I am back obsessing about over the counter (OTC) transactions again. Before we dive in let’s quickly define OTC transactions as they come in many forms in different markets – from the direct deposit by the agent into theend user’ss wallet in Kenya to the transfer of money from one agent to another agent, with or without identification, in Pakistan and Bangladesh respectively. The common factor is that at least one end of the transaction is conducted without involving the wallet of the user – either the sender or the receiver.
There are clearly very good reasons for agents and customers, and even some go-to-market reasons that might entice providers to want an OTC service; but the long-term downsides for all, except agents, concern me greatly.
In their December 2012 paper “A Digital Pathway to Financial Inclusion”, Dan Radcliffe and Rodger Voorhies of the Bill & Melinda Gates Foundation outlined how basic mobile connectivity and digital remote payments are the first two necessary steps towards an inclusive digital economy. I believe there is a very real risk that providers which leverage OTC transactions to reach massive scale will get caught in the OTC trap. They will find (and in many case have found) that:
their services and the customers using them are entirely dependent on agents;
very few users register and fewer use wallets; and as a result
no ecosystem develops.
They and their customers will then be stuck in Stage 2, the payments only step of Radcliffe and Voorhies’ stairway to an inclusive digital economy.
This is not the financial inclusion we are all seeking through digital financial services. Payment services are immensely valuable for the poor, no doubt – but access to payments does not result in what most people would define as “financial inclusion”. And yet access to basic mobile money payments is already effectively being touted as “financial inclusion” (see box for one example of many). Once again, we are risking what a leading expert cited in Do the M-PESA Rails Contribute to Financial Inclusion? described as “low equilibrium financial inclusion”. We have already seen how ineffectual it is to ask the poor to run the marathon out of poverty on one leg through the growing body of short-term RCT studies that suggest microcredit alone has limited impact. Countless studies, most notably The Portfolios of the Poor, have documented the poor’s needs for a range of financial services encompassing savings, credit, payments and insurance. Offering the single leg of payments and asking the poor to run the marathon will have similarly limited results.
“According to Finscope Tanzania 2013 survey, a nationally representative study of consumers’ perceptions on financial services and issues, the number of adults using financial services in the country has more than doubled from 27% to 57.4%, over the course of the last four years.” – TanzaniaInvest
The root of the problem?
Indeed it may be the lack of credible wallet-based product offerings that are driving the predominant use of OTC transactions in many countries. If providers are unable to build and rollout products that offer real value to customers, then registering a wallet may well be an unnecessary and time-consuming exercise, not just for the agent, but for the end user as well. The most obvious use of wallet-based services (for MNOs at least) after airtime top-up is bill payment. So the limited use of these services by Kenyan adults (of whom 68% are registered users) according to Intermedia’s Financial Inclusion Insights from September-October 2013, is surprising and alarming (see Table). The same survey noted that for all the publicity only 15% of active mobile money users had used M-Shwari. Clearly, sign-up and use are very different things, as we had surmised when we wrote M-Shwari: Market Reactions and Potential Improvements.
As Mike McCaffrey and Anastasia Mirzoyants concluded in their blog The Human Touch Required to Evolve Digital Finance, “After several years of development in the industry we do seem ready to make the leap to more sophisticated services, however, given the business models the telecoms have developed that encourage channel detachment, it might just be the banks – slow and steady – that invest correctly in the human touch that brings the needed trust.”
While liquidity management is consistently cited as one of the most challenging elements of managing an agent network, there are times when it is more difficult than others. People’s need to deposit, withdraw and send value fluctuates quite considerably, and so while an agent might understand how much e-float and cash to carry on an average day, that still means that on high volume days, they, and therefore the entire system, are exposed to having inadequate stocks of value.
In Uganda and Kenya agents rank the “fluctuations in client demand” as the greatest impediment to float management, and in Tanzania it is ranked second (out of seven possible major impediments). Ironically, providers are usually already analyzing transactional data and know exactly when and why many of these fluctuations are occurring.
So what is the problem?
The answer really depends on which type of fluctuation in demand is causing problems and how the provider has developed systems to manage them. Foremost, agent network managers need a system for monitoring float and cash levels, which can start gathering this data for them. For predictable fluctuations, the two important dimensions of analysis are 1) the magnitude and 2) the frequency of the fluctuation. Understanding how the dimensions interact is important to selecting the proper solution for them. Below, the chart maps different fluctuations in client demand based on their magnitude and frequency. We interviewed the major providers in Uganda to illustrate these drivers, but as discussed below, providers will have to make their own chart for their own roll-outs.
Advice for Addressing Fluctuations:
Agent Support: All leading agent networks have a support system where agents are visited regularly to check on their business, but also to provide them with market information. This is when the drivers of fluctuations in demand need to be clearly explained, so agents understand when more extreme levels will occur. We recommend focusing on the extra commissions they can earn if they are prepared, because a two-fold increase in demand usually translates to a similar increase in revenue for them, and that is what will pique their interest.
Further, a more sophisticated reward structure can also be developed around motivating agents who prepare themselves by increasing their liquidity holding to better manage these fluctuations. This is going to work best for drivers in quadrants one and three, where events are frequent enough for the agent to remember them.
Agent Reminders: For drivers that occur more infrequently, say less than monthly (quadrants two and four), even if these occasional drivers are explained during support visits, agents will still need reminders to prepare. SMS campaigns and call centers can be used to give agents a friendly reminder of the business opportunities approaching. These can be done in two rounds, a week before the event, and then again the day before the occurrence.
Liquidity Top-ups: Regardless of the frequency of the occurrence, the magnitude is also important, since an agent can potentially be aware of an upcoming fluctuation, but just not have access to the capital to provision for it. These drivers are shown in quadrants one and two, and are in need of special attention.
Some providers and master agents have developed stronger relationships with key agents and provide these agents with float on credit. These top-ups should be easy to access, have reasonable interest rates, and short terms for repayments, usually less than a month, and sometimes the next day. It should be viewed like more of an overdraft than a loan. It may be a good idea to help your topped-up agents advertise that they have float during these high traffic events, which will help signal to your customers where they can easily transact.
Developing Your Own Diagram:
Unfortunately one cannot just copy and paste this framework from Uganda. There will be different drivers in your ecosystem that will happen on different frequencies and definitely with different magnitudes. Further, where these divisions occur (the red-dotted-lines on our chart), will have to be monitored for your individual roll-out and will depend on the character and structure of your network and individual agents. Decisions like minimum float levels, the level of monitoring of them, the time and money it costs agents to rebalance, and the quality of training and support services given to agents will all effect their ability to react to these fluctuations.
Practical First Steps Forward:
Look for these fluctuations in your transactional records, and talk to your agents regularly to find out when they are most struggling with high traffic days. Focus on fluctuations in transaction levels in the highest performing 20% of your network since these are much more likely to be agents that are preparing for these events, and actually doing more transactions during them. Compare these statistics to the performance of the rest of the network during these periods to gauge how many transactions you might be losing during these high demand periods where agents are unprepared. Use your support staff to ask about this in visits to low performing agents. Is it a result of the need for better education during support visits? Are agents aware but just forgetful; or are they simply unable to increase liquidity levels due to capital constraints?
Liquidity management is one of the hardest tasks in agent network management, but hopefully these simple tips can help increase transactions during the times when it is toughest, as those are also moments of great opportunity.
Remittances have emerged as the most common anchor product offered by alternate banking channels, (banking channels used by the unbanked such as money transfer agents), particularly in large Indian cities like Delhi and Mumbai. Huge unmet demand for sending money home efficiently and quickly, combined with a willingness to pay for the service, has made over the counter (OTC) remittances an attractive proposition for many digital financial service providers. Competition in this space has increased tremendously and every provider is keen to hold on to an increase, their share of the pie.
The delivery channel for remittance services comprises a range of stakeholders from the bank to the front-line agent and all the managers and facilitators in between. Such is the importance of the channel offering remittances that the provider chosen to make the remittance is often not decided by the customer, but rather by the front-line agent, who makes the decision based on the commission he/she will receive. Customers sending money using OTC are often oblivious of the provider used to send their money. Their primary concern is confirmation that money has reached the intended beneficiary.
Recently the OTC remittance business in Mumbai has caught the eye of First Rand Bank (FRB) a multinational bank, which has entered into this arena with an innovative and disruptive business model that focuses on keeping the channel happy. The business model, which is still in its nascent phase, has been (according to transaction agents and distributors) efficient enough to wrest nearly 20% of the business from well-established Business Correspondent Network Managers (BCNMs) within six months of the bank entering the OTC market.
Practices adopted by the new entrant (what we observed)
· Competitive channel compensation: One of the reasons for M-PESA’s remarkable take-off in Kenya was the generous commissions Safaricom paid to their channel in the start-up years in order to gain traction. For example, in 2010 the average agent received $420 commission per month. Since M-PESA has become so well entrenched, and with the growth of the agent network, this had fallen to $129 by 2013. In Mumbai FRB gained much-needed traction and, in turn, made in-roads into the well-established remittance market by offering better compensation to channel partners. Master agents or “distributors” and front-line agents were offered lucrative commissions to attract the early adopters among them. Below is a brief comparison based on the feedback we received from the field.
Direct involvement of the bank in channel recruitment: In this model, the bank has done away with BCNMs and is directly recruiting distributors and agents in the field. The bank carries out extensive due diligence prior to finalizing the distributors. They target distributors who have worked with other providers since they already have an agent network working for them. This experience of distributors is then leveraged for agent selection. A team from the bank is deployed on the field to monitor the agent selection process, conduct background checks, and assist the distributor in finalizing agent recruitment.
Advance credit limit to agents: Shortage of e-float at agent counters is a perennial issue that every provider grapples with – this has been repeatedly highlighted in The Helix’s agent network assessments (ANA) surveys across the globe. This problem becomes even more acute when the agent is unwilling to increase his/her liquidity with increasing business volumes. To ensure that a shortage of liquidity is no more a roadblock to scale-up operations, the bank has given a credit limit of Rs.5,000,000 (US$8,333) to its agents. This is given to the agents without any physical collateral or security deposit. And as the conservative eyebrows rise, it is worth mentioning here that there are a few (but only a few!!) mechanisms to prevent fraud.
Hourly reports: Distributors and the agents get hourly reports of all transactions. These reports keep the distributor informed of the cash position of the agent. The distributor’s field staff collects any excess cash from the agent. Instead of the traditional method of liquidity rebalancing, where the field staff member visits the agent counter only once a day, the frequency of visits to agent counter is not fixed and varies depending on the volume of business. This helps the distributor to collect cash and not leave the agent overloaded with cash. While in principle this collection exercise should be religiously followed on an hourly basis, non-adherence to this leaves the bank exposed to the risk of flight by the agent with large amounts of cash exchanged for e-float that has been taken on credit.
Distributor’s personal guarantee: Since this model is inherently exposed to cash risk, the bank has adopted some control measures. The bank has communicated that any fraud committed by the agents will be the distributor’s responsibility and reinforces this through constant in-the-field monitoring. This ensures that distributors are cautious during agent recruitment and also in cash management. Thus they recruit only those agents with whom they have an existing business relationship and can trust. The bank, through these measures, leverages the existing relations of the distributor and the agents to its benefit.
The bank, through its real-time monitoring framework, keeps a bird’s eye view on the entire business landscape. Whenever the cash balance increases beyond an acceptable level with any distributor, the bank intervenes to ensure that the cash is deposited in a timely manner.
MicroSave’s presentation to RBI in January 2014 highlighted that agent commissions and liquidity management are among the most important aspects that contribute to a sustainable agent network. With minor tweaks in the business model, FRB has made major in-roads into the well-established remittance market of Mumbai. This was made possible also because a portion of the channel commission is sourced through higher customer charges. MicroSave’s prior research suggests that customers are willing to pay for the service this sector offers.
Potential implications
The market share that the bank was able to capture in such a short span of time guarantees that the tactics adopted has been observed by the competition. We are yet to see how the competition will react to the erosion of their market share. In the meanwhile, what we can assess are the potential implications for the sector. The figure below examines these in two eventualities – 1. Where the model succeeds and 2. Where it fails.
Over the past few years, MicroSave has conducted several research studies in Indonesia[1] to understand the household level financial ecosystem. Through focus group discussions (FGDs) and participatory rapid appraisal (PRA) tools, we gained insights on access to, and use of, financial products in communities across Indonesia.
This blog focuses on the role of informal institutions in providing financial services to the members of the community and concludes by highlighting the opportunities these present for formal financial service providers. The following are some of the financial products/services we observed in the field.
Savings
Savings with Arisan/RoSCA
Arisans are very commonly used in all communities across the country. As with most of the ROSCAs (rotating savings and credit associations) that are so common in other parts of the world, members contribute a fixed amount on a periodic basis. The arisan group meetings (typically weekly or monthly) are held at a time and location convenient for the members. The meetings also provide a platform for members to socialize and bond with family, friends, and neighbors. The amount collected at the meeting is given to one member at the end of the meeting based on a lottery. In Indonesia, the administrators – an agent or a local institution – usually charge 5-10% of the collected amount.
Example: In a group of 30, each member contributes IDR100,000 (US$8.5) per week for 15 weeks. Each week, a lottery is held and one member receives the total amount collected, net of the administrator’s fee of IDR100,000 (US$8.5). Thus, the lottery winner leaves the meeting with IDR1,400,000 (US$ 115).
Pyoh scheme
Pyoh is an advanced version of ROSCA prevalent in the coastal regions of West Java. The scheme allows members to access a given month’s contribution by bidding for a discounted amount of the total pool of money available. It is largely offered/managed by members of the ethnic Chinese community who are perceived to be trustworthy and reliable in managing bigger amounts of money. As Ibu Ayoh, a Pyoh member says – “Chinese are good at managing money and they never default”.
Ibu Ayoh, along with 40 others, contributes IDR1,000,000 (US$83) on a monthly basis for 40 months in the Pyoh scheme. At the end of the tenure, she is entitled to receive IDR40,000,000 (US$3,290). However, after 20 months, she needed cash for her business and decided to bid for that month’s contribution. Ibu Ayoh won the bid for IDR35,000,000 (US$2,880) a discount of IDR5,000,000 (US$410). This money (IDR 5,000,000) was equally distributed among the members at the end of the meeting.
Package saving schemes
Offered by individual agents or/and local grocery stores, this product is popular among women. Members use these schemes to “save-up” enough funds for large events such as Eid-el-Fitr and family functions. At the end of the savings period, members receive grocery packages such as rice, syrup, sugar, cookies, flour, meat etc. Agents charge anywhere between 5-7% of the amount collected from the members. They also make a good margin on the grocery packages. The product really adds value because Eid is the biggest event of the year where family members/friends meet, celebrate and exchange gifts, which requires large-scale expenditure on groceries. So members prepare for the expenditure by savings as little as IDR 3,000 (US$0.25 – to put things in perspective a pack of cigarette costsUS$1 – 1.5!) on a daily basis. Further, enrolment is easy and collections are typically made at the saver’s doorstep – either at home or at their place of work.
Cash savings with individual agents
Under this scheme, members save periodically (daily, weekly or monthly) to build up a lump-sum amount. But members receive cash instead of a gift package upon redemption. Savings range from as low as IDR3,000(US$0.25) to as high as IDR100,000 (US$8.5) per installment. Agents do not provide interest on the savings collected. Indeed they charge an administration fee of 5-10% on the total amount collected. This fee increases if a member wants to withdraw funds before the scheduled date of redemption. Agents visit the members’ residence or business to collect savings. Further, members have the flexibility of skipping or prepaying installments depending on their liquidity position. Despite apparent benefits of convenience and flexibility, there have been instances of agents cheating and disappearing with customer’s hard earned money. In one research in West Java, we observed a local level, sub-prime crisis, where the agent had disbursed risky loans using the savings mobilized. When the loans defaulted, he could not honor the savings redemptions and took to his heels.
Savings with schools
In some areas, schools collect savings to inculcate savings habits among their students. The savings are used for specific needs such as to buy books/uniform, pay the examination fee, recreation etc. Product features in terms of amount, interest rate, a frequency of collection, tenure, administration fee, etc. differs from one school to the other. For example, we learned that some schools in Bogor, West Java charged 5-10% administration fee or IDR50,000 (US$4) whichever is less for withdrawals, but paid interest on savings deposited. In some other instances schools do not charge the administration fee and in turn, do not pay any interest on savings.
Loans
Money Lenders:
Ubiquitous money lenders have a field day because there is virtually no competition for them in much of the country. They offer hassle-free loans with limited documentation. To get a loan, all you need is a local identity card as proof of identity. Money lenders charge eye-wateringly high-interest rates. For example, for an IDR1,000,000(US$83) loan, the borrower pays an upfront fee of IDR50,000 (US$4) and IDR30,000 (US$2.5) for daily for 40 days. The annual percentage rate of interest is a whopping 336.12%! People still borrow from these money lenders because they do not have any alternatives.
Fish traders in Cirebon
Fishermen communities depend on the fish traders for their credit needs. Traders usually buy fish from the fishermen,
process and sell it in domestic or overseas markets. They also provide soft loans to fishermen to meet their business or household needs. The amount varies between IDR10-50 million (US$822-4,112) depending on the need and repayment capacity of the fisherman and his relationship with the trader. Even though no interest is charged, fishermen who avail these loans are obligated to sell their catch to the trader usually at 5-10% lesser than the market rate. On the positive side, borrowers need not repay the loan till the time they decide to sell the catch to other traders. Effectively, this is like a retainer loan to ensure that a trader gets a steady supply of fish at a 5-10% discount to the market rate.
Loan from local warungs (mom & pop) stores
Fishermen usually purchase diesel for fishing boats, cigarettes and other essentials from local warungs (mom and pop stores) on credit. They usually pay higher rates (10-15%) for the goods purchased. However, they still prefer taking loans from these stores because there is no documentation and the loan is very flexible so they can repay based on their household cash flows, which are largely determined by their catches at sea.
Remittances
With rapid urbanization, domestic remittance services are in high demand in Indonesia. A nationwide survey performed by Gallup shows that 24% of the population sent money to family/friends living in a different location. Banks seem to be predominant remittance channel with 43% off remitters using this method. However, it is interesting to note that the bank channel is often being used in an inefficient manner. Workers based in Jakarta and other urban centers usually have a bank account but use this to send money to an agent who has a bank account at the receiving location. This agent, in turn, hands over cash to the recipient and charges around IDR5,000 to 7,000 (US$0.40-0.60) per payment. However, for international and large value remittances, these charges may exceed IDR10,000 (US$0.82).
So what does this all mean?
Our research confirms that people use a diverse set of informal financial products. And why not? They offer value:
Trust and familiarity (Almost everything works on trust!)
Easy and hassle-free enrolment with limited documentation
Doorstep delivery of service
Product/process design that meets the needs of the community such as flexible schedules, small value payments, easy withdrawals, receipts/passbooks as physical evidence, etc.
However, along with benefits come strings attached. These include:
High cost of the transaction in terms of interest rates, fees, and charges
Risk of fraud and misappropriation of fund
Insights from the research begin to answer compelling questions that digital finance service providers so often grapple with, particularly for providers in the launch phase (which is largely the case in Indonesia).
Considering the household financial ecosystem, on which financial activities/streams should providers focus?
How to seamlessly digitize these cash streams without radically changing the financial behavior of the customers?
How to ensure that there is value to all the stakeholders (and more so for customers) in shifting from cash to cashless?
By doing a deep dive into the communities and understanding their financial activities and needs, we have helped some of our partners in Indonesia come up with relevant DFS products/concepts. Pilots are underway with leading telcos, banks and agent networks, and seem promising. Watch this space for further updates.
1]Research studies were conducted for individual clients and therefore not available in the public domain.
It was a hot afternoon during one of our recent agent network assessment studies, when I got the opportunity to meet Raju. He seemed no different from the typical participants in our focus group discussions in Bihar. A farmer somewhere in his middle 30s, thin and frail, wearing a half-sleeved ‘baniyan’ (vest) and pants with a ‘gamcha’ (scarf) around his neck.
When Raju approached the Business Correspondent (BC) agent’s outlet, the agent shouted at him “Kal aana … Aaj nahi ho paaega … Hum busy hain. Dekho shehar se loog aye hain (Come tomorrow … cannot assist today … I am busy. I have guests from the city)”’. The exhausted Raju looked disappointed and severely let down. When he got up to leave, we requested for a brief interaction with him. He was reluctant initially, but on the agent’s insistence agreed. Within a few minutes of interaction we discovered that this was his third visit to the agent’s counter in the last 2 months.
In the last three years Raju has made multiple unsuccessful efforts to be financially included. During his first attempt, he was able to open an account, but the agent could never support any transactions. He was later told that the mandate for the agent was to only open accounts, and the agent could not help him make transactions for lack of access to the required technology. Having learnt his first lesson, he later approached another agent who was actually transacting in a nearby village for an account. This time he opened a new and transactional account, but soon the agent went dormant because a new BC Network Manager got the contract to open accounts in his village. Raju was told that the new organisation will take time to appoint functional agents. The wait continued for more than six months, after which he gave up and contacted a new agent – the one we were interviewing. To his surprise, this agent is willing to solve his problem, but only if he opened a new bank account.
Raju was determined to have a bank account on which he could transact because he wanted to benefit from various government schemes and to save money to repair his house. In villages across India there are many, not as resolute as Raju, who dream to be financially included to get access to as saving services, remittances (sending and receiving money), pension and MNREGA payments etc. It is quite ironic that in the same country a rural customer faces such challenges to get access to banking services, while an urban customer has innumerable banks wooing him/her to open an account. As for Raju, the wait still continues. We hope that the delays do not extinguish his admirable determination to be financially included.
This incident highlights important aspects of the problems that financial inclusion (FI) in India is facing.
Part-1 of the problem: Whenever the Business Correspondent Network Managers (BCNMs) in an area change, more often than not, the new BCNM starts the account opening process for individual customers right from scratch. This mostly occurs due to lack of technical and backend compatibility across BCNMs and banks. To avoid further hassles and achieve account opening targets, banks also happily agree to reopen such accounts with new BCNM.
Very similarly, whenever there is a change in government policy, or the government itself, the process of financial inclusion starts afresh from the very beginning, with limited or no focus on activating or maintaining the already existing accounts. This was even apparent when Jan Dhan Yojana was announced this Independence Day. Initially, it was not made clear that the benefits offered would also be available for existing accounts. Now, the grapevine is abuzz with news that at least 25-30% of the new accounts are in fact duplicate.
Part-2 of the problem: Imagine a situation where the government distributes free cars (wish this were true) but the fuel stations stop selling fuel. What would happen? Most people would buy a car that would be left parked without serving any purpose. Similarly, the focus in financial inclusion has always been more on creating new accounts and much less on empowering customers to make transactions and derive any substantial benefit from them. Most bank accounts created for the purpose of financial inclusion hardly have any transactions taking place, making them virtually useless.
Let’s take a step back and think through this. Regulators are well aware that we are adding thrift accounts solely to achieve targets; bank officials know this as they see the dormant accounts day-in and day-out on their servers; and even the customers know this as they have opened accounts before and will open others again just for the added benefits. We can all agree this is sub-optimal.
Based on our experience and interactions with FI stakeholders below are three key recommendations which will be vital to ensure long-term sustainability of FI initiatives:
Make transactions and account activity a measure of FI success immediately: India’s mobile network operator (MNO) distribution channel has a well-designed and ever innovative commission structure that can be used in the FI sector too. For example, retailers are incentivised not just for the sales of SIM, but also for the first and second month recharges by the new prepaid customer. Similarly, our BCs should be incentivised not just for the opening of accounts, but also for subsequent transactions. Incentive alignment with the larger goal of account activity will ensure that the agent puts an effort to explain the product and its benefits to potential customers, and also help them use the account better. Who knows may be after understanding the benefits in detail, customers might actually adopt it? – This should ensure that we stop the account opening race – and resultant account dormancy epidemic.
Lay down the foundation to build systems for credit assessment of the financially excluded customer base: FI was never about only opening accounts, but rather about providing the whole range of savings, credit and insurance services to customers currently excluded from the formal financial system. To create the customer pull, we need to ensure that credit is also made available to these customers; but banks will only offer credit to them if they are able to assess their creditworthiness with confidence. The MFIs in India have set up credit bureaus that appear to be functioning well. Organisations such as Cignifi and Lenddo have already started working on proxies to better judge creditworthiness of excluded individual customers. Just as MFIs have been able to establish themselves as sustainable organisations, we need banks to reach out to the excluded voluntarily and not due to some regulatory pressure. MicroSave’s work has already demonstrated that there is a clear business case for banks that are serious about using agent networks to deliver a range of financial services, so this really should not be tremendously difficult. It is a matter of will and intent. – Systems to assess credit worthiness of mass market customers should build the banks’ confidence to realise FI’s business potential.
Drive all G2P payments through FI channels while ensuring supportive last mile communication: Across the globe, digital financial services (DFS) have been launched on the basis of core “anchor products” that provide the volume of transactions to underpin their initial rollout. These cash cows that allow the providers of services to enrol and serve large numbers of customers are typically remittances or government payments. In India, DFS has taken off at scale in the remittance corridors from major cities that host migrant workers who need to send money home quickly … but elsewhere continues to languish. The Government of India makes over $65 billion in G2P payments to tens of millions of its citizens every year. This provides a tremendous opportunity to provide an anchor product to underpin the country’s financial inclusion efforts. The government should make all G2P payments electronically, direct into bank accounts – thus providing transaction volume to the rural agents that currently struggle to break even. This needs to be accompanied by appropriate remuneration for front-line agents and the organisations that manage them, as well as appropriate beneficiary centric communication. Given the huge volumes in all G2P benefit schemes, it can act as a much needed cash cow for the otherwise struggling FI channel. – This will provide FI the anchor product it needs to launch and get to sustainable scale.
These recommendations are not sufficient to attain inclusion, but are the necessary pillars for financial inclusion to flourish in rural India. The above activities will do much to ensure that banks reach out to the excluded customers for the business proposition they offer and not the regulatory mandate pushing it.
Raju belongs to this ever increasing group of individuals who are included, re-included and then re-re-included in the “% of financially included Indians”. This much talked about percentage and its growth is good to flaunt on forums and in panels, however it’s on field utility to the rural poor still remains debatable.
Service Offerings at Agents are Static & Rudimentary
Across East Africa The Helix Institute’s research (2013) is showing that even after seven years of market development in Kenya, six years in Tanzania and five in Uganda, agents are still providing the same very rudimentary services that they did from the beginning. The graph below shows that just about all of them provide both cash-in and cash-out services for customers, but that those are the only services which are provided in any uniform manner across countries.
In Kenya, 79% of agents also report offering account opening services for new customers, but both Tanzania and Uganda lag far behind here. In Uganda, significantly more agents are involved in airtime top-up and bill pay compared to its East African counterparts, however, even in Uganda, 83% of agents do not offer these services. Money transfers (also referred to as direct deposits) are not another service, but just a way that customers try to circumvent paying a P2P transfer fee by having agents send the money for them and is actually something most East African providers try to eliminate.
Commissions Structure & Desire for Speed to Scale Drives This Pattern
This often confuses people who correctly understand that airtime top-ups and bill-pay are major drivers of volumes and values on digital finance platforms. The difference is in East Africa they are executed on the handset and not at the agents.
There are two major factors driving this trend, the first financial and the second related to scale. The first issue is the manner in which most East African providers structure their pricing and commissions, best explained here by Ignacio Mas. Basically, providers lose money when customers cash in, because the customer does not pay a fee, yet the agent earns a commission. Further, they have to share the revenue they make on cash-outs with the agent, as the agent is actually physically conducting the transactions and needs an incentive to do so. However, providers earn and retain 100% of the revenue from transactions made over the handset. Therefore, in order to limit the amount of commissions they have to pay to agents, and increase the amount of revenue that they earn directly, services are designed to incorporate the agent as little as possible.
The second major reason is speed to scale. If a service can be offered digitally, then it is easier for it to grow virally. People can enroll and use it anytime, anywhere, and all the impediments of paperwork and having to deal with a person are eliminated.
Agent Banking Growing, but Just in Kenya, and is Still Relatively Small
From both a business model perspective, and a financial inclusion perspective, we should be most interested in the absence of the sophisticated financial services on the right side of the chart (savings, credit and insurance). These are services that are likely to create more transactions per customer (revenue), and also play a greater role in supporting customers to manage their money (financial inclusion).
Banks like Equity Bank, Kenya Commercial Bank (KCB), and Co-operative Bank are now building agent networks in Kenya that allow people to access banking services at the agent level, but relative to the telecom’s mobile money agent networks, the banks’ efforts are still eclipsed in the country figures, and therefore only really show-up as the 2% in the deposit column for Kenya on the above chart. Uganda is still waiting for agent banking regulation that would allow banks to enter the market, and in Tanzania, the banks are far behind the developments in Kenya.
Channel Detachment for Next Generation Services
The next generation services like M-Shwari and M-Benki in Kenya and M-Pawa in Tanzania are examples of the more sophisticated banking services that have been lacking in the industry. All three services provide savings and credit to customers. They offer the potential to increase revenue for the providers, as well as provide more useful services for the mass market customer. However, like P2P, airtime, and bill pay that came before them, they are all being offered exclusively over the handset, detached from the agent channel.
Customers enroll on their handset, and then mostly just move e-value from their mobile wallets to and from these services. To cash-out (withdraw) from the services, agents are still involved, but the key is that they are not incorporated in the enrolment process or the subsequent support services. Therefore, this new generation of exciting new services is detached from the agent channels that have historically been defining features of successful roll-outs.
M-Shwari was the first of these next generation services to hit the market, and about a year later, after a marketing campaign that was largely detached from the channel, InterMedia data shows that only 10% of Kenyan adults report having used it. This is far from the viral growth which we all hoped to see and the channel detachment that characterized its launch is likely a key factor in the lower than expected results.
Channel Involvement to Support Growth & Uptake
During this launch and initial growth phase, the most important activity to focus attention on is the detachment of the marketing campaign from the channel. Most marketing for these products has been above-the-line, focusing on mass media advertising, billboards and banners. While that was also a crucial component of the marketing when mobile money was launched, the big difference was that it was complemented heavily by below-the-line strategies which in the case of M-PESA in Kenya involved spending 10-15 minutes with each customer explaining the service, and paying over a dollar per customer acquired in commissions.
The current approach seems to assume that now that this expensive time consuming customer acquisition has been done, customers will now register for new products directly over the handset given some advertising to make them aware of the opportunity. However, savings is different from other transfers and payments in that the person who is saving must have an order of magnitude more trust in the provider offering the service.
Customers are no longer just trusting the provider to quickly transfer value to someone they can verify with immediately. Saving money or buying insurance, the customer gives the provider money to hold, and must trust the provider over the entire duration of the policy cover, or life of the deposit. This is a tough sell for a digital system most people still do not understand, and tougher sell for a digital system without a human face that can assure mass market customers it will work for them, and actually help solve some of their specific problems.
Concluding Thoughts
While offering simple transfer services digitally over the handset has taken-off in East Africa, scaling them digitally has not. The lynchpin is likely in finding the right people on the ground to sell these more complex products. Not all agents in the existing East African networks will be able to do this as it is fundamentally a different skill than conducting transactions, but there definitely will be an overlap, and given the trusting relationships many have with customers, this seems like a good starting point. For the agents that cannot evolve to sell as well, they can be supplemented with sales agents who roam around professionally pitching the product.
After several years of development in the industry we do seem ready to make the leap to more sophisticated services, however, given the business models the telecoms have developed that encourage channel detachment, it might just be the banks – slow and steady – that invest correctly in the human touch that brings the needed trust.
InterMedia (with funding from the Gates Foundation) and the The Helix Institute of Digital Finance (a joint partnership between MicroSave, The Gates Foundation, the IFC and The UN Capital Development Fund) together, have collected the largest datasets in the world on digital finance (mobile money and agent banking), and the results are beginning to challenge some of our long held beliefs about how these systems work and what people are using them for. The research focuses on eight digital finance markets around the world, with InterMedia responsible for the demand data from the customer perspective, and The Helix Institute complimenting it with supply data from the providers offering these services.
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It was a hot afternoon during one of our recent 
