INTERNATIONAL FINANCE CORPORATION Mobile Financial Services in Microfinance Institutions: Caja Sullana in Peru Diana Lewin and Martha Casanova This case study was conceptualized and directed by Diana Lewin from MicroSave. Findings were summarized by Martha Casanova. Table of Contents Acknowledgements............................................................................................................................................v CHAPTER 1:  Introduction.................................................................................................................................1 CHAPTER 2:  Overview: Development of mobile financial Services in the Peruvian Market....3 Regulation of Mobile Financial Services.............................................................................................................................................................. 3 Mobile infrastructure....................................................................................................................................................................................................... 3 Lack of access & unmet demand............................................................................................................................................................................. 4 Caja Sullana: business model and strategy........................................................................................................................................................ 4 Banking correspondent business model............................................................................................................................................................ 5 Agent network management.................................................................................................................................................................................... 5 Marketing strategies for the BC channel............................................................................................................................................................. 6 Risk management of the BC channel.................................................................................................................................................................... 6 Performance of banking correspondents: cost and benefit analysis................................................................................................ 6 Cost analysis.......................................................................................................................................................................................................................... 7 Benefits of the banking correspondent channel........................................................................................................................................... 7 Challenges, lessons and recommendations..................................................................................................................................................... 8 Challenges............................................................................................................................................................................................................... 8 Lessons learned..................................................................................................................................................................................................... 9 Recommendations.............................................................................................................................................................................................. 9 List of Tables Table 1:  Differences between Kasnet and Cajamax agents.......................................................................................................................... 4 Table 2:  The process of managing agents............................................................................................................................................................... 5 List of Figures Figure 1:  Volume and value of Cajamax agent transactions........................................................................................................................ 6 Figure 2:  Transaction breakdown by type for Cajamax and Kasnet agents, 2012.......................................................................... 6 iv MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: CAJA SULLANA IN PERU Figure 3:  Kasnet/Cajamax cost comparison........................................................................................................................................................... 7 Figure 4:  Sensitivity analysis – transaction costs as transactions, network and investment grow....................................... 8 Figure 5:  Sensitivity analysis – transaction costs relative to the number of transactions.......................................................... 8 Figure 6:  Agent network management – Key components........................................................................................................................ 9 Acknowledgements The authors acknowledge the contribution and input of the following staff of Caja Sullana who provided relevant data and support required to conduct this study: Name Position 1 Ing. David Chávez Varona Jefe de Medios de Pago, Productos y Servicios Electrónicos 2 Rossana Jiménez Chinga Gerente Adjunto de Ahorros y Finanzas 3 Lic. Bertha Isabel Fernández Oliva Gerente de Administración 4 Econ. Luis Alfredo León Castro Gerente de Ahorros y Finanzas 5 Samy Wilfredo Calle Rentería Gerente de Créditos 6 Manuel Casana Jefe de Marketing 7 Maribel M. Preciado Esquiembre Jefe de Planeamiento, Investigación y Desarrollo 8 Mg. Luis Alberto Lamela Salazar Gerente de Riesgos 9 Ing. Carlos E. Paz Amaya Administrador de Base de Datos 10 Carmen Ortiz Castro Oficina de Atención al Usuario 11 Edgar Berrocal Vargas Gerente Zonal III B 12 Lic. Adm. Oswaldo Castillo Barreto Administrador, Oficina Barranca 13 Econ. Rafael Torres Susanibar Administrador, Agencia Lima 14 Javier Ernesto Garces Angulo Analista de Riesgo 15 Sheila Silva Analista de Riesgo 16 Marco Antonio Cruz Zapata Asistente Servicios Financieros Electrónicos 17 Luis Fernando Palacios Nuñez Auxiliar Servicios Financieros Electrónicos 18 Evelyn Córdova Vásquez Auxiliar de Servicios Financieros Electrónicos CHAPTER 1 Introduction This report is part of a series of five case studies conducted The Caja Sullana case study was conducted in July under the IFC “Business Case for Mobile Financial Service 2013. The team relied on secondary research along with Channels in Microfinance Institutions” project. The pur- visits to the organization to collect and analyze data, and pose is to analyze how MFIs can implement MFS channels to interview MFI staff, mobile financial service users and to drive profitable growth while extracting lessons help- agents. ful to different stakeholders in the microfinance industry, The study concluded that even though not all of especially in designing better targeted and successful the benefits of operating through agent networks can m-banking projects. be quantified, they still exceed the costs. It is well under- The “Caja Municipal de Ahorro y Crédito Sullana” stood that setting up and operating a network of agents (Caja Sullana Municipal Credit and Savings Bank) start- is very costly; and growing these operations may be chal- ed operations in 1986 in the municipality of Sullana, Pi- lenging. Nevertheless, agent transactions cost much less ura in Peru. As of December 2012, the organization had than branch transactions. This generates significant cost penetrated 11 out of the country’s 1,831 districts through savings for those operating in this way. Furthermore, im- its 70 branches and offices, becoming the fourth largest plementing agent networks enables the bank to reach CMAC1 by deposit and credit volumes with 205,146 sav- remote places more cost effectively while expanding ings and 119,470 credit clients. The bank offers its services service points and increasing liquidity and revenues from through a variety of channels, including branches, bank- additional services offered, such as bill payments. Simulta- ing correspondents, and home-banking among others. neously, the risk of holding cash at branches is reduced Fi- IFC selected a variety of organizations as case study nally the channel could become essential in realizing one subjects, differing by region and the business model each of the bank’s most ambitious social objectives: enhancing has implemented. Caja Sullana was chosen because: financial inclusion in remote areas. •• It was the first MFI to launch a banking correspondent channel in Peru. •• It relies on banking correspondent (BC) schemes, one 1 CMAC. Cajas Municipales de Ahorro y Crédito being its outsourced agent network while the other 2 According to The Economist Intelligence Unit Limited, in 2012, and for the fifth consecutive year, Peru ranked first in the Global is managed in-house. Microscope on the Microfinance Business Environment, a result of •• Caja Sullana operates in one of the microfinance sec- the country’s strongly competitive microfinance sector and sophis- tor’s most competitive and sophisticated countries.2 ticated regulatory environment. CHAPTER 2 Overview: Development of mobile financial services in the Peruvian market The Peruvian financial system comprises 67 entities reg- adults, compared to Peru’s 278. As of June 2013, there were ulated by the Superintendencia de Banca, Seguros y AFP a total of 22,952 banking correspondents in the country. (SBS); among these 42 specifically target the low-income segment. The Peruvian microfinance sector also includes 15 non-regulated, micro-credit non-governmental organi- REGULATION OF MOBILE FINANCIAL SERVICES zations, plus 19 specialized cooperatives, amounting to a total of 76 entities involved in the microfinance sector. In June 2005 the SBS introduced a regulation allowing As of December 2012, there were a total of 4,285,000 financial entities to offer services through banking cor- microfinance clients in the country, or roughly 14.2 per- respondents. This alteration cleared the way for regulat- cent of the total population and 19.37 percent of the eco- ed MFIs to offer credit payments, cash withdrawals, fund nomically active population. transfers, cash deposits in their own or third party ac- A wide diversity of products and services is available counts, and bill payments as well as the right to open and to microfinance clients. MFIs offer products to corporate close basic accounts.3 Furthermore, a Law for Electronic clients, medium- small- and micro-businesses, inclusive of Money was passed in early 2013, the objective being to consumer loans and mortgages. Savings products include regulate the issuance of e-money. term deposits, recurring deposits, demand deposits and others. Only a few organizations offer micro-insurance products. Some other services offered by MFIs include: re- MOBILE INFRASTRUCTURE mittances, bill payments, foreign exchange, and interbank transfers. As of December 2012, 99.4 percent of the districts in the The growth of the Peruvian microfinance industry country had mobile phone service. This compares to only has been followed by an improvement in financial inclu- 38.96 percent of districts with a financial services presence sion over the past five years. This can be attributed to the (through offices, ATMs or agents). great number of players in the industry, the generally fa- At present there are three telecom operators in the vorable regulatory framework for microfinance and spe- country, Telefónica Móviles with a 51 percent market share cific policies issued to improve financial inclusion. Despite this, Peru still lags behind several Latin American countries as regards financial use and access. For example, Brazil has 3 In 2011, the SBS introduced regulation for simplified savings ac- 45.57 offices per 100,000 adults compared to Peru’s 17.47; count processes, named the “basic account”. The main objective is and Uruguay has 486 and Mexico 416 creditors per 1,000 to enhance financial inclusion 4 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: CAJA SULLANA IN PERU (brand name Movistar), followed by América Móvil with CAJA SULLANA: BUSINESS MODEL AND 43 percent (brand name Claro) and Nextel (6 percent). The STRATEGY advent of number portability at the beginning of 2010 increased the level of competition among players. The “Caja Municipal de Ahorro y Crédito Sullana” (Caja Sullana) started operations in 1986 in the municipality of Sullana, Piura. By December 2012 the organization had LACK OF ACCESS & UNMET DEMAND extended its reach to 11 out of Peru’s 1,831 districts, op- erating a network of 70 branches and offices—becoming Peru has a competitive and sophisticated microfinance in- in the process the fourth largest CMAC4 measured by de- dustry, although there is still an important gap in terms of posit and credit volumes. financial inclusion: the percentage of the population with an account at a formal financial institution is relatively low (20.5 percent), while only 33.95 percent of districts have a bank branch office, an ATM or a banking correspondent. 4  Cajas Municipales de Ahorro y Crédito TABLE 1: Differences between Kasnet and Cajamax agents Kasnet Cajamax Operating Outsourced to Globokas, with Caja Sullana monitoring Owned, in-house network scheme operations Multi-bank Caja Sullana only Provides hardware Provides hardware Recruits new points Recruits new points Provides supplies Provides supplies National network One-to-one recruitment of new agents Caja Sullana pays a commission on transactions plus a Caja Sullana purchases the point of sale devices, pays a connection fee to Globokas maintenance fee to Hiper (IT partner), and takes care of HR, IT, and marketing costs. Globokas pays transaction commissions to Kasnet agents Caja Sullana pays transaction commissions directly to agents IT platform Agent operations are automatically linked to the banks’ core systems Agent points of sale are connected through a Globokas The bank registers each Hiper Center POS in the system switch Operations are debited/credited from the client’s Each operation involves a debit or credit in both the agent’s account with the net result for Globokas netted out and and client’s accounts settled at the end of the day Type of Withdrawal transactions Deposit available Credit Payment — Bill Paymenta — Transfer to own or third party Balance check — Number of agents 1,155 89 Amount of tx 144,939 tx 228,411 tx Volume of tx $7.8 million $17.5 million a As of October 2013, Caja Sullana had agreements with 80 companies for bill payment including 70 schools, 3 water companies and 4 electricity companies. Overview: Development of mobile financial services in the Peruvian market 5 Caja Sullana’s portfolio has grown steadily from as conduits for its services offering. And in 2012, these $89 million in December 2007 to $409 million as of De- banking agents conducted 373,350 transactions for a cember 2012. Over the same period, average loan size in- total volume of $25.3 million/74 million Peruvian nue- creased from $1,568 to $3,424 per loan client. vo sol. BANKING CORRESPONDENT BUSINESS MODEL AGENT NETWORK MANAGEMENT Caja Sullana began offering its banking correspondent The Channels Unit was created in 2007 to oversee all services via its own network, Cajamax. In 2010, the bank electronic channel functions. It presently has more than established a partnership with Globokas, which operates ten staff. a multi-bank agent network called “Kasnet”, that now also Caja Sullana is supervised by the SBS and must there- offers its services. The Globokas partnership grew out of fore have a Customer Service Unit to assure compliance the need to increase the number of service points coun- with the regulations. The Customer Care team responds try-wide, without investing in recruitment, training, hard- to client complaints and provides solutions, as well as ware, or agent management. training, to enable staff to handle products and services, The bank now operates through both networks. solve client queries and collect and collate feedback on Since June 2013, Caja Sullana has used 1,244 agents areas needing improvement. TABLE 2: The process of managing agents Choosing agent Addressing agent locations and On-going complaints and recruitment Agent training monitoring concerns Cash management •• The Channels Unit •• The Channels team •• Agent monitoring is •• Agents can call •• When recruited, agents establishes targets visits the agent mostly done off-site; Channels team must contribute regarding new agents location, installs the and there is no formal headquarters during $684–$1,026 of capital. based on the strategic POS, plus the branding process for on-site office hours regarding •• After three months’ business plan and material (banners, visits. complaints and operations they qualify analysis of the past flyers, signage), and •• On a monthly basis, concerns. To resolve for an “Addenda”.a year’s performance per then trains the agents. the Channels team day-to-day issues, If approved, the channel. prepares a ranking agents can also liaise branch is responsible •• Market potential in the of best and worst with branch staff. for recovery of the area suggest actual performing agents by “Addenda” at the end branch location. branch on a monthly of every month. •• It is the branches’ basis. Transactions •• Agents can deposit responsibility to recruit are then validated cash at Caja Sullana new agents in their for processing branches, or make a respective operating commissions and sent deposit in favor of Caja areas, and align these to the appropriate Sullana into any bank. to channel team branches for •• The agent is criteria. completion. responsible for security •• Agents are shops •• The mother branches at their shop, and there such as supermarkets, inform their agents is no insurance against pharmacies, grocery re: the amount of robberies. stores and the like. MFI commissions earned. staff have no agent Then the branch pays role. the commission to the agent. a Revolving credit line from the Bank. 6 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: CAJA SULLANA IN PERU FIGURE 1:  Volume and value of Cajamax RISK MANAGEMENT OF THE BC CHANNEL agent transactions 20,000,000 250,000 The bank risk management process consists of a thor- ough evaluation of risk implications, and the introduction Amount (USD) 200,000 15,000,000 of control measures at the earliest stage of a new product # TXN 150,000 10,000,000 or service. All risk events are registered in the bank’s risk 100,000 5,000,000 system, and monitored thereafter. 50,000 In terms of compliance with Know Your Customer re- – 0 2009 2010 2011 2012 quirements, agents are not yet allowed to open accounts; # Transactions Transaction amount (USD) therefore only clients who have undergone the regular KYC process can use the service. In withdrawing cash from agents, clients need to present their debit cards. Other transactions, such as making deposits or loan repayments, MARKETING STRATEGIES FOR THE BC can be done with client ID or loan numbers. These involve CHANNEL lower risk than withdrawals. However transaction limits are imposed by the regulatory agency to avoid mon- The marketing unit manages an annual budget for all Caja ey-laundering issues. Sullana products and services. There is no specific budget for the BC channel. Regular materials for below-the-line marketing such as flyers, banners and signage for agents, PERFORMANCE OF BANKING are covered within this budget. CORRESPONDENTS: COST AND BENEFIT The bank has found that the most effective market- ANALYSIS ing strategy is word of mouth (locally known as “mouth to ear”). It has learned that people are most easily con- As can be observed in the figures below, the volume and vinced to use the service if someone they know recom- value of Cajamax agent transactions has been growing mends it. steadily, in fact at more than 110 percent per year. FIGURE 2:Transaction breakdown by type for Cajamax and Kasnet agents, 2012 Total volume of transactions for Kasnet and Total number of transactions for Kasnet and Cajamax agents of Caja Sullana (USD) Cajamax agents of Caja Sullana 8,947,547 105,896 7,833,657 7,502,291 95,802 77,968 54,956 36,635 697,735 308,355 1,949 – Withdrawals Credit payments Deposits Bill payments Transfers Withdrawals Credit payments Deposits Bill payments Transfers Balance check Balance check Overview: Development of mobile financial services in the Peruvian market 7 In December 2012, Cajamax agents conducted an variable cost per transaction (commission) is much lower average of 343.13 transactions per month, compared to with Cajamax, resulting in total per transaction costs of 26.45 for Kasnet agents. For Cajamax agents, this meant $0.71 for Cajamax and $1.33 for Kasnet agents. average earnings of $92.76. However, since agent commis- Deeper analysis of this point underscores that as the sions have recently been lowered, Caja Sullana will have number of transactions is markedly increased, transaction to wait and see if the transaction flows and commissions costs show a concomitant decrease. Specifically, for ex- paid remain attractive to these agents. ample, in doubling the number of transactions (with the needed investment in marketing) would yield a total per unit transaction cost of $0.49 (or 30 percent less than the COST ANALYSIS current cost). Even doubling transactions, agents, market- ing and staff needed for network management would The agent channel does not generate any direct revenue lead to a transaction cost reduction (at $0.63 per transac- for Caja Sullana because transactions do not entail any tion). Figure 5 details the decrease in transaction costs as charges to clients. The only type of transaction that gener- the number of transactions increase. ates revenue is bill payment, which is only available at Caja- max agents. In these cases, Caja Sullana keeps the entire revenue. In 2012, Caja Sullana collected $8,216 for 36,635 BENEFITS OF THE BANKING CORRESPONDENT bill payment transactions, or average earnings of $0.22 per CHANNEL bill payment. This is lower than the average commission paid per transaction, which stands at $0.23 + VAT. 1. Increased number of service points in more geo- On the other hand, Cajamax agents require a higher graphic areas: initial investment and have higher annual maintenance In introducing the BC channel, the bank was able costs per agent than is the case with Kasnet. However, the to add many service points. This contributed to the FIGURE 3: Kasnet/Cajamax cost comparison Variable cost per transaction Annual cost per agent •• In the case of Kasnet, 88 percent of the (commissions) cost is variable, with the remaining and 544 12 percent fixed. •• For Cajamax transactions, 61 percent of the transaction costs are derived from 1.33 fixed costs, a much larger contribution 0.71 than is the case with Kasnet. – •• Overall, the variable cost paid per Cajamax Kasnet Cajamax Kasnet transaction is higher for Kasnet agents than the total cost of Cajamax agents. Annual maintenance cost Initial set-up cost Although Kasnet agents provide a great 31,000 number of additional service points that require negligible investment, the cost 20,000 incurred per transaction is very high, 55,285 resulting in 18 percent of the expenses 21,787 and 43 percent of net losses from all alternative channels. Cajamax Kasnet Cajamax Kasnet 8 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: CAJA SULLANA IN PERU Sensitivity analysis – transaction FIGURE 4:   ensitivity analysis – transaction FIGURE 5: S costs as transactions, network and costs relative to the number of investment grow transactions Cost per transaction with various scenarios (USD) Cost per transaction as the number of transactions increase 0.71 0.8 0.71 0.63 Transaction cost (USD) 0.49 0.6 0.4 0.47 0.30 0.37 0.32 0.2 Current Double TXN and Double TXN, – 0 1,000,000 2,000,000 3,000,000 4,000,000 double marketing, marketing, agents, and sta Number of transactions decongestion of branches and improved conve- 6. Reduced risk for cash held at branches: nience for clients. As the risk is outsourced to agents, management con- 2. Reduced cost per transaction: tends that this amounts to effective risk reduction for Transactions at a branch cashier cost $2.24 USD per cash held at branches. tx. By comparison, transactions at Cajamax cost 87 7. Technology developed for banking agents can be percent less; at Kasnet agents, 43 percent less; and leveraged in contingency situations: at ATMs, 68 percent less. Considering indirect costs, When there is a break in the communication systems, the channel generated $458,081 of savings, or ap- Caja Sullana uses the POS devices and the BC network proximately 5.2 percent of the organization’s net it has developed to conduct branch transactions. Do- profit. ing so provides great value to the organization, from 3. Increased liquidity and revenue from additional both the customer service and risk management services: perspectives. Bill payment is only possible at Cajamax agents, and this is the only type of agent transaction at that gener- ates direct income for the organization. In 2012, there CHALLENGES, LESSONS AND were 36,635 bill payment transactions which gener- RECOMMENDATIONS ated $8,216 in direct income along with increased li- quidity being made available to the bank. Challenges 4. Cost savings: The channel generated $458,081 of savings, repre- •• Growing the Cajamax network: Over the last two senting an amount equal to 5.2 percent of the organi- years, Caja Sullana has seen high agent turnover. zation’s net profit. This was mostly due to fraudulent practices among 5. New products developed: agents, such as transaction fractioning. However, the Based on the POS technology of the BC channel, Caja numbers suggest that the revenue streams to agents Sullana developed a product called “Prestafácil” with are still low. Thus, Caja Sullana must be cautious when the the aim of reducing moneylender market share in decreasing agent commissions because doing so market areas. may cause this turnover rate to increase. Overview: Development of mobile financial services in the Peruvian market 9 •• Finding shops suitable to function as agents is not easy. Agent network management – FIGURE 6:  •• Field staff have made a poor contribution in identify- Key components ing and opening new agent operations. •• The communications infrastructure is not sufficient. The country’s Internet/phone coverage is not 100 percent. IT Agent Recruitment Lessons learned support •• Clients need to be educated as regards the reliability Agent network of agent transactions. This is best achieved by bank management Marketing Training staff or through marketing campaigns at branches in which promoters educate clients about the channel. •• Online transactions help to avoid fraud and minimize Monitoring risks. Incentives and risk mgmt. •• Recruiting existing clients as agents is helpful. •• Developing in-house systems, which is to say inde- pendently, facilitates innovation while reducing costs long-term. •• Agent turnover needs to be closely monitored and •• Pointedly introduce products that drive transaction controlled. Ideally, commissions provide sufficient volumes. Organizations must understand specific incentive.Ultimately, however, organizations need to market needs in their operational areas to understand influence agents to identify with the brand; this can what key volume drivers are required. be done by having a good support mechanism plus preferential access to products (for example, preferen- Recommendations tial rates on products). •• Banks can take it for granted that most customers •• Reinforce Caja Sullana client migration as an expedi- will not trust the channel in the initial stages. Low-in- ent in increasing the adoption of the new channel. come clients tend to respond best to recommenda- •• Improve the efficiencies (shown in the graphic below) tions from a trusted source, such as a bank officer with of agent network management in aid of avoiding in- whom the client has an established relationship, fam- creased transaction costs, and a decrease in Caja Sul- ily or friends. lana’s outreach due to agent turnover. 10 MOBILE FINANCIAL SERVICES IN MICROFINANCE INSTITUTIONS: CAJA SULLANA IN PERU Key factors Recommendation Monitoring Automate “transaction splitting”. Agent Support •• Develop more resources to provide agents with better tools for liquidity management •• Provide agents with a transaction/earnings report •• Provide agents with a local contact to assist them in resolving issues •• Conduct detailed analysis to better understand agent turnover drivers; then forge plans to proactively reduce it Marketing •• Strengthen and invest in agent promotion •• Monitor branding of agents Training •• Provide agents extra training on security issues, particularly how to detect false notes, among other topics •• Explore the introduction of a system for on-going and/or refresher training, ideally when new features are introduced •• Organize regular agent meetings to provide them an opportunity to learn from other agents and thereby more easily adopt best practices Increase number of agent transactions •• Add more types of transactions via agents •• Make additional marketing efforts to educate clients about the benefits of the agent network •• Revise the branch staff incentive scheme to include agent performance (number of transactions) as one of the key performance indicators. This should encourage branch staff to extend further support to agents Monitoring channel performance •• Monitor key indicators, such as the number of clients and non-clients using the service and transactions per client and non-client •• Build an allocation-based costing system that conveys a more realistic picture of channel performance