Study Finds Branchless Banking Cheaper than Banks

May 25, 2010    

Branchless banking is cheaper than traditional banking, but the gap between the two may not be as wide as some may think. According to CGAP research that compared 26 branchless banking pioneers and traditional banks with products aimed at the same kind of customers, on average, branchless banking is 19% cheaper across eight use cases. The average monthly cost of using a branchless banking service is US$3.90 compared with US$4.80 when using a traditional bank. Those figures, quoted in PPP adjusted dollars, are based on eight different ways customers use a service in a given month (use cases).¹

Branchless banking is particularly cheap (50% cheaper) if clients use it for medium-term savings and bill payment. In the case of short-term safekeeping, banks as a group are cheaper (43%) than the branchless banking pioneers. In other use cases (sending, receiving, high usage, and typical M-PESA and Kenya bank customers), branchless banking is cheaper, but not dramatically so, ranging from 12% to 14% cheaper (see Figure 1).

Figure 1: Prices for banks and branchless banking across eight use cases

Figure 2: Average price across eight use cases for branchless banking providers

In theory, branchless banking services should be able to significantly undercut traditional branch-based services on price. Bank branches require considerable investment in infrastructure, equipment, human resources, and security. By contrast, branchless banking leverages existing infrastructure (agent shops) and equipment (in many cases, mobile phones). For this reason, CGAP predicted in 2008 that branchless banking could offer basic banking services to customers at a cost at least 50% less than what it would cost to serve them through traditional channels.

So, why isn’t the pricing gap wider? There are several reasons. First, the new study specifically examined banks that actively target low-income customers and selected the cheapest comparable accounts for these customers. Most banks in developing countries target a more affluent clientele, and if we expanded the study to include them, we would expect to see the gap between branchless banking and traditional banking grow much wider. However, since CGAP focuses on the unbanked poor, for this study we included only banks actively targeting this segment.

Second, it is possible that establishing a successful, scaled branchless banking service could be more expensive than expected. The upfront cost of a technology platform that can scale to 1 million clients within a few years costs about US$3 million, and some branchless banking providers are spending an additional several million dollars in marketing costs in the first few years. In other words, branchless banking providers may be choosing prices that accelerate payback of their relatively large up-front investment.

Third, some branchless banking providers want to leave room to come down on prices as more competitors enter the market. It will be interesting to see whether prices do come down with competition, and if so, how quickly.

Fourth, CGAP’s study counted only one component of overall cost: fees charged by providers. Depending on whether customers would typically make a special trip to conduct financial transactions, branchless banking with its wider network of service points could be saving customers considerable time and money in transport costs. Safaricom in Kenya says 47% of M-PESA customers save an average of three hours in transport time and US$3 in transport costs.

Finally, branchless banking gives clients other price-related advantages that are more difficult to quantify. Branchless banking providers charge pay-as-you-go, while most banks charge set monthly fees. Low-income people with erratic cash flows prefer to pay as they use a service rather than committing themselves to set monthly fees.

Customer uptake and usage is influenced not only by absolute prices but by the way a service is priced. For example, to encourage money transfers and airtime purchases, some services offer free deposits, which have the unintended consequence of making branchless banking an affordable way to save.

At low transaction values, branchless banking is 38% cheaper than banks

Banks tend to charge fixed fees whether a person transacts with US$1 or US$100, while branchless banking providers charge tiered or percent-based fees for many transactions. So, the lower the transaction value, the cheaper branchless banking will be compared with banks. At a low average deposit amount of US$23,² branchless banking providers are, on average, 38% cheaper than banks (US$3.0 versus US$4.8). This means branchless banking will be significantly cheaper than bank alternatives for low-income, previously unbanked customers who are likely to transact at this lower end.

However, branchless banking providers are typically 45% more expensive than banks at high transaction values (around US$200).

Sending money via a branchless banking service is 54% cheaper than informal methods

In the case of money transfer services, branchless banking providers compete with non-bank providers, such as couriers, money changers, post offices, and bus companies. On average, these services cost 6.7% of the value of the transfer (based on data from Cambodia, India, and Tanzania); transferring the same amount via a branchless banking service costs just 3.1% (i.e., branchless banking is 54% cheaper), according to the study. Furthermore, the informal methods take several days (compared with branchless banking’s instantaneous transfer), and the risk of losing money is much higher than branchless banking.

Low-income households spend 0.6% of their share of GDP on branchless banking

The annual cost of US$47.44 (adjusted for purchasing power parity) as an average of all eight use cases is 0.60% of an economically active, low-income household’s GDP. This varies from just 0.2% in Brazil to 1.3% in Afghanistan (see Figure 3).

Figure 3: Range of BB pricing as percent of low-income household GDP
(Low-end is cheapest use case [medium-term savings];
high-end is most expensive use case [high usage])

Households spend more than this on mobile airtime (0.65%³) and it’s a small fraction of the 30% of consumer spending in developing countries that is spent on food. Of course, the best test of whether customers consider the price worth the value received from the service is actual customer usage. The rapid uptake of M-PESA in Kenya suggests that this service, at least, is worth the price for a large segment of the population.

¹ The study looked at eight different use cases—(i) sending money transfers, (ii) receiving money transfers, (iii) short-term safekeeping, (iv) medium-term savings for an asset, (v) bill payments, (vi) high-frequency transactional account (as a proxy for financial inclusion)—and two real life transaction bundles—(vii) the average M-PESA user and (viii) average Kenyan bank customer. (Data on M-PESA users are from a 2008 survey of 3,000 households by FSD Kenya and MIT. Data on Kenya bank customers are from “Technical Report: Bank Pricing Study,” prepared for Central Bank of Kenya, September 2007.) Prices were adjusted for differences in purchasing power between countries to reflect that the value of US$1 varies widely between the poorest country in the sample (Afghanistan, US$800 GDP per capita) and the richest (Brazil, US$10,200 GDP per capita).

² CGAP analyzed the eight use cases across low ($23), medium ($69) and high ($207) average deposit amounts. These are derived from actual deposit data from five services.

³ This number is based on a monthly average of $4.3 (average from M-PESA in Kenya, Smart Money in the Philippines, WIZZIT in South Africa).