May 23, 2014

Branchless Banking

By Hisham Isa, Vice President (Marketing)

In this week's column, we continue our series on mobile banking with a look at distribution.

When it comes to expanding financial services, distribution is the name of the game, particularly if you'd like to reach new consumers, such as the UnderBanked - people who have trouble accessing financial services or who do not have bank accounts.

To reach these consumers, banks need to look beyond traditional forms of distribution. They need to look beyond building bank branches. They need Branchless Banking.

The UnderBanked

The UnBanked and UnderBanked constitute a huge market segment. The World Bank estimates that 2.5 billion adults across the globe lack access to formal financial services. Most of these consumers are in developing countries, but there are over 100 million UnderBanked in the United States as well (about 1/3 of the population). The UnderBanked rely on non-bank financial solutions - like Western Union and loan sharks - to remit funds to loved ones or borrow money.

Branchless Banking, meanwhile, has actually been around for ages - since the proliferation of ATM machines in the 70's and 80's. But whereas ATMs complemented traditional bank branches, new forms of branchless banking are being used as separate channels altogether. Having a strong distribution network makes it easier for clients to access services like depositing and withdrawing funds.

Building on Branchless Banking is the best way to reach the UnderBanked - and better service other consumers as well.  Here are three ways banks could expand their networks:

1. Partner with a Retailer

Take the case of Tesco, the UK's largest retailer with over 3300 stores. Tesco first entered the world of financial services in the late 1990s in partnership with the Royal Bank of Scotland (RBS). Since 2008, Tesco has gone it alone, offering consumers savings accounts, current accounts, credit cards, loans, insurance and more. Tesco Bank now has more than 7 million banking customers in the UK.

Some of Tesco's competitors - including Sainsbury and Marks & Spencer - also offer banking services.

British consumers are highly loyal to their supermarkets - almost as loyal as when it comes to choosing a bank (66% loyality to banks, 62% to supermarkets) - which has led some commentators to question whether Supermarkets could become Superbanks.

2. Partner with the Post Office

Postal accounts have been around since the 1860s, when Great Britain opened the Post Office Savings Bank. Most of these accounts have been run directly by postal systems, however banks have started making inroads here.

In Brazil, Banco Bradesco won a tender in 2001 giving it exclusive access to 5300 of the country's 10,500 postal branches. Bradesco gained access to a great network as well as access to communities where it did not have banks; the postal service gained a new revenue stream. In 2012, Banco do Brazil took over the Banco Postal service from its rival. As of April 2012, there were 148 million Brazilian Reals (USD 66.5 million) in deposits. There are now Banco Postal outfits in nearly 6000 post offices and 95% of Brazilian municipalities.

Another example to highlight is in rural Pakistan, where the First MicroFinance Bank Pakistan (FMFB-P) is partnering with the public post offices to extend micro-loans. FMFB-P notes that the post office has a network of 4000 offices throughout the country, which is particularly useful for accessing people in often-hard-to-reach rural areas.

3. Partner with a Telecom

From 7-Elevens to Mom & Pop convenience stores, mobile operators run some of the largest retail distribution networks to support the sale of pre-paid cards. Several banks have already taken notice of this, partnering with the telecoms to offer financial services. In The Philippines, a dozen banks are partnering with SMART Communications (for 'SMART Money') and in South Africa, Standard Bank is working with MTN (again).

Branchless Banking

Mobile is being increasingly used by both traditional and non-traditional banks. In some cases, we're seeing phones take the place of ATM cards. In others, text and smartphone applications are enabling new providers to offer remittance services as well as savings and loans.

21st Century Branchless Banking can be the key to quick organic growth. In The Philippines, for example, Globe BankO - a popular choice of BuzzCity's Filipino users - used a branchless strategy to grow to more than a million customers in just a few years.

If banks are to remain competitive in the retail space, they really need to think outside of their traditional channels and see how new distribution networks can engage consumers.

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