After years of market development, digital finance in Nigeria has still yet to take-off. The market is still experiencing some regulatory impediments, but most of all, providers need improved strategic approaches to their anchor products, core operations and expansion strategies.
The principle of doing things right the first time (DRIFT) is essential. Despite the great potential in Nigeria, core agency functions are currently run with very limited resources, and there is an emphasis on quantity rather than quality.
Five years after the passage of the 2009 Regulatory Framework for Mobile Payment Services by The Central Bank of Nigeria (CBN), digital finance (mobile money/agent banking) has still yet to take-off in Nigeria. A nationally representative survey of Nigerians, conducted by InterMedia in 2013, found that only 0.01% of Nigerians have a mobile money account. Critics note regulation in the country prohibits telecoms from taking the lead in the roll-out of digital finance as they have in East Africa, and suggest the lack of progress is due to their lack of involvement. Banks likeEcoBank, andFirstBank, (as well as third party providers likePaga), are left leading the charge but are still plagued by some fundamental issues.
The Helix Institute of Digital Finance recently finished qualitative research on work being done around the country, and the ironic finding is that the issue is not a lack of initiative by providers, it is that they are doing so much that they do not have the bandwidthhttps://www.microsave.net/helix-institute/ to it strategically. Providers have jumped to try to scale quickly without first sitting and designing processes, structuring management, and giving clarity to their value proposition. Once these tasks have been completed, the focus becomes scale, and here telecoms have a big advantage because they already have more customers, large marketing teams and budgets, and extensive experience in network development and distribution. However, scale is not the primary problem in Nigeria right now, it is the lack of strategic clarity that results from skipping this first developmental stage, which we term as the “Launchpad Stage”.
Agents & Products Everywhere, but Quality & Strategy Limited
On the product front, providers are engaged in G2P payment programs in rural Nigeria, they are offering bill pay opportunities in urban areas, airtime top-ups on the handset, and advertising P2P payments on national television. However, robust market research and sophisticated customer segmentation has not been done to ensure that products are positioned for the right customers. This is leading to market confusion, where the average Nigerian is still very unsure what digital finance is, and how it solves a pressing problem for them.
In September 2013, theCentral Bank of Nigeria reported 67,494 agents had been on-boarded by providers, while The Gates Foundation did a census of financial service touch points that year found only 3,275 mobile money agents (5%), indicating extremely high levels of inactivity in agent networks. The Helix research confirmed that agents are reporting very low revenues, are frustrated with the lack of quality of provider support, and are unclear how they are supposed to pitch the growing arsenal of products to customers. Dissatisfied or dormant agents, together with the high levels of system down time in Nigeria, are undermining trust in digital financial services.
Providers are desperately dealing with angry agents, while trying to sell a wide range of different services, leaving them to triage a battery of operational challenges without bandwidth for strategic progress.
Starting Small is the Key to Growing Big
The great irony of digital finance is that the overall business model depends on large scales of customers and volumes of transactions served by tens of thousands of agents, however, those who ignite this flame of growth too soon, get caught dashing around to control its burn as its increasing scale compounds small problems until they become crippling issues.
The key to successfully growing big is starting small with a ‘Launchpad Stage’ which focuses on quality NOT quantity first. It should involve only a maximum of few hundred agents, with the objective of defining the anchor product, and streamlining all processes and protocols. In a large country like Nigeria, it should have a geographic focus. It should not include master agents, super agents, or aggregators. Those are tools for management of networks at scale, and bringing them in too early will only leave them lurking around the business model trying to find profits that only come in to existence later when scale is introduced.
M-PESA in Kenya had a ‘Launchpad Stage‘ that is not often acknowledged. In started in 2005, and lasted for about two years. It was run as a pilot with only eight agents and about 500 customers, and the focus was on learning and gathering information to improve the quality of the service, and the clarity of the value proposition. This was an essential process, as they ended up entirely changing their value proposition from a microfinance solution to a person to person (P2P) transfer service. This Launchpad phase allowed them to solve problems while they were still small, and then scale solutions to them strategically as they sequenced in agent infrastructure to support it.
Advice for Pioneering Banks
Unfortunately skipping the Launchpad Stage, is a common oversight. However, by now many Nigeria providers should have a treasure trove a data they can mine to figure out which products have been used by which customer segments, and use this data to help them complete this first stage of development. Since the Launchpad Stage does not involve scale, banks should be equally apt at completing it successfully as the telecoms. Banks, however, have different initial sources of strengths than telecoms, which they will first want to leverage.
Generally in all developing world countries, a telecom will have an order of magnitude more customers than the bank. However, that is not relevant in the Launchpad Stage. Banks need to first focus on their strengths, and in terms of finding a value proposition for customers, and the large ones will want to start with the customers they already have. Banks may have mostly served upper class clients for hundreds of years, but those clients run companies making and receiving an alluring number and value of payments. Help them send those streams of salaries, bill and retail payments to mobile wallets. GSMA MMU showed that bulk paymentswere the fastest growing product in 2013. Direct the lower value customers crowding the banking halls out to the agents, thus legitimizing and building trust in the system and business for the agents.
Telecoms also have the advantage of large airtime distribution networks they can convert into cash-in/cash-out agents. However, this is also a secondary issue that becomes relevant when scaling. The Launchpad Stage is just for selecting your first few hundred agents, and developing an arsenal of processes, checks and balances around them. Many banks have a great way to do this too; the small and medium sized enterprises (SMEs) customers banks have can make great agents. This is what bKash did to recruit their first few hundred agents, and where other banks we have worked with as well have started.
Telecoms are designed for scale, and have many advantages over banks for achieving it, but pursuing scale is a secondary activity after the value proposition has been developed and core processes have been designed and tested in the Launchpad Stage. Banks are not at a disadvantage when designing a launchpad, and they should look to some of their existing core strengths to execute this phase effectively. This is where many banks across the globe driving for scale are stuck and they probably need to stop to do a strategy refresh along the lines of what is being suggested above.
We will address the issues of scaling effectively in a future blog.
Amid all the renewed talk about product innovation and a client-centric (or what we at MicroSave have, for over a decade now, called a “market-led”) approach to financial inclusion, I find myself wondering if we have lost sight of two key aspects:
The differences between market leaders and market followers
The challenges of advancing through the product development continuum
Market leaders vs. market followers
Corporations (including financial institutions) are, by strategy, either market leaders or market followers – first or later movers. First movers do the product innovation to lead the market. They invest heavily in product development and often have an outstanding in-house capability to conduct market research and create/test innovative products or (as we will discuss below) ways of marketing and communicating existing products.
Later movers watch and copy. They sometimes struggle with the back-office systems (IT, processes etc.), but the “externals” of new products are clear as soon as they are offered in the market (even, sometimes, at the pilot-test stage). Late movers assess if the product innovation is likely to be a success in the market and respond accordingly. Of course, if they do not see the potential of a product early enough they may struggle to counter the entrenched position of first mover market leaders – as we have seen, for example in Kenya, with M-PESA.
Corporations’ product innovation strategies may vary according to geography, depending on their market position and the resources they are willing to invest in any given market. So we may see one bank leading in one market and following in another where they are relatively new entrants – or indeed copying their own across products across borders. Thus Equity Bank has largely transposed its market-leading Kenyan products into the Tanzanian, Ugandan and Rwandan markets. Once it is well established in these markets, one can reasonably expect the bank to use its capabilities to refine its existing products or develop new ones specifically for these newer markets. Market leadership and customer focus is, after all, deeply engrained in Equity Bank’s DNA.
Key takeaway: it does not make any sense at all to expect all organizations to be market leaders and undertake product innovation … indeed many are simply not geared up to be anything other than market followers.
The product development continuum
MicroSave has already posted Key Questions that Should Precede New Product Development in the context of microfinance institutions (broadly defined to encompass banks, MFIs, credit unions, etc.). The same questions apply to mobile network operators (MNOs). At the core of some of these questions is the product development continuum.
Many products suffer from poor take-up because of inadequate or inappropriate marketing and communication. Across the globe, millions of potential clients are not using financial products because they do not know of their existence, or understand adequately how they might be useful. Quality market research can shed light on this, and on many other important issues that drive product uptake – see Market Research: Beyond Product Development. These insights can enable financial institutions to deepen their reach into existing market segments or reach new ones with the same product. And of course, repositioning a product with a new marketing campaign is much easier, quicker and lower cost than developing a new one.
Quality market research can also often provide important insights into minor tweaks to the delivery process or product terms and conditions. When MicroSave started working with Equity Bank (then called Equity Building Society) on product innovation in 2001, it had 109,000 customers. The first rounds of focus group discussions yielded the important insight that customers were confused by the plethora of charges that Equity levied. Within a few days, Equity had consolidated these charges into one single price and rolled out a careful communication strategy to ensure that the entire market was aware of the changes. And thus began a journey that would see Equity Building Society transform into a bank, list on the Nairobi stock exchange and become the dominant bank in Kenya, growing to serve 8.7 million customers by 2014 (see The Market Led Revolution of Equity Bank). The initial step was product refinement – accomplished with minimal fuss, and without even a pilot-test.
The final, most complex and most time and resource consuming step on the product development continuum is new product development. And it is not for the faint-hearted. Nor, as we argued in Who Is The User In “User-Centred Design”? is it something that can be easily outsourced to outsiders with a poor understanding of the marketplace, the regulatory environment, or the internal culture and systems of the financial institution. New product development requires a structured process to manage its inherent risk throughout – as we explored in the report Systematic Product Development. Due to the complexity of the process, it is often easier to follow rather than to lead.
The model significantly de-risks MFI operations. Operating as agents of banks almost entirely removes political risk from the equation. Banks and their agents come under the sole purview of the Reserve Bank of India, and the possibility of state government interference will be significantly minimized if not altogether eliminated – particularly when poor people’s savings are involved.
Banks are struggling to establish agent networks that can profitably and reliably service the low income, unbanked segments of the economy. While they have been successful in opening accounts, they have not been as successful in promoting transactions. As they expand the range of services and seek to drive credit through agent channels, banks will have to depend on MFIs that understand this segment and have built systems and processes to serve it.
MFIs will be able to offer a wider range of products and thus to meet the real financial needs of the clients rather than pushing credit alone and optimistically claiming that it is for entrepreneurial activities.
Banks can reflect the assets and liabilities in their books thus enhancing their balance sheets. Banks can increase the spread and share the risk-return of lending to the low-income sector with the MFIs in a more realistic manner.
Savings is a service that is universally needed by people in the low-income segment. Offering the poor a range of financial products such as savings, pension, and remittance services will create a higher degree of client satisfaction, and thus customer loyalty and reduced default. The savings history of clients will also enable better credit appraisal and will help (to some extent) address the problem of multiple borrowing.
Banks will partner with MFIs that have built much more cost-effective outreach channels. The operating expense for an MFI branch that can service 2,000 – 3,000 clients is in the range of Rs.5-600,000 per annum. One entry-level officer in a bank will cost as much. Banks, on account of cost considerations alone, will struggle to directly service the low-end market; tie-ups with MFIs provide tremendous opportunities.
The BC relationship will also open up the possibility of appointing agents in villages to offer savings and pension services. While client origination can remain with the MFIs, agents can deal with day-to-day operations and settlement can take place with the MFI on a daily basis. This should reduce the cost of operations, and the economies achieved can be passed on to clients.
The banking regulator will be more satisfied when it knows that banks have their skin in the game. If banks use and monitor MFIs as banking agents this will inspire confidence in the regulator that they are maintaining the requisite oversight and due diligence.
While some of the existing MFI-bank credit relationships are manual in nature, most BC relationships typically ride on either card- or mobile phone-based technology as the front end. This will enable better and more efficient cash management at the MFI end. Currently, 1-3 % of the total cash at the MFI is typically either in transit or stacked in vaults in the numerous branches. This can be an instantaneous process riding on technology.
Banks can leverage MFIs’ local knowledge and cash and risk management skills to build a manage a network of agents that will allow them to reduce the cost of many of the core operations, reduce over-crowding in their banking halls, increase sales and service to high-value customers and increase the quantity and quality of their rural loan portfolio.
MFIs and their agent networks can also be conduits for direct benefit transfer payments, thus earning additional commission revenue to the model. This will diversify income sources, enhance revenue for the front-line agents and the MFI BCs and introduce the MFI to new clients and opportunities to cross-sell to them.
MFIs can build efficient channels to offer financial services and work with multiple banks to reach the under-banked/unbanked segments. Banks will be interested in such tie-ups not only because of the regulatory pressures but also because once they begin servicing this segment, they will realize the potential that it holds.
Beyond the opportunities presented by the BC model, MFIs need to be cognizant of the adverse impacts that embracing the BC model may have on their current business. We consider below three main types of impacts, though the severity of each may vary depending on the type of MFI. In many cases, these threats are flip-sides of some of the benefits discussed above.
Impact on group meetings. The group articulates the methodology of most MFIs, so they need to be careful in assessing how the introduction of front-end technology and BC operations can support or disrupt the conduct of group meetings. This depends on how the BC channel is structured:
Field officer or group leader acts as the front-line agent. In this case, savings operations would be conducted during the group meeting. Offering saving services along with credit will result in longer group meetings. In fact, MFIs might opt to shift savings operations to a separate meeting in order to preserve the focus of the credit meeting on repayment. Increased duration of group meeting or more frequent meetings will lead to a reduction in loan officer caseload, which will affect the business turnover and profitability for NBFCs.
Third-party outlets acting as front-line agents. BC operations with technology enablement can help in making meetings cashless, and that can reduce meeting duration or frequency. Cashless meetings may be more attractive to business-oriented MFIs and especially NBFCs, but they may challenge the models of those with a more didactic approach to development.
Erosion in repayment discipline. MFIs also need to make sure that BC operations do not lead to loss of group liability, which is one of the core principles of group-based microcredit. This may happen if meetings are less frequent, or if the availability of individual products from banks leads people to question the usefulness of group-based products. Loan repayments using technology-enabled BC channels may also lead to a situation where clients blame non-repayment of loans on the front-line agents – or technology-related problems (“The system was down”, “I’d lost my mobile phone”, “The agent didn’t have liquidity”, “I sent money to the wrong account”, “I forgot my PIN”, etc.).
Cannibalisation of existing business. Most MFIs suspect that in the long run, banks might be potential competitors for their lending business. NBFCs and not-for-profit MFIs, which offer microcredit as their core business, suspect that banks may gain access to their clients through the BC channel and start extending credit directly to them. Or, perhaps more immediately, NBFC-MFIs may be uncomfortable with the idea of lending off-balance sheet on behalf of banks; or struggle to negotiate the right commercial arrangements with banks to do so.
The burden on institutional capacity. MFIs need to evaluate the existing management capacity–skills and bandwidth—to negotiate with the multiple stakeholders involved in BC operations. NBFCs with larger operations and used to managing relationships with funders and investors may not find it very difficult to manage the new relationships, although for regulatory reasons they will need to place a separate corporate identity and team to manage this. MFIs and NGOs with smaller operations and with little experience of managing strategic relationships may find it trying and may need to bring in dedicated people with the right caliber. Institutional capacity will also need to effect the cultural change that MFIs need to undergo in order to offer savings along with the credit.
These advantages and disadvantages will require careful research, analysis, strategic planning, and negotiation – the steps to making the transition (and indeed the initial decision on whether to do so or not) are examined in the next blog “NBFC-MFIs As Business Correspondents – What Will It Take?”
The Microfinance Expansion Project (MEP) in Papua New Guinea has multipronged approach towards enhancing financial inclusion in the country. In this video, Jagdeep Dahiya, MSC’s Training Specialist in PNG, outlines how MEP is trying to achieve financial inclusion by stimulating both the demand and supply for financial services.
In the previous blog, we looked at the challenges presented by fraud, armed robbery and customer service. In this blog, we look at perhaps even more fundamental issues of agent profitability, and the related issues of customer education (or marketing!) and the product range available to drive transactions.
Making enough money to cover costs
Just under half of the Tanzanian agents are making more than $100 profit per month (see graph) … but many are making losses or very small profits. Those agents making less than $50 profit per month are inevitably going to start asking themselves whether offering digital financial services is worth the time, energy, money (for float) and effort invested.
In addition to the limited product range (discussed below), agent profitability is also compromised by two other important factors. Firstly, system downtime is still prevalent- in Tanzania and Uganda in particular. While it varies significantly across the different providers, almost all agents report experiencing system downtime, and estimate that on average each episode of downtime costs them about 10 transactions.
Secondly, but more importantly, in both Tanzania and Uganda agents are turning down transactions for want of e-float (or in some cases cash). In Uganda, agents turn away an average of 3 transactions a day for want of float, in Tanzania, they turn away 5 transactions or 14% of average volumes each and every day. Small wonder that many are struggling to achieve profitability!
Sadly, in the absence of interoperability amongst providers’ systems, non-exclusive agents have to hold separate e-float for each provider they service – thus increasing both the cost of their digital financial services and potential of them running out of e-float for any particular provider.
Time taken to teach customers about the service
Even though the markets for digital financial services is relatively mature in Uganda and Tanzania (both countries contain several of MMU’s “Sprinters”), agents are still struggling to educate customers about the service. This is probably one of the reasons why over the counter (OTC) transactions are so popular in many markets (particularly Bangladesh, Ghana and Pakistan). If providers want to avoid the OTC trap, there is clearly a little more thinking to be done on how best to support agents (and ideally the sophisticated customers using the service extensively) to explain the nature and potential of the service to existing and potential customers.
Broader range of products
But there is a more fundamental concern here, services at agents in both Tanzania and Uganda are almost universally limited to cash in/out, account opening, limited bill pay, airtime top-up and some OTC transactions. Despite the apparent lack of competition, Kenya is seeing a rapid growth in savings/ credit products (primarily through M-Shwari), and in merchant and other payments (primarily through Lipa Na Pesa).
However, one of the most striking results from the ANA surveys has been how narrow a range of products is offered through different provider channels in both Tanzania and Uganda. In both countries, very few agents are offering much beyond cash in/out, account opening and over the counter (money transfer) transactions – which of course undermines the potential of a wallet for self-initiated transactions and ultimately a cash-lite ecosystem. Fewer Tanzanian agents (see graph) offer OTC money transfers (23%) than Ugandan ones (30%), and fewer Tanzanian agents offer bill payments (5%) than Ugandan ones (17%). And while no Tanzanian agents offer airtime top-up, 17% of Ugandan agents offer this service. So even amongst the limited range of products offered by agents in the two countries, Tanzania seems to be lagging. Perhaps this will change with the recent announcement of M-Shwari for Tanzania.
But, ultimately, to reduce the agent churn that appears to be so prevalent even in the mature East Africa markets, providers will have to increase agent profitability. This is unlikely to come through enhanced commissions, which are under pressure from competitive forces already, so increasing the number of transactions that each agent processes are likely to be key. The current rates of 30-35 transactions per day in Tanzania and Uganda, and of around 45 per day in Kenya, leave too many agents struggling to make the money they need to stay in business. This is evidenced by the fact that in the Kenya ANA study only 58% of Kenyan agents said they thought they would be an agent in one year’s time.
Clearly mature markets are by no means stable markets!
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