Governments are the biggest social spender with their G2P payments. However, questions are consistently raised as to whether the payments reach the intended beneficiary. G2P payments in India face issues such as insufficient withdrawal points in villages, inactive CICO (Cash-In Cash-Out) points, poor service quality at withdrawal points, sustainability of CICO points, lack of electronic mode of fund transfer, etc. To address these gaps, MicroSave has developed the “District Readiness Assessment (DRA)”. It assesses the readiness of stakeholders responsible for effective and efficient payment of government benefits, in a particular geography. In addition the DRA could also be adopted for delivery models other than G2P payments. A slightly modified version could be used to understand the preparedness of any service provider to penetrate any particular market. Frequent use of this tool will go long way to equip and guide stakeholders.
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Financial inclusion histories
We do most of our work in a historical vacuum. We tend to think of today’s problems and opportunities as unique. That’s a natural bias in an age imbued with a sense of inexorable progress reliant on technological solutions. But if we lift our gaze over historical time, we find numerous references to issues and debates that are not unlike those prevailing today. There’s nothing like historical perspective to temper one’s excitement about the latest idea or trend. Maybe that’s why we shy away from probing too deeply in our history books.
Let me share three things about the past that I’ve recently become aware of that relate to contemporary discussions of financial inclusion.
Big history: G2P payments and the origin of coinage
In his sweeping historical account of the development of credit and money systems, David Graeber, author of Debt: The First 5000 Years, makes the claim that it was governments, not markets and the spirit of the enterprise they embodied, who had the burning need that led to the invention of coinage. Markets could function just fine with credit arrangements when people bought stuff from one other, with trusted parties clearing (or discounting) debts between people from different localities who didn’t know each other and were not likely to meet again. Hence the observation, which I wrote about in this blog a year ago, that money has always been largely virtual.
But governments of the time had a specific need for a readily exchangeable, portable, tokenized form of value that could be used for mass micropayments: for the victualling and quartering of troops as they marched and spread across the territory. Governments then stepped up taxation as a means of getting those coins back from the people, so that they could be recycled. So markets worked on ledgers, but armies needed cash. Of course, once coins became widespread, markets readily adopted them, but the vector for mass adoption lay elsewhere.
I am struck by the similarity with the situation today. The new burning micropayment need of most developing countries is the distribution of cash-based social welfare payments to a rising share of the population. And indeed we see that in many countries –and for many donors— it is the need to make G2P payments that is driving the agenda around digitizing money, for finding something that is Better Than Cash. These schemes may help many needy people, but at its core it is about meeting a pressing government need.
Family financial histories
We often go out searching for financial tidbits in poor people’s lives, but have you wondered about the financial history of your own family? Try asking your parents and grandparents the kinds of questions we so mechanically ask total strangers in foreign lands.
I asked my parents, who grew up in an impoverished, conservative, isolated, economically mismanaged, post-civil war Spain. They were the first in their families to go to college. I learned that their parents didn’t have bank accounts, but neither did most everyone else they dealt with. When my parents were growing up, cash was hidden around the house, and some of it was spread over several envelopes. What if they needed money? My father made the gesture of a finger slipping in and out of a ring: my grandmother’s wedding ring doing regular financial duty at the pawnshop. Both my parents agreed that in case of need within their respective families, the main option was to scramble for more work. It’s almost like their parents were purposely holding back from doing more work regularly in order to leave some room for extra income in case of need.
All this may sound familiar. But what really struck me was how uncomprehendingly my parents looked at me when I insisted on knowing how their own parents managed without a bank account. It just didn’t seem that important to them, at the time. My parents both became doctors and learned to avail themselves of the convenience of modern banking. But they are clear in their minds that the account came with their economic and professional success, not the other way around.
Do you know your family’s financial history? When and how did a bank account first enter your family’s life, and how momentous did that seem to them?
150 years of financial diaries
It is said that writing evolved from the need to record debts. We tend to look at money matters like they hold an important key to understanding broader personal and societal matters, which may be why we have such fascination for understanding how others manage their money.
It should be no surprise, then, that there is a long tradition of conducting financial diaries. In her study spanning the period 1870-1930 in the United States, Viviana Zelizer discovered numerous instances of “household-budget studies” that “richly documented how the working class and lower-middle class spent their money,” at a time when the consumer society was being established. Even our research methods are not so new.
Disruption is simmering in Kenya
Something disruptive has been simmering for some time now in Kenya’s rapidly evolving digital finance market. M-PESA the lauded and the most successful mobile money offering in the world has started to feel it too. At the core of the disruption is the “Thin-SIM”, a decade old technological innovation from China.
M-PESA – The Benchmark
A survey conducted in Kenya found that mobile money usage is twice traditional banking services. Compared to 2013, mobile transactions increased by 26% in the first half of 2014 and amounted to US$12.5 billion. The market has so far been dominated by M-PESA with 73% of market share and75% of the adult population using M-PESA for their money transfer needs and (increasingly) some of their daily purchases. Such is the brand domination that 43% of Kenya’s GDP flows through M-PESA. It is for these reasons that M-PESA is considered to be the benchmark for mobile money deployments worldwide.
M-PESA till now has enjoyed a quasi-monopoly in the Kenyan mobile money business, and while many competitors tried, none managed to make a significant dent in its market share. Until recently the agent network of M-PESA, which amounts to 85,000 agents, was under an exclusive contract arrangement with M-PESA. But recently because of the changes in regulations, which were long fought by Safaricom, M-PESA had to open up this exclusive agent network to others. While move seemed to have the potential to end M-PESA’s monopoly, three months have passed, and it has not really affected M-PESA at all.
In a country like Kenya where the majority of the population is already comfortable with mobile transactions, a new entrant can compete in the mobile money market in two ways. They could either customize offerings to attract customers who have not been brought under a formal financial umbrella or (probably the easier) they could target existing M-PESA users. The thin SIM technology focuses on the latter.
Equity Bank – The Challenger
In April 2014, Equity Bank acquired a license of Mobile Virtual Network Operator (MVNO) to make its financial services more accessible and affordable – and to respond to the challenges posed by a competitor (Safaricom) owning the channel infrastructure. An MVNO is wherein an existing brand enters the mobile telephony business without actually investing and owning the radio spectrum.FinServe Africa, the MVNO established by Equity Bank, will trade as Equitel and deliver its services on the Airtel network. It has partnered with a Taiwan based organization, Taisys, for ultra-thin SIM cards. These SIM cards are 0.1 mm thick and can be laid on top of an existing SIM card thus converting a single SIM slot mobile phone to a dual SIM phone without any hardware adjustments.
Equity Bank plans to provide these SIM cards free to its existing customers in Kenya through its network of branches and agents. The bank believes the market is mature enough to route a basket of asset and liability products through this initiative. By using the thin SIM as the channel, Equity Bank has plans to disrupt the Kenya’s digital finance market. To do so they have announced access to instant loans through Equitel at a monthly interest rate of 2% as compared to M-Shwari’s industry standard of 7.5%. Also to compete with M-PESA on mobile money remittances, Equity Bank originally announced transaction charges of 1% subject to a maximum of Ksh.25 ($0.28). This was also way less than the current market charges of 16%. Equity Bank is thus offering a very real price-based, customer value proposition. But on September 15th, CEO James Mwangi sought the further increase the pressure on Safaricom by announcing that Equity Bank would not charge for transfers within its MVNO network. “We shall use USSD which is not expensive and so we opted to give money transfer services for free,” he said. “If we do this, we can collectively save Ksh43 billion[US$ 505 million], which is what Kenyans paid for to transfer cash last year. It costs nothing for us to offer that service because USSD is free for a telecom.” With approximately 9 million accounts at Equity Bank, this service could result in the very rapid emergence of competition and capture a significant proportion of M-PESA’s market share of 17 million customers.
Security Fears – Or Delaying Tactics?
Safaricom has opposed this technology expressing concerns about the security of thin SIMs. This has managed to delay the commercial launch of Equitel by six months. GSMA, the mobile network operators association, has also advised using an independent consultant to ascertain the risks involved before regulators allow the commercial launch of this technology. But since this technology has been tried and tested in the past in China, Singapore, and other developed nations, it was reasonably likely that Safaricom’s concerns would not prevent the launch for very long.
In July 2014, Bob Collymore noted that he was not worried about losing customers to any of the three new MVNOs. “Customers have stayed with us because of the total proposition, which includes network size, coverage, speed, and reliability … Our concern about the slim SIM is its potential to compromise customer security”. But James Mwangi, CEO of Equity Bank remains confident about the security of the thin SIM technology, as shown in this fascinating video interview, and charges Safaricom with irresponsible scare-mongering. And, of course, those really concerned about security, but wanted access to Equity Bank’s cheaper fees can buy a dedicated SIM, to use alone or in parallel with a Safaricom/M-PESA SIM in one of the dual SIM phones that are so common in Kenya.
Despite this, there is now a protracted tussle going on between the Communications Authority of Kenya (which has given the go-ahead for the trial launch of Equitel for a year – with the intent of monitoring and reviewing the security during the rollout) and the National Assembly’s Committee on Energy, Information and Communication Technology (which wants a security audit of the thin SIM technology before allowing Equity Bank to take it to market). CAK Director-General Francis Wangusi insists that the approval for a one-year trial given to Equitel, was still valid despite the directive issued by MPs stopping the commercial launch, noting, “We are an independent authority and it should be clear that this means there should not be interference by political, government or commercial interests”.
Amid the crossfire, there is some suggestion that the parliamentarians’ intervention is politically motivated. “”Being partly owned by the government, it becomes hard to regulate Safaricom and even harder to allow a direct competitor to its suppliers. Safaricom’s M-PESA is hosted by Kenya’s Commercial Bank of Africa-a bank said to have ties with the first family. It would be hard for anyone to let go of their golden goose just like that,” said a political economist who doesn’t want to be named.”
In the latest twist, Equity Bank now faces another legal challenge from a “data specialist”, Daniel Murage, who has, surprisingly, taken it upon himself to go to court to “Restrain Equity Bank from conducting a one-year trial of the thin-SIM technology until pending issues on data protection are addressed,” on the basis that “The bank intends to subject its customers to the service without providing any safeguard to the vulnerability and safety of (the) personal data of the account holders in their possession since the system’s vulnerability is at high risk”. Given that Mr. Murage is under no compulsion to use the Equitel services, this challenge seems almost as bizarre as the one from Consumers Federation of Kenya (Cofek) in June 2014, which claimed that the MVNO licenses were unlawful as there was no public consultation regarding the allocation of “scarce natural resources” (by which they meant bandwidth). As many commentators have pointed out, it is very strange to see Cofek challenging market developments that can only benefit consumers in terms of choice and price. One cannot help wondering what really underlies these challenges.
Safaricom’s Competitive Response
Through their MVNO, Equity Bank rides on the Airtel network, and with no investments in infrastructure they can focus on customer acquisition – including through offering lower rates. Aware of this move, Safaricom has already responded. After stating on July 8th, 2014 that there were no plans to reduce M-PESA tariffs, on August 19th, 2014, in a proactive move, Safaricom reduced their cost of sending money (P2P) by 67% for small and medium value of transactions (while also raising charges for larger ones), well before the commercial launch of Equitel. Some observers have suggested that this move shows just how worried Safaricom are about Equitel. Either way, the increase in costs for larger transactions means that it has become harder (or at least more expensive) for businesses to use M-PESA to transfer cash … a move that may well drive them into the arms of Equitel.
Win-Win For All?
While the thin SIM technology is still in the very nascent stage, the price war has already picked its winner: the end user. Some immediately foreseeable benefits include lower costs for mobile money transactions, cheaper access to credit, the benefit of dual-SIM without any additional costs, eventual opening of a wide range of innovative products, and improved customer experience as the bank now controls the channel itself, to name a few. Customers will be able to access both M-PESA and Equity Bank’s Eazzy24/7 and related banking services on a single handset. Once Equity Bank offers many of their banking services on mobile phones, customers can actually use a very significantly enhanced product range well beyond money transfer, payments, and the savings and the short-term credit offered by Safaricom and Commercial Bank of Africa through M-Shwari. Safaricom, in turn, will no doubt use its new system and user-friendly APIs to encourage and support new waves of innovation.
At first glance, it appears to be a win-win for most stakeholders – including the Central Bank of Kenya which is seeking to further enhance financial inclusion in the country. But for Safaricom, it is also time to rethink their strategies. The reduction in tariffs for small and medium money transfers is a start, but there is more to come. Bob Collymore, CEO of Safaricom, notes that 95% of transactions in Kenya are still made in cash and that digitizing these represents the very large and very real market opportunity. On September 16th, 2014 he announced, “We have been working on a new upgraded version of M-PESA for three years now and have already undertaken software and hardware upgrades”. The new M-PESA system, which is expected to launch in early 2015, will allow Safaricom to increase its integration with a range of partners including banks and utility companies and thus offer a broader range of services. And since it able to process 600 transactions per second (just less than twice the capacity of the current system), it should offer the increased reliability that customers seek.
What does the future hold?
So will this thin-SIM technology and the lower tariffs offered by Equity Bank revolutionize the mobile money market in Kenya? Will it really disrupt the market or will the fears raised by Safaricom around the security of the thin SIM mean that customers refuse to use them? Commenting on this, in an excellent discussion in The Helix LinkedIn Group, Edward Obiko, Card Management and Multichannel Services at Bank of Africa–Kenya, noted, “When it comes to small transactions, convenience eats security for breakfast”. But Jaqueline Jumah, Manager – Digital Financial Services, MicroSave notes, “I still feel it will be tough changing the perceptions of the users”. Furthermore, it is important to note that Airtel previously eliminated charges for P2P transfers in an attempt to disrupt Safaricom’s dominance of the mobile money market but failed to do so. Some, however, suggest that this because Airtel’s agent network was insufficient (or insufficiently active with the liquidity to transact) to create the network effect that is so essential for successful mobile money systems.
Equity Bank’s agent network is already widespread with over 11,000 agents. It is well organized, monitored and supported by the bank, and is recognized and appreciated by Equity Bank’s customers. Indeed the bank’s agent network is already conducting 3,000,000 transactions a month – more than their branches or ATMs. The agency business is already yielding huge volumes of net deposits for the bank to intermediate (see graphs). The Central Bank of Kenya Supervision Report 2013 tells us that the average value of a deposit at a bank agent in 2013 was KSh.8,676 (US$102) and the average value of a withdrawal at a bank agent in 2013 was Ksh.3,987 (US$47) – with an average transaction value of Ksh.5,616 (US$66). From the graphs below, we can see that the average transaction size at an Equity Bank agent in March 2014 was Ksh.6,234 ($73) – far above the typical M-PESA transaction which lies in the range of Ksh.1,000-2,000, with an average cash in transaction size of about Ksh.1,220 ($14).
But perhaps we should leave the last word to the Kenyan wananchi commenting on newspaper articles, the vast majority of whom seem to enthusiastically embrace what Equity Bank is trying to do. “The competition is so healthy since it accords the consumer a fair price determination. I am so impressed at Equity Bank’s innovation much to the delight of the ordinary Kenyan. The bank revolutionized the banking industry, which was riddled by unhealthy practices and higher end principles and policies bringing the service to within reach by all. It is time such a healthy competition entered the money transfer business …”.
Designing and Delivering Agriculture Financing Products
This resource book can act as a useful guide to MFIs engaged in providing financial services to the poor, particularly agricultural finance; community based organisations engaged in aggregation of farm produce and other practitioners in the area of agricultural financing. The intended benefits of the resource book are to help the audience in understanding clients’ perspective, understand the concept of value chains and usage of the tool of value chain analysis, identify opportunities and develop these into a product concept, use pilot testing to gauge clients’ feedback on the product and its impact on organisation; and roll-out of the product successfully with known benefits and impacts.
Behavioural Insights in Insurance
It is a widely held belief amongst experts and industry players that, “Insurance is never bought, it is always sold”. Though, numerous research studies on insurance have focused on preference and willingness of consumers, the anomaly of demand and apathy of users remain one of the greatest mysteries of the financial world. This note takes an alternative view from the conventional wisdom of expected utility and optimum deductible in insurance to analyse user preference. Instead the note highlights explanations for insurance purchase and use decisions through concepts of behavioural economics. The note argues that use of these concepts along with thorough understanding of business dynamics of the insurance industry can alone lead to effective user centric designs in insurance and microinsurance.
Draft branchless banking regulations in Indonesia – A review
The Government of Indonesia has been proactive in its efforts to extend formal financial access to the unbanked and under-banked sections of the society. The release of draft regulations on branchless financial services for financial inclusion by Otoritas Jasa Keuangan (OJK – the financial services authority that regulates and supervises financial services activities in banking, capital markets, and non-bank financial industries) is a positive step in this direction. It is laudable that OJK has provided much needed regulatory clarity in such a short time. This note provides an analysis of the draft regulations based on our experience of working in Indonesia and other geographies.
Some of the positive and progressive clauses of the regulation are highlighted below.
- Stakeholder Feedback: OJK’s initiative to seek feedback from industry experts and stakeholders is commendable. Media reports also suggest that OJK plans to have discussions with industry players to seek their suggestions. These consultations provide much needed industry perspective, making it a collaborative effort to devise enabling regulations.
- Simpler Customer Due Diligence (CDD) Requirements: A client with any photo identity card issued by the government or a reference letter from a local community leader can open a basic savings account. This is the most progressive clause of the regulation. Simpler CDD requirements help the financially excluded sections of the society integrate into the formal financial system. For example in Pakistan (with simpler CDD requirements for low-value accounts), the number of branchless banking accounts grew 63% in a year, from 1.8 million in September 2012 to 2.96 million in September 2013. Further, this clause is in line with Financial Action Task Force’s guidance on AML/CFT measures for Financial Inclusion ensuring that the risks associated with simpler CDD requirements are not compromised.
- Diverse Product Suite: The regulations permit service providers to offer a wide array of products such as savings, micro-loans, micro-insurance, and transfers thus providing a one-stop shop for all clients’ financial needs. It is a well-documented fact that poor lead active financial lives because they are poor, not despite it. They create “portfolios” using various financial products through informal and formal institutions to address their immediate and longer-term needs. Research conducted by MicroSave in Indonesia and elsewhere(for example India, Bangladesh, Sri Lanka, and Nepal) shows that there is high demand for diverse financial products/services among the poor and the unbanked. A diverse product suite also drives up transaction volumes increasing business viability for service providers and agents.
- Varied Service Providers: Banks, financial institutions and insurance companies (life and asset) are eligible to become branchless financial service providers. This enables smaller banks and financial institutions (including microfinance, rural banks, and venture finance institutions) with limited capital and geographical presence to offer financial services through low-cost technology-enabled channels. Further, service providers are allowed to appoint individual agents (airtime sellers, mom and pop stores, etc.) and business entities (with legal status) as agents. This is a marked shift from existing electronic money regulations, issued by Bank Indonesia, which favor big Buku IV banks(banks with a minimum core capital of IDR 30 trillion i.e., approximately US$2.6 billion) by allowing them to appoint individual agents. Airtime sellers, small retailers, and mom and stores have played a significant role in facilitating low value/high volume financial transactions in other geographies. In Indonesia, both the organized and unorganized retail sectors have a significant presence. 75% to 80% of retail sales are through the unorganized sector, and reports also suggest that there are 2.56 million retailers in Indonesia. Clearly, these outlets can play a major role in reaching out to the unbanked and under-banked.
However, we would like to suggest some improvements to make the regulations more progressive and further foster the development of branchless financial services in Indonesia.
- Customer Charges: Regulations suggest customers can be charged for withdrawals and transfers only after four transactions in a month. All other transactions are free. The assumption behind these restrictions seems to be that customers may not willing or able to pay for the services. However, research done by MicroSave with Cocoa farmers in South Sulawesi indicates that customers are willing to pay up to IDR 5000 for withdrawals and IDR 2500 for bill payment transactions. Further findings from cost and willingness to pay research conducted in India suggest that an overwhelming 80% of the respondents are willing to pay for the services if they are closer, quick and easy (hassle free). Restrictions on charges are likely to render the business unviable both for service providers and agents. In a nationwide study conducted by MicroSave (findings of the research were presented in an exclusive workshop for OJK), respondents mentioned that commissions/incentives remain the biggest motivation to become an agent. Agents carry out key activities – customer enrolment, liquidity management, transaction facilitation etc. – and additional revenue in the form of incentives/commissions keep them motivated. Charging customers for enrolment, cash-outs, payments, and transfers make the digital financial services (DFS) viable and sustainable for all the stakeholders.
- Location restrictions: Regulations suggest that service providers need to have branches in the eastern part of Indonesia in order to be eligible for branchless financial services. Further regulations restrict agents from operating in provincial, regency or municipality capitals. Removing these clauses would help service providers realize the full potential of DFS deployments. Studies in all countries with successful DFS deployments show that agents are present both in urban and rural areas. For example, only 43% of M-PESA agents in Tanzania are located in rural areas and the rest in urban areas. Further GSMA’s State of the Industry 2013 (Mobile Financial Service for the Unbanked) study shows that 71% of the agents worldwide are in urban areas. Contrary to the common perception, there is very significant and important demand for such services even in urban areas. Proximity, convenient timing (early morning or late evening), less documentation and no queues are the reasons why customers prefer to conduct transactions with agents in urban areas. Research conducted by MicroSave in Indonesia suggests that 57% of the respondents like agents’ convenient timing as it allows them to transact before/after their work. Furthermore, those who have migrated to the cities for work need urban agents to remit money home into the rural areas. So removing this facility will weaken the value proposition for clients and remove a key anchor product for DFS providers.
- Withdrawal restrictions: A customer can withdraw only IDR 5 million (US$430) a month, even though he/she is allowed to maintain up to IDR 20 million (US$1,720) in the account. While the intentions seem noble (risk mitigation, AML/CFT measures and liquidity management), the consequences can be negative. Customers will want uninhibited access to their own funds at any point in time. Not providing this access will spoil customer experience leading to limited uptake. Personally, as customers, we would not be willing to save with a bank which restricts from withdrawing our own funds! The risks/frauds related to withdrawals at agent outlet are already taken care of as regulations mandate two-factor authentication. Further, OJK can mandate banks to note down customer identification number (KTP/SIM etc) for every agent initiated a transaction. This is already being practiced in Kenya and has been helpful in controlling frauds.
- Agent Exclusivity: Regulations mandate agents to partner with only one service provider. Agents should be given the option to partner with multiple service providers depending on the business potential he/she foresees in the area. Many of the regulators such as in Pakistan, Rwanda, Kenya etc. mandate non-exclusivity of agents (i.e. agents can partner with more than one bank/service provider). True financial inclusion can be achieved through non-exclusive agents, especially in rural areas where access to formal financial services is limited. Setting up exclusive agent networks in rural areas will also be more costly and unviable. In addition, we have observed that it is difficult to find qualified agents in rural areas given the limitations in term of capital, education level, ability to use technology, etc. Moreover, from the customer perspective, non-exclusive agents will provide a shared platform for a better customer uptake. Customers can choose the best product/services for them when they have a choice between various service providers. Agents can and indeed should act as financial supermarkets offering multiple products/ services through various service providers.
- Agent Association with Bank: The proposed regulations suggest that only existing customers associated with the bank/service provider for at least two years are eligible to become agents. It will be good if this requirement is relaxed or done away with. It can be a “good to have” criteria rather than a “disqualifying” criteria for recruiting agents. Otherwise, it will prevent many deserving, capable and willing candidates from becoming agents. Further OJK may direct banks/FIs to have their own agent selection criteria to ensure proper due diligence in the selection of agents. A case in point is branchless banking regulations in Pakistan where the central bank mandates the service providers to have new agent on-boarding procedure (NATP) as part of its Agent Due Diligence policy.
In conclusion, OJK has taken a giant leap towards achieving the objective of financial inclusion in Indonesia. However, to create a win-win situation for all the stakeholders, more importantly, customers, OJK may consider suggestions provided by MicroSave and other industry experts. For the service providers – the ball is in your court now! It is your turn to come up with viable, innovative and customer-centric branchless financial services business models that meet the needs of unbanked and under-banked Indonesians.