Distribution Networks for M-Banking. CGAP Technology Program 28/Sep/2009

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Distribution Networks for M-Banking

CGAP Technology Program

28/Sep/2009

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

product

• Stable income

• Purchases multiple products ($$ for

bank)

• Basic literacy – rational decisions

• “Close” relationship (speak same

language)

• 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)

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Understanding customers is critical since how they use the

product drives profitability of the channel

Average Balance 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 A ve ra ge Tx /M o 1 -4 -2 0 3 5 7 10 12 14 17 19 2 -9 -7 -5 -2 0 2 5 7 9 12 14 3 -14 -12 -10 -7 -5 -3 0 2 4 7 9 4 -19 -17 -15 -12 -10 -8 -5 -3 -1 2 4 5 -24 -22 -20 -17 -15 -13 -10 -8 -6 -3 -1 6 -29 -27 -25 -22 -20 -18 -15 -13 -11 -8 -6 7 -34 -32 -30 -27 -25 -23 -20 -18 -16 -13 -11 8 -39 -37 -35 -32 -30 -28 -25 -23 -21 -18 -16 9 -44 -42 -40 -37 -35 -33 -30 -28 -26 -23 -21 10 -49 -47 -45 -42 -40 -38 -35 -33 -31 -28 -26 Salaried Self-Empl Student Business

Estimated profitability of accounts at SBI (on a variable-cost basis) Rupees/ Month /Account

• 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 

it‟s a game of

scale

Bills

payments

(future)

Remittan-ces

Gov’t

programs

(future)

P2P

transfers

(future)

X%

+

XX Rs/Mo X%

+

XX Rs/Mo X%

+

XX Rs/Mo X%

+

XX Rs/Mo

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Organizations that serve the poor, setup distribution networks

with distinctive characteristics

Example of Telco distribution network

Telco Regional Agency Area Manager Deployment supervisor: • Coordinate training/recruiting • Deploy product changes

Sales supervisor

• Relationship management (visit 30-50 points /day)

• Push sales targets • Liquidity monitoring

• Identify potential new agents

• Investigate issues in compliance, fraud Roaming customer support

• Technical support to end-customer through agencies and retail points

x N X N x5 x100 x40 • 22 Million customers • 2 Mn Retail points

• Visit all retail points 1/month

x3

Own B&M distrib agencies:

• Direct sales, promotion in high traffic areas • Customer service

• Liquidity management

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,

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

• 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

Total Cost Volume (# of

accounts)

Avg Income/ Account

Challenge in running a network – Sample case

Cost as a function of volume

Who is

more likely

to drive

scale

effectively?

Cost/ Account EXAMPLE

1. Reach minimum

scale for

profitability

2. Be able to scale network

to really achieve impact

in the P&L

Bank or 3rd Party?

Regardless of who

does it, business will

be driven by scale

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Case 1: EKO – India

EKO

State Bank of India

(SBI)

S&D network Mer-chant Mer-chant Mer-chant Mer-chant Mer-chant Mer-chant Mer-chant Mer-chant

Airtel

S& D network Original Airtel Distribution Network converted into agent network

New agents setup by Eko

(future)

Branding by EKO *

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

• 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)} Mer-chant Mer-chant Mer-chant Mer-chant S& D network • 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 Part of Airtel‟s unconverted S&D network Other Banks (Future)

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Case 1: EKO – India (cont.)

EKO

SBI

Mer-chant • Agent:

‒ Opens accounts (collects formats, performs KYC)

‒ Gets fixed fee per transaction

‒ Gets incentive fee on account opening • Airtel:

‒ Gets fee in return for “sharing” / supervising distribution network

‒ Gets normal fee from SMS messages (certain

transactions) • SBI pays EKO:

‒ Account:

‒ Opening account fee ‒ Yearly Account

Maintenance fee

‒ Transactional fee (% of transacted amount) ‒ Services (remittances)

‒ Fixed transactional fee

• User pays:

‒ No cost for withdrawals and deposits ‒ X Fee for remittances

• 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

* 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

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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 couldn‟t 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 MNO‟s

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Case 2: Monitise

– UK

Monitise platform

Banks

(HSBC, NatWest, Royal Bank Scotland ) Mer-chant Mer-chant Mer-chant Mer-chant S& D network Monitise distribution network (partners with existing MNO, retail chains, etc)

Branding by Monitise

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

• Agent:

‒ Opens accounts

(collects forms, performs 1st _{level KYC)} • Invididual non-bank electronic accounts

Other:

MFIs Retail chains

MNO’s

(T-Mobile,O2, Vodafone,…) • Pooled account • Marketing (pull) • Mobile wallet ( ‒ Bank branded ‒ MNO branded

(exclusive per phone users) • Cash-in /out • Payments (P2P, purchases) • Remittances Branding by Monitise, but once the wallet is opened, then it is the wallet‟s brand

Multiple M-Wallets

All M-Wallet available for user to choose from*

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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 3

rd

_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

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

party agent networks

Basic

• Banco do Brasil with some of its AM

• Bradesco • Banco do Brazil

with Banco Lemon (new setup)

Value-added

• Banco Lemon with some of its sub-agents

• VisaNet for Banco do Brasil • GTech with HSBC Bank as agent manager • Caixa Economica Federal and lottery points

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

3rd_{Party Agent Networks}

4 5

1

Bank managing agents

Outsourcing

some activities

Intermediating

the value chain

Mer-chant Mer-chant Mer-chant Mer-chant

Bank

• Banco do Brazil with chain Pao do Azucar

• Bradesco with Postal network

Chain becomes agent for bank

(exclusive) 2 Mer-chant Mer-chant Mer-chant Mer-chant Chain

Bank

3rd_{party managing} bank’s agents 3 Mer-chant Mer-chant Mer-chant Mer-chant

Distribution Networks for M-Banking. CGAP Technology Program 28/Sep/2009