What Can Branchless Banking Do to Advance the Field, and What Can It Not Do? From Mobile Banking to Point of Service

Introduction

Today, less than 10% of the 2.5 billion people living with less than 2$ per day have
access to a financial services of any kind1

. As a consequence, the poor have to spend a
great amount of energy and time to manage their finances. For instance in Haiti, it can
take up to 4 hours simply to initiate a transfer of money2

. Even saving for school fees
becomes a challenge. These resources could be spent on productive activities and help
these people get out of poverty.
Access to water, electricity or good transport networks are often referred to as
indispensable to development. There is no doubt that financial services should be added
to the list. 10% is a confounding number for such an essential infrastructure. The question
is what prevents financial institutions from serving this market adequately?
Unsurprisingly, part of the answer has to do with costs: the cost to serve people outside of
the main urban centers is too high. Another part relates to business models: small
balances are unattractive to intermediation focused institutions. For those and for other
reasons, the vast majority of poor people see their access to financial services limited to
informal or semi-formal providers. They have no choice. The situation is slightly
different for microcredit, although costs remain high.
This is starting to change, thanks to the pervasiveness of mobile communication services
and their fast adoption by customers and businesses across developing markets. There are

1 World Bank, CGAP, Financial Access 2009, (p.23).
2 Espelencia Baptiste, Heather A. Horst & Erin Taylor, Haitian Monetary Ecologies: A Qualitative
Snapshot of Money Transfer and Savings, Institute for Money, Technology and Financial Inclusion, UC
Irvine, November 2010.

4
currently more than 1 billion people without an account but with a mobile phone3
.
Distances between people get reduced, distances between places matter less. Mobile
services can take financial services outside bank branches, closer to where people live
and work. The road to financial inclusion may not be straightforward but the fast
adoption of mobile communications gives strong signal that progress could accelerate its
course.

Branchless banking holds the promise of addressing two major hurdles to financial
inclusion: lack of proximity and high costs. Building on the sustained development of
mobile communications, it makes it possible for the banking sector to embrace indirect
distribution via agents and for new mobile money services to reach otherwise unbanked
customers. Branchless banking is therefore essentially about facilitating access to
financial services (i.e. loans, savings, insurance), not about replacing these services.
This paper explores what branchless banking can bring to the field, as well as what it
cannot. Let‟s be clear about our focus: it is financial services. No more, no less. Financial
services play an important part in development and branchless banking can help poor
people take control of their financial lives, which are complex. This is not an option they
have today when they predominantly use cash.
The main contribution of branchless banking is to offer poor people the ability to conduct
conveniently and at an affordable price, their basic financial transactions at a retail point
close to where they live and work. The main two approaches, agent banking and mobile
money, rely on mobile connections for real-time communications, and often on mobile
phones too.
Branchless banking offers a gateway to a population which has never engaged with
financial institutions. It provides much greater access to essential financial tools in the
formal sector. Usage shows those new customers trust their new micropayments services,
which is essential for sustainable impact.
3
The Mobile Financial Services Development Report 2011. World Economic Forum.

5

Creating new points of service and offering new transactions capabilities is the
opportunity. Delivering it brings challenges. It is unsettling both for the incumbent
providers, the banks, and for the disruptive new comers, retailers and mobile service
providers. Banking beyond branches essentially entails the unbundling of existing
financial services. It requires the right enabling environment to be sustainable at scale.
The power of branchless banking goes well beyond providing access to financial services
for the poor. By effectively connecting them to the rest of the economy, it puts the poor
on a wider web of opportunities, through which they can expect to lead more productive
lives. Other stakeholders benefit from branchless banking, among which governments
and large organizations: it becomes easier for them to reach the poor with
micropayments, expanding further the windfall for this otherwise ill-served part of the
population.

1 – Complex financial lives
Financial services are essential for people to manage their lives; this statement is as valid
for the poor as it is for the wealthier readers of this paper. Actually, it may be even more
important to the poor, who need to get by with very little means. Portfolios of the poor
shows how poor people spend a great amount of resources to manage their limited
financial assets4

. They creatively combine different financial instruments and thereby
leverage a whole portfolio of solutions for their financial needs: they pay people, goods
or services, save small amounts they are sometime able to accumulate, lend to and
borrow from their relatives or neighbors. The average number of financial instruments
used by the 250 or so poor households documented in the book is 10 in Bangladesh and
South Africa, 8 in India and at least 4 across all households5
.

4 Daryl Collins, Jonathan Morduch, Stuart Rutherford, Orlanda Ruthven. Portfolios of the Poor: How the
World’s Poor Live on $2 a Day. Princeton University Press, 2009.
5
Ibidem.

6
The main difference between the way poor and wealthier people manage their financial
lives, is that the former can only resort to cash and physical assets while the latter have
other options. Cash reduces poor people‟s horizon to their nearest community: it is
useful in an environment they trust (no risk of theft) and where they can physically be
(sending cash to distant parties or locations is onerous). This drastically limits poor
people‟s opportunities. Cash also inevitably favors the present or very near future:
holding cash is difficult and costly in inflation ridden and unsecure environments. It is
also (too) easy to spend, including by demanding family members. Cash is therefore
more of an impediment than an effective instrument to build a better future. Ideally, poor
people should use cash by choice, not by default.
For the rest of us, most transactions within the formal banking sector are movements of
electronic money, not of cash. A savings account stores electronic value. Even an ATM
withdrawal entails an electronic component. It is therefore difficult to envisage how
financial inclusion can be effectively addressed without helping the poor accessing that
electronic world. To take a stepped approach to a complex problem, facilitating access to
electronic transactions is a good starting point. Poor people may have small balances, but
they transact frequently. Compared to wealthier customers, their transactions may be
smaller, but they are more numerous. The turnover of funds in poor households is many
times the value of their financial assets: 15 times in rural areas and 8 times in urban
areas6
. This is because the main financial goals of poor households are to manage their
daily cash flow against irregular income, as well as to accumulate small, frequent lump
sums to be able to resist shocks and to build up investments capacity.
Relying on cash to manage one‟s financial life also means having little privacy in doing
so: physical assets are visible, hiding money aside not necessarily discreet and travelling
to a bank branch rarely unnoticed. The story of this woman in Eastern Africa who
reported on the opening of an agent of a savings bank close to her home started as we
would all expect it to: she could now go directly from her plot of land to the local agent
to deposit or withdraw money instead of travelling to the bank branch and enjoyed the
6
Ibid.

7
proximity and saving on transport costs and time. This was not the reason for her sharing
her story though. To her, there was another benefit, both simpler and much greater: she
did not have to dress up nicely to conduct her financial transactions anymore, she could
go to her local agent in her working clothes. She gained much privacy – and safety – as a
result: no one noticed she was depositing or withdrawing. There is little doubt many other
women who manage the financial lives of their households would enjoy having the same
opportunity.
2 – Proximity at low cost
Branchless banking enables people to make those small transactions outside of bank
branches. It saves them the inconvenience of travelling to a location, which is often far
away from where they live and work: Burundi has 107 bank branches for about 8 million
inhabitants. Branchless banking means that financial institutions can reach their
customers through retailers and points of services located outside their normal branches.
Agent banking is one dimension of branchless banking. This ability for a financial
institution to delegate customer facing activities to an agent who represent it, is not new.
What is new is the tremendous opportunity to connect those agents in real-time to the
financial institution they represent. This is the result of the phenomenal progress in
communication technologies and in particular mobile communications which can now
connect remote locations in an efficient way. It means electronic registration to new
services can be processed instantaneously. It means customer depositing cash on their
account at these locations can see their accounts credited securely and immediately,
reducing thereby any credit risk.
Mobile communication is also essential to the other dimension of branchless banking:
mobile money. This new service enables unbanked customers to open an account which
they manage from their mobile phone, on which they can store electronic value and from
which they can transact: receive money from others, make payments, check balances,
among other functionalities. They can register for the service at small local stores, close

8
to where they live and work. They can also deposit or withdraw cash at these „cash
merchants‟. The service can be managed by any retail organization which can satisfy the
requirements of the financial services regulator. Smart and G-Cash in the Philippines
were the first mobile money services to be launched and to reach some scale7

. M-PESA

in Kenya is the most successful to date8

. Joseph Kinyua, the Permanent Secretary
Treasury in the Kenyan Government, was referring to its usage in the result of an audit
done less than two years after its launch9
:

“Today, many Kenyans are using the M-Pesa service to conveniently transfer money
safely, efficiently and effectively. They use it for paying field staff their allowances and
expenses so that they do not need to travel to the Head Offices for payment, sending a
long haul truck driver money for spare parts, sending money to family members for
consumer purchases, school fees payment, sending pocket money to students in schools,
and sending emergency medical payments among other purposes. A taxi driver wishing

to be offered prepaid services due to security reasons could request for payment via M-
Pesa service. In many instances today, Kenyans traveling up-country deposit cash before

the start of the journey to pick it up upon arrival to their destination thus avoiding the risk
of loss through theft or robbery that has increased in Kenyan highways today”.
The mobile money provider can be a bank but not necessarily – knowing that in all cases,
the funds are held by a prudentially regulated bank10. It can be a retailer; it is often a
mobile network operator. First and foremost, it is a retail organization with a strong
brand, a recognized competence in marketing and solid experience in distribution.
Brand, marketing and distribution are essential to both agent banking and mobile money.
Contrary to what many assume – or fear – technology is not the difficult component to
implement. It does matter but the service does more. Branchless banking combines the
7 http://mmublog.org/wp-content/files_mf/annualreport2010.pdf. Pages 82-96.
8 Ignacio Mas and Dan Radcliffe Mobile Payments Go Viral: The Story of M-PESA
9 The Alliance for Financial Inclusion: Case study – Enabling mobile money transfer. The Central Bank of
Kenya‟s treatment of M-Pesa. http://www.afi-global.org
10 Michael Tarazi and Paul Breloff. “Nonbank E-Money Issuers: Regulatory Approaches to Protecting
Customer Funds”. CGAP, 2010.

9
power of real time communications to the convenience and efficiency of existing local
retail outlets. This is why mobile banking is very different to branchless banking and
unlikely to advance the field. Mobile Banking is essentially only a mobile channel, it
refers to using a mobile device to access information from or send information to an
existing bank account. It adds value to banked customers. It does not help the unbanked.
By relying on existing retail outlets and deployed technology, branchless banking
provides a new infrastructure with great capillarity and at low cost. It does not replace
banks but adds a larger presence which helps them reach more poor customers and
provides more opportunities for poor people to access financial services.

3 – Gateway to financial inclusion
To effectively move from the cash world of informal financial services to the electronic
ecosystem which underpins formal financial services, poor people need to be able to
convert cash into electronic money and the other way round. The objective is not to get
rid of cash but to provide, conveniently and at an affordable cost, the conversion
mechanism without which poor people cannot participate in formal services. This is the
most difficult part of branchless banking as it is the one which requires the local points of
service.

The opportunity is there, as cash is already exchanged for goods in retail stores.
Merchants exchange rice, soap or oil against cash which goes in their till. They can act as
cash merchant in the same way as they are also rice merchants and soap merchants. A
customer cashes-in and receives electronic money from the merchant, another cashes-out
and the opposite happens. The critical point here is that the merchant is more than a till:
it is an entrepreneur who invests his/her own working capital in soap and rice inventory
and in the shop. They do no different when they trade electronic money – they buy it in
advance, as they do with rice and soap, so that they can resell it. When they take cash
from a customer who wants to make a deposit they do not accept it on behalf of a third

10
party, i.e. a financial institution, they do it because they see an opportunity to sell
something they own (electronic money) and get remunerated for providing that service.
Thus, they are not an agent of that financial institution to any greater degree than they are
an agent of the rice company when they sell their rice.
Once cash is converted into electronic money, it can move around electronically, cheaply
across large distances. Today, poor people have to travel with their cash or use informal
transfer mechanisms if they need to send money to relatives who live far away.
Branchless banking allow customers to send electronic money to each other, to make
payments, and for the more mature solutions to shift money between different accounts,
all this without having to travel to a bank branch. When coupled with the use of a mobile
phone, it also means transactions can be initiated and received at any time or from
anywhere – there are no constraints of opening hours.
A third essential element of branchless banking can make a real difference to poor
customers: it is the transactional account. Electronic rails on which people do single
transactions, such as Western Union exist already. They are not terribly efficient.
Transactional accounts give customers choices in how to manage their financial life. The
simple option to keep part of the amount on the account, rather than having to withdraw
everything as cash, already provides convenience and safety. It is a convenient means to
store value to face short term needs and assist in managing cash-flow uncertainties. By
facilitating electronic transactions, these accounts become the first step into the formal
financial service sphere, where everything is stored and handled as electronic money.
Some initiatives recognize the role of the account for financial inclusion purposes, such
as the Mzanzi „no frills‟ account in South Africa. Their success is however limited11
.
They often build on the assumption that the poor cannot afford financial services and
mandate the account for free. In reality, the poor struggle with fixed price structures (i.e.

11 A minority of these accounts is used regularly and the balances remain very low. See page 3:

http://www.cgap.org/gm/document-
1.9.51476/CGAP_Technology_Program_Country_Note_South_Africa_Public.pdf

11
opening or monthly fees, minimum balances) while variable ones (i.e. per transactions)
would be more appropriate.
Beyond the role of mobile in branchless banking, the uptake of mobile services shows
how a population with low education and high illiteracy rates can fast embrace innovative
services. It does not matter that the service is electronic. And it does not require any
specific standalone education program. Educating customers is the role of the service
provider, it is what they call marketing. The only requirement is that the new service
meets their needs in a way that can be communicated easily and understandably. Mobile
did just that in the communications space, especially with the prepaid option to reload a
phone in very small increments (as low as 20 cents in Pakistan). The same thing can take
place with financial services: poor customers will adopt financial services which meet
their needs.

This is what happened in Kenya with M-PESA. The simple proposition to „Send money
home‟ which was launched in March 2007 by Safaricom is now used by more than 15
million customers. By the end of 2009, over 70% of households in Kenya and more
importantly over 50% of the poor, unbanked and rural populations used the service12
. The
marketing campaign of Safaricom did a great financial education work to the point that in
June 2010, 70% of the electronic transactions in Kenya were done on M-PESA.
Interestingly, it represented only 2.3% in value, pressing the case further for the huge
demand for very small transactions13

. This possibility to use small amounts means that
new customers are willing to try. The familiarity with the mobile phone helps them build
trust in the system faster.
A new trusted mechanism to store and move electronic money is meant to replace storage
and movements of cash, but not the relationships and organizations built to make and
manage those decisions. If people have elected to join savings groups for instance, they
can continue to do so at the same time as they take advantage of the efficiency of

12 http://www.mit.edu/~tavneet/M-PESA_Update.pdf
13 Central Bank of Kenya.

12
branchless banking. M-PESA in Kenya for instance has a functionality for savings groups
which adapted the otherwise individual account to allow the group account be managed
by a few individuals. Kim Wilson explains in Jipange Sasa how it is used by a group in
Kibera, Nairobi: “To withdraw cash in preparation for the meeting, the group
management committee visits an M-PESA agent; each committee member punches in a
PIN that only he or she knows”
14

. Scalable mobile money can support small community-
based activities.

4 – Unbundling financial services
Financial inclusion requires a new branchless infrastructure to solve the proximity and
costs problems faced by banks today. It means finding ways for the banks to reduce the
cost of providing their services. They need not be behind all aspects of their services,
they can let other entities do that for them. For instance the access part could be managed
by a third party. It is the essence of what agent banking or mobile money is about: cash
and electronic value can be exchanged in retail stores (the small cash merchants) and
agents can sell basic financial services. Small transactions can be done from/to
transactional accounts opened via a bank agent or with a mobile money provider. Cash is
inefficient for the poor but also for banks and its customers: it is the main reason behind
overcrowded bank branches. Customers have to wait a long time, whether they come for
simple cash transactions or for more sophisticated operations, such as buying structured
products. The bank branch should not have to deal with all the cash and the small
services. It should concentrate on complex operations and sale of structured financial
service, which are its core business.

Branchless banking has the potential for great efficiency gains for the banking industry. It
effectively unbundles the provision of financial services. It introduces the idea that more
specialization and more cooperation between specialists should be explored further if
costs are to go down and financial inclusion progressed. Few other industries remain so
14 Kim Wilson. Jipange Sasa, in Financial Promise for the Poor, How groups build microsavings, Ed. Kim
Wilson, Malcom Harper and Matthew Griffith, 2010 (p. 104).

13
integrated and offer all the elements of the value chain, in a vertical manner, including
distribution. It may not be a coincidence that few other sectors only serve 10 % of a
market.

The changes go beyond the banks and impact the entire financial service ecosystem. The
prospect of having 100% of the population with access to electronic value and able to
transact across distances opens up opportunities for even the smaller financial services
providers. MFIs can use mobile money accounts to disburse their microloans but also to
collect the repayments. MFIs are mostly about issuing small loans. Why should they
worry about disbursing or collecting cash. Others can do it for them, probably better,
faster and cheaper.
The unbundling approach to financial services on the supply side also means a new
regulatory stance15. Branchless banking does not seek any exemption from regulation and
advocate instead for service-based regulation (rules vary depending on the type of the
service provided, not the type of institution which provides it). It supports risk-based
approaches which create an enabling and sustainable environment for all the parties
involved.

Such a regulatory framework should allow branchless banking providers to open account
for their customers instantly. The easier the opening of accounts, the more likely their
take-up and usage. How do you open accounts instantaneously? By allowing service
providers to defer strict „Know Your Customer‟ (KYC) based on account activity
thresholds. While the accounts are limited to a small balance/ transactions and all
transactions can be monitored and frozen in case of fraudulent use, the risks are indeed
limited.

The regulatory framework should also let branchless banking providers sell services to
their customers through agents which act on their behalf and/or by rolling-out a network
15 Claire Alexandre, Ignacio Mas, and Dan Radcliffe Regulating New Banking Models that Can Bring
Financial Services to All, Challenge, May/June 2011.

14
of cash merchants which do cash in and cash out only. In most cases today, service
providers cannot operate beyond their branches or are limited to agents. Cash merchants
are often regulated as agents, despite their different set up and incentives. Both categories
should be recognized, regulated differently and service providers should be able to chose
the retail branchless strategy they prefer.
The regulatory framework needs to enable entities, including non-banks, to get licenses to
operate „only‟ as payment service providers, e-money issuers and/or money transfer
providers. These institutions would not be allowed to invest or intermediate the funds
they receive and can therefore be regulated differently than a credit issuing institution (a
bank). They should be regulated depending on the type of services they offer, in a manner
proportionate to the specific risk of the service16

. A more open (but level) playing field

can help spark some more competition and innovation in financial services.

5 – A new web of opportunities
Branchless banking builds on the wide adoption of mobile communications by an ever
growing segment of the poor population and by all types of businesses. The core
contribution is financial access. Being able to conveniently and affordably move from
cash to electronic, poor people can start using a wide range of financial services provided
by a broader range of financial institutions. For instance, in addition to visiting the few
providers located close to where they live, mobile money users can solicit business from
other providers further away, thereby increasing competition on the supply side and their
chance to get a good service or product. Poor people get a wider range of opportunities,
far beyond the few kilometers around where they live.
Services which were difficult for the poor to access and use are now within reach.
Savings is one obvious example. People are unlikely to travel to a bank to deposit a small
16Michael Klein & Peter Dittus “On harnessing the potential of financial inclusion”. BIS 2011.
http://www.bis.org/publ/work347.htm

15
amount every week or couple of days. If they can send the sum electronically, or deposit

it in cash at their local banking agent, then distances do not matter anymore. Some M-
PESA customers have started to do just that since mid 2010 when M-KESHO was

launched17: Equity Bank offer them a savings account which they can fund through their
M-PESA account. If the market has been good and a seller has made a bit more money

than usual, he or she can send the little extra from their M-PESA account onto their M-
KESHO savings account for safe storage, earning interest. No need to go to an Equity

branch and wait for it to open, M-PESA works day and night.
Enabling payments across distances, especially in time critical situations, can have an
important impact on people‟s lives. In Tanzania where Vodacom offers a mobile money
service also called M-PESA, the staff of an NGO (CCBRT) “ locate people requiring
medical help and alert CCBRT, which transfers the money to pay for the person’s bus
fare by M-PESA”. Since the start of the scheme, “they have quadrupled the number of
cleft lip surgeries and more than doubled the fistula surgeries in less than one year18”.
Branchless banking also represents an opportunity for large organizations, private and
public, which need to make micropayments to poor people. They too have to rely on cash
today. And they too would love to find other options and use electronic means to pay.
Within the development community, conditional cash transfers programs usually comes
to mind but the point is here much wider. It is all government payments (salaries,
pensions, safety nets…), all large employers‟ salary payments, etc. Being able to make all
these payment electronically has great benefits. A study made in India about the benefits
of e-payment to Indian Society concluded that “an electronic platform for government
payments to and from individual households could save an estimated USD 22.4 billion a
year – almost 10 per cent of the total payment flows between the government and
households” and adds that E-payments may well ensure that every poor household in
India – approximately 80 to 100 million – will have unparalleled access to secure and
convenient benefits directly from the government, and without the interference of

17 www.equity.co.ke
18 http://www.cbm.org/programmes/CCBRT-275774.php

16

intermediaries19

.” Electronic payments can be more efficient for the sender but also for
the recipient, who is more certain to get the whole sum, and to receive the funds faster.
The mobile network operator Roshan is offering the mobile money service M-Paisa in
Afghanistan. In 2010, they started a project in which the Afghan National Police
disbursed salaries using M-Paisa. Many policemen received their full salary for the first
time and assumed they had got a salary raise20
.

Conclusion

The contribution of branchless banking to the field is multifaceted and offers solutions
for both clients and providers. By focusing on access, these new platforms have the
potential to be real springboards for the poor to effectively manage their financial lives in
a safe and efficient environment and more realistically aspire to more productive lives.
By providing access to financial services as well as choice, branchless banking can
impact financial inclusion. It can also contribute to progress on financial security and
integrity by bringing more people into the formal and electronic sphere and reducing the
usage of cash which is difficult to oversee.
This exciting potential cannot hide the fact that branchless banking is very hard work and
no silver bullet has been found yet. No matter the thrilling examples of impact and
progress distilled throughout this paper, the current status of branchless banking in April
2011 is not brilliant. We are still in the proof-of-concept stage. Except in East Africa
where Kenya‟s neighbors Tanzania and Uganda are showing now promising signs of
success in their mobile money deployments and in some Latin American where agent
banking is making some progress, the picture is pretty blurred. On the policy front,
awareness for financial inclusion has never been as high on the global agenda, however
concrete regulatory progress at national level are scarce. The point here is not to give up

19http://www.mckinsey.com/clientservice/Social_Sector/our_practices/Economic_Development/Knowledge
_Highlights/Inclusive%20growth%20and%20financial%20security.aspx
20 http://techcrunch.com/2010/10/17/m-paisa-ending-afghan-corruption-one-text-at-a-time/

17
but to stress that branchless banking is difficult and requires a bit more than a few mobile
handsets.

Branchless banking won‟t solve all the problems of the poor or the problems of all the
poor but it deserves some credit for putting this segment of the population center stage,
within a connected network open to all customers, not only poor ones, and by giving
them choices to decide for themselves.

Branchless banking is fundamentally about access and creating new channels. It is a very
important infrastructure for developing countries. Equally, we should not lose sight of the
financial products which can be reached through these channels and recognize that lots of
work still needs to be done on that front.

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