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Distribution Networks for M-Banking

CGAP Technology Program


28/Sep/2009

Serving the BOP is a different game: Different customer, different


product
Regular Bank Customer

Stable income
Purchases multiple products ($$ for
bank)
Basic literacy rational decisions
Close relationship (speak same
language)

BOP segments

Unstable income
Limited spare cash bank has to
compete for share of pocket
Low literacy rational and irrational
decisions (only numeric literacy
presumable)
Relationship through third party
Frequent interaction with telecom
retailers (usually pre-paid)

Understanding customers is critical since how they use the


product drives profitability of the *channel*
Estimated profitability of accounts at SBI (on a variable-cost basis)
Rupees/ Month /Account
Student

Average Tx /Mo

Average Balance
500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

-4

-2

10

12

14

17

19

-9

-7

-5

12

14

-14

-12

-10

-19

-17

-15

-5

-3

-1

-24

-22

-20

-10

-8

-6

-3

-1

-29

-27

-25

-15

-13

-11

-8

-6

-34

-32

-30

-20

-18

-16

-13

-39

-37

-35

-25

-23

-21

-11
-18 Self-Empl
-16

-44

-42

-40

-30

-28

-26

-23

-21

10

-49

-47

-45

-35

-33

-31

-28

-26

-2
0
2
Salaried
-7
-5
-3
-12
-10
-8
-17
-15
-13
-22
-20
-18
-27
-25
-23
Business
-32
-30
-28
-37
-35
-33
-42
-40
-38

X%

X%

X%

X%

XX Rs/Mo

XX Rs/Mo

XX Rs/Mo

XX Rs/Mo

Remittances

Bills
payments
(future)

Govt
programs
(future)

P2P
transfers
(future)

Small balance accounts do


not generate income for the
bank, and input/output
transactions make it
expensive to operate
Getting users to bring
money to the account is
often the basis for attracting
them to use servicer

Total profitability will depend


on patterns of usage
However, even successful
products make only small
margins its a game of
scale

Organizations that serve the poor, setup distribution networks


with distinctive characteristics
Example of Telco distribution network
Telco
Regional
Agency

xN

Area
Manager

22 Million customers
2 Mn Retail points
Visit all retail points 1/month

XN

Own B&M distrib agencies:


x40 Direct sales, promotion in high traffic areas
Customer service
Liquidity management

x5

x3

x100

Deployment supervisor:
Coordinate training/recruiting
Deploy product changes
Roaming customer support
Technical support to end-customer through
agencies and retail points
Sales supervisor
Relationship management (visit 30-50 points
/day)
Push sales targets
Liquidity monitoring
Identify potential new agents
Investigate issues in compliance, fraud

Key features
Depth
Reach everywhere leveraging
third parties
High touch relationship
management with agents
Scaleable Structure Can
grow steadily by adding new
points
Micro-liquidity management
(frequent dispensing,
proactive control)
Close supervision of field
operations (training,
compliance, fraud)

A bank can do this by itself, or it can leverage third-party networks

Challenge in running a network Sample case


Cost as a function of volume
2. Be able to scale network
Cost/
to really achieve impact
Account
in the P&L
1. Reach minimum
scale for
profitability

EXAMPLE

Volume (# of
accounts)

Total Cost

Avg Income/
Account

Who is
more likely
to drive
scale
effectively?

3rd party agent managers HAVE MORE INCENTIVES for


scale:
It is their core business
Scale is only way to recoup investment
3rd party agent managers CAN BECOME MORE EFFICIENT:
High focus on efficiency of operations
Often develop internal knowledge (IP) and best practices

Bank or 3rd Party?


Regardless of who
does it, business will
be driven by scale

Case 1: EKO India

State Bank of India


(SBI)

Airtel

Other
Banks
(Future)

EKO

Part of Airtels
unconverted
S&D network

Merchant

S& D
network

Merchant

Merchant

S& D
network

Merchant

Merchant

Merchant

Merchant

Original Airtel
Distribution Network
converted into agent
network
Merchant

Started as independent
agent integrator
Partnered with Airtel as
strategy to build network
Partnered with SBI to offer
agent network
IT/NGO structure to comply
with regulation on BC

S&D
network

Merchant

Merchant

Merchant

New agents setup


by Eko
(future)

Merchant

Branding by EKO *

Product:
Savings account, opened in the
bank with mobile number as a/c
number; transact via mobile
Follows simplified account rules

Agent:
Opens accounts
(collects forms, performs
1st level KYC)

* Branding currently driven by SBI/EKO but in process of changing to a form where EKO will be the primary brand, followed by cobranding banks.

Case 1: EKO India (cont.)

SBI pays EKO:


Account:
Opening account fee
Yearly Account
Maintenance fee
Transactional fee (% of
transacted amount)
Services (remittances)
Fixed transactional fee

SBI

Contract between Airtel /


EKO: Based on SLA
Offers banking grade operations
(compliance, supervision)
Back-end services: form collection
and management
Call center operations
Agent training
Remunerates distribution (trade) as
well as all partners

EKO

Airtel:
Gets fee in return for
sharing / supervising
distribution network
Gets normal fee from SMS
messages (certain
transactions)

Merchant

Agent:
Opens accounts (collects formats,
performs KYC)
Gets fixed fee per transaction
Gets incentive fee on account opening

User pays:
No cost for withdrawals and deposits
X Fee for remittances
* The choice of a distribution partner should be led by depth of current distribution and efficiency of supervision. Adoption of this
product within the Dist. Org. as a critical product with dedicated sales supervision is critical to success

Case 1: EKO India (cont.)

Key aspects to highlight:


Was able to bring together two giants to work on something
that individually, each of them couldnt achieve
This talks about the strength of the value proposition to
both institutions
Has created a new platform not only to reach but to
understand customers based on their use of the account.
Important two parts of their Intellectual property:
The User Interface (text-based, security method) that can
work on all cell phones
Methodology to convert MNO outlets into bank agents
(training, supervision, IT solution, etc)
Because interoperability is mandated in India -> service has to
eventually be open to all MNOs

Case 2: Monitise UK
Banks
(HSBC, NatWest, Royal
Bank Scotland )

MNOs

Other:

(T-Mobile,O2,
Vodafone,)

MFIs
Retail chains

Pooled
account

Monitise platform

Invididual non-bank
electronic accounts

Multiple M-Wallets

S& D
network

All M-Wallet available


for user to choose
from*
Branding by Monitise,
but once the wallet is
opened, then it is the
wallets brand

Agent:
Opens accounts
(collects forms, performs
1st level KYC)

Merchant

Merchant

Merchant

Monitise distribution
network (partners with
existing MNO, retail
chains, etc)
Merchant

Branding by Monitise

Marketing (pull)
* User can open any M-Wallet (all will appear in the menu on the phone), but if its an MNO
wallet, then he can only open a wallet with his mobile operator.

Mobile wallet (
Bank branded
MNO branded
(exclusive per phone
users)
Cash-in /out
Payments (P2P,
purchases)
Remittances

Case 2: Monitise UK (cont.)

Key aspects to highlight:


Has managed to setup an interoperable platform in the UK ,
but (probably) largely dependent on market conditions (for
MNOs)
Still not clear that this solution can be adopted by market
actors in environments with large dominant players
Solution is based on mobile wallets rather than mobile bank
accounts. However, it opens the possibility to have
individualized bank accounts managed by a 3rd party
Taking up a larg(er) space in mobile payments in developed
markets (UK, US).
Visa has minor equity stake
Recent partnership with Metavante to form Monitise
Americas

Some markets (i.e. Brazil) have seen a major evolution in third


party agent networks

Outsourcing
some activities

Intermediating
the value chain

3rd Party Agent Networks

Bank managing agents


1

Bank as agent
manager

Chain becomes
agent for bank
(exclusive)

3rd party managing


banks agents

Basic

Value-added

Bank

Bank

Bank

Bank

AM

AM+

Bank

AM

Chain
Merchant

Merchant

Mer- Merchant chant


Merchant

Caixa Economica
Federal and
lottery points

Merchant

Mer- Merchant chant

Banco do Brazil
with chain Pao do
Azucar
Bradesco with
Postal network

Merchant

Merchant

Mer- Merchant chant

Banco do Brasil with


some of its AM

Merchant

Merchant

Mer- Merchant chant

Bradesco
Banco do Brazil
with Banco Lemon
(new setup)

Merchant

Merchant

Mer- Merchant chant

Banco Lemon with some of


its sub-agents
VisaNet for Banco do Brasil
GTech with HSBC

Source: Analysis by Eduardo Diniz and Martin Jayo; Fundacion Getulio Vargas; Sao Paulo, Brazil, 2009

What would make sense for Colombia?

Issues to think about:


Service points vs Transaction points
What is required to reach the poor?
Both?

Setup a
Shared Bank
Agent
Network?

Economies of scale vs presence at the


POS
What kind of brand presence would be
needed at the POS?
What actors
are likely to
become agent
managers?

Other
options?

Fragmentation vs Concentration
Is there space for multiple networks?
The case for agent commissions
Competition/ branding
Who takes the lead?
How would banks compete?
Non-banking actors
How to involve them
What role will they play / Incentives to
play?

Advancing financial access for the worlds poor


www.cgap.org
www.microfinancegateway.org