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Several times bitten: Still not shy?

Posted on by MSC

The intention to provide at least two accounts to each household in the next one year is welcome. But the question in everybody’s mind is: how will the target be achieved, and what will be the status of these accounts at the end of this exercise? The target itself is ambitious: we want to open 200 million accounts in a year, which converts to more than 660,000 accounts each day (considering 52 Sundays and 10 national holidays, although banks usually have more holidays in a year). To put things in perspective, all public sector and private sector banks collectively opened just 108.5 million BSBD (basic saving bank deposit) accounts in three financial years up to March-end 2013. Granted that our banks will work more efficiently this time around, and perhaps the government’s focus and guidance on this matter will lead to the achievement of these figures. But what can we learn from the implementation of these schemes in the past?

One need not look too far into history … we are surrounded by the results of earlier, government mandated financial inclusion efforts. Nearly half of the adult population still does not have a bank account; census data gives a figure of nearly 58.7 percent of households availing banking services, while World Bank estimate is lower i.e., only 35.2 percent adults (15 years and above) have an account with a formal financial institution. This is the situation eight years after RBI sanctioned the use of agents (business correspondents – BCs) to allow banks to reach remote and rural locations to serve what is known as the ‘underserved’ or the financially excluded population.

So, while one of the challenges is to ensure the opening of 200 million accounts amongst underserved households, a far greater challenge is presented by the question, “Where will the 200 million new customers transact?” To service, almost 70 percent additional customers, the existing banking infrastructure, especially the number of bank outlets will have to expand significantly. As bank branches are expensive to set up and to operate, the BC channel or extension points which ride on banking agents had been proposed. To use this channel effectively banks will have to appoint, train, manage and remunerate BC agents. But preliminary results of MicroSave’s recently concluded research (report forthcoming) indicates that hardly 35-40 percent GramPanchayats currently have an active agent. And when villages in Uttar Pradesh and Bihar were sampled, we found that only 7% had transaction ready agents or customer service points – see the box.

The Curious Case of Missing Agents in Rural India

In a survey of 2,932 villages with a population of greater than 1,000, only 39% are covered through customer service points (CSPs) according to State Level Bankers’ Committee (SLBC). Fieldwork reveals that only 7% of the villages have transaction ready CSPs; only 4% have CSPs available to transact every day. A little over 2% of the appointed CSPs are doing more than 10 transactions a day, and less than 4% are earning more than Rs. 2,000 a month; with a median monthly income as low at Rs.1,500 – and so quite likely that such agents will quit the business soon.

It may be true that 221,341 agents were appointed by the end of March 2013, but it is also true that many of them have quit and remain only on paper, and many others never even started operations. (They were never provided with POS device, or the device was never repaired/replaced once it broke down, or customers did not come for repeat transactions due to the high rate of failure, connectivity issues and so on). Therefore, questions about infrastructure and presence of an adequate number of well trained and well-equipped cash-in/cash-out points will have to be addressed in addition to the push for opening additional accounts. The government needs to focus on the number of active accounts held, rather than just the absolute number of accounts opened. Otherwise, we are staring into a situation of a high number of dormant customer accounts because they don’t have a place to transact, a situation that we have been through in the past.

The July 2014report from InterMedia, “India: Financial Services Use and Emerging Digital Pathways”, shows that only 54 percent of accounts are active (activity defined here as one transaction in 90 days), and within this, the usage is lower in rural locations. Therefore to assume that providing an account will lead to actual usage and to financial inclusion is incorrect. Customers need the right products, which are designed to suit their specific financial needs. They will not use saving and loan products designed for upper and middle-income customers and do not want a “no frills” account that is stripped of useful features like ATM cards.

If we believe that direct benefit transfer (DBT) payments will take care of account activity, we are forgetting that the distribution channel’s viability is still an issue that needs to be addressed. Banks have still not been able to see profitability in the BC channel; and so, in turn, they do not provide adequate support or timely commission payments to the BC network managers. And thus the agents are not adequately managed or remunerated. The DBT programme has the potential to be an anchor product to underpin and make the BC model viable. But in most states banks are not adequately remunerated for delivering DBT payments, so the opportunity is missed.

As a result of an endless procession of directives, pilots, and forced-march rollouts, the country is littered with the debris of “financial inclusion efforts”. These failed efforts and a multitude of closed agent outlets erode the trust of the poor in the reliability of formal financial services.

All those who care about bring financial services to the poor could best support the financial inclusion agenda by taking a step back. We need to spend the time to learn from the earlier mistakes, align incentives so that all partners are willing and able to move forward and then prepare for a flawless implementation. Rushing out another set of admirable targets and mandating unwilling partners to achieve them will not further the cause. The current government has commendably resisted populist measures until now – be it the financial bill, or the railway budget or any other matter having a direct impact on the common man. It should also resist populist pronouncements on financial inclusion as well. A delay of a few months will be less harmful than a repeat of earlier mistakes.

Aadhaar based e-KYC service – The much needed change catalyst for financial inclusion!

Posted on by MSC

It is a well-documented fact that a   low level of financial inclusion in rural India is primarily due to low penetration of formal financial institutions, especially the banks. Another equally important reason for this is lack of acceptable proof of identity and address documents. Though a number of initiatives had been endeavored by the Central / State Governments and the banking regulators to counter the aforesaid challenge, the problem remained largely unresolved.

In this context launch of Aadhaar based e-KYC service (electronic repository of demographic details and photograph verifiable through biometric authentication) could prove to be cure-all in order to reduce the risk of identity fraud, document forgery, and instill paperless KYC verification.

Reserve Bank of India (RBI) had communicated to all banks (excluding RRBs), payment system providers and prospective prepaid payment instrument issuer to treat the information made available from UIDAI as an ‘Officially Valid Document’ under the Prevention of Money Laundering guidelines to open a bank account.

Further on, recently released report of the Nachiket Mor Committee on “Comprehensive Financial Services for Small Businesses and Low-Income Households” made some concrete recommendations to enhance the spread and use of formal financial institutions.

The most revolutionary, and therefore the most talked about, the recommendation is the provision of a “Universal Electronic Bank Account” (UEBA), for each adult Indian using Aadhaar as e-KYC.

In a recently released blog we had mentioned, it would be a leap of faith by a bank/few banks to take this lead of e-KYC. Good news is that at least one bank has already done this and it is one of the largest private sector banks, Axis Bank.

The case of Mrs. Boudevi is not an ordinary one. Rather in times to come by it may prove to be a historic one. She is the first person whose account opened through e-KYC facility of Aadhaar. In coming few years it may be a thing of yore that it used to take a minimum of 15 days for lucky ones to open accounts. And for the unlucky ones, those who did not have proper documents they could very well remain without accounts.  And that’s how it has been till now.

This is precisely what Aadhaar as e-KYC is set to change. And now as it is done we can say it is good start and leap of faith. It goes against the basic fulcrum of Indian banks as they are not to put faith in records of some other entity. That UIDAI has a high level of data integrity and security definitely helped in this development.

Now that it is out of the way what comes next? What exactly banks can expect in return? Why are they more likely to lap up this opportunity? We may deconstruct this going further.

Why banks should adopt this? Because private Banks are at a disadvantageous position in comparison to public sector banks in terms of their outreach owing to two prime reasons. One is late entry and second is limited/restricted access to unlimited capital to deepen their outreach. But private banks can turn this disadvantage into an advantage with the use of technology and e-KYC is just one of them.

On the question of what comes next, definitely, banks look at it in the context of returns. With the use of Aadhaar as e-KYC banks can deepen their outreach in the unbanked segment of the population. In the short run, it will help them in meeting their social banking targets but banks will be missing the opportunity if they stop at that. They should start looking at this segment as potential customers. As is fairly well documented in our studies and otherwise also poor do save and they save for various purposes, hence they need access to financial products. It can even be argued that access to financial services should be fundamental right. Hitherto unbanked population could not have access in want to not having KYC documents to meet the requirements of banks. Aadhaar as a backbone of this platform gives banks the opportunity to offer financial products that suit the requirements of poor and unbanked population segment.

But all this may come to naught if there are not enough banking outlets to access these services. As a recent study by MicroSave highlighted in the sample of five districts only 4% of 1000+ population villages have access to bank CSPs.

It can be safely said that Aadhaar based e-KYC service can turn out to be much-needed change catalyst for financial inclusion in rural India. A good start has been made but there are many more chapters untold and it will be interesting to see how this story unfolds?

Financial inclusion and new product development — What should guide us?

Posted on by MSC

The answer is, of course, customer needs. Customers’ knowledge and perceptions about the financial services on offer—plus any challenges in accessing these services—are the other two major guiding factors. With all this in mind, any service provider can develop and then modify successful products.

Easy to outline in a very short paragraph, easy to comprehend, but the real problem lies in the implementation.

In India, the financial inclusion stakeholders (the central bank and its retail banking network, microfinance institutions, international donors, among others) realized that the unbanked and under-banked–41 percent of the overall population, 60 percent in rural areas—were facing the service-access challenge noted above. Many couldn’t open their first accounts because they lacked both the necessary cash for initial deposits and the documentation to fulfill standard KYC (Know Your Customer) authentication and credit-check procedures.

So banks came up with Zero Balance Accounts, a “product enhancement” that allowed these stymied prospective clients to open an account with no deposit and relaxed KYC (i.e. minimal identifying paperwork and background checks for creditworthiness).

In theory, and on paper, and in conference rooms a far remove from the undocumented and the unbanked, these solutions should have worked…but they didn’t. Why? (For a comprehensive understanding of the history and many complexities inherent in this problem, please see MicroSave’s research papers on Dormancy in No Frills Accounts. Also, Barriers in Access to Banking which highlights a wider spectrum of issues beyond simply minimum balances and authentication.)

Life Insurance Company of India (LIC), India’s largest state-owned insurance and investment operation with an estimated asset value of US$3 billion, and prestigious industry awards (see here and here for more) would seem to be an unlikely candidate to be doing a much better job at serving up the right solutions. But they do. Let’s look at some of the reasons.

LIC’s core product from the outset almost 60 years ago has been life insurance, with a focus on an endowment, risk cover, and long-term savings. During this time, they have been consistently creating new, targeted combinations for every new customer segment—while improving and extending their agents and office delivery channels, which now include an LIC app and more flexible premium payments.

Somehow LIC has also managed to avoid the deadly detour into back-end processes and regulations dictating the customer interface, even fairly simple interfaces like money transfers. Instead, the basic LIC customer need for long-term financial protection seems to actually inform everything from sign-up to pay-out. Digital financial services could usefully heed this distinction.

As everyone knows, but no one readily admits, mobile banking and all its various electronic offshoots depend almost entirely on remittances to be “sustainable”—i.e. make money and survive. Without internal remittances from urban migrant workers to rural communities, (estimates vary from $1-5 billion and of course, are not current), the essential cash-IN would not exist to enable savings, investments, payments, and other cash-outs that help create and maintain full financial inclusion.

So, if we briefly revisit the first paragraph, the urgent customer need—in this case, quick, easy, cheap money transfer from sender to the beneficiary—should be simple to understand and even simpler to execute. Opening an account just gets in the way. Banks instituted the need for this tiresome and usually unwelcome process to comply with money-laundering concerns, not because an account is needed to transfer a small amount of rupees from bank agent to bank agent. And, as many remitters are discovering, it is possible to do the easy way without an account—please see Transition from OTC to Wallets–Findings from Bangladesh, and Values Offered by OTC.

User adoption is based on trust. Bank accounts are no exception. If anything, since money is involved, more trust and thus more time are necessary. Let people try something first, with no commitment or complications, for as long as it takes, before insisting they buy into your value proposition and open an account.

Late last year, MicroSave researchers were in the field talking to customers, bankers, and agents about various authentication techniques. (In India, identification and verification for a transaction can include thumb impressions, signatures, PINs, and/or all ten biometric fingerprints.) Most customers like the thumb and biometric impressions best since they don’t have to remember anything. But many had learned how to manage PINs—after initial mistakes and frustrations—and proud of their mastery, they weren’t interested in changing.

Biometrics posed problems as well at the outset. Customers pressed their rough fingers on a surface that could only read smooth, clean fingertips and incurred delays, false negatives, and other difficulties. Again, they figured out quickly that moistening their fingers expedited the process—and their G2P benefit payments. Even the elderly, not usually the fastest segment to adopt and adapt to a new technology, saw the benefit to perfecting their biometric technique and did so with minimal fuss.

From this, we can conclude:

  • In order to collect money (or any asset of value) in their name–and to ensure it does not end up in someone else’s hands—people will accept relatively complicated authentication processes and learn them quickly and without complaint;

And by extension:

  • In order to collect money from a relative or the government—funds recipients feel are rightfully theirs—people see no reason to open an account from which they intend to withdraw all or most of the full sum immediately. They see even less reason to then pay fees on an empty account.

Perhaps the more correct answer to Financial Inclusion and New Product Development–What Should Guide Us? are customer needs, to be sure, but explored over time and without biases. It’s surprising how much people will tell us if we just listen better, observe more, and pause to think how most of us would respond in their situation.

Remittance Market in the Philippines

Posted on by MSC

The Philippines, an archipelago of 7107 islands, is an important remittance market in Asia. Over 9.5 Million Overseas Filipino Workers send over US$ 24.3 billion (10.7% of the GDP) every year which makes Philippines the third largest recipient of remittance in Asia after India and China. In this vedio, Shivshankar V., our Resident Expert in the Philippines, talks about the remittance market and about the project in which MicroSave is supporting a consortium of financial institutions in the Philippines to set up a remittance company catering to unbanked migrant population in rural areas.

Non-Financial Services for MSMEs

Posted on by MSC

Besides access to finance there are range of capacity building services that MSMEs need for their growth and development. Non-financial services are such capacity-building inputs which are mainly targeted at enhancing the performance of a business enterprise. In this video, MSC’s Products and Delivery Channels Expert, Raunak Kapoor, shares his experience on the role and importance of non-financial services in complementing financing efforts for enterprises. He further talks about the role of different stakeholders including financial institutions, business development service providers and other support partners, such as donors in expanding the provision and effectiveness of non-financial services design and delivery.

The status of agents in Kenya: Proliferation, dominance, evolution & impact

Posted on by MSC

The Helix Institute of Digital Finance released its third Agent Network Accelerator (ANA) country report on 19th June 2014, in a launch event conducted in partnership with FSDK and InterMedia.  The research presented was based on a nationally representative sample of 2,113 interviews with agents that were conducted across Kenya in September/October 2013, as well as 748 additional interviews with banking agents.  The presentation noted that agents in Kenya were very busy, conducting a median of 46 transactions per day for each provider, which is 48% more than the 31 transactions per day found in Tanzania.  The presentation went further to focus on four key themes that emerged from the Agent Network Accelerator Survey: Kenya Country Report 2013, namely, the proliferation of agents in the country, the effect of Safaricom’s dominance, how the network of agents is evolving, and the indicators for the impact it is having on financial inclusion.

Proliferation

Over seven years ago Safaricom launched M-PESA in Kenya. The assumption among many is that agents in Kenya have been in operation for a number of years as well.  However, the ANA research finds that 59% of agents have been in operation for a year or less.  While it is clear that a large portion of this is explained by aggressive growth from the provider, the survey also found that only 58% of agents thought they would continue to be an agent in a year’s time.  This indicates that there might also be a lot of turnover of agents in the network.  Further, the vast number of agents is putting pressure on each of them individually, with agents ranking competition between themselves as the greatest barrier for them doing more business.

Dominance

Agents were selected randomly for the survey, and 90% of the ones engaged were serving M-PESA.  Across East Africa, each country has a leading provider, with MTN controlling 63% of agents in neighbouring Uganda, and Vodacom having 55% in Tanzania, but the high level of the dominance found in Kenya is unprecedented.  This dominance has some interesting implications like the degree to which the country’s agent network is shared.  Exclusive agents only serve one provider, and providers like to keep it that way so their competitors cannot leverage on their networks, but they need a lot of market power to enforce this aspiration.  The dominance of Safaricom has allowed it to keep the most exclusive agent network in the region, with 96% of agents serving only one provider vs. 48% in Tanzania.  This seems to greatly impact profits for the agent since they can only earn revenue from one provider rather than multiple, and explains much of why agents in Tanzania make a median of $US 95 per month vs. only $US 70 in Kenya.  Therefore Kenyan agents do more transactions per provider but make less money overall by serving fewer providers per agent.

Evolution

The agent network in Kenya, not only continues to proliferate rapidly but is also evolving the types of agents it has.  About three years ago, banking agents were introduced to the market, and more recently mobile money merchants began operations (see the blog on merchants in Kenya here).  Banking agents are now becoming an important part of the digital financial ecosystem in Kenya and display some interesting traits.  A lot of the banking teams building these networks used to work in mobile money, and seem to have designed certain facets of them similarly.  For example, both mobile money and agency banking networks display similar levels of dedication, exclusivity, rural/urban locational splits, liquidity management techniques, and support systems.  However, the differences may be even more intriguing, as we see bank agents being more educated, and willing to do much larger transactions for clients than mobile money clients.  Bank agents are also displaying some growing pains, taking a long time to register new customers, and still having 50% of their agents doing 30 transactions per day or less.  Banks will have to focus on these issues as they continue to expand their networks across Kenya. However, the outlook is positive given some of the mature metrics of agent support and management they are already displaying.

Impact

The presentation examined impact from multiple angles including, the geographical expansion of the access to financial services.  The access frontier is being expanded with at least 55,000 agents across the country, which is much higher than the approximately one thousand bank branches in Kenya.  However, it seems like they might be constrained geographically.  Of the 77% of agents that report travelling to rebalance their float levels, 77% of them say it takes them 15 minutes or less to reach their rebalance point.  With 91% of them reporting using a bank to rebalance, this seems like the majority of Kenyan agents are concentrated around the financial infrastructure that we are trying to extend outwards.  Further work is planned to look at the correlations to population densities, and try to determine the degree to which this is problematic.

Conclusion

Agents feel like the market is saturated, with some reporting opening side business to supplement revenue, and only 58% of them saying they think they will still be an agent in a year.  It seems likely that the number of agents on the market will contract.  Safaricom’s M-PESA continues to dominate the market, and while the regulatory wind seems to be pushing towards non-exclusive agents, the high-quality support they are providing to their agents’ means it will continue to be hard to wrestle market share from them.  The addition of banking agents to the market is welcome, and they may be finding a different market need than mobile money such as showing the ability to conduct bigger transactions for customers.  Finally, the agents are extending financial inclusion, but evidence indicates they many may be tethered to the existing financial infrastructure for rebalancing, and therefore further expansion into rural and remote areas may require superior liquidity management techniques.  Overall, it is a very positive picture, from the frontier market in digital finance.

To read our ‘Agent Network Accelerator Survey – Kenya Country Report 2013‘ in full click here

To read our ‘Agent Network Accelerator Survey – Tanzania Country Report 2013‘ in full click here

To read our ‘Agent Network Accelerator Survey – Uganda Country Report 2013′ in full click here