Thursday, June 17, 2010

Mobile Banks are cheaper than traditional Banks

A recent study by CGAP provided a price analysis of simple financial services (targeted at the unbanked) in 10 countries. In particular they studied several use cases including sending/receiving money transfers, short-term safekeeping, medium-term savings and bill payments. The primary goal of the study was to compare costs of conducting transactions through mobile banks and traditional banks. The researchers used data from 16 mobile banks (in 10 countries) and 10 traditional banks (in 5 countries). If you don't have time to read through the 60-slides, I summarize some of the key findings below.

Adjusted for PPP, the average cost for the use cases studied was $3.9 per month (the average is computed across the 16 mobile banking services).

Mobile (or "Branchless") banks are 19% cheaper on average: prices are in US$ and are based on one-month usage of a given service.

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The vast majority of unbanked users conduct low and medium size transactions, for which mobile banks are cheaper options. As transaction amounts increase, traditional banks become more competitive. In fact, for transactions that exceed $200, traditional banks were 45% cheaper.

The graph below details the cost differential for money transfers. The lower the transfer amount, the larger the gap between mobile and traditional banks. At a certain transaction size, money transfers cost about the same whether one uses mobile or traditional banks. For larger amounts, traditional banks are cheaper to use:

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The researchers found that mobile banks were 54% cheaper than the "informal" money transfer services found in many developing countries. The cost of money transfer averaged about 3.1% of the funds transferred for mobile banks, and 6.7% for the "informal" providers.

The researchers also compared costs for what they defined to be "high-usage" accounts. These are accounts that included the following transactions on a monthly basis: at least 2 deposits, 2 money transfers, 2 withdrawals, 2 bill payments, 2 balance inquiries, and 2 airtime top-ups. The "high-usage" accounts would be mobile bank users who "transact like typical bank customers" and as such are reasonable as proxies for financial inclusion. The researchers found that compared to a mere 11% for mobile banks, 89% of bank fees are fixed monthly fees! Since most low-income and/or unbanked customers prefer the pay-as-you-go model, most of them gravitate towards mobile banks.

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One could argue that traditional banks have different costs structures that prevent them from competing with mobile banks in acquiring large numbers of low-income customers. The danger is that they may lose such customers "forever". In a recent survey article, I noted that as mobile banks offer more sophisticated products, they stand a good chance of retaining customers who normally would migrate to traditional banks.

In closing, anyone interested in mobile banks should peruse this study. There are several slides that compare the transaction costs AND usage patterns for the 16 mobile banks covered in the study.


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