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Partnerships and innovations will be key to reducing liquidity concerns for agents in the DRC

Posted on by MSC

Today’s blog focuses on liquidity management. It uses recent insights from MicroSave Consulting’s (MSC) field study of DFS agent networks in the Democratic Republic of Congo (DRC), which in turn stem from interviews with over 50 agents.

Our research in the DRC showed that a significant number of agents have been using informal rebalancing methods due to inadequate access to liquidity—both cash and electronic. This behavior poses risks to the client, agent, and DFS providers alike. Insufficient initial capital investment in DFS by the agent has been fueling the practice of informal rebalancing, complicated further by the dollarization of the economy. Moreover, a scarcity of rebalancing points due to the lack of financial infrastructure in the DRC has been compounding the practice.

Why is liquidity so important in the DFS business?

Liquidity refers to the adequate availability of cash and electronic value. A DFS agent requires both to serve customers effectively at their shop or counter. An agent’s lack of liquidity will cause them to turn away customers, which, in return, (a) causes dissatisfaction; (b) erodes trust in DFS; (c) limits the agents’ ability to earn commissions and be profitable; and (d) influences brand perception negatively.

Although liquidity management is a risky and costly part of the DFS business, providers and agents must prioritize it if they are to flourish. DFS industry practitioners agree that liquidity management is critical for success, and yet challenging to “get right”—particularly in areas that lack basic banking infrastructure, roads, and security. Such market characteristics are common across most of the DRC except for a handful of major cities, where the infrastructure remains basic. According to the research conducted by CGAP, the primary cost of the mobile money business for retail agents is liquidity management, which consumes 20-30% of the total expenses for this business line. Solving liquidity issues takes a conscious effort, as it will not resolve itself on its own.

Findings from agent interviews in DRC

1. MNO DFS agents are generally not investing enough capital in the DFS business, which affects both their profitability and sustainability.

MNOs in the DRC are not consistently imposing minimum initial capital requirements on agents when starting out in the DFS business. Agents reported starting their DFS business with as little as 10 USD. This is problematic, as an agent will not be capable of serving customers who wish to deposit or withdraw funds at their agent outlet. As such, neither the agent nor the provider will earn any commissions and would have to turn customers away, causing dissatisfaction.

In contrast, banks and MFIs in DRC impose a minimum capital requirement of 500 USD on their agents in accordance with Structure 29 issued by The Central Bank of Congo (BCC). As a result, they are better prepared to serve clients. However, the downside is that this large amount of starting capital represents a significant barrier to entry to this occupation.

“You have to have a lot of money in the account and [have it] all the time because it will strengthen the trust of the customers who know that there is always cash. [The] customer will even advertise by encouraging his entourage to return to the agent who has the capital permanently.” Agent in Kasaï

2. Liquidity capacity is diminished because agents must maintain electronic float and physical liquidity in both USD and CDF (Congolese francs)

Another complication plagues the DRC and other dollarized economies, namely Zimbabwe, Liberia, and Somaliland. It is the need for agents to manage liquidity in two currencies—US dollars and Congolese francs. Agents must stock both currencies based on customer demand, and risk losing out as exchange rates fluctuate.

DFS providers in the DRC require that each agent holds multiple currencies (USD and CDF) in digital accounts and in cash to offer DFS services. However, the setup of the digital accounts prohibits the direct exchange or transfer of e-float from one currency account to another. This presents a unique operational and rebalancing challenge for agents.

Conflicts of interest often arise between an agent and a customer when the transaction involves currency exchange. Each party wishes to see their preferred rate applied, yet ultimately the agent is generally compelled to accept the client’s preferred rate because they do not wish to lose the client or decline the transaction. This has been affecting agent profitability and customer experience and satisfaction negatively.

“The exchange rate USD to Congolese francs is unstable. The price at which dollars are sold and bought differs. Some customers expect high rates from us when we serve them. This impacts my profitability, but I am obliged to serve my clients.” —Agent in Kongo Central

3. Many agents admitted to using informal methods to manage cash or electronic liquidity to avoid turning away customers—some of their liquidity workarounds may lead to fraud issues.

The formal rebalancing channel for DFS agents in DRC is through “super agents”, who are known locally as “cash partners”. Agents must travel to a local bank, MFI branch, or MNO commercial outlet to rebalance the electronic float or obtain physical cash. Many agents reported difficulties or unwillingness to do so—given that there are only 0.14 bank branches per 1,000 km2 in the DRC. Moreover, due to security concerns, carrying large amounts of cash is risky.

For agents, rebalancing through the official channel is time-consuming and risky. It also proves costly for agents in terms of the opportunity cost of shutting up their shop to travel to a bank branch. It is unsurprising that agents have been turning to unofficial methods to manage their liquidity. These methods comprise borrowing money from fellow agents or trusted acquaintances in their proximity and holding on to a client’s physical cash but waiting until a later time to add the electronic value into the client’s account. While these informal methods may help an agent to avoid turning away customers in the short run, they certainly bear more risk—for the client, agent, and provider.

“If I am stuck, I call my friends who send me liquidity. [For] example, if a customer comes to make a deposit of 500.000 CDF and I do not have 500.000 CDF in electronic money, I call a friend who is an agent who sends me virtual currency to serve the customer, and I settle with him at the end of the day.” Agent in Kivu

Agents in urban areas of the DRC reported fewer problems with liquidity management due to the greater access to bank branches (or other rebalancing points). Yet, they still reported that this activity was time-consuming, costly, and sometimes dangerous for them. The e-money providers (Vodacom, Orange, and Airtel) have partnered with banks and other financial institutions. As a result, their agents are able to obtain physical or digital liquidity from bank branches throughout the country. The agency banking providers (Finca and Equity Bank) require their own branches in the various regions to help their agency bankers manage their liquidity.

What next for liquidity management practices in DRC?

There is certainly room for Congolese DFS providers to support their agents better to manage their liquidity. Indeed, many are already looking at implementing new, official procedures and methods. These include implementing master agent models or partnering with new types of “cash-rich” institutions, that is, not just the banks, which could also act as liquidity providers. It is evident that partnerships will be required if the accessibility and availability of rebalancing points are to be improved.

Liquidity management partnerships and innovations from across the globe

As the DFS industry over the world matures, we see providers implementing new and innovative methods to help their agents manage their liquidity effectively. In the following section, we take a quick look at some innovative liquidity management practices that involve partnerships between DFS provider and one or more external entities. These new liquidity management practices are listed in order of relevance to the DRC market, where smartphone penetration remains minimal, which means that more advanced app-based solutions are currently less relevant.

Identifying cash-rich businesses that can also act as liquidity providers

Alongside the banks that traditionally supply liquidity, finding businesses that can provide liquidity would increase the number and also possibly the proximity of official rebalancing points for agents.

Direct delivery of cash or e-money to the agent

Several DFS providers globally are now developing “float runners” systems. In some cases, the DFS provider offers this service directly, and in other cases, they have partnered with external entities. In Uganda, Airtel Money partnered with 53 float runner entities, known locally as “aggregators”, who buy float from a super-agent or the official liquidity provider and deliver it to individual Airtel Money agents. Airtel defines a specific territory for each of its aggregators. One of the float runner companies, Blacknight, covers about 800 agents in different regions—mainly rural areas.

Adding functionality to the agent account to facilitate dual currency management while ensuring commission structures encourage transactions of both currencies

The highly successful mobile money provider, Telecom Zaad, from Somaliland has been using a dual currency platform for some time. It recently also added currency conversion functionality to its wallet service, allowing customers to convert Somaliland shillings to US dollars quickly.

Credit advances for agents

Airtel Uganda, in partnership with JUMO, uses alternative credit scoring methods to provide a digital micro-credit product to its agents—Wewole. Similar initiatives have also found use in the Philippines and Fiji.

Using data analytics to help predict liquidity requirements

Predictive data analytics, using transactional data around agent locations to predict future demand for float, may improve liquidity management by providing efficient estimates of float inventory. African Mobile Money provider, Zoona, has pioneered this approach in Zambia.

Using geo-mapping to improve the visibility of rebalancing points

NovoPay in India uses advanced GIS mapping systems to match agents with nearby field officers who top up agents’ floats.

Conclusion

Poor access to liquidity—both cash and electronic—is one of the primary reasons behind the low activity of agents and customer dissatisfaction in DRC, and has been leading to a proliferation of informal, risky rebalancing methods. As a result, we call on the local DFS providers to look closely at how they can better support their agents to manage their liquidity effectively.

Trustworthy, sustainable partnership agreements will be key to improving liquidity management for agents in DRC. Some local DFS providers have already started focusing on methods 1 and 2 from the liquidity management practices. These providers have been building partnerships between banks, telecoms providers, microfinance institutions (MFIs), and other cash-rich organizations to help increase the number of formal rebalancing points for agents. They have also been looking at ways to mobilize cash liquidity so that agents themselves do not have to travel the distance to meet their rebalancing needs.

Face-to-face network specialists: Helping institutions better bring digital finance to the unreached Part 1

Posted on by MSC

Last year was filled with a refreshed interest in agents, and starting 2019 with a look ahead to their future can inspire a vision for how to build them into an industry that advances financial inclusion while boosting businesses targeting the base of the pyramid (BoP). At the World Bank Spring 2018 meetings, H.M. Queen Maxima of Netherlands and the then President of the World Bank, Jim Yong Kim emphasized the importance of mobile money agents. Queen Maxima noted how a business case needs to work for every player in the value chain to deliver services, including agents. Dr. Kim observed that only trusted agents can provide augmented services to include oral-only, illiterate, or innumerate customers.

For those eager for a faster path toward diversified digital financial services that meet the practical needs of the unbanked, it is time we start looking at networks of agents as the center of solutions that can “unstick” the status quo, as highlighted in The Clear Blue Water on the Other Side of the Digital Divide.

The initial steps towards agent-driven approaches are documented in a number of works. They include the FIBR/MasterCard paper Digital Solutions for Analog Agents: New Technologies to Manage Agent Networks, CGAP’s Employee and Agent Empowerment Toolkit and Ideabook, which detail how to “strengthen the engagement and the ability to deliver valuable customer experience,” and GSMA/MSC’s Distribution 2.0: The future of mobile money agent distribution networks, which highlights exemplary practices for any provider.

This blog series outlines potential next steps towards an augmented future, which visionaries in the industry could explore through the support of Agent Network Management Companies (ANMC).

The posts will focus the case on:

  1. The need to disrupt the conventional approaches or actors to speed up the progress;
  2. The unique positioning and potential advantages that make ANMCs deserving of support;
  3. Six ideas worthy of experimentation;
  4. How different institutions could use ANMCs to complement their current operations.

In the short run, mobile money service providers should differentiate between sales and transactional agents. The differentiation between sales and transactional agents involves:

  1. Relatively sophisticated sales agents who are usually dedicated and are exclusive to one brand. These agents are responsible for selling products, onboarding customers, and conducting transactions of larger value;
  2. Basic transactional agents, who are usually non-dedicated and non-exclusive. These agents are responsible for conducting typically smaller cash-in and cash-out (CICO) transactions.

Improving on the status quo

The 2017 Global Findex report revealed much to celebrate for financial inclusion, and undeniable strides towards the provision of DFS, indicating a promising future. Those of us with a passion for the power of DFS to deliver real value to the poor want to see the future sooner—and without the growing digital divide that we currently see emerging. We can surely improve on the current 24% (30-day active) usage rates, offer a broader array of products, and find creative ways to overcome gender disparities.

While each country’s digital journey is different, there are some common denominators that can stifle the primary drivers of the efforts of both telcos and banks to serve the mass market through digital platforms.

If we are ever going to offer more sophisticated digital financial products, we will need to respect the need for trust and the role of face-to-face interaction to build that trust, particularly in oral and rural communities. In order to achieve this, we will need to develop and deploy models that can increase the value-add by agents rather than minimize them and continue to see agents as a regrettable cost.

Dr. Kim highlights that agents are required to provide a range of services upon which all of mobile money depends. Yet liquidity management, marketing, customer service, complaint management, and agent assistance with transactions are rarely, if ever, factored into their formal compensation. Agent commissions should be seen as part of mobile money’s “cost of goods sold”, plus sales incentives. Agents are fundamental to any mobile money service rather than merely a channel cost to be squeezed out of existence. Despite smartphone sales growth (accompanied by data or not), in most countries, low-income customers will want and often need a trusted person to explain the nuances of aspired-to, sophisticated products, to promote the benefits, and to provide the after-sales service.

To reach the mass market, telcos and banks, with their greater power, customer base, and balance sheets were the obvious first choices to back. However, the same scale can also create hurdles for reaching the low-income market with products that are tailored to meet their needs. These challenges include legacy systems, competing priorities, product-focus over customer segmentation, and more alluring, affluent markets.

ANMCs are specialists in developing face-to-face, commission-based networks on behalf of brands through a focus on recruiting, training, equipping, and quality control or performance management. In contrast to telcos or banks, tackling change through ANMCs offers the following advantages:

A. A sole focus on agents and no need to compete with numerous internal alternatives that face larger corporations puts them in a better position to optimize agent performance. Boosting the value-add of frontline sales and basic transaction agents is a different business from the retail work of banks or MNOs. So it would help to have specialists build out this human resource-based business. To date, ANMCs have been sidelined in relation to other financial inclusion influencers, but it could, and indeed should play a bigger role.

B. The smaller size of ANMCs means that they have less entrenched business practices, which could make it easier to gain and hold their attention on creative approaches to optimizing their agent networks for both profitability and social impact (or value addition).

C. ANMCs are not weighed down by legacy systems. These make it harder for established industries to find new ways to track and boost agent performance or even report internally on agents’ sales volumes or customer satisfaction for more refined segmentation. So ANMCs could pioneer data-driven decision making, as shown in the example of Zoona.

It is our belief that proponents of financial inclusion need to also foster ANMCs with the same philanthropic or social-technical support that banks or telcos have received. Some options are highlighted in the next post.

Although some have been initially instrumental in the rapid build-up of networks (as Top Image did for M-PESA), ANMCs have not proliferated or realized their full potential, since telcos and banks typically persist with in-house agent management. Telcos and banks have so far seen opportunities to secure competitive advantage through owning and managing their agent networks. This will be eroded as markets move towards shared agents and agent-level interoperability. Thereafter telcos, if not banks, will likely begin to think more carefully about the potential economies of shared and third-party managed agent networks governed by key performance indicators. While telco agents have so far been raised up to offer predominantly a transactional, basic CICO service, bank agents have shown that you can start operations with sales agents, who offer a range of relatively complex financial services.

As markets shift and some telcos find themselves selling off assets, starving their mobile money investments, consolidating, or facing non-exclusivity of agents, they may seek stronger ANMCs. These third-party service providers could alleviate distractions from the core business and reduce the costs of running agent networks by offering shared services. Here we propose six paths that warrant experimentation in order to build an industry of ANMCs that are positioned to advance financial inclusion and profits for all.

To foster new, stronger, diversified, or shared agent networks, proponents of financial inclusion could support an “incubator” for:

  1. ANMCs by catalyzing startups or bolstering smaller players;
  2. Last-mile sales networks to augment their offerings as providers of a range of digital services;
  3. DFS products by incorporating R&D specialists within the daily operations of an owned network;
  4. Joint ventures through brokers that form and run shared agent networks;
  5. ANMC associations to tackle shared problems and proliferate the increased value-add brought by their industry;
  6. Franchise services company that spreads expertise and investments for ANMC owners to not have to learn the best practices on their own.

We will discuss these six approaches in our next blog.

A journey, two decades in the making

Posted on by MSC

Twenty years ago, we were born in the heart of Africa in Uganda as the MicroSave project. The year was 1998. The microfinance industry at the time was focused almost exclusively on microcredit, and as the name suggests, MicroSave came into being to resolve this issue.

As a first step, we drew influences from Stuart Rutherford, as well as approaches developed in the Philippines. We conducted market research with the aim to understand opportunities and problems from the customers’ perspective. This marked the start of our signature “market-led approach” to consulting, and unmasked significant problems underlying the microcredit model then prevalent in Uganda—that we set about fixing.

Until the year 2000, MicroSave focused on demand-side market research in East and Southern Africa. We trained hundreds of people from across the globe in our Market Research for MicroFinance (MR4MF) approach—a precursor to what is now known as human-centered design. After the first mid-term review, our work evolved to include both demand- and supply-sides. We worked with industry leaders to develop toolkits and training content on 35 different aspects of managing MFIs and banks.

We worked with nearly 20 leading financial service providers in East and Southern Africa to refocus their business towards a customer-centric or “market-led” approach. We helped Equity Building Society grow from 109,000 customers in Kenya into Equity Bank. The bank was listed on the stock exchange and currently serves 12 million customers across East Africa. Building on our growing work on digital finance, we also sat on Equity’s steering committee and helped with the initial testing of M-Pesa.

In 2006, the next big spurt in our growth arrived when we brought our lessons and success from Africa to India. In the next two years, we had expanded to Sri Lanka, Bangladesh, the Philippines, Indonesia, and Nepal. We added country after country to our list. We widened the scope of our cutting-edge knowledge and advice to a diverse set of players. In the years to follow, we opened new sectors and services to include digital financial services, finance for energy, housing, water and sanitation, among others—all with a focus on low-income people.

From 2013, MicroSave started shaping digital inclusion, government to person (G2P) payments and social inclusion landscape in India. We started by preparing an approach to assess the readiness of districts for delivering G2P payments. This helped the government in prioritizing the launch of G2P programs. We worked on the rural employment guarantee program (MGNREGA), social pension programs, LPG subsidy, food subsidy, kerosene subsidy, fertilizer subsidy, among others.

Farmer1

Our work over the years benefits about 850 million people, with an annual subsidy outflow of about USD 71 billion. We also worked on the largest financial inclusion program in the world—PMJDY—and worked on the harmonization of the know-your-customer (KYC) process to enhance financial inclusion. Through this, we gained expertise in public policy design, digital identity, digital technologies, pilot testing of social programs, and KYC.

In 2016, we took these learnings to Indonesia. We helped in the pilot of a new cash-based subsidy program called Bantuan Pangan Non Tunai (BPNT). We are now assisting the expansion of this program. We have also been helping conduct a pilot to leverage the digital identity system (NIK) in Indonesia for e-KYC to enhance the pace of financial inclusion.

Today, we still pride ourselves on our authentic insights led by a thorough understanding of the socio-cultural and business contexts of our markets. However, we are no longer the niche research firm that started out many years ago in a small shared office in Uganda. We have grown into an organization that finds wide recognition in the international development community. The MicroSave name has come to represent the vast wealth of knowledge we have amassed on the lives of low-income people. Now it is time to pause, reflect on the journey across two decades, and step up our game, as a lot remains to be done.

The world of development that we inhabit has been in a state of constant change. MicroSave needs to be better prepared in this ever-changing environment. Our horizons have widened, and it is time we set our sights higher. There is a need for stronger and more consistent branding, especially when the teams are expanding across locations. It is time to relook at our identity. The new identity would leverage the time-tested MicroSave name, yet we must showcase our formidable expertise that we continue to garner in the development sector.

Enter MicroSave’s new avatar—MSC—or MicroSave Consulting. We explored a number of options but MSC was the natural choice, forging a deep connect with our staff. The MSC brand lets us retain our legacy while providing a wider canvas for us to connect with a more diverse base. We prefer to use the acronym form—MSC over MicroSave Consulting as it promises instant recall.

Our transformation into MSC kick-starts various other changes—our brand colors, design principles, and our language guidelines. The new color swatches reflect quality delivery, an empathetic mindset, creativity, and a deep desire to realize our mission.

With these changes, MSC aims to reach multiple milestones. We would consolidate our identity as a young, multi-directional, multi-sectorial consulting company. We would like to take the concept of “market-led” to all aspects of the lives of low-income people. Our work now focuses on education, health, livelihoods, climate change, water, sanitation, energy, gender, youth, and refugees, among others.

The new identity reflects our emergence as an avant-garde consulting partner that offers divergent thinking, passion, diverse expertise, and insights from different cultures. As a result, we will reinforce our identity as “the world’s local expert in financial inclusion”. We seek your continued support as patrons and well-wishers. Join us, as we chart new directions in our journey as MSC!

MSC is a boutique consulting company that partners with participants in financial services ecosystems to achieve sustainable performance improvements and unlock enduring value. We have been at the center of the digital finance revolution since we supported the M-PESA pilot-tests and advised Equity Bank on strategy, products, agent networks and bulk payments. Today, we work with governments and leading banks, telcos, and third-party service providers across Asia and Africa.

At MSC, we offer strategic and operational advice that allows our partners to innovate and succeed in a rapidly evolving market. We help you gain a deep understanding of your clients, their needs, perception, aspirations, and behavior. With our support, you can seize the digital opportunity, address the mass market, and future-proof your company.

 

Aligning regulations to enhance digital financial inclusion in Indonesia

Posted on by MSC

This policy brief is based on our earlier studies and interactions/ experience with industry players in Indonesia. It presents a broad framework and strategic considerations to align the two DFS programs in a bid to enhance digital financial inclusion.

 

MSC: Enabling social, financial, and economic inclusion in digital age

Posted on by Parul Tandon

MicroSave Consulting (MSC) is a boutique consulting firm that has, for 20 years, pushed the world towards meaningful financial, social, and economic inclusion. With 11 offices around the globe, about 190 staff of different nationalities and varied expertise, we are proud to be working in over 50 developing countries. We partner with participants in financial services ecosystems to achieve sustainable performance improvements and unlock enduring value. Our clients include governments, donors, private sector corporations, and local businesses. We can help you seize the digital opportunity, address the mass market, and future-proof your operations.

To explore more about MSC and to browse through our offerings please see the corporate brochure.