Digital Financial Services: The Current Landscape In 3 sentences: CGAP is focused on spurring financial inclusion through digital financial services innovation. Over 250 providers now serve over 340 million customers across 84 countries using digital channels like mobile money, with 38% of customers classified as low-income. Rapid scaling of agent networks has enabled the expansion of services from basic transfers to include savings, credit, insurance, utilities payments and more, transforming access to financial and other services for the poor.

1. Digital Financial Services:
The current landscape
Peter Zetterli
January 2015

2. • Global partnership of 34 org’s focused on financial
inclusion; housed at the World Bank
• Mission is knowledge driven:
• Spur innovation in financial services at BOP
• Generate insights on what works / doesn’t work
• Disseminate best practices to practitioners
• Key learning partners and audience:
• Financial services providers (MFIs, banks, MNOs)
• Regulators and policy makers
• Donors and development partners
• Pragmatic, evidence-based advocacy at the
leading edge of innovation
CGAP is a multi-donor think tank dedicated to access to finance

3. 2.5 billion people
have no access to formal financial services

4. 1.9 billion of them
have a mobile phone

5. 5
On average, how many different financial services or
products do poor families at the base of the economic
pyramid use in any given year in the informal economy?
But do poor people really need financial services?
a) 0-3
b) 4-10
c) 10-15
d) 16-20
e) More than 20

6. …yes they do
6
Poor households in the informal economy use, on
average, 17 financial instruments each year

7. A large number of actors have now understood this opportunity
250+ providers of digital financial services in 84 countries
Together they serve over 340 million customers
38% of these – 128 million people – are low income
Source: CGAP and GSMA MMU State of the Industry 2013
Sub-Saharan Africa:
52% of deployments
70% of active users

8. Models differ across the globe, depending on the context
In Latin America, over 95% of
DFS accounts are card based
In South Asia, vast majority
of DFS customers don’t have
accounts at all but transact
over the counter (OTC)
In Sub-Saharan
Africa, 90% of DFS
accounts are mobile
Source: GSMA MMU State of the Industry 2013

9. DFS: Key concepts

10. Terminology: Trying to make sense of the landscape
MOBILE MONEY
Transactional wallet
mostly used for local
remittances and airtime
M-COMMERCE
Remote purchase of
goods, services via mobile
M-BANKING
Use of mobile for
banking transactions
E-BANKING
Use of electronic
channels for banking
(such as internet, ATM)
E-COMMERCE
Remote purchase of goods,
services via computer
M-INSURANCE
Insurance models tied to
mobile phone/wallet use
M-CREDIT
Loans accessed and repaid
through a mobile wallet
M-SAVINGS
Interest bearing accounts
accessed via mobile wallet
MERCHANT
PAYMENTS
Retail purchase of goods
& services using mobile
DIGITAL FINANCIAL SERVICES (DFS)
Delivered over a digital channel (mobile, internet) using any electronic instrument (card, phone, computer)
Accounts, products and services can be accessed remotely (outside a physical branch or outlet)
MOBILE
FINANCIAL
SERVICES
(MFS)

11. The basic DFS model
E-money walletE-float AgentsAgent wallet

12. Key concept 1: E-money
Standarddefinition
Closed-loop
store cards
are not e-
money
• Monetary value represented
by a claim on an issuer
• Electronically stored (on a
server or–rarely–a card) and
exchanged
• Widely accepted means of
payment by others than the
issuer
• Can be redeemed as cash
Bank
accounts
and prepaid
bankcards fit
the description
E-money accounts can be issued by non-banks.
They are regulated more lightly than bank products.

13. Key concept 2: Agents
• Offer services on behalf of the provider
• But are separate entities—not provider staff
• Provider typically fully liable for agent
• This liability cannot be contracted away
• Usually has a different core business
• Often small retailers or airtime vendors
• In advanced markets, dedicated agents exist
• Transact against own funds in real time
• Don’t at any point hold customers’ cash

14. Verify client
identity
• Comply with KYC
standards
• Guard against
fraud
Help clients
transact
• Cash-in and
cash-out
• OTC payment
transactions
Act as face of
the service
• Sign up clients
• Educate clients
about the service
• Troubleshoot
clients’ problems
Agents fulfill 3 important functions in a DFS service

15. CGAP research on the activity rate of customers registered by best vs. worst agents
Agents are central to the success of the business
Providers often focus on agent quantity, but agent quality is more important:
• If agents are weak, customers will not use the service
• Registering inactive customers is only a drain on the business
Top 20% of
agents by # of
registrations
Top 10% by
activity rate
Bottom 10% by
activity rate
Top10%Bottom10%
Activity Rate
Customers registered
by these agents make
up 5.7% of total
customers
Activity Rate
39.9%
0.9%
Profile of customers registered
by these agentsAll Agents
Top 20% of agents by
# of registrations
Customers registered
by these agents make
up 5.1% of total
customers

16. Why are DFS transformative?

17. Traditional financial services are inaccessible to the poor
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
World Developing countries Of adults earning <$2 /day
Global financial inclusion
Excluded Included
Source: World Bank Findex 2012

18. Why are traditional financial services inaccessible to the poor?
1. High cost of bank branches
 Branch infrastructure is small & heavily urban
2. High documentation requirements
 Large share of population cannot qualify
 Illiterate clients often more or less shut out
3. Low income clients find banks intimidating
 Actually prefer informal, risky, expensive svc
 Products, experience not designed for them
4. Most banks don’t want low-income clients
 Rather, they consciously try to keep them out
 Opening fee, monthly fee, minimum balance, etc
DFS models help overcome them all

19. Technology dramatically lowers cost of outreach
*Includes costs for physical set up (e.g. brick and mortar branches, hardware) only.
1

20. Case in point: Financial infrastructure in Kenya
Bank branches have been built
over the past 100+ years.
Today, there are 1,200+
bank branches in Kenya.

21. Case in point: Financial infrastructure in Kenya
The ATM network has been built
over the past 24 years.
Today, there are 2,300+
ATMs in Kenya.

22. Case in point: Financial infrastructure in Kenya
Today, there are 120,000+
DFS agents in Kenya.
DFS agent networks has been
built over the past 7 years.
Low cost of infrastructure
translates to high access.

23. The same goes at the global level
Points of presence for traditional financial services…

24. The same goes at the global level
…are dwarfed by mobile phone connections.
6,800,000,000
Mobile Phone
Connections
Source: GSMA Wireless Intelligence

25. Risk-based KYC has lowered documentation requirements
It now aligns with what most people actually have
…in return for restricting those accounts:
• Limited maximum balances
• Limited transaction amounts
• Limited types of transactions
Bank High DFS Low DFS
Basic details Y Y Y
National ID Y Y -
Proof of address Y - -
Regulators are allowing lower Know-Your-Customer (KYC)
requirements for DFS accounts:
2
Ghana Low DFS:
• $300
• $100/day
• $1,000/month
Endorsed by global standard setting bodies and watchdogs for
Anti-Money Laundering and Combating Funding for Terrorism (AML/CFT)

26. Mohammad Moniruzzaman, 2009 CGAP Photo Contest
Local agents are
far more inviting
to poor people
• Less formal
• No paperwork
• No queues
• Familiar setting
• Often known in
the community
• Agent is a peer
3

27. Distribution of agent transactions by day of the week and hour
% of total transactions within a sample of agents
Mon
Tue
Wed
Thu
Fri
Sat
Sun
10 2 3 4 5 6 108 12 14 16 18 20 2221 2397 11 13 15 17 19
22.6%
36.0%1.2% 40.2%
Business hours at Agent Partner
Business hours at bank branch network
Agents are also more accessible and convenient
Source: Akya/CGAP analysis; Note: Based on sample of 3,961 transactions

28. If banks aren’t getting it (and they’re not), others will (and are)
• 4/5 of deployments are led by non-banks
• Mostly mobile network operators (MNOs)
who have strong business reasons for DFS
• Direct revenue from transaction fees
• Acquisition and retention of voice customers
• Cost savings from digital airtime sales
4

29. Here’s why MNOs are so active in developing DFS
Average MNO revenue per user, 2000-2014
$ 0
$ 20
$ 40
$ 60
$ 80
$ 100
$ 120
Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010 Q1 2012 Q1 2014
Developing countries Sub-Saharan Africa
Source: GSMA Intelligence (2015)
55%
70%

30. This isn’t about charity or CSR but real business (and that’s great)
Source: GSMA MMU State of the Industry 2013
$300m
Doesn’t include indirect revenues:
• Customer gain + retention
• Cost savings from digital airtime

31. …and this is with a single use case!
DFS has been primarily centered on domestic remittances (and airtime)
DFS are evolving to become considerably more than that

32. DFS innovation
33

33. Lots of different payments are moving onto DFS channels
…and creating a sea of new acronyms
• P2P: Person-to-person transfers/payments
• G2P: Gov’t payments (social transfers, salaries)
• D2P: Donor payments (beneficiaries, staff)
• P2G: Person-to-gov’t (fees, fines, taxes)
• P2B: Person-to-business (retail, online purchases)
• B2P: Business-to-person (salaries, allowances)
• B2B: Business-to-business (suppliers, clients)

34. Savings & credit
Water
Energy
Insurance
Agriculture
Transportation
Health
Mobile Money
Moreover, DFS enables a whole range of other products
35
Diversification
of financial
products
Other
applications
that improve
the welfare of
very low
income
segments
Some of which are completely new business models
Digital
Finance
+

35. Savings: Tigo Wekeza (Tanzania)
• Mobile wallet as savings account
• Tigo earns interest from its partner
banks on its customers’ e-float
• Regulation limits use of the interest
• Decided to distribute the funds to customers in
quarterly payments direct to wallets
• $10m to 3.5m clients in first two payments
• Amounts small since balances small (for now)
• Interest >9% vs bank current accounts 0%
…other MNOs are now following suit

36. Savings and credit: M-Shwari (Kenya)
• Savings and credit account
• Partners: Safaricom (MNO) & CBA (Bank)
• Customer gets a limited bank account
• Opened and accessed only via MM menu
• Can only hold money or move to MM wallet
• 2-5% interest on any balance (even KES 1)
• No minimum balance or opening fee
• 30-day credit of $1 to $220 at 7.5% interest
• No collateral or credit history needed
• Initial credit score based on phone+MM use

37. $1.1b
$193m
• Analogues already out in
Tanzania, Zimbabwe
• Expect to see many more
launch in 2015
• A lot of customer side
research under way
• Consumer protection debate
rages on the risks of easy
access
• Either way, potential for very
rapid uptake is proven
CBA went from 50k to 8m accounts in 2 years

38. Insurance: Tigo Family Care Insurance (Ghana)
$1.5 $61 $122
$13 $332 $664

39. The same rapid scaling is happening in a range of markets
We are witnessing not isolated cases, but a new business paradigm evolving
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Country A (36m) Country B (18m) Country C (12m) Country D (11m)
Total policies prior to MMI MMI policies today
36 mths 18 mths 12 mths 11 mths

40. Mobile models are transforming microinsurance in Africa
…less than four years after the new business models were invented
Source: Making Finance Work for Africa (2013) and MicroEnsure
8 of those 9 have done this
with mobile microinsurance
Microinsurance
growth in Africa
2010-2012: 200%
9 markets with
>1m lives insured

41. Airtel Ghana’s new free three-in-one policy:
Customer value propositions are also getting better
Product diversification is only beginning
Over 1m customers covered in one year

42. Digital Finance +
43

43. Access to mobile has grown far faster than to energy and water
1 kWh of energy costs $2.30 in rural Bangladesh
1 kWh of energy costs $0.30 in Western Europe
Source: GSMA, World Bank, IEA 2012.

44. 1.2 billion people
have no access to electricity

45. M-KOPA: Pay-as-you-go energy solutions
Rugged 8W solar panel
2 LED lights + 1 LED torch light
Phone charger (5 plug types)
Portable radio
2 year warranty
Sold in Kenya, Tanzania, Uganda (Ghana)
Costs ~$200—too much for many people

46. Customer pays $33 up front
Then pays $0.50/day to use
Zero balance > Turns off
Tops up account via MM
After a year, it’s paid off
No more payments needed
Model was impossible prior to mobile money
>100,000 customers since Oct 2012

47. 750 million people
have no access to safe water
Across rural Africa, 50,000 water supply points have failed.
There is little point in drilling wells if there is no system to
maintain them.
Jamie Skinner,
International Institute for
Environment & Development

48. Grundfos LifeLink: Pay-as-you-go water solutions
Solar powered system
Well + Submerged pump
Automated water dispenser
Remote monitoring & service
Customer pays per use w/ RFID token
Token is topped up via mobile money
Commercially sustainable at $1/cubic meter

49. 40 projects in East Africa
100,000 people served
Model impossible prior to
mobile money

50. What do these innovations do that’s transformative?
Enable collections across vast distances
Enable tiny payments very frequently
Create “new” financing models
> Fit amounts payable to people’s cash flow
Ties payments directly to use—100% pre-paid
> Stable, reliable revenue stream for company
Makes payments direct, instant & transparent
> Reduces leakage, fraud and corruption
Payments are not fungible
> Opens new avenues for gov’t and donor support

51. DF+ innovation is concentrated in mature DFS markets
52
• 60 services across energy,
water, health, agri,
transport and education
• 70% in Africa with over
half in Kenya and
Tanzania; In India, services
leveraging a variety of
branchless mechanisms
• 50% of businesses in
energy or water and
sanitation sectors
Countries with global share of
digital finance+ businesses*
Kenya,
43%
India
23%
Tanzania,
8%
Uganda,
5%Zambia
3%
Other,
17%
*as of July 2013

52. 2.5 billion people
have no access to formal financial services

53. Finally, real progress on financial inclusion
As exemplified by the changing landscape in Tanzania
0%
10%
20%
30%
40%
50%
60%
2009 2013
Active MFS accounts Financially excluded

54. Advancing financial inclusion to improve the lives of the poor
www.cgap.org