Branchless Banking In Pakistan

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Overview:
Population: 177 million (2010 figure)
% Urban: 36% (2008 figure)
% aged under 15: 36% (2010 figure)
GDP/capita (PPP): $2,600 (2009 figure)
No. Bank Branches: 9,041 (2010 figure)
No. Bank Accounts: 16 million (2009 estimate)
No. Mobile phones: 97 million (2010 figure)



1: Introduction and Overview:
Although the population of Pakistan is more than 170 Million, still the number of bank accounts
held by individuals in Pakistan are estimated to b around 16 Million, which means that still a
majority of people in Pakistan do not have access to banking services. This issue is more critical
in the rural areas of Pakistan where there are very few branches for a large population i.e.
almost 2500 branches for a population of 105 Million or an average of 42500 persons per
branch. In contrast the number of mobile phone users exceeds 97 Million. A dynamic telecoms
sector and permissive regulator have provided the foundations for an emerging branchless
banking sector.

1.1: Industry Overview:
Banks
Mobile comapies
1.2: Background:
Branchless Banking represents a cheaper and faster way of banking as an alternate of the
conventional banking system operating through branches. It allows the financial institutions and
other commercial actors to provide financial services to the customers outside the conventional
banking system by using delivery channels like retail agents, mobile phones etc. BB can be
used to substantially increase the financial services outreach to the un-banked communities.
Provision of enabling regulatory environment by careful risk-reward balancing is necessary to
use such models.

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United Kingdom is an early pioneer of the BB service. It was launched by Midland Bank (now
part of HSBC) in 1989. In Pakistan BB service started as the banks adopted new technologies
to come in line with the banking services provided by the banks in other developed countries. In
order to fulfill its duties and to promote financial inclusion without risking the safety and the
soundness of the banking system in Pakistan, SBP issued BBR (Branchless Banking
Regulations) in 2008 which are to be followed by all the financial institutions undertaking BB.
The regulations are also useful for other parties involved in providing the BB services.
1.2: Policy and Regulatory Environment:

After a well-attended workshop on branchless banking in November 2006, the GoP established
a forum for relevant stakeholders to discuss Pakistans approach to branchless banking. Over
time, the participation of most of the major industry stakeholders declined, leaving the SBP, the
Ministry of Information Technology (MoIT), and Tameer as the main participants.
In June 2007 the Banking Policy & Regulations Department (BPRD) of the SBP released its
Policy Paper on the Regulatory Framework for Mobile Banking in Pakistan (Policy Paper). As
stated in the Policy Paper, bank-led branchless banking offers a distinct alternative to
conventional branch-based banking in that customer conducts financial transactions at a whole
range of retail agents (or through mobile phones) instead of at bank branches or through bank
employees. The resulting 2008 Branchless Banking Regulations (BBR) generally implements
the approach articulated in the Policy Paper.
2: Branchless Banking Models and Activities:

According to the BBR, only Bank-Led Mode of BB is allowed. The non bank-led model will be
allowed after the stakeholders have gained enough exposure and after necessary controls have
been put in place. In a financial institution, a customer can have only one BB account.

2.1: Permissible BB Models:

As stated above, only bank-led model of branchless banking is allowed at present which may be
implemented in different ways. Firstly, it can be implemented either by using agency
arrangements or by creating a JV between Bank and Telco/non-bank. Further, the mobile phone
banking which make up for large part of branchless banking can be implemented by using one-
to-one, one-to-many and many-to-many models. It is the responsibility of the FI to carry out
detailed analysis of pros and cons of each model before any of them.

2.1.1: One to-One (1-1) Model:

In this model a bank offers its mobile phone banking services in collaboration with a
telecommunication company. As a consequence the services may only b provided to the
customers of that specific MNO. This model can either be JV-based or implemented through
specific agency agreements between the bank and the MNO. It offers greater customization,
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good service standards, possibility of co-branding and co-marketing. On the other hand, it lack
in outreach as it is limited to the customers of one telco only.

The Easy Paisa Mobile Wallet (discussed below) offered by Tameer Bank and its parent,
Telenor, to customers who have a Telenor mobile phone represents the one-to-one model.
(Tameer Bank also offers a limited service through its Easy Paisa agents to the customers of
other MNOs or customers that do not have a phone at all. These customers are able to transact
one-off bill payments and send domestic remittances to other non-customers.)

2.1.2: One-to-many (1-) Model:

In this model a bank provides its mobile phone banking services to the customers of any
telecommunication company. This model offers the advantage of reaching bankable customers
who has a mobile connection. But this model has several limitations and problems e.g. all the
MNOs may not be willing to provide banks a priority SMS pipe to provide quick services which
are the essence of the mobile banking services. Further, the FI needs to bear all
advertising/marketing expenses. Another serious drawback of this model is that it may require
the bank to rely upon its own branch network for product distribution etc.

United Bank Limited (UBL) Omni (also discussed in more depth below) is an example of a one-
to-many model, where UBL has developed its own network of agents that will serve customers
of any mobile operator.

2.1.3: Many-to-many (-) Model:

In this model, all he banks and all the telecommunication companies come together to provide
quality mobile banking services to almost all the bankable customers. Under this system, a
central transaction processing system (TPS) is established, which must be controlled by an
financial institution; or by a subsidiary owned and controlled by an financial institution or a group
of financial institutions; or by a third party service provider under proper agency agreement with
a bank. The TPS should be capable of:

(i) Settling all transactions on real time basis,
(ii) Storing all proofs of transactions and
(iii) Providing a day end reconciliation to all member banks.

All settlements must take place in specific Branchless Banking clearing accounts of all
participating banks /MNOs/TPS provider kept with a designated bank. This model offers the
maximum connectivity and hence maximum outreach and is closer to the desired situation
where all banks and all MNOs should be able to entertain each others customers (Just like the
existing ATM network in the country where customer of any bank can use ATM of any other
bank).
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The many-to-many model presents certain benefits to banks, including:
(i) the opportunity to purchase access to a switch (analogous to ATM access), which
would reduce the required investment in the technology required to support MNO
branchless banking, and
(ii) access to a large pool of new customers and the fee income from providing
branchless banking services to them


2.1.4: Alternate Channels:

BB can also take place by using agents other than telecommunication companies. For example
a bank can provide its services through other channels like Fuel distribution companies, Post
office or any other organization having a good network or a bank may use any other technology
to provide its services like GPRS or POS terminals.

The above explained three sub-models (one-to-one, one-to-many and many-to-many) can also
be applied to this type of branchless banking (i.e. one financial institution may join hands with
one super agent [1-1], one financial institution with many agents [1-] or many financial
institutions and many super-agents may join hands to provide BB services [-]), provided the
complexities of each model are understood, the operating procedures are documented and the
risks are identified and taken care of.

In each case customer account relationship must reside with some financial institutions and
each transaction must hit the actual customer account and no actual monetary value is stored
on the mobile-phone or TPS server (the balances shown on mobile phone etc. are merely a
reflection of the actual balances). Consequently the use of the term e-money to represent the
services offered under these guidelines is prohibited as being technically incorrect.

In December 2009, the SBP and Pakistan Telecommunication Authority (PTA) agreed to set
up a Joint Regulatory Committee to introduce a unified regulatory framework for Third Party
Solution Provider system. It remains to be seen whether this new initiative will provide additional
encouragement for the many-to-many model to be pursued and if so, by whom.

2.2: Permissible Activities:

Following services/products may be offered by the financial institutions:

Opening and Maintaining of BB account :

A BB account is an account which is opened and operated by a customer with a bank. Banks
may link such account to a particular branch or to a centralized branchless banking unit.
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Account capabilities/limits are proportionate with the level of customer due diligence (CDD)
and KYC procedures the customer has undergone.

Account-to-account Fund transfer :

Account holders may transfer funds to/from their BB account from/to their other already
registered accounts (current/saving bank accounts, loan limit accounts, credit card accounts
etc.)

Person-to-person Fund Transfers :

Account holders may transfer their funds from their BB accounts to the BB accounts or other
regular accounts of other customers of same or some other bank (depending upon the model).

Cash-in and Cash-out :

Account holders may withdraw cash or deposit cash into their BB accounts through a variety of
options e.g. bank branch counters, ATMs and authorized agent locations.

Bill Payments :

A customer can use his BB account to pay utility bills as well (gas electricity etc.)

Merchant Payments :

A BB account can also be used to pay for the goods/services purchased by the customer.

Loan Disbursement/Repayment:

Financial instruments, particularly Micro Finance Banks can use the BB accounts of the
customers to disburse small loans to them and the borrowers can use the same accounts in
order to repay the loan back to the institution.

Remittances:

BB accounts can be used to receive/send remittances subject to the existing prudential tregulations.\

3: Risk Based Customer Due Diligence (CDD) :

In order to optimize the gains and benefits of BB and to extend the financial services to the
maximum of the unbanked part of the society without compromising the AMT/CFT (anti money
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laundering / combating the financing of terrorism) requirements, a risk-based CDD
approach is outlined by SBP.

Under the risk-based CDD approach, the BB accounts are divided into three categories. The
KYC requirements, transactional limits and the minimum technological requirements differ with
each type of level and they are listed below. It may be noted that,

Level 1 accounts are for individuals only,
Level 2 accounts are for individuals as well as firms, entities, trusts, not for profit organizations,
legal persons etc.
Level 3 accounts are for business use only.

Account Level Level 1 Level 2 Level 3
Discription Entry Level account
sufficient for most low
income individuals
Top level account
offering all BB
facilities
and subject to full
KYC
requirements as
applicable to a full
service
banking account.
Account specific for
merchants,
businesses,
banking agents or
third party
service providers.
KYC
requirements
1. Filling and signing
an
account opening
application form.

2. Photocopy of
Computerized
National
Identity Card.

3. Verification of CNIC
by NADRA.

4. At least one
personal
face-to-face contact
with
a designated
employee
of the FI or a
biometric
fingerprint scan and a
digital photo taken by
a BB agent must
reach the FI.
1. Filling and signing
an account
application
form.

2. Fulfillment of all
KYC requirements
specified under
Prudential
Regulations
issued by SBP as
amended from time to
time. (Presently given
under regulation M-1
of
the PRs).

3. Verification of CNIC
by NADRA.
1. Fulfillment of all
requirements of level
3 account.

2. Fulfillment of
additional
requirements as
specified by the FI.
Maximum Rs. 60,000 FI must set limits FI must set limits
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Balance
Limits
(debit/credit)
commensurate with
each
customers profile.
commensurate with
each
customers profile.
Maximum
Throughput
Limits
(debit/credit)
Rs. 10,000 per day
Rs. 20,000 per month
Rs. 120,000 per year
As above As above
Minimum
Technological
requirements
As outlined by SBP. As outlined by SBP. As outlined by SBP.

Despite the above relaxations in KYC requirements for level 1 account holder, the FIs must
adhere to the requirements of other relevant prudential regulations (like PR M2-M5).

Financial institutions must also make sure that their transaction processing system is capable
of:

(i) Imposing the said limits in order to avoid any breach.
(ii) Sending warning or alert messages if the users are near any said limit. (It is not
necessary to send, but the capability to send such messages should exist)
(iii) Analyzing the history of the transactions to identify such customers of level 1 and level
2 who are capable of moving to the next level after fulfilling the additional requirements
of KYC.
(iv) Identifying suspicious transactions and reporting them to the financial institutions
compliance setup in order to take further action.

Minors may open level 1 or level 2 BB accounts after submitting a written undertaking from
their parents/guardian that they accept any liability arising out of the actions of the minors.

Further, the financial institutions are not required to send bi-annually statements to the account
holders. However the account holders should be capable of viewing the last 10 transactions
through their mobile phones without any cost and demand a printed statement of account (for a
period not more than past 12 months) by paying fee as specified by the financial institution

4: Key Roles & Responsibilities:

The eventual responsibility for BB lies with the financial institution, however the financial
institution may take steps to protect itself against the liabilities arising out of the actions by its
agents, service providers or partners. Within the financial institution, BOD is responsible for
strategic decisions, senior management for effective oversight and compliance and audit
functions for ensuring soundness of internal controls and adherence to rules, regulations
and operational guidelines.



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4.1: Board of Directors:

The banks board of directors or the senior management, incase of a foreign bank, is responsible
for development of the banks BB system, its strategies and the related policies.

They are expected to take a explained decision on how the bank is going to provide the BB
facilities to its customers keeping in view its risks and the regulations.

4.2: Senior Management:

The banks senior management is responsible for the implementation of the BB strategy and for
overseeing the working of the system and the services.

BOD and Senior Management must ensure that the scope and coverage of their internal audit
function has been expanded to proportionate with the increased complexity and risks inherent in
branchless banking activities and the Audit department has been staffed with Personnel having
sufficient technical expertise to perform the expanded role. It is also incumbent upon the BOD
and FIs' senior management to take steps to ensure that their FIs have updated and modified,
their existing risk management policies and processes to cover their current or planned
branchless banking services. The integration of branchless banking applications with legacy
systems implies an integrated risk management approach for all banking activities.

4.3: Compliance Officer:

Compliance officer should ensure that proper controls are installed in the system to address any
compliance issues. The management and the system designers should keep in contact with the
compliance officer so that BB products and services are in line with the regulations and the
bank do not have to delay any services due to any compliance issue.

4.4: Internal Auditors:

Internal Auditors are responsible to ensure adherence to the policies, rules, regulations and
operational guidelines. The internal auditors give report to the BOD. The review the process of
the BB to make sure that all the guidelines and the rules and regulations are followed. They are
also responsible for making an audit of the activities which are outsourced by the financial
institution e.g. to any Telco under relevant outsourcing agreement.




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5: Agents-Assisted Banking:

The true power and benefits of BB cannot be unleashed until and unless some trusted third
party is involved to provide some services which are traditionally and usually provided by the
staff of a bank. The word AGENT here does not include any third party which provides technical
services to bank such as requirements for the transaction system. However, a third party
technology service provider can become an agent if it meets the required criteria. There is no
restriction on this.

5.1: Types of Agents:

Agents may be of following three types:

(i) Super Agents: These may b organizations that have well-established outlets or
franchises or a distribution network. They are mainly responsible for handling the sub
agents. They may include fuel distribution companies. Pakistan Post etc.
(ii) Direct Agents: They may include large to medium sized stores having a separate
agreements with the financial institution.
(iii) Sub Agents: These are the branches or the outlets which are managed or controlled by
the super agents and are not directly monitored by the financial institutions themselves,
on a day to day basis.

5.2: Role of Agents:

Agents may perform the following functions, depending on the agency agreement and the type
of the agent:

(i) Open BB accounts (level 1 account only).
(ii) Cash in/Cash Out from the BB accounts.
(iii) Bill payments of both the registered BB customers and other walk-in customers, of any
utility company.
(iv) Loan repayment/disbursement collection.

One agent can provide services to multiple banks at a time provided that the agent has
maintained proper agent agreements with all the banks, separately.

The agents may not change or alter the fees charged or the fee structure provided by the bank.
All the charges should be pre agreed between the bank and the customer and should be
properly communicated to the customers.



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5.3: Agent Due Diligence:

Use of agents to provide BB services to the customers makes the financial institution vulnerable
to many kinds of risks like operational or reputational risks. So the bank should adopt proper
Agent Due Diligence (ADD) procedures to minimize these risks.

The banks should have proper, clear and well defined ADD procedures. The procedures should
at least contain New Agent Take On Procedures (NATP).

NATP should clearly define each agent type and should contain the minimum criteria for the
selection of each agent type. The agents appointed by the banks should enjoy good reputation
and should have a well organized structure. The financial institutions may give publicity in the
locality for the agents engaged by them.

5.4: Agency Agreement:

The Service Level Agreement (SLA)/ Agency Agreement (AA) should be signed by all the
concerned parties and is submitted by the financial institution. It contains the details about the
activities and the functions to be performed by the parties, their responsibilities and the
confidentiality clause.

The SLA with the agent should at least contain:

(i) The rights, duties, expectations and the responsibilities of both the parties.

(ii) The scope of the work performed by the agent and the fee sharing structure.

(iii) That the outsourced activities are subject to the regulatory requirements of SBP, and
that the SBP inspecting officers should be given full right and excess to all the
documents, records, reports and staff of the agent.

(iv) The requirement to keep all the records, date, and files safe by the agent for a period of
at least 5 years or the agent should transfer those to the financial institution at pre-
specified intervals who shall save it for at least 5 years

(v) That all the data which is collected by the agent for the purpose of BB, either from the
customers or from the financial institution is the property of the financial institution, and
the FI should be provided with the copies of all the documents or data it deems
necessary.

(vi) A protocol for any amendments in the service contract or stipulations for the termination
or default of the contract.
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(vii) Suitable limits for the amount of the cash which the agents/subagents can hold and the
limits on individual customer payments and receipts.

(viii) That the agents should not make any management decisions or should perform
management functions or act or appear in the capacity of a member or employee of a
financial institution.

(ix) The requirement that the transactions are shown in the books of the banks at the end of
the day or next working day.