Agent network is the key to branchless banking - An interview with Syed Irfan Ali, Director Banking Policy and Regulations Department, State Bank of Pakistan

In this interview Irfan talks about the future of branchless and m-banking industry in Pakistan and the lessons to be drawn from experiences in other countries. He also shares his views on the profitability of this growing banking genre, the challenges it faces, and how the State Bank plans to deal with that in coordination with Pakistan Telecommunication Authority. The following is the edited transcript.
BR Research: What does branchless banking constitute of; what kind of products and services does it cover?
Irfan Ali: The objective of branchless banking is to go outside the ambit of branch banking itself.
At present, we have 40 commercial banks, including Islamic banks and 8 developmental financial institutions. As we are a country of 180 million people, with at least 100 million adult people, so technically speaking we are providing banking service to around 25 percent of adult population. But various studies show that banking penetration in Pakistan is less than that; only 12-15 percent of the population is properly banked.
So, we thought that we should explore other ways and means outside the ambit of branch operations to address the unbanked sector and to promote financial inclusion. Hence we came up with branchless banking regulation.
When we talk about branchless banking sky is the limit, as these services can be provided through post offices, retail stores, departmental stores, mobile network operators, petrol pumps & CNG stations etc. It is the beauty of the branchless banking that it leverages state of the art smart technologies and we can carry out financial and non-financial transaction using cellular phones, GPRS, internet, Point of Sale machines, plastic cards etc.
Our main objective is to promote basic banking facilities, such as an opening of bank account, remittances transfers, cash withdrawal, deposits, payment of utility bill, through a distinct registered network of agent all over Pakistan.
The basic banking services allowed by State Bank in Regulations include:
-- Opening and maintaining a BB Account
-- Account-to-account Fund transfer
-- Person-to-person Fund Transfers
-- Cash-in and Cash-out
-- Bill Payments & mobile phones easy loads
-- Merchant Payments
-- Loan Disbursement / Repayment
-- Remittances
BRR: In making the regulations for branchless banking, the State Bank has chosen the bank-led mode as against the telecom-led model. What were the reasons behind this decision?
IA: We chose the bank-led model specifically to protect depositors. Under this model, any bank that enters into branchless banking model needs to have Agency Agreement with agents and that Agreement authorizes SBP to inspect the books and accounts of agents also.
This enables SBP to have an appropriate level of control over operations and supervise payment and clearing system since banks are custodians of the depositors' money and SBP is the regulator of all banks.
If somebody else on the streets starts providing banking facility, then the State Bank would not have a check on that. So the SBP provided the best through its regulation to protect depositors and at the same time to facilitate banking transaction outside branches.
BRR: Does that mean that telecom companies cannot roll out mobile banking service?
IA: They can enter into an agreement with an authorized bank to launch a mobile banking service, just like what Telenor did, as they can not come out with their own model. What they did was to partner with a bank i.e. Tameer Microfinance Bank and started rolling out the mobile banking services by performing as Super Agent of the bank.
BRR: What has been the response of bankers so far?
IA: We have got a very good response from the banking community. Initially, the banks were not forthcoming; they were a bit apprehensive.
However, branchless banking regulations were formed through a very elaborate consultative process, not only members of the State Bank gave their input, but members from Ministry of Information and Technology and bankers from the banking community also participated in development of regulations.
And we came with regulations which were very well drafted; when the draft was displayed on our website the CGAP, the International Finance Corporation, the Asian Development Bank, DFID - all gave positive comments on it. Moreover, our branchless banking model & regulations have been literally copied by other countries.
BRR: Aside from UBL and the Telenor-Tameer venture, which other banks are looking forward to launch branchless banking services?
IA: Habib Bank is undergoing negotiations with Ufone while Bank Alfalah is talking to Warid. Habib Bank & Ufone have our approval to offer mobile banking services to Habib Bank's existing customers. HBL's branchless banking arrangement with Ufone is at initial stage. As negotiations are in the initial phase, I anticipate that they will launch branchless banking services by the mid of the next year.
Dubai Islamic Bank has also SBP's approval to pilot launch their branchless banking deployment. The bank will launch their services early next year 2011.
MCB Bank is also offering mobile banking services to its existing customers as additional delivery channel since one and a half year.
Lately Askari bank also contacted us. Then we have organizations such as TCS who are talking to us to setup microfinance institution, with an object to provide branchless banking services. At this moment in time, we are talking to at least three new players who want to enter the market.
BRR: How successful UBL Omni and Easypaisa have been in providing banking services to underserved areas?
IA: The most important achievement as far as Telenor Pakistan and Tameer Microfinance Bank is concerned is that they are providing branchless banking services through around 12,000 branchless banking agents across Pakistan. But, the potential is far more than this, since each telecom company has 150,000 agents all across Pakistan, who provide package of telecommunication services. This means that the telecom industry can have a total of approximately 500,000 agents.
It may be difficult to connect all those 500,000 agents into the network of branchless banking agents, but within three to five years I do anticipate that agent network for branchless banking will grow to 50,000 agents.
The challenge, basically, lies in developing network of agents. Once agent gets into network, then the real challenge is to retain him, keep him happy, to train him and at the end of day agent should be able to make some money out of it. He should be motivated & be profitable; otherwise he wouldn't provide banking service or would lose inclination.
BRR: What kinds of challenges exist in dealing with agents and what is the future?
IA: The development of agent network is the key to successful branchless banking. Since operator's main target is to reach customers that will not be possible without setting up agents' network.
But sometimes customer doesn't want to go to bank; it is too far, he wants facilities at his door steps or nearby. The agents do not provide services at door step but may be 50 yards away. But ultimately the number of banking services will soon be available at doorstep, once the public starts using m-banking facilities.
BRR: Can you give an example of a successful branchless banking model around the world?
IA: There are so many of them, among them famous is M-PESA in Kenya and GCASH in the Philippines. And there are some operatives in Mexico, who have done a wonderful job, and also Brazil. These two countries are quite comparable to Pakistan; they have huge land mass, like ours, somewhat similar population structure but with better literacy rate and higher per capita income.
A large number of migratory workers in these countries and in Pakistan work in urban areas with their dependent families living in the rural areas. They have the needs for banking services for their families and the solutions are mobile phones.
BRR: There is an impression in certain quarters that banks might not like to enter into m-banking, because it might be less profitable in terms of margins per customer. What is your view?
IA: It's not easy to provide banking services through branchless banking. But any bank that develops infrastructure and takes lead will set the market.
This reminds me of one story; some 200-300 years ago two foreign shoemaking companies sent their representatives to the sub-continent. The representative of one company went back and said that there is no market since nobody wears shoes there. While the representative of second company went back and said that there is huge market, because nobody wears shoes. So a lot depends on your view and your will.
It is not possible for every bank to provide branchless banking model. But, I am very hopeful that more branchless banking services providers will come into market. Each bank that jumps into this business has to find its own niche and the potential is huge since we are a country of 180 million people with majority of unbanked.
BRR: Is branchless banking profitable; how long will it take to reach the breakeven?
IA: On per transaction basis it is profitable. But since infrastructure cost is very high, operators will start making profit when the volume of transaction will grow.
But banks are not providing one service; they have a basket of products. There might be few products that are not making profit, but, branchless banking gives them outreach and helps them the regulatory target of financial inclusion.
BRR: If bank branch and the bank's retail agent are present in one village, don't you think that customer will go to branch?
IA: It is the customer's personal decision, but going to the branch will likely require higher transportation cost because of the higher number of branchless agents. If it cost me Rs50 to go to bank branch and Rs20 to a branchless agent, I will go to agent. We cannot control prices; our objective is to provide services. It is now up to the customer. More importantly, it is customers' psychological mindset that they feel it more convenient to go to retail shop as compared to decorative bank branch.
BRR: Since branchless banking deals with the least sophisticated and uneducated customers, what steps have been taken to balance consumer protection regulation with financial inclusion?
IA: The regulation has made it mandatory for any bank that wants to set-up branchless banking framework to have a consumer protection mechanism in place. Consumer disagreement and complains have to be addressed by bank instantaneously. Banking service provider will be given no relaxation as far as consumer protection is considered.
However, to educate customers, we have embarked on a training programme in unbanked areas to educate the customer through stage show; presentation etc, as customer literacy and awareness are the prime issues. But, we have not achieved a lot, as we are in initial phases.
BRR: What sort of branchless banking products are coming in the market?
IA: So far it is the usual ones -- remittance products, utility bill payment facility and account opening, mobile phone top ups. Initially there will be very basic services. But if say for example tomorrow Tameer decides that they want branchless banking model to lend money they can easily launch loan products with SBP's approvals. However, the industry is at nascent stage, it may take one or two years for loan products to come in market.
BRR: What are you currently working on?
IA: We are currently working on developing inter-operability model. In this regard, we are working with the Pakistan Telecommunication Authority. This will provide a medium to banks and telecom companies to conduct business transaction with each other through third party service provider.
It will develop technical platform that will act as a hub to facilitate & route financial transactions, which is not available at the moment. For instance, if you have an account with UBL then you will be able to transfer money to a person who has an account with HBL. Moreover, if you have an account with UBL Omni's retail agent then you will be do transaction with Easypaisa's retail agent.
BRR: What are prospects of using mobile to deliver financial services to unbanked customers?
IA: We are very optimistic because there are 100 million SIMs floating around. Everybody has a mobile phone. So that's the ultimate target and we want people to use mobile to conduct financial transactions.
If people get educated and understand mobile transaction they would develop confidence in this medium. Mobile will be one of the main tools to provide banking service. It is the main foundation, as there are 12,000 post offices, 10,100 bank branches, 500,000 agents, but there are as many as 100 million mobile phone subscribers.
Currently working as the Director Banking Policy & Regulations Department (BP&RD) State Bank of Pakistan Irfan oversees the implementation of the existing policies & regulations in the banking industry of Pakistan.
Irfan has vast experience in wide range of policy & regulatory issues pertaining to financial institutions. He has also been involved in issuing Branchless Banking Regulations for Financial Institutions in Pakistan, and is leading the State Bank of Pakistan's team on Branchless Banking.
Irfan, who received his MBA degree from Lahore University of Management Sciences, also holds a Masters degree in Banking & Finance from University of Wales.