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Why do (some) MNOs sprint and (most) banks limp?

Posted on by MSC

A previous MMU blog “Can India Achieve Financial Inclusion Without the Mobile Network Operators?” concluded “MNO-led systems therefore have a hugely important role to play to create the market – to build people’s confidence in digital financial services and local agent-based systems – and thus lay the foundation for digital financial inclusion.”

All well and good… and of course MNO-led mobile-money models have been more successful than bank-led models in several parts of the world. This is in part because mobile money is a more natural “fit” to MNOs’ high volume, low value transaction and agent-based business. But also the business case for MNOs is based on reducing customer churn and digitising payments for airtime, in addition to the revenues for managing payments transactions.

Furthermore, payments are inter-spatial transfers that can be confirmed either by receiving the money, and/or with a simple call by the sender to the receiver – thus building instant trust. These factors (together with MNOs’ natural advantages as first movers in this market) put them in the perfect position to make the market for digital financial services.

Conversely, banks are much more comfortable handling low volumes of high value transactions in their own premises (and certainly not with dispersed agent networks). And the business case for banks is primarily based on offering a range of products. Furthermore, since many of these products (for example insurance and savings) are inter-temporal (as opposed to inter-spatial) in nature, immediate confirmation and thus trust in the new digital financial system is much more difficult to achieve.

But …in markets where the Central Bank insists on bank-led models and prohibit MNOs from issuing e-money, are MNOs likely, or able, to play the market making role for digital financial services? The moves from Airtel with Axis Bank and Vodafone with ICICI Bank in India suggest that (after many false starts) MNOs will indeed play a very significant role as agent (or business correspondent) network managers.

Why? Well, MNOs have several significant advantages as agent network managers:

  • They have established multi-layer distribution networks, with many thousands (in India’s case 1.5 million!) of retailers selling airtime and providing extensive urban and rural coverage.
  • The MNO business model is based on usage (those high volumes of small value transactions), and therefore more aligned to the willingness and ability of the poor masses to pay in small sums; unlike the traditional bankers’ business model that is based on float.
  • Mobile pre-paid platforms that manage high volumes of low value electronic recharge are very synergistic with the needs of digital financial services. These platforms also allow the ability to offer highly customised and relevant products (supplemented with capabilities for fine segmentation and analysis of usage trends).
  • MNOs have high levels of brand awareness amongst poor and rural customers that can be leveraged well for cross-selling financial services. MNOs also invest regularly and extensively in marketing and promotions to create channel and consumer awareness.
  • Telecommunications is a well regulated service industry, similar to banking. Thus mobile retailers acquiring new subscribers are well equipped to handle KYC norms and service activation processes.
  • Telecommunications is also an investment intensive and long gestation business. Thus mobile operators have superior capability to source funds, and make large investments with long time horizons for returns.
  • MNOs work through extensive partnerships, aggregating third party products seamlessly into their offerings – essential for the success of digital financial services.
  • Last, but quite importantly, in many countries there is severe competition, price-wars, and commoditisation of voice and basic services, so MNOs are highly motivated to offer stable, diversified value-added-services that promise substantial upsides in terms of reduced churn, decreased airtime distribution costs and increased revenue.

Digital financial services in one of the few industries that has a clear first mover disadvantage. Building the trust of low income people in electronic money, the systems that manage it and the agents that provide the cash in/out services is a very challenging proposition. But MNOs are, in many ways, better placed than banks to meet these challenges – they are likely to be essential to achieve digital financial inclusion, even in India and other bank-led model markets.

Financial services that poor people want

Posted on by MSC

Financial institutions trying to serve the mass market rarely seem to have the time to the conduct market research necessary to identify prospective clients’ real needs and aspirations. Many rely on “bath-tub product development” – product ideas developed on the basis of the senior management team’s experience and “gut instinct”, and often rolled out without any pilot-testing … let alone consultation with the target market.

Others prefer the “me too” strategy and thus simply wait, watch and copy products offered by their competitors. India’s “No Frills Accounts” rolled out by a wide variety of banks are a case in point – with dormancy estimated to be 80-90% despite the government’s attempts to push conditional cash transfers through them. MicroSave’s research into this phenomenon revealed that there were a series of features to which poor people aspired and needs that they could clearly articulate … and that poor customers were, in the main, willing to pay for these services.

MicroSave research over the years across Africa and Asia has highlighted that people need (not just want) financial services that are convenient, accessible, affordable and appropriate … and of course reliable in that they are consistently available, on demand. A single transaction account like the No Frills Account is unlikely to meet these criteria … particularly when delivered through traditional banking branch infrastructure.

  • Convenience requires proximity and longer opening hours – most obviously through a distributed agent network.
  • Accessibility often necessitates ATM cards or mobile money solutions to obviate the need to negotiate overcrowded branches, complex forms and intolerant bank staff, and is likely to require us to rethink how we communicate products.
  • Affordable needs to encompass direct costs (transport to the branch and food when the trip take a full day), indirect costs (lost wages and other opportunity costs); and hidden costs (brides and commissions for filling up and processing forms) – and not just the “on the board” fees/interest rates that are formally charged by bank.
  • Appropriate must reflect how poor people live and how they think about and manage their money.

Poor people’s need for appropriate products mean that they need a range of products (just as you and I do) to reflect their life cycle. They also need disciplined systems that break down their accumulation of lump sums into small manageable amounts (saving up, through or down).

The products used to accumulate lump sums should ideally be differentiated and ear-marked for specific needs, in the same way that poor people often ear mark specific income streams for specific uses to help with their mental accounting. For example: savings for a bicycle, to buy some land and for old age are very different in terms of the time horizons and instalment amounts.

Similarly, loans for a medical emergency and for investing in a fixed asset are very different in terms of loan size and structure, as well as the pace at which they need to be appraised and disbursed. This has very important implications for financial institutions seeking to offer a range of products to the lower income market segment: a single transaction account will not help manage a series of complex savings goals; and a standard working capital loan repayable in weekly instalments over a year is only appropriate for a limited set of business people.

As a bare minimum, therefore poor people need a suite of products that includes:

  • A transaction or very basic savings account (linked to a reliable and efficient payments/remittance system that is not too costly);
  • Recurring deposit accounts for different goals (with an attached overdraft to which they have automatic and immediate access – up to 90% of the value of the amount deposited);
  • A general short-term (up to one year) loan (that can be used for working capital as well as consumption smoothing, education etc.);
  • A longer term loan (secured against assets acquired with the loan).

Clearly ,this suite of basic products need to be tailored for, and communicated to, specific markets and market segments – but a market-led approach to product development is essential if we are to have real positive impact on the lives of poor people. Just try imagining how you would manage your finances if you only had access to a typical microcredit product – a loan repayable weekly for 50 weeks!

Principles and Models of an Effective Credit Scoring Tool Design

Posted on by MSC

In this video, MSC’s expert Anup Singh, Domain Leader for MSME financing, discusses the utility of credit scoring tool for standardised appraisal of prospective MSMEs for financing. He mentions about the key design considerations that the banks and financial institutions must keep in mind while developing credit scoring tool for MSMEs’ appraisal. He compares the statistical and judgmental models of credit scoring tool design and discusses cases when each of these can be used.

Digital Financial Services Volume V

Posted on by Parul Tandon

The Digital Financial Services (previously called E/M Banking) Volume V is the tenth publication under the Optimising Performance and Efficiency (OPE) Series. The OPE Series brings together key insights and ideas on specific topics, with clear objective of providing microfinance practitioners with practical and actionable advice.
In response to repeated demands from practitioners, MicroSave has developed this fifth compilation of brief publications on digital financial services. This compendium presents a bouquet of articles addressing digital financial services in India and its scope. The compilation further covers experts’ views for mobile-phone based banking.

Product Development: Reasons why MFIs Fail to Focus on It

Posted on by MSC

In this video MSC expert Anant Jayant Natu talks about the inherent constraints in the operational context of microfinance institutions (MFI) that limit the possibility of a rigorous focus on product development. He also touches upon some factors that can drive the product development process in spite of these constraints. The intangible nature of financial product and a demand driven microfinance market are presented as two key reasons for MFIs’ lack of interest and focus in product development. However, under competitive pressures faced in maturing markets, where client retention and market expansion become an absolute necessity for survival, MFIs have indeed shown that they adopt product development as a deliberate strategy.

Research with a roll of the dice

Posted on by MSC

Anyone who has spent even a little time asking people questions about money—how they spend it, how they save, how they plan ahead—already knows the responses do not always accurately reflect what’s happening in real life. For a lot of reasons.

MicroSave has given a fair amount of thought as to how we might manage this exchange to achieve less biased results, particularly since much of our research is qualitative. (We are after the reasons, why and how, specific aspects of financial inclusion succeed or fail.) Participatory research methods focus on community rather than individual needs help make respondents less self-conscious and more willing to engage.

Nevertheless, anything involving cash flow and payments, behaviour patterns, or a specific new offering, still elicits a biased response.

The most obvious reasons being that most of us, rich or poor, would prefer to present our money management skills in the best possible light, rather than admit to a researcher—or anyone else—uncertainty, fear, or ignorance. Research participants also tend to over-think the situation and respond to what they believe the moderator wants to hear. We already know, for example, what happens when we ask respondents—no matter how subtly—a hypothetical question about a new cattle insurance offering or better debt management.

Almost all of us went to school. Everyone, including students with only brief and limited exposure to education, learn early that if you tell the teacher what s/he hopes you will say, you are far more likely to succeed in that class, and every other class, than the kids who ask too many questions and promote alternate opinions. (A lot has been written on this topic, but here is a useful summary of what goes wrong in classrooms—and its longer-term effects.)

So, how do we move away from respondents seeking to provide what they believe are the “right” answers? One solution we came up with that seems to be working surprising well is to involve them in games such as Chutes and Ladders whereby decisions, in this case financial ones, have gratifying, or dire, consequences.

But since it’s just a simple game, players can take more risks, feel less chagrined when they fail, and discuss the consequences of their actions more candidly. Our research questions and follow-up probes become part of the game, rather than a discussion about abstractions and hypotheticals. The understanding is better when one is in action [rather] than listening or reading.

financial-inclusion-consultancy

Hypothetical situations are also easier to introduce in a simple game, and for respondents to answer spontaneously without the worry of making “mistakes”. In some instances, we even award small prizes like chocolates and pens to game winners, again to shift the focus away from correct or incorrect answers.

Instead of introducing a new form of livestock protection as a new service and asking who might sign up for it, we incorporate the question into one of many decision points in game. As a result, answers now range from “Yes” (generally those who have many cattle and already understand the cost benefits of insurance) to “No” (those who have very few and see insurance as too expensive) to “Not sure” (the many who are unclear about what insurance entails and, in a game, welcome an explanation). We discuss all three answers and then move on with a roll of the dice.

“Games aren’t tests; they’re just fun,” notes Premasis Mukherjee, a senior MicroSaveresearcher. “Everyone gets involved—and everyone is also reminded, very usefully, the important role luck plays in all our lives.”

MicroSave has already used this technique with some gratifying results in our recent studies on information sources and financial capability and financial metaphors. We plan to incorporate it in current and future research efforts as well.

We would be delighted to hear your own thoughts on using games and other informal, appealing techniques that encourage more personal involvement. Our goal is to free respondents from the performance anxieties many experience—and the less than trustworthy responses that result—in too many research situations. These are nevertheless still experiments in progress and others’ findings, positive and negative, are very welcome.

For more information on these methodologies, please contact us at akhilesh@MicroSave.netand akhand@MicroSave.net.