Monthly Archives: June 2011

Mobile Banking for the Unbanked – HBS

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Published: June 13, 2011
Author: Carmen Nobel

Executive Summary:

A billion people in developing countries have no need for a savings account–but they do need a financial service that banks compete to provide. The new HBS case Mobile Banking for the Unbanked, written by professor Kash Rangan, is a lesson in understanding the real need of customers. Key concepts include:

  • The case teaches the lesson of meeting your customers’ actual needs, not the needs as you perceive them.
  • WIZZIT offered traditional banking services via mobile phones. M-PESA realized that the target audience did not need traditional banking services, but rather a simple way for workers to transfer money home to their families.
  • The M-PESA service induces carrier loyalty among the Safaricom customers who use the service.

    In many developing countries it’s common for a person to have a mobile phone but not a bank account. In fact, more than 1 billion people fit this description, and the number is only likely to increase. To that end, many companies are considering how to give residents access to banking services via their handsets. The GSM Association predicts that by 2012, nearly 300 million of the previously “unbanked” will be using some form of mobile banking.

    “The mistake a lot of us make is to look at the folks at the base of the pyramid and assume that they must need the same types of services we need.”

    The Harvard Business School case study Mobile Banking for the Unbanked explores two very different examples of mobile financial service models: WIZZIT, a third-party startup that teamed with a major bank to provide standard banking services via mobile access to impoverished residents of South Africa; and M-PESA, an initiative launched by the mobile network operator Safaricom (in conjunction with Vodafone) to offer a new type of financial service to the poor residents of Kenya.

    Ultimately, the more successful of the two, M-PESA, realized that the intended customers didn’t really want bank accounts at all—they wanted effective ways to send money home to their families.

    The case’s key lesson is the importance of meeting the real needs of your target audience, not the needs as you perceive them, says professor V. Kasturi “Kash” Rangan, who authored the case with research associate Katharine Lee and teaches it in his second-year elective course Business at the Base of the Pyramid.

    “The mistake a lot of us make is to look at the folks at the base of the pyramid and assume that they must need the same types of services we need,” Rangan says. “Everybody needs food. We need education, and so do the poor. We need banks, so they must need banks. But that’s the wrong way of approaching it. The ecosystem in which they live is very different from ours. They’re on weekly or even daily wages, and their family circumstances are different. So we’ve really got to dig in and figure out what their real needs are and their pain points.”

    The problem with WIZZIT

    WIZZIT entered the mobile banking market in 2004 because the mobile phone penetration rate in South Africa was almost 100 percent, thanks in large part to the onset of prepaid services that offer low-cost handsets and the opportunity to buy airtime in advance.

    “A subscription model doesn’t appeal to the poor at all,” Rangan says. “They don’t want to pay a fee for something they might not use.”

    Moreover, more than half of South Africa’s population had no access to a bank account. This was largely because half of the population lived below the poverty line, and banks, understandably, were not eager to serve a moneyless customer base.

    “Banks find it an unprofitable proposition to serve people who make less than three dollars per day,” Rangan says.

    Still, WIZZIT’s founders thought there was a noble and viable business model in bringing banking to the poor, via a mobile banking platform that could be used on even the most primitive cell phone. They succeeded in finding an engineer to develop the platform, but quickly ran into a major regulatory roadblock. Per the South African government, only licensed banks were allowed to take deposits. The cost of a license was the equivalent of $34 million—a hefty fee for a startup—and the South African Reserve Bank was wary of issuing new permits. Hence, the WIZZIT execs began searching for an established banking partner. Time and again the top-tier banks turned them down, so the company ended up teaming with a second-tier bank, the South African Bank of Athens.

    “Banks find it an unprofitable proposition to serve people who make less than three dollars per day.”

    By 2009, WIZZIT was not yet profitable. The banking partnership proved problematic in that it was hard for a second-tier bank to compete with its larger brethren, which by 2008 were forced by government mandate to offer low-cost banking options for the poor. But WIZZIT also suffered because the founders failed to recognize the true needs of their target customers.

    “WIZZIT essentially took a banking service like the one we have here—depositing salaries in the bank that we draw down to make payments—and decided that this is what the poor wanted, too,” Rangan says. “Of course the founders were very creative in bringing the costs down dramatically and improving access, so the poor could afford to bank. The problem is that this is not the way that the poor think of money. They hardly have any savings. Their main need is money-transfer.”

    The success of M-PESA

    In many developing countries, including Kenya, most of the population lives in rural areas, but the majority of bank branches and jobs are in the cities. To send money home, a city worker had to seal his wages in an envelope and pay a courier to travel for hours to the village. Alternatively, the worker could travel to the village himself, but that meant paying a hefty percentage of his wages for bus fare, plus a day of lost work.

    Safaricom and Vodafone initially built M-PESA, a money-transfer application that resides on a phone’s SIM card, as a tool for microfinance organizations to collect loan payments. (“M” stands for “mobile,” and “pesa” is the Swahili word for “money.”) But soon after launching the service in 2007, they realized their mistake and quickly repositioned the service with the slogan, “Send Money Home.”

    “The beauty of M-PESA is that they understood a fundamental theorem of marketing: understand what your customers really want,” Rangan says.

    To create a distribution channel, M-PESA franchised thousands of mom-and-pop convenience stores to act as M-PESA agents at their existing places of business, such that customers could transfer money and receive money conveniently.

    In order to use the service, the customer hands his money to the agent, plus a transfer fee (about 40 cents). Through a computerized process secured by multiple passwords and PINs, the agent transfers the payment to the customer’s phone. Rather than hiring a courier or hopping on a bus, the customer simply hits “send” to transfer the money to a family member’s phone.

    “Then, ka-ching! The family member goes to an agent in her village and cashes the money from her phone,” Rangan explains.

    Rangan says his students are generally quick to realize why M-PESA is popular among customers. But they wonder how such an application can also be good for the carriers’ bottom line. After all, the company is not allowed to pay interest on savings or to invest the float, per government orders; Kenya, too, has strict banking regulations. And how much revenue can anyone garner from a 40-cent fee that customers pay once a week, if that?

    “Students first take a look at M-PESA and think, ‘This is CSR [corporate social responsibility]! Where’s the double bottom-line?” Rangan says.

    “Why not harness the power of business to take care of their needs?”

    The answer is in the sheer number of registered M-PESA customers,some nine million as of January 2010. More than $600 billion has been transferred through the service, which has garnered revenues of about $100 million—and would have earned even more were regulations more lenient, Rangan says.

    Perhaps more importantly, the service induces loyalty and additional phone usage. “For Safaricom it’s a profitable opportunity not just because of the fee it makes from the mobile transactions, but because it makes existing customers sticky,” Rangan says. “The company provides an essential service, it is helping the person send money home. He will stay with Safaricom. Plus, as soon as his wife gets the money, what do you think she’s going to do? She’s going to call him on the phone, and that will increase mobile usage!”

    Lessons learned

    Rangan is currently tracking mobile financial services in India, the Philippines, and Indonesia, where several banks are beginning to see the value of such services and, consequently, are entering trial partnerships with mobile operators.

    “It’s not going to be the Nokias, Motorolas, or Microsofts that are going to lead the charge,” he says. “Not even the mobile network operators. It’s going to be the banks because they have the licenses.”

    In teaching the case in class, the goal is not to put the spotlight on mobile banking, but rather to consider the opportunity of serving an enormous underserved population.

    “What I want my students to also take away is to realize that there are 4 billion people on this planet who live on less than five dollars per day,” Rangan says. “If we depend solely on charities and governments to take care of them, we’ll have to wait for centuries before we banish poverty. Why not harness the power of business to take care of their needs?”

    About Faculty in this Article:

    HBS Faculty Member V. Kasturi Rangan

    V. Kasturi Rangan is the Malcolm P. McNair Professor of Marketing at Harvard Business School.

    Banking Via a Cellphone and a Shack –

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    KHAYELITSHA TOWNSHIP, South Africa—Mavis Nonkongozelo walks up to the Five Sisters convenience store here, then pulls a mobile phone from her bag and a few rands from her brassiere. She is ready to bank.

    With a few taps on her cellphone, the 34-year old preschool teacher connects to a nascent mobile-banking network aimed at Africa’s new consumers. The saleswoman accepts a 20 rand ($2.94) bill through a barred window and then taps back on her cellphone. Soon, the money is credited to a special no-fee account at Standard Bank, South Africa’s largest.

    Africa’s banking picture is changing, thanks to rising incomes and spreading use of mobile phones. In South Africa, Standard Bank is breaking from its main business in favor of a low-cost mobile phone model. WSJ’s Peter Wonacott has details.

    Mobile Banking in South Africa

    Per-Anders Pettersson for The Wall Street JournalStandard Bank employees sign up residents for cellphone banking accounts in Khayelitsha, the largest township in Cape Town, South Africa.

    From this corrugated-metal shack outside Cape Town, Standard is breaking from its main business of drawing customers to its branches and automatic teller machines in favor of a low-cost mobile-phone model that is based on proximity to people, like Ms. Nonkongozelo, who have never banked before. The shift says a lot about where banks are placing bets on Africa’s economic growth as a new middle class emerges.

    Since an official launch last year, Standard has opened more than 8,300 of these so-called “bank shops” at sites ranging from street-side convenience stores to raucous taverns. By the end of this year, Standard intends to have 10,000 set up around the country, mostly in South Africa’s predominantly black townships, and has recruited local sales agents to find customers. The shops aim to tap what executives estimate is a pool of about 15 million people in South Africa, or about 30% of its population, who don’t have active bank accounts but now have the means to spend and save.

    Standard doesn’t charge for this type of account, but the bank earns small commissions on cash transfers and those who stock up on mobile-phone credit. “It’s not a golden pot of money,” says Thoraya Pandy, one of the managers at Standard spearheading the mobile-banking program. “We need to bring in loads and loads of customers.”

    The dearth of banks in Africa has long constrained the flow of capital and economic growth. Most banks deemed the costs of expanding branch networks too high and the return from poorer customers too low. Only 20% of African families have bank accounts, according to the African Development Bank. And there are Nearly nine times as many people in developed countries borrowing money as in Africa, according to the World Bank.

    The Next Continental Shift

    Multinational corporations are racing to make the most of Africa’s burgeoning middle class. With reporters on the ground there, a Wall Street Journal series examines the changes.

    Even in South Africa, the continent’s richest economy and the one with the heaviest concentration of banks, rural residents rely on taxi drivers to transfer cash between towns. The drivers typically take 10% of the total. But Africa’s banking picture is changing, thanks to rising incomes and spreading use of mobile phones.

    In a new report, the African Development Bank estimated that a consumer class—defined as those who have $2 to $10 a day to spend—has grown to about 300 million, a critical mass the size of similar middle classes in China and India.

    At the same time, mobile-phone subscriptions in Africa have jumped from 90 million in 2005 to an estimated 333 million in 2010, according to the United Nations. In South Africa alone, cellphone-banking subscriptions—offered by all of the country’s big four banks—grew 21% between July 2009 and June 2010, according to the most recent figures from the nation’s central bank. As a result, financial firms are deploying mobile-phone services to reach once-unreachable customers.

    South Africa’s First National Bank is using mobile banking to expand into neighboring African countries. Standard is rolling out its mobile-bank-shop model in Nigeria, the continent’s most populous country and one of the fastest-growing economies.

    Meanwhile, Western Union Co. has teamed up with M-Pesa, a unit of Kenyan telecommunications firm Safaricom, to conduct money transfers with other parts of the world via text messages. M-Pesa now has 14 million customers, partly because it caters to people banks have neglected, according to Khalid Fellahi, a senior vice president at Western Union.

    “Africa is the hot spot for these kinds of services,” he says.

    Still, managing and expanding a business that relies on high volume and thin profits isn’t easy. A study released last month from the Monitor Group, a global consulting firm, identified 439 initiatives selling to African consumers living on less than $2 a day, but it said most of them were struggling to turn a profit. The study’s lead author, Michael Kubzansky, said financial firms that found ways to reach poorer customers through retail outlets—and even churches, in the case of one insurance company— improved their odds for success.

    But even banks that have aggressively courted Africa’s lower-income consumers say mobile phones and retail outlets can’t substitute, at least in the short term, for a bank counter. “When a client has a problem, they want to talk to someone,” says Carl Fischer, head of marketing and corporate affairs of Capitec Bank Ltd., a South African firm that offers low-cost banking. “Changing that behavior is very tricky.”


    For Standard, the bank-shop rollout hasn’t come without glitches. Some stores have closed abruptly after the proprietors found steady work or returned to their home villages.

    But the experiment makes sense from a cost perspective, says Coenraad Jonker, one of the Standard bank executives behind the bank-shop program. ATMs have been targets for armed gangs. So instead of automatic-weapon-wielding guards transferring money, a palm-size machine at a bank shop can do the same with a cellphone signal.

    “It used to be our central concern was security. Now it is accessibility,” he says.

    Standard conducts background checks of potential merchants before it sets them up as cash-transfer points. It screens for criminal records, looks into credit history and makes sure the area where they operate has cellphone coverage as well as electricity. Those selected are then taught how to use the mobile-banking system.

    Standard doesn’t pay merchants, but many see the benefit of being associated with one of South Africa’s most-recognized brands. Five Sisters even painted its store the same color as the blue Standard Bank banner that hangs down the side of its shack.

    On a recent Friday afternoon, a butcher who had been cleaving meat from goat carcasses next-door came to the window to make a deposit. She took a mobile phone and money from a smudged apron pocket and completed the transaction in minutes.

    Next up: Ms. Nonkongozelo. She was never able to save money before. Now, the preschool teacher and single mother of three has 240 rand in her account. It helps, she adds, that walking to the nearby Five Sisters feels safer than a longer trudge to an ATM, where, in her high-crime neighborhood, she runs the risk of being mugged.

    “Somebody may think I’m coming here to buy an egg,” she says. “They don’t know I’m here to withdraw money.”

    —Jackie Bischof in Johannesburg contributed to this article.

    Microfinance Firm Gets Fresh Round of Funding –

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    BANGALORE — In what could be pegged as a revival of investor interest in firms offering credit to the poor, micro-lender Janalakshmi Financial Services Pvt. Ltd. has raised 650 million rupees ($14.67 million) in its third round of funding from private equity firms.

    “Coming after a major crisis in the sector, this is a major transaction and is a clear sign that the tide is turning for microfinance,” said Ramesh Ramanathan, chairman of Janalakshmi, which lends to the urban poor.

    The number of deals involving microfinance companies has fallen this year although the quantum has remained almost the same. In the first half of 2010, seven investments worth $75 million were made in microfinance companies; so far this year, only four investments worth $69 million have been made, according to Venture Intelligence, a data provider.

    Once a favourite with investors, the Indian microfinance sector has run into trouble after Andhra Pradesh introduced stringent regulations last year in response to allegations that microfinance institutions were charging usurious rates of interest, lending indiscriminately and, in the process, even driving some borrowers to suicide. There have been mass defaults in the state since then. Bankers have also withdrawn credit lines to such lenders, sending the microfinance sector into a deep crisis in its biggest market.

    Private equity firm Citi Venture Capital International was the lead investor in the Janalakshmi deal. Existing investors such as Bellwether Microfinance Fund, Lok Capital, Tree Line Asia Master Fund (Singapore) Pte Ltd., and Michael and Susan Dell Foundation have participated as well. Bangalore-based Unitus Capital was an adviser on the deal.

    With the latest round, Janalaksmi has raised more than one billion rupees from investors in the past three years. It intends to use the proceeds for business development, including more disbursements.

    “The fund-raising was not easy,” Mr. Ramanathan said. “It was a very difficult process. There are two main concerns that I would say investors have: Is there a clear ecosystem to operate in? What is a company’s business model?”

    “This is quite an extraordinary quantum of funds being raised by a microfinance company, particularly in the context of the microfinance crisis,” said Vineet Rai, founder and chief executive of Aavishkaar Venture Management Services Pvt. Ltd., one of the biggest investors in micro-finance institutions in India. The firm is looking at closing two more investments in microfinance companies in a month’s time.

    “This has to be seen as a vote of consent from investors for financial inclusion,” he said.

    Mr. Rai, however, cautioned that the deal does not indicate that microfinance companies are completely out of the financing tangle as yet.

    “I think investors will still wait for another six to nine months to see how things pan out,” he said.

    Indonesia Banks Chase Microloans –

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    Lenders See a Huge Opportunity to Expand Reach and Boost Earnings


    SUBANG, Indonesia—Top banks in Indonesia are rapidly rolling out hundreds of microlending branches across the archipelago in the latest push by financial institutions to expand their reach—and boost earnings—by serving the less affluent.

    Microfinance services usually are handled through charitable groups, government programs and specialty-finance companies, such as Grameen Bank in Bangladesh.

    But in Indonesia, the country’s biggest banks, including Bank Mandiri and Bank Danamon, are powering growth in the market, which they say is under-served and lucrative.

    “The potential in this market is huge,” said Minhari Handikusuma, a director at Danamon who is spearheading its push into microlending. Danamon figures more than 60% of small businesses in Indonesia, or more than 50 million entrepreneurs, aren’t served by the country’s banking system.

    Bank Mandiri’s micro branch in Subang in West Java is small, with simple furnishings and just five employees, to make borrowers feel at home.

    Microlending has expanded too quickly in some places, such as India, triggering a backlash and debt crises. That hasn’t snuffed out global enthusiasm for the business. The latest moves also point to a new driver of investment in Indonesia, one of the world’s largest developing economies.

    Despite Indonesia’s impressive expansion for the last three years, the country’s ratio of loans to gross domestic product, a measure of how widely cash circulates in the economy, remains below 30%. That is lower than any other country in Asia. Singapore, Malaysia and China are all above 100%.

    Some Indonesian banks have remained reluctant to lend after the Asian financial crisis of the late 1990s, and many don’t have a nationwide branch network to reach potential borrowers.

    But as the global buzz about microlending increased since Muhammad Yunus was awarded a Nobel prize in 2006 for his pioneering microfinance work, Indonesia’s urban banks experimented and found that microloans gave them net interest margins—broadly the difference between yields on loans and the cost of funds—of close to 10%. That is more than three times the money they earn on some corporate loans.

    For all banks in Indonesia, the total amount of microloans has surged 75% in the past five years to more than $30 billion.

    The microlenders chose to focus on lending directly to individual entrepreneurs, unlike Grameen-style lenders that usually lend through women’s groups.

    They also chose to focus on rural town markets with hundreds of businesses in one spot, rather than dealing with the costs of going to far-flung villages, as many microlenders do.

    Nonperforming-loan levels have been low in Indonesia and the revenue flows have been more stable than regular lending. When demand for corporate loans dried up in 2008 and 2009, the micro sector kept expanding.

    To reach out to poor entrepreneurs, though, banks rewrote their rule books.

    Mandiri’s branch near the Ciasem market in Subang, West Java, for example, is run by five people, compared with 20 in a regular branch. It is the size of a two-car garage with simple plastic furniture and desks. Its vault is a room with a steel door and padlocks.

    Keeping the branches basic saves money and helps customers feel at home, said branch manager Suhedi, who like many Indonesians uses only one name.

    Loan forms were simplified to one page and people without collateral are allowed to leave their grade-school diplomas or wedding certificates as collateral.

    Customers of rival lenders who can’t sign their names are allowed to use a fingerprint-scanning system, though some farmers’ fingers are so calloused the readers can’t scan them.

    When borrowers balked at paying monthly or quarterly installments, Mandiri started collecting daily, sending employees to the neighborhood market in the morning to collect.

    “It’s a great way to get them to pay on time,” Mr. Suhedi said.

    Within four months of opening late last year, his branch was profitable and was collecting more savings than it was lending out. It now accumulates more cash in one day than some regular branches.

    Mandiri plans to expand the number of microlending outlets it has to 2,300 in the next three years from around 1,500 today.

    The bank also increased its war chest for loan expansion with a rights issue of shares that raised more than $1 billion.

    Its total microlending, which was nothing 10 years ago, is now close to $1 billion.

    At Danamon, microlending was less than 5% of its loan book six years ago. It is now headed toward 25%. The bank has developed mobile branches that work out of cars rather than an office.

    Produce-stand owner Nurjanah has been in the business for more than 20 years and never had a bank loan. If she needed money, she went to a loan shark.

    Now she has $2,500 in loans from Mandiri that helped her to purchase more bananas than she would normally buy.

    She said her profit is better because she got a better price by buying more and that she never would have taken the loan if she had to go to a branch to make payments.

    “I am a 24-hour business. As long as there are customers I am open,” she said, passing a customer a plastic bag full of red chilies. “When there is a lull, I sleep here.”

    —Yayu Yuniar
    contributed to this article.

    Write to Eric Bellman at