5._Pakistan_Mobile_Money_Gap__Analysis_Study_(2).pdf

USAID FIRMS PROJECT

Pakistan Mobile Money Analysis

October 2014.

This publication was made possible by the support of the American people through the United States Agency for International Development (USAID). This publication was produced for review by the USAID. It was prepared by Lee Kironget,PhD.

USAID FIRMS PROJECT

Pakistan Mobile Money Gap Analysis

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development, the United States Government or Chemonics International Inc.

Data Page

Contract Number: GBTI II Task Order No. EEM-4-07-07-00008-00

Contractor Name:

Chemonics International Inc.

Name of the Component:

Value Chain Development (VCD)

USAID Technical Office:

Office of the Economic Growth and Agriculture; USAID Pakistan

Date of Report:

November 19, 2014

Document Title:

Pakistan Mobile Money Gap Analysis

Author’s Name:

Lee Kironget, PhD

Study Design and Methodology:

Lee Kironget, PhD

Photo Credits:

Cyma Riaz, USAID Firms Project

Editing:

Lee Kironget, Kaiyan Yousaf

SOW Title and Work Plan & Action ID:

Work Plan Level #23600, Action#6718, SOW #2080

Project Area:

Pilot for Information and Financial Mobile Solutions

Key Words:

<Financial Inclusion, Gap Analysis, MM Space, Mobile Money, m-Wallets, Pakistan, State Bank of Pakistan, USAID >

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Abbreviations/Acronyms

ADB Asian Development Bank

ADR Alternate Dispute Resolution

AIP

AML/CFT

Annual Implementation Plan

Anti-Money Laundering / Combating the Financing of Terrorism

AMP Award Management Plan

BEE Business Enabling Environment

COP Chief of Party

COTR Contracting Officer’s Technical Representative

DEDS District Economic Development Strategies

EG Economic Growth

EU European Union

FATA Federally Administered Tribal Areas

FLB Fruit Logistica Berlin

FSN Foreign Service National

FY Fiscal Year

GDP Gross Domestic Product

GIS Geographical Information System

GOP Government of Pakistan

HACCP Hazard analysis and critical control points

IDP Internally Displaced Person

IMF International Monetary Fund

IT Information Technology

IUA Infrastructure Up gradation Agreement

KPCCI Khyber Pakhtunkhwa Chamber of Commerce and Industry

KPK

KYC

Khyber Pakhtunkhwa

Know Your Customer

M&E Monitoring and Evaluation

MGA

MM

MNO

Mango Growers Association

Mobile Money Mobile Network Operator

MoU Memorandum of Understanding

NGO

OTC

Non-Governmental Organization

Over The Counter

PaRRSA Provincial Reconstruction, Rehabilitation and Settlement Authority

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PHDEC

PTA

Pakistan Horticulture Development and Export Board

Pakistan Telecommunication Agency

RFP

SBP

Request for Proposal

State Bank of Pakistan

SME Small and Medium Enterprises

SMEDA Small and Medium Enterprises Development Authority

SO Strategic Objective

SOW Scope of Work

TBD To Be Determined

TFFs Trout Fish Farms

US United States

USAID United States Agency for International Development

USG United States Government

WB World Bank

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Table of Contents

1. EXECUTIVE SUMMARY................................................................. VII

2. KEY INSIGHTS .............................................................................. VIII

2.1. PAYMENTS ................................................................................... VIII

2.2. MOBILE MONEY USAGE ................................................................ IX

2.3. UPTAKE OF MOBILE MONEY WALLETS (MWALLETS) ............... X

2.3.1. AWARENESS.. ....................................................................... X

2.3.2. OTC ....................................................................................... XI

2.3.3. TRUST. ................................................................................. XII

2.3.4. PRICING AND COMPETITION. ............................................ XII

3. RECOMMENDATION. .................................................................... XII

3.1. CREATING AWARENESS AND UNDERSTANDING. ................... XIV

3.2. FROM OTC TO MOBILE WALLETS .............................................. XV

3.3. CREATE A COMPELLING PRODUCT SUITE................................ XV

3.4. ON GOING MARKETING. ............................................................ XVII

3.5. AGENT NETWORK AND MANAGEMENT. .................................. XVII

4. CONCLUSION ............................................................................. XVIII

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1.0 INTRODUCTION

1.1 BACKGROUND

1.2 THE STUDY

1.2.1 MANAGEMENT BUY-IN AND CORPORATE COMMITMENT

1.2.2 ENABLING REGULATORY REGIME

1.2.2.1MOBILE MONEY AND BRANCHLESS BANKING MODELS

1.2.2.2REGULATION TO MAKE MOBILE MONEY TO WORK FOR THE

POOR

1.2.2.3KYC AND AML

1.2.3 DISTRIBUTION AND AGENT NETWORK

1.2.3.1GROW THE NETWORK WITH THE CUSTOMER BASE

1.2.3.2UNDERSTAND AGENT ECONOMICS AND RISK

1.2.3.3INVEST IN MAINTAINING AGENT QUALITY

1.2.4 INNOVATIVE PRODUCT OFFERING

2.0 OTC VS MOBILE WALLET MODELS

2.1 LIMITATIONS

2.1.1 LIMITATIONS FOR THE CUSTOMER:

2.1.2 LIMITATIONS FOR MOBILE MONEY PROVIDERS:

2.1.3 LIMITATIONS FOR THE MARKET:

3.0 THE WAY FORWARD IN PAKISTAN

4.0 ANNEXURE/ APPENDICES

SECTION 41.01 ANNEX / APPENDIX-2 TROUBLESHOOTING ADOPTION

OF MOBILE MONEY

5.0 REFERENCES

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Exchange Rate

1 USD = 90.6427 PKR

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1. Executive Summary

Mobile money (MM) refers to the use of mobile phones to perform financial and banking functions. It has been used to assist the billions of people who have little or no access to traditional financial services. Where the service is available, users can securely receive funds, pay bills, make bank transactions, transfer funds, and purchase goods and services.

Based on survey findings 1 , 9 in 10 Pakistani households including poor, rural and unbanked households, have access to a mobile phone and a SIM card. Although the rates of mobile money (m-money) registration and use are low, only 5% of Pakistani households are mobile money users. This compares with 86% of households in Kenya, 35% in Tanzania, and 21% in Uganda. Among nonusers of m-money, insufficient awareness (60 % of nonusers know about the services) seems to be the most common reason for not using mobile money. Among households that have no mobile money user

(either OTC or account-based), only 60% even know mobile money exists. Moreover, many poor Pakistani’s will not leave the comfort and familiarity of transacting in cash. At the household level, 92% of mobile money users are Telenor Easy paisa customers (most exclusively but some in combination with other providers) while 7% are UBL customers.

In view of the above statistics, Pakistan is a prime candidate for mobile financial services that operate on low operational cost structures. Since the introduction of mobile money in 2008, Pakistan saw a surge in use of MM that has since flat-lined with very little month on month growth.

USAID through its FIRMS project commissioned this Gap Analysis to review the Mobile

Money landscape, comparing it with similar economies globally with a view to strengthen what has worked, remedy what didn’t and learn from success and failures of other MM deployments.

1 Bill & Melinda Gates Foundation’s Financial Services for the Poor (FSP) program

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The study uses four main methodologies

Survey questionnaires. Both face-to-face interviews and remotely. The survey strived to choose group sets representative of the different economic groups in Pakistan. The survey collected basic demographics, access and use of mobile devices, access and use of MM, access and use of formal financial services, level of satisfaction with the service providers and Mobile

Financial Services products (MFS), Level of trust on the mobile channel and MM Service providers , and over-the-counter (OTC) mobile money use.

N= 136

Interviews with the key stakeholders in the mobile money industry.

This included all the MNOs, commercial banks, microfinance banks, aggregators, regulators, donors, end users and Agents.

Results and feedback from an industry-wide workshop held in Islamabad, Pakistan.

Background research and papers by players in the MM space.

Although several mobile network operators in Pakistan have partnered with banks and introduced mobile money products, they are still struggling to get established and fully operational.

2. Key insights

2.1. Payments

While cash remains the main media for payments, digital payments are slowly gaining acceptance.

Card-based payment has seen more acceptability recently and is seen as “trendy” and the “in thing”.

Mobile money is mainly used for remittances and utility payments.

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2.2. Mobile money Usage

Mobile money is easy to use: In Pakistan the prevalence of Over The Counter

(OTC) method makes mobile money easy to use, all you need is a CNIC and the funds.

Very Few mobile money users are registered: 7 % of the surveyed had used mobile money. However, only a negligible percentage had registered mobile money accounts.

94% percent of non-registered mobile money users use MM services over the counter with an agent.

Almost 98% use mobile money for personal and bill payments. Personal meant paying domestic help and P2P.

Very few MM users are registered. 93% of the respondents who use mobile money services have not registered their own accounts; instead, most prefer to conduct transactions through an agent’s account.

Most users did not hear about MM from agents. Although OTC agents are a prime facilitator of mobile money use, very few active mobile money account holders first heard about mobile money through an agent, and none of them said a recommendation from an agent prompted them to start using mobile money.

Most users do not quantify time they use to get to an Agent. Around 19 % of mobile money users spend more than 15 minutes travelling to an agent; 21 percent use a motorcycle taxi or a minibus taxi. This suggests that there could be significant time savings for OTC mobile money users if they registered their accounts.

Top 3 reasons for starting to use a Mobile Money account are 1) to receive money from another person 49%. 2) To receive money from another person 39%

3) To send money to an organization / government or pay bills 20%

Top 5 uses for Mobile Money account: 1) To withdraw money 42%. 2) Deposit money 31%. 3) Pay utility bills 25%. 4) Send money to family, friends and acquaintances to support with emergencies 11%. 5) Send money to family, friends and acquaintances for regular support 1%.

Level of trust for MM is very low. When it comes to trust Mobile money lags behind banks and MFI. This is mainly due to rampart SMS and phone call fraud.

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Also since MM is new and heavily tech-focused people are still suspicious of using

it. Data from SBP indicates that trust among users is higher than among non-users, indicating that knowledge and awareness have direct influence on trust

2.3. Uptake of Mobile Money Wallets (mWallets)

While there has been increase in the use and uptake of mobile money, still use of registered mWallets is very low. The study found that this mainly due to 4 main reasons.

2.3.1. Awareness. TV is the main media through which people heard of mobile money. Majority of the non-users (40%) cited unawareness as the reason they do not use mobile money, with 34% believing they do not need it.

40%

34%

7% 6% 5% 5% 3%

Do not know about it Do not need it (do not send or receive money)

Do not understand it

Do not own a mobile phone

No network available

Too complicated

Other reasons

• 8% of nonusers said they transfer money to individuals who are at a distance of more than 2 kilometres away, but only 42% of this group knew that this task could be conducted via mobile money.

Similarly, 8 % of non-users said they receive money from individuals who are more than 2 kilometers away, but only 37% of this group knew that mobile money is an option for receiving this type of money transfer. This is significant, given that money transfer is currently the most well-known mobile money function in Pakistan.

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• 57% of non-users owned a mobile phone, but only 13 per cent of this group knew that a mobile money account can be used to buy airtime top-ups.

2.3.2. OTC – Over the Counter Transaction was also cited as a reason people do not use mobile money. Due to its ease and convenience, majority of the use do not feel the need to register for mobile money. While OTC has been good to the MNOs as it gives them the much needed scale in MM（The MM active customer base is far much less than the total customer base), throughput and

Yield. 2

Banks and Financial Services Providers (FSPs) have found it easy to champion the OTC model as they are already using the OTC in the daily operations. OTC for banks and FSPs decongest the banking hall leaving room for high value clients.

For customers OTC is appealing mainly because of the following:

• They don’t need to learn a new skill

• The user interface of mWallet is sometimes too complex for most users.

• Techno-Phobia

• No KYC

• Near zero trust issues

• “its too difficult to use” mentality

The service of OTC remittances is the dominant activity. In Pakistan’s overall mobile phone banking services industry, which processed forty-one million transactions, worth $1.6 billion in the first quarter of 2013”

-- State Bank of Pakistan

2 The easiest and fast way to grow throughput is to open OTC to large value transaction and Yield Seems like it’s the only way to get to the competitions’ base.

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2.3.3. Trust. This study, backed with data from the State Bank of Pakistan (SBP) found that mobile money lags behind State-owned banks, private banks, and

MFIs when it came to trust among users. This is mainly because of rampant

SMS and phone call scams in Pakistan and due to the fact that MM is a new and on a non-traditional platform

2.3.3.1. Data from SBP indicates that trust among users is higher than among non-users, indicating that knowledge and awareness have direct influence on trust.

2.3.4. Pricing and Competition. Majority of those surveyed found the cost of using mobile money high and prohibitive compared to the traditional ways of sending money. It was however noted that they did not quantify the time factor.

Both MNOs and FSPs pointed out that the cost of VeriSys (the real-time biometric verification of customers’ data from NADRA) was very high. At the time of drafting this report, there had been agreement between the regulator and NADRA to reduce this cost further.

3. Recommendation.

Based on the gap analysis, the most obvious “pain points” in looking at explicit customer needs are two types of transactions: remittances and bill payments. Remittances because a large percentage of people are migrants (working away from their villages/provinces) and need to send money home; and bill payments since, the billers will not provide credit and are likely to disrupt supplies if not paid on time. Therefore, it’s getting clearer by the day that remittances (and possibly bill payments) are emerging as the most common

“anchor” products for mobile money deployments. And, of course, in Pakistan G2P

USAID Firms Project Page. xiii payments (benefit transfers, salary payments, Social payments, Pension etc.) can also play this important role. It is with this in mind and based on Pakistan’s unique geopolitical position that the following recommendations are put forward.

The analysis will seek to address the following key concerns:

Customers are not aware of mobile money.

Customers are aware of the mobile money service, but do not understand how it could be beneficial to them

Customers get bogged down in the registration process and never try the product

Customers don’t understand the mechanics of performing transactions and are apprehensive to try something so novel as mobile money

Customers don’t trust the operator’s brand or Mobile money itself and are hesitant to conduct financial services on the platform.

The objective of any mobile money providers’ program is to persuade consumers to register and become regular users of its mobile money service. Given the current products and services consumers are using instead of mobile money, the adoption of mobile financial services represents a significant behavior change.

To drive customer usage, operators must guide customers on a journey from their first encounter with mobile money to habitual use of the mobile money platform. For this the analysis will use the following customer journey diagram.

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UNAWARE AWARE UNDERSTANDING KNOWLEDGE/

REGISTRATION

TRAIL REGULAR

USE

Customer has never heard of

MM

Customer hears of MM

Customer understand the benefits of MM knows the steps needed to tries the

MM

service becomes a habitual user

3.1. Creating Awareness and understanding.

As awareness and understanding are the reasons impeding the adoption of MM money in Pakistan, it is imperative that all the stakeholders come together to create this awareness. It’s not enough that consumers know the name of the mobile money service or even that they know what mobile money is. Rather, awareness campaigns must build understanding to help users see how this new service is both relevant and beneficial to them. This lays the groundwork for behavior change.

Here there is an opportunity for private sector, the regulators and International development partners such as USAID to work together to create this awareness.

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3.2. From OTC to mWallets

While OTC has been credited with the rapid adoption of mobile money in Pakistan, its success has inadvertently impeded further adoption of mobile money and mWallets. As will be demonstrated later and using example from the other deployments around the globe, OTC model denies the MNO significant amount of revenue. It’s therefore imperative that MNOs take steps to move clients from OTC to mWallets. This should include:

• Competitive pricing on mWallets –mWallets transfers. Making it cheaper than OTC will not only encourage the move to mWallets but also result in

MNO and Brand stickiness.

• Rewards for using mWallets. M-Loyalty program. Similar to Bonga Points in

Kenya and frequent flier miles in the airline industry will help with the behavior shift to m-Wallets

• Innovative revenue share with agents that help in activating wallets for users.

• Campaigns to highlight the convenience, user control and other benefits of wallets.

• Rewards for keeping a minimum amount of e-Value on the wallet, as being pioneered by Telenor.

3.3. Create a compelling product suite.

Most experts consider a product (or suite of products) that generates two to two-and-a-half transactions per month per customer to be a commercial success. So, which products are most likely to achieve this level of transaction volume? In

Pakistan like most other countries, Mobile Money service providers have focused on approach of Person –to- Person (P2P) echoing m-pesa’ value proposition: “send money home”

A more promising approach would be to focus first on identifying a “killer app” that would drive a high volume of transactions onto the platform, and then promoting this product through both above-the- line (ATL) marketing (which includes mass-

USAID Firms Project Page. xvi market advertising channels such as television, radio, newspapers, magazines, and outdoor advertising) and below-the-line (BTL) marketing (which includes non-media marketing techniques such as direct mail or face-to-face sales). The most successful deployments will expand into other products only when a killer app gains traction.

The first step in designing a killer app is to conduct a detailed customer-needs assessment that maps the current behavior and pain points of the provider’s most important customer segments, and then implement a service to address the needs identified. It’s in the detailed customer research that MM players in Pakistan needs to invest more, instead of “copying “ Easy Paisa offering. As demonstrated in the research, there is no product offering to compete with the traditional ways of savings i.e. in Gold, Farm animals, under the mattress.

Other possible killer apps could be point-of-sale payments, business-to-business transfers, mobile bill pay, mobile payroll, international remittances, agricultural insurance, savings, or microloans. Two examples of Bank for the Unbanked and

Trading and Payment platform product suites are shown below

Example 1

Bank for the unbanked

Vision: Become the least expensive provider for the full range of bottom-of-the-pyramid customers’ financial-services needs

Potential products:

• Bill pay

• Payroll direct deposit

• Domestic and international remittances

• Savings

• Credit

• Life insurance

• E-wallet (“me-to-me” current account)

• Welfare and social-security payouts

• Pensions

Example 2

Trading and payments platform

Vision: Become a comprehensive platform for applications and payments, offering an alternative to credit-card platforms

Potential products:

• Bill pay (e.g., utilities)

• Point-of-sale payments

• Payment facility for informal trade

(e.g., consumer to kiosk owner)

• Lease-to-own payments (e.g., solar panels, scooter)

• Real-time weather applications

• Agricultural insurance

• Commodities-markets u p d a t e s

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3.4. Ongoing marketing. Experts frequently cite poor marketing as one of the key barriers to adoption. Our research validates this observation. Our research also suggests that the most successful mobile-money providers have combined both ATL and BTL marketing to drive registration and transactions. While a lot has been done on ATL in Pakistan, very little has been done on the BTL front. BTL, face-to-face interaction is critical to drive trust. Potential customers must receive quite a bit of education about how the new service works and what it could mean for them before they will trust the system. A customer normally would require 10 -

15 minutes of face time with an agent of other mobile money representative in order to feel comfortable in using the product. Our research in Pakistan also suggests that most companies need to revise their expectation regarding the marketing investment needed. All marketing activities should drive customer adoption and usage. A common mistake is to focus marketing efforts on customer acquisition at the expense of use. Messaging should communicate the benefit of frequent use and educate customers about the variety of situations in which using mobile money could benefit them.

3.5. Agent Network and Management.

In Pakistan the “Agent is King “ due to competition and due to the players offering the same products, there has been a massive commission war, with the MM service providers undercutting each other. This has seen the agent receive higher and higher commission as the service providers battle for the agents to sell their service over the competitions’. This model is NOT sustainable and the industry admits there is a problem. There is a dire need for the key players to come together, probably under the mediation of SBP, to address this.

The other consequence of this agent war is the reduction of the agent footprint across the country. This is because no service provider is willing to invest money and time in training new agents only to have the competition come in later and

“steal “ them away by offering more commission. While the SBP of Pakistan has

USAID Firms Project Page. xviii tried to address this with the 70/30 rules3 it has not worked. The 70/30 rules4 is good on paper but virtually impossible to implement and enforce. In the interest of increasing inclusivity, agent foot print and promoting adoption of mobile money use, the regulators should go back to drawing board in allow an element of exclusivity in new and remote regions, until such a time the MM market has matured

4. Conclusion

There are several elements that are in play and factors that will contribute in creating a

“financial inclusion tsunami” in Pakistan.5

9 in 10 households in Pakistan have access to a phones or SIM card, all of whom have payment needs but don’t have bank accounts. This number is expected to grow before the gap narrows.

Most of the adult population already owns a CNIC card meaning they have the basic requirement for a legal contract with a mobile money provider.

63% of the population is under the age of 25 and therefore device savvy.

98% of the phone owners pre-load value into their mobile phones through scratch cards and various other digital means. This means that they are not only number literate but can also follow basic language syntax i.e. yes, no, enter, and cancel, and so on.

The state bank of Pakistan has committed to creating an environment for

Mobile and digital finance to grow.

Finally, with only 10% of the population owning bank accounts there is a huge unmet need for financial inclusion.

For any of this to make sense, the regulators, and industry leaders should devise a way of measuring the impact of financial inclusion and mobile money on poverty levels. In

3 SBP new rule requiring that at most 30% of all new agents in urban areas be exclusive.

4 70/30 5 Qasif Shahid, Head of Remote Banking & Business Development & Executive Vice President at MCB Bank

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Pakistan both the World Bank has its own score card. Grameen foundation has the PPI that is in use in several countries and is currently used by the Pakistan Microfinance

Network. It is recommended that Grameen Foundation’ PPI (Progress out Off Poverty

Index) can be used as an M & E tool in Pakistan. It is also recommended that State Bank of Pakistan and any interested private sector firm be trained on the use of PPI.

http://www.progressoutofpoverty.org/ http://www.progressoutofpoverty.org/ http://www.progressoutofpoverty.org/

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1.0 Introduction

1.1 Background

More than 17% (27 million) of Pakistan’s population live below $1 a day and 73%

(116 million) live below $2 a day6. The impressive economic growth record of the past four years and successful financial sector reforms still have a long way to go before the persisting inequalities among regions, classes and between genders are reduced. The outreach of microfinance and other financial services to the poor and marginalized groups in Pakistan remains very low compared to other Asian countries. According to recent estimates7, only 2% of the poor in Pakistan have access to microfinance services against 35% in Bangladesh, 29% in Sri Lanka, 8% in Nepal and 3% in India.

Based on survey findings8, 9 in 10 Pakistani households including poor, rural and unbanked households, have access to a mobile phone and a SIM card but the rates of mobile money (m-money) registration and use are low, only 5% of

Pakistani households are mobile money users. This compares with 86% of households in Kenya, 35% in Tanzania, and 21% in Uganda. Among nonusers of m-money, insufficient awareness (60 % of nonusers know about the services) seems to be the most common reason for not using mobile money. Among households that have no mobile money user (either OTC or account-based), only

60% even know mobile money exists. Moreover, many poor Pakistani’s will not leave the comfort and familiarity of transacting in cash. At the household level, 92% of mobile money users are Telenor Easypaisa customers (most exclusively but some in combination with other providers) while 7% are UBL customers.

EasyPaisa and Omni hold 53% and 23% market share respectively, down from

55% and 24% in the previous quarter. The market shares of smaller aggressive

6 World Development Report 2007 7 from the Consultative Group to Assist the Poor at the World Bank 8 Bill & Melinda Gates Foundation’s Financial Services for the Poor (FSP) program

USAID Firms Project Page. 2 players such as Mobicash, U-Paisa, and HBL-Express are slowly inching up with individual growth in share volume of 1% each. Particularly, Mobicash has captured a market share of 9%.9

In view of the above statistics, Pakistan is a prime candidate for mobile financial services that operate on low operational cost structures and overheads. Although several mobile network operators in Pakistan have partnered with banks and introduced mobile money products they are still struggling to get established and fully operational.

The objective of this consultancy is to conduct an analysis of the mobile money landscape in Pakistan and evaluate it to international best practices in comparable economies. This gap will facilitate the development of a comprehensive strategy for spreading awareness and suggest ways of radically scaling up mobile money systems in Pakistan. The targeted impact is the development of an ecosystem that will support the long term and sustained growth of the Pakistani mobile financial services market.

1.2 The study

Today, mobile money services are available throughout much of the developing world. Most markets have a live offering and many have multiple services. In 2007, there were fewer than 20 mobile money services for the unbanked worldwide.

Since then the number of deployments has ballooned to over 190, with another

115 planning to launch.10

How are these 190 services faring? Unevenly. Many mobile money services have yet to achieve significant scale, but a collection of stand-out services appear to

9 http://www.sbp.org.pk/publications/acd/BranchlessBanking-Apr-Jun-2014.pdf http:// www.gsma.com/mobilefordevelopment/ programs/mobile-money-for-the- unbanked/tracker http://www.sbp.org.pk/publications/acd/BranchlessBanking-Apr-Jun-2014.pdf http://www.gsma.com/mobilefordevelopment/

USAID Firms Project Page. 3 have figured out the formula and are riding a steep growth trajectory. According to

GSMA’s 2012 Global Mobile Money Adoption Survey, 14 services qualified as

Mobile Money Sprinters, the world’s fastest growing mobile money services. What has been the formula for their success?

We sought to find out what drives on-the-ground success and to develop a preliminary set of prioritized, actionable recommendations. We interviewed and conducted a workshop with more than 20 leading mobile-money providers and banks offering digital finance, which we supplemented with a survey of about a dozen providers and industry leaders globally.

We are going to look the key enabling features of the Mobile Money sprinters and compare them to the Pakistan landscape. On this basis the following were deemed key to scaling mobile money.

• Management buy-in and corporate commitment.

• Enabling Regulatory regime

• Distribution and Agent network

• Innovative Product offering.

• Technology.

• Strength of brand

• Market structure

To appreciate this the analysis will look at the general life cycle curve of mobile money deployments.

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Market

Entry.

Internal beta launch

Deployment of 500 agents to 10% market penetration for user. 1 trx/user/mont

Market penetration exceeds 10%. 2+ trx/user/month

Design Launch Scale-up Diversify

Figure 1 Mobile Money Life cycle

1.2.1 MANAGEMENT BUY-IN AND CORPORATE

COMMITMENT.

Our research shows that most successfully mobile money deployment take about

3 – 5 years to break even and start making profits.

The experience of WING in Cambodia would appear to bear out the truth of these observations. Launched in 2009 by ANZ bank, and initially conceived as a product aimed at bulk transactions, particularly pay roll processing for Cambodia garment industry, WING has grown into something of a mobile money success story, though one which is largely overshadowed by African successes. Nevertheless, in 2013 WING turned a profit break even and reach profitability.

In Pakistan most of the Easy Paisa, benefitted from a unique and innovative corporate partnership between Telenor and Tameer Microfinance. This saw Easy

Paisa getting the “best of both worlds” This unique marriage enabled Easy Paisa both the liquidity and management buy-in to reach scale.

Other players should consider that an enthusiastic, committed corporate culture that is willing to make significant up-front investments and patiently wait for impact at scale is crucial to mobile- money success.

Mobile money has great potential to be profitable for the service providers in the long term because of the combination of direct fee revenues and indirect benefits

(churn reduction and lower airtime- sales-channel costs being the most significant).

Conservative estimates indicate that both MNOs and banks can generate http://www.wingmoney.com/ http://www.anz.com.au/personal/ http://mobilemoneyasia.blogspot.com/2013/05/in-industry-of-disappointments-why-is_3907.html

USAID Firms Project Page. 5 significantly more profits once mobile money reaches scale. From what we have seen so far, though, mobile money tends to become profitable only after it begins to “go viral” and enjoy the benefits of network effects.

Because new technologies and people’s money are involved, it takes time for people to become comfortable and trust the system. Therefore, strong corporate commitment and faith in mobile money’s future profitability is crucial for success in the launch and scale-up phases.

This rings particularly true as the rest of the mobile money and branchless banking providers playing catch up in Pakistan. The Management should commit more funds than expected to reach scale. Most successful mobile-money launches have had the backing of millions of dollars.

Safaricom poured $30 million into M-Pesa. Other successful deployments received similar levels of investment: Vodacom spent $25 million, and MTN

Uganda put up $10 million in initial investment. Numerous other deployments in the last few years have attempted to get off the ground with less than $1 million, only to find themselves unable to gain traction. Mobile banking is not simple; it requires a thorough, careful understanding of customers and agents, and a willingness to invest in the buy-in of both these groups. If companies are not willing to invest and stay committed, the deployments will not reach scale

Mobile Money Lifecycle with critical indicators

Entry.

Internal beta launch

Deployment of approx.

500 agents to

10% market penetration for user. 1 trx/user/mont penetration exceeds 10%. 2+ trx/user/month

Design Launch Scale-up Diversify

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Management buy-in

Enabling Regulatory regime

Distribution and Agent

Innovative Product offering

Technology

Partnerships

Brand recognition and

Most Critical

Highly Important

Important

1.2.2 ENABLING REGULATORY REGIME

For there to be any significant success in mobile money, there must be an enabling regulatory environment with clear mandate and vision to drive financial inclusion and a cash-lite economy.

The impact regulators have on the mobile determines hugely on the growth and sustainability of the industry. The two main regulators are the State Bank of

Pakistan (SBP) and the Pakistan Telecommunication Agency. Since Pakistan has a Bank-led model, SBP plays a big role. PTA is primarily tasked with regulating the

Technology aspect of Mobile money and SPB with the regulating the money aspect.

1.2.2.1 MOBILE MONEY AND BRANCHLESS BANKING

MODELS

Pakistan has a bank-led model, at least on paper. This has led to MNOs either acquiring a bank (normally a small microfinance) like the case of

Telenor and Tameer Microfinance bank or partnering with financial institutions, like the case of ZONG. Other banks like Muslim Commercial bank have pursued a Teleco-agnostic model.

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In the interest of financial inclusion, the SPB has allowed a mix of different model to their credit.

To further promote the adoption mobile money and digital finance I Pakistan, SPB should look at not leaving the market of financial services for the poor in the hands of a single player. There needs to be a level playing field where multiple players can reasonably contest the market, and where success is not premised on a single operator exerting its dominant position in the adjacent telco market to the exclusion of others.

Alongside the dominant MNO scenario, SPB should ideally demonstrate viability of two further types of models. One is a Telco-agnostic mobile money solution, where non-banks –whether banks, retail chains or independent third parties—can leverage deployed mobile technologies

(networks and phones) without having to enter into specific partnership agreements with telcos. In this fashion they could build a branchless banking solution without having to go through the expense of rolling out large numbers of cards and point of sale terminals – which telcos don’t need to do.

A telco-independent solution would need to circumvent ‘bottleneck assets’ controlled by telcos which are not offered on standard commercial terms, namely access to the SIM card and to the USSD communications channel.

This requires the scheme promoter to develop an alternative security and user interface presentation mechanism. With the growth of 4G and 3G networks, and as smart phones increase in the country, this should be a viable option.

1.2.2.2 REGULATION TO MAKE MOBILE MONEY TO

WORK FOR THE POOR.

The other key step in driving mobile money uptake in Pakistan is for the regulators to create an ecosystem that makes mobile money work for the poor segments of the population and to service smaller transactions. This is largely not happening in Pakistan.

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The current transaction costs are still high, locking out the bottom of pyramid from the service. SPB and PTA should look at the eventuality that mobile money is working commercially for service providers and affordably for poor customers for transactions of as little as PKR100 or PKR200.

There are two key requirements to open up the low-denomination transaction market profitably.

First, there needs to be sufficient volume of transactions to be able to amortize operating costs over a larger transaction pool. Thus, there is benefit in schemes broadening the usage base to include P2P, bill payment

(C2P), salary disbursements (B2P), government welfare payments (G2P), of which is currently being aggressively pursued.

Second, there needs to be a more segmented and diverse cash merchant channel. There is a limit to how small (and cheap) store-based transactions can be, before they start placing an unreasonable burden on the store.

Poorer customers, especially those in rural areas, will need to be served through alternative channels, be they roving collectors, market-based resellers, Imams or leaders of community-based organizations. There is a tantalizing possibility of savings-led groups providing a transaction consolidation and cash aggregation point from which it becomes efficient to connect the poorest people with mobile money systems. In this fashion, mobile money would leverage not only existing physical infrastructure but established social capital as well. MCB’s mobile banking is dropping all cost to the customers for transactions on the system. This has helped driver service activation for MCB.

1.2.2.3 KYC and AML

About 90% of adults in Pakistan have a National ID (CNIC) issued and maintained by NADRA. This forms the basis of individuals entering into financial agreements with any service provider.

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During our research, most industry players complained about having to deal with two different sets of KYC – one for SIM Registration regulated by PTA and the other KYC for mobile money registration regulated by the SBP.

While unique geopolitical position of Pakistan requires it to be strict on KYC, it is within the acceptable international KYC/AML regulation to streamline the two KYC requirements. At the time of this report, PTA and SPB were working to align the KYC requirement so that users would only need to do it once – at the SIM registration level. This is okay for any new customer but the challenge still remains for the existing millions of customers that have

SIMs but haven’t gone through the mandatory KYC from PTA.

Transaction on CNIC has helped mobile money and specifically Easy Paisa quickly transact billions of rupees. Credit must be given to SPB for allowing this. The next step for both regulators and service providers to move customers from just using the platform to move money from point A to B, to start storing money within the ecosystem – this is the true cashless and cash-lite economy.

It is key that the service providers continue to engage the regulator on a regular basis and an open forum so that together they can put in place anti-money laundering policies, risk management and compliance systems that meet with the SBP’s satisfaction without being hampered by regulation that could kill mobile money before it manages to take flight. A regulator following the market while monitoring it closely has also been shown to be a key determinant in allowing mobile money to reach scale.

1.2.3 DISTRIBUTION AND AGENT NETWORK

Depending on who you ask, Pakistan has between 60,000 – 120,000 agents .The

60,000 proponents argue that most of the agents are shared so the 120,000 number is not the real on the ground picture.

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Our findings suggest that managing the agent network is the most critical post-launch success factor. Agents conduct the cash-in and cash-out functions, enabling customers to convert cash into electronic money and back again in convenient locations; in the eyes of the customer, the agent is the face of the company. In Pakistan’s OTC model it is the agents that do the actual transaction on the agent phone. This means the agent can either build or destroy trust and credibility.

Many providers focus on building their agent networks as fast as possible, without careful attention to the agents’ business case and profitability.

This oversight and warped business strategy has led to the current Agent wars in

Pakistan.

New service providers wanting to get a piece of the OTC pie from the market leader go out in to the field and recruit the market leaders already trained agents, offering them higher commissions to push their products and platform over the competition’s. This has led to scenario where agents are paid as high as 110%.

This model is not financial viable and not sustainable business practice.

The undercutting and agent wars has had the negative effect of reducing the agent-footprint across the country as no service provider is willing to invest time and money to recruit and train agents only for the competition to swoop in and “steal them”. During this research, this was highlighted and brought to the attention of the

SBP.

According to our research, this is a mistake. We propose four key tenets in managing an agent network:

Grow the customer base and the network in tandem;

Understand agent economics and risk—the business case for agents is not that simple;

Only enroll agents who have the right skills and dedication, and be prepared to train and retrain.

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Roll out unique products that will distinguish you from the competition.

1.2.3.1 Grow the network with the customer base

Getting the agent network rollout right is one of the most complicated aspects of launching mobile money. If a provider enlists too few agents, customers perceive the system as difficult to use, or even useless. On the other hand, if there are too many agents, many of them cannot generate enough business to cover the cost of managing liquidity. As a result, they stop maintaining their electronic money float and cash balances or altogether move to the competition. This is bad for the agents and damages the system’s credibility with customers. It is best not to let such an imbalance continue. For example, when one African provider realized that it had too many agents relative to transaction volume, it cut its agent base in half.

To ensure ease of use for customers and the appropriate level of business for agents, a provider must take a considered approach to network growth

As an example, one of the keys to Safaricom’s continued success has been its decision to match network growth to customer-base growth, ensuring a steady.

The practical implication is that the agent network can start out smaller than commonly expected. The initial network will likely number in the hundreds, not thousands, and it does not have to cover the entire country. Safaricom launched M-Pesa with just 400 agents in a country of almost 37 million people. For large country like Pakistan, we urge a regional launch, accompanied by later rollouts.

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Figure 2 M-Pesa Customer growth drove agent growth

Agents

Transaction per agent

2008 2009

1.2.3.2 Understand agent economics and risk.

This may sound simple, but many providers have failed to ensure that their agents have a manageable path to profitability. Experts note that it takes a year or more for agents to see profits from mobile money. The Gates

Foundation maintains that agents must process around 30 to 50 transactions per day for their business to be viable. Understanding the business case for agents means analyzing their day-to-day operations and developing solutions to their biggest pain points, as well as understanding the trade-offs they face.

For example, managing liquidity is the largest cost for agents, representing one-third of their total costs. In this context, there are two sides to liquidity:

managing physical cash on hand and managing the amount of e-money the

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11 CGAP

USAID Firms Project Page. 14 agent has bought as “e-float.” Agents must invest significant amounts of money up front in e-float and other costs, which in many countries including

Pakistan, can be as much as three times per capita GDP. In the early days of a deployment, there are too few transactions to offset these costs. Even when transaction volume increases, agents often see their revenue only once a month, when commissions are paid. Another cost of liquidity management is the risk of robbery for agents holding large amounts of cash for payouts, which has been a problem for some Brazilian banking correspondents. This could be the case for the larger cities of Pakistan in the near future.

Liquidity is also an agent’s most vexing logistical challenge. Most agents struggle to maintain enough cash or e-money to meet customer demand on peak days, like government paydays. And even on normal days, most agents must typically plan to send someone to the nearest “superagent”

(that is, an intermediary agent—larger than others in the network—that helps the provider manage parts of the network and ensures that smaller agents can conveniently manage liquidity) or bank branch to rebalance cash and e-money. In some countries agents have an informal agreement with each to help out when they run out of cash or e-float.

Some of these timing issues have relatively simple solutions. For example, paying agents to sign up customers can help the agent earn some income before transaction volumes really kick in and lock them in from the temptation to jump ship and sell the competitions product. However, to ensure this does not become an incentive to sign up a large number of dormant customers, these commissions should be staggered, with parts becoming due, for example, at initial registration, first deposit, first financial transaction, and continued use. Providers should also consider up-front loans to high-potential agents. The key is to understand the full business case and design incentives, loans, and other financial aspects of the

USAID Firms Project Page. 15 relationship appropriately. This thinking will help Pakistan agent management move from the panacea that is the ever-increasing, non-sustainable agent commission.

1.2.3.3 Invest in maintaining agent quality

Agent quality is critical for maintaining customers’ faith in the system and distinguishing your product offering from the competition. The best agents maintain liquidity consistently, market mobile money effectively, educate customers in mobile- money use, and remember their training instructions.

Such agents are an essential asset in mobile money, but acquiring them requires careful recruitment, training, and monitoring, with a particular emphasis on protecting customers from fraud. In our research almost none of the mobile money users indicated that they learned about mobile money from agents. This shows glaring deficiency in the use of agents to drive adoption and use of mobile money.

Mobile-network operators (MNOs) interested in launching mobile money have often tried to convert their prepaid airtime distribution network to a mobile-money network, but this strategy has not always worked. Airtime dealers are rightfully wary of cannibalization of their business by mobile money—once users adopt mobile money, what is to stop them from buying airtime over their handsets? This could kill the agents’ airtime sales. This discrepancy in incentives between airtime sales and mobile money has been a major barrier to mobile-money growth for an MNO in Asia. And the switch to becoming a mobile-money agent does not initially appear lucrative, since commissions on mobile money are typically lower than commissions on airtime. Therefore, providers seeking to build a network may need to be choosy with respect to existing airtime sellers—recruiting only high-potential early adopters—and then branch out to different sources of high-quality talent, such as retail chains, or aggregators, such as super-agents.

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In addition to recruiting effectively, providers must offer agents ongoing training services, especially at launch and when introducing new features.

Because airtime dealers have high employee turnover, retraining agents by visiting each shop up to twice a year may be necessary.

Safaricom has outsourced this successfully to the independent contractor Top

Image. Other providers, including EKO in India, have managed training well in-house, choosing to outsource only the more day-to-day functions of agent management (liquidity balancing, for example).

Consistency, continuous follow-up, and in-shop training are all important.

Our research revealed that agents do not prefer to send their employees off-site for training and that employees who receive off-site training typically do not retain what they…