Fighting Poverty Profitably Full Report

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III. Cash-In-Cash-Out: Creating access to payment systems Chapter summary Cash-in-cash-out (CICO) is the second element in the four-part ACTA framework of payment system economics 1 . It enables consumers to move cash into or out of a payment system by depositing and withdrawing it to and from their accounts. CICO distribution outlets include bank branches, ATMs, and individual money agents. Cash handling networks support distribution outlets by making sure that each of them maintains the right amount of cash. These features are particularly important for those who are not accustomed to transacting electronically. Historical evidence from across the world indicates that reliable and accessible CICO systems are necessary for growth of digital payment systems, which often grow alongside the CICO systems. A successful payment system that fosters financial inclusion requires CICO services that consumers can access easily, trust, and use at a low price. CICO distribution outlets must be located in local communities, even in rural areas. More distribution outlets expand access to more users. Furthermore, users must have confidence that CICO distribution outlets will be open and have cash when they need it. They also need to trust their accounts will be credited properly when they deposit cash, and that they will be charged published rates when they withdraw or deposit money. Pricing must be affordable for very poor consumers since our research shows that all consumers still want access to cash, even as their use of digital payments grows. Low price, in turn, requires low-cost systems. Our economic analysis of CICO activities across a broad set of markets yields several major insights: • Payment system providers generally lose money on their CICO activities, but the amount varies widely by country and type of system. Banks typically lose money, while individual money agents, who handle deposits and withdrawals for consumers and businesses, can find it profitable. In developed payments systems, the margin of loss for CICO can range from minus 15% to more than minus 100%. This stems from costs for each withdrawal or deposit ranging from 50 cents to over $5, and cash withdrawal fees from zero to $1.40. This translates to annual costs of $6-to- $60 and revenues of $0-to-$17 for a user withdrawing 12 times annually 2 . • Using agents to provide CICO services is universally important to ensuring reach to poor customers at costs that can be as much as 90% lower than alternatives such as branches. In all developing markets we examined, agents play an indispensable role for quickly expanding reach and building scale. It is vital for payment systems to be able to scale up their agent networks by providing them sufficient incentives. 1 ACTA stands for: Accounts, Cash-in-cash-out, Transactions, and Adjacent opportunities for profit. 2 This is the level of CICO use typical in countries where digital payments use has taken root. FIGHTING POVERTY THROUGH PAYMENTS I SEPTEMBER 2013 www.gatesfoundation.org 40
• Improving system design and operations together can lower CICO costs in developing countries by as much as 40%-to-60%, with each of these actions contributing about half the impact. – Improvements to system design can account for a 25% cost reduction and include optimization of CICO distribution outlets and cash centers (up to 20% cost reduction) and optimization of route planning for moving cash (up to 5% cost reduction). Effective CICO systems rely on complex and interconnected supply systems that offer potential for increased cost effectiveness through improved design that incorporates optimized locations for a network of agents or ATMs, and coordinated routes for mobile agents or refilling ATMs. – Better cash forecasting, recycling of cash and process improvements can each improve system efficiency, together lowering CICO costs by up to 35%. Forecasting reduces the stock of cash stored in the system that is not earning interest, and can reduce the number of cash deliveries needed. Forgone interest is known as a funding cost. Better forecasting can reduce funding costs to branches and ATMs by up to 50%, or 10% of total costs. Optimizing inefficient systems of money agents has the potential to bring similar improvements. Recycling – taking cash deposited by users and then dispensing it directly to other users – also can reduce overall costs by roughly 10% as can improving process efficiency. • Costs for a cash withdrawal could be as low as $0.20-to-$0.50 (or $2.50- to-$6 annually for a user transacting 12 times). This requires optimized system design as well as high operational efficiency. • Providers typically price CICO either to lower operating costs or to maximize revenues, often through adjacent services. Strategies to lower operating costs involve pricing that encourages customers to use the lowest cost CICO outlets. In revenue maximizing strategies, providers seek to generate as much value out of CICO outlets as they can -- either by offering additional revenue generating features (e.g., sales of tickets or mobile phone minutes) or by recovering costs directly from cash withdrawal fees. • Reliable and accessible CICO networks are necessary for growth of digital payments. Evidence from across the globe suggests that cash access will remain important long after digital payments take root. As a result, successful digital platforms that encourage financial inclusion require complementary traditional solutions for both collecting and dispensing cash. To offer a more detailed analysis of the role of CICO in payment systems, we have divided this section into five parts. • Activities involved in CICO • Components of CICO costs • Methods to lower CICO costs • CICO revenue and pricing models • Implications for poor people in developing countries. FIGHTING POVERTY THROUGH PAYMENTS I SEPTEMBER 2013 www.gatesfoundation.org 41
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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
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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 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 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
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Page 64 and 65: 80%. Cost per transaction ranges fr
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Page 68 and 69: Components of transaction costs Tra
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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
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Page 82 and 83: customer’s payment, as well as fo
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Page 86 and 87: Walmart, for example, has expanded
Page 88 and 89: of less than $1. As Chapter 2 showe
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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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