Setting Up a Bank-Led Mobile Banking System

For a bank, setting-up its own mobile banking system basically consists in outsourcing teller activities to external cashiers holding an account in the bank. Just as with an MPS provider, authentication and registration of transactions can be done by mobile phone or by card. This will result in a bank-led mobile banking system (for a synthesis of the differences between bank-led and non-bank-led mobile banking schemes, see Box 2). The major difference with a MPS is the fact that there is no e-wallet: the bank-led MB is an additional distribution channel to access bank accounts, which are therefore much more easily accessible.[1] The main advantages for banks of setting up their own MB are:

x It contributes to promoting savings, as it gives the clients easy access to money on their deposit account and increases transparency through SMS information;

x Bank sets pricing according to its own interests;

x Banks determines the product range with financial services eyes;[2]

x Bank-led schemes are potentially open to customers of all mobile operators (provided the bank negotiates agreements with these operators);

x The money “stays in the bank” whereas with non-bank solutions involving e-money, the float (total value of e-money issued) goes to a financial institution not necessarily interested by a small rural clientele;

x Cross-selling effects are easier to create, for example clients coming to save can build up a history of transactions which can be taken into account for future loan appraisals.

Box 2: Differences Between Bank-Led and Non-Bank-Led “Mobile Banking”

Mobile banking schemes are often classified with reference to the promoter of the system:

x Bank-led scheme (corresponding to our narrow definition of mobile banking):

○ Client has a contract with a regulated financial institution;

○ Mobile banking is used by the financial institution as an additional channel to distribute existing financial services outside of its branches;

○ Mobile banking transactions are made directly on the client's current account.

x Non-bank-led scheme (this is what we refer to here as mobile payment services):

○ Client has a contract with a non-financial institution (Mobile Network Operator, Payment service provider…);

○ Clients exchange money for a stored electronic value (“e-money”) that they can use to pay goods and services or transfer to another account holder;

○ E-money is stored on a specific account, called “virtual account,” “electronic wallet.”

We will now look at third-party agents, discuss the critical success-factors of dealing with the principal-agent dilemma and managing cash, and then explore the challenges that need to be met in order to set up a third-party agent network.

Who Are Third-Party Agents?

Third-party agents are existing commercial outlets that can be very varied: village shops, pharmacies, gas stations, lottery kiosks, cybercafés, post offices, MFIs,[3] etc. As a prerequisite for being a financial institution's agent, they must have an activity involving cash transactions and be ready to manage a sufficient level of funds; moreover, their existing activity should cover their fixed costs. As agents typically incur very few specific fixed production costs for offering the banking services, except for the necessity of maintaining a sufficient level of float (see below), the fact that the contribution of their agent revenue is marginal dramatically reduces the break-even point related to the provision of financial services. As a consequence, they have the capacity of reaching out much further than bank branches.

The Bank – Agent Relationship

A challenge to successful outsourcing is the management of the principal agent problem, i.e. the difficulties that arise when a principal hires an agent, such as the problem of potential moral hazard and conflict of interest, inasmuch as the principal is —presumably— hiring the agent to pursue its, the principal's, interests.

The benefit a shopkeeper can expect from becoming an agent is not only financial (from the commissioning). Other important aspects are: increasing visibility, attracting new customers with cross-selling effects, and making better use of existing infrastructure and available staff time. Reciprocally, the agent's image will impact the bank's: a bank partnering with well-established agents will gain in visibility and potentially attract new clients, whereas partnering with agents having a bad reputation will jeopardize the bank's image. The way agents treat the bank's customers will also reflect on the bank's reputation. Moreover, in cases where the agent also delivers financial services other than those of the bank, conflict of interest arises.

All these elements need to be taken into account when choosing agents and defining the economic model, the contract and the monitoring system so as to bring the agent's interests into alignment with the bank's interests and to be able to adjust quickly if necessary.

Managing the Cash

Cash management is the critical aspect of the agent business. We will now look at how this is handled in various contexts. The main obstacles agents meet in this regard are:

x Employee malfeasance, as store owners must almost always leave a large amount of money in the hands of employees in order to rebalance their float;

x Physical security;

x Travel cost and time, which has to be factored in the analysis of the profitability of the financial services activity for the agent.[4]

The total amount of transactions external agents can operate as well as the unit amounts they will be authorized to handle will be limited by their financial capacities: typically when working with small independent agents, cash transactions are offset by corresponding transactions in the agent's account at the bank, whereby the agent is only authorized to receive cash up to the amount available on his account (float) – when an agent cashes money in on account of a bank, it is dealt with as if he were taking money out of his account. Obviously, he can only hand out the cash he has at hand. As cash-in and cash-out transactions are not always balanced in a given period of time, agents might be unable to perform requested transactions. The financial capacities needed for an agent depend on his proximity to a place where he can cash in and out on his account and the delay with which his account will be credited. One way of addressing the problem of agents' financial capacities is to structure the agent network with different levels presenting a graduation of financial capacities. Masteragents can be used who are responsible for managing the cash and electronic-value liquidity requirements of a particular

group of agents;[5] their operations are more challenging in rural areas. In Kenya,

some M-PESA agents who are located near to their masteragent's branch can renew their cash two to three times daily while more rural agents do so once a day or once every two days, with over an hour travel time.

Density of the agent network in the bank's areas of operation is a key factor to enable proximity and convenience for the customer base. The economic activity in rural areas generates short travels towards hotspots (markets, high circulation crossroads etc.) where it is possible to find retail shops, petrol stations and sometimes MFI/banks' branches which can be used as points of services for remote financial services as well as relays for smaller agents located in remote areas.

Setting Up an Own Third-Party Agent Network

Setting up and managing an agent network is a lot of work, which translates into costs: identification of agents, training, close monitoring to make sure they are handling operations well, control, hot-line for support in case of problems. In building its agent network, a bank will choose one or a mix of the following strategies:

x Rely on pre-existing networks (typically major retail chains, gas-stations networks, post offices or MFIs). The heads of networks typically function as masteragents[6] and will participate in the supervision of their agents. Masteragents will need to organize the support to their agents' cash withdrawal and deposit needs, either by setting up cash-managing branches or by identifying higher-level agents or banks with whom their agents can deal;

x Select independent retail shops and manage them directly (banks are in a good position to identify such agents among their individual shopkeeper clients);

x Outsource the building and management of chains of agents to third-party agent management companies who sign up, equip, train and maintain agents on the behalf of their client.[7]

Banking Correspondents: A Specific Type of Third-Party Agents

Some banks use banking correspondents whose role is not limited to cash transactions but who also act as intermediaries authorized to sell some of the bank's products and services. This has proven to be an efficient way of increasing outreach, in Brazil for example.[8] The main differences between a bank-led mobile banking system and a network of banking correspondents are that (i) the range of outsourced transactions is broader and (ii) banking correspondent networks have usually been set up based on card and POS technology.

Although some regulations allow a significant participation of banking correspondents in the loan process (collection and preliminary processing of loan applications including verification of primary information, financing proposals, disbursement of small value credit, follow-up for recovery, post-sanction monitoring),[9] this raises questions as screening of loan applications and loan approval and follow-up are complex processes requiring specific training and inducing a risk for the bank. Delegating them to outside agents would certainly require a strict prior due diligence, sufficient training, and close monitoring and control.

Relevance of Setting up a Bank-Led Mobile Banking System

The cost of setting up mobile financial solutions and a network of agents from scratch is so high for a single bank that it might be profitable only for the largest ones.[10] For banks focusing on loans, the investment in such a system is probably not worth it, since only a minor part of the costs related to credit are significantly reduced by mobile banking systems. However, in the perspective of increasing deposits and savings and of developing the range of services, especially considering the high demand for payment and remittance services in rural areas, the investment becomes more attractive. Other considerations are factored in the decision of creating and managing a MB system, including impact on image and differentiation from competitors.

Thus, setting up a bank-led mobile banking system helps to make sure that such a system serves the bank's interests, but it is a very heavy initiative, which results at cost level in reduced transaction costs and increased production costs in a proportion depending on the environment. An idea is being tested to reduce the weight for smaller-sized banks: setting up mobile banking systems used jointly by several banks. These systems can either be centralized and imposed by the monetary authority[11] or set up by an individual service provider serving several banks.[12] This type of systems may allow banks to share costs and reach larger volumes while allowing a good adaptation of the system's functionality to financial services needs as they are designed to serve banks' needs in priority. The challenges they face are effectively serving different needs and priorities between different banks, it will be interesting to follow their effective set-up.

  • [1] As for example Xacbank Mongolia, Opportunity Bank Malawi, see Kumar et al. (2010), Cajas Vecinas Chile.
  • [2] See: McKay et al., 2010: "MNOs, which have often led the first wave of innovation in branchless banking in some countries, are not well positioned on their own to lead a new wave if it entails offering a broader range of products. Finally, some MNOs will find mobile payments do everything they want them to do: increase loyalty among voice clients and decrease the cost of distributing airtime. In other words, they may have no motivation to do more”, p.10.
  • [3] Central Bank of Kenya, for example, has issued guidelines for agency banking in May 2010, including the possibility for MFIs and SACCOs to act as banking agents
  • [4] Frederik Eijkman, Jake Kendall, and Ignacio Mas, “Bridges to Cash: the retail end of M-PESA. The challenge of maintaining liquidity for M-PESA Agent Networks”, 2010.
  • [5] A masteragent is a person or business that purchases e-money from an MNO wholesale and then resells it to agents, who in turn sell it to users. Unlike a superagent, masteragents are responsible for managing the cash and electronic-value liquidity requirements of a particular group of agents. See GSMA, “Mobile Money Definitions, Mobile Money for the Unbanked”, 2010. definitions
  • [6] Like PEP in Kenya for M-PESA, see Eijkman et al., 2010.
  • [7] Banco Popular in Brazil (the banking correspondent brand of Banco do Brasil) uses companies such as NetCash in Sao Paulo State and the Brasilia Federal District and PagFacil in Pernambuco. Lemon Bank in Brazil has no branches at all and relies on 16 agent management companies (including three that it purchased) to manage the majority of its 5,750 agents. See also Gautam, 2008.
  • [8] See Kumar et al., 2006; Rotman, 2010; and McKay, 2010.
  • [9] See Reserve Bank of India, Discussion Paper on Engagement of 'for-profit' Companies as Business Correspondents,, 2010.
  • [10] See Kumar et al., 2010.
  • [11] The eZwich smartcard-based system was launched by Bank of Ghana in 2008 and usage is compulsory for all banks including rural banks and savings and loans companies; the launch of the Maldives Monetary Authority Project supported by CGAP and World Bank is planned end 2010.
  • [12] The Senegalese Authorities are launching a phone-based mobile banking scheme aimed at increasing outreach of financial services in rural areas, open to all interested MFIs and banks, with the support of KfW.
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