Is Mobile Banking More Hype than Reality? New Focus Note Explores the Future of Branchless Banking

November 18, 2009    

With the right market conditions, branchless banking, including mobile phone banking, could be the primary channel for poor people to get basic financial services by the year 2020. So says Scenarios for Branchless Banking in 2020, a new report from CGAP and the U.K.’s Department for International Development (DFID). The report is the product of a six month scenario-building project that engaged nearly 200 leaders from the fields of technology and finance from more than 30 countries.

In all four scenarios modelled in the report, the adoption and use of branchless banking services is forecast to be higher in 2020 than it is today. But in two of the scenarios, bursts of rapid acceleration are followed by periods of falloff or flatter growth.

“Recent surveys of customers using branchless channels in Kenya, Brazil, Philippines, South Africa and India show that today’s customers are primarily not the unserved majority,” says Mark Pickens, who co-authored the report. “We were able to identify only a few providers who are using mainly branchless channels and who meet two criteria: serving more than a million active low-end clients and making a profit from doing so.”

The authors identified four key forces, which are likely to increase the use of branchless channels by the poor:

• Demographic changes—including a greater number of younger consumers coming into the market and greater mobility at least within countries—will be favorable for the adoption of branchless banking.
• Activist governments will play a greater role as regulators of the financial sector, providers of social safety nets, and providers or encouragers of the rollout of low-cost bank accounts and financial infrastructure. This expanded role may be helpful for financial inclusion.
• While security concerns about cash crime will continue to drive the adoption of electronic transaction channels, the rise of electronic crime will affect consumer confidence and test the risk management of financial providers.
• Internet browsing via mobile phones will reduce costs of financial transactions and enable new players to offer financial services.

The new CGAP/DFID report also examines the potential impact of the recent financial crisis on branchless banking channels, concluding that governments are now more likely to be sceptical about innovative approaches and new players. However, the researchers found that governments’ fundamental goals around increasing financial access have not changed.

“From our engagements with regulators, we have been impressed by how strong the goal of financial inclusion remains in developing countries; and this objective may temper some of the reaction from the crisis,” says co-author David Porteous. “Governments are also already responding to the global economic downturn by investing more vigorously in extending social safety nets.”

Setting the recent financial crisis to one side, the researchers also identified several long-term uncertainties that could curb the development of the branchless banking market. These include the following:

• Which entities regulators will allow to provide financial services, and under which conditions. For example, can financial services providers use agents for account opening and cash handling or can non-banks issue electronic money?
• Whether private sector providers will develop robust models for financial services beyond payments, and whether consumers will adopt them. For example, the ability of banks to intermediate deposits is almost universally denied to e-money issuers, denying them the credit margin.
• Whether rising competition will spur more services, greater innovation and lower prices
• Whether and how a large-scale failure of a branchless banking service will affect the confidence of consumers, other providers and government.

Interwoven within these uncertainties, the researchers created four scenarios, producing different trajectories in the uptake and usage of branchless banking services over the next 10 years. In each of the scenarios, the adoption and usage of branchless banking services is forecast to be higher in 2020 than it is today, but in two of the scenarios, bursts of rapid acceleration were followed by periods of falloff or flatter growth.

“Success in branchless banking ultimately depends on offering the customer a service proposition that is superior to existing options,” says co-author Sarah Rotman. “To date, branchless channels meet this standard only for some clients. High initial adoption can be followed by high dormancy rates or infrequent usage, which indicate that the service is not as useful as it first appeared. Ultimately, poor people will use the new electronic services when they meet real needs.”