By: Chris Bold

Pakistan is one of the fastest developing markets for branchless banking in the world. Clear regulations and a regulator that is willing to both listen to the private sector and provide incentives for innovation have promoted a dynamic branchless banking sector. Two players have already launched services, and others are waiting in the wings. This Brief highlights both existing and anticipated businesses and outlines the key challenges and opportunities that are likely to shape the market over the next 12 months.

Financial Access 2010 is the second in a series of annual reports by CGAP (Consultative Group to Assist the Poor) and the World Bank Group to monitor statistics for financial access around the world and to inform the policy debate. The series was launched in response to the increasing interest in financial inclusion among policy makers and the development community. The first report, Financial Access 2009, introduced statistics on the use of financial services in 139 economies and mapped a broad range of policies and initiatives supporting financial inclusion.

In the past decade or so, many microfinance institutions (MFIs) have experimented with alternative delivery channels to reduce costs, facilitate greater outreach to hard-to-reach areas, and increase customer convenience. In theory, mobile phones could be used to reach many more customers at a lower cost than any existing delivery channel. Yet despite this potential, in the vast majority of countries there is not yet an existing m-banking service that MFIs can leverage. M-banking to date has largely been driven by MNOs and, to a lesser extent, by some large banks. MFIs have by and large not played a significant role in the implementation of m-banking services.

Despite growing agreement on the potential of technology to expand access to finance, or branchless banking, there is surprisingly little data publicly available about low-income users. This Brief draws on some of the first ethnographic research on M-PESA, one of the earliest success stories in mobile phone-based delivery of financial services. The research offers insights into how poor people use M-PESA, its impact on their lives, and some unexpected consequences.

A significant proportion of microfinance institutions (MFIs) in developing countries operate either as nongovernmental organizations (NGOs) or as projects run by international NGOs. Many of these NGO MFIs plan to “transform” into a for-profit company—often, a regulated financial institution.

Only about one-quarter of households in developing countries have any form of financial savings with formal banking institutions: 10 percent in Kenya, 20 percent in Macedonia, 25 percent in Mexico, 32 percent in Bangladesh. Yet access to financial services—whether in the form of savings, payments, credit, or insurance—is a fundamental tool for managing a family’s well-being and productive capacity: to smooth expenditure when inflows are erratic (occasional work, seasonality of crops), to be able to build up purchasing power when expenditures are large and sporadic (school fees, buying seeds), or to protect against emergencies (natural disasters, death in the family).

Branchless banking has great potential to extend the distribution of financial services to poor people who are not reached by traditional bank branch networks; it lowers the cost of delivery, including costs both to banks of building and maintaining a delivery channel and to customers of accessing services (e.g., travel or queuing times).

This Brief provides a quick look at the growing use of banking agents to extend financial services to low-income and poor people. Banking agents are retail vendors, lottery outlets, and post offices—trusted local establishments that can double as a kind of bank branch, processing everything from bill and pension payments to deposits, withdrawals, and money transfers. For the most part, however, poor clients are not yet using the full range of financial services. Cross-selling financial services through banking agents and getting poor people not only to use the agent network, but also to become true clients of their bank are still challenges faced by many financial institutions.

This Technical Guide helps financial service providers determine whether they should offer money transfer services. And if so, it helps them determine what strategy, products, and institutional structure are needed to support a successful money transfer operation. Financial service providers that serve the poor are drawn to the money transfer market because it offers them the opportunity to fulfill their financial goals and their social objectives. As a fee-based product, money transfers can also generate revenues and bolster the bottom line.