Mobile Payment in Sri Lanka: Market Demand Assessment

1. Mobile Payment in Sri Lanka: Market Demand Assessment Dr. Peter Lovelock Director, TRPC

2. The Study • 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. 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

3. Current Context • 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 • 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) 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

4. Current Context • Formal 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

5. 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 basei.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. 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.

6. 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

7. Mobile Payment Platforms

8. Key Findings Monthly Average Household Expenditure (LKR): • 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)

9. 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

10. Key Findings…Mobile Preferences Mobile Phone Use and Desired Use • 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

11. Key Findings… Awareness of Mobile Money Services Awareness of M-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%

12. Key Findings…M-Money: Drivers Mobile money drivers Demand for Different Type of M-Money Transactions (percent) Drivers: Ease of use, safe handling of money, and wide accessibility –in other words, convenience and security 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

13. Key Findings… M-Money: Constraints Barriers to mobile money • 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

14. Gaps to be addressed

15. Opportunities and Next Steps • Utility 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 • 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 • 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) • 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 • International Remittance • Remittances account for $6 billion (6% of GDP) and via mobile money can challenge existing high-cost or grey-market remittance channels

16. Conclusions • Significant enthusiasm for m-payments but little consistent understanding of demand • Understandingof 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.

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18. Mobile Banking/Payment InteroperabilityScenarios for Sri Lanka

19. 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

20. Value of Interoperable Mobile Transfers National Payment Corporation of India:Interbank v. Intrabank Mobile Transfers Source: NPCI

21. An interoperability framework must accommodate multiple forms of acceptance points, payment methods, and processing systems Transfer Device Fund Source Point of Transaction Transfer Systems Fund Destination Clearing & Settlement Systems Cash Cash Cash Cash Agent POS Wallet Card Account ATM Phone Wallet Account Phone

22. Example: One of many possible cooperation models Scenario 1: Mobile Intrabank transfer Performed as existing ‘on-us’ transaction. Scenario 2: Mobile Interbank transfer Performed through existing LankaClear clearing/settlement, augmented as necessary to support instant transfers Scenario 3: e-Money-to-Account transfer eMoney funds held in escrow purchased/transferred by escrow managing bank to then initiate either ‘on-us’ or interbank transfer Scenario 4: Bill pay Agree to common billing codes conforming to biller’s account number; support directory to map customer’s bill account to bank account. 1 Bank 2 2 Bank 1 Bank 3 LankaClear 4 Bank n Bank 4 Bank 5 Mobile Operator eMoney Escrow 3

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24. Nepal-hampered by no RTGS • 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 Mobile Wallet Bank Account Phone Mobile Wallet Bank Account Must register for sending service before cash-out Mobile Wallet Bank Account Phone Partner Banks Only Mobile Wallet Bank Account

25. 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.

26. Annex: Demographics: Key Characteristics • 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’. Product/ Company- based decisions

27. 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 avmonthly 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.

28. 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. Frequency of top-up (%)

29. Annex: Banking Use & Demand Bank Account Possession by SEC • 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. Bank Account Possession by Household Income

30. 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 Frequency of Usage

31. Annex: M-Money Demand 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.

32. Annex: Mobile Payments • In 2011, the Central Bank enabled a bank-led model and a non-bank-led custodian model with the following guidelines: • ‘Mobile Payment Guidelines No.1for Bank-led Mobile Payment Services’ • ‘Mobile Payment Guidelines No.2 for Custodian Account Based Mobile Payment Services’

33. 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.