Manuel Bueno

Interview with CGAP’s Mark Pickens: Branchless Banking Sector “Exploding”

Mark PickensMark 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 have quoted CGAP on NextBillion in several posts (see them here, here and here). They 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 the mobile, banking and technology industries. His work has been quoted in The Economist, The Banker and Prior to joining CGAP, Mark consulted with the United Nations, US government, commercial banks and specialized microfinance lenders.

Last Friday, I had the pleasure of interviewing Mark about branchless banking’s recent developments and the most important issues as this market evolves in complexity and size. Mark explains why mobile phone banking is currently one of the hottest sub-topics in the financial services in emerging economies sector.Manuel Bueno: Mark, CGAP has done a lot of research and published extensively about legal frameworks in branchless banking; how receptive are the regulators to your advice?

Mark Pickens:
Well, I think you can safely say that in the last 5 to 10 months there has been a huge uptake in not just awareness, with newspapers such as the Financial Times, the Wall Street Journal and The Economist covering these issues, but also from private sector companies who say they are exploring or even launching pilot programs. This sector has just exploded, so the public sector, especially regulators, have become very interested in this issue and especially what CGAP has to say about it.

You see, what branchless banking does is, firstly, be disruptive to business models. Mobile phone companies and other operators are now starting to offer financial services in many countries. Secondly, branchless banking disrupts regulatory models. Hence, regulators are now exploring how to fit these two disruptions together. This is a difficult choice, because on the one hand, they have to preserve financial stability and a disruptive business models such as mobile phone banking really flies on the face of that and especially if there are no clear best practices about how to regulate and oversee such a market.

On the other hand, central bankers have to try to improve access to finance and they are getting a lot of pressure from politicians and the media to push this issue. So, how to balance these two issues is the tough question, particularly because there aren?t any clear regulatory best practices established and traditional ways of regulating may not fit the bill here.

CGAP is trying to provide a means for regulators to have some peer conversation and learn from each other. For example, the Central Bank in the Philippines has worked out an ad-hoc regulation in this matter with two mobile phone companies and we are trying to get them to talk with the Reserve Bank of India which is now encountering this phenomenon with Airtel and Vodafone. We just had a very large event in London for central bank regulators two weeks ago and the response we got from them was amazing. They loved it. They are eager to learn from each other, because that really is the best way of figuring out what would make most sense in their own countries.

Why has CGAP’s work so far been concentrated on the legal side of branchless banking, rather than on business models, for example?

That’s true, most of the work we have done for now is about that, but a lot of the work we are doing now is in fact about business models. We have three papers coming out in the next couple of months which explore issues such as customer adoption, how to build shared agent networks and the early experience with branchless banking and whether it is reaching poor people and why or why not.

Also, there seems to be a lack of information regarding the profitability of these services, what is your impression here? How profitable are these firms right now?

Of course, that varies. Many of the early pioneers have been startups like Wizzit in South Africa and should reach break-even pretty soon. Then you’ve got the large mobile companies, like G-Cash or Vodafone, in which mobile phone banking is not a huge portion of their bottom line yet, because they are very large companies and because the revenue coming from these services is still comparatively small compared with voice revenue. In this case, they are positioning themselves to take advantage of this trend for the next few years as a value added service which can possibly drive up the average revenue per user in the future, rather than a way of making a lot of money right now.

For most banks branchless banking represents the continuation of their services. Branchless banking is just a way of adding another channel to servicing customers which avoids higher infrastructure costs. Some of the more innovative banks are looking into these services as a way of extending their outreach and penetrating their current markets. For these players it is hard to tell whether this is profitable for them. A possible exception might be Brazil, where this has been going on for almost ten years and the market has gained scale. Banks there will tell you that it has been definitely an economic gain in terms of migrating to this channel low income customers, people receiving pensions, receiving social grants and so on.

My impression was that banks tend to not like to enter these markets, because it might be less profitable in terms of margins per customer than, for example, telecommunications firms.

Let’s talk about banks in the stereotypical African market. Historically, these banks there have had very high returns on equity than other banks in other parts of the world. You could say that is partly due to their non-engagement with the middle and mass market. They were just going after corporations and high net worth individuals, which are also the higher margin customers. However, in the last 10 years, the market has seen increasing competition. All the efforts to increase financial access in these markets have been led by non-banking actors, such as mobile phone companies or entrepreneurs.

That is not particularly surprising. Mobile phone operators have several characteristics and abilities that banks do not have such as the penetration in their markets. Mobile phone operators have a much wider set of customers and already serve low-income people. That predisposes them to seeing financial services to mass market customers as an additional service to offer. They are also very experienced in running network agents and dealers and handling a high volume of transactions.

To be continued in a future post, where Mark and I will explore the possible evolution of the mobile phone banking industry as it grows out of payments and remittances and into other financial services. Stay tuned!