Despite the fact that MSMEs contribute significantly to the economy and employment, MSMEs are undersupplied with adequate, affordable, timely and market-led financial products. MSMEs play a vital role in developing economy, says MSC’s Assistant Director, Bhavana Srivastava. In this video, she outlines the financial needs of a typical MSME such as Credit, Savings, Transactional Banking Services and Business Development Services. And also voices the need for financial literacy and awareness programs for SMEs.
Bhavana concludes that a perceptible change in MSME banking can only happen when banks start viewing this segment as a viable business segment and include MSME banking in their core business strategy.
Blog
District readiness for G2P payments: Ready or not…Well, still mostly ‘not’ part – I
G2P (Government to Person) payments have been common in India for a long time but questions are consistently raised as to whether the payments reach the intended beneficiary. In addition to this, the convenience, cost, efficiency, and certainty with which a beneficiary can avail, and then withdraw, the benefit payment also remain under scrutiny. As a result, with G2P payments such a key part of government strategy, there is a great deal of focus on ensuring timely, effective and convenient delivery to the intended beneficiary.
Electronic Direct Benefit Transfer (EBT) is one way to transfer funds electronically from the relevant department/treasury to individual beneficiaries’ bank accounts. EBT seeks to minimize leakages at the same time improving upon the time it takes to transfer funds. However successful implementation hinges on successful withdrawal, and for this, there has to be a network of available and accessible “Cash-In-Cash-Out” points servicing beneficiaries within their vicinity.
The core value adds are that:
- the government saves by weeding out ghost beneficiaries, speedy transfers, and unauthorized withdrawal,
- beneficiaries avail such benefits in the village itself, without incurring traveling cost, ‘service charge’ to middle-men and loss of wages.
It is indeed a win-win situation if achieved … but an implementation of DBT/EBT has thrown up more challenges than policymakers ever anticipated.
Typically there are a host of stakeholders involved in the entire process. These might differ depending on if it is Aadhaar based DBT or non-Aadhaar based one. But the diagram outlines the generic system.
It is evident from the above diagram that it is a multi-stakeholder process, and calls for a seamless coordination between a large number of players … and this is where the fundamental challenge lies.
At the front-line, beneficiaries must interact with:
- The district administration for scheme-related matters such as enrollment and updates in the beneficiary details, etc.
- Financial institutions and their cash-in cash-out (CICO) networks for account opening, linking or “seeding” of Aadhaar number (if Aadhaar authentication is used), checking account status, and financial transactions.
There is also back-end coordination and interaction between different stakeholders, but beneficiaries are not aware of these and there is no role they can directly play in them, so we do not discuss them here.
The Government of India announced more than 100 districts for Aadhaar based DBT roll out, and in addition, state governments have other such programmes in other districts. But there does not seem to be any clear basis for choosing the districts for rollout. This leads us to a very basic question: Could there be a tool that helps governments to decide which districts to choose for DBT roll out depending on districts’ readiness level? And, of course, this tool may also help us all to understand which areas need focus for successful roll out.
In the next blog in this series, we will discuss how MicroSave has responded to this challenge and developed “district readiness assessment” (DRA) tool, to assess the readiness of a district to deliver EBTs.
Mor committee report: Is cash-out the answer everyone is looking for?
As Ignacio Mas pointed out in his blog ‘Better than Cash, or Just Better Cash’, digital financial services often have a tendency to promote the use of cash, instead of discouraging it, by making cash more effectively. His central argument is that by facilitating cash-ins and cash-outs, service providers are encouraging an easy movement of money while not according sufficient attention to the need for savings.
We believe that making the movement of cash more efficient has its own advantages, especially when low-income customers are involved. However, these benefits pale before the advantages of driving a cash-lite ecosystem using digital means. A cash-lite ecosystem removes inefficiencies pertaining to cash-in and cash-out while ensuring that the reliance on physical cash comes down substantially over a period of time. Storing money digitally can potentially lead to cascade effects and drive economies of scale for digital money in the longer term.
The Nachiket Mor Committee on “Comprehensive Financial Services for Small Businesses and Low Income Households”, in its advocacy to set up Payment Banks[1] addresses the need to make cash more efficient by recommending cash withdrawals from accounts maintained at these banks.
Over the years, many studies by MicroSave and others have reported that the “unbanked households” need a range of financial services (not limited to credit alone), and are willing to pay the “right” fee for these services. These financial services include the need to store and save money. Customers will normally store or save money once they are convinced that they can easily withdraw the money.
Unlike banked customers, the unbanked need frequent, low-value transactions rather than a few high-value transactions. There are two ways in which this can be facilitated. One is to ensure that the agent always has requisite cash to facilitate cash-outs and second is by providing more opportunities to conduct digital transactions.
Enabling cash-out by PPIs is the first step in the direction and in all likelihood, a very important one. It will significantly improve service delivery and also ensure that the customer starts trusting the agent network. However, cash-out comes with attendant challenges such as liquidity management. PPIs[2] (who are likely to convert to Payment Banks) have not yet addressed liquidity management in a comprehensive manner.
Given the restricted acceptance of the current prepaid instruments (Semi-Closed Wallets); customers in all likelihood will be forced to withdraw cash to send/spend on daily needs. The recommendation would have been much more interesting from a policy perspective had it focussed on ways and means to keep money electronic while providing universal access.
Unfortunately, the recommendation does not address the need to make merchant registrations easier. Currently, the PPIs have to spend significant energy, time, and cost to acquire / onboard physical merchants. This has led to them redirecting focus from merchant acquisition to remote payments, thereby severely restricting merchant payment opportunities for the customers. One of the major costs for a PPI currently is the cost of digitization of money. This will significantly increase if the money needs to be reconverted from digital cash to physical cash, thereby putting extra pressure on the customers in terms of higher transaction charges or making the business unviable. The secret is to be able to keep the money in a digital form for as long as possible. Along with cash withdrawal, it would have been ideal if Payment Banks were given the freedom to allow any merchant to accept payments.
From the viewpoint of stakeholders in the ecosystem, it is important that a cash-lite economy emerges (assuming included = cash-lite). Customers have to be able to spend the digital cash easily and across different types of merchants as cash handling can often be expensive for them. A move in this direction will trigger a relook at the existing Merchant Subvention Fees (MSF). We believe that a new MSF for digital financial services has to emerge, the current structure will not encourage the merchants to sign-up or will continue to push merchants into not accepting mobile money thereby severely denting the progress that can be made.
Given the customer segment the committee wants to address, the recommendation for setting up Payment Banks and the design structure conceived, while promising in its outlook, may not entirely meet customer needs but can be treated as the starting point in the evolution of making mobile money completely ubiquitous.
[1] Payments Bank: This is a design that provides payment and deposits, but not credit. A Payments Bank may or may not pay interest on the account/wallet that it provides. Once again, a Payments Bank can be nested or independent. A Nested Payments Bank would need to partner with a bank (Sponsor Bank) to hold both the escrow account and to participate in the payments network. An Independent Payments Bank would be a direct participant in the payments system and instead of escrow balances with the sponsor bank would hold some combination of CRR and SLR directly with the Central Bank.
[2] Pre-paid instrument issuers.
Increasing Staff Productivity in Agriculture Microfinance
This Note highlights the efforts of TSPI in the Philippines to develop productivity incentives to support the growth of their TSPI Palayan (Rice) Programme (TPP). TPP is now offered in 92 branches with outreach to 15,000 clients and a loan portfolio of PhP369 million (US$8.2 million) as of December 2013. In 2013, TSPI embarked on an expansion campaign targeted at increasing TPP productivity. Early results from the pilot test of the incentives, which resulted in increased outreach as well as portfolio quantity and quality, encouraged TSPI to extend the campaign to succeeding cropping seasons.
Mobile Money Agents in Uganda: Sprinting ahead, but the marathon’s not yet over
With 50% of cash-in/cash-out agents conducting at least 30 transactions per day, it is evident that Uganda is one of the world’s leading digital finance markets. However, despite its impressive growth, many operational challenges still persist. The Helix Institute of Digital Finance’s ‘Agent Network Accelerator Survey: Uganda Country Report 2013’ (conducted by MicroSave and the Bill & Melinda Gates Foundation) analyses both the operational factors of success, and residual challenges in agent network management in the country. Here I highlight four key findings from the report and discuss their implications for market maturity and the direction of its future development.
72% of agents are located within 15 minutes of a rebalancing point.
Unfortunately, this is not a positive indicator, but a result of agents having trouble surviving outside of areas where rebalancing is quick and cheap – along the road network and near financial institutions (see similar findings here in Tanzania). To extend the reach of the networks farther, time must be spent on resolving major operational issues such as liquidity management, monitoring and support.
This problem of ‘liquidity tethering’, (see Emerging Trends for Agent Networks in 2014), is prevalent across the industry. Looking at Uganda, where 43% of the entire population, and only 34% of the poor population, live within 5km radius to a financial access point, increasing the geographical reach of agent rebalancing services will be key to creating a ubiquitous and genuinely inclusive digital financial sector in the country.
Profits are high with 40% of agents making at least US$100 of profits a month.
Although agents are generally happy with their financial gains, data shows they could be earning significantly higher profits. With a median of ten transactions per day being denied due to service downtime, b Ugandan agents could increase their daily transactions by 33%, if this issue was addressed. Although similar challenges plague the industry internationally, researchers were surprised by how much it was affecting the ability to serve customers in Uganda.
This issue, however, can also be seen as a symptom of the industry’s rapid growth and success, as transaction volumes regularly overwhelm platforms that were not designed for such scale.
Changing or updating platforms is a costly and lengthy process with which providers are currently struggling. In the meantime, providers need to focus on minimising the impact at the agent level by giving them timely and accurate warning about system downtime.
Agencies are “new”, with more than half having been in business for less than one year.
Once again this figure may come as a surprise due to the maturity of the Ugandan market. Data shows this high percentage of nascent agents is a result of both rapid growth and agent churn (agency’s closing and tills being given to other agents). However, be it growth or churn, the large number of inexperienced agents in the market undoubtedly impacts the quality of service delivery. (Further research will need to be done to distinguish the level of contribution of each factor.)
Given agents are the face of the brand, and can play an important role in building trust in the system, the issue becomes – how do you cost effectively train them, and then monitor and support them in the field given many have a short life-cycle? Here, incisive agent selection is key, as is strategically spending monitoring and support budgets as the agents mature.
Banking services (credit, savings and insurance) are almost non-existent.
According to Pew Research, in Uganda 50% of cell phone owners regularly make or receive payments on their phone. Further, InterMedia reports half of households registered with mobile money store money on their m-accounts, meaning the country is already at a level of maturity where people feel comfortable leaving a little float on the system.
However, innovation of new products in Uganda remains almost completely absent, leaving agents primarily doing cash-in and cash-out. Bill pay and airtime top-ups are available, but mostly over the handsets, and integration with banking services is recent, and not being offered on the agent level at scale.
Opportunities for product innovation, which would increase the amount of transactions each registered customer does on the system, are abound and agents can play an important role in selling them to the mass market, if providers strategically include them.
Click here to read the ‘Agent Network Accelerator Survey: Uganda Country Report 2013’ in full, and delve deeper into the data on Uganda’s operational factors for success and opportunities for improvements as the market moves into its next stage of maturity.
Don’t Throw the Baby Out with Bathwater
2013 could have been a watershed year for G2P (government to person) transfers as the Government of India (GoI) decided to use the Aadhaar unique identification system for Direct Benefit Transfers (DBTs). However, the recent decision to suspend the DBT scheme for liquid petroleum gas LPG cylinders (popularly known as DBTL) seems set to reverse this. What went wrong in the 12 months since the launch of this ambitious scheme, prompting the GoI to suspend implementation completely? We need to understand the context and dissect the process of DBT to assess this. There is evidence that Aadhaar-based DBT brought in efficiencies wherever a supportive eco-system was provided. Aadhaar-based DBT needs more sustained and coordinated effort from local government, banks and business correspondents to realise its potential.