INNOVATIVE FINANCING FOR SMES Channels, Tools and Techniques to Enhance SME Finance Margarete Biallas Cairo, 15 January 2015
Growth in Digital Access Significant improvements in mobile phone and technologies are resulting in new, innovative models that deliver financial services at lower prices. Formal financial institutions hold 1.9 Billion accounts and face the rising competition from an alternative financial industry 2.7 billion Internet users 135 million Google users 1 billion Facebook users 1.8 billion accounts with digital financial service providers (e.g. Paypal, Alipay, Qiwi, Mercado, FINO, PayU, ebay) 17.8 million mobile banking accounts 3000 Number of Internet Users around the World, millions 2500 2000 1500 1000 500 0 70 38.8% of the world population has an access to Internet 513 361 248 147 1,018 817 719 587 1,319 1,093 1,971 1,802 1,574 2,497 2,267 2,749 2
(in US$ Million) Banking Penetration for Adults Potentially Large Market & High Demand for Retail Banking Annual Disposable Income (US$ Million) $350,000 $291,231 $300,000 $250,000 $235,178 $196,608 $200,000 $153,526 $150,000 $100,000 $50,000 $- 2009 2012 2015 2018 Estimated and Potential Banking Penetration 12% 10% 2009 2012 2015 8% 6% 4% 2018 50 million unbanked today will increase by further 9 million by 2018 Average disposable income US$ 3000 expected to increase to US$ 5000/capita Bank penetration is 10% Many of these new potential clients will be young and rising from lower income segments, setting the stage for technology driven financial services. Current Population Composition +64 yrs, 6% Under 15yrs, 31% 2% 0% 50 52 54 56 58 60 Population aged 16 to 64 (in millions) 15-64yrs, 63% A young and rising population will create a large market for technology driven 3 banking products
Mobile Banking Leverages On Existing Networks & Ubiquity of Mobile Phones in Egypt Egypt has an extremely high mobile penetration rate of over 100%. Existing networks like gas stations and postal system may be leveraged to deliver a mobile banking solution An estimated 60 million unique users - 75% penetration Close to 100% penetration among users that are more than 15 years old Setting up a mobile banking initiative tends to be considerably cheaper than setting up a full-fledged branch. Points of Presence 1,000,000 Banking Vs. Mobile Penetration 150 600 5,000 810 2,383 3,200 4,552 120% 100% 80% 60% 101% CIB CIB ATMs CIB PoS Branches Gas Stations All Bank Branches Postal All ATMs Branches All PoS 40% 20% 10% 0% Banking Mobile 4
Four mobile wallets MobiCash, Phone Cash, Flous and Vodafone Cash have launched in Egypt in the last 15 months. an estimated 500,000 of Egypt s estimated 102 million cell phone subscribers are using them Law dictates that cell phone providers can only offer mobile transfers through a bank and on ly individuals not businesses can use the service, and subscribers cannot exceed LE 5,000 worth of transactions per month with a per transaction limit of LE 1,000 and a daily limit of LE 3,000 per Central Bank regulations. Limits on interoperability. Integrated payment gateway ATM, call centers, IVR (Interactive Voice response), bank branches, online banking, and mobile banking Partnerships with: banque du Caire, NBE, Bank Misr, Alex bank, AWB and Arab African International Bank Agent network manager Targeting rural areas Partnerships with all MNOs in place MFIs, online payments, and fast moving goods companies 31 million customers 37% market share Leveraging Orange mobile money implementations in 7 African countries Partnership with NBE to launch Flous 32.8 million customers 39% market share First in mobile money market with HBSC in 2008 - pilot failed Launched in 2013 Housing & Development Bank 20 million customers 24% market share International remittances opportunity to leverage presence in Saudi and UAE Partnering with Emirates NDB to launch Mobicash As well as allowing people to send money using their phones, all services enable customers to deposit and withdraw funds from their accounts at designated shops such as RadioShack. NBE Phone Cash enables cross network transfers Vodafone Cash also enables people to pay some bills less than LE 200 and make small purchases on credit.
Benefits for the Players in the M-Banking Ecosystem Benefits for Banks Increasing market share: expand customer base to new market segments and geographic regions. Capture additional revenue: by cross selling products to new and existing customers. Reduce operating costs: through a more cost-effective delivery channel for financial services. Lower cost of funds: by mobilizing lower cost deposits. Decongest branches: through more service points and longer business hours. Benefits for MNOs Increase client base: by acquiring new customers individuals and corporates. Additional and non-traditional MNO revenues: by increasing usage and offering new payments products. Churn reduction: by increasing customer loyalty. Benefits for PSPs Long term source of revenue: build on infrastructure and platform to reach mass markets and offer multiple products. Increase customer base: expand reach to new segments and geographic regions. Benefits for Individuals and SMEs Access to the formal financial system: access to a bank account and banking services for the hitherto unbanked. Building a financial history: including financing needs and spending patterns of the financially excluded. Quality & security: price transparency, market information and safe alternative to cash. Affordability and convenience: lower fees to transfer funds, just in time transfers, saved opportunity costs. Deepening relationships: for existing customers. Payments: (i) convenient and secure payroll payment method; and (ii) facilitates real time payments between SMEs, suppliers and customers. Market information: access to information on products and pricing. Cash management: reduces need to hold cash in the value chain thus increasing safety in cash handling. 6
Fundamentally, Each Model Resolves Who Leads the Process JV or 3 rd Party FI Driven MNO-Driven Who is in the Driver s Seat? Market Power, Brand Power, & Footprint Regulatory environment in geography Existing infrastructure in region 7
Different Forms of Partnerships Exist Market characteristics such as regulatory regime, depth of financial and mobile infrastructure drive first to market / initial market dominance It is about leveraging the strength of each of the respective partners Partnerships between banks and MNOs/PSPs can achieve the twin goals of financial inclusion and sustainability Mobile Network Operator (MNO) Payment Service Provider (PSP) Bank Last mile enablers of m-payments Core interest is voice/ data However, their ability to provide comprehensive financial services is severely constrained. Partnership with banks are required and can become very complex over time as product suite expands beyond a payment Requires high volume for sustainability first mover advantage & market size are key Only one source of revenue Mixed results so far. Success only where PSPs have been able to partner with many banks and MNOs to tap into customer demand Banks may develop their own channel or partner with PSPs/ MNOs Mobile/ card in combination with agents is a low-cost channel expanding reach beyond brick and mortar infrastructure and decongests branches Revenue is not reliant on transaction fees, but on cross selling financial services. 8
Mobile Banking Enabling Factors There are 5 main enablers for successful transformational mobile banking Enabling regulations Relevant stored value account Agency banking AML/KYC 1 Customer adoption Focused marketing and communication Customer education 5 Transformational mobile banking Market demand What is the existing unmet demand? What is the size of the target segment? How to achieve critical size? 2 Agent management Selection and training of agents Commission model Liquidity management Monitoring 4 Business model Revenue model for each party Business and client ownership Channel management Strong value proposition 3
Enabling regulations are key 1 The regulatory framework plays a significant role in determining business models REGULATORY ENVIRONMENT Limit the degree of freedom of market players in structuring the business model Impose constraints on agent model development (types of agents, certifications, licensing ) Impose constraints on the service and impact customer ease around registering and transacting at agents Service Provider Agents Customer Issuance and management of electronic money accounts AM/CFT and KYC requirements Impose pricing scheme The use of agents may or may not be permitted Customer ease and convenience
Understanding market demand 2 Survival 1. Day-to-day survivors <US$100 pm Trendy identity 7. University students US$100-300 pm 6. High-school kids US$10-100pm 2. Rural receivers <US$100 pm Support family s survival 3. Urbanised blue collar workers <US$100 pm Autonomy 5. Young service workers US$100-200pm 4. SOHO selfstarters US$100-300pm 9. Next generation aspirers US$100-300pm Work & Play 8. First generation white collars >US$150 pm 10. Ambitious guardians US$300-500 pm Raise family & invest in education Comfort 11. Wealthy family providers >US$500 pm
The Core Business Model for Banks 3 Rapid growth of small retail accounts through the MFS channel Channel txn revenue will not cover channel costs Portfolio growth Transaction revenues Lower cost of funds Lower operating cost ratio INCREASE IN ROA 12
MFI Case Study: The 5 Year Business Plan 3 $5 million in net losses before breaking even in Year 4 13
Distribution Channels are Key to Access Agent requirements are complex and not well understood by players 4 Business Management Financial Planning Sales Compliance Plan all aspects of business Meet with retail agents on a regular basis to understand their business Track needs for additional training, promotional materials, other tools Develop primary financial statements Perform financial forecasting Reconcile electronic and cash movement at end of each day Recruit new retail agents Develop sales forecasts for their network Motivate agents, and monitor progress against sales goals Report results to MFSP Monitor retail agents effectiveness in achieving compliance with MFSP and regulatory policies Follow up on overdue or outstanding documentation Liquidity Management Training Ensure that retail agents have sufficient electronic value on their phones Set up system to provide and retrieve cash, as needed by agents Provide initial training on MFSP services Encourage retail agents to attend MFSP special training sessions Ensure retail agents are sufficiently traine
Enhancing the SME s business 5 Profitability Basic Payments led Proposition PHASE 1 Use of e-wallet/ branchless banking reduction of cash use Send/receive payments via individual transactions Help tracking/ bookkeeping notifications + transaction history Specific Business Offer PHASE 2 Bulk payments (salaries, commissions, suppliers,...) Bill collection Distribution network/supply chain management Cash management 15 Full Financial Provision PHASE 3 Savings products Loan disbursement and instalments Credit Insurance products Integration to accounting software Leasing, factoring offers Time
Assess value proposition 5 What cost savings can be attained by commercial client through electronic payments outsourcing? What predictable transaction traffic can bank attain through outsourcing to justify expanding consumer payments infrastructure? What commercial clients can bank retain and acquire through payments outsourcing solutions? What new consumer product options can bank introduce through Financial Institution (lending/d eposit taking licence holder) Savings Loan/Credit Business Account Biller Account Financi ng Paymen ts and cash manage -ment offers SME Bills/AP Bills/AR Cashback offers Providers Customers commercial channels? What benefit do consumers attain by using new payment solution? Payroll Account Payroll/ disbursements/ Phone Top Up Employees Collection (distrib.) 16
What We Do Support institutions with advisory services along side investments to increase reach, reduce costs, and expand product offerings for unbanked and underbanked populations. Create and leverage alternative delivery channels such as mobile phones, EFTPOS, payment card infrastructure and bring digital expertise to traditional banking industry; develop and prove business cases. Client Advisory Services 1. Diagnostic and Business Modeling - Develop and monitor the business case and business plan for FIs. 2. Network Build-out - Support agent network build out by assessing money flows & training agents. 3. Product and Process Design Assessments and develop products & process design. 4. Customer Up-take and Financial Awareness - Develop financial awareness campaign to ensure customer uptake and education. Investment Services 1. Equity - to FIs for the build out of an M-banking platform (possibly including an agent network). - to early stage fintech companies (switches, etc.) 2. Risk Sharing Facilities - to FIs who want to develop M-Banking platforms but lack the risk appetite (possibly also for agent liquidity management) 3. Loans - to FIs for on-lending through M-Banking delivery channels. Target institutions include FIs who are developing an M-Banking platform but need funding for on-lending 17
THANK YOU Margarete O. Biallas Financial Institutions Group Global Lead Digital Financial Services & ADC T -90-212-358 2569 M -90-530-936 48 71 F -90-212-385 3001 E mbiallas@ifc.org Footer