Cgap - banking on mobiles webinar - oct.01.2008

©2008 CGAP. All rights reserved. http://www.cgap.org/technology

Banking on Mobiles: Why, How, for Whom?

Kabir KumarIgnacio MasCGAP


Table of Contents

1. Why: The logic of branchless banking

2. How: Developing and managing branchless banking channels

3. For whom: customers, banks, operators

4. Summary: The good, the bad, the ugly of m-banking

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Table of Contents






The logic of branchless banking

1. Use existingretail

infrastructures

1. Use existingretail

infrastructures

3. Use existingdeployed

technology

3. Use existingdeployed

technology

2. Deliver trustthrough

technology

2. Deliver trustthrough

technology

Real-time account-to-account transfers

Customer

Agent


Any store can potentially be an agent


The power of using existing infrastructure

~25m

~1m600k500k250k

~3bn

WesternUnion

Bankbranches

Postoffices

ATMs POS Mobile Phones

Philippines1,000 branches7,000 ATMs25,000 POS terminals in stores1.1 million prepaid airtime resellers

PanamaLargest bank has 65 branches850 shared ATMs (many in branches!)12,000 prepaid airtime resellers

Worldwide points of presence


Status of branchless banking

COUNTRY PROVIDER MODELAfghanistan Roshan (mobile operator) M-banking Brazil Caixa Economica Federal (bank) Banco

Bradesco (bank) Card-based Card-based

Chile BancoEstado (bank) Card-based Colombia Banco Caja Social (bank) Card-based DR Congo Celpay (bank) M-banking India SKS Microfinance (MFI)

State Bank of India (bank) M-banking M-banking

Kenya Safaricom (mobile operator) Equity Bank (bank)

M-banking M-banking

Mexico Banamex (bank) Card-based Mongolia XacBank (bank) M-banking Pakistan Tameer Bank (bank) M-banking Russia Beeline (mobile operator)

Tavrichesky Bank (bank) M-Banking

Senegal Ferlo (third-party) Card-based


Worldwide ‘league tables’

Country # of agents Brazil 55,000

(+66,000)S Africa 6,500Kenya 2,600Peru 2,400Philippines 2,000Colombia 572

(+3660)India 460Ecuador 63Pakistan 30

Status of agent deployments Status of ‘transformational’ m- banking

PHILIPPINES: Smart Money +Gcash, 9m registered, 3m active. KENYA: M-Pesa, 3.6m registered

users (½ transaction/user/month at average €30).SOUTH AFRICA: FNB, MTN, ABSA,

Wizzit, 4m registered, 1m active.INDIA, PAKISTAN, MONGOLIA: Still early days…


Table of Contents


2. How: Developing and managing branchless banking channelsDeveloping agent networksM-banking applications and usabilityData securityRegulatory issues and responsibilities




Types of mobile transactions

Personal/ Social

Commerce

Banking

Proximity Remote

P2P payments

A2A paymentsCash in / cash out

(agent)

In-store purchases(merchant)

Bill payment

E-commerce


Setting up and managing BB channels

Agent segmentationCharacteristics of ‘good’ agentsPartnerships to scale upBusiness modelOnline vs. offline usage

Agent networks for cash in / cash out

Agent networks for cash in / cash out Mobile bankingMobile banking

Usability: user interfaceSecurity: encryptionNature of bank-operator dependencies


Segmentation of agents

“Human ATM”

Bank’s objective

Offload transactions from branch

Bradesco thru BradescoEspresso

“Bank offspring”

Cater to “blue sky” segments

A proposition suited to their needs/means

People with lower income

Create & market new products at viable prices

Banco do Brasilthrough BancoPopular

“Branch substitute”

Extend geographic coverage

Proximity

Rural / remote populations

Cash management and selling

Bradesco thru Banco Postal

Customer benefits

Convenience

Customers targeted

Existing clients

Key challenges for the bank

-

Examples in Brasil

“Branchless bank”

Minimize fixed cost, faster roll-out

New concept no-frills bank

Any

Marketing & sales presence

Lemon Bank


Strategic partnering for growth

Advantages:Faster roll-out, more scalePrime locationsSteady, loyal customer flowEasier to advertise locationsSingle contract, consolidated line of credit

Disadvantages:Harder to negotiate equipment placement and branding arrangementsMore costly

Go for retail franchises?Go for retail franchises?

They can handle:Agent selection, legal contracting, setup & trainingMonitoring and maintenance of POS/communications equipmentMonitoring and reporting on agent performance

Use network managerUse network manager

Knowledge of individual storesCash collections

Partner with distributorsPartner with distributors


M-banking applicationsNature of user experience

(How user-supplied transaction details are captured)

Single commandInteractive session,

network-based

Voice

USSD messaging

Data(GPRS/EDGE

/WCDMA)

Missed call dialinge.g. Eko

SMS messaging

Wire

less

bea

rer u

sed

Interactive session, using menu on

client

Telephone banking by IVR/tones

SMS to short codee.g. G-Cash,

Obopay

Single USSD to short codee.g. Eko

USSD sessione.g. WIZZIT

WAP sessione.g. most

mainstream banks

JAVA aplet on phone

e.g. Obopay (US)

STK on SIM carde.g. Smart Money,

MTN Banking, Celpay, M-PESA


M-banking UI: SMS (G-Cash)

Send SMS to 5082882:REG M-PIN/ Mother’s Maiden Name/ First Name/ Last Name/ Address/ Landline

REG 1234 / Aurora Reyes/ July/ Santos/ 5 Santol St., Project 4, QC/ 024261001

From 5082882:Thank you July Santos for registering to G-Cash on 08/12/04 at 10:30 a.m. You may now use G-Cash. For more info, reply to this msgwith INFO. Ref. . 13131

Register

Transfer money to another mobile number

From 5082882:You have received 500 of G-Cash from 958345254 on 8/12/04 at 10:30 a.m.. Ref. #13134.

500 1234 9175880309

Send SMS to 5082882:Enter amount <space> PIN <space> 11 digit mobile number of recipient





network-based

Voice

USSD messaging

Data(GPRS/EDGE

/WCDMA)


Wire

less

bea

rer u

sed

SMS messaging


client



Obopay




mainstream banks

JAVA aplet on phone

e.g. Obopay (US)




M-banking UI: USSD (Bharti Telesoft)Balance inquiry

Enter *211# to receive the USSD menu

Menu appears auto-matically on screen

Press “Answer” to select choice “1”

Press “Answer”

Response message Select choice of account Press “Answer” Enter your PIN





network-based

Voice

USSD messaging

Data(GPRS/EDGE

/WCDMA)


Wire

less

bea

rer u

sed

SMS messaging


client



Obopay




mainstream banks

JAVA aplet on phone

e.g. Obopay (US)




M-banking UI: SIM Toolkit (M-PESA)





network-based

Voice

USSD messaging

Data(GPRS/EDGE

/WCDMA)


Wire

less

bea

rer u

sed

SMS messaging


client



Obopay




mainstream banks

JAVA aplet on phone

e.g. Obopay (US)




M-banking UI: WAP/Java (Bharti Telesoft)

Log in

Transfer money to another mobile number


Data integrity: Confidentiality of data

Quality of encryption protocolPrivate key versus public key encryptionLength of encryption key (e.g. 128bit)

Scope of encryptionEnd-to-end (SIM-based) = need collaboration of operatorBroken chain (SMS, USSD) = need to trust the operator

EncryptionEncryption

Security of key placementPreloadedEmbedded in hardware (chip) vs. software

Terminal security: Keystroke capture / virusesSIM replacements

E-security vulnerabilitiesE-security vulnerabilities


Regulatory landscape

Who can be an agent, licensing processBank-agent relationship: roles & responsibilities, permitted & banned activities, contract termsSharing agents among banks

Outsourcing client contactOutsourcing client contact

Know Your Customer (KYC)Reporting of suspicious transactionsMaintenance of transaction records

AML / CFTAML / CFT

Account issuance & e-moneyCompetition issuesCommitment / business continuity

Account issuanceAccount issuance

E-security, data privacyTransaction authorizationsConsumer protection

Data & financial integrityData & financial integrity


What can go wrong? Who is responsible?

Customer shares his mobile phone and PIN… and is used malevolentlyFraudster manages to electronically intercept the client’s PIN Client is robbed inside or near agent’s storeThe agent’s store is robbed and the cash is stolenThe agent is robbed on his/her way to/from the bank branchClient makes a deposit, and value credit to his account is less than what he paid in and also less than what is shown on the receiptClient makes a deposit, and value credited to his account is less than what he paid in but same as what is on the receiptUsing P2P transfer capability on mobile phone, the client sends money to the wrong phone number (= bank account number)Client makes a deposit, but the account is empty when the customer goes to withdraw (bank goes, normal prudential regulations apply)Fraudulent agent is set up


Table of Contents



3. For whom: customers, banks, operatorsCustomer adoption insights and uncertaintiesRole of mobile operators M-banking scenarios for banksMaking it work for MFIs



What providers think of adoption

2 million29%

5 million50%

10 million7%

30 million14%

0% 50% 100%

# People in developing countries using mobile phone primarychannel for financial services

300,000 7%

500,000 21%

1.5 million36%

3 million36%

0% 50% 100%

How many are poor (< $3/day)

2 years21%

5 years50%

10 years29%

0% 50% 100%

# Years for 100 million to use cell phones for payments+


Early adopters of m-banking

Demographic Indicators Users (n=215)

Non Users (n=300)

South African adults

71%

50%

23%

Financially “unsophisticated” (FSM 1 and 2) 28% 93% 45%

Own or borrow mobile phone 100% 65% 49%

At least high school education 63% 31% 29%

Unemployed 15% 45% 27%

Male 71% 50% 49%

Personal Income < USD 135 / month 30% 64%

Household Income < USD 270 / month 43%

6%

39%

“Destitute” (LSM 1 and 2) 16%


Airtime purchases and non-transactional services are used most

Products used


Attitude to m-banking


Key customer adoption uncertainties

Can mobile banking substitute for the human touch? Can mobile banking appeal to more segments than the young and technologically more sophisticated? Can providers walk the tightrope between reliability and customer convenience? Will customers value ubiquity more than credibility? Will government develop practical risk-based approaches to know your customer? What level of financial literacy will be needed? Will interoperability increase adoption?


Role of banks: m-banking scenarios


Service delivery roles for mobile operators

Securecommunications

Account hosting& transaction authorization

Accountissuance

Telecomsoperator

Financialinstitution

Smart Money (Smart Comms + Banco de Oro, Philippines)MTN Banking (MTN + Standard Bank, S Africa)

G-Cash (Globe, Philippines)M-PESA (Safaricom, Kenya)M-Paisa (Roshan, Afghanistan)

WIZZIT (+ Bank of Athens + all telcos, S Africa)Barclays IndiaAny bank doing WAP


Access to finance opportunity

Well known, trusted brandMany unbanked customersSIM card: security + user interfaceLarge network of airtime resellersExperience with high volume, low value transactional platforms

StrengthsStrengths

Limited experience with controls on cash handlingUnsophisticated, single product sales channels

WeaknessesWeaknesses

Less churn – customer stickinessBranding – innovationDrive data – beyond voice/SMSCheap distribution of prepaidExtra service revenues

OpportunitiesOpportunities Loosing operational focus‘Creeping regulation’ – banking regulationBreach in data security – liability & reputational riskCustomer care burden

ThreatsThreats


Policy issues

Bank account vs. e-money vs. prepaidArguments in favor of operator:

Store of value vs. means of paymentFinancial robustness of operators

Arguments against operator:Unfair competition (not subject to reserve or capital requirements)Precedent

Account issuanceAccount issuance

Convergence of two oligopolisticmarkets: telecoms + bankingRisk of transfer of market power by mobile operator

Withholding service from banks

Competition issuesCompetition issues

Mobile operator’s core business is voice:

Everyone uses it, frequentlyHigh margin

What if the operator decides to re-focus on core business?

CommitmentCommitment


Making it work for MFIs

No real-time accounting system / inadequate IT platform

Too costly / complex to set up given resources and small scale

Insufficient incentive for agents

Potential disruption to group ethos

Customer acceptance

IssueIssue Potential solutionsPotential solutions

Hosting of back-office (ASP)

Shared agent networks

Individuals rather than shops as agents

?

Usability vs. value proposition?Customer awareness?

MFIs have strengths partners value (local knowledge, product development acumen, handle small loans)


Mobile banking: Mixed record for MFIs

Partner w/ Andhra Bank to offer m-banking to SKS’s 1.5 million clientsClients can make deposits/loan repayment remotelySKS can offer deposits, reduces cash handling cost, LOs concentrate on marketing rather than meetings

SKS Microfinance (India)SKS Microfinance (India)

Loan repayment via mobile, rather than group meetingDegraded joint liabilityAdditional work for credit officers

M-PESA with Faulu (Kenya)M-PESA with Faulu (Kenya)

Loan officers spent more time on relationships, delinquencyNot always a net gain for clients -costlier for someWorking on automated interface from GCash to back officeProcessing 10,000 transactions / month

Rural Banks with G-Cash (Philippines)

Rural Banks with G-Cash (Philippines)


Table of Contents






The good, the bad, the ugly of m-banking


Advancing financial access for the world’s poorwww.cgap.org

www.microfinancegateway.org

http://www.themastercardfoundation.com/

http://www.uncdf.org/english/index.php

Economy & Finance

Cgap - banking on mobiles webinar - oct.01.2008