Electronic Payments in Pakistan (Part II)

 

Original Publication

This article was first published in January 2009 edition of CIO Pakistan.

Preamble

This is second in the four part series covering the subject. In part I we set the stage - defining consumer electronic payments, channels through which it is conducted and trends in local industry. Search CIOPakistan.com for ‘ePayments’.

In this issue we discuss the role of popular Alternate Delivery Channels - ATM, Internet and Call Centres. We discuss the supply and demand in both developed and developing economies, and make recommendations on way moving forward for the Pakistani banks.

ATM

In 1939, world’s first mechanical cash dispenser installed in New York by City Bank of NY (now CitiBank) was actually removed due to lack of consumer interest. The experiment was repeated in London by Barclays with an electronic dispenser in 1967. Forty years later, there are estimated 1.7 Million around the world. These machines are ubiquitous – from Antarctica to large Navy ships.

World-Wide ATM Statistics & Trends

Developed Economies:

Interestingly, half the world’s ATM machines are installed in 2 regions where the e-payment systems are most sophisticated. The US has over 400,000 ATM machines & Western Europe has 350,000. However, as saturation point reaches, highlighted by decreasing revenue per ATM, growth rates have slowed too.

In terms of ATM networks or switches, there is a very healthy competition. For example, the US has 40 networks that are independent to set their own policy for interchange and switch fee. The largest bank-led network belongs to Bank of America with over 17,000 machines in the US.

In terms of deployment strategy, half the ATMs in US & Western Europe are deployed by Independent Sales Organizations. ISO installs an ATM and lease it out to retail outlets. The retailer collects revenue from ATM fee of $1.50 - $2.50 per transaction. On average, a retailer collects $200 - $1,000 from an ATM and the monthly lease and communication costs are $150 - $500. How many outlets in Pakistan would like to see this kind of additional revenue?

Developing economics:

There is extremely low penetration in developing economics. At the end of last year, India had approximately 32,000 and China had 130,000 ATM Machines (see ATM density chart for population normalization). However, the growth rates here at more than 20% annually. The markets are dominated by very few switches, and concept of ISO is in nascent stages even though it is a proven business case in the West.

Pakistan

At over 30%, Pakistan has highest growth rates for ATM installations in the world. This growth is however threatened due to industry slowdown as well as consolidation through M&A activity. This is not great news considering our ATM density is one-fiftieth of the West and even one-fifth of China. See the graph for better comparison.

ATM P&L Analysis

Cost:

Unlike ISO which are highly profitable, banks lose money on ATMs everywhere, with US average loss of $250 per Bank run ATM. Then why do they continue to invest? In the words of a Wells Fargo Executive, ‘The truth is, if I didn't have ATMs, I wouldn't have customers”. Over 40% consumers list ATM availability as their first priority in selecting a bank.

So what does an ATM cost? The cost elements are:

  1. Software license fee
  2. Hardware depreciation and maintenance fee
  3. Communication costs
  4. Cash Management
  5. Security, Electricity and Real Estate
  6. Switch and Interchange fee

 

Even by conservative estimates of several bank managers, monthly ATM costs average PKR 50,000 – 100,000 per ATM. The wide range suggests different banks have different efficiency levels in their purchasing and operations. Where does your bank fall within this range?

Revenue

On the revenue side, an average ATM sees 65 transactions per day or 2,000 per month, of which 70% transactions by bank’s customers generate zero revenue. Hence monthly revenue is below PKR 10,000 per ATM. Did someone say peanuts?

 

This brings the losses to PKR 40,000 to PKR 90,000 per ATM. Transactions per ATM are also stalled for last many quarters. So revenue is not increasing while cost increases due to devaluation, higher electricity and insurance costs. No wonder banks call ATM their biggest loss leader.

So what can banks do?

Clearly, it is a necessary investment particularly for consumer banking, and there is a strong demand which seems to have gone untapped. So banks can either reduce costs or increase revenue. How?

Reduce cost:

  1. Stop building your own little paradises. Outsource your ATM infrastructure – when a contractor will manage 1,000 ATM on behalf of 10 banks, they will be able to reduce costs by 20-40% compared to 10 banks running their 100 ATM networks. This will require banks to co-operate on contractor selection. Can they cooperate?
  2. Small banks should not even invest in ATM. Instead, they should attract customers by allowing them to use any ATM in Pakistan for free. Say 25,000 consumers use ATM 3 times a month. For 75,000 transactions bank reimburses a Million rupee, equivalent to running 10-20 ATMS. But now their consumers can use 3,000+ ATMs instead of 10 or 20.
  3. Eliminate ATMs and use Branchless Banking to reduce your monthly costs from PKR 100,000 to PKR 10,000 per location.

Increase traffic and revenue:

65 transactions per ATM per day compares palely to high volume ATMs that see 300+ transactions in some city locations in Pakistan and West. Banks can:

  1. Allow other uses of ATM, some of which may not even require an ATM card, but use ATM as a kiosk. Some examples are:
    1. Bill payments and charge extra for convenience
    2. Traffic tickets and make money on challan fee
    3. Coupons for each withdrawal, make money on those 70% free transactions
    4. Airtime purchase of higher values – make 15 Rupee for each 500 rupee card
    5. Tuition fee – charge 0.5 or 1% of the value transferred
  2. Invest on ATMs in retail outlets. This will reduce costs related to security & electricity while increasing traffic and marketing potential of ATM. Again, use of ISO and Branchless Banking should be explored.

Internet Banking (IB)

The first web-based IB applications came in early to mid 90s. At first these provided informational services but by 1998, many were providing domestic and international fund transfers and bill payments. By 2000 these were standard features for any bank in the West. Now these systems provide all services provided in at a branch - mortgages, auto loans, payroll, brokerage, IRAs, 401K, etc.

In Pakistan, 75% of the surveyed banks offer IB. However, some provide informational banking only yet others provide intra-bank transfers and 5 utility bill payments. That’s as feature rich as it gets. Why are we offering what others offered 15 years ago?

Trends

The future for IB is very promising. For informational banking, the growth last year was 100%, with daily volumes growing from 9,000 to 19,000.

Transaction volumes grew at 50% last year from PKR 8.3 Billion to PKR 12.2 Billion. An interesting element is amount per transaction; compared to average ATM withdrawal of Rs. 6,500 and average POS transactions of Rs. 4,000, IB averages at Rs. 33,000. This suggests that many higher value corporate transactions are taking place. What can banks do to attract small consumer transactions?

Internet Merchants

E-Commerce numbers of Pakistan are dismal. With 10 Million internet users and 6 Million debit/credit cards, there are a total of 19 Internet Merchants with monthly processing of PKR 30 Million ($ 375,000). Waqar electronics in Karachi does more business every month. Internationally, compare this to monthly sales of $ 1.5 Billion by just Amazon.com. Why stake-holders have not encouraged this mode of payments?

So what can banks do?

Banks need to increase traffic and transactions by bringing offline processes online.

  1. Be brave and offer more services. Bring many of the offline processes online. Bill Payments, Account opening, Auto Lease, Mortgages, Cheque book, ATM renewal, Credit cards – create secure front ends to legacy applications your bank is already using in-house.
  2. Offer special products for the huge SME sector. For example, there is no reason not to offer online payroll if internal fund transfer is already offered. Similarly, Insurance payment for employees, Bulk Bill payments for post-paid mobile connections and Auto Lease for company cars are also very simple processes to move online. Accountants will love you for making their life simple, and CEOs will have fewer checks to sign! It’s also a good policy to go Green.
  3. Grow E-Commerce! This needs collaboration between Insurance companies, NADRA, NR3C Credit Bureaus and Banks. They need to provide an eco-system which encourages consumers to pay electronically and merchants are not penalized for fraudulent transactions. Digitization of economy is our responsibility in this digital age and we owe this to ourselves.
  4. All bills should be electronic – introduce Bill cards along the lines of Telco prepaid cards. Consumers pay their own bill through cell phone and Bill cards.

Think about it – Banks in the West did these 10 years ago, and we have access to same security and technology vendors as they do.

Call Centers

Almost all banks in Pakistan now have a 24x7 call centre. The services provided vary depending on deployed technology and use cases. Some provide informational banking – so support on product information and transactions. Others allow automated PIN reset and fund transfers to bill payments.

Trends

Consumer’s use of call centre for informational banking has grown by only 5% over the last year. This compares to 100% growth in IB. For transactional banking, volumes have gone down from PKR 2.7 Billion to 2.55 Billion (negative 5%). Average transaction value has also decreased by 15%.

A dying horse? Perhaps; but let’s see what over the counter drugs can do!

So what can banks do?

  1. Do a complete BPR or hire someone to do it for you. Stop investing in your Call Centres and IVR. If I need to buy a 100 rupee scratch card, I will not use your 10 Million Rupee IVR system. If you are already invested, sell it to some BPO in Vietnam or Philippines.
  2. Have a friendly person pick up the phone within 5 rings when we dial the UAN. Five out of 6 calls are for information. Make those 5 people very happy. The 6th can be routed to a more specialized transactional desk.
  3. Last but not the least; stop your telemarketing teams from calling the same customer twice. It’s a simple excel formula; do it and you will make your employees and consumers less frustrated. Your phone bills will also be smaller.

Following these suggestions can easily reduce the CAPEX by 90% and OPEX by 50%. Consumers will be happier, calls will be shorter, lines will move fast and your ROI will smell better than a dying horse.

Next Month

In the third part, we look at the plastic industry – the cards and associated POS. And in the fourth & final part, we focus on branchless banking, allowing for banking through retail outlets.

About the Author

Farzal is passionate about delivery channels – from Branchless Banking and 24x7 Direct Insurance to Mobile Multimedia and Social Networking. He has worked at 4 start-ups in addition to Merrill Lynch and BearingPoint. He is a Director at amaana, teaches E-Commerce at IBA, consults professionally and lives at farzal@ciopakistan.com