The banking sector in Pakistan has come a long way since 1947. With over 12,000 branches spread across the country, the banking footprint is well established. However, it is still insufficient to serve the rapidly growing population, most of whom still have little or no access to banking services.

The State Bank of Pakistan, the regulator of the banking sector, realised the gravity of the situation and once the technology was available, grasped the opportunity to bring the “unbanked” lower income groups and rural population into the fold. The solution to this situation is branchless banking that relies heavily on IT, especially telecommunications technology.

Branchless banking – Rise of the unbanked

Branchless banking is defined as the delivery of financial services outside conventional bank branches, often using agents and relying on information and communications technologies to transmit transaction details – typically card-reading point-of-sale (POS) terminals or mobile phones. It has the potential to radically reduce the cost of delivery and increase convenience for customers.

Consequently, branchless banking can increase access to financial services for the poor, but only if regulation allows the following:

(i) permit the use of a wide range of agents outside bank branches, thereby increasing the number of service points.
(ii) easy account opening (both on-site and remotely) while maintaining adequate security standards.
(iii) permit a range of players to provide payment services and issue e-money (or other similar stored-value instruments), thereby enabling innovation from market actors with motivation to do so.

The Consultative Group to Assist the Poor (CGAP) is a global partnership of 34 leading organisations that seek to advance financial inclusion. As CGAP’s definition states, branchless banking is all about the financial inclusion of the unbanked, who often belong to the lower-income groups. The role of information and communication technologies is central in this approach.

The basic concept is, for those who cannot or do not go to the bank for logistical or at times even social reasons, the bank comes to their doorstep or at least nearby. Major services on offer:
(i) Deposits
(ii) Withdrawals
(iii) Remittance to various cities, where the receiver may not need to have a bank account
(iv) Payment of utility bills
(v) Payments for products/services provided by vendors who accept e-payments through branchless banking channels (for example Internet Service Providers)

In addition to consumer-centric services, there is also great potential for the government. The government can use branchless banking to make or receive payments from remote areas where physical infrastructure is not present.

Models

Across the globe, there are various models of branchless banking followed. The most widely followed model in South Asia is the One-to-One model, where a single bank or financial institution collaborates with a single telecom company or an organisation with a large distribution network for providing financial services.

Theoretically, either the bank or the telecom can take the lead in this model. However in Pakistan, the One-to-One model is a bank-led venture with the bank partnering primarily with a telecom company on GSM networks. The other models are One-to-Many, where a financial institution partners with many telcos for the provision of services; and Many-to-Many, with cross collaboration among various stakeholders in the branchless banking infrastructure. At the macro level comes G2P (Government-to-Person) model where the government uses the branchless banking to make or receive payments.

A typical branchless banking model is beneficial for the bank, the telco, consumers and the economy as a whole. Below is a simplified diagram of collaboration between a bank and a telco for branchless banking services.

Government-To-Person

In Pakistan, government salaries make up 68 percent of total Government-To-Person (G2P) payments, pensions contribute 21 per cent while social cash transfer programs are 11 per cent.

Government payments as of recently have been replaced by direct transfer to bank accounts, instead of the old method of using by-post delivery or desk payments at a government bank. Benazir Income Support Program (BISP), the largest social security program in Pakistan, covering 5.5 million families with a budgeted allocation of 75 billion rupees, utilises innovative methods for disbursement.

Major G2P and branchless banking events in Pakistan

In 2008 when BISP was launched, disbursements were made employing the traditional money order service of Pakistan Post. From 2010 onwards, BISP employed new methods involving NADRA-customised smart cards (Benazir Smart Card), and are now using prepaid magnetic strip cards (Benazir Debit Card - BDC).

Besides BISP, EOBI in collaboration with NADRA has started paying EOBI benefits through Telenor, utilising their agent network and at NADRA kiosks using smart CNICs without the hassle of waiting in lines. Similar models can be implemented for making payments to farmers, government employees etcetera.

In 2013, there were around 4.5 million G2P beneficiaries. It is estimated that at the current growth rate of 75 per cent, all G2P payments could be digitised in the next five years.

On the G2P front, SBP states that branchless banking beneficiaries of G2P have reached almost 4.5 million by end 2013. Beneficiaries with bank accounts are 1.1 million, while the rest are card-based beneficiaries, highlighting the fact that majority of G2P beneficiaries are account-less. In addition, only two per cent of the beneficiaries use mobiles and only one percent of them use OTC (over the counter) channels for payments. At the end of 2013, G2P accounts held deposits worth 805 million rupees.

Risks and challenges

Data Extracted from State Bank of Pakistan newsletter

Awareness/change management

For a country where basic education is a luxury and access to technology in rural areas is only now gaining a foothold, reliance on e-payments and awareness about its correct usage proves to be a challenge. However, with proper promotion, awareness and growing usage, the horizon looks favourable in this regard.

KYC / AML / CFT Concerns

Financial institutions in general and those involved in remittances in particular are today, more than ever, concerned about the risk of their channels being utilised for money laundering and financing of terrorism. These institutions have gone to great lengths in implementing Know-Your-Customer (KYC), Anti-Money Laundering (AML) and Combating of Finances for Terrorism (CFT) regimes.

Branchless banking is a realm where a walk-in client can make a remittance to another walk-in client hundreds of kilometres away, in a different legal jurisdiction (province/territory). Although the limits allowed for such remittances is restrictive for now, KYC/AML considerations will always be cause for concern in such a scenario. Strengthening of controls over national ID card issuance and a zero-tolerance policy towards adherence of SOPs by the agents can enhance the comfort level in this area.

Security regulation

Pakistan is still a relatively new market for e-payments and branchless banking, and it might take a while before seamless regulations regarding security are implemented. There can be two aspects of these regulations, technological and financial. In Pakistan, branchless banking spans the domains of three regulatory authorities, State Bank of Pakistan, Pakistan Telecommunications Authority and NADRA (National Database and Registration Authority).

While NADRA provides authentication of Account Holder information based on CNIC, the actual Banking and Telecommunications platforms are the domain of SBP and PTA, who have joined hands and signed an MoU in this regard. However, additional regulations and guidelines vis-à-vis telecommunications would facilitate smoother operation and will help to reduce risks.

As Pakistan opens up for 3G and 4G technologies, a large Islamic bank announced its full-scale entry into the branchless banking sector. This would be the first MFS (mobile financial services) solution to be rolled out post-3G 4G-advent. As per the press release, their solution would also incorporate social media integration – a first in Pakistan. Pakistani consumers, especially those who remained unbanked so far, would be the ultimate winners.

Muhammad Adil Mulki is a banker and a Certified Information Systems Auditor.
Syed Adnan Rizvi is a banker and investment analyst.