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Branchless Banking in Pakistan: A Laboratory for Innovation

Branchless Banking in Pakistan: A Laboratory for Innovation

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Published by CGAP Publications
Pakistan is one of the fastest developing markets for branchless banking in the world. Clear regulations and a regulator that is willing to both listen to the private sector and provide incentives for innovation have promoted a dynamic branchless banking sector. Two players
have already launched services, and others are waiting in the wings. This Brief highlights
both existing and anticipated businesses and outlines the key challenges and opportunities
that are likely to shape the market over the next 12 months.

Branchless banking regulation was first introduced in Pakistan in April 2008. From the beginning, the State Bank of Pakistan (SBP) has taken a constructive regulatory approach by providing clear guidance and being willing to listen to businesses and adjust regulation where necessary. A variety of business models is emerging that involves a wide range of players, including mobile network operators (MNOs), technology companies, and even a courier business.(Notably, a bank remains ultimately liable to SBP in all the models.) The government is further encouraging innovation by piloting the use of branchless banking to distribute government payments. Taken together, these factors make Pakistan a unique laboratory for innovation.

SBP has issued four branchless banking licenses and is considering several others.
Pakistan is one of the fastest developing markets for branchless banking in the world. Clear regulations and a regulator that is willing to both listen to the private sector and provide incentives for innovation have promoted a dynamic branchless banking sector. Two players
have already launched services, and others are waiting in the wings. This Brief highlights
both existing and anticipated businesses and outlines the key challenges and opportunities
that are likely to shape the market over the next 12 months.

Branchless banking regulation was first introduced in Pakistan in April 2008. From the beginning, the State Bank of Pakistan (SBP) has taken a constructive regulatory approach by providing clear guidance and being willing to listen to businesses and adjust regulation where necessary. A variety of business models is emerging that involves a wide range of players, including mobile network operators (MNOs), technology companies, and even a courier business.(Notably, a bank remains ultimately liable to SBP in all the models.) The government is further encouraging innovation by piloting the use of branchless banking to distribute government payments. Taken together, these factors make Pakistan a unique laboratory for innovation.

SBP has issued four branchless banking licenses and is considering several others.

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Published by: CGAP Publications on Jan 19, 2012
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Branchless Banking in Pakistan:A Laboratory for Innovation
October 2011
Pakistan is one of the fastest developing markets for branchless banking in the world. Clearregulations and a regulator that is willing to both listen to the private sector and provideincentives for innovation have promoted a dynamic branchless banking sector. Two playershave already launched services, and others are waiting in the wings. This Brief highlightsboth existing and anticipated businesses and outlines the key challenges and opportunitiesthat are likely to shape the market over the next 12 months.
      B       R      I       E      F
Branchless banking regulation was first introducedin Pakistan in April 2008. From the beginning, theState Bank of Pakistan (SBP) has taken a constructiveregulatory approach by providing clear guidanceand being willing to listen to businesses and adjustregulation where necessary. A variety of businessmodels is emerging that involves a wide range of players, including mobile network operators (MNOs),technology companies, and even a courier business.(Notably, a bank remains ultimately liable to SBP in allthe models.) The government is further encouraginginnovation by piloting the use of branchless bankingto distribute government payments. Taken together,these factors make Pakistan a unique laboratory forinnovation.SBP has issued four branchless banking licenses andis considering several others. Figure 1 shows wherevarious businesses stand in the license applicationprocess.
Large-Scale Deployments
Tameer Microfinance Bank
and its parent company
Telenor Pakistan
, a major MNO, launched easypaisain October 2009. Easypaisa allows any customer, evensomeone without a Tameer account or a Telenorphone, to make over-the-counter bill payments andmoney transfers through easypaisa agents. Tameerhas over 12,000 easypaisa agents, two-thirds of which are processing at least one transaction perday. According to easypaisa, 23 million transactionshad been processed by the end of July 2011, witha total throughput of Rs 43 billion (US$500 million).Bill payment initially accounted for the vast majorityof transactions, but domestic remittances have seenstrong uptake, and now account for 60 percent of throughput.In February 2010, Tameer and Telenor launched theeasypaisa “mobile account,” which allows customerswith a Telenor SIM card to access a Tameer accountand perform a range of transactions directly fromtheir phone. Following the June 2011 relaxation of requirements for account opening (see Box 1) Tameerand Telenor revamped the account-opening processfor mobile accounts and ran a major advertisingcampaign, which resulted in over 500,000 newcustomers, according to easypaisa.
UBL Omni
is a new branchless banking servicelaunched in April 2010 by commercial bank UBL. UBL
LicenseapplicationIn principleapprovalPilots/small-scale launchLarge-scaledeployments
Bank Alfalah
HBL
Kashf 
MCB
WaseelaBank(Mobilink)
TCS Bank
 Askari Bank
Dubai IslamicBank Ltd (3agents)
FirstMicrofinanceBank (53agents)
Tameer Easypaisa(12,000agents)
UBL Omni(5,000agents)
Figure 1. Emerging and Established Branchless Banking Services in Pakistan
 
2
Omni allows customers to make over-the-counterbill payments and send money to friends and familyin Pakistan via a network of agents known as OmniDukans. The service also offers an account accessiblefrom mobile phones via SMS or WAP and cards(both generic and Visa cards are available). TheOmni account requires a minimum balance of Rs100(US$1.15) and offers several fee packages, includingpay-as-you-go, weekly, monthly, and annual. UBLhas won several contracts to disburse paymentsfor nongovernment organizations and governmentschemes, such as the Benazir Income Support Program(BISP), the government’s flood relief program, and theWorld Food Programme (see Box 2) (CGAP 2011).UBL reports that at the end of June 5,000 agents weredisbursing payments to 2 million recipients underthese programs. Recently, UBL started accepting loanrepayments for microfinance institutions (MFIs) andproviding cash management facilities for businesses.As it is with easypaisa, a major challenge for UBL isgetting customers to sign up and transact via accountsinstead of relying on over-the-counter transactions.
Pilots or Small-Scale Launches
First MicroFinance Bank
(FMB) was the first bank inPakistan to experiment with branchless banking. Itreceived special permission from SBP to collaboratewith the Pakistan Post Office on a pilot in March2008. For the pilot, FMB loan officers were stationedinside post office branches for loan disbursementand collection, allowing FMB to expand far morecheaply than it could were it to open new branchlocations. FMB reports that it has now deployed staff in 52 post office locations and has disbursed 162,000loans amounting to US$29 million. Loan officersreport to the nearest FMB branch; they do not havean electronic system for recording transactionsundertaken at the post office. There are no plans toscale up the service.
Dubai Islamic Bank Pakistan Ltd,
which
 
targets highnet worth individuals, was awarded a branchlessbanking license in April 2010. It plans to operatelow-cost channels for 50,000 existing customers inschools, business districts, residential areas, andshopping malls. According to the bank, service is inthe pilot phase at three sites and will likely expand to25 locations by year end. The service will not targetthe mass market.
Anticipated Market Entrants
Mobilink
is the largest MNO in Pakistan, with 32million SIM cards issued at the end of 2010 (PakistanTelecommunication Authority 2010). It has had twounsuccessful attempts at launching a branchlessbanking service in Pakistan to date: the first with thePakistan Post Office and the second with Citibank. Inits third attempt, Mobilink and its parent company,Orascom, received a license for a wholly owned
The Government of Pakistan, and in particular SBP,has shown strong leadership in promoting financialinclusion as a policy priority.After consulting with the private sector, thegovernment issued new branchless bankingregulation in April 2008. The regulation allowed forseveral models of branchless banking by which bankscould offer services through a network of agents.This gave banks and their partners the confidence toinvest in rolling out services. As services were rolledout, a number of issues that were still holding backsector development came to light. In response tothese, SBP issued revised regulations in June 2011.
•Thenewregulationremovedtherequirement
to capture biometric fingerprint informationat the time of account opening for the lowestvalue accounts. Deploying the biometric capturetechnology to thousands of agents was expensiveand created a significant barrier to customerenrollment. Biometric information could notbe verified against the national databaseand, consequently, did not provide additionalsecurity. A digital photo of the account holder isnow required instead to confirm the person wasthere at the time the account was created.
•Underearlierregulation,customerscouldmake
a higher value of over-the-counter transactionsthan they could transact through an account, allwith lower customer identification requirements.The new regulation raised the transaction limitson accounts to fix this discrepancy.
•Thenewregulationalsointroduceda“level0”
account, with very low balance and transactionlimits, which may be opened electronically withno physical paperwork. This will further reducethe cost of account opening.
Box 1. The Regulatory Environment forBranchless Banking in Pakistan
 
3
microfinance bank—Waseela Microfinance BankLimited—in September. It is anticipated that the newbank will soon apply for a branchless banking licenseand that it will roll out a business model that closelyresembles easypaisa’s with a range of over-the-counter services, such as domestic remittances andbill payments available to anyone and an enhancedproposition, including a mobile wallet for Mobilinkcustomers that they can access from their phone.
TCS
is Pakistan’s biggest logistics and couriercompany. With over 500 outlets, it has a largerfootprint than DHL, and it has a strong brand. TCShas long aspired to make use of its agent networkand convert its couriers into “barefoot bankers” whodeliver financial services to customers’ doors. TCS hasresisted signing an exclusive agreement with any onecommercial bank and has decided, like Mobilink, toapply for its own banking license. SBP has requireda business plan for a full-service microfinance bank. If TCS succeeds, it will be the first courier company inthe world to offer financial services.
Bank Alfalah
and its sister company, mobile operatorWarid (both owned by the Abu Dhabi Group), mightbe expected to be an ideal branchless bankingpartnership. Bank Alfalah has shown its commitmentto branchless banking by distributing both floodrelief payments and participating in the BISP mobilebanking pilot (see Box 2) on a smaller scale thanUBL. There have been reports that Warid is inmerger discussions with other telecommunicationscompanies in Pakistan, which has the potential todelay any plans the group might have.
Askari Bank
is a second-tier bank with 235 branchesthat is 50 percent owned by the Army WelfareTrust and 50 percent owned by private investors.Askari has recently been awarded a branchlessbanking license and has signed a deal to developa branchless banking venture with Zong (ChinaMobile), the smallest but fastest growing MNO inPakistan. The service will be jointly branded and willinitially target army salary disbursements as a way toencourage both soldiers and their families to signup for accounts. The plan would be to recruit agentsin strategic locations near army barracks. Askari andZong are exploring promotions, such as free SIMcards to anyone who registers for an account.
MCB
is a large commercial bank with over 1,100branches. Although it applied for a branchlessbanking license early on, it has not yet rolled outan agent network, because it is still unsure of thebusiness case. It has developed a mobile bankinginterface for existing customers, powered byFundamo. This interface is now used by 150,000customers and has processed Rs 7 billion (US$80million) in transactions. MCB has recently partneredwith Nokia to develop a mobile banking applicationthat can be loaded on all Nokia handsets and that willbe preloaded on new models. MCB is also exploringoptions to use Nokia stores as agent locations.
There is a lot of interest in government-to-person(G2P) payments as a means of promoting financialinclusion in Pakistan.
•FollowingthemilitaryactionintheSwatvalley
in May 2009 the Government of Pakistan andthe World Food Programme worked with UBLto issue automatic teller machine (ATM) cardsthat were used to make payments to 12,000beneficiaries.
•AfterthefloodsinAugust2010,thegovernment
worked with UBL, Bank Alfalah, and HBL toissue Visa branded cards to nearly 1 millionvictims who had lost property. Beneficiariescould withdraw money at ATMs or use theircards to purchase goods.
•BISPisPakistan’sflagshipsocialcashtransfer
program with 2.2 million beneficiaries. Twopilots use branchless banking agents. Thefirst uses a card with a barcode on the backthat is read with a scanner. The second usesmobile phones. Four banks (UBL, HBL, Tameer,and Bank Afalah) have agreed to provide acombined total of 180,000 free mobiles tobeneficiaries in order to be included in thepilot. At present the pilots do not allow funds toremain in the customers’ accounts or for themto transact from their phone.
•SBP,inpartnershipwithDFID,hasrecently
announced a Challenge Fund that will providegrants to other government departmentsto allow them to experiment with financiallyinclusive payment arrangements.
Box 2. Government Payments andBranchless Banking

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