A report by International Financial Corporation (IFC) of the World Bank and the Mastercard Foundation points way for institutions to understand best practice financial modelling in implementing Direct Financial Services (DFS) in Sub- Saharan Africa.
The report with the title- Aligning Expectations: The Business Case for Digital Financial Services is a four-year longitudinal study from 2014 to 2018 which focused on nine financial institutions in Sub-Saharan Africa as they implemented DFS; mainly agent banking and mobile banking solutions.
Digital financial services include methods to electronically store and transfer funds; to make and receive payments; to borrow, save, insure and invest; and to manage a person’s or enterprise’s finances.
The study was conducted with the aim to provide an understanding of the business case for DFS and the role financial modelling plays when setting expectations for the new channel, including whether or not the first set of the DFS projections were met by the participating institutions.
The findings serve as basis for a set of informed best practice benchmarks that institutions can use for their own financial planning when implementing digital banking solutions.
“Based on this study, this report presents the key elements financial institutions need to consider when putting together a financial model for a digital channel, including detailing the main items related to capital investments and operating expense of the channel,” the report noted.
Meanwhile, in the quest to promote a sound financial system in a country that has more than half of its adult population excluded from the financial cycle, the Central Bank of Nigeria (CBN), recently introduced Payment Service Banks (PSB).
The initiative, as disclosed by the apex bank will allow Banking agents, Mobile Money Operators (MMOs), Retail chains (Supermarkets), Telecommunications companies (Telcos), to operate as a financial service agents.
To understand how to reach self-sustainability of a digital banking service, some key recommendations were stated in the report and they include; adjusting DFS usage forecasts to the reality on the ground; not overcomplicating financial models; and generating solutions that address specific market challenges rather than blindly adopting processes used by other DFS providers.
The report explained that a DFS planning stage should include a considered and careful financial modeling exercise that builds on realistic and informed assumptions, and accounts for different partnership and channel uptake scenarios. Such models as mentioned in the report require a trade-off between simplicity and accuracy, as overcomplicated financial projections can affect the visibility of the financial planning exercise, and may even confuse priority indicators the new channel should meet.
It is therefore important to properly identify and highlight the key information necessary to assess the viability of the channel. Sensitivity testing may eventually help to determine the factors that most impact the business case.
According to the report, financial modeling exercise can also contribute to a self-sustainability assessment by helping to understand the direct and indirect income streams, as well as expenses, of the digital channel. Such assessments is said to also allow institutions to monitor profitability of the channel and its progress towards break-even.
Assumptions should draw from experiences in similar contexts, that is, similar market environments and peers. It went further to say that Mobile Money Operators (MNO) industry benchmarks may be misleading for financial institutions in aspects of agent network growth, customer transaction amounts, and transaction mix.
One of the conclusions drawn from the report was that for the financial institutions that participated in the study, initial expectations on agent banking were only partly met. Channel activity and transaction volumes were mostly below expectations, while direct costs, that is, agent management staff salaries and commission expenses, were in line or above the forecast. The research therefore concluded that agent banking adoption was lower and costs higher than projected.
While channel registration targets were often met, targets for customer activity and transactions were out of reach. Targets on agent recruitment and activity as cited by the report deserve better attention and should be part of every financial model.
Theoretically, the potential to mobilize savings through a digital channel is high. However, due to system limitations and country characteristics, that potential could not properly be quantified for most of the financial institutions, as compiled from study.
The report revealed that two institutions in the study, however, have data that allows tracking the savings trends of customers, with one bank showing that savings collected through the digital channel multiplied by seven in a twelve-month period.
Additionally, it was noted that for three banks the size of the total savings portfolio more than doubled after the launch and roll-out of their digital channels.
Reaching DFS channel sustainability requires out of the box thinking: innovative approaches combined with clever product and service offering can enlarge direct channel revenues and boost the recognition of the DFS channel, the report recommends.
Meanwhile the approaches adopted by the study institutions to enhance channel sustainability involved overcoming common MNO belief that clients should not be charged for cash-in transactions, and the design of products that are only delivered and served through agents.
The report suggested that the need to think innovatively and ‘out of the box’ should also apply to the financial modeling exercise; by allocating cost savings from agent deposit mobilization, or revenues from the loan business, to the agent network.
Nigeria currently operates a bank-led financial inclusion model and this is argued by financial inclusion analysts as the reason why the country, despite its large population and mobile phone penetration lags its Africa peers in including more of its citizens into the financial cycle.
“Financial inclusion is on the rise globally, accelerated by mobile phones and the internet, but gains have been uneven across countries,” the World Bank said in a statement.
Nigeria recorded a decline in the period covered by the World Bank report between 2014 to 2017.
According to the Global Findex database, Africa’s largest economy reported an average decline of 4.5 perecntage points in its financial inclusion rate, as 25 years and above of its citizens with bank accounts dropped by 5 basis points from 49 percent in 2014 to 44 percent in 2017, while account holders over 15 years, fell 4 percentage points from 44 percent in 2014 to 40 percent in 2017.
The central bank of Nigeria has the target to include 80 percent of its population into the financial cycle by the year 2020. Although it said the impediments to achieving this target is ascribed to economic constraints, insecurity issues in the northern part of Nigeria, obsolete strategies, among others.
As such, the apex bank adopted new strategies based on two major principles. Firstly, that regulations should be focused on the activity and not the actor; defining the eligibility to provide the financial service without closing off the sector from future innovation.
Secondly, that actors are to focus more on the activities they possess ‘comparative advantage’ in, to achieve the greatest impact. Given the complexity and volume of changes that need to happen, individual actors are to focus more on the activities that best suit their capacity whilst maintain an inclusive lens as much as possible.
Tags: mobile agents