Liquidity Management

Planning Techniques and Approaches to ensure service continuity

Ciprian PanturuAssociate Consultant

PHB Development

Developing and managing efficient Agent Networks in Lao

Overview

• Definitions (MPESA liquidity)• What does « Liquidity » mean for DFS?• What does « Liquidity » mean for Agent?

• Techniques and considerations to ensure liquidity• Liquidity Rebalancing• Transactional patterns• Planning ahead (holiday/ busy days/ bank

closed)

• Support received from the Service Provider• Alerts on Liquidity levels• Regular visits from the Agent Supervisor• Super Agents structure

What does « Liquidity » mean for DFS?

DFS does not create value• at any point in time, the digital value is backed up by physical cash at 1 on 1 ratio

• As long as both cash and e-value co-exist, there is need to exchange one

against the other

The « exchange » between e-value and cash takes place at the Agent (for this channel)

A

What does « Liquidity » mean for DFS?

• Why does the Agent need Funds on account?

Cash –

E-value + E-value –

Cash +

CustomerCash in/ Initiate OTC

Agent

What does « Liquidity » mean for DFS?

• Why does the Agent need Funds on account?

CustomerCash in/ Initiate OTC

Agent

Low Balance

What does « Liquidity » mean for DFS?

• Why does the Agent need Cash in hand?

Cash +

E-value – E-value +

Cash –

CustomerCash out/ Receive OTC

Agent

What does « Liquidity » mean for DFS?

• Why does the Agent need Cash in hand?

CustomerCash out/ Receive OTC

Agent

Low Cash

What does « Liquidity » mean for Agent?

The Agent needs to have, AT ANY TIME, both Cash in hand AND Funds on account, in SUFFICIENT AMOUNT to serve any customer comes to transact

Agent

Customer ACash in/ Initiate OTC

Customer BCash out/ Receive OTC

What does « Liquidity » mean for Agent?

• 100 Million LAK Cash + 100 Million LAK on Account Problem solved!

• … but the Agent transacts twice a day & gets 600,000 LAK/ month as

commission

• He has better things to do with that money!• Buy more goods and sell them in the shop• Expand business, invest in new equipment• Buy a new car, organize a wedding…

• The Agent will invest if the return meets the expectations

Investment

Com-mission

Liquidity Rebalancing

• Let’s assume the average transaction at 300,000 LAK and the Agent makes 2 transactions per day:

• He goes every day nearby a rebalancing point and he makes sure he balances his funds every time• He needs to invest 600,000 LAK in cash and 600,000 LAK on account = 1,200,000 LAK investment • …and he gets 600,000 LAK as commission per month

• By rebalancing the funds, the Agent is not increasing, nor decreasing the total investment

In-vestment

Commis-sion

Blue line: Agent’s account balance, Orange bars: rebalancing transactions (adding cash when low, subtracting it to deposit on the bank account)

Liquidity Rebalancing - exercise

• Agent starts the day with 5M in cash & 5M on account

• The following transactions take place:Customer Txn Agent Cash A/C Bal. Total

Start 5M 5M 10M

Sends 1M OTC Receives cash 1M/ Pays 1M from a/c 6M 4M 10M

Makes 2M deposit

Sends 2M OTC

Receives 1M OTC

Makes 2M deposit

Liquidity Rebalancing - exercise

• Agent starts the day with 5M in cash & 5M on account

• The following transactions take place:Customer Agent Cash A/C Bal. Total

Start 5M 5M 10M

Sends 1M OTC Receives cash 1M/ Pays 1M from a/c 6M 4M 10M

Makes 2M deposit Receives cash 2M/ Pays 2M from a/c 8M 2M 10M

Sends 2M OTC Receives cash 2M/ Pays 2M from a/c 10M 0M 10M

Receives 1M OTC Pays cash 1M/ Receives 1M on a/c 9M 1M 10M

Makes 2M deposit Receives cash 2M/ Pays 2M from a/c ?? ?? ??

Transactional patterns

CorridorsSelect a city

About Tableau maps: www.tableausoftware.com/mapdata

Inter-city corridors (top 20)

• From City to Village• Cities are net senders Agents need more e-value• Villages are net receivers Agents need more cash

• Seasonality• Sending during harvest period• Receiving during rainy season• Early morning/ late evening

• Each Agent has an unique transactional pattern• They need to understand it and plan liquidity

accordingly• By looking back at previous week/ month’s

transactions…• …they can identify high and low transactional

behaviors

Planning ahead

• For recurrent events• Market days: people will take advantage of this trip

to perform their transactions• Week-ends: banks are closed – plan for liquidity

ahead, people have time

• For holidays/ other events• Lao New Year/ Women’s day• Around start date of School or University year

• 1.5 X stock rule• Start each day with 1.5x « previous day’s

transactions »Date Total Cash

inTotal Cash out

1.5X Rule Cash in

1.5 Rule Cash out

28/01

2,000,000 5,000,000 3,000,000 7,500,000

29/01

1,000,000 2,000,000 1,500,000 3,000,000

Alerts on liquidity levels

The Agents have their own business to run. Sometimes, they may forget to check their Balance/ level of cash . An Alert SMS can help to remind them about it.

• If Balance is low• Send SMS Alert and propose corrective actions• Agent Supervisor calls the Agent and proposes to

rebalance

• If Balance is high• It could mean that the Agent is low on cash• Same actions as above, but less categoric

Low Balance Alert

Your Balance is below the specified limit. Please rebalance!Nearest cash point:

Regular visits from Agent Supervisors

• The Agent Supervisor has to be in permanent contact with the Agent:

• Visit each Agent at least twice a week• Review Agent’s past transactions and identify any liquidity issues that occurred • Engage a positive dialogue

• The A-Supervisor will offer training and support on all matters, but especially on how to manage the liquidity:

• Present the different techniques to manage liquidity• Provide proximity contacts for rebalancing• Provide support to define each Agent’s liquidity

profile and transactional patterns

Super Agents

• At the beginning, Service Provider’s Points of Presence have the role to assure rebalancing points for Agents

• For more evolved deployments, partnerships with Financial Institutions are put in place to assure liquidity

• Super Agent Structure: Leverage on their Points of Presence for Agent rebalancing

• Master Agent structure: Financial Institutions select a group of Agents and manage their liquidity

• High-volume cash handling businesses• Similar arrangements with Corporations disposing of

wide and mobile distribution networks, handling important amounts of cash – i.e. Beerlao

Conclusions

Liquidity Management represents certainly a challenge for DFS developments:

• It is crucial to understand the mechanisms to mitigate this risk

• It is important to promote a culture of compliance to liquidity rules among the Agents from early stage

• Monitoring customer’s and agent’s transactional behaviors provide insights to adjust the liquidity policy

Agent had no

money 69%

Agent sys-tem

down 8%

Net-work down 11%

No ID 7%

Other 5%

M-PESA Chal-lenges with cash-

out

Source: Sicap 2012, Coping with Dormancy

Ciprian PANTURUAssociate ConsultantPHB Development

Thank you!