Business Models
In the past, we have classified branchless banking business models as either bank-led or mobile network operator (MNO)-led. But in fact, there are a number of more complex business models that are emerging as the industry develops. The private sector is looking to understand these models better, while regulators and policy makers are increasingly interested in understanding how these models work.
More specifically for the private sector, a business model typology helps identify and evaluate new business opportunities in their markets and helps to determine what the “play” is that makes the most sense for them.
More specifically for regulators and policy makers, a business model typology helps them to understand market forces that may be shaping their agenda and to understand what drives the actors in their markets. In addition, it helps them to understand what the likely evolution of the market is, and what issues need to be addressed in order to protect the public interest.
Emerging business models
CGAP has identified four main business models to better understand the choices industry faces in pursuit of viable models in branchless banking: money service provider, mobile bank, agent-based acquirer, and m-wallet aggregator. See the figure below where we identify for each model its value proposition to the customer, the legal structure, the business logic and other key features. There are likely to be a number of other business models, especially as the industry develops. There may also be plenty of variations – the models shown below are the major ones.
Emerging Business Models in Branchless Banking
*billers are broadly defined to include anyone who needs to receive a payment
These models reflect different strategic priorities of the businesses involved. More importantly, even in markets where mobile network operators in particular may be looking to copy the M-PESA blueprint, regulation, market structure, and other factors may make it more attractive to pursue some of these other models. There is a lot that can be written about each of these models, but we can focus on two main points.
First, all of these businesses need a network of agent locations for customers to cash-in or cash-out. The cash-in/out network, as a result, sets the floor on the cost structure for all the models. At scale, in all models agent commissions become the principal component.
Agent-based acquirers (or agent network managers, as they are known in some markets) can offer a valuable proposition to any of the other three businesses to reach customers who live in predominantly cash economies. Agent acquirers may be attractive to banks developing an agent channel or a mobile network operator (MNO) pursuing a money service provider model.
Second, the mobile bank business model is advantageous because it makes it easier to allocate profits between the MNO and the bank. Banks and mobile operators could enter into a joint-venture to pursue such a model, or, where regulation permits it, enter into even closer partnerships. If the bank and the mobile operator are under a single ownership structure (for example, EasyPaisa and BanKO) then there are certain unique cost advantages.
Market structure
Regulatory permission is needed for a mobile operator to launch an M-PESA like service or a bank to set-up an agent channel in place of branches. But even in markets where regulation may be permissive, such business models may not take off. Market structure impacts both incentives for businesses to strike partnerships and presents operational challenges unique to branchless banking. Regulation and market structure together shape which business models are likely to flourish.
In the telecom industry, two aspects of the market structure are likely to influence MNO’s ability to successfully launch a financial services business. These two factors are the degree of fragmentation and the degree of penetration in the market.
Fragmentation defined as the number of players and their relative market share is important to determine to what extent MNOs are facing competition for market share and revenues and, perhaps equally important, the degree of control they have over their airtime distribution channel.
The degree of penetration, on the other hand, shows to what extent operators have room to grow in their core business. In a highly fragmented market where the degree of penetration is low, operators may continue to develop schemes in their core business to acquire market share. They need not prioritize mobile financial services.
The intensity of competitive threat and the degree of fragmentation together align incentives for MNOs to pursue financial services. The Indian telecom market is a highly fragmented market and competition is extremely heated. Mobile operators may be less inclined to drive mobile financial services. They are pushed to introduce scheme after scheme so their air-time resellers are pre-occupied with promoting those new schemes instead of selling the competitor’s business. In such a scenario, operators are not easily convinced that mobile financial services present a “clear bet”.
On the banking side, saturation at the middle and higher segments, successful large scale incursions by at least one financial actor into the low-income segments, and a market that has matured and developed 'skills' to target niche segments, seem to be conditions that predispose banks to pursue branchless banking. The combination of these conditions (on the MNO side and banking side) makes specific business models more viable and likely to emerge.
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