Branchless Banking – a new frontier for microfinance?

The Consultative Group to Assist the Poor (CGAP) – the independent microfinance policy and research centre based at the World Bank – announced last Thursday the launch of a new partnership with the UK Department for International Development (DFID). DFID will be co-funding the CGAP Technology Programme along with the Bill & Melinda Gates Foundation, by providing £8 million to the project.

CGAP Technology Programme focuses on promoting the use of information and communication technologies (ICT) in order to increase access to financial services for a greater number of poor people. In practise, the programme strives to design, implement and test branchless banking models that can easily be scaled up and replicated.

The term ‘branchless banking’ designates the delivery of financial services without the use of traditional bank branches. Instead, these models have recourse to mobile phones and SIM cards, payment cards and card readers, or online banking, in order to carry out identifications and transactions, whereas cash is handled at non-bank agents such as post offices, small retailers or telecommunications stores.

For six years CGAP Technology Programme has been providing technical advice to a dozen of projects in Asia, Africa, and Latin America. Through this experience and these experiments, branchless banking has appeared as a substantial opportunity for delivering financial services in rural and remote areas, at low cost.

The piloted projects often proved successful and innovative, promoting not only basic financial services such as payments and loans but also access to savings and insurance mechanisms (they’ve notably implemented the first mobile phone-enabled savings accounts targeting poor unbanked people) or the use of social protection payments as a vehicle for banking the poor (see CGAP report here).

As the “Scenarios for Branchless Banking in 2020” CGAP report highlights it, the fundamentals are here: the past decade has seen an amazing spread of mobile telephony usage. As a result, more than 80% of the world’s population resides within mobile coverage and there are over 4 billion mobile subscriptions implemented worldwide, with 80% of new connections being made in emerging markets and mostly by lower income consumers.

Branchless banking has the potential to greatly accelerate financial inclusion by enabling commercial banks, mobile network operators and MFIs to reach large numbers of previously un-served people. Indeed the main limitation in achieving universal access to financial services is the cost of building and maintaining branch networks in order to reach remote and low-income populations. Research conducted by CGAP Technology Programme in 2008 (see report here) found that using third-party agents cost on average 30 times less (76 times less in Pakistan) and replacing them with a mobile phone further cut costs in half.

Nevertheless current customers of branchless banking are for the most part not the formerly unbanked poor people, even if this category is starting to make more use of branchless mechanisms.

The increase of financial inclusion through branchless banking does not occur by nature and faces several hurdles.

Firstly, regulation is often restrictive concerning branchless channels, which slows innovation. For instance, regulated MFIs may not be allowed to be banking correspondents of big banks or to pilot their own network of banking agents; in other cases non-bank MFIs can not issue electronic money or intermediate deposits. For these reasons, among others, MFIs have not been successful to date in scaling up branchless banking services.

Another constraint lies in the fact that poor customers are often hesitant to use technologically innovative financial services since they understandably have lower familiarity with technology than mainstream banking customers. They may feel uncomfortable using a cell phone for sending money, or making deposits on their savings account through the hands of a small retail outlet assistant.

Also, the country’s infrastructure may not be reliable enough. Frequent power shortages, weak wireless telecom network and national switch to process electronic transactions constitute considerable obstacles to the implementation of a sustainable branchless banking system.

But the bulk of the flowering of the branchless banking’s potential  will in the end depend on governments and MFIs: on them weigh the respective responsibilities to enable necessary regulatory environments and to take the risks to implement technologically innovative systems that correspond to the needs of the poorest and strong business models for services that go beyond payments. But most MFIs lack the specialised technical skill needed to  implement branchless models or exploit existing platforms.

Uniting could be a good starting point. One of the CGAP project partners – the Ecuadorian Red Financiera Rural – consists of the association of MFIs contracting together a technology provider to build and maintain core banking systems and branchless banking channels in order to minimise costs and make up for their lack of appropriate expertise.

In any case, it is tempting to rely on the positive reflections set forth in the CGAP scenarios in order to conclude: “For the first time in history, it is conceivable that a majority of people in a majority of places, including low-income countries, will have access to modern electronic payment services. If this alone is the measure of financial inclusion, then we face the decade with optimism.”

2 responses to “Branchless Banking – a new frontier for microfinance?

  1. Another issue is whether regulations allow agents (representing microfinance banks) to collect and disperse physical money. Many countries do not allow that. Apart from that, security is an emerging concern as mobile money gains the attention of criminals.

    Here, in Pakistan, the recent mobile money solution, Easy Paisa, involves a microfinance bank but all marketing efforts are focused towards the urban population for the moment. The process of rolling out the service to rural areas is disappointingly slow

  2. Pingback: DFID-sponsored summit shows potential of mobile banking to reach the poor « RESULTS UK – News and Views

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