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More Than Hygiene – Improving Agent Network Performance to Maximise Profitability

Posted on by MSC

Over the last four years, as part of the Agent Network Accelerator (ANA) project, we have interviewed more than 34,000 agents from over 40 leading providers of digital financial services (DFS) across 11 countries in Asia and Africa.

So what did we learn?

Agent Dedication and Exclusivity is Declining

We see a general trend towards agents running a DFS agency as an add-on to other existing businesses (non-dedication) and working for more than one provider (non-exclusivity). While the trend is most pronounced in Tanzania and Pakistan (see Figures 1 and 2). In Bangladesh, on the other hand, third party models have emerged.

At the same time, many providers see their agent networks as a source of differentiation from the competition and direct control over the agent channel. Our data confirms that agents trained and monitored by their providers perform significantly better than those left to their own devices (see Training and Monitoring Can Improve Agent Performance below).

So, while the move towards shared 3rd party agent networks seems an obvious next step to containing costs of platform management and maintenance, and of agent training, management and monitoring; as well as improved liquidity management (particularly in fully interoperable environments), there are limited signs of this emerging in many markets. In some markets regulations also limit the potential for 3rd party shared agent networks because regulators want to be able to hold a regulated financial institution accountable for agent performance.

Ultimately, providers should compete on product rather than channel. So we may see the emergence of a few exclusive sales agents working for specific providers to sell products, open accounts and conduct larger transactions. These would then be complemented by large numbers of shared agents servicing a range of providers by conducting small cash in/out transactions.

NOTE: ANA surveys were conducted in 2013 in Uganda, Kenya, and Tanzania; in 2014 in Bangladesh, Kenya, Pakistan, and India; in 2015 in Zambia,Tanzania, Uganda and Senegal; in 2016 in Bangladesh and in 2017 in Pakistan.

Insight: Service and support to agents can be a key success driver and differentiator – but 3rd party model/outsourced services may be the way to go in the future, at least for cash in/out transactions.

Inability to Transact Remains a Problem

Many agents report experiencing periods when they are unable to transact, be it due to network interruptions or system downtime. Service downtime not only causes inconvenience, it also erodes trust. Service downtime is particularly frustrating for customers, who feel that they are unable to access their money and, in some cases, complain of missing important opportunities or deadlines as a result. It also often results in customers leaving money with agents to complete the transaction when the system is back up, which raises fraud risk.

Furthermore, too many transactions are still being denied due to liquidity management challenges. Agent illiquidity may also mean lost access to money or necessitate splitting of transactions and thus incurring higher transaction fees and customer time[1] These inconveniences and supplementary costs undermine user trust (who will allocate less money to the system and conduct fewer transactions) and non-users (who may avoid DFS for fear of not being able to access their money when they need it).

Moreover, every transaction denied for want of float, reduces commission income for the agent in an operating environment where they already struggle to make adequate profits (see Agent Viability Remains a Problem below).

Insight: Trust continues to be eroded. Providers with reliable platforms and reliable liquidity management systems will carry the day.

Approaches to Liquidity Management Are Evolving

Providers are beginning to use creative approaches to respond to liquidity management challenges, including:

–         Dedicated rebalancing counters at banks to provide agents faster service;

–         Liquidity “runners” to deliver liquidity in the form of both cash and e-float;

–         Credit lines/overdraft facilities for float;

–         The use of analytical tools to predict demand; and

–         Providing in-depth liquidity management training to Master Agents.

Insight: We still need more solutions for liquidity management, especially to get cash to rural areas. Advanced data analytics, the “uberisation” of agents and creating better digital ecosystems to keep money digital can all help.

Agent Viability Remains a Problem

Profits from the DFS agency business are modest, between US$143 and US$190 per month, (adjusted for cost of living differences). The highest agent profits were reported in two markets plagued by illicit OTC transactions, frequently performed by agents for an unofficial, unauthorised fee. Unauthorised fees or overcharging is common, enabled by lack of transparency (many agents do not display approved or current pricing schedules for their services). As a result, customers are unsure of service fees and often convinced that they are being over-charged, undermining trust and reducing service uptake and usage.

Unauthorised fees, of course, create real additional costs for customers but are increasingly accepted as part of the fee-for-service – particularly where agents are conducting OTC transactions and thus reducing the risk of sending money to the wrong number. Given some of the losses that can result from sending money to the wrong number, perhaps we should not be surprised that people are willing to pay a premium to protect themselves against this risk.

However, this clearly a suboptimal solution for both consumers (who confine themselves to agent-assisted transactions, limiting the opportunities for cross selling additional products and services), or the provider (which becomes dependent on agents and thus limits profitability) in the long run. Safaricom has sought to address this with the Hakikisha system that enables M-PESA customers to stop erroneous transactions within a window of 25 seconds and allows up to five such instances per day

Insight: DFS agency remains a low-profit business, a reality that may be driving unauthorised charges. Agency therefore is generally better as an add-on (non-dedicated) business, especially outside urban areas at the head of remittance corridors.

Agent Training and Monitoring Associated with Better Performance

Providers tend to delegate induction training to Master Agents and third parties – only a minority of agents report being trained directly by the provider. Likewise, too many agents are being left to their own devices and never receive monitoring or support visits. This is likely to suppress their profitability. As a recent Harvard Business School research demonstrated, the presence of tariff sheets increase demand by over 12%, while agents’ ability to answer a difficult question about mobile money policy increases demand by over 10%.

We have seen some evidence that training is associated with improved compliance and increased profitability. This association is clear in Bangladesh, Senegal and Uganda, but much less pronounced in other countries surveyed under ANA programme.

Insight: Training may be associated with better compliance, transaction volumes and profitability of agents, yet providers continue to outsource this function.

Robbery and Fraud are Increasing

Agents are struggling in the face of rapidly growing problems with robbery and fraud. This is a challenge that needs concerted and coordinated efforts to resolve. Providers and agents are beginning to address this problem, but more can be done. In our expert group meeting, providers, software platform vendors and consultants recommended a three-pronged approach: 1. training of agents; 2. the monitoring of fraud trends and proactively informing agents; and 3. collaborative fraud monitoring and reporting frameworks. A recent in-depth analysis of options to address the growing scourge in Uganda highlighted five different fronts on which fraud can be tackled.

Insight: Insecurity and fraudulent activities are growing – this could increase agent churn and to further undermine trust in digital financial services.

The ANA surveys have given us deep insights into the behaviour and evolution of agents across 11 countries. Many of the issues and challenges are now well-known, and the surveys quantify them in ways that have not been previously done. As a result of these surveys and the associated training, many providers have taken important steps to improve the quality of their agent networks, but much remains to be done. Agent networks remain the most costly and complex part of any DFS deployment, and successful providers are invariably those that get this crucial piece of their business right.

MicroSave’s Agent Network Accelerator programme has conducted research on agent networks in 11 countries – Kenya, Tanzania, Uganda, Nigeria, India, Indonesia, Bangladesh, Pakistan, Zambia, Senegal and Benin.

The surveys deliver cutting edge knowledge and data designed to help leading providers overcome the cost and complexity of building sustainable cash-in/cash-out (CICO) networks. We produce country and provider reports,

The data and reports power The Helix training curricula.

Managed by MicroSave, the ANA surveys have been funded by the Bill & Melinda Gates Foundation, UNCDF, Karandaaz and FSD-Uganda.

[1] However, it is important to remember that service downtime and illiquidity also occur with, and are tolerated by customers of, ATM-based systems.

Three Areas DFS Providers Prioritise to Enhance Agent Networks

Posted on by MSC

Since its launch in 2013, The Helix Institute has offered evidence-based insights, practical training and technical assistance on agent networks to DFS providers across Africa and Asia. We asked providers to tell us what steps they have taken to improve their agent networks after engaging with The Helix. This blog sums up their actions, classified into three broad areas: 1) enhancing network size, distribution and make-up; 2) boosting service reliability, and 3) ensuring network sustainability.

1. Network size, distribution and make-up

To deliver on DFS deployment objectives, providers must get the right agents in the right places to serve their customers. The Helix trainings facilitate learning that helps providers review and refine their approaches to achieving the scale, reach and characteristics of the network best suited to support their deployment objectives.

  • Overhaul Agent Network Strategy: Eleven providers have overhauled their agent network strategies following The Helix training and exposure to peers from other markets. To respond to growing demands of managing and scaling agent networks, some opted to outsource the agent network management, while others adopted master agent models. Providers were inspired to let go of exclusivity clauses and guidelines on mandatory agent spacing (within a specific radius of each other), which has improved agent accessibility and increased transaction volume.
  • Strategic Agent Selection: Many DFS providers struggle with agent dormancy, which often stems from poorly targeted agent recruitment. Consultations with The Helix have driven 14 providers to refine their agent selection criteria to ensure their agents will actively transact. For example, providers have enhanced their geographic targeting to ensure agents are recruited from strategic locations and/or raised minimum start-up capital requirements to boost agent liquidity. Others through evaluating agent performance determined which agents do not add value to the network. In some countries, providers are now deactivating non-performing agents in an effort to streamline their networks. This is remarkable since in the past providers were reluctant to reduce agent numbers, viewed as a manifestation of scale.
  • Mandatory Agent Training: Research by The Helix has shown that trained agents perform better than their untrained counterparts. Our courses further emphasise topics essential for agent training. At least 14 providers reviewed their agent on-boarding approach: those who previously had no training structures have set up training departments to handle agent training needs; others have formalised agent training curricula and created training of trainer manuals. Providers came up with creative ways to identify gaps (e.g. by tallying agent call centre issues) and ensured curriculum included those issues. For example, several providers launched modules on fraud to increase agent awareness of the potential sources, prevention and mitigation measures. Some providers have encouraged agents to use social media as a platform for sharing their experiences and tips.

2. Service reliability

The success of digital financial services relies on how available, accessible and reliable they are to their customers. Without a reliable distribution channel, providers are unlikely to see high take-up and usage, regardless of the merits of their product design. A reliable service ensures customers are able to access DFS wherever and whenever they need it.

  • Enhance Liquidity Management: On the whole, float management is among the biggest hurdles in agent operations. Most financial providers in Africa have delegated the responsibility of managing float to agents. However, agent illiquidity undermines customer trust in the service and poses a threat to provider reputation. The Helix training and experience sharing between African and South Asian providers has led 23 providers to step up efforts to assist their agents with liquidity management. Some have engaged liquidity runners to deliver e-float or cash to agents, while others started facilitating access to lines of credit to boost agent’s working capital. In addition, some providers have opted to situate rebalancing points closer to the agent outlets and streamline rebalancing processes to enable real time float deposits at partner bank.
  • Minimise Network Downtime: Connectivity in most developing countries has proved a major hurdle in the deployment of agent networks. Some providers have therefore chosen to locate their agents only in areas where there are masts to ensure that agents can carry out transactions and reduce inactivity. Other providers have initiated system upgrades based on recommendations from peers.
  • Regular Agent Monitoring: Agent monitoring boosts agent loyalty. It builds a relationship between the agent and the provider, enhancing the business partnership. Exposure to best practices during The Helix training sessions have encouraged providers to introduce defined agent monitoring structures. These include outsourcing to 3rd parties and automation of agent monitoring processes to enhance effectiveness and cut cost. Additionally, some providers have formalised fraud and risk mitigation measures in regions with high incidence of fraud.

3. Network sustainability

Agent networks represent a large proportion of providers’ investment in digital finance deployments. Both agent commissions and management costs add up to significant sums expected to be covered by transaction fees. Balancing service affordability and agent remuneration is an art, elusive to many. The Helix-facilitated training and networking has inspired providers to target sustainability from three key directions:

  • Attractive Agent Business Terms: Whether agents see their business as lucrative affects how much effort they invest in growing the business. As such, agents condition providers’ DFS business growth. Following The Helix training, 13 providers were compelled to review the value proposition for agents to make it more attractive. Some have boosted commissions; others introduced performance bonuses or commissions for customer education and registration. Providers also sought to entice agents with non-monetary benefits like agent portals that facilitate business management or opportunities to address their fellow agents and share best practices for high performing agents. In over-the-counter (OTC) markets, where competitive commissions decide which service is accessed, The Helix spurred provider collaboration to standardise commissions and halt commission wars.
  • Revamp Customer Value Proposition: The utility of DFS to customers determines whether they use the service and the corresponding agent network. This is a function of the range of products provider offers and how well they meet customer needs. Twenty providers have gone back to revamp their customer value proposition as a result of The Helix trainings. Some redefined the product portfolio by introducing new use cases, multi-language functionality and repositioning the whole digital offering (e.g. shifting focus to merchant payments). Others dropped transaction fees and introduced airtime bonuses to reward usage. Another group returned to square one, undertaking market research and extensive customer consultations to tailor products to client needs.
  • Diversify Marketing and Communication Activities: The Helix curriculum sensitises providers to the importance of thoughtful and deliberate marketing activities. Thirteen providers have shifted emphasis from impersonal above-the-line campaigns to targeted below-the-line activities. Some providers in African markets have replicated creative approaches by peers, taking advantage of existing channels such as ‘town criers’ and market days to implement their marketing and communication activities. Many are now using community activation days to encourage customers to visit an agent. Providers are increasingly recognising the agent’s potential and role in communicating and educating the customer. This is being done in conjunction with activities that build trust in the agent network such as locating agents within the banking halls.

Recently, The Helix Institute convened DFS industry experts on regulatory, strategic and operational issues to reimagine agent network management for the future. This blog along with this summary of our learnings from years of interactions with agents and providers set the stage for their exchanges. Subsequent blogs present ideas on how to reinvent liquidity management, Interoperability – A Regulatory Perspective, Progress and Challenges with KYC and Digital ID emerging from the workshop.

Data in this blog is based on survey responses from about half of the MNO (36), Bank (46), 3rd party (13), Microfinance institution (8) senior managers from 33 countries who attended our training courses to share experiences, exchange ideas and draw inspiration from guest speakers and site visits with generous support from Bill & Melinda Gates Foundation.

 

Why is Digital Credit such a Huge Opportunity and Challenge

Posted on by MSC

Digital Credit is one of the fastest moving segments in financial product innovation. Today, digital credit provides quick funding for businesses and is capable of being an important source of revenue for DFS providers.

Setting Digital Credit Right – Is it Time For a Major Re-think?

Posted on by MSC

 

MicroSave’s Graham Wright expertly highlighted a worrying trend in an article on digital credit published in January 2017. His article highlights the fact that negative listing is shutting out millions of users from accessing microlending services. This, in turn, has affected financial inclusion. Mr Wright estimates that around 2.7 million people in Kenya – around 10% of the entire adult population – have been unduly denied service. Often, as in the case of 400,000 of those folks, financial exclusion is the penalty for defaulting on loans of less than $2!

More worrisome is the fact that these consumers, who may not have fully understood the terms and conditions, then frequently return to the grey and black markets. While costs and risks abound in these markets, positive borrowing behaviour fails to be digitally captured. Such shadowy and usurious forms of exclusion are precisely what microfinance was invented to combat in the first place. This is a major regression for inclusion, as digital disruption should be all about education and democratisation.

Rethinking Financial Services

Smartphone adoption is dramatically changing this landscape. While feature phones utilising USSD undoubtedly remain a core channel for reaching the base of the pyramid, that dynamic is shifting rapidly. In its place are emerging entirely new modes of communication, consumption and connectivity, enabled through newer and smarter devices.

These Internet-enabled, data-creating devices now connect 3.2 billion unique worldwide users. These users include not only loved ones around the corner or across a border but also an array of providers, old and new, who are ready to deliver the next wave of financial services. Among these providers are banks, microfinance institutions, microinsurance providers, e-commerce enablers, you name it. By 2020, the GSMA predicts smartphone penetration to surpass 5.7 billion subscribers.

 

Worldwide, mobile operators are assessing paths and gearing up to realise their potential as major enablers of the next generation of financial services. Some operators will embrace their evolution and innovate into major players in digital financial services, others will remain marred in the status quo of declining ARPU and loyalty. The providers who fail to adapt adequately would end up losing out to more innovative competitors and OTT challengers.

The biggest victors, however, will undoubtedly be the 2.5 billion unbanked folks, cheering on as device prices plummet and 3G/4G networks multiply.

Smartphone-driven Financial Services – a Marathon, Not a Sprint

In 2016, Mozilla released a fascinating, highly-recommended report called Stepping Into Digital Life. The in-depth research project spanned 12 months and tracked first-time smartphone users in Kenya. “Adoption is socially motivated,” the report concludes. “Owning and operating a smartphone can thereby elevate their status in society, and the resulting sense of pride plays an important role in adoption and learning.”

However, the report cited a couple of critical insights:

  1. Without the right skills, smartphones can exacerbate adoption challenges, instead of alleviating them.
  2. First-time smartphone users have little understanding of their role as consumers.

On its own, therefore, technology is insufficient to improve financial inclusion without concurrently solving for its entrenched legacy impediments: access, ability, and need. Financial technical literacy is a process enabled, but not resolved, by smartphones. Without engaged and educated consumers, the offerings of service providers as well as the lives of consumers will continue to be marred by risk.

Identity is the Core of Inclusion

The core of inclusion – and the inverse of risk – is identity. Who is the applicant and what is their financial history? How can they improve their standing and gain increased access? Well, problematically, 3/5th of the world’s unbanked people lack a legally-recognised form of identification. Moreover, in most countries, credit bureaus cover less than a quarter of the local population.

I recently joined a Women’s World Banking roundtable in New York City, where I came to know some startling facts. Women make up a disproportionately large share of the unbanked. For example, while 46% of men in developing countries have a bank account, only 37% of women in these countries have access to banking. The gap is even larger among those in poverty. Women who live below $2 a day are 28% less likely than men to have a bank account.

So, how do you assess an applicant without a footprint? And how do you level that playing field across gender, geography, class and access?

Meeting Users Where They Are Today

Currently, 77% of the world consumes mobile services on a prepaid basis. This implies that every year, mobile network operators process a trillion dollars’ worth prepaid top-ups – $.30 or $.40 here, $1.50 there. These top-ups are of low value, used in huge volumes, and are exceptionally inconvenient for everyone.

Because these customers predominantly transact in cash, lacking access to credit, they must travel in-person to a top-up shop to add balance to their phones. The distance is sometimes a few blocks, and often a bus ride away. Imagine doing this every week or every day, regardless of how otherwise busy or cash-strapped you may be. Imagine having to decide between topping-up your phone and buying diapers.

Prepaid Top-ups are the Formal Financial Transactions of Unbanked Consumers 

At Juvo, we are rethinking digital financial services. We partner with mobile operators to provide intuitive tools to consumers in emerging markets, enabling them to create, capture and benefit from their own positive financial behaviour. Rather than focus on extending as many loans as possible, we are taking a responsible, deliberate and personalised approach to building up users’ identities to mitigate risk for all parties involved.

We believe in rewarding users for these micro-transactions, generating the building blocks for upstream financial service access. Our products offer prepaid users an engaging and frictionless journey, from anonymous SIM card to robust financial identity. The products are based on the simple, frequent and standard behaviour of borrowing and paying back digital airtime credit extensions. We leverage prepaid subscriber data to allow anyone, regardless of the quality or fidelity of their financial identity, to obtain for a digital no-fee, interest-free product loan, delivered straight to their phone within seconds. As users borrow and pay back these loans, they advance from beginner to bronze and up to diamond status. This paves the path to build up an identity and unlock innovative digital financial products.

For carriers, our solution has proven to lift Average Revenue Per User (ARPU) by 10-15%, drive loyalty, and reduce churn by 50-90%. It simultaneously adds convenience, access and identity to the financial lives of our users. All this adoption and engagement, filtered by our data scientists, results in a greenfield database of millions of well-defined and segmented prepaid mobile consumers.

The Path to Upstream Services

Every mobile operator has been repeatedly told that they are optimally situated to deliver the next wave of financial services, given their distribution networks, communication channels, massive user bases and strong brands, However – and operators are acutely aware of this – the path to mobile money success is riddled numerous obstacles. They include high cost, severe risk, burdensome or ambiguous regulations, massive account dormancy rates and, ultimately, failure.

Juvo mitigates these challenges by offering an alternate path. We reduce the risk and cost of providing financial services by generating engaged users and rewarding that engagement. We then segment our users with game mechanics and data science. This deliberate and sequential approach enables us to offer personalised, timely and targeted financial services from only the most innovative FSPs to the right users.

We partner with international FSPs, such as Mastercard and MoneyGram, alongside local providers of microinsurance, microfinance, digital credit, savings products, energy solutions, handset financing, among others, to create channel-specific products hand-tailored to our users. We emphasise on personalised offers, consumer education, and sustainable financial habits. We understand that forcing the adoption of a feature-bloated, one-size-fits-all app at an entire population demands massive behavioural change and education, as is the case with most Mobile Money Operators. Most often, this approach simply does not work. Here at Juvo, we, therefore, are banking on a personalised future of finance.

Juvo is a San Francisco-based fintech company that was founded with an overarching mission: to walk billions of people worldwide who are creditworthy, yet financially excluded, up a pathway to financial inclusion, starting with their mobile phone. Juvo’s proprietary Identity Scoring technology uses data science, machine learning, and game mechanics to create financial identities for anonymous prepaid mobile subscribers across the globe, providing ongoing access to otherwise unattainable financial services. The company has recently closed its Series B round, raising $40 million in funding led by NEA and Wing Venture Capital.

How Can Providers Make Digital Credit More Profitable?

Posted on by MSC

Many commentators have raised concerns about the interest rates charged for digital credit. And, given that the entire process is automated and dependent on computer algorithms rather than expensive human intervention and analysis, this seems reasonable. On the face of it, it is strange that the interest rates charged for digital credit should be closer to those common in the informal sector than those charged for other formal sector loans. So what is going on?

There are three key drivers of the high interest rates: 1. The small size of loans; 2. The cost of data analytics; and 3. The risk premium priced in.

  1. Small Loans: We all know that, broadly-speaking, it costs the same amount of money to make a $10 or a $10,000 loan. Digital credit loans, absent the personal relationship, start by lending small amounts (typically $10-20) to gauge repayment behaviours and base future lending decisions (largely) on the basis of these. The interest on these minimal amounts is often inadequate to cover even the variable costs associated with making a digital loan (SMSs or data charges etc.).
  2. Data Analytics: Digital credit providers not only need to invest significant amounts upfront to build their platforms and algorithms, but also on an on-going basis to keep refining them as they learn through the behaviour of their customers. One large provider tells us that they are spending $200-300,000 per month on analysts to maintain and develop their system.
  3. Risk Premium: MicroSave’s recent analysis of a credit reference bureau’s data has highlighted the extraordinarily high default rates amongst digital credit borrowers in Kenya, where the best data is available. We can safely assume that this is a pervasive problem. Inevitably, providers of digital credit have to price these losses into the interest rates charged for loans. This means that all borrowers (whether they repay on a timely basis or not) have to pay the risk premium for those that default.

While providers of digital credit will always struggle with the mathematics and economics of small loans and the cost of data analytics, there is clear opportunity to reduce the level of defaults and thus the risk premium that has to be charged … and perhaps that smart algorithms alone will not be enough to do so.

CGAP’s Greg Chen highlights six early errors made by digital credit pilots and deployments. Several of these contribute to the high levels of default.

  1. Offering credit without a strong remote identification system. When you can’t verify customer identity, offering remote services is difficult, especially at scale.
  2. Poor targeting, where credit offerings attract a high-risk applicant pool.
  3. Cumbersome loan application processes so that only those higher risk borrowers, who are unable to secure credit from other sources, apply.
  4. Poor product design, which does not adequate recognise and reward those that do repay regularly and on time.
  5. An excessive focus on credit scoring but the absence of a sound collections strategy.
  6. Credit scoring models that were too conservative and did not allow credit to be extended to more than a small fraction of applicants.

Addressing 1. – 5. could allow providers of digital credit to improve targeting, increase loyalty and reduce both risk and default … thus increasing the profitability of providers of digital credit.

1. Identification systems: A growing number of countries are introducing formal identification systems – many of which are bio-metrically enabled. And, even where no such systems are available, app-based ID systems (including for example Yoti, Taqanu, Trulio) are increasingly common. These, of course, require smart phones, but the growing penetration of smartphones continues despite some set-backs with low cost smart phones. Digital credit providers will need to leverage these ID systems to have a firm fix on their customers – this will be key to identification, credit assessment, collection and delinquency management. ID will also be key to running effective credit bureaus. Unfortunately, few countries outside Kenya have credit reference bureaus designed to help with the management of the small loans offered by digital credit … and thus to allow people to develop a credit history. While Kenya’s credit reference bureau is still finding its feet, it is playing an immensely important role in creating transparency and allowing those who do repay on time to create a positive records.

2. Poor targeting: Getting the right balance between credit scoring models that are too conservative and those that are too liberal is key to building an effective system. But there are other drivers of poor targeting. Digital credit lenders will also need to achieve the right balance between aggressive “push” marketing and ensuring that their product is properly understood in the market. As we have seen, too many people respond to push marketing by borrowing out of curiosity, and without any real need or purpose in mind. Providers can clarify their marketing to give customers a better understanding of their terms and conditions, as well as the penalties for non-repayment. This approach would also allow them to address challenges with consumer protection. They can also use behavioural nudges to facilitate appropriate behaviour.

Mobile network operators (MNOs) can also reduce targeting risk by completing initial credit screening through lending airtime credit. Airtime has marginal costs for an MNO, and thus represents a much lower risk than e-value credit. Thus this approach could allow MNOs to test borrower’s credit behaviour at much lower cost before opening a window to borrowing e-value.

 

3. Loan application processes: Many SMS-based and USSD-based digital credit systems make it almost too easy to access credit, thus potentially encouraging frivolous applications for credit. This, may need management through behavioural nudges – for example to encourage the potential borrower to view the terms and conditions, or to reaffirm the need for the loan after a nominal “cooling off” period. In contrast most app-based systems require the user to go through many screens (and, in some cases, what are seen as invasive requests for data and photographs) before they are given their loan. These systems need a thorough review to ensure that each step in the process is optimised, really adds value and does not put off high potential borrowers.

4. Poor product design: Currently, few of the digital credit products available reward those that consistently repay on a timely basis – except by offering larger loans. As borrowers demonstrate their credit-worthiness it would make sense to reduce the risk premium (and thus the interest rate) that they have to pay for each successive loan. This approach might be further reinforced and optimally communicated by creating a tiered status system (similar to those for airline miles) so that borrowers can aspire to move up the tiers and thus qualify for lower interest rates, larger loans, variable repayment periods and other benefits. Additional product innovation might include: 1. Loans with a tenure of a day for market traders who are currently having to use loans repayable over weeks or a month to finance their business cycles, which run from early morning to afternoon; 2. Goal-based savings/loan products with an appropriate financial planning tool embedded in the app or USSD interface; 3. Longer-term loans for those with an excellent credit record who want to borrow for their business – once again these need to reflect their business cycles.

5. Absence of a sound collections strategy: At present most digital credit providers use SMS to encourage repayment, but otherwise have little interaction with their borrowers. Only a few are using call centres to talk to borrowers struggling to repay. The important human touch is missing, and thus digital credit loans are last on the list to repay amongst households with multiple loans outstanding. For larger loans it may also be valuable to involve agents in both loan origination and repayment/delinquency management.

Readers will note that none of the above refers to using “big data” – in a way that has been so successfully done in the developed world (for example by Lending Club in the US). This is because the vast majority of low income people in the developing world do not leave adequately deep “digital footprints” to reliably inform credit decisions. This will change over time, but for now the most effective (and commonly used) indicators of credit worthiness lie in credit history and behaviour, and (to a lesser extent) top-up and call/SMS behaviour. It maybe that for larger loans app-based providers of digital credit may also want to use psychometric indictors to assess willingness to pay. However, this would be dependent on reducing the typical screening questionnaire from 200-300 down to 40-50 questions without losing predictive capability – quite a challenge.

There is a clear need to reduce the risk premium for borrowers of digital credit. While this may be difficult (but by no means impossible) to do for the first couple of loan cycles, it should be eminently feasible for later loans cycles once the borrower has established credit history and wants to borrow larger amounts. Doing so should incentivise timely repayment and increase borrower loyalty … and thus profitability of the providers of digital credit

Give us Some Credit! Meet the Digital Borrowers in Kenya

Posted on by MSC

It is 3 am in Nairobi. The city, known for its vibrant nightlife, is wide awake. Entertainment spots in the bustling capital of Kenya overflow as the night goes on. The streets are a sea of activity, filled with pleasure-seekers. Interestingly, it is between 3 am and 5 am that a third of all the digital loans from providers are taken. Could this be just a coincidence?

MicroSave conducted a qualitative study in Nairobi and Meru to understand the perceptions and motivations of low-income Kenyans to use digital credit. Using our customer-centric Market Insights for Innovation and Design (MI4ID) approach, we identified three profiles of digital borrowers: Repayer (Muthoni), Juggler (Makena) and Defaulter (Nyachae). In this blog, we analyse their use of digital credit and suggest ways to adapt existing products to better serve these customers.

Muthoni, 35, is a trader at Gikomba market. She buys fresh vegetables from Wakulima market at 3 am. She finances this purchase through digital credit. She has a choice pool of seventeen providers, and no longer uses informal lenders, who would charge her 10% interest per day. Her credit limit is $200, achieved through on-time repayment and disciplined saving.

Muthoni is a “Repayer”. Repayers are the premium customers for digital credit providers. They rarely default and can take multiple loans in a month. To reward this customer segment, providers could enable access to shorter or longer term loans, multiple/concurrent loans and increase credit limits. As is the case with Branch, other providers could also implement loyalty programmes that reduce interest rates and facilitation fees based on the size of loans taken, as well as on-time repayment. This would create ‘stickiness’ and reduce customer churn, as they tend to graduate to products with cheaper variable costs.

Makena, 37, runs a grocery shop in Igoji town. She is married and has four children. At any given month, she services over three digital loans in addition to traditional loans. Currently, she uses M-Shwari for emergencies and to boost her business, KCB M-Pesa for ease of consumption and Equitel to pay school fees. Occasionally, she uses Airtel Kopa Cash for sports-betting. She also has an $8,000 land loan from Cicido SACCO and another one from Equity Bank, which was used to restock her shop after it was looted. She usually repays late, but right before being negatively listed to ensure she can borrow again. ‘I prioritise [repaying] the Sacco loan as opposed to digital loans due to the huge penalties on default imposed by the Sacco. In some cases, they take your personal assets.’

Makena belongs to the “Juggler” segment of digital borrowers, who face capital scarcity leading to the use and “animation” of different credit instruments to meet various financial needs. In this context, we recommend that providers cater to such customers by offering more flexible repayment periods and options to borrow in tandem and pay in instalments. The providers should also have clear incentives for on-time repayment (such as simultaneous access to multiple loans).

Nyachae, 26, is a savvy entrepreneur who runs an African fashion attire business in Nairobi. In 2015 he took a $5 M-Shwari loan to test the product but has not repaid it. He claims that reminder SMSs from the provider cannot scare him: “I delete the reminder messages. They don’t know me so they can’t find me”. Something about borrowing digitally feels less serious to the defaulter. Nyachae postponed the repayment until he was negatively listed with the Credit Reference Bureau (CRB). He would now have to pay $22 as clearance fees on top of his outstanding $5 loan to pass a credit check. Nyachae is currently servicing a $700 loan from the church SACCO. Recently, he managed to get a $20 loan from a provider despite being negatively listed.

Nyachae is a “Defaulter”. To better serve this segment, providers could include a personal dimension in the digital collection process. This could be done, for instance, through follow-up calls or through agent engagement in the case of larger loans. In addition, providers should better understand the defaulters’ intentions for borrowing as well as motivations and abilities for loan repayment. CRB regulations should accommodate the realities of digital credit, for example, by having different tiers of clearance fees that are commensurate with the loan amounts.

While interacting with Muthoni, Makena and Nyachae, we came upon a number of insights. These are enumerated below:

  • Borrowers only had a limited understanding of the terms and conditions. This was because these were presented in legal jargon and accessing them through a weblink created real technological, cost-related, and psychological barriers. There is, therefore, a need for salient and simple terms and conditions presented before a customer accepts the loan (that is, through pop-up messages for STK, or inbuilt messages for mobile apps). It would also be ideal to separate the interest rate from the principal. This will limit confusion and enhance understanding of the repayment amount.
  • There is clearly an element of gaming the system to influence loan limits. In this regard, providers can use interactive SMS to understand the context of customers’ loan uptake. Is it taken in an emergency? Is the loan availed as a trial without consideration for long-term implications? Or is the borrower trying to “game the system”? Engaging customers before they take the loan can reduce uninformed borrowing and delinquency. It can help avoid a situation like Nyachae’s unrepaid $5 loan.
  • Reminders messages sent at different times of the day do not elicit repayment behaviour (Nyachae and Makena ignore messages sent in the morning). Providers should instead customise repayment reminder messages and incentives in terms of the customer segment and ensure that the reminders are goal based, so customers may see the value of timely repayment. Including a personalised touch, such as follow-up calls, can also drive repayment. This has been seen in the case of providers like KCB M-Pesa that uses a dedicated call centre to follow up with loan defaulters, Tala, which uses a collection agent, and Nimble Kenya, which also call to follow up with defaulters.
  • Ultimately, to encourage timely repayment from customers like Makena and Nyachae, there is need to use behavioural levers to drive repayment. These could include the following:
    • Priming ‘good borrower’ identities during the loan application stage. (‘Only prompt repayers take this loan, do you wish to proceed?’);
    • Framing loan default as having serious consequences (‘You will not be able to borrow in future if negatively listed on the CRB’);
    • Using social proof to elicit on-time repayment (see the adjoining Tala chat screen).

There is a clear demand for digital credit. A growing range of providers experimenting with approaches to respond to this demand bodes well for the future. However, to serve the wide range of borrowers better, providers should design products that leverage both rigorous data analyses as well as demand-side customer-centric research to understand the wide range of behaviours, contextual challenges and client experiences. Over time, they should incorporate learning within the product to educate customers on personal savings goals, and make these accessible to customers before and/or after disbursement.

Regulators also have an important role to play and should make it mandatory for all providers (including app-based lenders located outside the country) to use Credit Reference Bureaus to share data on digital borrowers. Regulators should set minimum standards for customer recourse channels and coordination by partners to address issues/complaints raised by customers and drive long-term usage and customer loyalty.

Digital credit is still a nascent industry with much scope for learning. Understanding the needs, aspirations, perceptions, and behaviour of customers should allow providers to design products and ‘lend smarter’, rather than depend on the risk premium-inflated interest rates to secure their business case.