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Branchless Banking

The Problem:

Various barriers continue to prevent banks from readily deploying new technologies along with mobile network operators (MNO’s) (or independently for that matter), to facilitate the delivery of financial services to remote or difficult to serve communities. Among other obstacles, the incorporation of new delivery channels for retail banking is rife with regulatory and technological complications, such as:

• The lack of regulations around the issuance of electronic (e-) money, specifically regarding the ability of non-banks to issue e-money;
• Difficulties developing sustainable partnerships between banks and MNOs particularly due to the tight profit margins characteristic of low value, high volume mobile banking products.

Furthermore, a legacy of traditional banking services has left a complex foundation to incorporate proportionate regulations on many emerging issues in mobile banking, including but not limited to: e-money regulation, anti-money laundering measures, operational risk management, the establishment of real time clearing and settlement issues and a broad spectrum of prudential risks (e.g. liquidity, credit and solvency risks).

Nevertheless regulators continue to work diligently to encourage and support the emergence of this potentially transformative new retail banking channels that can deliver a cost effective and efficient financial services to the unbanked.

The Solution:

Branchless Banking is a term that encompasses banking service channels such as:

• internet banking;
• ATM / POS devices;
• banking agents operating out of retail outlets; and
• mobile phone based financial services.

While each of these areas brings with them a unique set of challenges they all try to provide a solution to the prevailing inability of traditional bank branches to reach new, often poor and vulnerable, customer segments. Banks looking to offer basic services to a broader customer base, therefore often look to branchless banking facilities to enhance access to affordable, safe and convenient financial services, while still keeping costs low enough to remain financially sustainable.

The potential for branchless banking is often anchored in the ability of technological innovations to lower the costs of offering financial services through new channels, such as point of sales (POS) devices and mobile phones. These new technologies have become much more affordable in recent years and have catalyzed significant penetration in new markets across the globe.

Besides financial institutions, non-banks such as MNO’s have been leading the way in offering financial services through their respective networks. In many developing markets MNO’s have invested in the necessary infrastructure in rural areas that traditional banking services have failed to access with brick and mortar branches.

Why is Branchless Banking important to Financial Inclusion?

The transformative nature of mobile banking is anchored in the degree to which it can increase the value of financial services to previously excluded communities and the potential to improve the efficiency and stability of the financial system as a whole. Specific benefits to the implementation of branchless banking may include:

• Increased Security: As an alternative to cash, electronic value can be stored on a remote server and can be accessed freely via a card or mobile phone. This relieves the security risk of handling large amounts of cash on paydays, managing savings and facilitating payment or remittances.
• Introduction to the formal financial system: As a convenient and affordable alternative to cash, branchless banking products are an effective medium in which to introduce the previously unbanked to the formal financial system.
• Electronic footprint: The electronic nature of the products allows financial institutions and regulators to understand better the financial needs and spending patterns of the financially excluded and protect the system from anti-money laundering and fraud.
• Expansion beyond urban centers: The nature of mobile networks expands access to branchless banking well beyond the urban centers where many of the unbanked reside. Whilst there is also a considerable unbanked market in urban areas, in many rural areas the lack of bank branches adds an additional cost to accessing the closest services.

While there are many other additional advantages to the financial inclusion mission these are some of the most significant. In this context there is a need to establish a solid regulatory framework and a convincing business case in order to develop systems that are effective and sustainable. In many less sophisticated markets access to the most basic financial services such as payments and savings can in itself be transformative to the lives of the unbanked.

What are the most pressing issues?

Currently there are over 120 mobile money products on offer worldwide. However the common thread across all of these products is a profile of challenges that will test their sustainability and ultimate success. The most pressing issues are founded around the development of a proportionate regulatory framework for branchless banking as well as a complimentary business case to achieve viability.

The areas of the regulatory framework that are of the most importance are the development of e-money guidelines for both banks and non-banks and the roll played by agents in expanding the reach of the branchless banking services. Associated with these areas is the need to establish real time clearing and settlement processes, anti-money laundering measures and liquidity management. Critical to the management and success of any regulatory framework is ensuring a sufficient level of supervisory capacity to engage with and monitor the industry as it grows and develops.

In the development of a business case for branchless banking there is still much work to be done to understand the nature of effective partnerships between banks and MNO’s and how the high volume, low value transactions relate to the respective retail strategies. Establishing a level playing field between banks and non-banks is an important aspect of the debate that centers around rules of competition and inter-operability in back office systems as well as customer facing operations.