The Kenya Country Report is based on a nationally representative sample of over 2,000 mobile money agent surveys carried out at the end of 2013, all over the country. The report finds that after seven years of market development, Kenya continues to be dominated by one strong provider with an army of exclusive agents. These agents are well supported, and generate very high transaction levels but only offer a limited suite of products and have fairly low profits. Download to read the report in full for more exlusive insights and data
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Mobile Money Merchant Payments – What does the Future Hold?
In October 2012, GSMA MMU asked the burning question; ‘Can mobile money work for merchant payments?’ Across the developed world cards are being swiped, dipped or waved to pay for everyday purchases, but the question remains if mobile money can, or will, have the same levels of usage in the developing world.
Currently mobile money providers have thousands of agents who facilitate the exchange of cash and electronic money. They are usually small retailors, and are paid a commission for offering the service. In contrast, mobile money merchants generally do not facilitate these exchanges, but simply accept electronic payments in exchange for the goods or services they provide. The merchant, the customer, or neither is charged a fee by the provider for using the mobile money service. These merchants are still very new, but the 2013 State of the Industry Report, shows adoption of merchant payments is slowly gaining traction, with 65% of the mobile money deployments now offering the service. Although activation rates are still very low, this is to be expected with mass market strategies that target micro, small and medium enterprises, and in places like Kenya, we see the numbers already improving.
In this blog we’ll discuss why merchant payments are important, what they mean for the evolution of the agent network, and where they might be headed.
Why is it important?
Currently, mobile money is only being popularly used for a small subset of payment purposes, mainly small airtime top-ups, infrequent bill payments or transfers to a friend/family member (P2P), which cumulatively account for 97% or transactions by volume or 89% by value globally (State of the Industry 2013). Even in the famous Kenyan market, the CEO of Safaricom, Bob Collymore notes that 98% of transactions are still done in cash. Further, people are using their mobile wallets for savings, but the amounts stored are very low, and the majority of funds are still withdrawn from the system quickly after they are received.
Merchant payments add another use case for mobile money by enabling customers to pay for goods and services from the value stored on their mobile wallets. This additional service for the customer encourages them to transact with electronic money more often as there are more options for doing so, and also incentivizes them to store money electronically as it becomes more useful tool for making payments.
This is attractive to the provider as both these changes in behaviour can increase their revenue, and potentially goes a long ways towards increasing usage of the systems as payments to merchants are made so frequently. According to industry insiders “the ratio of merchant payment transactions to P2P transfers is 16:1 in a developed market.” Although we cannot directly compare the developing world to the developed, it does seem that this indicates that there is a huge opportunity for digital merchant payments. Therefore this is a key element in making mobile money more relevant on a daily basis, and evolving the payments system away from cash and onto the digital platform.
What does this mean for the evolution of the agent network?
When mobile money hit the market, many providers engaged existing Fast Moving Consumer Goods (FMCG) retailors to try and reach scale quickly. They convinced the retailors in these networks to additionally provide cash-in and cash-out services, and therefore evolved their functionality. Many predict that these agents will be converted into merchants, accepting digital money for their goods and services rather than exchanging it for cash. However, for customers, paying in digital money in some cases incurs a fee and takes longer than paying in cash, and for agents receiving a commission, transitioning to merchant payments likely means forgoing it. This makes it a hard transition to sell and means providers around the world are struggling with a number of different models to try and make it work.
In Kenya, the Lipa na M-PESA merchant payments service that Kopo Kopo and several other aggregators help manage charges the merchant 1% of the value of the transaction, enabling the customer to conduct it for free. Kopo Kopo entices businesses to become merchants by providing them with business analytics from the transactions they make on the system, and focusing their pitch on specific value propositions like reducing pilfering associated with cash businesses. However, the design of this system means that it is generally more alluring to more sophisticated businesses that generally were not previously targeted as mobile money agents. The result in Kenya is that instead of building on top of the agent network, the merchant network seems to be evolving mostly alongside it, increasing the overall places in the country where mobile money can be used.
Where are we and how might we move forward?
From Lipa na M-PESA in Kenya, to TigoPesa in Tanzania, ZAAD in Somaliland and EcoCash in Zimbabwe, there are a myriad of different attempts to build models in this field. After about two years of market development it is safe to say we are still not sure which ones will succeed, but in Kenya we now have two years of data from which we can make some astute observations to help the industry understand what we do know.
Kenya is obviously a unique market because of its maturity where 62% of the adult population actively uses M-PESA already. Merchant payments should be easier in an environment like this where people already trust the system, and are accustomed to holding some digital money on their phones that they can use to make purchases. Emulating this stage of market maturity is likely something providers will need to do first before launching merchant payments, as Ignacio Mas quips, you cannot make payments with an empty wallet.
However, Kenya is also a success story in part because of the innovative work Kopo Kopo is doing to select, acquire, train and support new merchants. Launched in 2012, it now manages over 12,000 merchants for the ‘Lipa na M-PESA’ (‘Buy Goods’) service. It has designed analytics to reduce inactivity in the network, and has even launched Grow, a merchant cash advance service to encourage merchant usage and retention, which caught the whole industry’s attention. Some of the techniques used are similar to those used for managing agents and can be important, and others are just being learned.
This marks the first blog in a series that will explore the emerging world of merchant networks in mobile money to shed light on what some of the best practices in the industry currently are and where the industry seems to be headed.
The blog was co-authored with Ben Lyon – Director of KopoKopo Inc
Product Development for Youth
Youth is a potential segment to provide financial services as they constitute a huge proportion of the world population. Beyond the sheer numbers of youth, there are several other reasons why this segment has to be considered as having great potential to provide these services. Despite youth being an important segment for providing financial services there are many challenges around it. MSC has worked with several financial institutions and other stakeholders in making this financial services provision a little easier. In this video, the speaker, Veena Yamini Annadanam describes the challenges in product development for youth and outlines MSC’sapproach to addresss these challenges. In addition to market research, systematic product development, MSC focuses on building financial capability of the youth and working with parents, communities as support groups and policy makers to create an enabling environment for financial institutions to offer these products.
Government subsidy in microinsurance: A necessary trend?
For quite some time, the world of microinsurance has been debating the role of government (more specifically government subsidy) in the growth of microinsurance. While commercial microinsurance – where the client pays a premium for their policies underwritten by an insurer – paved the way for innovative and efficient ways of delivering insurance services to the low-income people, these programmes have rarely achieved impressive outreach.
Meanwhile, governments have entered the sector with subsidized insurance programmes of various kinds, targeted at the lower income people. Though these government-subsidized insurance schemes often look similar to social security schemes, they are different fundamentally. While in traditional social security schemes, the government underwrites the risks and pays for the services, in this new generation of programmes the government pays the full (or a part of) premium, while the risk is underwritten by insurance companies.
Many argue that these schemes are not “microinsurance” in true spirit since often either client voluntarily subscribe to them, or do they pay the premium (or full premium) … and in some cases both! However, these schemes occupy a significant position in any discourse about the sector, since both of them are similar in function – they cover insurable risks of low-income people. Interestingly, these schemes do not fall under the purview of ILO’s definition but qualify as microinsurance in the definition coined by IAIS.
ILO Definition of Microinsurance:
Microinsurance is the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of risk involved.
IAIS (International Association of Insurance Supervisors) Definition of Microinsurance:
Microinsurance is insurance that is accessed by low-income populations, provided by a variety of different entities but run in accordance with generally accepted insurance practices.
During the “Landscape of Microinsurance in Asia and Oceania” study, MicroSave came across many such schemes and were challenged to distinguish them from commercial microinsurance. We realized they are fast closing the gap with commercial microinsurance and hence it was unwise to let them fall outside the purview of the study. We landscaped these government subsidized microinsurance schemes as “social microinsurance” in the study, an idea we found limited buyers that time.
We are pleased to see that this idea has recently been endorsed by Michael McCord, a global veteran and leader in the field of microinsurance . While he argued in favor of government support in health insurance, we believe the logic can be extended in case of agricultural insurance, too. This learning is based on our recent project on weather index insurance in five Asian countries.
In the traditional agriculture insurance programme, viz. National Agriculture Insurance Scheme (NAIS) of India, the Government supported insurance companies in both ways: a) claims subsidy and b) premium subsidy. This resulted in a startlingly poor financial performance with a 640% claims ratio (for every INR100 of premium collected, NAIS paid INR640 as claims!!). The reasons for such high claims ratios might be poor design and/or non-actuarial pricing. However, without the government support, the insurance companies would never have come forward to offer this product (except maybe the public insurer AIC).
Based on the recommendations of a study by the World Bank and GFDRR in April 2011, the Indian Government modified the NAIS and called it mNAIS (modified NAIS). Under the mNAIS programme, the government provides an only premium subsidy, and the insurer has to bear the responsibility for claims. Since the underwriting risk is now carried by the insurer, they take extra care in the pricing and management of the scheme. The government’s role also helps the scheme non-financially, as it has now mandated all recipients of subsidized crop loan to avail the mNAIS facility, which has, in turn, helped the scheme achieve impressive outreach. The percentage of loanee to non-loanee farmers in India is 98%, which shows the role the government mandate played in creating the outreach.
Government subsidy is also extended to index-based agricultural insurance programmes of India (in addition to the traditional insurance schemes). Index insurance settles claims on the basis of measuring some proxy indicator (such as temperature, rainfall, wind speed, humidity etc.) in contrast to measuring the actual yield itself. India is the global leader in weather index insurance running the largest weather-based crop insurance scheme (WBCIS). Again, one of the main factors for success has been government support. Under this scheme, the farmer pays just one third the premium, and the remaining two-thirds are shared by the state and central governments. This way the premium ‘burden’ on the farmer is less, making them more willing to purchase the insurance product. There is an abundance of such full or part subsidized schemes in India. China, Georgia, Indonesia, Jordan, Kazakhstan, Nepal, Pakistan, Philippines, Thailand, and Vietnam are some other Asian countries with strong government subsidized microinsurance (or “social microinsurance programmes”).
In Asia, social microinsurance has an outreach of nearly 1.7 billion as compared to a little over 170 million insured through commercial microinsurance. This differential in outreach is a clear indication that government subsidy is instrumental and, quite probably, necessary in the growth of microinsurance, at least until the programme stabilizes (becomes sustainable and arrives at claim ratios of less than 100%). The government essentially plays the role of a market maker until the social microinsurance products are perfected, their delivery innovated and the outreach scaled up. However, the important question here would be when should the Government stop subsidizing these programmes … and, indeed, will it ever be able to do this considering the political compulsions! Perhaps part of the answer lies in a gradual phasing out of the subsidies as poorer populations experience benefits accruing to them and insurers make their products and delivery channels more robust.
Expanding access to finance for small businesses in India: A critique of the Mor Committee’s approach part 3. Assessing access to finance for small businesses?
The first blog in this series highlighted the context of the Mor Committee’s recommendations and the significant gap between the supply of and demand for credit for small businesses. The second blog in the series examined the role of the banks, development finance institutions and non-bank financial institutions (NBFCs) to examine why they have been so backward in coming forward to meet this gap. This concluding blog looks at the ways of measuring access to finance for small businesses.
Credit to GDP Ratio – Is it a good measure to assess access to finance for small businesses?
The Mor Committee report recommends that by January 2016 every significant (more than 1 percent contribution to GDP) sector and sub-sector of the economy should have a credit to GDP ratio of at least 10 percent. The Committee recommends the use of credit to GDP ratio to assess the extent of credit reach to various sectors in the economy. The report highlights that India at its abysmal 70 percent credit to GDP ratio is way below the averages of high-income countries (200 percent) and the middle-income countries (100 percent). The Committee argues that targeting 10 percent credit to GDP ratio for all significant sectors by 2016 would catalyze inclusive growth and subsequently reduce poverty.
At the small businesses level, the report presents the finding that the credit to GDP is 35 percent at an aggregate level. Similarly, at industry and services level, the ratio stands at 56 percent and 25 percent respectively.
In our analysis of subsectors within the MSME segment at the two-digit level of NIC-2004 classification, MicroSave found that of 47 sub-sectors only five, namely Food Products and Beverages; Textiles; Chemicals and Chemical Products; Basic Metals; and Fabricated Metal Products contribute greater than 1 percent to the GDP. In terms of access to finance, these five subsectors had comfortable access ranging from 49 to 101 percent. Thus, we observe that while credit to GDP may be a good ratio to determine access to credit at the aggregate and sectoral level, at the sub-sector level it does not hold relevance.
Also, the targets assigned for January 2016, at 10 percent credit to GDP is not relevant for the MSME sector per se as all the sub-sectors within MSME segment have greater than 10 percent credit to GDP ratio. The credit flow is skewed in favor of medium enterprises with micro enterprises languishing for want to institutional credit.
A World Bank study highlights that access to credit is inversely related to firm size. Size is a significant predictor of the probability of being credit constrained and hence micro and small enterprises are highly credit constrained. In such as scenario, credit to GDP ratio would not sufficiently reflect the access to credit to small businesses. Lack of a clearly articulated and representative ratio may mean that the banks and financial institutions would expand access to credit to the MSME sector as a whole by focusing largely on medium-sized enterprises.
Thus, it would be worthwhile to use the formal credit to capital ratio to measure the access to credit by small enterprises. The underlying assumption upon which this indicator is suggested is the fact that it clearly defines the leverage of the enterprises. Also, in our opinion, instead of looking at MSME sector as a whole, it is important, for the purposes of measurement of access to credit to look at the micro, small and medium enterprises individually.
Another measure in line with the suggestions of World Bank’s report on the assessment of credit constraints for enterprises is the credit-constrained status of the micro, small and medium enterprises. World Bank suggest that the enterprises can be classified as below:
The status of all enterprises across the size ranges can be assessed periodically to estimate the access to finance. This will provide a better understanding of the access to credit amongst micro and small enterprises, and thus focus policymakers’ attention on these key drivers of Indian economic growth.
Who is the user in “user-centred design”?
In 2000, we had completed two years of what we thought was outstanding work to understand the needs, perspectives, and aspirations of the end customers for banks and microfinance institutions. It was time for MicroSave–Africa’s first mid-term review, led by industry gurus Beth Rhyne and Marguerite Robinson … and they gave us a wake-up call.
They noted, “The mid-term review of MicroSave-Africa found the project to be outstanding in articulating client perspectives …. MicroSave-Africa‘s … excellent market research training course has already given 16 MFIs a new perspective on clients and tools (focus group discussion and participatory rapid appraisal techniques) to learn about client needs more effectively. MicroSave-Africa has not done as well on the supply side, in part because it has underestimated the complexity and scope of the work needed to introduce new products successfully inside MFIs.”
We had developed a series of qualitative research tools and techniques that helped (and continue to help) hundreds of financial institutions develop new and refined products that are used by millions of people in Africa, Asia, and Latin America.
But this success could not have been achieved without clearly understanding exactly who uses these products.
The obvious “users” are the end customers of the financial institution or mobile network operator. But as our mid-term review highlighted, there is another very important “user”: the organization that will deliver the product. MicroSave has been running training and technical assistance on product development and innovation for 15 years now, and we have repeatedly seen two challenges:
- When an external agency conducts market research and hands a beautifully constructed product prototype to a financial institution, it has a high chance of becoming a “product orphan” – unloved and rejected by its prospective parents. External agencies can rarely adequately understand the institutional needs, culture and operational realities of the financial institution. So, more often than not, the product prototype is not adequately profitable, or conflicts with other operational realities, or presents insurmountable challenges for the IT systems and so on. External agencies from different countries also often fail to understand the regulatory environment or cultural nuances of the target market – particularly if they insist on arriving with “optimal ignorance”.
- Even when the market research is conducted by staff of the financial institution in collaboration with MicroSave (our preferred model) we sometimes see their perspectives shift from being to an institution focused to the other end of the spectrum and being to customer focused. In between these two extremes lies the “sweet spot” for products that are market-led but meet the institution’s needs and realities. Institution-focused financial services ignore the market and end customers’ needs, perspectives and experiences; but over customer-focused products can be too complex, or simply not adequately profitable to deliver.
The solution lies in building qualitative market research capacity within institutions so that the tools and techniques can be used not just for product innovation but also for a myriad of other drivers of customer-centric or market-led financial services: customer service, marketing & communications, corporate brand & identity and so on. And so that the products developed are based on the needs of both the customers and the institution that serves them, as well as an adequate understanding of the regulatory environment.
Indeed, we at MicroSave would argue that the most successful financial institutions (and indeed other corporations) have in-house market research capability. Equity Bank is a very good example of this – we trained six of Equity’s staff on qualitative market research in 2001-02, and this team helped guide the bank from 75,000 customers in 2000 to over 1 million by end 2006. Equity then underwent a massive expansion, and in 2010 came back to MicroSave asking us to train a new cadre for its “Research and Product Development” cell because the original staff that we had trained had either moved up within the organization or had moved on. This new cadre is now working with us to develop the products for rollout across the bank’s digital finance channels and for its operations in Tanzania, Uganda, Rwanda, and South Sudan. Equity Bank now has 8.7 million customers in Kenya alone. They are perfectly positioned to balance the needs and perspectives of the customers and the bank.
The users in “user-centered design” are necessarily both the customers and institution that serves them … and not as one fresh-faced consultant announced to colleagues of mine, “the donor who pays my bills”!