still relatively of savings, credit, or other products it may need to new territory for almost all microfinance clients, and add or adapt to the channel; what volume of deposits, the investment required to roll out a new channel loans, or other business it can reasonably expect to is daunting: a $2 million to $4 million initial outlay mobilize; and how to grow its business through the for staff and systems is not uncommon, with more than half of this outlay Figure 1: Revised Approach to Client Engagement in Channel Projects coming in the form of parallel contributions from the client. Microfinance institution clients require a true partnership with IFC to feel comfortable undertaking a channel project, and they want to share the risk of innovation proportionally. Without some assurance SMARTLESSONS — MARCH 2015 3 of continuing support, clients are based on positive initial outcomes unlikely to feel comfortable committing from the partnership in the Democratic to outcome-related targets, which can Republic of Congo and the strength of be problematic when structuring the this relationship, FINCA has asked for IFC’s project. Moreover, given the many assistance in rolling out its alternative uncertainties inherent in such a new delivery channel strategy worldwide— area, clients expect some degree of with additional support from IFC as a flexibility to refine and revise their provider of advisory assistance and as a approach based on early experience and shareholder. lessons. IFC has addressed the need for unambiguous partnership and risk- sharing in the structure of the project legal agreements: continuing advisory assistance in the form of a specific cooperation agreement, combined with grant support. In addition to the design-phase advisory support described above, IFC commits to provide advisory services during at least the first part of the implementation phase, to support the client’s testing and refining of key assumptions made during the design phase. The details of this advisory assistance are formalized in a cooperation agreement—usually at the same time as the signing of a performance-based grant agreement. With IFC’s advisory support, the project and grant targets can then be amended as necessary, based on the initial results CONCLUSION of the project to ensure realistic but sufficiently aggressive objectives. Although it is still early days, IFC’s initial experience in supporting ADC projects To avoid placing undue risk on the client with African microfinance partners has during the early stages of the project, been largely positive. Nonetheless, our the grant agreement is also structured initial engagements in this space serve with a significant upfront payment to highlight the reality that branchless DISCLAIMER and with the first performance-based channel development is new territory SmartLessons is an awards tranche linked to output-based targets for both IFC and our clients—even those program to share lessons learned (for example, number of agents) that that are more mature and relatively in development-oriented advisory services and investment the client has more control over; later sophisticated. This means IFC cannot operations. The findings, tranches are more closely tied to the expect our microfinance clients to hand interpretations, and conclusions expressed in this paper are those outcomes and impact of the project. us a fully baked project, signed, sealed, of the author(s) and do not Even mature microfinance institutions and delivered. We are all figuring this necessarily reflect the views of IFC or its partner organizations, are unlikely to push ahead without some out as we go along, and success in ADC the Executive Directors of The reassurance that early stumbles will not implementation will require a true World Bank or the governments they represent. IFC does not result in the withdrawal or curtailing of partnership to reach the mutual goal of assume any responsibility for the IFC’s financial and advisory support. expanding access to finance for those completeness or accuracy of the who are least served. information contained in this document. Please see the terms The Africa microfinance team’s and conditions at www.ifc.org/ partnerships also go beyond the smartlessons or contact the program at smartlessons@ifc.org. individual-project level. For example, 4 SMARTLESSONS — MARCH 2015