Finance is essential to help people escape a hand-to-mouth existence. Your finances are disconnected from the rest of the world is the reality today if you are poor or low income. In all likelihood, you rely on informal solutions. Stashing small amounts of cash in a jar; relying on friends and family members to help out with occasional loans or favors; belonging to an informal community savings group; or using the services of trusted money guards or moneylenders.
Financial markets are quite simply failing to meet the needs of a vast swath of society in a way that is affordable, convenient, and safe. It doesn’t have to be this way. It is not that markets are inherently incapable of meeting this need; our current financial system simply has not organized itself to meet it.
However, it doesn’t have to be this way. It is not that markets are inherently incapable of meeting this need; our current financial system simply has not organized itself to meet it.
What Is Branchless Banking
Because finance is about exchanging the cash people need on a daily basis for promises of value, and vice versa, proximity is objective number one. Moreover, trust is the second important objective because those promises need to be maintained if people are going to find finance useful. Enter technology. If a customer, retail outlet and bank are linked by a common secure technology platform, they can transact with sufficient certainty that they are dealing with whom they think they are. Their transactions will be recorded, and that promises will be kept.
Branchless banking projects are measured according to the relationships between the users and the various players in the service-delivery chain. The minimum criteria for what constitutes branchless banking include nonbank retail outlets being used as customer touch-points at least for cashing in or out of the accounts.
The second is technology, such as payment cards or mobile phones, is used to identify customers and authorize transactions electronically. In some cases, to allow customers to initiate transactions on their own. Thirdly, transactions can be processed against an electronic store of value (although cash-based services for non-customers may also be offered in addition).
Lastly, although they may not be licensed and regulated, accounts are issued by institutions recognized by the banking regulator. This represents a fairly expansive definition of branchless banking. This is because it may involve three types of “outsourcing” of activities typically conducted by banks to non-bank players. The customer interface, where customers at the very least cash in and cash out from their electronic accounts; the operation of the accounts; and the issuance of the accounts and the investment of the float.
Branchless Banking Key Elements
A branchless banking platform is made up of three key elements. Firstly, the collection of retail outlets where transactions are originated- the retail network. The payment network, which aggregates the transactions from the collection of retail outlets and routes them to the appropriate issuer. Furthermore, the account platform. This manages the service logic by authorizing individual transactions and maintaining the value of accounts. Each of these elements has very different economics, and each presents key tradeoffs that providers need to face.
An understanding of the economic drivers helps establish the roles of the value chain and the types of partnerships that are most likely to achieve the necessary scale and ensures that the service can be delivered at an end-to-end transaction cost that poor customers can afford.
Developing World Financial Services
There is growing interest in many parts of the developing world in delivering financial services through retail agents, including post offices, airtime resellers and local shops. Being able to transact at local retail agents has many potential advantages. For providers of banking services, it allows the rollout of a much more granular distribution network without incurring the large fixed setup and operational costs of the branch and ATM networks.
Retail agents are inexpensive to set up. They are typically remunerated on a per-transaction basis, so their cost to the provider is largely variable. Financial service providers can use agents to decongest branches, expand coverage to areas where they do not have branches, or develop lower-cost services for lower-value customer segments. For the customer, agents further reduce the cost of accessing financial services by cutting down on travel time and waiting time at banking outlets.
Modern agent networks rely on technology to eliminate credit risk. They also ensure the finality of transactions at the point of transaction between the customer and agent. Some schemes use point-of-sale devices at the store in combination with customers’ bank cards, while others use people’s existing mobile phones as both a virtual bank card and a POS device. The bank or account issuer is able to authorize and execute transactions in real time, ensured by the technology platform.
Moving Forward With Branchless Banking
Branchless banking (often referred to as technology-enabled agent banking) enables clients to store, send and receive electronic money through local agents, rather than traveling to the nearest bank branch. By moving financial services beyond banks´ traditional “bricks-and-mortar” infrastructure and shifting them to a more scalable, variable-cost channel, they will improve.
Thus financial services can be provided profitably and sustainably to segments of the population that are poorer or more remote. Those that are currently neglected by regulated financial institutions included. However what we are talking about is not the mere adoption of new channels. Nor is it about the adoption of technologies by existing players in order to expand profitably into unserved customer markets.
The possibility arises of creating very different value chain structures through a process of specialization and scale. Some may include retail outlets expanding their product inventory to include cash-conversion services at a very local level. Grassroots microfinance institutions positioning and selling a range of microcredit. Microsaving and larger banks offering custodial and investment services. Therefore, a more rational and specialized structure of financial services will have to be built for the poor people.
Sourced and extracted from The Economics of Branchless banking- By Ignacio Mas
