Ayala Grabs Leadership in Mobile Banking for Microfinance 122.0

Ayala Corporation has obtained Bangko Sentral ng Pilipinas approval to convert Filipinas Bank into an innovative IT-oriented microfinance bank. The Philippine Star reported this in today’s (10.13.09) issue, BPI forms microfinance, IT-oriented bank.

Global Innovation Leadership for Ayala. I predicted this to happen in my August 31 post, World Class Innovation: Microfinance as an Ayala Blue Ocean 101.0. This represents global innovation leadership in a new category: mobile phone banking in microfinance.

Three Key Components. According to the Star report, the new bank will have authorized capital of P500 million of which P500 million will be subscribed. It ill be 40% owned by Globe Telecoms, 40% by Bank of the Philippine Islands (BPI) and 20% by Ayala Corporation.

Globe, through G-cash Remit, will provide the electronic wallets through the mobile phones as technology enabler and the existing merchant relationships from the pre-paid (load) replenishment for ‘branchless’ banking-type cash transactions. As in Kenya with M-Pesa, the merchants who already service the “load” business of Globe, may be convinced to do cash disbursements to support this new enterprise.

BPI’s role here is to provide the banking input. Having BPI and Ayala as part owner could facilitate banking regulator (BSP) and insurer (FDIC) relations to this innovative enterprise.

Ayala will provide the overall direction and, expectedly, the entrepreneurial input.

Credit Risk and Cost Management. In microcredit lending, typical credit risk management is done in two parts.

First, lending is in standard and small loan packs to spread the risk over a wider portfolio. Cost from credit appraisal, etc. is reduced via standardization.

Second, collections are done daily say at by 9am to match with the earning cycle of the client. If no payment is made through G-cash at that time, the next flag is at 2pm. The loan becomes callable on the second or third day of non-payment. This servicing can easily be enabled by software at the first or second collection time.

To reduce servicing cost, Globe can create software services in monitoring daily G-cash repayments even on an hourly basis that can substantially reduce the cost of face-to-face servicing by the microfinance retailers.

Other Risks. Ayala has to be careful not too bring too much of the big bank mindset to this business or it will fail.

The major operational risk that I see, though, comes from the typical difficulty in managing a two-sided market – the pricing of the service.  Through the G-cash component, the service has elements of a tw-sided market. While the bank has lock-in through G-cash, a wrong price approach viz the channel, i.e. the retail micro-lenders, can the led the channel to seek credible options.

Monopolistic Competition? It is interesting to note that the members of the Rural Banks Association of the Philippines are “concerned that the new bank would compete directly with rural banks and their existing client base using mobile banking,” according to the same newspaper report.

The RBAP should not worry. It does not make commercial sense for Ayala to go into the bottom of the pyramid as they will be a high cost operation.

Leadership. This new Ayala bank will be better off lending as a wholesale banker to the retail lending sector: the rural banks, lending investors and the informal lender, typically the ‘Bombay 5/6′. Being a wholesale banker is what we recommended in our addendum post on September 2 Addendum to Microfinance as an Ayala Blue Ocean, 102.1.

This retail micro-lending sector is borrowing their funds at about 30% per year, i.e. 2.5% per month, and earning about 50% – 70% after taking substantial risk in granting clean loans and the huge cost of daily servicing.

Ayala, in this bank, can adapt the microfinance model in lending to the sector or run risk management like credit card lending, i.e. manage the risk with relatively small but many tranches of standard credit packs say P1m, P2m and PM. The standard packs will also allow for low cost operations in the area of credit verification. It can also follow similar collection modes to match the collection cycle of the retail lender.

Hidden Asset. A further hidden benefit for Ayala will come from the transaction and credit history of all accounts in the whole microfinance sector. In a few years, this credit database will become an important asset to extend Ayala’s leadership into the middle market and related areas like insurance and trade credit finance as the accounts grow bigger.

PLDT and the other leading banks must find a way to compete in this category or Ayala will leapfrog and create a big lead.  Taking the RBAP comment and other risks above there is definitely room for a credible competitor.  For PLDT, all it takes is the acquisition of  good, middling bank to enter the wholesale banking market.

Non-convexity(?!) in Value-Adding. For the Philippines, the potential benefit of extending credit to all nooks and crannies of the country could be exponential in Total Factor Productivity as the multiplier effects in value-adding and money velocity kick in.

There is also a possibility of lower transaction cost with technology-enabler above as well as lower interest rate of bulk credits from BPI to a more professional retail sector. This can result into lower cost of financing for the downstream consumer trading sector.

Win-Win. With a very big bottom of the pyramid, the TC or transaction count at all the palengke, tricycle drivers, etc. is humongous; a P1 per transaction charge can easily translate to billions in one year.

This type of innovation stream is a win-win from Ayala to the consumer as it reduces cost through efficiency and lower risk without necessarily lowering profits.