Wednesday, 18 May 2011

The Branch is Dead…Long Live the Branch!

I was having dinner with an entrepreneur in the Indian payments space earlier today. The emerging business models and evolving consumer adoption trends in banking & financial services, soon overshadowed the culinary delights that had adorned the table!

A silent revolution is unfolding on the ground, which otherwise appear frequently on business plans and venture capital pitches. Retail outlets, appointed by Business Correspondents (BCs) are now permitted to open bank accounts, accept deposits, facilitate withdrawals, take bill payments and enable fund transfers. This bodes well for retailers as they find discover new revenue streams but also have a great proposition to drive walk ins into their outlets. Now, this is rather well known and has been the norm for several countries that have successfully adopted the BC model and driven the financial inclusion agenda effectively.

An interesting development is however, that non-banking customers can now walk into a BC appointed retailer and deposit cash into third party bank accounts, and see their funds get transferred in real time! Hence a labourer toiling on the roads of New Delhi can ensure that his wife, thousands of miles away, in a village in Tamil Nadu can receive funds into her account in a couple of seconds. This effectively bridges the banked with the unbanked, converts cash into an electronic format and provides an instant transfer experience. All critical aspects for building confidence and driving usage of formal banking, payment and transfer mechanisms and eventually leading to the belief in the need for a bank account and financial inclusion.

The key point to be noted is that the neighbourhood retailer has earned the ‘Trust’ of the consumers accessing this suite of services. Banks have invested billions of dollars in building their brands and providing assurance to customers that their money is safe with them. Now, the retailer with his social equity, appears to have cracked the code!

Now, for most people reading this post, the process and experience of banking, having the comfort of a branch nearby (which may never be visited) is well ingrained and considered the only method of storing and accessing funds. However for billions of people worldwide, their circle of trust extends to their immediate social circle of neighbours and retailers, whom they can see and meet, at their convenience. A bank can be an ‘alien’ institution, an inanimate object that they cannot relate to as easily. MFIs with self-help groups have amply demonstrated this!

Which takes us to the second inflection point. Banking services have been rolled out by some companies, wherein the retailer requires just a mobile phone to accept deposits, enable withdrawals and fund transfers! No POS machines. No ATM machines. No Internet Banking terminals! No technology intensive kioks! No card plastic! No card readers! And a ton of other no’s as well, which would give shudders to most professionals who have grown enamored (and possibly addicted) to these devices and technologies.

Hence the question that is quite clearly staring us in the face today. Where do we go from here? How does one increase financial inclusion, banking access penetration and electronic payments usage.

The current access metrics in India are at predictably low levels of 66.3 branches per 1 million persons* and 16.3 ATMs per million persons (Source : Report on Trends and Progress of Banking in India 2009-10, RBI). For North America those ratios stand at 260 branches per 1 million persons and 1340 ATMs per million persons. Taking into consideration the income distribution and growth levels, the geographic spread and infrastructure challenges, traditional expansion models would still target a 3x growth in number of branches and 20x growth for ATMs to achieve reasonable levels of financial access. And with over 300,000 POS terminals, the growth factor opportunity for this segment can only be exponential.

This would of course incur capital investments, exceeding the GDP of several countries. But the question remains.

Which would be a more economical and successful method of banking and electronic payments growth?

There could be three approaches

Leverage new to banking & payments channels: The business correspondent and retail networks, appearing to be the primary choice.

Leverage new to payments devices : Enable payment processing via devices such as the mobile phone. Square could be a good point of reference on this dimension. I have in my earlier report, outlined the recommendations of the Inter Ministerial Panel, which has outlined a framework for mobile based acceptance network development. It has set out norms for a different approach to ATMs as well. Hence the thought is in place and the initial designs as well.

Follow the traditional branch + ATM expansion model

The Shifting Point!

The question that one ponders on now. The business correspondent / retailer models referred above have been primarily designed with a perspective of addressing the requirements of clients at the bottom of the pyramid, in both the urban rural markets.

Can these models be similarly applied to address the needs of the mass affluent and affluent audiences as well, in both urban and rural markets?

It’s been ages since I’ve visited my bank branch. Net banking and ATMs address my needs sufficiently. Hence the only leg that remains is that served by the ATM for dispensing cash.

Then, why do we need two models of expansion? The first catering to the affluent, and the second catering to the not too affluent.

A high end supermarket chain is just as hungry for business and walk-ins as your local neighbourhood grocer, a fundamental premise that drives retailers to participate in transaction processing.

Would I mind walking across to the cashier at the supermarket till to withdraw cash as I pick up groceries? Possibly not!

Would I mind depositing cash at a computer peripherals store as I purchase anti-virus software? Possibly not, again.

Would I mind if my pizza delivery guy swipes my card on a device like square instead of a fancy high end POS device? Nope!

Would I prefer a smiling attendant behind the cash till to an automated voice urging me to take my cash quickly? Yes! And she doesn’t have to be in a bank costume.

What would influence banks, regulators and processors to evaluate this radical shift in thinking? Isn’t there a sufficient economic value migration opportunity, for shifting the savings in capital and operating expenditure incurred in managing branches & ATM channels to the retail channel partner?

Would then, banks still need to invest in branches? Can a virtual bank complemented by a payment networks brand operating on a retailing layer operate in a scalable and efficient manner? Or, would in fact, retailers actually be willing to pass back value to banks for leading customers to them? Or would this perhaps lead to drastic reduction in costs across the value chain resulting in higher earnings for customers on their savings and lower lending rates possibly?

Can a model be evolved, where a ‘bank’ branch may be primarly designed for customer enrolment and loan disbursals, with currency disbursement, fund transfers and other services be completely migrated to their retailing partners? With new customer acquisition mostly occurring at third party locations, the branch could even play a administrative supervisory and customer support role in a hub and spoke model, wherein a single branch oversees the operations of hundreds of retailers and ATMs in its hinterland!

With mobile devices having achieved over 100% penetration levels in the mass affluent segments, the mobile could effectively act as the access and authentication device. This in turn could restrict the need for POS or ATM devices as we know them today. This makes it even easier for retailers to participate in the payments processing domain.

This potentially ‘outrageous’ approach is open for debate and would welcome your views.

Saturday, 16 April 2011

Payments (Alone) May Not Pay the Bills

I came across an enterprising man who worked as a driver and doubled up as the neighborhood milkman. In the initial months,he found himself collecting and carrying large amounts of money on a daily basis, which became quite unwieldy with his day job. To make matters worse, with outstanding dues, leakages in collections and a host of challenges posed with managing currency, he often wondered if in fact he was making any profits in this enterprise.

A benevolent aunt stepped in and helped him open a bank account in a new age bank. Now armed with a debit cum ATM card, he ventured into this mysterious world of electronic banking and soon adopted a device called the 'ATM'. Though 24 hour access was the dominant benefit, the ATM allowed him to experiment and learn with his banking relationship without the risk of 'social embarrassment' in a branch.

The ATM was soon his new business ally, allowing him to make currency deposits, print mini statements, place requests for cheque books and a host of other essential features that helped run his business. It was his business ledger and he would brave it into the branch once a month to take a detailed printout for the month, tallying the deposits and withdrawals!

I'm not particularly sure if the founders and generations of bankers thereafter had conceived of such benefits, but this enterprising entrepreneur did indeed create some for his use. In an interesting twist however, in this journey, he still hasn't ventured out to use his debit cum ATM card for making over the counter purchases at retail stores! He just doesn't get it!

"Why should I use a card, when I have cash in my wallet?"

"Why should I use a card, when I know I may spend more than I should?"

His bank, in the meanwhile, has been pounding him with offers of reward points for using his debit card for POS purchases!

With a debit card population crossing the 200 million mark in India, the industry continues to be challenged with low levels of usage at POS. Furthermore, with a host of new age mobile based banking, payments & transfers services available & being introduced by leading players, it makes one think!

  1. Should more be done to increase the adoption of these new age payment systems?

  2. What is the role of banks & Financial Institutions in the payments space in driving adoption of electronic payments?

This appears to be a challenge spanning socio-economic segments. PhD yielding professors and rickshaw pullers seem to resonate similar questions!

Hence, though the challenge is universal, is the solution necessarily singular?

The conventional methods of driving adoption of electronic payments, may be broadly classified into the following three categories :

  1. Legislation & Financial Incentive : The South Korean model wherein card based payments are mandatory for tax breaks

  2. Convenience & Safety : The classical advantage of using plastic. No need to carry cash (and spend money you don't' have!)

  3. Scarcity : MPesa, launched in a financial environment that didn't offer a semblance of a reliable transfers network.

When one operates in an environment of 'Scarcity', then the need for safety and trust are sufficient!

But how would it work when alternatives are available? Here…cash is good! It's worked for centuries, and no reason that it won't for the ones coming up as well.

As a significant proportion of future growth would emerge from populations that lie below the affluent & mass affluent segments, there is a need to understand and define solutions that address their need states and socio economic environment. Furthermore, one needs to bring in a wave of fresh thought even for those customer segments that we have been addressing in the past.

The challenge that lies ahead for those in the payments industry is to think beyond transaction processing and move towards designing solutions in a segmented manner. Why should financial institutions even consider this approach in a more aggressive manner. Well, let's do a reality check!

  1. Margins are dropping : We've all seen what's going on with Interchange in North America. The wave should sweep the globe in mature markets soon

  2. Who's grabbing the value in the value chain? : Non Banking institutions appear to be raking in the revenues in what was conventionally deemed to be the domain of banks & FIs, as in the case of MPesa

  3. Dropping ticket sizes : It makes immense sense to make 1.1 % on a USD 50 transaction, but not as much on a 50 cents transaction.

  4. Brands v/s commodities : We all know that brands command a greater premium vis a vis commodities. Would intermediate value added service providers come in and rule the roost?

  5. We don't need Reward Points! : The new consumer lying near the bottom of the pyramid may not find the tried and tested approaches of reward points sufficient enough to switch behavior.

There appears to be a tenable economic argument or justification for banks to consider going down the path of value creation.

What next? Well, banks & FIs may do well in investing greater resources in enhancing both the experience and value generated in the payment process, often the last leg in the buying process. Some brands have however made some interesting forays that should inspire others.

Visa had launched 'Rightcliq' in 2010, allowing consumers to shortlist products online and seek feedback from their social networks. This, as a service was made available for non-customers of Visa products as well. Subscribers could also use non – Visa cards to make purchases!

American Express labs had set out on that journey, potentially reaching out to customers and going further back in the purchasing and selection behavior prior to the end payment state.

The fundamental shift lies in the fact that both these brands and a few others have realized the need to develop segmented solutions that address aspects in the buying process, that venture further up the value chain, much beyond the actual act of making payments.

Now, let's head back to the milkman. What would be a sufficient stimulus or trigger point for him to use debit cards for over the counter purchases. Reward Points? May be..or perhaps:

  1. A discount coupon sent via an SMS with every swipe? Hence demonstrating the economic impact of using a debit card vis a vis cash?

  2. An alert informing him how much he could have earned on bank interest if only he had not withdrawn a large amount of funds at the beginning of the month and used his debit card prudently for purchases through the month. Also, how much he could have saved by availing discounts from bank issued offers.

  3. Offer him additional airtime if he were to purchase talk-time with his debit card

  4. Escrow systems & Micro-credit: Establish a promise to pay between a trader and a buyer via the mobile for a pre-defined period. On maturity, the seller receives the due amount. The buyer however continues earning interest on the balance till the date of debit! This could also be an interesting take on EMI payments

  5. Group Buying & Pooling : Groups often purchase items in a collective format to avail discounts, or even pool in together for gifting purposes. Could a pooling system be enabled, allowing each of the group members to make payments to the local retailer, allowing the retailer to track the payments received and the customers in availing the benefits.

Though there is clearly no scarcity in creativity, a significant nudge is required in the fundamental shift required for payment service providers.

Could these be services that could be charged? Why not? If the bank can establish a comprehendible and coherent value proposition, why not?

The migration to electronic payments would surely need to offer solutions to daily problems and needs of the larger populace. We really need to move past reward points!

Wednesday, 16 February 2011

Electronic Payments in India - Looking Back & Surging Forward

Have authored a document on Electronic Payments in India recently.

The document is available on at the following link

Look forward to hearing your views and feedback