In Pakistan, there are two primary transaction channels in the branchless banking sector: mobile wallets, and over-the-counter (OTC). In contrast to the mobile wallet platform where customers execute all transactions on their mobile phones themselves, the OTC model is facilitated by an agent. This channel is a convenient and reliable platform for customers to transfer funds, pay utility bills and top up their mobile phones. It has nevertheless slowed down the pace of promotion of financial inclusion by limiting customer access to facilitated transactions only, a barrier which can be addressed via a shift from OTC to mobile wallets. Today, OTC dominates over mobile wallets in terms of both volume and value of customer oriented transactions within the branchless banking sector.

Source: SBP Branchless Banking Newsletter

THE HISTORY OF PAKISTAN’S OTC MODEL

The OTC model was first introduced in Pakistan in 2009 when Telenor Easypaisa launched its mobile wallet in partnership with Tameer Bank, a local microfinance bank, with the objective of increasing access to finance. At the time, Telenor’s market share of annual cellular subscribers was less than a quarter of the total, and only Telenor customers could transact on the mobile wallet channel. In order to reach out to a wider and more inclusive customer base, Telenor Easypaisa introduced OTC transactions to the market. As the first entrants in this space, Telenor Easypaisa had the arduous task of creating an agent network from scratch. The gains from being a first mover however, were slowly eroded by competitors who took advantage of their initial spending on agent training, infrastructure and awareness campaigns to build their own MM offering. Since the initial investment in OTC by Easypaisa, big telecoms have found it easier to adopt this methodology by converting GSM retailers into OTC agents, and build off Easypaisa’s existing network.

THE POWER OF PAKISTAN’S AGENTS

The popularity of OTC transactions gives the agent a disproportionate amount of strength amongst all branchless banking stakeholders. Customers rely on agents’ accounts due to a perceived difficulty in using a mobile wallet account. Thus, for OTC transactions, agents can control which provider a customer uses. Consequently, though a hugely profitable channel, the agent-led OTC model has led to two negative outcomes. First, it is cutting into provider revenue and second, it has made consumers dependent upon agent assisted financial services.

The agent has the power to choose a service provider based on the commission and other incentives provided to him which has sparked a ‘commission war’ as MNOs compete for a share in the OTC market and cut down on their profit margins. For every P2P transaction made via the agent, MNOs pay half of the fee charged to the franchise which is further split equally between the franchise and the agent. In addition to the regular commission paid, the MNOs spend a considerable amount on trade marketing which offers exorbitant proportions of commissions to the agents; in some cases commissions may amount to over 200% of the value of transaction. Incentives in the form of bundles (free air time, data etc.) is an added strain to the MNOs profits who are engaged in a fierce war to make agents convert to their network. As a result, mobile operators have been facing considerable losses while the agents have benefitted by taking up a huge proportion of their profits. Due to the agent-led OTC pricing model, Pakistan has the highest median agent profit at current price PPP adjusted prices compared to India and Bangladesh.

Source: ANA Survey 2014

It is important to note that even in a mobile wallet led model the role of the agent, while diminished, is still significant in regards to registration and cash-in and cash-out functions. Although some mobile wallet services allow for remote account opening, other providers still require customers to seek agent assistance. Banks and MNOs are responsible for training agents and are now outfitting them with biometric verification machines to facilitate level 0 account opening for which agents do not charge a fee. Further transactions done remotely by the account holder as well as cash in and cash out services do not generate profits for the agent either.

THE FUTURE OF AGENT LED BRANCHLESS BANKING

Given that the agent is an integral part of the mobile money infrastructure in Pakistan across all models, there is an urgent need to change the prevalent pricing, training and incentivization structure if we want the branchless banking industry to grow. One potential alternate pricing structure is called ‘freemium’ where everyday low value transactions for personal or commercial use below a set daily limit can take place for free, and instead value is drawn from customers who transact more. In theory free small value transactions could drive greater adoption and allow MNOs to benefit from network effects in the long term. And, once a significant number of customers adopt the mobile wallet platform, more transactions via this channel will increase its general value and potentially create demand for a wider range of products.

CONCULSION

The shift away from OTC to mobile wallet transactions is a thorny issue that involves many actors along the branchless banking value chain that are incentivized in different and sometimes diametrically opposite ways. The steps to move the market in the preferred direction of more mobile wallet transacting will require innovative thinking and fearless experimentation. The suggestion given above is just one possibility within a myriad of possibilities and Karandaaz is eager to work with the market in researching and developing possible new pricing and delivery models.