MSC’s Group Managing Director, Graham A.N. Wright, during a live talk with MFI experts in Luxembourg.In this video, Graham debunks the hype around digital credit. He goes on to state that digital credit is not a cause for celebration as it is instigating financial exclusion.
Blog
Redefining Retail Banking – Agency and Beyond
Agency banking offers the prospect of much greater access to financial services for large numbers of currently unbanked or underbanked individuals – through financial institutions rolling out financial services using third party agents. However, agency banking is simply the latest element in a much wider technology-driven revolution in banking.
Technology is redefining banking across the world. In Europe, most transactions happen online, branches have introduced biometric identification of customers, interviews with customers are conducted through video conferencing, documentation is scanned and digitised. In the UK, near field communication has allowed widespread contactless payments, cash in circulation is reducing.
Banking in the developing world is different from Europe. Generically, there are fewer branches, ATMs, and POS devices, lower levels of interoperability, low levels of merchant payments, and much lower percentages of access to financial institutions. Usage of informal or semiformal mechanisms – savings groups, deposit collectors, money lenders, friends and family – is much higher. Interestingly, the technology revolution has gained huge momentum here too.
In 2002, Stijn Claessens and colleagues wrote a paper “E-finance in Emerging Markets: Is Leapfrogging Possible?”, at the time this was a forward-looking paper. Today, we can say with certainty, that it is not only possible, but it is happening; and rapidly.
So, what factors are driving this leapfrogging? Technology and communications have created the launch-pad for change. The mobile phone revolution has enabled customers to have new channel for banking services in their pocket and have underwritten the extension of mobile money. Mobile money, in turn, has acted as proof of concept for agency banking, inasmuch as it has proven that financial services can be delivered through technology, communications and third parties.
However, there are fundamental challenges facing agency banking. Many bankers do not understand the business case for agency banking. Agency banking is channel, it is not, of itself a product, and merely facilitates transactions. For existing customers, agency banking risks being simply an additional channel for transactions the customer would have completed anyway, thereby adding to costs. Furthermore, agency banking is a low-cost channel. It is neither (in the bigger picture) an expensive channel to run, nor does it return massive revenue through just existing transactional business.
So, why do it? Under the right circumstances, agency banking can reduce costs; it can assist a financial institution to on-board new customers. It can reduce overcrowding in branches to clear branches for high value customers or service delivery. It can facilitate the generation of new payment business. Agency banking can facilitate new deposits and enable microloans. The real business case for agency banking is in the change it facilitates.
The right circumstances, probably the most important three words in this blog? So, what are the right circumstances?
- Ability to onboard new customers easily: Financial institutions need to be able to use Agency Banking as key component of a strategy to on-board new customers. This will require not only digital identity, but also the ability of these institutions to access, free of charge, or at low cost, the national identity database and to use this to populate account opening forms. India has successfully used the Aadhaar bio-metric identity as a key component of opening hundreds of thousands of new digital accounts. In Kenya, banks have free access to the National Identity database.
- Government to person payments: G2P payments have been an important primer for the system in India, and a significant contributor to mobile payments in Northern Kenya as many governments pay pensions, pay fertiliser and gas subsidies.
- Interoperability: The ability to move money across the financial system and to link mobile wallets with bank accounts is important in the evolution of merchant payments.
- Appropriate pricing: Interoperability will be significantly constrained if there is a significant cost to individual payments, transferring funds, cashing out funds across networks or financial service providers. Experience from Kenya suggests that merchant fees should trend towards 1% in the East African market. Cashing out fees across networks should be modest – if there are high cash out fees, then it restricts functional interoperability.
- An enabling regulatory environment: In many markets, there is an uncertain regulatory environment – regulations take long to be drafted, legal amendments take years to pass through parliament. Intra-regulatory dialogue fails to reach consensus on the way forward for the digital finance industry.
- A willingness to invest in digitisation of bulk payment streams: Where appropriate payment streams such as those in agriculture, particularly those with regular small payments, coffee, tea, dairy, can be used to drive rural payment systems. In other countries, payments to industrial workers and digitisation of the workers payment streams can stimulate urban uptake.
Managing for the Future
Even with the right circumstances, financial institutions must carefully manage their digital operations[1]. They need to ensure that they have:
Agent networks[2]which work with high levels of reliability: Strong agent network management, combining clear agent selection and de-selection standards, liquidity management systems, agent monitoring, clear reversal and complaint mechanisms.
Strong digital processes: Straight through processing, advanced real-time fraud detection and prevention, velocity mapping, clear reversal policies and customer service.
Product development[3]: Successful product development implies a clear understanding of customer value propositions and use cases. It is likely that digital credit will prove popular with financial institutions and their customers, but pitfalls such as portfolio at risk, and potential credit black listing are likely to at once constrain the sector, and stimulate improved informatics.
Managing Strategically
So, agency banking can create change, but it is part of a strategy which looks externally to the competitive environment, and internally towards opportunities to digitisation.
- Competition and cooperation: There are occasions where the digital financial services industry can choose to cooperate. A clear case for this is in the provision of rural agents – where there may be insufficient businesses with liquidity to offer services to many financial institutions individually. This is the concept of shared agents which is being advocated by the Uganda Banker’s Association. A clear challenge for agents serving multiple providers is managing multiple e-floats, effectively dividing the e-float they have amongst many providers. A further case for cooperation is in the extension of a digital finance ecosystem and in the knowledge that making the system as a whole work for the customer can dramatically increase levels of adoption.
- Fintech disruption: If there is a single lesson to be learned from the rapid uptake of over the top (smart phone based) lending platforms, it is that financial institutions will need to actively watch and engage with (learning from, collaborating with or co-opting as appropriate) nimble financial technology companies, as they find ways to bring efficiency and effectiveness to aspects of financial services.
- Digitising the institution: Agency banking and the systems associated with it, is part of the trend towards digitising multiple aspects of banking internationally. Agency banking holds out a prospect of synergistic developments throughout banking operations, including the use of biometrics, centralisation of key functions such as account opening, strengthening customer service, digitising elements of loan decision making and loan documentation management, integration with national databases etc.
- Informatics: A digital future implies digitising information and implies returns to information when properly managed. It implies the need for financial institutions to capture and use information streams, such as payments, to improve decision making, design new products and services, and segment customers by investing in digital finance capacity, data warehousing, and recognising the strategic importance of information[4].
The clear message from this blog
The time to invest in the digital future is now, tomorrow may be too late. For retail financial institutions, particularly those with a large customer base, agency banking exposes customers to digital channels, and offers a realistic prospect of customer graduation to self-initiated payment transactions, a further value addition for the financial institution.
Re-imagining agent network management- What have we learnt?
At The Helix Institute of Digital Finance, we have spent the last four years researching the different facets of strategic operations in digital finance that really drive success. We started with the Agent Network Accelerator (ANA) project which conducted large quantitative surveys of agent networks in ten countries around the world. We have interviewed over 34,000 agents in eleven countries namely; Tanzania, Uganda, Pakistan, Bangladesh and India, Nigeria, Indonesia, Senegal, Zambia and Benin. While we release country reports on the major findings, we also aggregate the data and teach the lessons learned on how to design and develop an agent network in courses at the Helix Institute. This is a presentation of the lessons learnt in four years of ANA project.
How Smart are Smartphone Lending Apps in Kenya?
The mobile digital credit revolution in Kenya has attracted many fintechs offering loans via smartphones. Smartphone-based products have been touted for their potential to improve the user experience for digital financial services, particularly among low literacy customers. However, the Consultative Group to Assist the Poor (CGAP) finds that in India existing interfaces fail to realise this potential. MicroSave’s recent research on digital credit uptake and use revealed similar shortcomings in Kenya. This blog summarises the usability challenges of four major smartphone lenders in Kenya: Branch, Tala, Saida, and Zidisha.1
- Getting started
Low income customers may have limited access to digital credit apps. Because smartphone lenders primarily advertise via Facebook and Twitter, awareness of their products among low income people remains limited. Those who are aware often have basic smartphones with insufficient memory to install the lenders’ apps. Others struggle with hardware and software issues, since some software are incompatible with lenders’ app. Moreover, some apps like Jumo, Mjiajiri, Pesa Zetu require referrals from existing users (who may get referral bonuses); others like Micromobile and MPawa Sacco are accessible to members only. Finally, in some instances, the app requires users to have a Facebook account and an M-Pesa wallet, limiting service eligibility to Safaricom users.
Figure 1- Apps Require Users to have an M-Pesa Wallet and Facebook Account
The apps require users to sign up before exploring. The registration process can be lengthy and painful with several steps requiring a lot of data. Some apps require detailed, and what appears to be irrelevant or intrusive information on sign-up; this has raised concerns among users and may hinder take-up. For example, users may be asked to upload their pictures or share access to their private data, including call records, SMS, airtime loading history, handset device details, GPS and social media.
Figure 2- Zidisha Requires Users to Upload a Photo during Sign-Up
Figure 3 – Tala Loan Application Process
- Navigation and understanding
Users navigate easily and can access transaction history. CGAP guidance on Smartphone Mobile Money UI/UX emphasises the importance of flat menu hierarchy, which allows users to immediately perform desired transactions. Digital lender applications adhere to this principle: the menus have few action-based options that call upon the user to apply or repay a loan. As product offerings diversify, providers should avoid complicating the menus.
Figure 4- Tala and Branch Have Simplified Action Based Interface
Another key feature CGAP highlights is the ability of users to access their transaction history. All four lenders allow users to either raise a question in the app or request statements via email.
The look and feel of the interface can be improved through visual cues such as colour and icons. Some interfaces are not adapted for smartphones. Others are text heavy, dense and display too much information on one screen. Providers should instead communicate in easy groups with enough details to accurately inform but not overwhelm the customer. Visual cues might help customers picture the debt. For example, displaying loans and interest payments as colourful icons, labelled and sized proportionately to amounts.
Figure 5- Zidisha Loan Application Interface
Poor understanding, specifically of Terms and Conditions. Only one app (Saida) allows customers to choose between English and Swahili, others do not offer language options beyond English. Loan Terms and Conditions (T&C) are usually written in complex legal jargon or unfamiliar vocabulary, making it difficult to understand for most users. Warnings about negative listing with the Credit Reference Bureau (CRB) in the case of default, fail to explain the implications of being listed. Moreover, not all users review the T&C because they have to follow a link to a separate browser.
- Product design
Lenders’ credit scoring algorithms appear basic. As noted above, applications request access to a lot of personal data, presumably to be used for credit scoring. Some also contain a series of questions about age, current employment status, salary, the purpose of borrowing and existing loans from other providers. At the same time, there seem to be no mechanism to verify the accuracy of such self-reported information. Technically, borrowers could misrepresent their income or employment status to qualify for higher loan amounts. However, in most cases these apps appear to offer a standard loan amount to first-time borrowers, calling into question their use of personal data for lending decisions. It appears, that for all the hype, these apps are largely, or possibly even exclusively, using traditional credit history models – lending small amounts that are increased with good repayment behaviour. Branch claims to increase the amount and reduce interest rates for on-time repayment – an important break from the market norm of just increasing the loan size.
Customers face steep pricing and limited repayment options, but can test apps without borrowing. Fintech lenders are not subject to the recently introduced interest rate cap of 14% APR. As a result, app-based loans are often more expensive than STK-based or traditional options, particularly for first-time users. The maximum repayment period for Branch, Tala and Zidisha is one month. Saida offers customer a maximum of two months.
Figure 6- Loan Repayment Duration for Tala, Branch, Zidisha and Saida
Lenders’ default penalty policies are opaque: only Branch clearly states that it does not charge late fees or roll over fees. Luckily, users can test the application and review their loan eligibility and repayment options without committing to borrow.
- Assistance and support
Most lenders provide immediate on-demand assistance to borrowers prior to default, when support wanes. All lenders offer in-app customer support: users can submit their questions for immediate response or chat with assistants in real time, besides refering to the FAQ page.
Figure 7- Tala’s In-App Support
Customers receive text message reminders about repayment due dates. Some defaulters receive further reminders through email or even calls. However, options to restructure debt are limited. Branch, Tala, Saida defaulters are negatively listed on CRB after 90 days in delinquency and information on clearing listings is not well communicated. Some lenders hand over the defaulted accounts to collection agencies.
- Smartphone vs. STK usability comparison
Smartphone lenders in Kenya are yet to maximise the potential of smartphone interface to offer user-friendly, responsible digital credit. Moreover, while smartphone ownership is associated with pride and social status, it is still very limited, the vast majority of low-income digital credit users borrow via feature phones, which offer quicker and (in many respects) easier access with fewer keystrokes. The following table compares app lender features discussed above with those of SIM Toolkits:
Table 1: SIM Toolkit Vs. Smartphone App Features
Recommendations
Smartphone lenders in Kenya can further enhance user experience and make loans more accessible to the mass market with the following steps:
- Optimise apps for low-cost phones
- Remove requirements to sign in with Facebook and M-Pesa account
- Streamline and simplify registration process while complying with KYC requirements
- Consider limiting requests to access individual data, particularly if lending decisions are not based on this data
- Make interfaces visually appealing using colours and icons to communicate meaning, removing heavy text
Regulators can play a role in boosting consumer protection in digital lending by:
- Bringing all providers of digital credit under the regulatory framework – thus creating a level playing field
- Mandating that individual data lenders collect are subject to privacy laws
- Requesting that lenders institute measures to prevent customer over-indebtedness, be it through more flexible repayment terms or more extensive verification and credit checks
- Requiring that T&C be simplified and better communicated, for example using summary displays before customers accept loan and after loan disbursement accessible within the app, rather than by following a link away from the session.
1We examined these four because other app-based credit products are not freely accessible, requiring membership or referrals.
Re-imagining Agent Network Management – What Have We Learnt?
At The Helix Institute of Digital Finance, we have spent the last four years researching the different facets of strategic operations in digital finance that really drive success. We started with the Agent Network Accelerator (ANA) project which conducted large quantitative surveys of agent networks in ten countries around the world. We have interviewed over 34,000 agents in eleven countries countries namely; Tanzania, Uganda, Pakistan, Bangladesh and India, Nigeria, Indonesia, Senegal, Zambia and Benin. While we release country reports on the major findings, we also aggregate the data and teach the lessons learned on how to design and develop an agent network in courses at the Helix Institute.
Cashlite Ramnagar – A Pilot on Creating ‘Less-Cash’ Ecosystems
The payment landscape in India has been witnessing a paradigm change for last few years now; this is further accentuated by a slew of policy reforms and innovations that have happened in the last few years in pursuit to make India a less-cash economy.