Telco to help rural majority access banking services

Dtac's Pakistani partner lays blueprint for developing countries,

Telenor Pakistan, the country's number two mobile operator, has recently purchased a bank and is now using its banking license through its network of franchisees and top-up agents to offer banking services to Pakistan's largely unbanked population, with savings, insurance and international remittance soon to follow.

Remote Telenor Franchise in the misty hills of Dungagali, Pakistan. Telenor has 150,000 franchisees. Some 20-30,000 of these will be upgraded and trained to offer EasyPaisa microfinance to the unbanked majority in Pakistan.

Known as EasyPaisa, the idea by Telenor and the State Bank of Pakistan is to find a sustainable, profitable new banking model to help the billions in developing countries break out of the cycle of poverty by providing them with low-cost, convenient financial services.

In an exclusive interview, Roar Bjaerum, Telenor Pakistan Vice-President for Financial Services, and Arif Abdul Qayyam, Telenor Pakistan Director for Financial Services, explained the history of this innovative project.

Before coming to Pakistan, Bjaerum had been working on some of the financial services operations for Telenor in Bangladesh, Malaysia and also the ATM Sim project for Dtac in Thailand.

Telenor first took an interest and formed its financial services group in 2001 or 2002 and by 2006 it was clear that the market for telecommunication services was quickly reaching maturity.

The question is whether the telecoms industry has anything to contribute to reaching the bottom of the pyramid - the unbanked masses - and helping to provide them with financial services. It is not about competing against banks, but rather about working together to reach out to those communities in a cost-effective way.

There are three key strategies where a telecommunications company can engage in providing financial services. First is to provide services to those who do not have access, which is what Telenor is doing in Pakistan with EasyPaisa, and in Bangladesh. Second is to provide better financial services through mobile services, which is happening in developed countries and Dtac's ATM Sim project with Kasikorn Bank. Third is exploring the possibilities of technology for the future through Near Field Communciations (NFC), the Internet and other technologies.

Back in 2007, Telenor Pakistan started a dialogue with the Pakistani authorities and Tameer Bank, a micro-finance bank with a mission to serve the rural unbanked. The question was how best to roll out a branchless banking network to reach out to the poor, rural people without having to establish costly banking branches or ATM networks. The two were already in dialogue when the state bank came up with branching banking rules in 2008.

The idea expanded to Telenor's operations in Bangladesh. Starting in 2006, anyone could walk into a franchise of the local Telenor company, Grameenphone, and pay a bill.

However, the State Bank's guidelines were bank-led, which meant the bank held the licenses, offered the services and could use others as agents in the model. The bank does the risk management, the planning and money matters, while the agent does the distribution, the branding and communication with the customer.

Telenor was not satisfied with a partnership agreement, given issues with what happened elsewhere, hence it sought approval and finally bought 51 percent of Tameer Bank to ensure stability in the partnership.

Telenor Pakistan and Tameer Bank are two legal entities, but operate with a virtual balance sheet statement. Revenue and expenses from both sides are tallied and then the profits or losses are shared between the two entities. The customer-facing brand is EasyPaisa.

Arif Abdul Qayyam, Director for Telenor Financial Services Pakistan, said that the state bank had been very thorough in evaluating Telenor's request. The issue was a balance between stability, flexibility and the effectiveness of getting financial services out to the unbanked.

Arif Abdul Qayyam, Telenor Pakistan Director for Financial Services

Telenor Pakistan has 23 million mobile users. Compared to traditional banks, Telenor's 150,000 dealers and telephone network coverage have a much broader geographic and demographic footprint. Initially, Telenor is training 6,000 of its best dealers to offer financial services and the plan is to expand this training to around 20,000 to 30,000 dealers. In contrast, Pakistan has just 9,000 bank branches and 3,000 ATMs nationwide.

Retailers are used to receiving money and giving out goods and top-ups, but now they have to be trained to understand systems that also included giving out cash and balances.

The first service offered was utility bill payments. This is easiest as there is no cash out, only cash in. The second is a remittance service where people can send money from one place to another. Only recently has EasyPaisa opened a mobile wallet, a current account that can be operated from a mobile phone.

Qayyam said that EasyPaisa will soon add savings accounts, international remittances and insurance to the service offerings. Pakistan receives an estimated $8 billlion (258 billion baht) in international remittances with an estimated equal amount again in the informal economy. Many people still save money through the "under the mattress" model and it is hoped that the deposit account will bring some of those savings back into the financial system.

EasyPaisa was the first but the State Bank has now approved other similar partnerships, which Qayyam welcomes, as it will help build confidence in the system.

Bjaerum said that every mobile wallet is a current account with Tameer Bank with a proper account number, according to the state bank regulations.

Compared to other financial services offerings in the Telenor group, EasyPaisa is the first opportunity to offer the full range of financial services that people need. Bill payments and transaction services are not enough. The central idea of micro-finance is get people out of poverty by giving them the ability to absorb shocks from day-to-day life and store money so they can build assets. Doing this requires micro-payments and the flexibility to take very small insurance premiums.

It is pointless if this project is run at a long-term loss and the idea is to develop a model that is sustainable and can scale. Training has been a major investment, as has the cash management and forecasting cash requirements for the branch every day. Telenor runs its own fleet of armoured cars and trucks carrying cash and, in some cases, has partnered with local banks by issuing dealers with ATM cards so they can withdraw money from the bank.

Pakistan has only 12 percent of its 170 million people served by the formal banking system. Thirty five percent are estimated to be served by the informal financial sector, borrowing from friends and loan sharks and sending remittance through bus drivers who drive from town to town.

Fifty percent of people save, but often though hiding cash at home rather than with banks, and only two percent have any form of life insurance.

The state bank regulations have put a limit on the balance in each account at 200,000 Pakistani rupees (76,000 baht) to force the operation to expand out into rural areas. Other than that, Telenor and Tameer are allowed to do anything that a regular bank can, just with lower limits.

The next step is building up trust and understanding and Telenor is taking this step very cautiously as a failure now would shake confidence in the entire model worldwide.

Unlike many other telcos or even its sister company Dtac, which has launched mobile banking services to reduce churn and increase loyalty in the banking sector, EasyPaisa is focused primarily on providing financial services to anyone, whether they are a Telenor customer or not. Anyone can walk into one of the micro-finance Telenor franchisees and pay a utility bill or transfer money to a relative with a national ID card. However, if the user is one of Telenor's 23 million customers, then he can initiate the transfer himself through the mobile.

The system uses a USSD (unstructured supplementary service data) system or star and hash codes on the phone to set up a payment and thus can work with any handset. Account numbers are the telephone number plus a control cypher at the end.

Looking ahead, Telenor Pakistan is considering expanding EasyPaisa to salary payments and government aid or pension distribution programmes. The Pakistan government has no less than 44 different programmes that distribute cash to the people and, as is usual with cash, a lot of money is lost in the system.

About the author

Writer: Don Sambandaraksa
Position: Database Reporter