China – The Future Leader in Branchless Banking for the Poor?

One out of every five people in the world using mobile banking today lives in China. Leading microfinance experts agree with official estimates that nearly every household in China has access to a bank account. The high level of banking penetration is largely driven by government insistence that government transfer payments and subsidies, including agricultural subsidies and medical insurance for the poor, are channeled through bank accounts. 

According to a recent study by CGAP and the World Microfinance Forum on financial inclusion, the leading state-owned banks including the Postal Savings Bank of China and the Agricultural bank of China boast unthinkable numbers of retail bank accounts, at 475 million and 320 million, respectively. One out of every three Chinese holds an account at one of these two banks. The utility of these bank accounts, however, is the real question for those interested in financial inclusion. There is a clear recognition that poorer families, particularly those in remote areas, have trouble accessing accounts and use them mainly for encashment, which can often require costly travel to bank branches or ATM in distant cities and towns.

A farmer looks from in between a corn field

The Chinese government and both public and private sector players are now embracing branchless banking alternatives to increase accessibility and utility for millions of low income people, particularly in Western and Central China’s less developed areas.  In 2011, the People’s Bank of China launched agent banking pilots with leading banks and mobile network operators, which quickly built out networks of over 500,000 merchant agents processing cash out only, utilizing POS terminals and bank cards. 

China’s fully interoperable POS system, run by China Union Pay, the national payment gateway, has facilitated this rapid growth, but operational challenges do exist and business models have yet to be honed. The Chinese regulator is just beginning to look at options for cashing-in at agents, a critical element of improving the value of accounts for the poor.

A separate and exciting technological innovation gaining momentum in China being driven by the private sector and working with smaller financial institutions is the SIM overlay technology pioneered by Shanghai-based tech company F-Road, an IFC investment.The sim overlay consists of a paper-thin plastic sheet with an embedded chip that can be adhered to the top of any sim card.  Touch points built into in the overlay filter information between the two layers. The hardware provides a means to store and carry any program logic independent of the sim, allowing F-Road partner banks to provide the solution to their clients, regardless of the sim they carry, while minimizing communications costs driving mobile banking functionality for customers through a simple, telco-agnostic technology.  

Sim overlay technology was initially developed by Chinese MNOs nearly a decade ago as a mobile phone solution to support multi-operator access, designed to avoid roaming fees. A successful Canadian company, Roamly, uses this technology for the same purpose today globally. F-Road claims to be the first company to use the solution for financial services. 

F-Road offers the solution to smaller banks, including City Commercial Banks, Rural Commercial Banks and Rural Credit Cooperatives, some of which have millions of end clients. After four years of work, F-Road serves nearly 650 financial institutions across China with its sim overlay product, reaching 4 million active clients.  The growth curve is picking up, with partner banks onboarding 20,000 new clients per week.  F-Road estimates that it will reach 7 million active users by the end of 2013.

A key difference between the F-Road product and the majority of mobile banking services on offer in China is its use of the SMS channel, rather than mobile applications over internet.  Although many FRoad clients initially took this to be old-school technology, it has key advantages of being operational on 95-97% of both smart and functional phones and has security advantages over internet channels, which are under constant hacking threat in China.  To use the service, the client pays only a standard text fee for messages sent, not received.   F-Road on-boards partner banks through detailed process which includes installing the system at each bank and then training both management and line staff in technical implementation of the product, as well as how to market to clients who will most likely be active users.  F-Road clients pay up front per overlay during the first year of the relationship, so active use is important for the banks to recoup their investment.  After the fiChinrst year, the bank and F-Road share revenues, building a strong partnership between the tech provider and its banks.

We talked with F-Road about the use of its solution by low income clients. F-Road is unique in that it includes service to Rural Credit Cooperatives, which are acknowledged as the key market players reaching the poor, collectively serving 73 million people in rural areas throughout China. Because the solution works on functional phones as well as smart phones, it is more accessible for the poor than standard mobile banking applications.  Preliminary research indicates the main users for mobile banking among F-Road clients’ banks are micro and small enterprise owners, who use the channel to pay suppliers and make payroll, as well as for ecommerce and mobile payments, where the entrepreneurs buy wholesale goods online via mobile from online giants like Alibaba and its TaoBao platform.  

China has immense potential to utilize branchless banking to drive financial inclusion, but it is still early days of piloting, trial and learning, despite the numbers already on record. New steps in agent banking, mobile banking and emoney must be supported by meaningful products and business models that serve the real needs of the poor in order to drive a whole new phase of rural growth and poverty alleviation.

-------- The author is a consultant with CGAP in East Asia.