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THE road to financial inclusion has been well traversed. With its progressive vision and mandate, the State Bank of Pakistan is overseeing a realm with almost fairy tale-like connotations where our intrepid branchless banking knights, including Telenor’s Easypaisa and UBL’s Omni, have made giant strides in their quest to bring financial inclusion to the country’s unbanked.
As a result, 6pc of adults in the country today own a mobile banking account, catching up at an impressive rate with the 9pc who own a conventional one.
An estimated 4.5m over-the-counter (OTC) or ‘agent-assisted’ transactions take place every month, resulting in the transfer of more than $200m through official branchless banking channels — a significant challenge to the once-prevalent cash-only ‘hundi’ or ‘hawala’ system.
Easypaisa and Omni — with 55pc and 20pc market share per transaction respectively, according to the SBP — remain at the forefront of branchless banking locally, and also continue to garner international accolades. Easypaisa was the winner of the Wall Street Journal’s recent Financial Inclusion Challenge, while Omni gained one of the GSMA Global Mobile Awards for 2012.
The OTC model and its associated limited transaction variation is now so ingrained with branchless banking agents that the industry has been unable to convert what should have been a critical mass of users to mobile wallet users
But here the fairy tale must take a grimmer view. Where our branchless banking knights have gone from strength to strength and indeed created the market, they have simultaneously driven the OTC model to a stage where it has become the de facto transaction standard of branchless banking. This dominance is coming precariously close to throttling any significant growth of more varied and futuristic branchless banking, namely transaction diversity via mobile wallets (m-wallets).
Based on figures published by the SBP for the fourth quarter of 2014 (4Q2014), OTC transactions formed 86pc of total branchless banking transactions, whereas those conducted via m-wallets stood at only 14pc. M-wallets were used mainly for cash withdrawals and deposits and mobile top-ups, with some activity in bill payments — a very narrow usage of their potential scope.
Granted, the SBP has pointed out a 22pc increase in the number of m-wallet transactions, from 9.7m compared to 7.9m during 3Q2014 and an almost ten-fold increase for the same period in m-wallet to m-wallet monetary transfer throughput. However, the report also discloses that utility bill payments via m-wallets started to decline over the same period, and it doesn’t gloss over the fact that 54pc of m-wallets remain dormant.
The threat to the industry is hence not that branchless banking transactions will decline; they will undoubtedly continue to grow, and significantly so. The real peril to the industry is that diversity in transactions, especially through m-wallets, has failed to take the centre stage.
In 2009 when Easypaisa was about to be launched, the 70-odd member Easypaisa/Tameer bank team had a choice: to implement a more risky, but strategically long-term advantageous model based on comprehensive know your customer (KYC) procedures and voluntary SIM re-verification, or to go for the relatively hassle-free, more immediate and agent-assisted OTC model.
Unfortunately for the industry, the team chose the latter in a bid to reduce time to market, thereby leading itself and the entire branchless banking market on a road that is now rapidly coming up to a dead end.
The OTC model and its associated limited transaction variation is now so ingrained with branchless banking agents that the industry has been unable to convert what should have been a critical mass of users to m-wallet users.
The use of potential m-wallet services such as purchasing train and bus fares, fuel at petrol stations and micro-payments at retail outlets, to name a few, needs to become a reality. Public-service departments, banks and retailers need to work together to enable an m-wallet ecosystem that will move the industry forward onto a digital trail.
The recent 0.6pc bank transaction tax levied by Finance Minister Ishaq Dar must also clearly be seen as a threat. The end-consumer may be somewhat cushioned by the impact of the tax since many OTC transactions are micro-transactions — i.e. well under the Rs50,000 daily threshold. Also, a significant number of consumer accounts are ‘Level 1’ accounts that automatically incorporate a daily transaction limit well below the tax threshold.
The real issue stands at the branchless banking agent’s liquidity end. For every transaction over Rs50,000 that the agent makes to credit or debit their operational branchless banking or ‘Level 3’ account, he bears a tax cut that is dangerously close to his earned transaction commission of 0.5-0.7pc, effectively wiping out the profit that he stands to earn.
The tax has come at an unfortunate time for the industry when it is, at least subconsciously, struggling to correct the deficiencies of the OTC model. How the industry adapts itself to the collective threats outlined above will define its progress along the road to financial inclusion.
The author is visiting faculty at IBA.
Published in Dawn, Economic & Business, August 24th, 2015
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