CGAP Speech at Bank of Ghana: DFS - Opportunity or Threat for Banks?

05 September 2017

. . . OR . . .
CGAP Lecture at the 60th Anniversary Celebration of Bank of Ghana
Timothy Lyman, Global Policy Architecture Lead, CGAP
Accra, Ghana, August 18, 2017

Governors, distinguished guests, ladies and gentlemen. It is an honor to address you on behalf of the Consultative Group to Assist the Poor (the World Bank Group-hosted think tank on financial inclusion), better known to many of you by our acronym, CGAP. 

The title for my lecture in your program is “The Era of Electronic Payments: Opportunity or Threat for Banks.”

Like the Ghanaian President, I am a lawyer by training, and I was taught to always consider answering such a question with “it depends.”

In this case, it truly does!

But to focus on the positive, let me propose different emphasis for our title —“Digital Financial Services: Opportunities for Strategic Banks and Non-banks Alike.”

We are in the midst of one of the greatest periods of change in banking and financial services generally that the world has seen, driven largely by digital technology. 

Electronic payments—and digital delivery more broadly—have already fundamentally changed the experience of financial consumers the world over. And nowhere more greatly than in Africa, where digital delivery has already spelled the financial inclusion of millions who previously transacted solely, or primarily, informally. 

What will this mean for banks? Early evidence shows many will prosper, though these will be the ones ready to innovate, and their role may become very different from the traditional banking paradigm.

Let me explain, based on analysis CGAP has been performing over the last decade in one of the markets already most transformed by digital financial services (or DFS, as we’ve come to call it): Kenya.

Ever since M-PESA’s success became clear, banks have fretted about what it means for them—whether “mobile money,” i.e., a digital transactional platform that combines the functionality of a payment instrument with the capacity to store electronic value in tiny increments—was a mere blip or might perhaps be the undoing of “banks as we know them.”

It’s safe to say that mobile money is no blip.

Today, Sub-Saharan Africa as a whole and at least individual 19 countries worldwide boast more active mobile money accounts than bank accounts.

We can be equally confident that mobile money isn’t going to be the undoing of banks, though conversely “business as usual” is also not likely to work well moving forward.

Much was made of the day, late in 2008, when mobile money accounts in Kenya exceeded the number of bank accounts. Fewer know that in less than six years, bank accounts had already caught back up and in fact surpassed mobile money account numbers again (see figure 1).

(By 2015 there were +/- 42 million bank accounts in Kenya, as against +/- 32 million mobile money accounts.)

How did banks keep up (on this one measure) and which ones did?  The ones fueling the growth saw the writing on the wall and adapted, learning from—and learning to leverage—the success of M-PESA.

It was the invention of a new type of digital account, which leveraged the mass market outreach channel opened up by mobile money, that enabled banks to regain the lead on the total number of retail accounts: today, almost half of all bank accounts in Kenya are digitally accessed.

(The salmon color on figure 2 represents accounts that customers access via mobile.)

Traditional bank accounts still account for the other half; their number has also grown five-fold since Safaricom introduced M-PESA—though the growth is tapering off.

To hold their own, banks will increasingly need to understand how the financial services space is changing and make plans to change along with it.

Sticking with the Kenyan case, let’s consider examples of potential strategies—some less successful, some more so. 

We can group them roughly into:

  • “Competition strategies”
  • “Collaboration strategies”
  •  “Coopetition strategies” (as I will explain)

One obvious strategy for banks is to compete head on with the mobile money providers, courting the same customer base with a similar offering (while emphasizing differences that distinguish the bank in question).

The best Kenyan example of this is Equity Bank, M-PESA’s (and its parent company Safaricom’s) famous archrival in financial service offerings targeting the mass market.

Equity Bank, long a market leader in retail banking, has also been a leading adopter of technology, launching, for example, their first mobile service in 2006 (even before M-PESA).

The Equity brand has also emphasized physical proximity, utilizing ATMs and mobile vans aggressively to reach underserved areas way ahead of other actors in the market, and they deployed an extensive network of banking agents, starting as soon as regulation permitted them to do so.

The result was that by early in this decade, half of all bank accounts in Kenya were with Equity Bank—8.5 million in total.

On that note, it is worth emphasizing the importance of regulators’ keeping an eye on levelness of the playing field across providers—and taking stock of new issues in competition likely to emerge with DFS, such as Unstructured Supplementary Service Data (USSD) channel access and permission to work through retail agents.

On this critically important latter issue, by the time banks were allowed to reach customers via agent networks, M-PESA had been actively deploying agents for almost five years.

Moreover, the rules for banking agents did not apply to M-PESA, leaving the latter freer to continue exploiting the dominance it had already established.   

(By the way, this is a mistake that Ghana has thus far avoided—here the current agent rules apply equally to banks and non-banks.)

With one eye on such challenges as competing head-on with its mass market rival, Equity Bank was also willing to try a collaboration strategy with Safaricom.

In 2010 the two launched a joint product offering known as M-Kesho—or, perhaps better put, a suite of linked products: M-PESA mobile money offered customers access to Equity Bank loans and insured, interest-bearing savings, as well as insurance marketed on behalf of Equity’s insurance subsidiary.

In the end, the competitive tension between Equity and Safaricom defeated M-Kesho, which was never really promoted by either side—in part due to each party’s fears of losing their customers base to the other.

There is an important lesson here for banks assessing the ramifications of DFS: both Equity and Safaricom viewed their relationship fundamentally as a zero-sum game.

The problem, as it turned out, was with the partners, not the basic concept, as Safaricom would prove dramatically with the launch two years later of the now famous M-Shwari suite of mass market offerings, in collaboration with a very different partner bank, Commercial Bank of Africa (or CBA.)

Their joint offering would go on to garner 19.5 million registered users, largely because both partners faced a win-win proposition (which we’ll come back to shortly).

But for now, let’s stick with competitive strategies for banks and the Equity Bank saga. 

Tiring of friction with Safaricom around agents, pricing, USSD access, and other competitive challenges, Equity Bank made another bold move. It reinvented itself again, to compete head on with Safaricom: It got licensed to launch the first bank-owned mobile virtual network operator (or “MVNO”) in Africa (and one of the first in the world).   

(An MVNO is basically a mobile communications service provider that uses another owner's wireless network infrastructure to provide services to its own customers using its own software.) 

This gave Equity complete control of the channel, with advantages in pricing, security, and access to data on customers (an increasingly critical competitive advantage in the DFS space, as well as a new front of interest to regulators and supervisors). 

Let’s turn to collaboration strategies for banks—that is, win-win partnerships with mobile money providers, where each plays to its comparative advantage.

Through varying kinds of collaboration, banks can:

  • Gain access to the float balances that mobile money providers are obliged to hold with banks, which can be used for on-lending just like other deposits
  • Gain access to millions of new customers brought into the formal financial sector (of key interest to CGAP)
  • Gain access to large agent networks to serve customers beyond physical branches
  • Create innovative offerings that build off the basic digital transactional platform of mobile money, at far lower cost to reach a much wider market

These roles are not necessarily exclusive (if regulation, market structure, and commercial interest permit a bank partner to play more than one role.) 

A now world-renowned example is the Safaricom-CBA collaboration, M-Shwari. 

Before I delve into the product offering, let me come back to that vexing factor that most doomed the earlier Equity/Safaricom collaboration: The nature of the partners. 

Quite unlike Equity Bank (already an established mass market player), prior to M-Shwari, CBA was a second-tier corporate lender with virtually no retail customer base—a bank serving the urban elite.

It had nothing to lose and everything to gain by collaborating with M-PESA. 

Like the doomed M-Kesho, M-Shwari is a suite of offerings that build on the dual functionality of a digital transactional platform like mobile money (safe, tiny, yet economically viable value storage, coupled with the capacity to make payments.)

Safaricom provides the digital transactional platform (including the agent network) and CBA provides the rest:

  • A bank account with no minimum balance, bearing interest, protected by full prudential supervision, deposit insurance, and having access to the central bank’s lender-of-last-resort facility
  • Short-term, collateral-free, digital consumer credit — a high interest, 30-day “push” loan offered to M-PESA customers based on an M-PESA-owned algorithm initially driven by the customer’s voice, data, and mobile money usage patterns
  • Instant, remote account opening and free transactions between M-Shwari and M-PESA accounts

Similar to M-PESA, M-Shwari’s results have been dramatic, for CBA and for the Kenyan banking sector overall: M-Shwari’s current 19.5 million registered users represent over one third of all bank accounts, which is more accounts than the next two largest banks combined.

M-Shwari has propelled CBA’s profits up by 53%, according to the last earnings statement, and made it among the most significant holders of retail deposits in Kenya.

CBA is now very actively replicating this model in other markets across the region.

The final strategy for banks to adjust to the new DFS landscape is neither about head-to-head competition nor about finding the perfectly collaborative partner. The name we give it reflects its hybrid nature: “Coopetition.”

Here’s a recent example: Kenya’s banks have come together to roll out a real-time payments system enabling small-value transfers between institutions under a new brand: PesaLink.

PesaLink lets bank customers send payments using only phone numbers rather than bank account numbers, just like mobile money.

Although the switch started with P2P transfers, later phases of the project may expand to other use cases, including bill pay and merchant payments. 

Initially spearheaded by the Kenya Bankers Association, the value proposition to customers is similar to mobile money—real time transactions at low cost.

It remains to be seen whether the banks’ “coopetitive” desire for a viable alternative to M-PESA will triumph over their long competitive history in traditional retail banking; we can already see that some banks have promoted PesaLink more aggressively than others.

Also, the door has not been closed to MNO participation, which would change the “coopetition” dynamic potentially greatly.

So how does all this relate to Ghana?

The developments in Ghana so far are not dissimilar to developments in Kenya after the initial growth of M-PESA.

The share of Ghanaians with transaction accounts that are not offered by banks grew by three times over a five-year period between 2010 and 2015, per CGAP analysis (see figure 4).

Half this growth was directly attributable to mobile money.

As a direct result, the share of Ghanaians who were financially excluded fell by half (to 25% of the adult population).

Since then, a conservative estimate puts the current share of Ghanaians with active mobile money accounts at around 40% of the economically active population. This is more than the share of adults with bank accounts, meaning we have already passed the first inflexion point in the Kenyan story that I just shared.   

There are well over 100,000 mobile money agents nationwide (even allowing for some double counting).

The total balance in mobile money float in supervised banks has grown from about $5 million in 2012 to almost $400 million in March 2017—a growth of 75 times.

There are about 16 banks currently serving as partner banks for mobile money providers, using this basic digital transactional platform to provide a wide variety of tailored offerings. 

The innovation we are seeing is rapid, including the development of savings and credit offerings similar to M-Shwari, which drove the second inflexion point in Kenya.

From the multitude, I will just mention quickly three Ghanaian examples of partnerships creating value for providers (banks and non-banks like), for customers (particularly the formerly financially excluded and underserved), and for the real economy. 

They are also raising new issues for regulators and supervisors, and they are triggering a growing need for collaboration among banking supervisors and an increasingly diverse range of other public authorities. 

The first example takes us beyond product offerings that mirror conventional banking: this is BIMA Insurance Ghana.

The partnership involves a bank, an MNO e-money issuer, and an independent insurance company, and provides mobile-delivered disability and health insurance, as well as related services.

Mobile money is used for the payment of premiums and the claim payout: a lump sum of up to 4000 cedis (a little over USD 900) if the covered individual can’t work due to illness.

A second example takes us even further from traditional retail banking, offering customers tiny-denomination government securities purchasable with mobile money.

“TBill 4 all” is a partnership between a bank (Ecobank), a MNO e-money issuer (MTN), and indirectly the Government of Ghana.  Investment can be as low as 5 cedis (less than USD 1.15); there are already about 54,000 bond holders.

My last Ghanaian example of new roles for banks in financial service delivery—and partnering with non-banks—takes us even a step further to non-financial services needed for development and the well-being of the population as a whole. 

It is called PEG Solar, and it’s a collaboration among a bank, an MNO e-money issuer, and a so-called “pay as you go” off-grid energy provider (whose solar charging equipment is financed and paid for via mobile money.)

The off-grid energy is only possible because of the availability of mobile money in remote areas (and the resulting lower cost of collecting small amounts of cash).

These four different collaborations, each catering to different financial service needs, are just the tip of the proverbial iceberg, and in the Ghanaian market alone we are likely to see an increasing diversity of models implemented by different combinations of actors.

Such diversity is ultimately beneficial for all: customers, banks, MNOs, technology providers, and the economy as a whole.

To be sure, there will be individual firms, banks among them, that are losers—those without a strategic vision of their own comparative advantage in the emerging digital landscape. The smart banks are already focused on the new customers that ubiquitous digital transactional platforms now allow them to reach.

What do we want them to do with these relationships? That’s the question banks should be asking themselves.

And they shouldn’t allow themselves to get stuck in zero-sum game thinking.

They should think instead about how they can leverage their own comparative advantage, whether this is a tweaking of familiar roles or taking on something wholly new.

Wrapping up, it is worth emphasizing the critical role that regulators have to play in enabling healthy, dynamic and competitive development of digital financial services among banks and non-banks alike.

The new products and the new partnerships I have described are changing the nature and sometimes also the level of risks of concern to financial sector regulators.  Especially the introduction of non-bank actors and the new ways banks interact with them are introducing new risks and shifting known ones into new hands. 

Regulators must do their best to understand the changing picture and to level the playing field so as to allow different types of providers each to play to their strengths and leverage their comparative advantage—while also keeping an informed eye on the shifting risks.

To return to the question with which I started—should banks see the emerging, digitally transformed, financial system as an opportunity or a threat? —I can reiterate: “It depends.”

For those banks that think strategically, are willing to share space with novel new partners, and have a clear vision of what they can do best, the opportunities will be plentiful—and we all stand to benefit. 

This is a positive note on which to end, congratulating all on the Bank of Ghana’s Diamond Jubilee. Thank you.  

Click here to download the speech as a PDF.