Bridging the gap in Branchless Banking

This post is the final part in the series on branchless banking, and will provide an overview of the innovations (or gaps that need to be filled) necessary for branchless banking to be viable.  The introduction of this series set up the context.  The first part of this series provides statistics about the industry as is today, which is essentially in a fixed-cost and money-loosing phase.

The following structural changes are recommended to help the industry move from an early-adopter opportunity to a sustainable market which has the green shoots of sustainability and stability:

•  Use of Commercial Off The Shelf (COTS) hardware as a POS device.  This would preferably be a device which the agent already uses, for e.g., a mobile phone.  
• This will reduce the cost of entry for an agent
• Standardized devices will have higher uptime and lower maintenance costs
• Such devices will be interoperable with other service providers' infrastructure
• 
  An alternative to Core Banking solutions for No-Frill accounts.  Core banking solutions were not designed for No-Frill accounts, and therefore have not been cost-effective.
• Bring in more users, including banked, to use existing infrastructure.  This could well be a function of time.
• Increase use cases for electronic payments, including time consuming user awareness and education.  Presently, number of transactions per user per month is about 1.  This needs to increase to about 5-6 transactions per month (which is the break even point) by 2012.

The first two recommendations on this list are game changers.  An report by the Inter Ministerial Group (IMG) on Mobile Linked No-Frill Accounts (Apr 2010) has done a thorough analysis of how to structure the industry so that it is equitable and fair to all participants.  There is similarities between the above recommendations and those made by the IMG report.  We will have to wait and watch to see RBI's directives (as a response to the above IMG report) in this area and the impact on the industry's health.

In an free-market scenario, the recommendation to service providers would be to build out the network even though the business is not profitable.  Once you have a network in place, you can change the dynamics/structure to convert a loss-making proposition into a profitable business (e.g., PayPal).

In addition to the above changes, below are a few recommendations for service providers to focus on over the near-term to survive till the chasm is crossed:

• As the payments market in India is regulated (more so than elsewhere in the world), it would be best for service providers to focus on a few key geos,while waiting for the regulatory environment to be more favorable.
• Experiment quickly and many times to help identify killer apps and usage models, invest in consumer eduction..
• Do not spend a lot of money, while having access to a war chest.  I don't see profitability in this market under the current conditions.
• When the environment does get better (3-5 years), i.e., some of the fundamental gaps have been fixed, expand aggressively using your war chest.  
• Resist the temptation of being the biggest player today as with each passing day the bleed will weaken you.  There is no obvious advantage for early-movers.
• Partner with others.  Putting together proprietary vertically integrated solutions makes sense to get demonstrate and pilot solutions.  However, few organizations have the resources to  scale all parts of a vertically integrated service (e.g., custom hardware, feet-on-street to acquire agents/merchant, separation of platform and service, back-end processing infrastructure).  Identify and focus on your core competence and dominate this space.  Partner with others for complementary activities.  Investors/VCs should help force this issue as companies/entrepreneurs might not readily head down this path.

Finally, regulators need to address some gaps (e.g., reduce cost of KYC for opening new accounts).  This topic is not discussed here (need a different post for this).

What are your thoughts about where nirvana is in branchless banking in India?