Banks Are Not There
An estimated 2.5 billion adults lack access to basic formal financial services. This situation arises because banks do not find it economically attractive to deploy banking infrastructure and staff bank employees in poor and rural areas. Branch penetration, for example, averages only two branches per 100,000 people in the poorest country quintile (compared with 33 in the richest). ATMs are even scarcer, averaging only 1.3 per 100,000 people in the poorest quintile (compared with 67 in the richest).
With poor households having no access to formal banking infrastructure, they are left only with informal financial tools which are often risky, inconvenient, and expensive. While there is considerable work to be done to develop products that better meet poor people’s financial needs, financial exclusion is fundamentally a distribution problem.
Changing The Economics Of Retail Banking
In recent years, banks, mobile operators and payment system providers have begun experimenting with branchless banking models. These have promised to reduce the cost of delivering financial services. This is done by by taking small-value transactions out of banking halls and into local retail shops, where cash-in/cash-out merchants (such as airtime vendors, petrol station attendants, and shopkeepers) register new accounts and convert customers’ cash into electronic value (and vice versa). One form of branchless banking, called mobile money, seeks to fundamentally change the economics of retail banking in four ways:
First, it piggybacks off widely deployed infrastructure – the retail shops that exist in every village and every neighborhood and the telecommunications networks that are rapidly being built in developing countries – to extend financial services to large segments of unbanked poor people. The transaction information is then communicated back to the telecommunication provider or bank. The customer needs to visit a retail outlet only for transactions that involve depositing or withdrawing cash. By leveraging this real-time communications system, neither the scheme operator nor the customer needs to worry about stores running off with their cash because stores must pre-purchase electronic value from the issuing bank or mobile operator. Hence, any cash exchanged between the customer and the retail store is offset by an immediate, opposite transfer of value between the customer’s and store’s accounts (not the issuer’s).
Second, mobile money turns fixed costs (banking infrastructure, staff salaries) into variable costs (paying merchant commissions based on transaction volume). This dramatically reduces the revenue threshold needed to establish a viable transactional outlet – revenues no longer have to cover the cost of building and maintaining a bank branch and paying staff salaries; they only need to be enough to encourage the shopkeeper to promote the service alongside his other products.
Third, mobile money employs usage- rather than float-based revenue models for reaching poor customers with financial services. Because banks make most of their money by collecting and reinvesting deposits, they tend to distinguish between profitable and unprofitable customers based on the likely size of their account balances and their ability to take on credit.
Fourth, mobile money harnesses customers’ tremendous need and willingness to pay to make remote payments conveniently and securely. For most poor households, especially those in split families where the head of household works in one part of the country and sends money to his family in another, it is difficult to move cash over distances. However, once a customer is connected to an e-payment system, (s)he can use this capability to instantaneously send and receive money from friends and family, store value, pay bills and monthly insurance premiums, receive pension or social welfare payments, receive loan disbursements, and make repayments. In short, when a customer is connected to an e-payment system, her range of financial possibilities expands dramatically.
Speed To Scale
A fundamental characteristic of mobile money systems is that they struggle to achieve scale incrementally. This is due to three factors: (i) Network effects: The value to a customer of a payment system depends on the number of people actively using it – the more people on the network, the more useful it becomes. While network effects can help a scheme gain momentum once it reaches a critical mass of customers, they can make it difficult to attract early adopters when there are few users on it.
(ii) Chicken-and-egg trap (2-sided market): In order to grow, mobile money systems have to attract both customers and stores in tandem. It is hard to sell the proposition to customers while there are few stores to serve them, and equally hard to convince stores to sign up while there are few customers to be had. Thus, schemes need to drive both customer and store acquisition aggressively.
(iii) Trust: Customers have to become comfortable going to non-bank retail outlets to meet their cash-in/out needs and initiating transactions through their mobile phones (or other point-of-sale device). The best way to build trust in the system is to reach critical mass quickly so that existing customers become the prime mechanism for drawing in new customers. At first, all these elements work against a deployment. The benefit to a customer of joining the system is minimal when few others are connected (network effects) and the merchant network is not sufficiently dense and geographically dispersed to meet their (and their recipients’) cash-in/out needs.
It’s not all doom and gloom, however. Once a system reaches a critical mass of customers, all these elements start working in its favor. Customers want to sign up because their friends, family, and employers are already sending and receiving money through the system. Meanwhile, stores eagerly apply to become cash merchants because they see its money-making potential; customers eagerly join the system as outlets open up in their neighborhood; and existing customers start pulling in new customers by showing their friends and family how to use it.
The upshot is that mobile money deployments need to get from zero to critical mass as quickly as possible, lest they get stuck in the sub-scale trap. To do this, they need to get three things right: (i) they must create enough urgency in customers’ minds to learn about, try, and use the service; (ii) they must invest heavily in marketing to establish top-of-mind awareness of the product in a large segment of the population; and (iii) they must incur considerable customer acquisition costs (beyond marketing and promotion) to ensure that their cash merchants are adequately incentivized to promote the service.
Ensuring A Consistent Customer Experience
To ensure that customers can access physical cash and electronic money when they need it, schemes must build a dense, multi-layered distribution channel which can effectively perform the following activities: identifying, screening, and training new shops; providing the necessary store signage and maintaining ongoing delivery of promotional materials; supervising store activities and ensuring consistent application of brand guidelines; distributing commissions across stores; and (above all) giving stores convenient mechanisms to frequently rebalance their stocks of cash and e-money. These are challenging tasks as they have to be done at the same time across a large number of geographically disperse outlets. The logistical challenge is compounded as the number of outlets grows. Much has been written on this topic and we will not repeat that analysis here. For the purposes of this paper, suffice to say that scheme operators need to invest heavily in recruiting, training, and monitoring their retail cash-in/out networks, especially during the initial roll-out when the service is new to both merchants and customers.
Concluding Thoughts: Getting to Critical Mass
How then should a scheme promoter design an investment strategy that will help it avoid the sub-scale trap? Once a scheme has completed technical trials and gained confidence in the deployment’s longterm business model, it must dive into the deep end, making big early investments in marketing, merchant commissions, and merchant training in order to overcome the three barriers which threaten these systems — network effects, chicken-and-egg trap, and lack of trust in the new system. Otherwise, the positive networks effects associated with payment systems never kick in.
Sourced and extracted from: Scaling mobile money – by Ignacio Mas
