At the most basic level, widespread access to financial services requires the solving of two problems: the problem of risk—how to price and manage it—and the problem of distribution—how to reach even remote individual consumers. The most difficult part is often the ‘last mile’ in telecom speak, where individuals and households are connected to the network. Financial services have similar ‘last mile’ distribution issues: in particular, the question of how to provide convenient, cheap, safe access to cash deposit and withdrawal facilities.
A recent trip to Africa has given me new perspectives on this latter issue. Inter alia, I saw (and used) a new mobile banking solution being rolled out in South Africa, covered earlier in this blog, as well as a pilot solution starting in Kenya. Cheap, secure person-to-person payments are the ‘killer application’ for mobile commerce; however, until mobile phones become ubiquitous, there is still a need for points at which ‘e-money’ carried on the phone or in a remote account accessed by the phone, can be cashed out or deposited. This is where retailers may play such an important function. They already carry cash in their tills as part of their ordinary business; and as such, have a cost advantage over both new bank branches and even ATMs, which require a large initial investment. By placing mobile phones in the hands of even small, rural merchants in many countries, wireless technology is starting to ‘re-wire the last mile’, bringing basic cash back and deposit services as close as the nearest airtime vendor. This is much closer than any current financial institution for most people in most African countries.
Several recent publications add perspectives on the role of retailers in addressing the distribution problem for financial services.
A May 2005 paper from the Chicago-based Centre for Financial Services Innovation highlights ‘the potential and pitfalls of this burgeoning distribution channel’. It tracks the growing trend towards in-store financial service presence in the US, up from 50 banking offices in supermarkets in 1971 to over 6500 today. Large retailers like 7-Eleven and Walmart at the same time partner and compete with banks and credit unions which rent space in their stores.
Indeed, financial institutions have watched with bated breath as Walmart has sought to broaden its financial service offering through acquiring a bank or its equivalent. As a recent Economist article reported, Walmart has applied to open an industrial loan society in Utah, as a back door means of entry into banking used by US retailers. Walmart has been rebuffed before in its quest to buy a bank in the US, but will know by November whether this latest application is successful. If so, this will broaden the platform from which Walmart already offers various in-store financial services such as money transfers (with MoneyGram) at prices which compete with Western Union, as well as check cashing and bill payment. Walmart already partners with Discover to offer a credit card to its clients.
Such partnerships between high street retailers and banks are also common in the UK. A recent report by Feasibility commissioned by FinMark Trust listed six such ventures, the largest of which in terms of customer numbers appears to be Tesco, a partnership with RBS, which now has over 4million account holders and is seen as “UK’s most successful supermarket bank”. Marks and Spencer, the first retailer to venture into this area with the setup of a fully fledged bank in 1987, has apparently languished with declining account numbers; and was in fact sold by M&S to HSBC in 2004.
The Feasibility report was intended to assess the potential for new types of entity, including retailers, to take advantage of proposed new banking legislation in South Africa. The so-called Dedicated Banks Bill would make entry to certain restricted types of retail banking easier—by relaxing capital requirements, regulations and restrictions on control by entities other than narrow bank holding companies. Of all the types of entity considered, including mobile phone companies and microlenders, the report found that retailers as a group offered the greatest potential for using the legislation to provide banking services tailored to the low end of the market. Indeed, several large retailers in South Africa, such as clothing group Edcon and furniture chain JD Group, are already large lenders with millions of customers with store credit accounts. Both retailers have in fact had unsuccessful JVs with banks (Edcon with African Bank, JD with People’s Bank) to extend personal loans, now dissolved. But these failures may well be because the personal loans offered were too close to the core store credit offering of the respective retailers. Banking offerings which go beyond credit may well be more attractive to retailers. Notwithstanding the potential advantages of retailers, the Feasibility report found that strategies and opinions among retailers about direct entry into banking differed widely: an opportunity for some, a non-core business for others. Nonetheless, there is clear interest in this space.
The bank branch of the future—a mobile phone container in South Africa
However, solving the ‘last mile’ issue and reaching remote customers will mean going well beyond large, well-known high street retailers in urban areas, whose clientele may be largely banked. This is where the emerging partnerships with cell phone networks carry more potential, and not only because cell phone reception is expanding rapidly, even in rural areas of Africa. It is also because cell networks have developed extensive distribution channels which enable the sale of pre-paid airtime through ubiquitous points of sale: using large dealers who in turn manage extensive networks of thousands of small, accessible airtime retailers. These small merchants carry cash; and would no doubt welcome additional revenue streams from other transaction fees which can be priced affordably. For the provider, the real time nature of wireless transactions reduces (although it does not eliminate) the fraud risk inherent in such agency-relationships. There remain regulatory obstacles to overcome: KYC regulations (see recent blogpost) and restrictions on using agencies for deposit taking among them. If these obstacles can be overcome, these small vendor networks are likely to become the manned ‘ATMs’ of the future; and crack the last mile problem of inclusive financial services.
