Forum sur les politiques réglementaires de la microfinance en Afrique

Kigali, Rwanda

25 – 27 mars 2009

The Logic Behind Branchless Banking

Regulation Frameworks

Alaa Abbassi, CGAP Consultant October 2011

Branchless banking may overcome these constraints

What factors limit access to financial services?

Long distances & low pop density High bank costs relative to income

Low education & illiteracy Poor product/ channel design

Ban

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Age

nt

Clie

nt

Branchless Banking: What do we mean?

“… delivery of financial services outside conventional bank branches using information and communications technologies and nonbank retail agents.”

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Clie

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Branchless Banking: Cash-in

Client opens bank account (accessible by mobile phone)

Agent opens bank account (accessible by mobile phone)

2 Cash-in

3 Electronic value sent

4 Agent account debited

Client account credited

1 1

- +

Age

nt

Ban

k

Clie

nt

Branchless Banking: Cash-out

1 Electronic value sent to agent

2 Cash-out

3 Agent account credited

Client account debited - +

Age

nt

3

Additive vs. Transformational A

dd

itiv

e B

ran

chle

ss B

anki

ng

Tran

sfo

rmat

ion

al B

ran

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ss B

anki

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Bank-based vs. nonbank-based B

ank-

Bas

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No

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The logic of branchless banking

Use existing retail infrastructure

Use existing deployed technology

~40m

~6bn (by 2013)

~1.5m

665k 500k 445k

Western

Union

Bank

branches

Post offices

ATMs POS Mobile Phone

Connections

Estimated Worldwide Points of

Presence

The power of using existing infrastructure

Branch in store

$50,000

ATM

$10,000

No agent (cashless)

$0

Agent with POS terminal

$2,000

Agent with mobile

$400

Reducing the cost of banking infrastructure

Traditional branch

$250,000

Bank Agent

Benefits along the value chain

Client

Does branchless banking reach large numbers of low-income, unbanked people?

• On average, 37 percent of active users are unbanked among 9 services where good data is available

• Half of these 9 branchless banking pioneers reach more unbanked clients than the largest MFI in the same country: on average 86% more.

Does it scale faster than traditional approaches to banking low-income people?

Branchless banking also scales faster than traditional microfinance: in one particular case branchless banking providers needed 3 years to surpass the largest MFI, which had been operating for 15 years.

Customer adoption: What do we know?

* Preliminary findings from an upcoming CGAP Focus Note.

Is branchless banking cheaper than traditional bank products when those have also been aimed at low-income, unbanked consumers?

Branchless Banking is 19% cheaper than comparable bank services. The lower the transaction value, the cheaper branchless banking is in comparison.

Branchless Banking is half the price of informal options for money transfer.

What do low-income, unbanked people want from BB channels?

Customers have sent strong messages that they want products that go beyond payments. Ex: 21% of M-PESA consumers rate M-PESA as "the most important" instrument they have for savings. Similar data from Philippines and Brazil.

Customer Adoption: What do we know?

* Preliminary findings from an upcoming CGAP Focus Note.

Regulating agents: Who is permitted to act as an agent?

Regulating Agents: Approval needed to work as an agent

Forum sur les politiques réglementaires de la

microfinance en Afrique

Kigali, Rwanda

25 – 27 mars 2009

Nonbank E-Money Issuers

What are prudential regs?

Regulations aimed at

(i) protecting financial stability in

order to avoid bank failures and

(ii) reducing the level of risk to which

bank customers (i.e. depositors)

are exposed.

Include:

• Capital Adequacy Ratios (risk-weighting,

provisioning, Basel requirements)

• Reserve requirements

To Whom do Prudential Regs Apply?

• Banks

– But who’s a bank?

– An institution engaged in “banking” activity,

typically including taking deposits and

intermediating such deposits

Bank Agent Client

Mobile Network Operator

Benefits along the value chain

Bank ?

So, do Mobile Network

Operators which issue e-

money constitute “banks”

subject to prudential

regulation and bank licensing?

Forum sur les politiques réglementaires de la

microfinance en Afrique

Kigali, Rwanda

25 – 27 mars 2009

AML/CFT and Branchless Banking

Definitions …

What is AML?

Anti-Money Laundering

What is CFT?

Countering the Financing

of Terrorism

What is FATF?

The Financial Action Task Force

• Intergovernmental body tasked with

developing international standards against

money laundering and terrorist financing

• “40+9” Recommendations

– 40 Recommendations on AML

– 9 Special Recommendations on Terrorist

Financing

Recommendation 5

Financial institutions must undertake

customer due diligence measures

including “identifying the customer and

verifying that customer’s identity using

reliable, independent source documents,

data or information.”

AML/CFT and Branchless Banking

And can agents conduct

Customer Due Diligenece

(CDD)/Know Your Customer

(KYC) Procedures?

But does our target clientele have the

required documentation?

AML/CFT and Branchless Banking

Need for AML/CFT proportionate regulation: a “risk-based approach”

Basis in R5: Financial institutions may determine the extent of such CDD measures on a risk sensitive basis depending on the type of customer, business relationship or transaction.

Proportionality in South Africa

• Exemption 17

– Exemption of address verification for accounts

with balances < $2,500 and single transactions

< $500

• Guidance Note 6

– Permits non “face-to-face” account opening for cell

phone banking without documentary evidence – only

name and national ID number are needed which are

then checked against 3rd party database

– Subject to Exemption 17 balance limits PLUS daily

limit of approximately $100

Proportionality in the Philippines

• Circular 471

– Mechanism by which KYC/CDD can be

conducted by agents

• Agents register with Central Bank

• Training by Philippine AML Council or other approved

entities

• Verify identity during KYC/CDD

• Maintain records for 5 years

• Report suspicious transactions

• Circular 564

– Multiplicity of formal identity documents can be

presented for verification purposes

Detecting Suspicious Transactions

What’s suspicious?

Many to one and one to many

Many transactions following account

opening

Multiple accounts held by one client

Technology can track these patterns!

Examples from Iraq

Mobicash (launched by Amwal) in 2009

• Allows transfers between accounts in the same

or in different banks members in the Amwal

network

• Transfer to non-account holders is also possible

• Cash-in & cash-out only through participating

bank branches.

• Only 10,000 registered clients so far so how to

promote this?

Examples from Iraq (cont.)

Qi card

• Began in 2007 a private company with the participation of two state-owned banks.

• Licensed and regulated by CBI

• G2P (Salary payment solutions) using smart cards for the public sector employees with plans to include the private sector.

• Cash-out using ATMs, Exchange Companies with plans to use merchants as agents through POS.

• About 2,5 million users

• Use of biometric identity systems

Thank you