Banking the Poor: How Branchless Banking Measures Up

October 26, 2010    

Does branchless banking actually lead to more and better financial services for low income and poor people? A new CGAP paper examines three aspects of this question. First does branchless banking reach large numbers of low-income and unbanked people? Second, is it more affordable than traditional banking? And third, does it give customers the products they want? The CGAP researchers looked at 18 branchless banking providers with more than 50 million customers in 10 countries and found that branchless banking scales five times faster than traditional MFIs in half of the cases examined, and is 38% cheaper than traditional banks for low value transactions typically done by the poor. However, the services typically provided over mobile phones or card-based networks are still largely limited to payments, meaning MFIs have a complementary role to play. Much more work is needed, say the authors, to design innovative saving, insurance, and other financial products that take advantage of branchless channels.

Reaching the unbanked?
Data on eight branchless banking providers from Brazil to Tanzania shows that 37% of their customers previously had no banking services (see Figure 1). “Branchless banking is bringing many people into the financial system for the first time,” said Mark Pickens, co-author of the Focus Note. “In fact, in half of the cases we looked at, the branchless banking provider has more active, previously unbanked clients than the largest microfinance institution in the same market. What’s more, they are growing five times faster.” The branchless banking services studied each serve an average of 1.39 million previously unbanked people.

Figure 1: Percentage of active branchless banking clients who were previously unbanked

But branchless banking is not replacing or eclipsing traditional microfinance. Today the services branchless banking typically provides (payments) are complimentary to microcredit offered by microfinance institutions: both meet a widespread need for which clients are willing to pay.

Marginally cheaper
On average, branchless banking is 19% cheaper than comparable products offered by banks via traditional channels. Branchless banking is particularly cheap (50% cheaper) if clients use it for medium-term savings and bill payment as well as for low-value transactions (38% cheaper). These findings are based on analysis of the prices of 16 branchless banking services and 10 traditional banks across eight use cases.

Customer usage is influenced not only by absolute prices but by the way a service is priced. For example, in order to encourage trial of money transfers, some services offer free deposits, which make branchless banking an affordable way to save.

“Branchless banking is cheaper than traditional banking, but the gap is not as wide as some may think,” said Claudia McKay, co-author of the Focus Note. “Prices in the industry have not yet settled and we expect the price advantage of branchless banking to increase as the industry develops and competition increases.”

Giving customers more
In mature markets, such as Brazil and Kenya, branchless banking providers and third parties are responding to client demand and linking new products, such as loans and insurance to the basic electronic wallet or prepaid card. In Kenya, where M-PESA has operated for nearly five years, at least four providers are offering entirely new products that go beyond payments

• Credit Direct Kenya Limited is piloting a loan product using ATM transaction data from Kenswitch. M-PESA and Zap clients can apply and receive a cash advance of up to $30 over their handset in approximately 10 seconds.
• Equity Bank and Safaricom have launched M-Kesho, an interest-bearing savings account at Equity Bank that can be opened at M-PESA agents.
• Kilimo Salama, a partnership among the Syngenta Foundation for Sustainable Agriculture, UAP Insurance, and Safaricom, offers 5,000 farmers insurance policies to shield them from significant financial losses when drought or excess rain threatens crop yields. A network of solar-powered, mini- stations collects weather data, and affected farmers receive payment via M-PESA.
• The Mbale pension product, which attracted 18,000 customers in its first three months, enables people to make deposits as frequently as they like in amounts as small as US$0.25 via M-PESA and Zap.

The emergence of these innovative services suggests that branchless banking has the potential to offer much more than simple payment services. But the Focus Note concludes that, to fulfill its potential, the industry needs a greater understanding of low-income clients’ needs and wants.

“Substantial progress has been made in transforming financial services for low-income, unbanked people,” said Claudia McKay. “But social and commercial investors must continue to challenge the industry to create innovative products and experiment with different commercial models to extend financial services to many more people in hard-to-reach locations.”