On October 2, GAFIS – namely, the four private sector GAFIS banks, along with Program Manager BFA – will be featured as The Big Issue Debate at SIBOS 2014. Core GAFIS themes around scalability and sustainability of offering useful bank savings to low-income segments will be showcased and debated. How can useful scale be attained in a sustainable way? The GAFIS Journey through 2013 began to answer this question.
Basic bank savings accounts are the workhorse product of retail mass market banking today, but they rarely work well for the bank or the customer, who often finds it inconvenient or costly to transact through a bank branch structure. For the bank, more than 80% of these accounts typically have too low a balance to be profitable on their own; and as many as 50% lie dormant.
The GAFIS banks successfully experimented with ways to radically improve the business case for low-balance savings accounts, and the value proposition for low-income customers. The deployment of agents who can originate new accounts and take deposits reduces the net loss per account per month from approximately -$2.79 to -$1.02 (see Proposition 1.5). That’s still not profitable, of course, but for banks competing with mobile network operators to provide financial services, it is a very positive sign.
The GAFIS banks now have more than 25,000 agents, five times their number of branches and 10 times the number of agents at the outset. Early returns provide evidence that an agent channel can play a significant role in deposit mobilization for banks. For example, since early 2011, the number of agent transactions at Equity Bank in Kenya now exceeds the number through any other single channel—and the value of deposits at agents is twice the value of withdrawals.
With their current cost structures, such banks can typically make a profit on basic bank accounts only if the balances exceed $800, a virtually unreachable number for most low-income clients. For example, the average balance in basic savings accounts at GAFIS banks ranged from $50 to $151; the median was far lower, ranging from $7 to $20.
The agent channel improves the business case for banks because agents reduce account opening costs relative to branch-opened accounts (from $15 to $6, in the GAFIS stylized model). Agents also reduce the cost of handling cash (deposits and withdrawals) to as low as a fifth of that in the branch. And the post-opening “touch” by agents can also improve activation and usage rates—as shown by the 70% active rate (accounts with a positive balance) for ICICI Bank’s Apna accounts targeting a poor, rural client base in India (compared with less than 20% for typical no-frills accounts in India).
Beyond acquisition, activation, and regular servicing, cost allocation adjustments also improve the business case within a large bank. For example, in developing the proposition for its new Ahorro a la mano (ALM), Bancolombia’s cardless product that relies on mobile phones to transact, the bank acknowledged that existing cost allocations per account were based on traditional branch-based banking. ALM’s reliance on over-the-air account opening meant it would draw substantially less, if at all, upon the bank’s sales force, branches and card platform. Bancolombia recalculated a lower monthly unit cost for accounts opened remotely and serviced (for cash in/out) at agents or via a “cardless ATM” transaction.
To further increase outreach beyond the branch, GAFIS banks are also starting to send SMS messages with reminders, information and offers. While use of SMS is still at an early stage, initial evidence suggests that SMS messages can stimulate higher activation rates and higher balances in newly opened accounts, further improving the business case. As two examples, Standard Bank in South Africa and Bancolombia each send a choreographed series of SMS messages to newaccount holders during the first 2-3 months following account opening. To date, inactive ratios have been cut substantially, by around a third at each bank.
Large, retail banks are often the epitome of formal and bureaucratic institutions. That perception has been enforced in recent years, especially when banks are compared to fast-moving mobile network operators with mobile-money services. But that image may need to be revised. “Banks have begun to enter the 21st century—and are upending long-standing banking practices to reach low-income customers,” says David Porteous, CEO at BFA, project manager of GAFIS. “In so doing, they may change the face of large retail banking for all customers.”