Pakistan: A Laboratory of Branchless Banking

Financial sector policies in Pakistan have long been driven by the objective of increasing financial inclusion & increasing access to financial services by the masses. The strategy for expanding the outreach of the financial system relied primarily on expanding banking systems branch network, setting up special purpose government sponsored institutions,  Islamic banking institutions, microfinance banks, sales & service centers, booths and setting targets for credit to broad categories of different sectors of the economy. Its success has been mixed.

Extending the outreach of financial services to the un-banked/underserved areas and people – belonging mostly to the low income strata of the society – in a cost effective manner is viewed as a big step towards poverty alleviation. Emerging advances in information and communication technologies and their widespread usage offer tremendous opportunity to achieve this much desired goal by making available non-traditional ways of providing financial services.

Access to financing is now widely acknowledged as a path to meaningful economic inclusion and reduction in poverty. Policy efforts to increase access to finance in Pakistan have taken time to bear fruit, but now access is indeed expanding quickly in certain financial sectors (microfinance, remittances) albeit from a very low base. Nevertheless, policy measures cannot single-handedly increase financial access; poor socioeconomic conditions, gender bias, and low levels of basic education and financial literacy remain barriers. Also hampering financial outreach are slow technologic advances, weak legal foundations, and unsuitable financial processes and products.

The average Pakistani household remains outside the formal financial system, saving at home and borrowing from family or friends in cases of dire need. Fourteen percent of Pakistanis are using a financial product or service of a formal financial institution (including savings, credit, insurance, payments, and remittance services).

Despite reforms access to financial products remains limited. The State Bank of Pakistan (SBP) has embarked on an aggressive path of expanding financial market coverage via enabling, if strict, regulation, yet outreach has lagged behind the country’s growth and development needs. Reforms in the past decade have resulted in strong banks with a steady performance. As a result, Pakistan’s financial system has grown significantly in the last few years, and access and penetration of financial products has been expanding.

Developing brick and mortar branches is a costly proposition and the existing branch network of the banking system is insufficient to serve the millions of unbanked masses. In contrast, mobile phone subscription has seen explosive growth in Pakistan – total subscription now reaches to over 132 million across all income segments. Therefore, to encourage Financial Institutions to develop alternative delivery channels (ADCs), SBP in 2008, introduced Branchless Banking (BB) Regulations. The Regulations are applicable to all Commercial Banks, Islamic Banks and Microfinance Banks in Pakistan. Banks are allowed to partner with Mobile Network Operators (MNOs) for providing branchless banking services to the masses across the country. Electronic forms of payment that are linked to bank accounts not only replace cash with alternatives that are more transparent, efficient, secure, reliable and convenient, they also spur economic growth and enhance the access to banking services. SBP regulations support bank-led model in which the entire control & responsibility of the product and program rests with the authorized financial institution. In June 2011, SBP revised Branchless Banking Regulations with a view to speed-up account opening and operation through BB models in Pakistan.

These Regulations have actually catalyzed a number of branchless banking deployments with dual advantages: First, there is an enormous scope for expanding outreach, especially to hard-to-reach and unbanked areas. The emerging models relying on branchless banking agents will greatly extend the provision of financial services to the poor and marginalized segments. Second, alternative delivery channels promise significant cost reduction to institutions.

Up till now, the lack of a sizable distribution network has been a major challenge in broadening access to financial services. As a result, a large segment of the population, particularly those living in rural and remote areas have remained deprived of banking services. An important implication of this exclusion is that this large proportion of population has been overwhelmingly reliant on cash-based transactions, thus causing negative impacts on documentation of the economy, the tax-base, efficiency of economic transactions etc.

Impact of SBP’s regulatory and promotional initiatives

Pakistan, after introduction of Branchless Baking Regulations and significant achievements by financial institutions in the branchless banking arena has become one of the fastest growing markets for branchless banking in the world. These developments include increased competition, technological innovation, new business models, transformation in customers’ needs and behaviors, and regulatory proportionality. The widespread adoption of the Internet and mobile technology is extending the benefits of electronic payments to more people at more places. Due to these benefits, the expansion in the outreach of basic banking services has arisen overwhelmingly from agents and mobile phone channels. Mobile phone banking is now the new market niche for both banks and mobile network operators. From end-user perspective, instead of receiving cash, “mobile money” is transferred electronically from one mobile account, which is backed by a financial institution leveraging mobile technology, to another person with or without a Branchless Banking account. The funds can be used to buy goods and services at a store and can also be used to withdraw cash as needed.

Branchless Banking sector in Pakistan, although nascent in its age, has already turned into a burgeoning and dynamic industry. With firm support from the government and regulatory bodies, the banks and telecom companies have collaborated and invested significantly to develop new and innovative solutions to reach out to rural and remote markets of unbanked population with inclusive financial services.

BB was pioneered by Tameer Microfinance Bank through its EasyPaisa model in year 2009 and United Bank Limited’ (UBL) Omni in 2010.  After seeing their success, six more players including banks and telecoms have now entered the arena of branchless banking. Few other players are in pilot phase, and will soon enter the market after developing their operational readiness.  As per the latest data, BB providers’ combined network of agents is 125000 spread across all over Pakistan. The huge network of branchless banking is actually the driver for growth of access to banking service to all segments of the society. Total number of BB transactions has shown continuous growth in each successive quarter, growing by 64 percent during last one year (Sep-2012 to Sep-2013).  With the large network of agents, 51 million transactions were performed during the quarter ended September 2013, driving the total value of transactions to Rs. 223 billion.  Currently 2.96 million BB accounts exist which have access to a host of services including fund transfer, utility bill payment, domestic remittance, mobile top ups, loan repayment, and saving account features. On average, 576,822 transactions are being performed per day with an average transaction size of Rs. 4,315 which shows that these transactions are being carried out by the hitherto unbanked population. Most significantly, BB has played a pivotal role in providing efficient Government to Person (G2P) payments to Income Support Programs, Watan Card, and EOBI beneficiaries and its successful implementation has rendered the public’s strong faith in government support schemes. Branchless banking deposits have grown to Rs. 2,320 million.

Owing to enabling policy framework, all the five mobile network operators in Pakistan have developed and deepened alliances with financial institutions to leverage their technology and service distribution network for extending financial services. Branchless banking has also proved to be an effective instrument in channelizing the G2P payments in trying times like serving Internally Displaced Persons (IDPs), flood affectees during the last three years, and beneficiaries of the National Income Support Programs. In the coming days, this channel is expected to continue playing an important role towards the promotion of financial inclusion and the management of G2P Programs like Salaries Disbursements, Pensions, Income Support Programs, Watan Cards, Pakistan Cards and tax collections services, etc.

Branchless Banking- The Future of Banking?

In recent years, the regulators and policy makers have witnessed that there is widespread and mounting concern about access to financial services across the world. In most of the developing countries, financial services are only available to a minority of the population. Most people in these countries do not have accounts; do not receive credit from formal financial institutions and save their earnings under the pillows. They seldom make or receive payments through formal financial institutions. The limited use of financial services in developing countries has become an international policy concern. According to a CGAP study, between two and three billion people around the world are still excluded from access to formal financial services. The situation is particularly dire in the least developed countries where often more than 90 percent of the population is excluded from the formal financial system.

The Global Findex shows gaps in financial inclusion across demographics, with women, the poor, youth, and rural residents at the greatest disadvantage.

Information and communication technologies (ICT) provided the much needed opportunities to fill the gap in financial services outreach, which could not be met through conventional branch banking due to high cost and low profitability in remote areas. Branchless Banking is merely a cost effective alternative to conventional branch-based banking and it allows the banks to offer financial services outside brick and mortar traditional bank branches. In Branchless Banking, the infrastructure of potential agents like super stores, postal services, mobile network operators, petrol pumps, and courier companies can be utilized for provision of banking services.

In a growing number of countries, banks and other financial service providers have started offering banking and payment services through postal and retail outlets, including grocery stores, pharmacies, seed and fertilizer retailers, and gas stations, among others. They are moving towards ‘Branchless Banking’. Coupled with innovation and spread of ICT, traditional financial service providers are exploring the limitless opportunities for expanding the outreach of their business, hence increasing the access to finance in a way which was not imaginable a decade ago.  Branchless banking offers the means to provide the full range of financial services such as payments, deposits, credit and micro-insurance services without the use of physical bank branches, thus reducing significantly the cost structure. The financial services could be provided through mobile telecommunications networks or network of non-bank intermediaries, such as supermarket chains or post offices.

The rationale for branchless banking as an appropriate tool for transforming banking stems from two observations; traditional retail banks do not deliver services tailored to fit the currently unbanked, which has led to a gap in the market. Further, the fast diffusion of mobile telecom networks has enabled branchless banking service operators to draw on the geographic coverage of mobile networks and diverse needs of the client base. Hence, the common assumption behind branchless banking ventures is the potential of mobile phones as a channel for undertaking financial transactions.

ranchless 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. It is hoped that by moving financial services beyond banks’ traditional “bricks-and-mortar” infrastructure and shifting them to a more scalable, variable-cost channel, financial services can be provided profitably and sustainably to segments of the population that are poorer or more remote, and that are currently neglected by regulated financial institutions.

A key challenge, to implement a commercially viable and workable branchless banking solution, especially where population density is low, is to achieve a critical mass of users required to reap economies of scale to keep transaction cost low. This is even more relevant if the aim is also to promote financial inclusion as financial services would have to be offered at affordable costs. Thus, a requirement for an open and interoperable mobile platform that facilitates the participation of many service providers and that offers a broad range of services is critical in developing a sustainable and efficient solution for both providers and users.

However, the challenge of all the regulatory institutions is to ensure that all banking transactions, irrespective of the technology platform, are cost effective, efficient, and poses a low risk on the consumers. This requires close coordination in the area of regulation especially monitoring and licensing, provision of technological infrastructure and ensuring maximum benefit for consumers.

Challenges 

The opportunities of the technology-driven branchless/mobile banking are apparent, nevertheless; we know that there are also challenges attached with this emerging package of branchless banking.

1. Banks face the challenges posed by innovation. Banks don’t try to equip them with the state of the art technology to provide financial services and don’t adapt to the ever changing business environment. Process of adapting to the changes in our banks is quite slow. Typically, most of the banks prefer to wait till a competing bank installs an analogous solution or a new product/service then hurriedly deploy what is easy to copy-paste rather than adopt the innovation & be the first.
2. There is a challenge of how to balance between extending quickly the outreach of financial services outside bank branches and ensuring that consumers from vulnerable segment of society are adequately protected.
3. Consumer education & awareness are also big issues which need concentrated efforts on providers’ part for rapid but continuous uptake of branchless banking. Aggressive & rigorous marketing efforts are needed to achieve the desired upshots.
4. Creating trust in consumers’ mind that non-bank agent locations providing financial services are safe places and mobile phones are secure mediums to carryout financial transactions.
5. Supervision of agents in terms of their ability to provide quality services with dedication and ownership is also a challenge for the providers.
6. Since agent is the driver of branchless banking vehicle, therefore agent motivation to offer branchless banking services is the biggest challenge that financial institutions face around the world. Banks offering mobile banking services need to device an aggressive marketing planning and campaigns to attract customers to visit the agent location for their banking transactions. This will ultimately lead to revenue generation at agent’s shop which will increase agent’s motivation to offer mobile banking service.
7. Finally, branchless banking is driven by a network of cash points, of which most of them are not properly managed resulting in liquidity problems. One thing that a bank customer would least expects is going to a cash point to redeem the money and find out that there is no cash.

The role of payment systems technology, principally the use of mobile phone as a banking channel and payment device is one of the most critical of branchless banking. The pervasive availability and use of mobile phone around the globe and familiarity amongst its users makes it a very cost-effective distribution channel to improve accessibility to financial services to the unbanked and underserved segment of the population. This is further complemented by the proliferation of payment cards, particularly electronic money, which enables banking and payment services to be conducted without a bank account or visits to traditional bank branches. Finally, there is the need to continuously balance between prudential controls and allowing innovation to flourish within the financial sector. The environment within which branchless banking will flourish requires a great deal of innovation in terms of executing transactions, maintaining proper audit controls and ensuring fraudsters do not take advantage of unsuspecting customers. In order to address this concern, the regulators need to ensure a sound regulatory regime which is sufficiently accommodative to balance prudence and innovation.

Money is Mobile.

Not long ago, a PTCL fixed line connection was a rarity-a prestige, status symbol. Things changed rapidly and Orascom entered the scene with first GSM service. Mobilink became such a hit that people purchased earlier GSM connections at Rs.6000/7000. For a huge number of population, mobile phone was a wasteful, unnecessary expenditure. Things took a nasty turn and suddenly we had Ufone, Paktel, Telenor and Warid all competing for a budding customer base. With cut-throat competition, falling prices and always-keen-to-switch customers, revenues for mobile network operators started to decline sharply. The telecom regulator came down heavily on the operators with Mobile Number Portability (MNP) system, which by many is seen as a final nail in the coffin of telecom industry.

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Banking industry in Pakistan, as we knew it, was a lethargic, slow and too conventional. By masses, it was seen as bill-payment centres where one has to wait in long queues at the end of every month to discharge their utility dues. Heavily skewed in favor of public sectors, banks were not eager to compete on quality or service parameters. Things too a sharp turn here too with privatization of public-sector banks and entrance of foreign banks. Service standards suddenly became a jargon in the banking industry. Deposit-base started to be a competition parameter with banks willing more than ever to lend money to end-consumer. Consumer financing and the advent of a young and educated working class gave banks the much needed drive to go for innovation.

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State Bank of Pakistan was looking at all this with amusement and some excitement as well. The central bank was trying, vainly though, throughout the years to persuade banking establishments to increase their outreach and expand into rural, remote areas. Banks were not responding due to their business considerations.

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On the other hand, alternate delivery channels (ADCs) were revolutionizing the way traditional banking was done. Urban Pakistan was increasingly demanding and using non-traditional ways to bank. New channels were mostly concentrated to cater to the needs of educated, young professionals who were already bank accounholders but needed value addition. Banks responded with the following:

• Automated Teller Machinnes
• Internet Banking
• Credit/Debit Cards,
• POS machines

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There was a clear pattern in the evolution of these two industries. Both were fighting for revenues. Both were stuck in what is classically known as “Marketing Myopia“. Theodore Levitt was spot on when we look at his theory in the context of Pakistan’s telecom and banking industry. Something was needed. Something drastic which can benefit the companies, the customers and the industry. The need for innovation was no more an option. It became a necessity. The world was moving fast. It always moves fast.