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Top Blogs in Financial Inclusion – Pick your favourite

Posted on by MSC

Disseminating knowledge to aid sectoral growth has always been a critical aspect of our work. In the year 2015, we continued to accentuate our efforts to reach out to the readers with best of our research work, our evaluation of industry developments and published over 31 blogs. Here are our top viewed blogs:

Over the Counter (OTC) in Pakistan: Why It Works

A customer walks into a shop and tells the retailer … “I would like to send money to [another city] …”.  The discussion continues until, after verifying the customers original CNIC (Computerized National Identity Card) to meet KYC/AML requirements, the shopkeeper transfers money from his account. Once this is done, and the customer has confirmed that the recipient has indeed receive the money, the customer hands him both the money transferred and the commission payable. An over the counter (OTC) mobile money transaction has been completed, without the customer touching his own mobile phone. This blog examines the factors that are responsible for the success of OTC transactions in Pakistan.

Two More Revolutions Underway in Kenya

The blog highlights the developments in the digital financial services space in Kenya and also examines how the mobile money market is evolving in the country. The key points highlighted are-

1. Kenya is showing the beginnings of mobile enabled financial inclusion through two different models – one through a bank-MNO partnership, the other through a bank running an MVNO.

2. There is a growing focus on small-scale, consumer loans, not only from banks, but also from non-bank finance companies such as afb, many of which have their roots in payroll lending. But as more ambitious lenders with higher risk tolerance come into the market, it is fair to anticipate that it will be easy for people to get multiple larger loans via their mobile money accounts … and the results could be disastrous.

3. Savings are still very much an after thought. Relatively few people save on M-Shwari – the average balance, according to Cook and  McKay was USD $5.56 for all accounts, and $10.06 for those active in the past 90 days.

So Many Steps Forward … And Now One Big Step Back …

After the extraordinary progress made in the last nine months on setting a regulatory and policy framework to enable and encourage financial inclusion, January 16th 2015, Office Memorandum (OM) from the Department of Expenditure of the Ministry of Finance seems to be a setback for the ambitious PMJDY scheme.

The January 16th 2015, Office Memorandum (OM) fixes commission for banks distributing direct benefit transfers (DBT), including those for LPG – liquid petroleum gas. The OM states that for urban schemes like DBTL (the LPG subsidy), the transaction cost may be paid at the NEFT rate or the APB rate as per the extant RBI or NCPI circulars. For rural schemes “like pensions, NREGA, pre-matric scholarship, maternity benefits etc., where a large number of transactions are likely to be through the Business Correspondents the transaction charges may be paid @ 1% subject to an upper limit of Rs.10 per transaction”. The conservative commission announcement seems to reflect a Government mind-set that it is an expense and not an inevitable investment for the success of PMJDY and the expected social and financial returns. The blog states how the OM will impact the progression of PMJDY.

Small Finance Banks – Are You Ready? The Opportunities and Challenges

The blog discusses the advent of Small Finance Banks in India and how they will predictably alter the financial inclusion in India. Small Finance Banks reiterate the Reserve Bank of India’s commitment to achieve financial inclusion by supporting the development of institutions that offer innovative ‘high technology, low-cost operations’ driven financial services.

It is indeed an interesting time to be in the financial inclusion market in India. The performance of the Small Finance Banks in the next five years will, in a way, determine the path that the microfinance sector will take. At the same time, the Indian microfinance market has enough to offer to those MFIs who missed the opportunity this time around – particularly in the short-term. MicroSave speculates that many of the transforming MFIs may even have to “down-scale their lending portfolios” as part of their efforts to transform. This could give SKS, Satin and many mid-size NBFC-MFIs that made a conscious choice not to apply for licenses, the opportunity to significantly expand their portfolios and geographical reach.

At MicroSave, we are happy to have provided technical assistance support to eight out of the ten institutions that received the SFB license.

Designing an Effective User Interface for USSD: Part1

Suraj is an illiterate migrant from Muzzafarpur (Bihar) who works at a construction site in Delhi. He has recently opened a mobile wallet with a leading mobile network operator (MNO) in India. When we met him, his primary concern was – “How would I use my (mobile money) account, when I don’t even know where to find the required service?”

Users like Suraj represent the target customer group for mobile wallet service providers. One of the common attributes of this user group is the inability to use mobile money services on their own. This necessitates mediation from a family member or an agent to conduct a transaction. The most quoted reason for facilitation is the difficulty faced in “locating” various service offerings.

The blog examines how user interface (UI) plays a vital role in facilitating usability and enhancing user experience. Globally, mobile money service providers offer different access channels such as mobile application, internet, unstructured supplementary service data (USSD), interactive voice response (IVR) and SIM toolkit (STK). MicroSave came up with a comparative analysis of some of the commonly used access channels, please read the blog for details.

 

Payment Banks: What can we learn from Indian experience

Posted on by MSC

MicroSave’s “Payment Banks: What can we learn from Indian experience” is a handbook encapsulating 20 years of on-the-ground research and technical assistance; creating successful business cases while serving the mass market. The handbook provides deep insights, from across the globe, around strategy, product development, and agent network development/management.

Small finance banks: What can we learn from Indian experience?

Posted on by MSC

These short articles are based on years of on-the-ground research and technical assistance dedicated to developing sound business models and operations to underpin profitable approaches to serving the mass market, thus advancing financial inclusion.

Small finance banks: What can we learn from international experience?

Posted on by MSC

These short articles are based on years of on-the-ground research and technical assistance dedicated to developing sound business models and operations to underpin profitable approaches to serving the mass market, thus advancing financial inclusion.

Role of Bank Mitrs in Direct Benefit Transfer Ecosystem: Are Banks and Government Ignoring Their Brand Ambassadors?

Posted on by MSC

The direct benefit transfer (DBT) programme is an important and far-reaching initiative of the Government of India. The successful rollout of DBTL (DBT for subsidy transfer of domestic LPG) could save Rs. 7,700 crore (USD 1.167 billion) for the government. This is about 38% of subsidy budget of Rs. 20,000 crore (USD 3.01  billion) for LPG.

Similarly, if we assume an approximate saving of 38% through DBT in four schemes (MNREGA,[1] NSAP,[2]Fertiliser Subsidy Scheme[3]and PDS[4]) the government could save up to Rs.100,000 crore (USD 15.15 billion) out of the total subsidy budget of Rs. 270,000 crore (USD 40.09 billion). However, the success of these schemes will not depend only on the design of the programme and budgets allocated – the entire ecosystem must work properly for DBT to succeed.

While technology is the backbone of DBT, the importance of the role of front-end, last mile transaction points cannot be underestimated. By design, DBT schemes target the most vulnerable sections of the population (with the exception of DBTL, in which almost all sections of the population are covered). But this segment struggles to access banks for a variety of reasons: sometimes because they live in remote areas, far from bank branches; and often because they lack the knowledge and confidence to approach a bank. Additionally, they are not conversant with the banking system, and even if they are provided with access to the banking system, they depend on someone to conduct transactions for them. In this context, a robust agent or Bank Mitr (BM) network is the crucial link which can either make or break the implementation of the government’s flagship DBT programme.

Recent months have seen the re-emergence of a focus on the importance of this channel. The Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme, that has helped open more than 180 million bank accounts in less than a year, has very clear emphasis on BMs.

What ails the Bank Mitr network?

The low number of transaction-ready Bank Mitrs has always been a point of concern for regulators and the government alike. In 2012, MicroSave provided technical inputs to a national survey on BMs by CGAP-CAB which suggest that BM availability was in the range of 57―78%. Lack of adequate remuneration for BMs was primarily responsible for their discontinuation.

In order to tackle this challenge, the PMJDY vision document mandates a minimum payment Rs. 5,000 (USD 75.75 per month) to BMs; however, an assessment recently conducted by MicroSave highlighted that BMs actually receive an average of Rs. 3,951 (USD 59.86).

However, low compensation is not the only issue, or even the only financial challenge that BMs face. There is a multitude of issues that can be classified in two categories.

1.      Financial issues

a. No support for capital expenditures. There is no incentive for banks to support BMs’ expenses especially on technology, infrastructure, the branding of outlets and other capital items. As a result, BMs try to minimise their fixed cost on furniture and fixtures, computer/communication equipment, marketing, and even liquidity management (deposit in the settlement account, and cash in hand). The ANA report for India suggests that operating expenses for BMs are higher in India than other South Asian countries. The report highlights that rent, electricity and travel expenses for liquidity management constitute the bulk of the operational expenses for agents.

b. Delay in payment of commissions. Remuneration is not only small in absolute terms, but is also paid irregularly by banks/agent network managers (ANMs). The plight of BMs is often aggravated when the manager concerned (of the bank or the ANM) is transferred or retires. Most activities and processes are still person- rather than system-driven; so BMs have to start afresh each time a new manager takes charge. Furthermore, there is typically no intimation of pay out and no break-up or details about the business done by the BM for which payment is made. This leaves BMs unsure about their performance and/or what do they need to do to improve.

2.    Non-financial issues

a. Lack of trust by customers. Many BMs are not recognised as bank agents. Many customers do not trust BMs because banks do not publicly promote the people or organisations working for them as trustworthy legitimate entities.

b. Lack of monitoring by banks and/or intermediaries. Though banks have designated officials to monitor the BMs, very often because of the branch’s routine work and limited staff, monitoring of BMs falls to the bottom of the priority list and is ignored.

c. Ad-hoc and incomplete training. The majority of BMs are trained on how to operate the transaction device and given a few tips on troubleshooting. International experience clearly shows that they should be trained on banking products relevant to the area/ local needs, and on soft skills such as customer service.

d. Absence of a proper grievance redressal mechanism. BMs also complain about the lack of a reliable support system through which their problems can be resolved. Resolution of most technical and non-technical issues takes a lot of time, and this both adversely affects their business and further erodes whatever little trust customers place in them.

e. Lack of awareness among the masses. People in rural areas do not have good information about financial products, government schemes, and allied benefits, which would have otherwise driven BMs’ business. BMs believe that banks and government departments should work to address the prevailing myths associated with agent banking through financial education campaigns.

What can the government, regulator and banks do?

1. Enforce the payment of minimum remuneration in a timely manner to BMs. This single measure will stabilise and encourage thousands of BMs across the country, providing a fillip to financial inclusion efforts of the government.

2. Banks and government agencies should develop and deliver clear customer communication for all key products and government schemes. BMs can then sell these to their customers.

3. Develop and deliver standardised and engaging training programmes that include relevant details about the financial products as well as soft skills, such as dealing with customers. This will both boost the confidence of BMs and allow them to act as real financial intermediaries, rather than just being another transaction point.

4. Our experience in field of BMs’ remuneration tells us that the expectation of remuneration is a function of capital expenditure that BMs make. Currently, individual BMs have to make this expenditure on their own, with no support from the banks that appoint them. If RBI includes loans extended by banks to BMs for capital expenditure eligible as part of Priority Sector Lending (PSL) requirements, it will moderate BMs’ expectations vis-à-vis remuneration and help banks meet their PSL targets.

5. Banks should recognise, promote and market the BMs working for them to generate recognition of, and trust in, the channel.

6. Put in place a comprehensive grievance redress mechanism to ensure adequate (technical or non-technical) support for BMs. Regulatory audits should audit the banks’ grievance redressal systems when reviewing BM channel.

Trusted, committed and liquid Bank Mitrs can (and indeed must) play a much bigger role if the government’s vision for financial inclusion is to succeed. This blog highlights the key challenges and opportunities to address them. The recommendations are not high-cost in nature, and, if implemented, could transform the BM network from an often moribund/dormant channel into a vibrant and profitable one.

[1]MNREGA is the largest livelihood security programme in India, guaranteeing 100 days of wage-employment to rural households whose members volunteer to do unskilled manual work.

[2] NSAP is a  programme that has introduced a National Policy for Social Assistance for the poor and aims at ensuring minimum national standard for social assistance in addition to the benefits that states are currently providing or might provide in future.

[3] Fertiliser Subsidy Scheme is a programme in which the difference between the cost of production of fertiliser and the selling price/MRP is paid as subsidy/concession to the manufacturer.

[4] PDS in the country facilitates the supply of food grains and distribution of essential commodities to a large number of poor people through a network of Fair Price Shops at a subsidised price on a recurring basis.

Competition in the Kenyan Digital Finance Market: Digital Deposits (Part 3 of 3)

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This is the third blog in a three part series, which compares digital financial service offerings in Kenya.  The first blogfocused on mobile money services, the second one analysed digital credit and this one analyses digital deposits.

Digital deposit accounts are a controversial topic in digital finance.  Many analysts note that mobile money providers cannot offer interest on the balance held in a mobile wallet, and that could be a deterrent to greater usage.  However, for many Kenyan adults, savings rates are not high enough to make this a salient issue.

Deposit rates in Kenya are consistently below inflation rates, which were 6.9% in 2014, meaning they do not make money for the depositors; they simply help the depositors lose less than if they kept their money in cash or a mobile wallet.  That is not the most alluring of value propositions, and the earnings on small account balances of a few hundred shillings (a few dollars) do not add up to much.  Looking at deposit rates, M-Benki and M-Shwari provide the best returns, but it is really other features like reliability, flexibility, ease of access and the fact that savings contribute to credit scores that mass market customers generally value most highly.

The most interesting deposit account attributes are not their interest rates but the features they offer that really help people to manage their money.  The attached credit features (analysed in the last blog) certainly drive usage, and some products also offer associated insurance cover.  M-Shwari and the KCB M-PESA Account also launched a “Lock” feature (fixed deposits).

Furthermore, the KCB M-PESA Account launched an option to save for a specific target, which Equitel now offers as well. Equitel offers the additional feature of being able to send money to future dates.  While we do not have usage figures for these different features, these are the factors we expect to differentiate the market most. Given the complexity of the financial management techniques required by mass market customers, we expect these features will go through many changes before they are actively used by the majority of people.

The low minimum balances all products share are excellent, and the absence of maximum account limits for M-Shwari and Equitel are sure to be popular with salaried workers and businesses.  However, the maximum limit of one million KSH (US$ 10,000) in the KCB M-PESA Account is probably high enough for most Kenyans. The lower ceilings for Equity HapoHapo and the KCB M-Benki account might limit usage for middle class customers, although it is possible for customers to increase transaction limits by upgrading their accounts. This requires additional KYC details to be provided to the respective banks.

While we do observe some salient differences in terms of deposit rates and maximum limits for digital deposit accounts, we expect usage to be mainly driven by the allure of the credit products that are attached to such accounts. As other money management features are developed, we expect those will further determine successful uptake.  Providers that are closely studying the financial management habits of mass market customers; pushing innovation to provide those customers with targeted services; and investing in the streamlined roll-out of those services, will be the winners in this industry.

For now, in terms of digital banking the KCB M-PESA Account seems to be the one to beat, but it is still new and we still need to see that customers will pay their money back.

Each day the battle for market share begins anew. The Kenyan market is certainly complicated at the moment. Providers are pushing the frontiers of mobile based financial services, and it will be very interesting to see who is left behind as the industry steams ahead.

Note: These prices were collected in November 2015 by reviewing provider websites and advertisements; by reviewing terms and conditions; and by calling customer service centres when necessary. It is important to note that volatile market interest rates and dynamic competitive pricing schemes mean that prices change constantly.  Further, in multiple cases we received conflicting information from providers on their pricing schemes, and did our best to resolve them.