Micamericas

Apr 16, 2008

Does My Cell Have a Balance?

Latin American MFIs are excited about international electronic banking experiences. And although much remains to be adapted, learned, and activated, groups such as the CGAP are helping sort out the ideas in the region.

By Diego Fonseca
 

In 2005, Globe Telecom (GT), a telephone communications service, undertook a revolution among the campesinos in the Philippines. And it all was based on cell phones. That year, GT launched GCash, which allowed remote payments of credit, loans, service bills, restaurant checks, and even transfers at the national and international level through simply using the keys on one’s cell phone, without having to go to a bank. For some, it was the chance to enter the financial system from which they had always been excluded since they do not live in a city. For others, it was a low-cost opportunity to expand their portfolio with new clients.

Sponsored by the Consultative Group to Assist the Poor (CGAP), an independent organization of the World Bank that sets norms and represents the majority of existing microfinance funds, the system was put under the control and regulation of the Philippine Central Bank, to give confidence to all the market participants. By the end of 2007, GCash had 500,000 active clients and 50 rural banks associated. “With GCash, rural banks can expand services without having to invest in or build their own technical infrastructure,” explains Paolo Baltao, -director of Government and Financial Services of G-Xchange, Inc., the company administering the platform.

Baltao believes that the Philippines and Latin America have many similarities in the area of microfinance and that it is enough that a mobile service company and a microfinance institution (MFI) “do what has already been done” to make such service available in the region. Meanwhile, when he presented his case at the 10th Inter-American Microenterprise Forum, held in El Salvador in October 2007, a murmur buzzed through the room at the Radisson Plaza San Salvador Hotel. The experience of GT and GCash may still be rudimentary—Baltao declined to present results—and many in the audience wondered about potential benefits. But many others clamored for an answer to an earlier -question: Might it be easy to replicate the experience in Latin America?

That question does not yet have any clear answers. The region is the world’s third fastest-growing market in cell phones, behind Africa and Asia, and in several countries the number of cell phones has already surpassed the number of landlines, but the costs of text messages are still high. And although the technology may be available, in some cases the scale of the MFI is not sufficient to apply it and the investment does not appear to be profitable. Cell phone customers still have not overcome the cultural difficulty of clicking on their wireless phones to make a financial transaction. Or, in many cases, with technological capacity, scale, and more or less savvy customers, what is missing are more dynamic regulations.

Holy Grail Technology

Analysts continue to seek modern solutions. By using more technology, the plan of financial providers is and always will be to reduce costs to give customers more control over remote transactions. But to get there, they warn, calls for patience while diverse factors align—from the aforementioned regulations or the availability of low-cost technology to coordinating the service with the MFI’s business strategy.

Today there is much talk in the region about experiences such as GCash, and with good reason. Latin America has been viewed as pioneering the use of certain technologies and is the leader in others, such as non-banking correspondents, small retail stores that provide financial services for banks. In early 2007, Colombia alone had more than 96 non-banking correspondents representing six banks, among them BanColombia, Banco Agrario, and the giant Spanish bank BBVA. More than 20,000 transactions were made in deposits, withdrawals, credit-card payments and installments, for a total of more than US$1.8 million.

Countries such as Peru are also rapidly turning to electronic payment services (called mobile payments or m-payments), and Mexico, among -others, has begun decentralized payment services in private companies. In Brazil, large letters of credit are beginning to move electronically at a fast clip. Almost all the country’s municipalities now have a banking correspondent where clients can pay bills, deposit and withdraw money from their accounts, receive salary payments, pensions, and social payments. There are also projects focused on the base of the pyramid that are supporting this mechanism even in the extremely poor Northeast of the country. Even the banks have done a large part. By 2007, throughout the country there were already 200 biometric tellers—which read fingerprints—and legislation had gone into effect on the use of mobile transactions. According to predictions, in 2010 some 10% of the 50 billion transactions will be conducted through cell phones.

However, these same financial services, seen more in the Philippines and other markets, have not found sufficient traction in the region, which is still searching for its own Holy Grail technology. “One reason is probably the regulatory environment that tends to prohibit wireless services from offering mobile banking options without being associated with a bank,” says Hannah Siedek, a CGAP microfinance analyst. “Another reason could be the tax structure of some Latin American markets in which text messages are quite expensive.”

Beyond the first technological pioneers seeking solutions to electronic banking (see page 13), some markets in the region have already begun activating services. In Ecuador, for example, it is hoped that downscaling will soon allow the option to manage accounts via cell phones and Internet already enjoyed today by the clients at Banco Bolivariano, which specializes in people with median income. (A similar upsurge has already happened in -Brazil, where in 2007 more than 400,000 clients of Banco do Brazil made more than 35 million mobile transactions.)

Regulations, although tepid, have also progressed. The CGAP, for example, which in practice is one of the most active organizations in the region, has conducted studies on regulatory policies in nine countries around the world, including Brazil, Mexico, and Colombia.

The studies will help coordinate the subsequent parametrization of services, but meanwhile the successful experiences have begun to be recognized throughout the region. According to press reports, the Federation of Brazilian Banks has already demonstrated its wireless services to banks in Argentina, Bolivia, Colombia, Chile, Ecuador, Mexico, Peru, Uruguay and Venezuela.

One critical point is to allow telephone services to mobilize people’s money through their networks, and even more, to upgrade customer support service. “Although m-banking sounds quite promising, the real backbone of banks without branches is the network of points of entry and exit of money, such as, for example, banking correspondents,” says Siedek. “Without the equipment to charge one’s telephone with money, wireless phone transactions will not be a viable option for the poor.”

There are other examples as well; the experience in the Philippines is just one case of mobile banking providers around the world, but the range of potential services that can be offered in the markets is even broader. Some companies, such as Safaricom in Kenya, Wizzit and MTN Banking in South Africa, and Comcel, Telefónica and Tigo in Colombia, among -others, provide mobile banking, but with different focuses, according to Siedek. In Colombia, banks provide the service, while in South Africa and the Philippines the providers are outside of the finance sector. In some cases, such as MTN Banking in South Africa, there are joint ventures. The evolution and success of these cases (all are monitored by the CGAP, but it is still too early to draw conclusive results) could also determine whether similar models can coexist or if a single standard for provision of services works better. One or another option may lead to substantial differences in the costs of adopting each model.

And beyond these questions, other issues need to be resolved. One is the cultural impact. Siedek herself points out that electronic banking is a new business for most stakeholders and in many markets the providers must help prepare lower-income consumers to adopt the new services. Sometimes, this approach helps consolidate the model of financial correspondents, which can also lead to lower costs. According to calculations by the Superintendencia de Banca, Seguros y Administradoras de Fondos de Pensiones de Perú (“Superintendency of Banks, Insurance and Administrators of Pension Funds of Peru”), while construction of a subsidiary with seven tellers costs a bank US$35,000, to do it with 40 non-banking agents costs only US$5,000. In both cases, the costs are well below the US$200,000 needed to establish a branch with personnel.

Altogether, microfinance institutions have already begun using a handful of other technologies to help them reach their clients at lower costs. Applications to evaluate credit risk, administer portfolio management and even devices—such as hand-helds or postnets (see page 13)—are becoming common everyday items. Siedek explains that, besides thinking in terms of new technologies, significant inroads still need to be made to optimize the existing solutions, such as data management systems. “Sometimes we forget when we see the exciting technologies of m-banking and banking agents,” she says, “that without efficient and effective access to the heart of the financial system or system information, no institution will be equipped to benefit from complex platforms of mobile banking or the networks of banking correspondents or connections with networks of local automated tellers.”

Bill and Melinda and CGAP to the Rescue

The CGAP is in fact one of the most active organizations working, through technology such as mass services and formalization, to raise large numbers of people from the base of the pyramid. In association with The Bill & Melinda Gates Foundation, created by the founder of the technology giant Microsoft, a US$26-million project was launched in 2007 to finance some 30 electronic-banking experiments in nearly 20 countries. Nine of these projects, which will last for two or three years, are testing the use of automatic tellers, banking correspondents, mobile banking, and card readers in Africa, Oceania, Asia, and Latin America. Colombia and Mexico are among the first selected in the region.

The CGAP understands that use of mobile technology, thanks to the explosion of telephones throughout the developing world, can lower the cost of absorbing enormous numbers of poor people into the market, especially those dispersed in distant rural areas.

The CGAP is also working in several other operations. One of these is the use of processing hubs to outsource MFIs’ central banking systems. These systems are costly, tend not to be optimal and require great administrative efforts. According to the CGAP, some 45% of all MFIs still maintain and conduct their operations and accounting on Excel sheets. For many, investing in a complex information system does not justify itself due to limited size and operations.

In light of this situation, the CGAP began to consider outsourcing as an alternative. The model is already common among the MFIs’ older sisters, the traditional banks. Through the Internet, institutions can access their data and processing systems stored in servers and pay only an annual tax for the service. “It also helps MFIs negotiate better communications tariffs and allows access to distribution channels such as satellite connections, networks of automatic tellers, or the national payment system,” explains Siedek.

Another CGAP project is the use of alternative information in the applications of assigning credit risk and at the level of credit bureaus. Since low-income people often have informal work, they do not have a credit history and sometimes cannot even provide adequate identification documents or acceptable collateral. Meanwhile, the lenders possess scant knowledge of the clients’ economic activity so they are unable to adapt their products. This lack of information on ability to pay leaves many potential borrowers without access, or with access only to expensive credit.

The CGAP has seen that the electronic methods of payment—from bank cards to mobile phones—offer great opportunities to monitor (or take advantage of) the history of transactions and payments by clients. The organization is beginning to follow the hypothesis that the applications of risk qualification incorporate this type of information to predict the ability to pay and reliability of clients.

Philippine Magic

When Baltao was trying to explain the operations of GCash in San Salvador and the buzz for answers was growing, the executive clicked open one of the slides in his PowerPoint presentation. It showed that the GCash platform was already available internationally in 400 stores in 15 countries. A simple world map showed the company’s logo in Canada, the United States, Africa, the Arab countries, the United Kingdom, and half of Asia.

The room fell silent. Baltao then finished by displaying the words of the executive director of the Anti-Money Laundering Council of the Philippines. GCash is virtual money that is better than real money because the system leaves a track that can be followed by the Anti-Money Laundering Council, the Central Bank of the Philippines, other regulatory entities and the law, said Vicente Aquino in 2005.

Baltao’s message was simple: the system has support, it works. It is reliable. But that message still has not resonated through Latin America. Due to lack of favorable regulations, insufficient scale, cultural obstacles, and a handful of other reasons, it just hasn’t resonated. Thus, six months after the Forum in El Salvador and three years after the debut of the service in the islands, I asked Baltao for an accounting of any agreements, dialogue, or alliances his business has had in making progress toward activating the service in the region. 

“None,” was his response in an email. 

None. Zero.

Even good ideas need time to digest.

Successful Experiences

Everything Is Technology

The word “technology” not only refers to integrated circuits, binary language, the Internet and satellites. Loosely speaking, it means knowing what to do. And such know-how does not always call for major distribution of capital but instead for intelligence and creativity. Several examples illustrating this point have already become practices that have been repeated throughout the region.

Sweet Lemon

Argentinian Wenceslao Casares, previous owner of Patagon.com, gathered US$30 million and founded the Lemon Bank in 2003, the first bank in Brazil to operate exclusively with non-banking correspondents. Lemon Bank has installed 5,200 terminals in pharmacies, bakeries, gas stations and convenience stores, where 9 million people who do not have bank accounts can pay their bills and receive financial services. Banco Estado, the third-largest bank in Chile, asked Casares for advisory assistance on his business model with the idea of replicating it. Other Brazilian institutions, such as Banco Popular (“Popular Bank”) and Caixa Aqui (“Cash Here”), promptly followed the example of Lemon Bank—which has had projects with the Inter-American Development Bank—and also launched microcredit through correspondents.

Payments at Home

The chain of stores Elektra and the bank Banco Azteca, both owned by the Mexican Grupo Salinas, manage a good part of their system of collecting loans and microcredit online. Collectors make home visits to the residences of clients with postnets. Clients slide their automatic debit card and the device, which only needs access to a wireless connection, can verify online the status of an account and update the amount. The sales workforce at the microfinance FinComún now uses the PDA Tréo with the same objective: to speed up the approval of more credit and reduce the individual impact of processing each year.

My Bank, on Wheels

In 2006, MiBanco launched its service Oficina Ambulante (“Walking Office”), a bus that traverses the coast of Peru 15 or 20 times per month. The bank is not alone in offering this option of home banking. The credit card company Visa has also developed a similar service with banks in Colombia in localities that are more than 30 minutes away from the closest city with a physical banking institution. Specially adapted trucks emit cards in less than 23 minutes, thanks to wireless connections with banks and databases. Visa sees the strategy as a low-cost mechanism that allows the leveraging of existing technology, for both the business and the banks.

ATM Tracks

Already quite common in the region, in the microfinance industry and beyond, organizations such as Prodem in Bolivia and Red Financiera Rural in Ecuador have been among the pioneers in the use of automatic teller machines with fingerprint readers in rural zones. Associated with specialized promoters armed with PDAs, these services have helped place loans, capture deposits, and service clients. In countries such as Bolivia, for example, the tellers also include instructions in Spanish, Quechua and Aymara. The system has allowed automatic procedures, lower costs, shorter waits, and better customer service. For Prodem, it has been fundamental. The ATMs have helped Prodem’s clientele grow from 459 rural customers in December 2000 to 178,600 by December 2005.

Smart Cards

The South African Net1 began its listing in Nasdaq with a value of US$1 billion. Its value? It possesses a patent from the Universal Electronic Payment Systems (UEPS), a system that allows transactions to be made with smart cards and devices from commercial locations without having an online communications system. The smart cards let people access cash, recharge cards, make purchases and get money from automatic teller machines. The news? The United States is the base for Net1 to expand into Latin America. The next item it will sell: cards with paypass system, which do not require a signature. It is important to take note, since times are approaching with more competition, higher-quality and growing services, at less cost.

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