Priorities for Branchless Banking (Part 1 of 3)

Ignacio Mas is Deputy Director in the Financial Services for the Poor program at the Bill & Melinda Gates Foundation. Ignacio has been a Senior Adviser in the Technology Program at CGAP, Director of Global Business Strategy at Vodafone Group, Senior Manager Intel Capital, and visiting professor of International Business at the Graduate School of Business at the University of Chicago. He is the author of many articles on branchless banking, which are available here.

It is easy to foresee that in the future normal neighborhood stores will be used by poor people everywhere to conduct basic financial transactions, that technology based on real-time communications will be used to make those transactions reliable and secure, and further that providers will increasingly rely on people’s own mobile phones rather than on deploying cards and dedicated point of sale terminals.

But it takes a considerably bolder person to predict how exactly it will happen and by when. Rather than speculate on that, perhaps it is more useful at this point in time to lay out what are the milestones –let’s call it priorities— that those of us who support the development of branchless banking would like to see happen. I’m talking here about outcomes –what kind of offers we’d like to see in the marketplace—rather than constituent elements of the puzzle (such as regulation, agent network management or technology bits).

Here’s my take on what I’d like to see happen in developing countries.

Priority #1: Demonstrating scale and replicability

The first priority is to see the emergence of a minimum number (say, 3-4) successful branchless banking implementations at scale that can serve as powerful demonstrators internationally. We need to get several implementations across the line in order to show that the model is replicable and robust to different country circumstances, i.e. that it is still viable with a different mix of customer needs, quality and reach of alternative offerings, market structures, regulatory attitudes and requirements, etc.

These deployments need to have surpassed the critical mass threshold (or tipping point) beyond which they benefit from positive network externalities, strong viral marketing effects and a mutually reinforcing cycle of demand by both customers and merchants. Judging when a deployment reaches self-sustaining critical mass is difficult, but I would suggest that a scheme has demonstrated scalability and sustainability when it meets two criteria: (i) it has at least 10 times the number of cash in/out outlets (i.e. branches) of any bank, and (ii) it is able to generate at least 50 transactions per retail outlet per day. The first metric indicates that the scheme offers a compelling value proposition to customers based on convenience, whereas the second metric suggests that the retail cash in/out channel is healthy at reasonably low commission levels (50 transactions at around 10¢ commission per transaction would contribute $5 of daily revenue to the store).

Today, among mobile money schemes only M-PESA in Kenya meets these two requirements – in fact it has achieved twice these levels. A number of bank-led agent deployments in Latin America –most notably by Caixa Economica Federal, Bradesco and Banco do Brasil in Brazil, as well as Banco de Crédito del Perú and Bancolombia in Colombia—have met the channel health (i.e. transaction-per-store) criterion, but are still short of achieving a ten-fold increase in the number of outlets through their agent networks. A prime objective of such agent network deployments has been to decongest branches, i.e. to support existing customers rather than necessarily to reach out to new ones on a massive scale, and hence the scale requirement has been less important for them than for a de novo scheme which needs to create an entirely new customer proposition and brand.

Tomorrow I’ll discuss my 2nd and 3rd priorities for branchless banking.

- Ignacio Mas