Fighting Poverty Profitably Full Report

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3. Back-office processing. This includes product-related processing activities. At onboarding, back-office activities include processing a prospective customer’s application (entering information into the bank IT system) and verifying identity and suitability as a customer. Processing activities supporting account use include calculating interest and transferring money between a customer account and the bank (e.g., for an interest payment to the customer or the deduction of a fee from his account). Processing also includes statementing, which typically occurs both for active and dormant accounts. Providers may also need to undertake processing activities to close down accounts that have been dormant for sufficient time. In many cases, regulations set a minimum time that an account must be dormant before it can be closed. 4. IT platform and application maintenance. This includes establishing and maintaining the IT software and hardware to support accounts once they are established. It also enables the interface between accounts and customers, as well as back-office and front office employees. This IT must be sufficiently reliable to support business needs (e.g., have limited downtime and capacity to recover quickly from a disaster). It must provide security against fraud, and comply with all regulatory standards. IT systems must house and provide the same functionality for both active and dormant accounts. 5. Support functions. These functions, including risk, finance and HR also perform activities needed to support account opening and maintenance. As with channel maintenance, support functions have uses beyond account, so institutions charge only a percentage of their cost against accounts themselves. Providers must also spend money on product development and marketing. Marketing plays a particularly central role in generating new customer accounts and also plays a role in influencing existing customers to stay. Since marketing activities are broad and generally not directed toward current accounts alone, we do not consider them in detail here. Components of account costs Account costs can be broken down either by stage in the account lifetime, or by the activities needed to open and maintain an account across its life. The lifetime breakdown illustrates how average customer lifetime determines the relative contribution of onboarding costs to overall account costs. The cost breakdown by type of activity illustrates some of the differences in the cost structures of current accounts compared to mobile money accounts 4 . Cost breakdown by stage in the account lifetime An account generates costs unevenly across its lifetime. Exhibit 7 illustrates cost estimates for a typical current account in a developing country. 4 Current accounts held by banks, mobile money accounts, and accounts with other payment service providers generally have important differences in terms of functionality, which we do not discuss in detail in this work. For example, a current account at a bank typically offers a small interest rate to the account holder, generally gives access to multiple types of payment options, sometimes with additional fees (e.g., including debit card, credit transfers, cheques), and often can be linked to savings accounts, overdraft lines of credit, and other banking products. Mobile money account functionality typically is more limited, thought it differs across providers and countries, and providers are exploring ways of linking these accounts to other banking products, often in partnership with banks. FIGHTING POVERTY THROUGH PAYMENTS I SEPTEMBER 2013 www.gatesfoundation.org 26
EXHIBIT 7 Average annual current account costs by customer lifetime stage and across the life of the account DEVELOPING COUNTRY EXAMPLE Account costs, averaged for each year US Dollars 22 19 19 19 19 Annual costs, averaged across all years 1 US Dollars 20-30 5 Onboarding = 11 19 Period of use Year 1 Year 2 Year 3 Year 4 Year 5 A B B. C Onboarding Use Period of use Dormancy 3 Dormancy 1 On-boarding’s contribution to average annual account cost is given by looking at total on-boarding cost over the average customer lifetime of use (which is 11 years in Europe). Based on assumed 8% dormancy rate (as in the US) SOURCE: McKinsey Global Payments Map 2012 (2010 data), McKinsey Cost Per Product Benchmark, European Commission, EIU, Finalta, ABI, Banco de España, World Databank The relative contribution of onboarding costs to annual costs depends on the number of years that a customer remains active. In the example in Exhibit 7, the $22 in onboarding costs is slightly more than the typical annual costs of $19 during the period of use. When onboarding costs are spread out over the entire lifetime of the account, they contribute only $5 to average annual costs of $20-$30. Cutting onboarding costs by half or doubling customer lifetime lead to roughly the same decrease in average annual account costs (e.g., decreasing onboarding costs from $20 to $10 has the same effect as increasing customer lifetime from 4 to 8 years). 5 It costs money to maintain an account even after it goes dormant (in this developing country example, this happens after Year 4). These costs are roughly $11 per year. When averaged out over all the years the account exists, this maintenance contributes $3 per year. 5 Note that for the model of CICO, Transaction and Adjacency-driven Profitability, in which providers earn a profit on CICO and transactions, due to per-use fees they assess on users, account cost per use may be more relevant than account cost per year. For current account-based models in which most revenue comes from interest on account balances, account cost per year is the most relevant quantity. We give annual cost numbers to allow for an apples-to-apples comparison. FIGHTING POVERTY THROUGH PAYMENTS I SEPTEMBER 2013 www.gatesfoundation.org 27
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Page 8 and 9: ing from Poland and the Czech Repub
Page 10 and 11: EXHIBIT 1 Digital payments can simp
Page 12 and 13: spective in examining the major pay
Page 14 and 15: tems focuses on what is needed in t
Page 16 and 17: capabilities. Happily, major innova
Page 18 and 19: charging users - payers, payees, or
Page 20 and 21: EXHIBIT 5 Examples - A range of mod
Page 22 and 23: While the building blocks of a paym
Page 24 and 25: Market Behavior: Cost alone does no
Page 26 and 27: • Providers typically set account
Page 30 and 31: Onboarding activities Onboarding co
Page 32 and 33: 5. Support function costs allocated
Page 34 and 35: EXHIBIT 10 In developing countries,
Page 36 and 37: 5. Eliminate paper statements. Movi
Page 38 and 39: include a minimum balance, minimum
Page 40 and 41: EXHIBIT 15 European countries with
Page 42 and 43: III. Cash-In-Cash-Out: Creating acc
Page 44 and 45: Activities involved in CICO CICO ne
Page 46 and 47: Defining characteristics of distrib
Page 48 and 49: The breakdown of costs across CICO
Page 50 and 51: hicles, as well as the overhead to
Page 52 and 53: EXHIBIT 19 Branch cash withdrawals
Page 54 and 55: EXHIBIT 21 There are five primary m
Page 56 and 57: opportunities to reduce back-office
Page 58 and 59: EXHIBIT 22 Most countries lose mone
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Page 62 and 63: Transaction patterns across countri
Page 64 and 65: 80%. Cost per transaction ranges fr
Page 66 and 67: 3. What rules determine how money i
Page 68 and 69: Components of transaction costs Tra
Page 70 and 71: While the data shows that the digit
Page 72 and 73: “Push instruments” - such as cr
Page 74 and 75: Methods of lowering costs for a giv
Page 76 and 77: Improving operational efficiency Im
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The Netherlands gain efficiency We
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across countries, as Exhibit 38 dem
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customer’s payment, as well as fo
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1. What is the cost structure for p
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Walmart, for example, has expanded
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of less than $1. As Chapter 2 showe
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In the short-term, extending financ
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occasionally have to borrow from th
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The high cost is driven both by (i)
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Non-financial adjacencies can be a
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Implications for poor people in dev
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Conclusion As we conclude this repo
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Business correspondent (BC) Individ
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Financial adjacencies Interchange (
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Financial Services for the Poor Rea
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How M-PESA Works, CGAP Video. An ea
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Sources Databases CIA World Fact Bo
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Other Bank and company websites Int
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FIGHTING POVERTY THROUGH PAYMENTS I
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