UNTIL recently, banks have been competing for business by accessing the same middle and high income earners.

With a severely weak banking penetration of around 20 million accounts in a population of 180 million, banks are expanding their operations by catering to a larger and potentially profitable untapped low-income segments by encouraging branchless banking.

On the commercial banking front, the State Bank of Pakistan had made it mandatory for all banks in 2007 to open at least 20 per cent of their new branches in rural areas. But there was still a need to bring up a model that could cost-effectively and more rapidly achieve the purpose of banking the un-banked.

In 2009, the concept of branchless banking emerged, aiming to utilise a target over 131 million people who own a mobile phone in the country. This form of banking tends to cater to the low-income segment that conducts a large number of transactions, though typically of smaller amounts. And instead of undertaking its transactions directly with banks, this segment of the population does so at small retail stores and ‘pan shops’ around the country.

While the industry is still in its early stages, statistics reveal a sizable development of branchless banking so far. For the year ending December 31, 2012, the total number of branchless banking accounts posted a massive annual growth of over 127 per cent, led primarily by Level 0 and Level 1 accounts. Total transactional value showed an annual growth of over 90 per cent, along with 71 per cent growth in the total number of transactions conducted during the year.

A large part of this positive performance can be attributed to the amendment by the SBP in the branchless banking regulations in 2011, to introduce Level 0 category of the branchless banking account, which is the most basic type of account with low Know Your Customer (KYC) requirements and low transaction limits that are fit for a large number of low-income individuals. Other amendments were also introduced that gave more flexibility and ease to agents in account opening and in conducting transactions.

The SBP has allowed experimenting and testing new and innovative models to provide unique means of banking services to the un-banked segment.

The central bank granted pilot approval to one bank that has a distinct branchless banking model, whereby it approaches commercial and low-income segments in the form of booths and provides a wide range of branchless banking services.

The popularity of branchless banking has also taken an upturn look as a means of attaining low-cost deposits and providing banking services post-regular office timings. Based on these, branchless banking activity can be reasonably expected to pick up pace in the upcoming month of Ramadan.

Telecommunication companies also turn to this model to diversify from their reasonably saturated mobile services operations.

Branchless banking has also played a revolutionary role in modernising the process of some payment systems, of which the biggest trends have been observed in the Government to Person (G2P) and Employees’ Old Age Benefit System (EOBI) transactions. What had previously been a cash delivery system has now been revolutionised, whereby individuals can simply cash-out their payments from hundreds of agents around the country. And such bulk payments have shown a huge increase of 96 per cent in number terms and 27 per cent increase in volume terms in Q4’12.

While the above reflects branchless banking as an industry in a high growth phase, a number of facts point out that it might actually be underperforming its true growth potential. Since 2009, only five banks are operating in full-fledged ‘live’ status. And there have been a maximum of two branchless banking entrants in the industry each year. Part of this sluggish rate of entry can be attributed to the slow responsive role of the SBP in first granting the ‘pilot’ stage status and then in granting the ‘live’ status to these financial institutions.

The average transaction size has also reported a low annual growth of 11 per cent to get to Rs4,279 by Dec’12, which maybe a sign that people have not yet developed a strong faith in the safety and security of branchless banking models.

And despite the growth in numbers of branchless banking accounts, only about 27 per cent of agents are able to open accounts, while others face issues in fully completing the digital procedures of Know Your Customer requirements of account opening. Besides this, digital requirements primarily exist for Level 0 accounts, where the account opening form, CNIC and digital picture have to be sent electronically for processing to the financial institution.

Another issue relates to the inflexibility faced by some customers due to deposit and withdrawal limits set by the SBP for each account type. The charging of high withdrawal fee by some financial institutions also acts as a downside and limits the growth of transaction volumes.

Currently, the branchless banking industry is mostly dominated by two large players. However, with the ongoing entry of big banking and telecom names in the still emerging industry, we may see competition heat up to change the dynamics to a whole new level.