uganda-solutions to affordable banking

8/17/2019 Uganda-Solutions to Affordable Banking

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Completing the payments system:

An Industry Solution To Affordable Banking Services InRural Areas

June 21, 2006


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About Genesis Analytics

Consulting firm based in Johannesburg,provides strategic advice & guidance tobanks, financial institutions & publicsector bodies.

Clients include major Middle Eastern, African & South African banks &brokerages, MFI’s, corporates, local &international law firms, multilateral

organizations aid agencies, financialsector regulators & capital markets.

Areas of expertise:

strategy, financial economics banking & capital markets;

competition & regulation.


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Objective

Find solutions to access to transactional bankingservices in Uganda through:

Understanding rural demand for financial services

Understanding rural supply for financial services

Identifying key impediments to transactional bankingservices penetration in rural areas of Uganda

Identifying innovative / low cost solutions for financialservice providers to reach potential rural customers


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Situation/Context/Demand


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95% of Uganda’s population lives outside Kampala

I

K A M P A L A

G U L U

M U K O N O

K T GU M

LIRA

AP A C

M A S I N D I

P A D E R

M O R O T O

H O I M A

AR UA

B U G I R I

R A K A I

K O T I D O

K A L A N G A L A

K A A B O N G

M PI G

K U M I

M A S A K A

M A Y U G E

K I B O G A

K I B A A L E

N E B B I

M U B E N D E

K A M U L I

K I R U H U R A

S O R O T I

K A S E S E

B U S H E N Y I

N AKAPI R I P I R I T

K Y E N J O J O

W A K I S O

Y U M B E

AM UR IA

N A K A S E K E

I G A N G A

M O Y O

AD JU MA NI

K A B I N G O

K A T A K W I

N A K A S O N G O L A

K A B A L E

L U W E E R O

K A M W E N G E

S E M B A B U L E

M B A R A R A

MIT

0 - 50

51 - 100

101 - 150

151- 200

201 - 400

401 - 500

501 - 45000

Open water

Int’l boundary

District boundary

Division boundaryPopulation density

(Persons per km²)

50 out of 56 districts havemore than population densitiesof over 200 per Km

These districts support small

towns, the focus of Tier III &Tier IV banks, but lack accessto the payments system

Most Ugandan’slive beyond theformal payment

system

Tier I FI.s have

reduced costs byusing ATM’s buthave only deployed ATM’s in the main

towns

(Map: FSDU)


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Only 6.3 mill people are employed* – most are poor,earning less than $2 a day (+-UGX60,000)

14%

14%

9%

13%

12%

7%

UGX20,000

UGX40,000

UGX60,000

UGX100,000

UGX200,000

Active labour forcePercentageTotal in range‘000s

1,281

1,262

806

1,212

1,104

679

Financial servicescoverage Cellphone coveragePre & postpaid

Tier I – full to limitedtransactional banking

Tier II & III – limited to notransactional banking

Monthly incomeUGX, 2004

UGX0

2,917 32%

* Excludes individualsemployed in unpaid

domestic labour

Source: UBOS, 2004; interviews with variousbanks & mobile phone providers


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But most rural Ugandans believe that saving is important

2%

6%8%

12%

18% 19%23%

43%47% 48%

F o r f u t u r e p u

r p o s e s

S a v e f o r a

f u n e r a l

S a f e w a y t o k e e p

m o n e y

T o b e a b l e t o a c c e s

s l o a n s

B u

i l d i n g o r i m p r o v i n g

h o u s e

P

u r c h a s e b u s i n e s s

a s s e t s

S a f e w a y t o k e e p

m o n e y

F e a r o f u n f o

r e s e e n

c i r c u m s t a n c e s

M e d i c a l e m e r g

e n c i e s

S c h o

o l f e e s

Question: Reason why would save money?Percentage of respondents reporting issue as important

I n c r e a s i n g p er c en t a

g e of

r e s p on d en t s

No. ofrespondentsreportingissue asimportant

Source: USAID/Rural SPEED, 2005


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And want service providers to ensure security & tobe accessible …

7% 8% 9%14%

20%

2%

13% 14%

29%

9%

21%

34%

41%

2%

15%

60%

F r e e a c c e s s t o f u

n d s

L o w t r a n s a c t i o n

f e e

B a n k c h a r g e s

O p e

n i n g b a l a n c e a m o

u n t

H i g h i n t e r e s t r a t e s

T r a n s a c t i o n s p e e d s

E a s y p a p e r w

o r k

C a t e r s t o s m a l l c l i e n t s

A c c e s s t o l o a n s

L o n g o p e n i n g h o u r s

D i s t a n c e t o b r a

n c h

C

o n v e n i e n t w i t h d r a

w a l

A c c e s s i b

i l i t y

B O U r e g i s t r a t i o n

G o o d r e p u t a t i o n

S e c u

r i t y

Service costs12%

Value added

services15%

Accessibility26%

Security of funds26%

I n c r e a s i n g p

er c en t a g e of

r e s p o

n d en t s

Averagescore

No. ofrespondentsreporting issueas important

Source: USAID/Rural SPEED, 2005

Question: What is an important factor when choosing a savings account provider?Percentage of respondents reporting issue as important


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But most importantly financial services take-updepends on income levels & affordability

2% 6%8% 12%

13%19% 20%

27%

42%

85%

F e a r o f p e n a l t i e s

B u

r e a u c r a t i c p o l i c i e s

L a

c k o f i n f r a s t r u c t u r e

L o w i n t e r e s t r a t e s

D

i s t a n c e f r o m b a n k

L a c k o f k n o w l e d g e

L a

c k o f t r u s t i n b a n k

s

H

i g h b a n k c h a r g e s

T o o m a n y o t h e r

n e e d s

L o w i n c o m e

Question: why do you not save?Percentage of respondents

Source: USAID/Rural SPEED, 2005; Genesis research

Research globally indicated that 2% of income is the maximum individualswill spend on transactional banking services


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Financial services take-up depends on affordability

The 2% in Uganda suggest that if maximum monthlytransactional bank fees & charges can be reduced to aroundUGX1,200 3 million people can be brought into the paymentssystem

Monthly income Maximum bankcharges

Estimatedmarket,

thousands

UGX 100,000 UGX 2,000 1,782

UGX 60,000 UGX 1,200 2,994

UGX 40,000 UGX 800 3,800

UGX 20,000 UGX 400 5,062

Demand for transactional banking servicesBased on 2% affordability cut-off

Source: USAID/Rural SPEED, 2005; Genesis research


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Many rural Ugandans also receive remittancesfrom relatives abroad & in urban areas

It is estimated that between 19.4& 30 million transactions ofbetween UGX 50 and UGX 100Kcould be intermediated per year,

Many currently occur in informalchannels due to;

high cost

low access to paymentinfrastructure

Domestic remittancesfrequency of transactions per year

200

1,800

500

1 2 to 11 12

No. of

individuals(thousands)

Source: Discussions with market participants, UBOS, Genesis calculations


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Many individuals banking needs reflect theirinvolvement in SME’s

Source: Interviews with distributors, Genesis Analytics

FMCG manufacturer

Rural Distributors

Wholesaler Wholesaler

Dukka Dukka Dukka Dukka

Customer Customer Customer Customer


Many Ugandans (Income Ush50K &Ush150k) are involved in the “dukka”business

Dukka’s are the lowest point in the FMCGdistribution networks – NB contributors to

GDP in rural areas

Their business banking needs means thatthey may have a higher desire to be banked

74%

39%34%

3% 1%1%1%

F a r m i n g

L

i v e s t o c k

W h o l e s a l e

& r e t a i l

M a n u f a c t u r i n g

T a i l o r i n g

T r a n s

p o r t a t i o n

B a r b e r

Question: Economic activities engaged in?Percentage of respondents


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The FMCG networks are “ cash accumulators” that canplay a role in the payments system

FMCG manufacturer

Rural Distributors





Payment method: Bank draftValue: >UGX10 millionTransactions (p.d.): 2500

Payment method: CashValue: +-UGX5,000 – 40,000Transactions (p.d.): +-157,000

Payment method: CashValue: UGX50 – 1,000Transactions (p.d.): >1million

Banked>Ush10 mil lion

Not banked

>Ush2.5 mil lion

Not BankedUsh40-100,000


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Larger rural businesses have high cash handling coststhat detract from core businesses - banking opportunity?

Most rural businesses part of casheconomy

Banked businesses benefit from

Reduced cash floats

Lower cash handling costs

Convenient, (relatively) instant paymentof suppliers, labour & other costs

Businesses currently do not bank

becauseBank POR are far away

Depositing cash in banks is cheap noincentive to pay through an EFT

Distributors accept cash as payment

Dukkas pay in cash

Margins allow for the cost of carryingcash

FMCG manufacturer

Rural Distributors





C l i B ki d d ld b i ifi t i


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Conclusion: Banking demand could be significant inrural areas if banks provide a value proposition at 2%of income or UGX1000 pm

Bank charges

need to be meet2% affordabil ity

Lower the cost ofaccessing banks

Closer PORreduce cost oftransportation

Accessible Secure VAS Affordable

Improve the value

proposition forcustomers &providers

Access to credit

Easy payment ofschool fees

Understandableproduct

Customersbecome confusedby bureaucracy ofbanks, chargingprofiles etc.

Securi ty in

savingProvide readyaccess toinformation on

savings tocustomers

Securi ty intransacting

Provide securemeans fordepositing &withdrawingfunds & making

payments

Account acquiring

Low cost way toacquiring newcustomers in ruralareas

Transactionacquiring

Banks need toprovide easy accessto accountsthrough low costPoints ofRepresentationcloser to customers


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Furthermore..

There are significant FMCGwholesalers bursting with cash

that are crying out for asolution…

FMCG manufacturer

Rural Distributors



Customer Customer Customer



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Factors affecting supply of payment services

Only Tier I/II banks offer transactional banking services


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Only Tier I/II banks offer transactional banking services- Tier III / IV not part of the payments infrastructure

Tier I

Tier IV

Tier III

Tier II

1.7 mil

500,000

400,000

400,000

ATM

Branch

Savings,

Transactional,

Lending

Remittances

Branch

Savings,

Transactional,

Lending

Remittances

Customers Channels Product

Branch

Branch Savings,

Lending

Lending

+-1.7 mil

Transactionalbanking

Source: Interviews with Tier I/II/III banks,BOU, Genesis Analytics

Tier III / IV players could benefit from joining the payments environment

Tier I banks use expensive delivery channels not


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Tier I banks use expensive delivery channels, notviable in low transactions environments (rural areas)

Full branches cost at least$100-150k per branch, addrunning costs & between10,000 to 15,000 fee basedtransactions per month = UGX2000 + per transaction

Branches not viablesolutions for poor, low

transaction environments

*Not incl.: mainframe hosting fee & license feesModel assumes network of 100+ ATMs

°Estimate based on margin of between 20 & 70%

ATMs provided a lowercost alternative, but fullcost of transactions may

stil l be unaffordable tomany

Current

Channel

focusUsh

0

500

1000

1500

2000

2500

Branch

teller

Teller

terminal

ATM POS Mobile

Cost to financial insti tution per transaction

ATM economics work differently when you provide


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ATM economics work differently when you provideservices for other banks customers

If a bank is migrating customers from branch to ATM it saves money during the

conversion. To encourage migration banks under-price ATM transactions

However when banks provide ATM services to other bank customers pricing shouldreflect the full cost + a profit & some margin to the issuing bank

At the current price to customers, no banks can justify extending the network beyond

the needs of their own customers

ATM charges should rise to between UGX600 – 800 per “ on-us” transaction &up to Ush 1000 for “ off us” transactions!

*Not incl.: mainframe hosting fee & license feesModel assumes network of 100+ ATMs

°Estimate based on margin of between 20 & 50%

403

82

137 - 320

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55

Infrastructurecost

Acquiringbank switch

Nationalswitch

Margin toacquiring

bank°

Issuing bankswitch

Total on-ustransaction

cost

595 - 778

Totalissuing

bank

Inc. margin

1,000<‘On’ & ‘Off-us’ transactions cost of ATM,

UGX

Currentprice to

customers

The cost of running an ATM is closely related to its


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Issuing bank Acquiring bank

Inter-operability is the only wayto maximise all participants

revenues

Low revenue per ATM results ina tragedy of the commons

CustomersMore likely to maintain highbalance on account & transactmore frequently when ATM/POS devices are ubiquitous

Infrastructure providers Achieve higher utilisation ofcostly infrastructure when

available to all bankcustomers

ATM transact ions per month & costUGX

Industry leader(non Bankom)

1000

7000

Small Bank(Bankom)

The cost of running an ATM is closely related to itslevel of utilisation. Everyone benefits from “ traffic”

5,400

403Cost per

transaction

Low transactions per ATM are primarily attributable


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Low transactions per ATM are primarily attributableto proprietary networks & a lack of inter-operabili ty

There are“effectively” 2

interbank switchescovering less than27% of all ATMinfrastructure

Stanbic’sproprietaryinfrastructureaccounts for over

50% of all ATMsdeployed

• DFCU

• Nile• Orient• PBU• CMF• Cairo Bank

• Barclays• Citibank• Standard

Chartered

• Allied Bank

• Baroda• CERUDEB (35 ATMs)• Crane (20 ATMs)

• Diamond Trust

• Stanbic (150+ ATMs)

Banks with a link to an interbank switch

Bankom,50 ATMs (live)

Visa International24 ATMs

Banks with proprietary infrastructure

Networked

ATMs - 74

Proprietary

ATMs – 205+

Low levels of interoperabil ity = few transactions = ATMs even more loss making!

Pricing in the Ugandan market is wrong: local switching


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g g g gcosts are too high, & local interchange too low..

Interchange Issuing bankcost

Switching fee

82

Domesticswitch

Internationalswitch

Internationalswitch

Domesticswitch

Domesticswitch

‘On’ & ‘Off-us’ transactions cost of ATM,UGX

Internationalswitch

1,800

450

1,882

450

900

Recomm.rate

850

Switching Fee

InterchangeFee

Source: Visa, MasterCard, Bankom,Genesis calculations

Recommended

90

760

Total

Customers can get charged between UGX 400 and UGX 5000 per transaction

Visa members switch local transactions at international rates

T ti b h i d t i i !


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Transacting behaviour responds to pricing!

• Globally demand for ATMtransactions peaks ataround 5.5 per month(regardless of income orfees).

• At the bottom end demand isdirectly related to price.

• Price elasticities estimates

for the US range from -1.5 to-2.2

• SA Finscope data confirmsthis relationship

A T M t r a n s a c t i o n s

P e r m o n t h

Income per month (Ush)

Source: Finscope South Africa (data converted to UGX)

ATM transactions against IncomeUGX, per month

0

1

2

3

4

5

6

7

5,000,000 10,000,000 15,000,000

Non – fee revenue from balance on account is proport ional to numberof transactions..

T ti b h i d t i i !


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Transacting behaviour responds to pricing!

Source: Finscope South Africa (data converted to UGX)

Elasticity estimates suggest that a 50% reduction in price should leadto a more than 75% increase in transaction volumes, if theinfrastructure can be affordably provided…

Affordable / number of transactions per months

Customer fee per transaction

111135Ush 500Ush 50 K

223455Ush 1500Ush100K

455555Ush3500Ush

200K

900700500400200100Monthly spend for

payments (afteraccount hosting

costs of USh500)

Monthly

Income

Customer fee per transaction

111135Ush 500Ush 50 K

223455Ush 1500Ush100K

455555Ush3500Ush

200K

900700500400200100Monthly spend for

payments (afteraccount hosting

costs of USh500)

Monthly

Income

Tier III & IV players are not even in the game, serve


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Tier IV

Tier III

p y g ,poorest customers through most expensive channels!

Tier III & IV service poorer customers in rural areas = need to adopt lower cost solutions,but lack the scale to implement their own ATM or POS network, or card issuing platforms

Current

Channel

focusUsh

0

500

1000

1500

2000

2500

Branch

teller

Teller

terminal

ATM POS Mobile

Future

Channel

focus

‘On’ & ‘Off-us’ transactions cost of ATM,UGX

Conclusions: The current supply of f inancial


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services fails on many levels..

Tier I banks are beginning to migrate customers to lower costchannels (ATM), however:

Bankom interchange fee to ATM channels is too low to stimulate furtherroll-out

System wide ATM utilisation is low due to a lack of inter-operabilityThis is exacerbated by high switching cost

Given customer income levels this reduces demand

Lower volume of customers & cost per transaction make it in-feasible to

provide ATM’s beyond the main towns

Tier II/III/IV banks have not become part of the paymentsinfrastructure

Poorer customers are served with the most costly infrastructure resultingin low levels of demand, & an inability to provide appropriate savingsproducts


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Proposed solutions for banks & customers

Best practice in other markets can be applied across the


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Issuing Transacting AcquiringRisk mgmt.& KYC

Card managementsystems allow forreal-time MIS

Linking card tomobile phone furtherverification – reducing fraud risks

Card with PIN moresecure than paper(cheque/ passbook)for identification.

Deploy low costcash-in/out devicein cash rich ruralFMCG wholesalers

Support mobile-commerce solutionsto acquire cardtransactions in low

infrastructureenvironments

Ensure fullinteroperabilityand multi-functionality

Reduce the costof switching

Issue easilyavailable starterpacks

Low KYC flowlow balances

transactional banking value chain to decrease transactions costs,increase availability of infrastructure, reduce time spent at banks

& increase demand in rural areas of Uganda

New low cost issuing technologies reduce cost


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NO KYC atapplication - BUT

Transaction valuelimits or use limited toUganda

A/C can be upgradedto full function withformal KYC process

Instant activation at

ATM / mobile phone Capture mobile

number to link tocustomer

Option 1: Blister pack with: card (debit), PIN,instruction manual

Option 2: Bl ister pack with: card (debit orcredit), manual, no PIN (remote activation)

Case & instruction manual

PIN

Debit card (Maestro)

Case

Instruction manual

Debit card

Credit card (MasterCard)

Distributionstrategies

Branch

Bank Agent

Retailer

Key SuccessFactors

White label cards– larger banks monitor smaller banks / MFI’s

Issuing Transacting Acquiring Risk mgmt.& KYC

of customer acquisit ion

Interoperable cards create value for customers & banks


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Issuing Transacting AcquiringRisk mgmt.& KYC

The card is thekey to a range of

acquiringinfrastructure

Interoperable cards create value for customers & banks

Switching

Tier I BankTier II Bank

Interoperable cards allow customer to benefit from the full range of paymentchannels, allows some banks to focus on infrastructure and the others to focus onissuing (improves the scale economies for all).

Cards association branded cards create value for


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customers & banks

Card association branded cards allow customers and banks to access all Card Association Product solutions, and access card association branded acquiringinfrastructure.

All financial institutions should seek to issue card association branded cards,smaller institutions could be assisted to absorb the cost, and can benefit fromlarger institutions investments as principle members

Cross border remittances = Card 2 Card

Access to largest Ugandan network = Stanbic

Access to third party products = Airtime top up

Access to risk management solutions = Pre approved suppliers

Cross border util isation = Global networks

Lowest cost switching allows banks to acquire more


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transactions / customers

High switching costs make inter-operability prohibitively expensive

Banks need to be free toselect the lowest cost providerto make transactions

affordable; or,

a sustainable (profitable)solution needs to be found to

reduce cost of Bankom switch

Switching costs to banksUSD, Transaction value UGX100,000 to 500,000, POS

Source: Interviews with switches*ATM°incl. quarterly assessment fees charged by cardassociations

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

Bankom* Visa (dualmessaging)

MasterCard(dual messaging)

MasterCard (singlemessaging)

20 – 26c

4.7 – 13c

10 – 30c

8 – 15c


Switching Economics


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Switching Economics

Volume of Transactions (millions per month)

P r i c e p

e r

T r a n s a

c t i o n s

( U G X )

0.5 1.0 1.5 2.0

70

450

100

200

2.7

Internationalswitch usingdomesticsettlementpricing

Bankom switchsustainablepricing

Current position

Desired position


New low cost infrastructure options can extendt k b d b


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Issuing Transacting Acquiring

Risk mgmt.

& KYC

networks beyond urban areas

ATM wont work for rural areas!

Low cost devices provide the

platform to drive access inrural areas

Operate profitably at lowertransactions volumes

Do not require extensive manualintervention, minimisingmonitoring costs

Transact electronically allowing

centralized reporting & monitoringas well as minimizing fraud

Can do a significant proportion oftransactions done in a branch orat an ATM

0

500

1,000

1,500

2,000

2,500

Branchteller

Teller terminal

ATM POSMobile

Transaction cost on each channelUGX

FutureChannel

focus

Source: BAI, Genesis calculations

Rural

Channelfocus

POS devices have become more versatile..


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TypeVirtual voucher

dispenser Retail POS Mini-ATM

Transactionssupported

Virtual vouchers (mobiletop-up; public transport;events etc.)

Retail card acquiring;balances; mini-statements;top-up; 'cash-back'

Retail card acquiring;balances, mini-statements;'cash advance'; cash deposit;top-up; remittance

CommunicationDaily - vouchers are

uploaded onto the device

Real-time - using fixed or

mobile phone links

Real-time - using fixed or

mobile phone links

Interface withdevice Manual Card + PIN/Signature Card + PIN

Cost of device $50-100 $200 - 800 $1,000 - 2,000


POS transactions can be low cost in lowvolumes areas


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volumes areas

POS infrastructure can be 20% of the cost of ATM infrastructure

POS can also operate in transactions environments of 1000 p/m above

POS transactions typically also attract lower switching fees than ATMs But debit at POS is only likely to work for large single purchases (petrol

stations)

277

76

55

82

55

Infrastructurecost

Acquiringbank

switch

Nationalswitch

Issuingbank

switch

Totaltransaction

cost

*Not incl.: mainframe hosting fee & license feesModel assumes network of 1000+ POS’

‘Off-us’ transactions cost of POS,

UGX


Risk mgmt.

& KYC

Mini-ATM’s offer similar low costs to POS with morefunctionality


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functionality

329

128

55

82

55

Infrastructurecost

Acquiringbank

switch

Nationalswitch

Issuingbank

switch

Totaltransaction cost

*Not incl.: mainframe hosting fee & license feesModel assumes network of 1000+ Mini-ATMs

POS infrastructure can be modified to a more customer friendly Mini-ATM

Mini-ATMs can be configured to offer multiple services– i.e. cash advance; cashdeposit

Mini-ATMs can operate in transactions environments of 1000 p/m above

‘Off-us’ transactions cost of Mini-ATM,

UGX


Risk mgmt.

& KYC

Mini-ATM’s low infrastructure cost means that interchange could bemuch lower than ATMs: ‘Off-us’ = UGX449; ‘On-us’ = UGX258


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much lower than ATMs: Off us UGX449; On us UGX258

Cost to Acquiring

Bank

Cost toIssuing

Bank

Cost toswitch

transaction

Infrastructurecost


Nationalswitch

Issuingbank

switch

Interchange Issuing bankmargin*

258

128

55

Acquiringbank

margin*

73

82

55

Cost tocustomer

Total

44956

Source: Card Associations, Genesis calculations*Margin = 40% of cost


Risk mgmt.

& KYC

Savers need to be able deposit easily otherwiseaccounts remain empty = less transactions


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accounts remain empty = less transactions

Acquiring infrastructure in wholesaler locationsneeds to make sense for wholesalers

Merchants may need to be incentivised to handledeposits

Internationally this has been achieved by

Paying merchants for cash deposits

Charging merchants for depositing cash – merchants

then accept a merchant discount

Proposed solution:

Banks acquiring strategy should include

incentives for merchants to accept cash depositsusing a Mini-ATMs

Banks consider raising cash deposit fees forbusinesses..

FMCG manufacturer

Rural Distributors






Risk mgmt.

& KYC

Mobile phone can be used as a powerful low costchannel


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channel

Customer 2Merchant Account

Customer 1 Account

MerchantCash

CustomerCash

-100 +100

+100 -100Deposit/P2P

Non-CashP2PPayment

Merchant Account

Customer Account

+100 -100

SMS

Confirm

SMSConfirm

Cash

Acc Transfer

Acc Transfer

Withdraw/Payment

Reverse of Above

Mobile Payments canreplace three

cornerstones oftraditional retailbanking:

Cheques,

ATM’s/POS/Card

Branches & branchIT infrastructure


Risk mgmt.

& KYC

Mobile banking can mean a range of different things,with different technological complexity & investment


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with different technological complexity & investment

Key challenges:How to achieve maximum penetration & functionality with least set up costs & complete inter-operability

Riskiness oftransaction Simple/ low risk Intermediate risk High risk

Types of

transactions

Balance enquiry

Airtime purchaseSimple queries

Inter-account payments Person to person

Remittances

Level of interbankparticipation needed

Single bank solution Single bank solution Multiple bank solution

Note Low risk – low valuepayments,reversibletransaction through

partners

Higher risk - butcontained within onebank system

High risk - value transferacross banking system


Risk mgmt.

& KYC

Rethinking the architecture


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SwitchingOtherBank

First Generation Architecture?

Second Generation Architecture?

View phone as another channel, the card is the key totalk to devices & phone enables card to cardpayments

Switching

Bank 1

How to get the phone to talkto other devices & otherbanks?

Bank 2

M-commerce solutions can be up to 60% cheaper thantraditional ATM costs


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traditional ATM costs

‘on-us’ transactions using a M-commerce provider could be as low asUGX258 – compared with UGX595 for ATM transactions

‘off-us’ transactions become similarly cheap in comparison to ATMs

Combined with access wherever there is mobile phone coverage, mobile

banking provides a compelling value proposition for rural customers

160 - 210

8243 - 185

55

Infrastructurecost


Nationalswitch

Margin toacquiring

bank°

Issuing bankswitch

Total on-ustransaction

cost

258 - 450

Totalissuing

bankInc. margin

320<

‘On’ & ‘Off-us’ transactions cost of M-commerce channel,UGX

55

750<

Recomm. ATM ‘of f-us’

cost

Different Mobile payment strategies have had variedlevels of success


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levels of success

Keys to successful card acquir inginfrastructure

Low transactions costLow cost of adoption – no additional costto consumer or specific entry requirements

Cross channel & bank interoperabili ty

User friendly – easy to use & easy to signup

Multifunctional – B/E, P2Card, Airtime

Secure

Cost less than other channelsNo special phones, no need to purchasenew sim card

Able to interact at low cost with cards &other bank account

No need to re-register at branch, simple touse

Sufficient products to add value

Different levels for different tasks, mostsecure required for P2P between bankaccounts

Issuing Transacting AcquiringRisk mgmt.

& KYC

‘Cash advance’ can be achieved through a range ofchannels in rural areas


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ATM POS Mini -ATM Mobile

Least Transactions cost UGX 403 UGX 76

Cash advance is easy to manage by bank

UGX 128 UGX 154

Low cost device, maintenance, deployment

Operates in a low transactions environment

Cash advance has low impact on traditional channelrevenues

Overall score

Deal breaker

Difficult to manage

Ideal

Issuing Transacting AcquiringRisk mgmt.

& KYC

New solutions increase security and reduce paperbased fraud


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based fraud

Enhancing supervision Debit card systems subject to lower

levels of fraud than credit cards, Avoid parallel systems “double dip”

Proposed solution

Integrate card into branch through

Teller Value Terminals Customers are best custodians of

their money (SMS)

Card management systems havebuilt in MIS to facilitate clientmanagement

Card association switches clearinstantly & settle daily

Online solutions provide for increased surveillance & better controls on customers

Controlling Money Laundering In Uganda, identification is difficult – no

national ID & alternatives open to fraud Many rural inhabitants do not have

addresses or access to alternative formsof identification apart from LCs

Proposed solution

Offer a restricted use account with noKYC limiting

Individual (& monthly) transactionsvalues

OR use to within Uganda only

Upgrade to full account functionality withproper KYC process

Issuing AcquiringRisk mgmt.& KYCTransacting


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Benefits: Potential market for transactional banking

Transactions profile – pictorial


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Transactor

Type

Basic (savings)

Transactions

Per month

Total Cost

Farm laborer

Subsistence farmer

Mobile phone• Balance inquiry - 1

Mini-ATM• Deposit – 0.5• Withdrawal – 1POS• Purchase - 1

Mini-ATM• Deposit – 1• Withdrawal – 0.5

Mobile phone• Mini-statement – 1• P2P transfer – 1

Mini-ATM• Withdrawal – 1

UGX 745

UGX 1,245

UGX 1,425

Assuming the lowest cost switch new customers could reach2.65 mill ion supported through 2,600 POS/Mini-ATM devices


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UGX20,000

UGX40,000

UGX60,000

UGX100,000

UGX200,000

Total in range‘000s

1,281

1,262

806

1,212

1,104

679

Tier I – full to limited

transactional banking

Monthly inc.UGX, 2004

New customers*‘000s

909

1,121

Total Net Revenue Annual, UGX, million

UGX2,859

UGX2,858

UGX8,585

Source: UBOS, Genesis calculations* Based on a cut-off of 2% of total income

Total transactions

POS/Mini-ATM(mobile)Monthly, million

1.36 (0.90)

1.68

3.34 (1.51)2,333

303 UGX1,295 0.30 (0.61)

Transactor Type

Subsistence

Farm laborer

Basic


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Concluding remarks

Concluding remarks


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Uganda’s current transactions banking environment isrestricted to higher income consumers in major urban areas,mainly Kampala

About 74% of the 6.3 million monetized working population do nothave transactional bank accounts

This is mainly as a result of:

The high cost of infrastructure used by banks to acquire transactions(ATM’s & branches)

A lack of interoperable bank networks & high switch costs whichreduces transactions on infrastructure, increasing transactions costs

Concluding remarks


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Banks could change this situation, increasing access to afurther 2.6 mil lion individuals (41% of the monetizedworkforce) by:

Reducing cost of account opening by issuing ‘starter packs’ withlow KYC

Promoting debit card usage and issuance across all Tiers ofinstitutions

Ensure full interoperability by agreeing appropriate interchangeand tackling high costs associated with switching

Deploying low cost acquiring infrastructure – Mini ATM andsupport low entry cost mobile commerce

Intermediating cash into accounts through Mini-ATMs located at cashrich wholesalers

USAID/Rural SPEED has indicated that it would bewilling to support the development of solutions


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USAID/Rural SPEED aims to support access to financialservices in rural areas in Uganda

USAID/Rural SPEED has undertaken to support initiativesdesigned to achieve the goals set out in the presentation


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Thank You

uganda-solutions to affordable banking

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