Digital Financial Services:

The current landscape

Peter Zetterli

January 2015

• Global partnership of 34 org’s focused on financial inclusion; housed at the World Bank

• Mission is knowledge driven:

• Spur innovation in financial services at BOP

• Generate insights on what works / doesn’t work

• Disseminate best practices to practitioners

• Key learning partners and audience:

• Financial services providers (MFIs, banks, MNOs)

• Regulators and policy makers

• Donors and development partners

• Pragmatic, evidence-based advocacy at the leading edge of innovation

CGAP is a multi-donor think tank dedicated to access to finance

2.5 billion peoplehave no access to formal financial services

1.9 billion of themhave a mobile phone

5

On average, how many different financial services or

products do poor families at the base of the economic

pyramid use in any given year in the informal economy?

But do poor people really need financial services?

a) 0-3

b) 4-10

c) 10-15

d) 16-20

e) More than 20

…yes they do

6

Poor households in the informal economy use, on

average, 17 financial instruments each year

A large number of actors have now understood this opportunity

250+ providers of digital financial services in 84 countries

Together they serve over 340 million customers

38% of these – 128 million people – are low income

Source: CGAP and GSMA MMU State of the Industry 2013

Sub-Saharan Africa:

52% of deployments

70% of active users

Models differ across the globe, depending on the context

In Latin America, over 95% of

DFS accounts are card based

In South Asia, vast majority

of DFS customers don’t have

accounts at all but transact

over the counter (OTC)

In Sub-Saharan

Africa, 90% of DFS

accounts are mobile

Source: GSMA MMU State of the Industry 2013

DFS: Key concepts

Terminology: Trying to make sense of the landscape

MOBILE MONEY

Transactional wallet

mostly used for local

remittances and airtime

M-COMMERCE

Remote purchase of

goods, services via mobile

M-BANKING

Use of mobile for

banking transactions

E-BANKING

Use of electronic

channels for banking

(such as internet, ATM)

E-COMMERCE

Remote purchase of goods,

services via computer

M-INSURANCE

Insurance models tied to

mobile phone/wallet use

M-CREDIT

Loans accessed and repaid

through a mobile wallet

M-SAVINGS

Interest bearing accounts

accessed via mobile walletMERCHANT

PAYMENTS

Retail purchase of goods

& services using mobile

DIGITAL FINANCIAL SERVICES (DFS)

Delivered over a digital channel (mobile, internet) using any electronic instrument (card, phone, computer)

Accounts, products and services can be accessed remotely (outside a physical branch or outlet)

MOBILE

FINANCIAL

SERVICES

(MFS)

The basic DFS model

E-money walletE-float AgentsAgent wallet

Key concept 1: E-moneyS

tan

da

rd d

efi

nit

ion

Closed-loop

store cards

are not e-

money

• Monetary value represented

by a claim on an issuer

• Electronically stored (on a

server or–rarely–a card) and

exchanged

• Widely accepted means of

payment by others than the

issuer

• Can be redeemed as cash

Bank

accounts

and prepaid

bankcards fit

the description

E-money accounts can be issued by non-banks.

They are regulated more lightly than bank products.

Key concept 2: Agents

• Offer services on behalf of the provider

• But are separate entities—not provider staff

• Provider typically fully liable for agent

• This liability cannot be contracted away

• Usually has a different core business

• Often small retailers or airtime vendors

• In advanced markets, dedicated agents exist

• Transact against own funds in real time

• Don’t at any point hold customers’ cash

Verify client identity

• Comply with KYC standards

• Guard against fraud

Help clients transact

• Cash-in and cash-out

• OTC payment transactions

Act as face of the service

• Sign up clients

• Educate clients about the service

• Troubleshoot clients’ problems

Agents fulfill 3 important functions in a DFS service

CGAP research on the activity rate of customers registered by best vs. worst agents

Agents are central to the success of the business

Providers often focus on agent quantity, but agent quality is more important:

• If agents are weak, customers will not use the service

• Registering inactive customers is only a drain on the business

Top 20% of

agents by # of

registrations

Top 10% by

activity rate

Bottom 10% by

activity rate

To

p 1

0%

Bo

tto

m 1

0%

Activity Rate

Customers registered

by these agents make

up 5.7% of total

customers

Activity Rate

39.9%

0.9%

Profile of customers registered

by these agentsAll Agents

Top 20% of agents by

# of registrations

Customers registered

by these agents make

up 5.1% of total

customers

Why are DFS transformative?

Traditional financial services are inaccessible to the poor

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

World Developing countries Of adults earning <$2 /day

Global financial inclusion

Excluded Included

Source: World Bank Findex 2012

Why are traditional financial services inaccessible to the poor?

1. High cost of bank branches Branch infrastructure is small & heavily urban

2. High documentation requirements Large share of population cannot qualify Illiterate clients often more or less shut out

3. Low income clients find banks intimidating Actually prefer informal, risky, expensive svc Products, experience not designed for them

4. Most banks don’t want low-income clients Rather, they consciously try to keep them out Opening fee, monthly fee, minimum balance, etc

DFS models help overcome them all

Technology dramatically lowers cost of outreach

*Includes costs for physical set up (e.g. brick and mortar branches, hardware) only.

1

Case in point: Financial infrastructure in Kenya

Bank branches have been built

over the past 100+ years.

Today, there are 1,200+

bank branches in Kenya.

Case in point: Financial infrastructure in Kenya

The ATM network has been built

over the past 24 years.

Today, there are 2,300+

ATMs in Kenya.

Case in point: Financial infrastructure in Kenya

Today, there are 120,000+

DFS agents in Kenya.

DFS agent networks has been

built over the past 7 years.

Low cost of infrastructure

translates to high access.

The same goes at the global level

Points of presence for traditional financial services…

The same goes at the global level

…are dwarfed by mobile phone connections.

6,800,000,000

Mobile Phone

Connections

Source: GSMA Wireless Intelligence

Risk-based KYC has lowered documentation requirements It now aligns with what most people actually have

…in return for restricting those accounts:

• Limited maximum balances

• Limited transaction amounts

• Limited types of transactions

Bank High DFS Low DFS

Basic details Y Y Y

National ID Y Y -

Proof of address Y - -

Regulators are allowing lower Know-Your-Customer (KYC)

requirements for DFS accounts:

2

Ghana Low DFS:

• $300

• $100/day

• $1,000/month

Endorsed by global standard setting bodies and watchdogs for

Anti-Money Laundering and Combating Funding for Terrorism (AML/CFT)

Mohammad Moniruzzaman, 2009 CGAP Photo Contest

Local agents are

far more inviting

to poor people• Less formal

• No paperwork

• No queues

• Familiar setting

• Often known in

the community

• Agent is a peer

3

Distribution of agent transactions by day of the week and hour

% of total transactions within a sample of agents

Mon

Tue

Wed

Thu

Fri

Sat

Sun

10 2 3 4 5 6 108 12 14 16 18 20 2221 2397 11 13 15 17 19

22.6%

36.0%1.2% 40.2%

Business hours at Agent Partner

Business hours at bank branch network

Agents are also more accessible and convenient

Source: Akya/CGAP analysis; Note: Based on sample of 3,961 transactions

If banks aren’t getting it (and they’re not), others will (and are)

• 4/5 of deployments are led by non-banks

• Mostly mobile network operators (MNOs)

who have strong business reasons for DFS

• Direct revenue from transaction fees

• Acquisition and retention of voice customers

• Cost savings from digital airtime sales

4

Here’s why MNOs are so active in developing DFS

Average MNO revenue per user, 2000-2014

$ 0

$ 20

$ 40

$ 60

$ 80

$ 100

$ 120

Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010 Q1 2012 Q1 2014

Developing countries Sub-Saharan AfricaSource: GSMA Intelligence (2015)

55%

70%

This isn’t about charity or CSR but real business (and that’s great)

Source: GSMA MMU State of the Industry 2013

$300m

Doesn’t include indirect revenues:

• Customer gain + retention

• Cost savings from digital airtime

…and this is with a single use case! DFS has been primarily centered on domestic remittances (and airtime)

DFS are evolving to become considerably more than that

DFS innovation

33

Lots of different payments are moving onto DFS channels

…and creating a sea of new acronyms

• P2P: Person-to-person transfers/payments

• G2P: Gov’t payments (social transfers, salaries)

• D2P: Donor payments (beneficiaries, staff)

• P2G: Person-to-gov’t (fees, fines, taxes)

• P2B: Person-to-business (retail, online purchases)

• B2P: Business-to-person (salaries, allowances)

• B2B: Business-to-business (suppliers, clients)

Savings & credit

Water

Energy

Insurance

Agriculture

Transportation

Health

Mobile Money

Moreover, DFS enables a whole range of other products

35

Diversification

of financial

products

Other

applications

that improve

the welfare of

very low

income

segments

Some of which are completely new business models

Digital

Finance

+

Savings: Tigo Wekeza (Tanzania)

• Mobile wallet as savings account

• Tigo earns interest from its partner

banks on its customers’ e-float

• Regulation limits use of the interest

• Decided to distribute the funds to customers in

quarterly payments direct to wallets

• $10m to 3.5m clients in first two payments

• Amounts small since balances small (for now)

• Interest >9% vs bank current accounts 0%

…other MNOs are now following suit

Savings and credit: M-Shwari (Kenya)

• Savings and credit account

• Partners: Safaricom (MNO) & CBA (Bank)

• Customer gets a limited bank account

• Opened and accessed only via MM menu

• Can only hold money or move to MM wallet

• 2-5% interest on any balance (even KES 1)

• No minimum balance or opening fee

• 30-day credit of $1 to $220 at 7.5% interest

• No collateral or credit history needed

• Initial credit score based on phone+MM use

$1.1b

$193m

• Analogues already out in

Tanzania, Zimbabwe

• Expect to see many more

launch in 2015

• A lot of customer side

research under way

• Consumer protection debate

rages on the risks of easy

access

• Either way, potential for very

rapid uptake is proven

CBA went from 50k to 8m accounts in 2 years

Insurance: Tigo Family Care Insurance (Ghana)

$1.5 $61 $122

$13 $332 $664

The same rapid scaling is happening in a range of markets

We are witnessing not isolated cases, but a new business paradigm evolving

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Country A (36m) Country B (18m) Country C (12m) Country D (11m)

Total policies prior to MMI MMI policies today

36 mths 18 mths 12 mths 11 mths

Mobile models are transforming microinsurance in Africa

…less than four years after the new business models were invented

Source: Making Finance Work for Africa (2013) and MicroEnsure

8 of those 9 have done this

with mobile microinsurance

Microinsurance

growth in Africa

2010-2012: 200%

9 markets with

>1m lives insured

Airtel Ghana’s new free three-in-one policy:

Customer value propositions are also getting better

Product diversification is only beginning

Over 1m customers covered in one year

Digital Finance +43

Access to mobile has grown far faster than to energy and water

1 kWh of energy costs $2.30 in rural Bangladesh

1 kWh of energy costs $0.30 in Western Europe

Source: GSMA, World Bank, IEA 2012.

1.2 billion peoplehave no access to electricity

M-KOPA: Pay-as-you-go energy solutions

Rugged 8W solar panel

2 LED lights + 1 LED torch light

Phone charger (5 plug types)

Portable radio

2 year warranty

Sold in Kenya, Tanzania, Uganda (Ghana)

Costs ~$200—too much for many people

Customer pays $33 up front

Then pays $0.50/day to use

Zero balance > Turns off

Tops up account via MM

After a year, it’s paid off

No more payments needed

Model was impossible prior to mobile money

>100,000 customers since Oct 2012

750 million peoplehave no access to safe water

Across rural Africa, 50,000 water supply points have failed.

There is little point in drilling wells if there is no system to

maintain them.

Jamie Skinner,

International Institute for

Environment & Development

Grundfos LifeLink: Pay-as-you-go water solutions

Solar powered system

Well + Submerged pump

Automated water dispenser

Remote monitoring & service

Customer pays per use w/ RFID token

Token is topped up via mobile money

Commercially sustainable at $1/cubic meter

40 projects in East Africa

100,000 people served

Model impossible prior to

mobile money

What do these innovations do that’s transformative?

Enable collections across vast distances

Enable tiny payments very frequently

Create “new” financing models

> Fit amounts payable to people’s cash flow

Ties payments directly to use—100% pre-paid

> Stable, reliable revenue stream for company

Makes payments direct, instant & transparent

> Reduces leakage, fraud and corruption

Payments are not fungible

> Opens new avenues for gov’t and donor support

DF+ innovation is concentrated in mature DFS markets

52

• 60 services across energy,

water, health, agri,

transport and education

• 70% in Africa with over

half in Kenya and

Tanzania; In India, services

leveraging a variety of

branchless mechanisms

• 50% of businesses in

energy or water and

sanitation sectors

Countries with global share of

digital finance+ businesses*

Kenya, 43%

India23%

Tanzania, 8%

Uganda, 5%Zambia

3%

Other, 17%

*as of July 2013

2.5 billion peoplehave no access to formal financial services

Finally, real progress on financial inclusion

As exemplified by the changing landscape in Tanzania

0%

10%

20%

30%

40%

50%

60%

2009 2013

Active MFS accounts Financially excluded

Advancing financial inclusion to improve the lives of the poor

www.cgap.org