Mobile Payment in Sri Lanka: Market Demand Assessment

Mobile Payment in Sri Lanka: Market Demand Assessment

Dr. Peter LovelockDirector, TRPC

The Study

Methodology:

• Household survey conducted in Jan-Mar 2013 covering 2,040 households • Face-to-face interviews conducted using a structured questionnaire • Covered spending habits, mobile use, bank access, preference and mobile money demand• Differences across income, expenditure and education levels identified using Socioeconomic Classification (SEC)

system

• 73.2% respondents from rural areas• Average household income: LKR 20,000 - 35,000 • 40.3% of respondents between 15-30 years of age

Reasons for the study:

Lack of reach to the bottom of the pyramid segments: Financial institutions have been limited in expanding their services to reach more people at the base of the pyramid. High cost and limited infrastructure means that more affordable solutions are needed.

Mobile, or branchless banking as a solution: Due to large unbanked population and widespread use of mobile phones, mobile banking offers a new business model and delivery channel, to increase financial access to a wide range of services while reducing transaction costs.

Demand for mobile banking in Sri Lanka:With no proven models of mobile baking in Sri Lanka, this study was conducted to understand the demand for mobile based financial solutions, to help establish the availability of a viable business model for such services in the country .

Current Context• Banking Services:• Access to banking services widely acknowledged to be

high • Financial access in Sri Lanka estimated between 68.5% of

population (WB) to 82.5% of households (GTZ)• 58% of adults of bottom 40% income group have bank

accounts (WB)

• Macro perspective: • By 2012, 33 banks operated 3,378 branches

(16.2 branches per 100,000 people) • Majority of outlets concentrated in the

Western, Central and Southern provinces • One-third of population unable to transact

through a formal institution; with 50 per cent accessing financial accounts only on a monthly basis

Cash is still king in Sri Lanka, and there are significant numbers who would make use of an account if given reasonable access – reasonable in terms of access, price, convenience and trust

Current ContextFormal Financial Account Usage:

• While bank access is relatively high in Sri

Lanka, bank use is relatively low

• 13.7% of accounts inactive in any given

month, compared to 6.6% for South Asia

• 66.7% of account holders make 1-2 deposits

per month compared to 70.5% for South Asia

Alternative Payment Channels:• Cheques and RTGS are effectively the only

non-cash payment methods used on a broad scale – 99% total non-cash value (3rd quarter 2012)

• Penetration rate for debit/credit cards is low • Debit cards: 46% population (10 mill

cards)• Credit cards: 4.3-4.5% of population (1

million cards)

• Mobile banking and tele-banking facilities remain nascent Source: CBSL

Mobile Telecoms

• As of 2013, 5 operators served 22.4 million subscribers i.e. 97% penetration

• Local estimates place the number of multiple SIM users in Sri Lanka in the range 5-20% of base i.e. total subscriber base of 17.3-18.5 million

• By contrast, Wireless Intelligence estimated the rate of multiple SIMs in Sri Lanka to be 2.02-2.04, and the (unique) subscriber base to be only around 9.5 million by 2013 i.e. 41.1% penetration, which suggests limited market penetration. Dialog Mobitel Etisalat Airtel Hutch

7.8

54.7

3.2

1.7

Mobile Subscribers (million)

At high rates of penetration the mobile phone is an ideal alternative access channel for offering services such as financial access – particularly in the case of

remote rural citizens who are otherwise not considered by the banks.

Available Mobile Banking Services• In 2013, 8 domestic commercial banks provided m-banking services in Sri Lanka

• Available services: Range from balance inquiries to paying bills and fund transfers

• Technologies: Range from SMS-based service and USSD to mobile apps for smartphones

• In 2011, the Central Bank enabled a bank-led model and a non-bank-led custodian model

Available Mobile Banking Services (excluding Foreign Banks)

Banks M-Banking Service Technology used Mobile operators able to use the service

SMS IVR USSD App Dialog Etisalat Mobitel Airtel HutchBank of Ceylon BOC Paymate ü ü ü ü ü üComm Bank of Ceylon

Comm Bank M-Banking ü ü

DFCC Bank Mbanx ü ü

Hatton National Bank

Hatton Mobile Banking ü ü ü ü ü ü ü

National Development Bank

eZ Pay ü ü

Nations Trust Bank

Nations Mobile Banking ü ü ü ü ü ü

People's Bank People's M-Banking ü ü ü ü

Sampath Bank Sampath Mobile Cash ü ü ü ü ü ü ü üSeylan Bank ü ü ü ü ü ü

Mobile Payment PlatformsIntroduced by Dialog in 2007. Provides m-payments, m-banking,

and m-transfer

Introduced by Dialog in June 2012. Dialog users can pay utility bills and transfer money even without a bank account

An ICT software and service provider for the health sector

SMS-based out-of-band payment solution provider with bank and mobile operator interoperability

JV between zMessenger and Ambiq Technology, positioned to be the “ideal platform” for NFC services in Sri Lanka

SMS-based out-of-band payment solution provider. A key feature is bank and mobile operator interoperability

Central clearinghouse, undertaken the common mobile and EFT payment switch rollout; including mobile payments

SkyPay branchless banking solution by OpenArc, including m-banking/m-payments

POS-based branchless banking module by EpicLanka, based on owning 90% of all POS machines in the country

Key Findings

• Food, shelter and education comprise >50% monthly expenditure• Telecom expenditure the 4th largest spend item (6.1%)• Average mobile phone costs (LKR1,201.65) almost identical to average utilities expenditure

(LKR1,209.06)

Monthly Average Household Expenditure (LKR):

Key Findings• Mobile phone ownership:

• 94.7% own only one mobile phone with far less multiple phone account usage than usually the case in rapidly growing emerging economies

• Higher ownership of smartphones by rural than urban respondents

• Mobile usage:• Over-the-air top-up of mobile credit with 70.8% of usage• >15% respondents already share e-credits with friends and peers• Illustrates high familiarity with mobile credit transfer• Notably: a large gap between demand and use for m-banking, m-pay and remittance

• Usage of banking services:• Bank account ownership high: 88.2% including 80% of lower income• 20% of least developed still without a bank account• Majority of bank accounts being used only once a month or less

• Use of non-cash payments:• Only 16.8% own a debit card; 4.1% own a credit card. • Main purposes of card use: withdraw money for cash, shopping bill payments

Purpose of using a debit card by SEC (percentage)

This presents a substitution opportunity for mobile payments solutions

Key Findings…Mobile Preferences

• Demand for mobile social media and entertainment stood out with >10% demand

• Of greater note: the gap between actual use and wanting to use mobile banking, remittance and payments

• Almost equally true across all demographics suggesting a strong and, as yet, unmet demand for the services

• Currently there is greater use of mobiles for remittance (3.5%) than for m-banking (1.7%); not surprisingly demand is greater across lower segments

• Money received through remittance is mostly (52.7%) for personal or emergency needs, which means timely transfers of money are important

Socioeconomic Class

A B C D E

Make callsUsing 100 100 100 100 100

Desiring 100 100 100 100 100

Text messagesUsing 63.3 61.1 61 53.1 50.2

Desiring 68 63 65 55 55

EntertainmentUsing 27.5 21.2 19.3 18.3 19.1

Desiring 26 27 20 21 15

Social MediaUsing 13.7 9 7.5 4.8 4.3

Desiring 15 16 13 12 9

M-bankingUsing 2.1 2.3 1.7 1.1

Desiring 13 10 8 7 5

RemittanceUsing 0.6 3.6 3.4 2.8 1.6

Desiring 18 13 12 14 14

Make payment

Using 1.3 3.4 1.9 0.9 0

Desiring 11 9 7 8 8

Mobile Phone Use and Desired Use

Key Findings… Awareness of Mobile Money Services

• High awareness: 63.8% had heard of and were aware

• But, only 2.1% aware that they were using any m-money services

• Confusion in understanding

• eZCash: 2.4% aware, eChanneling: 0.2%, int’l remittances: 0.1%

Person-to-Person fund transfers 71.3

Bill payments 63.9

Purchases 21.6

Banking 17.1

Air time top-up 15.5

Loan application 6.3

eZ Cash 2.4

eChanneling 0.2

Receive money from abroad 0.1

Awareness of M-Money Services (%)

Key Findings…M-Money: Drivers

A B C D E Total (%)Ease of use 144 251 517 199 86 59.1Money security 108 188 379 149 81 44.6Awareness of the service 70 123 307 115 52 32.9Wide accessibility 26 62 136 58 43 16

Mobile money drivers

Drivers: Ease of use, safe handling of money, and wide accessibility –in other words, convenience and security

Demand for Different Type of M-Money Transactions (percent)

Note: SEC split for total population = SEC A 10%, SEC B 20%, SEC C 45%, SEC D 18%, SEC E 7%. For example, as per above table, 1.3 mio of Sri Lanka’s population falling into SEC A, demand to pay utilities through M-Money

Key Findings… M-Money: Constraints

Barriers:• Low ‘awareness’, lack of need, lack of trust, system difficulties, availability and

affordability• All are perception issues and thus subject to change with experience• Awareness, education and relevance can all be addressed through targeted intro of m-

money technologies

Barriers to mobile money

A B C D E Total (%)Lack of need 37.2 39.5 38.8 36.3 36.4 68.6Awareness 30.7 30.5 30.3 32.6 31.9 55.7Trustworthiness 9.1 8.3 10.8 7.1 4.8 16Difficult to use 4.8 8.1 6.3 8.6 9.3 12.9Availability 9.8 5 5.2 7.1 7.9 11.3Affordability 6.2 6.6 5.5 6.9 7.3 11.2

Gaps to be addressed

Communication between key players• Small market; too

much fragmentation undermines economies of scale .

• Extensive misunderstanding, disinformation and lack of clarity on what key players are doing, what’s demanded, what ‘s possible, what ‘s an opportunity

Understanding of mobile payments (as opposed to general ‘awareness’)• ‘How do I use the

service?’ ‘Why should I use the service?’ ‘What are the benefits?’

• These are not clearly understood

Identifying key pockets of demand• How much

investment required to commercialise and to be able to scale to sustainability?

• Robust answer required if a mobile payments ‘ecosystem’ is to be built, rather than single closed loop payments solution

Pricing and ROI• ‘How much should

the service provider charge for mobile payments services?’ ‘How much could the market bear?’ ‘If fees are too low how can ROI be achieved?’

• Models and existing best practices needed to accelerate current efforts and investments

Opportunities and Next StepsUtility Payments• Encompasses payment of government

bills, public transport, water bill s, airtime, utilities, car parks, insurance premiums, MFI transactions, payroll distribution, trishaw rides and fuel bills

• One challenge is partnering with the state run utilities sector

Regulatory Clarity for Branchless Banking • Providers unclear on how to service the

branchless bank opportunity. New guidelines on modes of branchless banking helpful

Targeting the Underbanked • Banks in general view mobile payments as

more appropriate to the middle income market, (exceptions: Lanka Orix)

• Unintended consequences: small businesses use eZ Cash to fill a transactions gap (Dialog)

International Remittance • Remittances account for $6 billion (6% of

GDP) and via mobile money can challenge existing high-cost or grey-market remittance channels

Agent Networks• Distinction between where they can and

cannot be used for ‘payments’ remains unclear

• Develop a programme for outsourced agent networks as part of overall market development

• Encourage long-term thinking in the development of an agent network business to develop as a separate business creating service agent deployments for other providers

eGov Services and Payments• Very low uptake due to low awareness.

Requires buy-in from the top and expansion of services for effective take-off. E-pension, e-local government and e-foreign worker are some of the services that the ICTA is looking to implement

Conclusions

• Significant enthusiasm for m-payments but little consistent understanding of demand • Understanding of mobile payments by Sri Lankans should not be taken as a given even where awareness

presents as relatively strong

• M-payments ecosystem fragmented and in flux • Institutional partners often not promoting m-payments; pride and a lack of information appears to prevent

companies from working with each other

• M-payments ecosystem likely to continue to emerge organically• Key question is whether that will enable traction or economies of scale

• Growing recognition that m-payments addresses existing payment gaps • Paying for public services online, transportation, etc. • Integration with e-government services could be established

• Central Bank seen to be supportive of development, and inclusive in its process, but further clarity on what players are allowed to do would be beneficial

Sri Lanka is still largely a cash-based economy; vast majority of transactions carried out in cash. Mobile payments uptake is increasing but much needs to be done for

mass adoption of such services to take place.

Thank you

Mobile Banking/Payment InteroperabilityScenarios for Sri Lanka

Interoperability is considered critical to mobile banking mass adoption

• To be widely accepted and used, must be as fungible as cash

• While mobile operators are initiators of mobile money, not drivers of interoperability due to business model conflicts

• While transfers are a fundamental starting point, banks are most suited to financial service diversification

Value of Interoperable Mobile Transfers

Source: NPCI

National Payment Corporation of India:Interbank v. Intrabank Mobile Transfers

An interoperability framework must accommodate multiple forms of acceptance points, payment

methods, and processing systems

Cash

Card

Phone

Cash

Account

Wallet

Cash Agent

POS

ATM

Clearing&

SettlementSystems

Cash

Wallet

Account

Transfer Device

Fund Source

Point of Transaction

Transfer Systems

Fund Destination

Transfer Device Fund Source Point of Transaction Transfer Systems Fund Destination

Supporting multiple transfer devices can cover a broader range of use cases and leverage existing network investments such as initiating ATM withdrawals via a mobile phones

Fund source interoperability, typically encompassed in “product interoperability” is compounded by need for different source (i.e. a mobile wallet and a bank account) compatibility as well as different issuer compatibility.

Cash agents are a key focal area of mobile payment and banking interoperability policyBanks who are able to leverage existing payment network arrangements have the opportunity to extend the value of this infrastructure to mobile transactions.

Challenge to broader interoperability has been to resolve interconnections with closed loop mobile payment/wallet systems typically run by mobile operators and non-bank financial institutions

The counterpart to fund source, product interoperability has important implications for scale and usage. Workarounds provide interim partial solutions such as mobile payments that send a unique “cash out” PIN and cumbersome multistep methods of wallet-to-account-to-account

Phone

Example: One of many possible cooperation models

LankaClear

Bank 1 Bank 3

Bank n

Bank 5

Bank 4

Bank 2Scenario 1: Mobile Intrabank transferPerformed as existing ‘on-us’ transaction.Scenario 2: Mobile Interbank transferPerformed through existing LankaClear clearing/settlement, augmented as necessary to support instant transfersScenario 3: e-Money-to-Account transfereMoney funds held in escrow purchased/transferred by escrow managing bank to then initiate either ‘on-us’ or interbank transfer Scenario 4: Bill payAgree to common billing codes conforming to biller’s account number; support directory to map customer’s bill account to bank account.

1

2

eMoney

Escrow

MobileOperato

r 3

4

Thank you

Nepal-hampered by no RTGS

MobileWallet

MobileWallet

Bank Accoun

t

Bank Accoun

t

MobileWallet

Bank Accoun

t

MobileWallet

Bank Accoun

t

PartnerBanks Only

Phone

Phone

Must registerfor sending service before cash-out

• Nepal system supports strong linkages between wallet and account products with two-way transfers, easing cash-in to wallet at retail level and transfer from wallet to account via mobile action.

• Non-interoperable wallets do create confusion and difficulty to compete with cash; customers need multiple wallets to transact with all and cash agents may/may not serve multiple wallets

• New initiative, M-Nepal, aims to address this challenge as well as interbank transfer limitations in country

Annex: Demographics: Survey Respondents

• Survey covered 2,040 households

• Households used as primary unit

• Respondents required to own and use a mobile phone.

• Differences across income, expenditure and education levels identified using Socioeconomic Classification (SEC) system• 43.7% within SEC C.

• The lower the SEC, the higher the rural representation.

• Fairly wide range across household income.

Province District Urban Rural

Western 588 229 359

Central 260 56 204

Southern 265 60 205

North Central 120 11 109

Sabaragamuwa 184 37 147

Uva 134 11 123

North Western 231 30 201

Eastern 160 61 99

Northern 98 52 46

Total 2040 547 1493

SEC Frequency Split (%)

Number Percent Urban Rural

A 232 11.4 38 62

B 386 18.9 29 71

C 891 43.7 30 70

D 348 17.0 17 83

E 183 9.0 10 90

Total 2040 100 100 100

Product/ Company- based decisions

• For the majority of respondents (69.1%), the main source of income is full-time employment,

• The father/ husband was usually the person in charge of expenditure decisions.

• The male/ female split was fairly even and most respondents lived in families of 4-6 persons, with an average monthly income and expense range of 20,000-35,000 Sri Lankan Rupees.

• The majority of respondents were in the 15-30 year bracket, skewing survey results slightly ‘young’.

Annex: Demographics: Key Characteristics

Annex: Demand Characteristics• Not surprisingly, basic requirements of food, shelter and education take the top 3 places

and by themselves comprise >50% of average monthly household spend.

• Telecom expenditure cumulatively (fixed line + mobile bills) comes in 4th, with the mobile component being more than half. Telecoms spend = 6.1% of av monthly spend.

• Interestingly, the proportion of budget put aside each month for savings according to survey respondents – LKR2455.64 – would have come 4th on this list.

Food / g

rocer

ies

Rent o

r mortg

age

Educati

on

Phone bills

Transport

Durable g

oods

Clothing & te

xtiles

Alcoholic

& tobacc

o

Health ca

re

Fuel &

light

Utilities

Enter

tainmen

t & cu

lture

Personal

care

Non-alco

holic beve

rages

Household go

ods & se

rvices

0

2000

4000

6000

8000

10000

12000

Annex: Mobile Usage• Scratch cards are the most used form for top-

ups, but OTA top-up use rising rapidly and now accounts for 70% respondents.

• Average top-up frequency: once a week;

• Some 7.5% respondents top-up every day.

• Average top-up amount = LKR51-100 pm.

What this means: • Familiarity of mobile money already exists broadly;

• When built upon behavior already prevalent services take-up looks likely to be dramatic;

• Healthy nascent demand for m-transfers already emerging; and,

• Mobile carriers have significant room for reducing costs by shifting the market over to OTA top-ups.

Daily 8.2

2-3 times per week 35.6

Once a week 39.1

Once every 2 weeks 11.3

Once a month 5.4

Once every 2-3 months 0.1

Don’t know 0.3

Frequency of top-up (%)

Annex: Banking Use & Demand

• Of 2040 households, 88.2% had a bank account, with 94% of the top socioeconomic bracket banked, and 80% of the SEC E bracket banked.

• The higher the income class the higher the bank penetration rate.

• Numbers skewed somewhat because of Samurdhi accounts – with 14.1% of respondents having a Samurdhi (or Samurdhi-style) account, most of these being at the lower ends of the socioeconomic segments.

• 20% SEC E still without a bank account

• While ~ 40% without a bank account are living on household income <LKR20,000 pm, 4.6% living on household income <LKR10,000 pm.

A B C D E TotalBanked 94 89 88 87 80 88Without bank acc 6 11 12 13 20 12

Bank Account Possession by SEC

<10,000 10,001-20,000 20,001-35,000 35,001-50,000 50,001-75,000 TotalBanked 72% 81% 89% 93% 93% 88Without bank acc 28% 19% 11% 7% 7% 12

Bank Account Possession by Household Income

Annex: Unbanked or Underbanked?

• Sri Lanka comparatively well banked.

• How active are those bank accounts?

• How well are they fulfilling the demands of a rapidly growing society?

• Bank accounts predominantly used for savings.

• Savings, withdrawals, and pawning are key uses of bank accounts,

• To a lesser extent: fund transfers and remittances.

• Most accounts used only once a month or less.

• Suggests that banks are not used for purchase transactions or to facilitate the flow of funds

Daily Weekly Bi-weekly Monthly <Monthly

Savings 0.3 1 2.4 52.3 39.6

Withdrawals 0.1 3.8 10.9 40 39.4

ATM card use 2.8 18 27.3 33.3 15.4

Pawning 0 0.5 0.9 4.5 88.9

Debit card use 1.7 14 28.5 39.6 13.6

Funds Transfer 5.6 5.1 6.6 36.7 38.8

Remittances 1.6 8.4 4.7 47.1 26.2

Frequency of Usage

Annex: M-Money Demand

A B C D E Total

Pay utilities 64 55 53 53 45 54Remittances 35 34 32 33 30 33Other retail payments 34 29 31 31 29 31Fund transfers 26 23 20 21 20 21General payments 18 16 16 15 15 16Phone bill (fixed line) 16 12 11 12 5 12Government payments 7 9 8 15 13 10Mobile bill 17 8 7 7 6 8Pay TV 6 8 5 7 3 6Public transport 7 6 5 4 5 5B2B payments 5 6 4 5 2 5Payroll 6 5 4 3 2 4

Microloan repayments 4 4 3 6 2 4

Demand for Different Type of M-Money Transactions (%)

Mobile money services demanded by respondents that would drive adoption are utility payments, remittances, retail payments and phone bills.

Annex: Mobile Payments

• In 2011, the Central Bank enabled a bank-led model and a non-bank-led custodian model with the following guidelines:

i. ‘Mobile Payment Guidelines No.1 for Bank-led Mobile Payment Services’

ii. ‘Mobile Payment Guidelines No.2 for Custodian Account Based Mobile Payment Services’

Annex: Mobile Payments Definitions

Understanding the various definitions relating to mobile banking are important:

Mobile banking (m-banking): refers to financial transactions undertaken using a mobile device against a bank account accessible from that device;

Mobile payments (m-payments): point of sale or remote payments made through a mobile device;

Mobile money transfers (m-money): the ability to move stored value from one account to another account using a mobile device;

Mobile wallets (m-wallet): an electronic store of value linked to the mobile number or mobile account. They do not require the holder to have a bank account, and can also be used as a payment instrument and a transfer instrument.