The solution lies with new delivery channels that make innovative use of ICTs to inexpensively process a large volume of small transactions and deliver a wide range of financial services
Providing financial services to poor people is costly, in part, because they have small amounts of money, often live in sparsely populated areas, and rarely have documented credit histories. Many specialised microfinance institutions (MFIs) have developed methodologies to serve this market, but they often charge relatively high interest rates to cover administrative costs and typically do not provide a wide range of services. Moreover, MFIs have so far reached only a fraction of the approximately 3 billion people who do not use formal financial services.
By contrast, commercial banks know how to deliver a full range of services. But often view microfinance as unprofitable, due to legal restrictions on interest rates and high costs of handling transactions at bank branches. This is bad news for poor people. Despite their considerable resources and large branch networks, most banks will not aggressively target these customers until they see profit in it.
The solution may lie with new delivery channels that make innovative use of information and communications technologies (ICTs) to inexpensively process a large volume of small transactions and deliver a wide range of financial services. Falling hardware costs and growing support infrastructure are making these technologies increasingly available. Debit and credit card readers now cost as little as US$125 and operate wirelessly. From 1999 to 2004, the number of mobile subscribers in Africa grew from 7.5 million to 76.8 million. Besides reducing delivery costs for banks, poor people may ultimately find these channels cheaper and more convenient to use than bank branches. Many who are unbanked now may gain access to financial services for the first time.
How it works
In a recent CGAP survey, 62 financial institutions in 32 countries report using technology channels such as automated teller machines (ATMs), POS terminals, and mobile phones to handle transactions for poor customers. Some are using new technology to better serve existing customers. But other institutions are using technology to develop 'branchless' channels that reach new clients in areas where setting up a bank branch may be too costly.
In Brazil, private-sector banks such as Banco Bradesco and Lemon Bank, and state-owned banks such as Banco do Brasil and Caixa Economica Federal, have developed about 30,000 so-called 'banking correspondents.' Lottery outlets, post offices, supermarkets, grocery stores, petrol stations, and other retail outlets act as agents for the bank, using POS terminals or PCs to distribute a range of banking services such as savings, credit, money transfers, insurance, and government benefit distribution. No bank staff are present; an employee of the correspondent conducts all transactions on the bank's behalf. Using this approach,
Brazilian banks opened an estimated 8 million new current accounts since 2000.
Mobile phone operators such as Vodafone's Safaricom (in Kenya), MTN (in South Africa), and Globe Telecom (in the Philippines), are also beginning to offer banking services, usually in partnership with banks or MFIs. Their main aim is to increase the volume of text message traffic and to increase customer loyalty. In South Africa and the Philippines, customers can deposit and withdraw cash at airtime top-up booths or retails and post outlets.
Too early to declare success
It is still too early to know whether branchless channels will prove profitable enough to convince banks that low-income
customers are a viable long-term market. To make money, a branchless channel needs to serve a critical mass of customers, and deliver a wide range of services. One challenge is building successful long-term client relationships when customers' main interface is not the bank itself but a supermarket or drugstore. Banco Popular do Brasil found that 30 percent of the accounts opened at its banking correspondents never become active. Profitability also hinges on banks' ability to make loans to their new customers. But making good credit decisions on borrowers who lack a credit history or any form of collateral will require partnerships with MFIs, new scoring techniques, or other innovative approaches. These methodologies are now being tested.
A second open question is whether these new branchless channels are being used by poor and very poor people. Evidence from Brazil is encouraging. Approximately 48 percent of clients served by Caixa Economica banking correspondents earn less than R$200 (or US$ 75) per month, less than the country's minimum wage. Still, more research must be done to understand why some poor people do not use these technology delivery channels. Is it because they are not comfortable using technology, do not trust the
operator, are illiterate, or do not feel the financial products offered are suitable for them!
Perhaps the most important lesson that banks and MFIs have learned in serving poor people is that understanding and communicating with the customer is the key to a successful channel. Experiments with offering debit cards to the employed poor in India have shown that, unless clients are specifically told not to reveal their PINs to others, they often will write these numbers on the debit card itself, rendering account security useless. In Uganda, Stanbic set up tents staffed with bank staff to walk customers through using an ATM for the first time.
Much of the operational risk involved in developing branchless delivery channels emerges from the need to accept, store and dispense cash. Banco Postal (a division of Banco Bradesco) has eliminated the need to transport large amounts of cash in and out of remote communities by working with local businesses and municipal governments to ensure they make end-of-month deposits on a timely schedule, thereby permitting pension and welfare recipients to withdraw cash at the beginning of each month.
The critical role which governments play is also becoming apparent. They can pass laws or use influence to stimulate banks to serve poor people, as they have done in Brazil, South Africa and India. In Brazil, rules governing use of correspondents have steadily evolved since the 1970s, permitting Brazilian banks to cost-
effectively deliver financial services through a dense network of retail and postal outlets. To help banks attract low-income customers, regulators in South Africa and Brazil relaxed norms on the identification requirements to open bank accounts with limited maximum balances.
Initial experiences with branchless banking channels point at three areas for further attention. First, policymakers that want to harness the potential of technology should think broadly about ways to balance improved access with appropriate regulation and oversight. Useful lessons could be derived from studying what regulators have done in the Philippines, South Africa, Brazil and other
countries where branchless banking is growing rapidly.
Second, further study is needed to understand what key design features will render technology channels comfortable, convenient, and trustworthy to poor customers, and thereby generate the transaction volumes required to make them profitable for banks.
Finally, technology channels raise questions about the future role of MFIs. If technology delivery channels become a profitable way for banks to offer a broad range of affordable services to the poor, MFIs may find it hard to compete with their narrow product and relatively high interest rates offerings at present. For banks to win the edge, however, they will need to develop credit scoring and other risk appraisal techniques which have heretofore been the comparative advantage of MFIs.