business models in digital financial services

Business Models in DFSClaudia McKay, Greg Chen, and Peter Zetterli

9 March 2016

Agenda

1. Bank Business Model –Equity Bank

2. MNO Business Model –Airtel Money

3. Standalone Model – bKash4. Diversity of Business Models

2

Links in the DFS value chain

Data / VAS Digital Channel Physical Channel

What sections of the value chain does the business own or control?

Who is legally responsible for the user accounts?

Whose brand(s) do users see?

Who ’owns’ the user relationship?

Accounts

Who sees and controls user / transaction data?

Are these data being utilized to offer Value-Added Services?

Who controls the key comms channel (USSD, SIM, data) used?

Who controls the physical touch points (e.g. agents or ATMs), who controls these?

3

Differing levels of controls

Data / VAS Digital Channel Physical Channel

What sections of the value chain does the business own vs outsource to partners?

Accounts

Shared control

Full control

No control

Completely controls the value chain item. Not dependent on any partner.

Partly controls the value chain item and/or shares it with partners

Controls no part of the value chain item. Value chain item may or may not be important for the business model

4

Bank model: Equity Bank5

In 2011, Equity Bank saw 6% of its cash transactions take place in the agent channel. What is the share today?

A. 15%B. 25%C. 40%D. 50%

A. B. C. D.

6%

39%

45%

10%

6

Majority of cash transactions have been shifted to the agent channel

Source: Equity Bank Investor Briefing Q3 2015

0

10

20

30

40

3Q 2011 3Q 2012 3Q 2013 3Q 2014 3Q 2015

Number of transactions, in millions

ATM Branch Agency

Agency

51%

ATM27%

Branch22%

Percentage of transactions by channel,

as of Sept. 2015

7

Since 2004, Equity Bank has grown its deposit base by 40x and its total loan portfolio by 60x. How much has its branch footprint grown in the same period?

A. 0 – In fact, it’s shrunk by 5%

B. 5xC. 10xD. 20x

A. B. C. D.

26%

10%

23%

42%

8

Target customer

Mass-market consumers• Largest retail bank in Kenya• 8.5m customers (2014) • Half of all banked Kenyans are

Equity customers• 94% of accounts have <$100

balance

Small & medium enterprises• More recent focus of the bank• Now over 70% of total loan book• Over $1.8bn in SME lending

10

Digital Strategy has evolved in several phases

11

Equity 3.0: the next step in the evolution

• Licensed as Mobile Virtual Network Operator (MVNO)

• Rents space on the comms channel from Airtel

• Issues SIM cards and SIM overlay under Equitel brand

• Offers regular voice, SMS and data services alongside an integrated financial services product

• Free P2P between Equity customers and Orange Money wallets

• 30 day mobile loans up to $2,000 at 1.5% interest

• Free educational content

13

Client Accounts

Ownership of the value chain

Accounts Client Data / VAS Digital Channel Physical Channel

Customer accounts are fully fledged bank accounts

Equity Bank is the only brand visible to customers

Accounts

15


Accounts Data / VAS Digital Channel Physical Channel



Equity Bank owns the transactional data

No other actor has visibility on the data

Mobile loan is based on data

16








Equity Bank initially relied on MNOs for the channel

Paid Safaricom $0.06/USSD session

In 2015 launched Equitel MVNO

Digital Channel

17








Equity Bank initially relied on MNOs for the channel

Paid Safaricom $0.06/USSD session plus SMS fees

In 2015 launched Equitel MVNO

Owns a network of 22,000 agents across Kenya

Compared to 166 branches and less than 600 ATMs

Only network to rival Safaricom’s 89,000 M-PESA agents

18

Profit model: Digital lowers CAPEX and marginal costs to expand reach

Reduce infrastructure cost Lower transaction costs

• An agent transaction costs Equity $0.88 less than a branch tx

• Moving away from Safaricom USSD to Equitel MVNO saved Equity $0.06 per mobile tx

• Rapid scale up of agent network since 2010

150x

3000x19

Profit model: Digital channels drive deposit mobilization, revenue growth

Mass deposit mobilization New revenue sources

Transaction fees: • Total transaction fee revenue grew by

29% in 2015 to $166m• 8 million transactions per month on

Equitel channel (Aug 2015)• USSD users average 2 txs / month while

Equitel users now average 21

Total deposits now $3.1bn

Agents collected $285m in deposits in Aug 2015 alone

20

Equity has grown larger with ever lower reliance on expensive branches and branch staff

0

5

10

15

20

2005 2007 2010 2014

Access points to 10k / 100k customers

Staff /10k Branches /100k (G) Agents /10k ATMs /100k

Source: Equity Bank annual reports 21

Key takeaways on the bank business model for DFS

1. DFS drives significant reduction in the cost of physical infrastructure

2. DFS can generate significant cost of funds reduction

3. These adjacencies enable banks to offer cheaper transactions

4. Lack of control over the communications channel can be a major challenge (and cost)

22

MNO Model: Airtel Money 23

What is the average amount of time it takes for an MNO to break even on a mobile money service?

A. Less than one year –these guys are money making machines!

B. Between one and three years

C. Between three and five years

D. More than five years –it’s a tough business

A. B. C. D.

10%7%

31%

52%

24

What share of total revenue are the top quarter of Mobile Money deployments making for the network operator?

A. 2%B. 10%C. 25%D. 50%

A. B. C. D.

0%

8%

50%

42%

25

11%EcoCash

Zimbabwe

26%Mobile money is growing as share of total revenue for MNOs

MM share of total revenues for respondents to GSMA SOTIR 2015

Source: GSMA State of the Industry 2015

of MNO-led services earn more than 10% of total revenue from mobile money

22%M-PesaTanzania

20%M-PESA Kenya

26

Airtel Money in Africa

Established in August 2012– Live in 16 countries

– 12m active customers

– 250,000 active agents

– 7m txns per day

– $70m in txns value per day

27

Target customer and value proposition

Mass-market voice customers• DFS was devised primarily as a

loyalty play aimed at the existing mobile telephony user base

• Increasing competition has led to customer churn

• In addition, new voice customer growth is set to fall from 8% to 4% as markets near saturation

• So customer retention will grow further in importance

Target customer

0%

1%

2%

3%

4%

5%

Q12000

Q12002

Q12004

Q12006

Q12008

Q12010

Q12012

Q12014

Customer churn rates 2000-2015

World Developed

0%

2%

4%

6%

8%

Voice customer growth

2010-15 2016-20Source: GSMA Intelligence 2016

29

Target customer and value proposition

Value proposition

Low-barrier formal account• Lower KYC than bank account• Remote signup via agents or

directly on the mobile phone

Convenient access to services• Transact on phone 24/7• Cash transactions at tens of

thousands of agent locations

Rapidly expanding offering• Data driven credit and insurance• Evolving ecosystem of services

30

How are customers using mobile money?Customer Transactions on mobile money

Source: GSMA State of the Industry 2015

2%

43%

5%

5%

3%

1%

31%

20%

27%

15%

1%

1%

32%

15%

0% 25% 50% 75% 100%

Trx Value

Trx Count

Air Time Bill Pay Bulk Disbursement Cash In Cash Out Merchant Pay P2P Transfers

Active customers conduct an average of 11 transactions/month and maintain median account balance of $4.70



Hosts all customer accounts on its own e-money platform

Airtel Money is the only brand visible to customers

All customer funds are held in pooled accounts at a bank

Accounts

32






Airtel Money owns the transactional data

No other actor has visibility on most of the data

Airtel Timiza mobile loan is based on transactional data

33









Airtel owns the digital channel

Cross promotions with voice business are often used (e.g. free talk time equal to P2P amount sent)

Digital Channel

34









Airtel owns the digital channel

Cross promotions with voice business are often used (e.g. free talk time equal to P2P amount sent)

Owns a network of 22,000 agents in Kenya and 20,000 in Tanzania

35

• Most transactions (except cash-in) come at a fee

• 77% of MNOs derive most revenue from customer fees

• In LAC and South Asia, get more fees from businesses

Profit model - Revenues

Indirect Benefits – Reducing customer churn and cost of airtime distribution Direct Benefits – Transaction Fees

• High customer churn contributes to price wars and falling margins on the voice business

• Selling airtime and data bundles via MM can be at least 20% cheaper than through physical scratch cards

Transaction fee revenue

Source: GSMA (2014) and GSMA Intelligence (2016)

0%1%1%2%2%3%3%4%4%5%5%

Safaricom Telesom MTN Uganda

Churn before MM vs. today

Before After

36

Profit Model - Costs

• Relatively little capex needed to launch, but significant opex to run

• Upon launch, MNOs invest 6-8 times the revenue generated to drive scale of agents and users

1. Agent commissions2. Marketing 3. Personnel

Need time and resources to deploy robust agent network and acquire customers

54% of top 10 provider revenue goes to

agent commissions

Early investment pushes breakeven out past 36 monthsMobile money profitability over time (months)

Key takeaways on the MNO business model for DFS

1. Mobile money can be profitable but getting there can be painful

2. Heavy losses in early years to build agent network and acquire customers

3. Indirect benefits can be significant but not always directly reflected in P&L

4. Increasingly, significant revenue requires an ecosystem-based approach

43

Standalone model: bKash

44

A. B. C.

27%

37%37%

What is the split between transaction fees and interest income for bKash?

A. 15% transaction fees, 85% interest income

B. 50% transaction fees, 50% interest income

C. 85% transaction fees, 15% interest income

45

bKash: A brief history

2009 Two Partners Inspired by East Africa:

1. BRAC: world’s largest NGO – mass market social service delivery with two large retail financial services businesses

• BRAC Microfinance

• BRAC Bank

2. Money in Motion: Investment vehicle of Iqbal Qaudir(MIT), Kamal Qaudir (Cell Bazaar), and Arun Gore (Grey Ghost).

46


BRAC Enterprise

1Enterprise

2BRAC Bank

bKashMinority Investors(49%)

47

BRAC: 3 distinct retail channels

48


Regulatory conditions

• 2011 launch – license for Mobile Financial Services held by BRAC Bank

• bKash cannot lend: value of bKash mobile accounts deposited in full with commercial banks

Initial Capital and Investors

• BRAC Bank 51%; Money in Motion 49%

• $10m from Gates + TA from ShoreBank/Enclude

• 2013 IFC and Gates Foundation invest

49


A standalone independent operation

• Hires its own staff,CEO and CTO (recruited outside BRAC and outside of Banking)

• BRAC assistance in year 1Seconded 4 staff

First 5,000 agents from BRAC borrowers

• By year 2 few links to BRAC or BRAC Bank"build it alone"

"if it relies on BRAC it will not succeed"

50

bKash: Scale

As of October 2015Accounts 21 millionActive Accounts 9 millionTransactions Per Month 90 millionValue of Transactions Per Month $1.4 billionAverage Transaction Size $16

51



“Mobile accounts“ issued by bKash; redeemed by bKash.

Value of deposits sit in pooled accounts at commercial banks

bKash primary visible brand; BRAC Bank subordinate

Accounts

55



bKash owns the transactional data

bKash holds the customer identification

Data will be used to develop new services with bank, insurance and MFI partners

56



MNOs provide USSD access

bKash pays MNOs 7% of fee revenue for access to their USSD

bKash manages a call center

bKash will launch a smartphone application independent of MNOs

57



Commissions 100+ distributors that oversee 100,000+ agents

bKash accounts can be serviced at BRAC Bank ATMs but not at BRAC Bank Branches or BRAC Branches

58

bKash: Profit model

Fees

Interest

2014 AuditMonths 30-42

REVENUE $84 Million

Agent Comm-issions

USSD

Corporate

COSTS$79 Million

PROFIT$5 Million

800 staff

110,000 agents

60

Key takeaways on the standalone business model for DFS

• Startup - neither MNO or Bank - can scale• Challenging profit model:

• No existing business lines to cut cost• No adjacencies or cross-sell• Profitability relies on transaction fees

• Strategy and sequencing key:• Early scale and profitability come from sharp

focus on basic payments• Medium term pivot towards broader array of

services; connected services61

Diversity of Business Models

62

• The digital channel is not in itself a business model

• It is a tool that enables innovation and diversity of models:• New ways to deliver existing services

• New services that weren’t possible in the past

• New partnerships based on specialization and interconnection

• A successful DFS ecosystem allows and even requires a diverse set of players and business models to succeed

• This session presents three quick cases just to give a flavor of the range of DFS business models that are possible

There are myriad potential DFS models

64

Value chainCustomer value proposition

Profit model

Introducing our analytical frameworkCapturing the key aspects of the business models

What cost or operational efficiency benefits does the service bring to the business?

Who is the target customer?

Who owns the customer relationship

and brand?

Data / VAS Digital channel

Physical channel

What is the value proposition for the target customer?

What sections of the value chain does the business own vs outsource to partners?

Accounts

What additional revenue or loyalty benefits does the service bring to the business?

• s

Shared control

Full control

No control

Completely owns the value chain item. Not dependent on any partner.

Partly owns the value chain item and/or shares it with partners

Owns no part of the value chain item. Value chain item may or may not be necessary to the business model

Color coding legend

65

Commercial Bank of AfricaPowering digital credit on the back-end

M-Shwari is a mobile-only deposit and credit account offered as a partnership between an MNO mobile money provider (Safaricom in Kenya) and a bank (Commercial Bank of Africa)

66


Profit model

Value proposition:

Commercial Bank of AfricaPowering digital credit on the back-end

Target customer: Mass-market consumers

Issues full bank accounts

Holds regulatory compliance

Only accessed via M-PESA and this is the brand most customers know

Customer ownership: Safaricom M-PESA

• Brings mass market Kenyans (about 50% of which were previously unbanked) the full benefits of a banking product (interest, deposit insurance, access to credit) – using mobile money as a gateway.

Credit scoring on MNO data

Underwrites the loans on own books

Owns repayment history data, but MNO partner also has visibility

Owns and runs the credit scoring algorithm in-house

The M-Shwari account is only accessible via M-PESA wallet

Available to 15.7m active Safaricom users

Cash-in and cash-out services only accessible via 91k M-PESA agents (not via CBA branches)

Increase revenue through profitable digital credit

Exact nature of Safaricom-CBA profit sharing is not public

• Total value of loans disbursed since launch (as of Feb 2016): $782 million• Average loan size: $30• Loan facilitation fee or 7.5%

• Deposit balance (Feb 2016): $73 million• Average account balance (90 day active accounts): $5• Interest rate on M-Shwari deposits 2 – 5%, above the 1.5% weighted

average reported by CBK

• CBA has minimal retail presence/infrastructure as its traditional target market has been the corporate sector

• M-Shwari partnership allows access to a mass market retail customer base by outsourcing channels

Reduce costs through low cost deposits

Accounts Data/VAS Digital channel

Physical channel

Customer-facing digital and physical channels are owned by Safaricom

67


Profit model

Value proposition:

Instaloan

E-money wallets belong to Globe (GCash)

Lending license also with Globe (Fuse)

Credit scoring on Globe (MNO and Gcash) data

Completely owns the repayment history data

Disbursement and repayment via Globe (GCash) wallets

Uses only Globe communications channels

Cash in/out takes place via Globe (GCash) agents


Physical channel

Similar model, except:• Controls entire value chain• Subsidiaries playing all the key

roles required by the model• MM (accounts + CICO)• MNO (comms)• Lender (scoring + credit)

68


Profit model

Value proposition:

All accounts belong to MNO partner – just e-wallets, not bank accounts

Credit scoring on MNO data

Owns and runs the credit scoring algorithm

Underwrites the credit on own books

Owns repayment history data, but MNO partner also has visibility

Disbursement and repayment via MNO partner wallets

Relies on MNO partner comms channel for transactions

Reliant on MNO partner agents for cash in/out


Physical channel

Similar model, except:• Controls almost none of the

value chain• Highly specialized on only

• Analytics• Lending

• Reliant on MNO partner for accounts, CICO, comms and access to customer data

69

OxxoLeveraging retail infrastructure for financial services

Oxxo is Mexico’s largest retailer by number of outlets with high traffic, long opening hours, and many unbanked customers. They are now leveraging their retail infrastructure to offerSaldazo, a debit card linked to bank account, in partnership with Banamex bank.

1,506

1,623

1,801

12,597

7-Eleven

Banamex

Bancomer

Oxxo

# of retail outlets

Banking sector total: 11,000

70


Profit model

Value proposition:

OxxoLeveraging retail infrastructure for financial services

Target customer: Mass-market retail consumers

Low KYC account at partner bank Banamex

Cards & ads co-branded Oxxo and Banamex

Customers think of it as an Oxxo card product

Customer ownership: Oxxo

• Low-barrier Saldazo “savings card” to store money safely• Special discount offers and loyalty bonuses for Oxxo stores• Better control of money with SMS alerts, digital statements• Use at any VISA enabled merchant

Banamex owns customer data, shares reports with Oxxo

Oxxo utilizes user data for loyalty rewards and improved marketing

Transactions happen at regular POS devices

Account may be linked to Telcelphone for mobile P2P, airtime and bill pay

CICO at 12,597 Oxxo stores

Oxxo has long opening hours (minimum 12h/7 days, some 24/7)

Retail payments at any VISA POS

Direct revenue from transaction fees

• Agency banking: 3.8m txs/mth• 41% of the national market share

• Remittances: 200,000 txs/mth after 6 months• Expecting to reach at least 1.5m

• Projected to generate 17% of total operating profit in 2-3 years

• Convenience stores are fairly commoditized, so Oxxo uses this as a competitive advantage• Gives people a reason to choose Oxxo

• Oxxo previously didn’t have much data on cash customers, but can now • Incentivize customers via loyalty rewards • Use data analytics to design better promos and marketing campaigns

• Aimed at mass market retail consumer base• Oxxo has 12m purchases daily (~1 per minute per store)• Mostly FMCGs with average ticket size ~$3 USD

• Leverages existing business for cost efficiencies• Large retail footprint already in place, staffed and equipped• Extensive cash handling processes

Generate traffic and data for core business


Physical channel

71

ZoonaThird party agent network with over-the-counter transfers

Zoona enables MSE businesses to offer over-the counter payments and remittance services, access working capital and purchase inventory through digital channels.

72


Profit model

Value proposition:

ZoonaThird party agent network with over-the-counter transfers

Target customer: Micro and small enterprises

Hosts internal agent wallets

Float is held by a banking partner

Does NOT offer consumer wallets (yet)

Customer ownership: Zoona

• Consumers:• Instant money transfer, bill pay and MM deposit or withdrawal

over-the-counter (OTC) with no need to register an account• Agents:

• New transaction revenue and increased footfall• Access to working capital• Digital payment of inventory

Agent credit based on tx data to accelerate the growth of its physical channel

Credit scoring on basis of Zoona transaction data

Kiva.org provides lending capital

Relies on SMS and data services by MNOs for transactions

End customers do not interact directly with any digital channel, since service is over-the-counter

Zoona acquires, manages and owns all its agents

650 agents and 1,100 outlets in Zambia

Revenue is driven by transaction fees

• Consumer services• $9m in transactions per month• Domestic money transfer (5-10% of tx value, capped at $9)• Bill payments, airtime sales

• Agent services• Working capital loans to agents (21% APR)• Supply chain distributor payments (e.g. SABMiller)

• Fixed costs: • Agents finance the costs for rent and operating expenses• Loan capital for agents is provided by Kiva.org and it’s crowdsourcing

network• Zoona pays for staff, agent training, and marketing

• Marginal costs: • Most costs are marginal, reducing risk for Zoona• Agents receive between 20% - 60% of transaction fees

• As a startup with no existing infrastructure, Zoona has built its agent network through entrepreneurs and existing retailers• Pure agents (Zoona franchise)• Retail outlets with agency as a side business• Distributors who use Zoona for B2B (FCMG and airtime)

CAPEX is kept low by “outsourcing” to agents


Physical channel

73


Profit model

Value proposition:

Kopo KopoValue added services for retail SMEs

Target customer: MSE retail merchants

Hosts internal merchant accounts

Float is held by a bank partner

Controls settlement of merchant funds, allowing for automated repayments of cash advance loans

Customer ownership: Kopo Kopo

• Merchants:• Reduce costs of cash handling (eg: leakage)• Electronic record of all transactions • Access to loans and other value added services

Partners (Mobile money providers) • Increase transaction revenue while outsourcing investment in

merchant focused ops and tech

Utilizes tx data to offer various VAS directly to merchants

Merchant credit based on KK txdata is a major revenue source

Owns and runs the credit scoring algorithm in-house

Kopo Kopo owns the merchant web platform for completing transactions, managing account, and accessing VAS

Safaricom controls the customer payments instrument (M-PESA)

Kopo Kopoacquires, runs and owns the relationship with all merchants on their platform

Total 10,000+ merchants

Consumer transaction fees

• Merchants in Kenya charged 1% of transactions received via M-PESA• Fee split evenly between Kopo Kopo and M-PESA

• Primary costs are: • acquisition and servicing of merchants • development and maintenance of technology platform

• Extends working capital loan to merchants based on transaction history• Loan has no maturity, but it repaid as an additional merchant fee on

transaction volume• This incentivizes merchants to push txs onto the channel so as to repay

quickly • Direct revenue from credit product has already surpassed transaction fee

revenue

• Kopo Kopo offers digital payment acceptance to a wide variety of merchants, from micro-enterprises up to large retailers

• Kopo Kopo aggregates merchants for mobile money systems like M-PESA, but the consumer relationship and experience remains with the MNO

Merchant credit product


Physical channel

Similar model, except:• Focused on merchants (not

agents) as immediate users• Stronger focus on credit product

in the core profit model

74

Accounts Data/VAS Digital channel Physical channel

Legend

Shared control

Full control

No control

Completely controls the value chain item. Not dependent on any partner.

Partly controls the value chain item and/or shares it with partners

Owns no part of the value chain item. Value chain item may or may not be necessary to the business model

Is moving partially into controlling the value chain item

Is moving significantly into controlling the value chain item


Business models focused on company strengths and assetsRange of models that specialize in a narrow part of the DFS value chain

OXXOVast retailer offers agency banking and transactionalaccount

M-Shwari (CBA)MNO (Safaricom) brings channel, retail presence, and marketing expertise

Bank brings credit license, expertise

and capital

Zoona OTC agent aggregator that offers agents credit based on tx data

Globe InstaloanComprehensive play by MNO with subsidiaries

Digital channel from Globe, agents from MM arm GCash

JumoSpecialised lender that

brings credit license and scoring model

Relies on MM/MNO partners for everything else

Kopo KopoFirst outsourced, but now controls its credit business

Merchant aggregator that offers merchants credit b. on tx data

Equity Bank Bank that established its own agent network


In a digital business, the physical channel is still important

OXXOVast retailer offers agency banking and transactionalaccount

M-Shwari (CBA)MNO (Safaricom) brings channel, retail presence, and marketing expertise

Bank brings credit license, expertise

and capital

Zoona OTC agent aggregator that offers agents credit based on tx data

Globe InstaloanComprehensive play by MNO with subsidiaries

Digital channel from Globe, agents from MM arm GCash

JumoSpecialised lender that

brings credit license and scoring model

Relies on MM/MNO partners for everything else

Kopo KopoFirst outsourced, but now controls its credit business

Merchant aggregator that offers merchants credit b. on tx data

Equity Bank Bank that established its own agent network


DFS business models are not static but evolve (rapidly)

Tim

e

Equity 2.0

OXXO 1.0

Equity 3.0

OXXO 2.0

Offered retail network as agency provider for banks

Issuing card based accounts under joint brand, mining tx data for loyalty, analytics

Est. own agent network for cash in/out to accounts

Secured own MVNO license, mining transaction data for advanced products

Advancing financial inclusion to improve the lives of the poor

www.cgap.org

http://www.themastercardfoundation.com/

http://www.themastercardfoundation.com/

business models in digital financial services

Economy & Finance