NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Mark Pickens is a Microfinance Analyst with the Consultative Group to Assist the Poor (CGAP), a global resource center for microfinance housed at the World Bank. We published the first part of the interview here on April 4th. CGAP are arguably the most authoritative source of information about branchless banking services and are currently in the forefront of research efforts to understand and develop this market.

Mark has co-authored a global review of regulation for mobile- and other forms of branchless banking, forming an evidence base from more than 500 interviews with central bankers and executives in mobile, banking and technology industries. His work has been quoted in The Economist, The Banker and CNN.com. Prior to joining CGAP, Mark consulted with the UN, US government, commercial banks and specialized microfinance lenders.In the first part of the interview, Mark elaborated on the most important issues as the branchless banking market evolves in complexity and size, as well as explaining why mobile phone banking is currently one of the hottest issues in the financial services sector.

In this second and final part of the interview, Mark and I explore the possible evolution of the mobile phone banking industry as it grows out of payments and remittances and into other financial services.

Manuel Bueno: One of the other trends in the branchless banking market is that initially, it was organized around transactions, and now it is slowly growing into other services, such as savings accounts or credit services. How do you think the initial business model will have to change to adjust to the greater complexities and risks of offering such services?

Mark Pickens: You are right. All the initial models were based around payments and not much savings or credit. For mobile phone operators, considering their business models, offering transactions services to their customers was not a huge leap. Also, many of the banks that are doing this, like in Brazil, really wanted to push customers to just do payments out of bank branches and into these cheaper alternative channels.

In terms of saving, there are two factors that will need to be accounted for as the variety of the services offered increases. Firstly, if a customer deposits money through an agent, the agent needs to be trusted. Will the agent take advantage of me? Will I be able to get my money back? This relates with the selection and training of the agents by the financial service provider and with the limits and operations controls imposed on the agent by the bank to limit the risks. Some countries do not have consumer protection laws, but it is still very much in the interest of the providers to protect their customers.

Secondly, there is the question of agent liquidity. Will the agent have enough cash on hand to be able to offer withdrawals? One interesting solution, not the only one, would be to develop a nationalized network of shared agents where it is not just one provider that has to incur the costs of paying for all the expenses related with agent management that I have just mentioned, but by a number of providers. The liquidity position would be much easier to manage and the costs would be lower. It would also bring interoperability. One of the problems right now is that, if I go to an agent, since networks are proprietary, I have to go to an agent from my own network.
Credit requires knowing enough about the customer in a decision that will likely not be done face-to-face with the customer. If the bank can?t ask questions about the prospective creditor’s cash flow, which is how most microfinance institutions make their decisions, could they collect enough data about the customers such as their savings history, their wages, their remittances or bill payments from other sources? There are a number of people looking into this problem and we will soon see a lot of stuff happening here.

MB: So you do see some firms making the move from transactions to savings successfully?

MP: No, not really. This is the next step. None of these problems are rocket science. It is the next step and everyone knows that. I think we are going to see a trial and error period before some good practices emerge out of this.

MB: Do you see this as becoming a disruptive innovation against more traditional banking models as branchless banking goes from mass market and “Base of the Pyramid” markets to higher net worth individuals?

MP: Hold on, let’s back up on that assumption. I think our best estimate is that fewer than 10% of the people using these services are poor and did not have a bank account before. One over-hyped element here is how unbanked people are now getting financial services through this channel. It is understandable that unbanked people are not being offered these services yet. The mobile company will avoid a double risk involved in a new technology and a new market. What we have seen so far for the most part is already banked people are the ones being targeted first. There is still a lot of work to do to offer these services to poor, unbanked customers.

With that said, I think this model is already very disruptive and I believe it is not only an additional path of serving a customer, but also a technological leap to increase market penetration. For example, remittance providers are now targeting the migrant Kenyan community in the UK.

MB: It is also interesting to notice that transactions are the services that have lower margins per customer and as services are upgraded, margins per customer tend to increase going into the core of traditional banking services. Do you think that from that point of view, banks rather than mobile phone providers are better suited in terms of expertise to develop branchless banking?

MP: Let’s talk about what banks are good at. Banks already have a relationship with central banks. They have risk-management processes and are trusted by the regulator. They sometimes do not live up to that, but they are recognized as responsible to act in the payment space. They also have expertise in judging credit risks, including consumer credit. However, in serving low income customer, if anything, microfinance banks know a lot more about these customers. They have this hands-on philosophy and that is how they measure and manage risk. They know the products for that market and they have a ready customer base for them. In the end, mobile operators also have a lot of the skills that I outlined earlier, in terms of serving the mass market. They know how to process a high volume of small transactions, which big banks do not know how to do and microfinance not always know how to do. Each one has its different set of advantages. It is not a surprise that mobile operators have jumped on first, but there might be partnerships that are going to be attractive to different players. This is playing out in different ways, I don?t think there’s just one way of doing this or one best set of relationships.

MB: About the dangers of these markets, which danger would be the one that keeps you away at night?

MP: Well, from the perspective of your blog readers, I think the most worrying risk is the one facing by customers and how to regulate against it while making it easier for customer to open bank accounts. Central banks should adapt “Know Your Customer” regulations to financial service providers having in mind the limitations of low-income markets. If they do not do it, I think we will see the opportunities for innovation diminished and see mobile banking go the way of traditional banking without getting to poor customers.Another risk is that, even if it reaches this people, will it only be for payments? We have a long way to go on that area.

Finally, who will be left behind? Are there going to be a hardcore but still very substantial group of people left behind due to maybe literacy, lack of customer education or lack of technology education?

MB: How many years would you estimate that branchless banking would require growing from offering only transactions to offering fully fledged financial services, not including insurance?

MP: This will be primarily driven by competition. It depends on whether the actors are entrepreneurs, mobile phone companies, or banks and the reasons for entering this market that we have mentioned before. There clearly is a first-mover advantage in this market. First movers will tend to build a defensive wall of scale and the possibility of new entrants coming in will depend on the size of the market. Second movers might be the ones who target low income people. All these developments will happen in 3 to 5 years.