August 10, 2015
Branchless/Mobile Banking (MB/BB) in the Solomon Islands is at a start-up stage. It has experienced some initial success, but it also faces a series of challenges towards greater adoption. It is early enough in the overall lifecycle of mobile money market development that, if the challenges are resolved quickly, it could lead to healthier development of the mobile money ecosystem while at the same time making meaningful contributions to financial inclusion. The time to act is now.
MB/BB services in the Solomon Islands were rolled out by the three major commercial banks- ANZ Bank, Bank of South Pacific and Westpac Bank- nearly two years ago. These technology based deployments have increased the uptake of new basic bank accounts with many Solomon Islanders now having access to banking through the spreading network of MB/BB agents in all the provinces.
Financial Inclusion data as reported by commercial banks
|Key Indicators||Baseline December 2010||Present Position December 2014|
|Number of savings bank account||87, 742||227, 813|
|Number of Digital Financial Services(DFS) Accounts||NIL||48, 876|
The Solomon Islands’ highly dispersed population makes financial inclusion a challenging task. Bulk payments especially those by Government have the potential to substantially increase the volume MB/BB transactions. In the Solomon Islands, the majority of the Government to Person (G2P) payments are in the form of fortnightly salaries paid to the nearly 16,000 Government employees. The Pacific Financial Inclusion Program (PFIP) undertook a research study on G2P salary payments with a view to analysing whether:
(i) G2P payments are a potential catalyst to increase transaction volumes of branchless/mobile banking deployments; and
(ii) branchless/mobile banking has the potential to improve the ease, convenience and cost of access to banking services by G2P payment recipients.
This study found that G2P payments themselves have limited opportunity to act as a catalyst towards the uptake of MB/BB, since the revenue stream from G2P payments is not large enough to drive a sustainable business case. Moreover, the target groups of G2P payments already have formal bank accounts to receive their salaries. Therefore, disbursing the G2P payment through MB/BB does not really advance the goal of increasing financial inclusion. On the other hand, MB/BB designed with innovative, need-based products or services might bring significant benefits for G2P recipients in terms of ease, convenience and cost, thus contributing to a “cashlite” society down the road.
Through this study, a number of challenges were identified and a series of recommendations were developed to address those challenges. Some of the key challenges and recommendations are listed below.
SUPPLY SIDE CHALLENGES & RECOMMENDATIONS
The main challenges on the supply side are disparities in the number of financial access points and the number of G2P recipients in certain provinces, and liquidity management at agent points.
“Coopetition” (cooperative competition) in the form of platform sharing at agent level is one possible solution, and an independent agent network could be shared among all service providers. The benefit of this shared agent concept is not limited to a specific geographic area and could therefore be considered for deployment throughout the country. Sharing can drastically cut down infrastructure and operational costs, thus allowing financial service providers to reach remote provinces, which they could not have done with a viable business case on their own.
One way to address the MB/BB agent liquidity management problem is by leveraging the existing network of Solomon Island Post or the two mobile network operators (MNO). The Solomon Post through their network of post offices and agencies can provide business to business (B2B) services to banks by acting as a rebalancing point for the MB/BB agents without cannibalizing their domestic money transfer (DMT) services. The MNOs have their own regional offices where lots of liquidity passes through and can be trialed as rebalancing outlets. There are also opportunities to explore using Savings clubs in rural areas as “liquidity points” or “super agents”.
DEMAND SIDE CHALLENGES & RECOMMENDATIONS
Salary withdrawal in the Solomon Islands is expensive and often time consuming. There is a lack of trust in mobile banking in some areas, and middle and lower income groups expressed fear of technology as a deterrent.
The usage of MB/BB in the Solomon Islands is dominated by services such as check balance, airtime top-up, cash withdrawals and modest levels of P2P transfers (either in the classic form, or through send money services). However, it’s clear that these use cases have not yet led to mass adoption of MB services in the Solomon Islands. Further uptake of MB/BB can be facilitated through the introduction and expansion of newer use case driven value added services, such as specialized savings and loan products, and/or tailored services for specific customer segments (e.g. women).
Expansion of merchant payments can be another way in which mobile banking adoption is facilitated. On average, a large number of respondents (78%) spend about SBD 237 (~USD 30) (between transaction fees and travel costs) each time they withdraw their salary themselves. Government employees withdraw their salaries once every 25 days on average. Thus, annually, they spend SBD 3460 (~USD 444) for withdrawal. Furthermore, G2P survey data indicates that Government employees spend over 90% of their salary on groceries, shopping for them, on average, 3 times a week. Expansion of merchant payment makes a lot of sense based on the users’ perspective. This will give the beneficiaries an opportunity to significantly decrease their expenses on salary withdrawal. It will also provide all the stakeholders with an opportunity to evolve into a cash-lite society and reap the benefits of adopting a more secure and convenient system for conducting transactions. Since this system will reduce the need to withdraw cash through agents, it can possibly address liquidity related issues as well. This approach makes sense from the financial service providers’ perspective as well, offering providers the opportunity to increase revenue from transaction fees through expanded MB/BB transactions.
The trust issue could be addressed through a combination of activities including advocacy and awareness building, identifying clear use cases for MB, and designing and introducing no-cost ‘trial’ offers.
BUSINESS MODEL CHALLENGES & RECOMMENDATIONS
The monthly volume of G2P payment is around SBD 30 million (~USD 4 million) for around 16,000 recipients. Currently, the revenue generated from G2P payment through MB/BB is limited and does not lead to a compelling business case for the banks. The liquidity management challenge, resulting from the lack of an effective rebalancing mechanism, is a major hindrance for business profitability. The existing fee structure that merely depends on the number of transactions creates an inhibiting situation for business profitability.
A business model improves when the revenues increase, or costs are reduced, or preferably both. A significant number of recipients (78%) spend SBD 237 (USD 30) on average to withdraw salary (combination of fees and travel cost). If financial access points can be provided within greater proximity of recipients, a higher fee may be charged. A combination of higher fee structure and redesigned fee structure (introducing slab-based fees) would help improve the revenue stream. Moreover, new products, such as enhanced merchant payments, should be introduced since over 90% of salary is spent on grocery. Greater adoption of merchant payments could lead to more transactions (therefore more fees) and reduced need for cash-out events (therefore also addressing liquidity management issues).
In order to reduce costs, MB/BB services should consider using a single platform: mobile phone based systems (and not POS based systems). CGAP analysis indicates that the total cost of deployment of a POS based infrastructure is around SBD 12,000 (~USD 1, 500) and the total cost of deployment of a mobile phone based infrastructure is around SBD 2,400 (~USD 300). The mobile phone based platform is 5 times less expensive. Adopting this approach may involve some initial costs of transition, but that would be a one-time expense while the benefits in cost reduction would be recurring. Furthermore, shared agents can be deployed to reduce overall systemic costs. Instead of each bank building its own network of agents, all the banks can adopt a coopetition strategy to create economies of scale.
REGULATORY ENVIRONMENT CHALLENGES & RECOMMENDATIONS
At present there are no regulations governing banks agents in the Solomon Islands. CBSI has allowed banks to roll out mobile and branchless banking and has adopted a “wait and watch” approach. CBSI has been progressive in permitting innovation to lead the way and plans introducing appropriate agency banking guidelines in future, being perhaps the most relevant approach for the country. The MB/BB deployments are now in their second year of roll out and valuable insights are emerging. Agency network management has been identified as a key challenge and CBSI is conscious of the need for developing the guidelines factoring proportionality, risks and need to protect consumer interests. PFIP is likely to assist CBSI in developing the agency guidelines and will do so after establishing a broad consensus among all relevant stakeholders and assimilating necessary inputs considering country specific needs.
TECHNOLOGY CHALLENGES & RECOMMENDATIONS
Mobile network infrastructure is quite limited in the Solomon Islands and data is relatively expensive. Of the three banks that have rolled out mobile and branchless banking, one uses a mobile phone based interface whereas the other two use POS based interface. Going by the experience so far, the latter methodology of using POS devices for BB operations places restrictions on rapid expansion as the service needs either a GPRS or a 2.5G mobile network coverage, whereas the technology using just the mobile phone interface can be used in more locations where basic voice and SMS coverage exists.
Investments with a long-term view are required to expand the mobile network infrastructure in the Solomon Islands. The development could be viewed on two sub-levels: (a) building new base transceiver stations (BTS) with voice and data connectivity, and (b) upgrading the existing BTS stations to provide data services. The second option is less expensive and easier to implement.
Investments in back-end technology will likely lead to long-term profitability for all relevant stakeholders in the market. Greater data usage will contribute to increased revenue for MNOs and create opportunities for innovative digital financial services. Once this happens, the larger data volume demand will lead to opportunities for further reduction of data prices.
It is strongly recommended that the MB players in the Solomon Islands migrate to a single platform, instead of simultaneously operating under two platforms (POS devices, mobile phones). Service providers will benefit from economies of scale (reduced operations and maintenance costs) if only a single platform is selected. Moreover, it will simplify the user experience considerably for both the agents and end-users.
From a long term perspective, stakeholders in the Solomon Islands should keep a close eye on the technological advancements at the global level with respect to payment platforms and payment services. This could open up opportunities for technological leapfrogging for the country even as it starts addressing the various challenges around payment systems.
G2P Study: Key Statistics
|Number of G2P Salary Recipients||16000|
|Number of respondents surveyed||279|
|Provinces covered||Guadalcanal, Malaita, Temotu, Renebel and Western|
|Number of respondents registered to MB/BB||60%|
|Salary withdrawal modes- ATM||51%|
|Bank Agents||40% (includes BSP manual passbook agents)|
|Amount spent on withdrawal (travel costs plus fees)||SBD$3460 per annum (by 78% respondents)|
ABOUT THE AUTHOR : Krishnan Narasimhan is the financial inclusion specialist, based in Solomon Islands, with the Pacific Financial Inclusion Programme.