Branchless Banking—hope or hype?

Shoaib Khan – AVP Enterprise Mobile Solutions (AbacusConsulting)

With the advancement in the fields of finance, education, technology, and medicine, developing nations feel a growing need to come at par with the world. The global economy today is highly interdependent, whereby the economic conditions of one region, by and large, affect the economic health of other regions—creating a ripple effect.

Developing nations must step up and do everything in their power to improve their economic prosperity, rather than depending on developed countries for help through transferring aid and technology. Financial intermediaries, particularly banks, determine the economic prosperity of any nation. A sound banking system, therefore, is what is required for a country to progress in today’s world. While most of the developed nations enjoy the benefits of various financial services offered through many accessible media, there is a potential unbanked market in the emerging economies that can be tapped to improve the overall economic outlook of these countries.   

Robert E. Hinson, a famous marketing and communications consultant, notes in his research, "Banking the poor: The role of mobiles", that about 90 percent of the people in developing countries lack access to financial services (for credit or savings). This ultimately forces the poor to remain in poverty forever. In a famous research study on “Finance, Inequality, and the Poor”, Beck, Demirguc-Kunt, and Levine found strong inverse relation between financial development and poverty rate.

One option of reaching out to the unbanked segment of society is through establishing physical bank branches in the underserved geographical regions; this, however, challenges the very idea of serving the lower income groups cost-effectively. In developing countries, banks and mobile carriers can collaborate on joint ventures to develop a sound mobile banking system and establish branchless banking (using retail stores, post offices, and gas stations as their agents) to access areas that are difficult to reach, due to geographic or political concerns.    

Ideally, mobile banking can be utilized to reduce operating costs, improve efficiency, and lead to new delivery mechanisms and business models. According to the State Bank of Pakistan, the alternate delivery channels rely on technology solutions and agent networks to reduce the transaction costs and improve financial access. In particular, mobile phones are considered to be the most viable tool to serve this purpose, as mobile phone users are four times the number of account holders of the formal banking system in Pakistan.

Technology plays a significant role in developing active collaboration between banks and banking-agents, ranging from mobile telecommunication service providers to retail store agents, which was not feasible before. This collaboration can help provide services to customers in areas that are either remote or difficult to access.

Branchless banking, which utilizes mobile technology, can be highly successful in such scenarios, since using mobile phones does not require high literacy and formal training for its users. Also, with the cut-throat competition in the mobile phone industry, the prices have declined substantially, making cellular communication more affordable for the lower income group of the society. Therefore, in developing countries, a  huge segment of the population (including those with low literacy levels) that currently owns a cell phone but does not have a bank account, will definitely be attracted by the opportunities of branchless banking and, therefore, will become a   part of the formal banking system.

The potential of mobile banking is not only limited to serving as a delivery channel for payments facilitation. The new WAP and Java-enabled mobile phones with GPRS support a wider variety of banking services, such as fund transfer between accounts, stock trading, and confirmation of direct payments via the phone’s micro browser.

Existing mobile banking facilities are primarily used for just payment and transfer purposes and not for credit and savings; this is not sufficient to boost the economy to its full potential. “We see opportunities for service providers, who move quickly to create new products, especially if they can establish shared networks of cash-handling agents to cover that ‘last mile’ of service delivery”, says Ignacio Mas, CGAP advisor and co-author of the report “The Early Experience with Branchless Banking”, (World Bank Group).

Likewise, using mobile banking, banks can expand their services and introduce new ones to the previously underserved communities. In the long run, the banks can think of ways to include the segments that are currently excluded from the benefits of financial services. The vicious cycle of poverty gives birth to financial exclusion in economies; the poor remain entrapped within this cycle. Being deemed default-prone, they are restricted to benefit from credit facilities—ultimately, being forced to compromise their living standards even further. In most developing economies, the branchless banking initiative can be utilized to approach this financially excluded stratum of the society and help them start their small enterprises. Co-Director of the Centre for European Research in Microfinance (CERMI), Marek Hudon, believes that if access to credit is directly instrumental to economic development, poverty reduction, and the improved welfare of all citizens, then it is a moral necessity to establish credit as a right (as proclaimed by Nobel Prize Laureate, M. Yunus).

With branchless banking, banks can get an opportunity to bank the unbanked and the mobile phone carriers can utilize this opportunity to offer more services to their existing and potential customers.  

In a nutshell, branchless banking makes it easier for the existing mobile phone customers and bank clients to experience expanded financial services with ease. It also includes that segment of the society which was not targeted by formal banking earlier. As more people open bank accounts and more transactions take place through banks, the economic growth of the country will be accelerated.

However, branchless banking is not all that perfect. There are still some limitations and glitches in the prospect that need to be resolved before branchless banking can become a successfully workable solution.

It is perhaps too far-fetched of an idea to assert that banks would completely go branchless in the near future, focus of the human-based work would entirely shift to sales and marketing, and the current human-dominated jobs will be replaced by automated machines and non-bank agents. 

In conclusion, branchless banking is an effective way to formalize the economy, reach out to the unbanked population, and utilize this service to improve the economic conditions of the financially marginalized stratum of the society.  This, ultimately, leads to the betterment of the economy as a whole. Once successful, this initiative will be followed by many other developing nations to improve their economic growth and alleviate poverty.

About Mr. Shoaib Khan

Shoaib Khan is a seasoned sales & marketing professional, experienced in marketing strategy, product positioning, competition analysis, solution pricing, and brand promotion for products  and services in the IT sector. He has enjoyed different managerial positions in top-notch IT Consulting, Technology, and Outsourcing firms in Pakistan and the Middle East. Currently, he is serving as Assistant Vice President – Head of Enterprise Mobile Solutions at Abacus Consulting.