Fighting Poverty Profitably Full Report

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EXHIBIT 10 In developing countries, annual account cost per year of use is $20-30, based on data from developed countries US Dollars A B C Onboarding Period of use Dormancy European average 60-100 7 75 1 70-110 20 75 Adjustment between developed to developing 120-170 32 119 100-150 27 105 1 3 2 3 3 3 4 Developing country estimate 20-30 5 3 19 Higher churn & dormancy (~150% higher than in Europe) increase onboarding spend per year of use Lower productivity (~50% of European level) increases labor costs at a given labor rate Lower overhead costs (~25% of European level) Cheaper labor (~$1 per hour versus European average of ~$30) SOURCE: McKinsey Global Payments Map 2012 (2010 data), McKinsey BTO – Cost Per Product Benchmark, European Commission, EIU, Finalta, ABI, Banco de España, World Databank 3. Lower overhead costs. Benchmarks indicate that overhead costs in the developing world are roughly 25% of those in Europe. We apply this cost differential to both onboarding and use-dependent maintenance components of cost. 4. Lower cost of labor. Here is where the difference between developed and developing worlds becomes huge. The cost of labor in the developing world is only about 3% of that in Europe (as little as $1 per hour compared to $30 in many European countries). This decreases labor costs drastically, decreasing the relative contribution of both on-boarding and maintenance costs. Methods to lower account costs Improving system design and operations are the most important methods for lowering account cost. There are five primary ways to reduce costs at a bank (Exhibit 11 has an overview). Applying all of these could lower total current account costs in developing countries by 65%-to-75% to $5-to-$10 annually, roughly to the level of current costs for mobile money accounts. Improving system design 1. Shift to bank agents and other lower cost channels. Shifting to agents and other lower cost channels, and away from branches, can lower the contribution of customer service and channel maintenance costs to total account costs by more than 40% (or $3), primarily by avoiding costs of managing branches, and shifting some labor costs into agent commissions away from salaries for higher-wage employees. 8 8 Shifting from branch to agent also reduces the costs of CICO by over 80% (see page 50). Cost reductions due to this channel shift are larger for CICO than for account. For account, back-office, IT-related, and support function costs are typically more than half of the total, but do not depend upon channel. However for CICO, the bulk of costs are channel-dependent. FIGHTING POVERTY THROUGH PAYMENTS I SEPTEMBER 2013 www.gatesfoundation.org 32
2. Streamline IT. This can lower costs by roughly 15%, at least to the level of IT costs to maintain a mobile money account. IT costs might fall to $2 from the roughly $6 we estimate at many institutions today. However risk and security considerations will inhibit further decreases. EXHIBIT 11 Improving system design and operations are the most important methods for lowering account costs Approximate breakdown of account costs currently and after potential cost reductions Percent System design 1. Customer service 1 2 2. 2. Channel Channel maintenance 3 3,4 5 maintenance 1 Reduced Current 1 2 Shift to agents and other lower cost channels, away from branches Streamline IT 3. 3. Back-office processing 1 3,4,5 10 processing Operations 4. IT platform && Application application maintenance 2 2 6 maintenance 5. 5. Support Support functions functions 2 3,4 5 3 4 Improve process efficiency Automate processes further Total 9 5 Eliminate paper statements SOURCE: McKinsey Global Payments Map 2012 (2010 data), McKinsey BTO – Cost Per Product Benchmark, European Commission, EIU, Finalta, ABI, Banco de España, World Databank; MPESA annual report; expert interviews Improving operations 3, 4. Improve process efficiency and Automate processes. Improving process efficiency in call centers and in back-office processing can lower account costs, particularly in conjunction with automating processes. Combined, they can lower costs by more than 10%. Even in relatively developed markets, process automation offers large potential for productivity improvements. Cross-European benchmarking studies suggest that spending an additional $15,000 to $25,000 annually per back-office banking employee can double his productivity (e.g., in terms of current accounts per employee). Hence, increasing automation for back office tasks is worthwhile as soon as employees earn more than about $15,000 to $25,000 annually. Providers can decrease costs from roughly $5 to under $2 by achieving levels of automation and process efficiency at a par with best-of-class institutions in the developed world. Note that limiting account options provides potential to reduce costs further. However, since the overall labor costs are low, the absolute potential for improvement from decreased labor time is limited; developing countries already reap the benefit of low labor rates compared to developed countries. FIGHTING POVERTY THROUGH PAYMENTS I SEPTEMBER 2013 www.gatesfoundation.org 33
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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 28 and 29: 3. Back-office processing. This inc
Page 30 and 31: Onboarding activities Onboarding co
Page 32 and 33: 5. Support function costs allocated
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
Page 60 and 61: Implications for poor people in dev
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
Page 78 and 79: The Netherlands gain efficiency We
Page 80 and 81: across countries, as Exhibit 38 dem
Page 82 and 83: customer’s payment, as well as fo
Page 84 and 85:
1. What is the cost structure for p
Page 86 and 87:
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
Page 98 and 99:
Implications for poor people in dev
Page 100 and 101:
Conclusion As we conclude this repo
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Business correspondent (BC) Individ
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Financial adjacencies Interchange (
Page 106 and 107:
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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