Economic Issue of the Day
Philippine Institute for Development Studies S u r i a n s a m g a Pa g -a a ral Pangkaunlaran ng Pilipinas
Vo l . I X N o . 1 ( N o v e m b e r 2 0 0 9 )
Transformational branchless banking: blazing new trails in delivering financial services What is branchless banking? With the technology available nowadays, financial services delivery is no longer limited to traditional banking methods. Mobile phones can now be used for shopping, paying tuition fees and utility bills, sending and receiving money, and even making deposits and withdrawals from one’s bank account. The two largest Philippine mobile network operators—Smart Communications and Globe Telecoms—offer their 8 million customers with the same services through Smart Money and GCash, respectively. In Brazil, customers open bank accounts, make deposits, and pay bills at lottery houses, small retail outlets, and postal offices equipped with card-swipe and barcode-reading point-of-sale (POS) terminals (Ivatury and Mas 2008). This strategy of delivering financial services outside of conventional bank branches using information and communication technologies (ICTs) and retail agents is what is called branchless banking. Technology plays an important role in this kind of set up since it allows transactions to take place at a significantly cheaper cost. Devices typically used are mobile phones like in Globe’s GCash service, and plastic cards like in Brazil’s Caixa Economica. Sometimes providers offer both cardbased and phone-based services as in the case of WIZZIT and MTN Banking in South Africa and Smart Money (Lyman et al. 2008). There are two models of branchless banking: the bankbased model and the nonbank-based model. In the bank-based model, customers have a direct contractual relationship with a prudentially licensed and supervised financial institution although a customer may deal exclusively with a retail agent hired by the bank. An example would be Smart Money. Smart’s five bank partners hold the Smart Money accounts and are responsible for securing approval from and reporting to the Bangko Sentral ng Pilipinas (BSP) while Smart acts as a facilitator of the banks’ businesses. In the nonbank-based model, customers have no direct contractual relationship with a prudentially licensed and supervised financial institution. Instead, the
customer exchanges cash at a retail agent in return for an electronic record of value. This virtual account is stored on the server of a nonbank such as a mobile network operator or an issuer of stored value cards. The balance in the account can be used for payments, transfer of funds, or convertion back to cash. Globe’s GCash service is initially a nonbank-based model. GXI, a wholly owned subsidiary of Globe registered by the BSP as a remittance provider, holds GCash accounts and information about transactions. At present, clients of the Bank of the Philippine Islands (BPI) and several rural banks can transfer funds between their bank account and GCash account (CGAP 2008).
Why does branchless banking matter? Branchless banking can either be additive or transformational. It is additive when it simply adds channels through which existing customers of mainstream financial institutions can access financial services. It is transformational when it extends financial services to the unserved clients outside the branched areas (CGAP 2008). Extending financial services to the unbanked poor in a costeffective way is essentially the goal of transformational branchless banking. Setting up traditional bank branch networks can be very expensive particularly in remote, small population areas. By tapping on existing technologies and infrastructures (i.e., mobile phone network and retail distribution channels) that already reach unbanked people, the cost of delivery of financial services can be dramatically reduced. Using agents rather than banks for remote cash transactions can significantly cut costs into half. Transactions done completely electronically through mobile banking, however, proves to be the biggest cost-saving technique. A typical transaction (i.e., cash deposits, withdrawals, and money transfer) via a bank in the Philippines costs around US$2.50 while the same transaction would only cost US$0.50 if done using a mobile phone (Ivatury and Mas 2008). Similarly, the use of mobile phones for domestic transfers and international remittance has the potential to lower costs up
Economic Issue of the Day
BRANCHLESS BANKING
Vo l . I X N o . 1 ( N o v e m b e r 2 0 0 9 )
to 75 percent (DFID 2009). Overseas Filipino workers (OFWs) send home approximately US$15 billion in remittances annually, with an average inbound remittance of about US$300. This transaction usually costs the sender US$7 to US$15, or between 2 and 5 percent of the value remitted. When routed via GCash or Smart Money, however, the same remittance would only cost less than 2 percent of the total amount remitted (CGAP 2008). Partnerships between providers and local microfinance players in the Philippines have also been established in order to reach unbanked, less developed areas. Globe Telecoms’ partnership with the Rural Bankers Association of the Philippines made remote deposits and withdrawals, loan repayments and disbursements, salary payments, and remittances between GCash and rural bank accounts possible. Smart Communications, on the other hand, has tied up with several microfinance institutions (MFIs) and cooperatives which made use of Smart Money for distribution and payment of loans (CGAP 2008).
Regulatory and other issues Since branchless banking seems to offer a cheaper solution to reach unbanked areas, which will benefit a large number of customers in need of banking services, both government and donors have started to support it with grants and other forms of assistance. The major concern now is how to adapt or apply existing regulatory norms to new branchless business models and what are the risks to consider. A CGAP study in 2008 based on branchless banking experiences in South Africa, Kenya, the Philippines, India, Pakistan, Russia, and Brazil shows a common challenge to policymakers and regulators: how to formulate proportionate regulatory policy that gives space for innovation and permits branchless banking to scale up safely. Among CGAP’s recommendations are: z Permit nonbank retail outlets to serve as agents and consider carefully any restrictions on the range of permissible agents and types of relationships permitted. z Evolve a risk-based anti-money laundering and combating financing of terrorism approach adapted to the realities of small, remote transactions conducted through agents. z Clarify the legal boundaries between retail payments, e-money, and other stored-value instruments and bank deposits.
z
Create a regulatory category for electronically stored value that allows nonbank participation on defined terms. z Create robust but simple mechanisms for consumer protection covering problems with retail agents, redress of grievances, price transparency, and consumer data privacy. z Consider the likely longer range competitive landscape today and how to reach the goal of interoperability. Finally, another issue concerning branchless banking, particularly mobile banking, is whether it can substitute for the human touch. Studies have shown that customers still prefer to deal face-to-face with a person rather than with an electronic device, and that having to deal with machine interfaces somehow weaken customers’ sense of control over their finances (Ivatury and Mas 2008). N
References Cohen, M., D. Hopkins, and J. Lee. 2008. Financial education: a bridge between branchless banking and low-income clients [online]. Working Paper No. 4. Washington, D.C.: Microfinance Opportunities. http://microfinanceopportunities.org/docs/ FE_for_Branchless_Banking.pdf. [Accessed 24 August 2009.] Consultative Group to Assist the Poor (CGAP). 2008. Notes on regulation and branchless banking in the Philippines [online]. CGAP Technology Program. Washington. D.C. http://www.cgap.org/gm/document1.9.3143/Philippines%20Notes%20on%20Regulation%20of% 20Branchless%20Banking.pdf. [Accessed 24 August 2009.] Department for International Development (DFID). 2009. World’s poor to be helped by “txt msg’ technology [online]. Press release, 12 February. London. http://www.dfid.gov.uk/Media-Room/Pressreleases/2009/Worlds-poor-to-be-helped-by-txt-msg-technology/. [Accessed 24 August 2009.] Ivatury, G. and I. Mas. 2008. The early experience with branchless banking. CGAP Focus Note No. 46. Washington, D.C: Consultative Group to Assist the Poor. Lyman, T.R. 2006. Regulatory issues in branchless banking: agents, mobile phones, cash cards, and new thinking. Washington, D.C.: Consultative Group to Assist the Poor. ______, M. Pickens, and D. Porteous. 2008. Regulating transformational branchless banking: mobile phones and other technology to increase access to finance [online]. CGAP Focus Note No. 43. Washington, D.C.: Consultative Group to Assist the Poor. http:// www.cgap.org/p/site/c/template.rc/1.9.2583/. [Accessed 24 August 2009.] Rosenberg, J. 2009. Microfinance, mobile banking, and barangays [online]. Washington, D.C.: Consultative Group to Assist the Poor. http://technology.cgap.org/2009/05/07/microfinance-mobilebanking-and-barangays/. [Accessed 24 August 2009.]
The Economic Issue of the Day is one of a series of PIDS efforts to help in enlightening the public and other interested parties on the concepts behind certain economic issues. This dissemination outlet aims to define and explain, in simple and easy-to-understand terms, basic concepts as they relate to current and everyday economics-related matters. This Issue was written by Larraine C. Zafe, Research Analyst II at the Institute, with comments and suggestions from Dr. Gilberto M. Llanto, Senior Research Fellow also at the Institute. The views expressed are those of the author and do not necessarily reflect those of PIDS and other member agencies and sponsors. N Philippine Institute for Development Studies NEDA sa Makati Building, 106 Amorsolo Street, Legaspi Village, Makati City z Telephone Nos: (63-2) 8942584 and (63-2) 8935705 z Fax Nos: (632) 8939589 and (63-2) 8161091 URL: http://www.pids.gov.ph