In the recent MasterCard Foundation Symposium on Financial Inclusion in Accra, I was asked to participate in a debate, arguing for the proposition that “disruptive innovation is no longer relevant to the needs of the poor.” Not easy for someone who has been deeply involved with optimising the delivery of digital financial services (or electronic banking as we called it then) since 2004, and in the M-PESA beta and pilot-tests in 2005. However, in preparing for the debate, several of my growing concerns were clarified. It became clear to me that we really do risk setting up a digital divide – and that we need to be thinking about this now, both as a development issue and as a commercial opportunity.
Six Drivers of the Digital Drive
To remind readers who have not read my original blog on this, here are the six key drivers of digital exclusion in emerging markets:
- In most rural villages there is inadequate infrastructure (electricity, mobile towers, etc.) to support fintech.
- Among poor households (including urban ones), there are few smartphones, and even the feature phones are largely owned by men.
- More than 1 billion people globally (spread across rural and urban areas) cannot read, write or understand the long number strings necessary to transact on mobile phones.
- Fintech providers have made little effort to tailor interfaces or use-cases for the low-income market.
- Furthermore, villagers value personal relationships – particularly when it comes to money. They will not trust technology that they do not understand for anything except very basic payments.
- Finally, it is quite clear that to date, the regulatory environment and consumer protection provisions remain too weak to provide security to the poor (and indeed many of the not-so-poor).
The 7th Overriding, Commercial Driver
There is, of course, a seventh driver of digital exclusion: the commercial perspective. Financial service providers and fintechs – entirely appropriately, given their responsibility to shareholders – must focus on the easier-to-reach and more profitable market segments first. And because of the widespread problem of financial exclusion (even amongst relatively affluent people), there are many opportunities for them to do this. Indeed, it is possible to profitably serve under/unbanked customers in geographies and markets that do not present the six challenges outlined above – or at least not the first four. So we can expect the commercial players on which we depend to deliver scale to focus on these easier-to-reach market segments – doing so makes commercial sense
The Clear Blue Water Oppportunity
However, this focus away from the more rural and poor urban communities means that any providers that do make efforts to reach these market segments will be swimming in the clear blue water on the other side of the digital divide. These markets will sometimes (but by no means always, given the omnipresence of the oral segment) be more difficult to reach and serve profitably – but digital financial services are, in many ways, a volume game. So carefully managed scaling into these communities has the potential to allow deep-pocketed and patient providers to generate good returns in territory that is largely not competed. If providers develop products and channels that meet the needs of these people they will be repaid with fierce customer loyalty. This has been well-demonstrated in Kenya by the rise of Equity Bank from a client base of 109,000 to over 11 million over the past 16 years – despite its crowded banking halls and occasional system outages. And this could be very important as a plethora of providers compete in the red shark-pool of the easy-to-reach, literate markets. But it will require a longer-term vision than most providers seem willing to entertain.
Agents are Key
To address rural and poor urban communities, providers must focus on leveraging the agent networks that serve so many digital finance users. Agents are widely trusted members of the community (indeed they should be recruited on this basis or they will probably fail) and often important opinion leaders and sources of guidance. By way of example, and possibly as a result: In Kenya, even after a decade of M-PESA, about half of users (66 percent of women and 34 percent of men) still seek agent assistance with transactions. Furthermore, in more mature markets at least, the majority of agents operate out of markets and towns where there is both electricity and 3G coverage. For the urban oral and poor segments, access to agents is not a constraint, and rural people often go into these markets to trade, meet, pay bills and seek a range of services. Many of these services can be delivered by the agent, particularly if next-generation agents bundle a range of agricultural, heath, bill pay, e-government and other services.
Ultimately we do, of course, need to encourage “cash-lite” and maximum user-initiated transactions to keep money digital. But in the short/medium term, the oral segment (and many others) will continue to use agents to assist them, so the lack of 3G coverage in rural villages may, for now at least, be an irrelevant barrier. And by the time the oral segment can eventually afford smartphones and data, coverage may well have been extended, either by the MNOs or by the Silicon Valley giants such as Facebook or Google.
Tailored Tools and Services
In the interim, agents are uniquely well-positioned to deliver money management tools and services that are tailored to the oral and poor segments. This can be done through smartphones or (better still) tablets at agent outlets running apps that provide user interfaces that are intuitive for the oral segment and reflect the mental models they use to manage their money. Fintechs can play an important role in developing tools and services that work for this target market. But fintechs will, in our experience, need assistance to understand and respond to the needs, aspirations, perceptions and behaviour of the poor, as they typically lack the capacity or resources to do so. As a result, most fintechs tend to create solutions and then look for problems that these might solve. Transaction via agents will allow customers to use, and get used to, these interfaces so that when they can eventually afford mobile phones, they will be conversant with how to use the apps – and thus be more likely to conduct the user-initiated transactions that are so key to providers making money from providing digital financial services.
The Commercial Potential in the Clear Blue Water
To achieve penetration and a critical mass of transactions for the agents will be easier than we have previously assumed, assuming that agents are not “dedicated” and thus dependent solely on agency business for their livelihoods. However, to achieve this, providers will need to develop products that respond to the needs, aspirations, perceptions and behaviour of the target market, and then market them through agents and other opinion influencers and social marketing. The poor have more resources and propensity to save than might be expected: For example, the PMJDY accounts opened for the unbanked masses of (primarily) rural India, after about two years now have an average balance of Rs.2,237 ($34), and these relatively stable balances are growing over time. Furthermore, they also seem willing to adopt market-priced life and accident insurance policies, when these are adequately marketed. And, of course, the demand for credit can be taken as a given … the question will be how to modify existing products to tailor them to the rural poor, and enhance consumer protection. We at MicroSave remain convinced that modifying the current suite of products would be relatively easy to do – and that doing so would enhance digital credit provider profitability. And CGAP has already demonstrated that improving key elements of consumer protection, such as transparent terms and conditions, increases trust, uptake and repayment rates.
The blue water on the other side of the digital divide is a clear, deep and wide opportunity for providers with the proper strategy – and the courage and foresight to dive in.
The blog was originally published on Next Billion