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Rethinking microfinance: This time with rules

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Microfinance has an image problem. It has had for a while now—instances of corruption, unfair interest rates, cover-ups, suicides due to coercive collection tactics—and the real victims are inevitably not the microfinance institutions (MFIs), but their clients: poor people caught in spiraling debt and little hope of legal recourse or financial relief.

Many directly involved in microfinance and related fieldwork do not agree with skeptics like David Roodman and Hugh Sinclair and would argue that the benefits still outweigh the problems noted above. Nevertheless, the need for more rigorous review and transparency is indisputable.

But HOW exactly does one impose “transparency” and more exigent controls for institutions that are not banks, and thus not subject to local or international banking regulations, and rely heavily, in some cases, on the trust and goodwill of absentee donors?

Social Performance Management (SPM or Responsible Finance for short, since both are easier to remember) is one possible solution to refocus the mission of microfinance and to provide more concrete support for their many struggling clients.

The idea of a social bottom line is not new. UN agencies and others whose charters differ from a market-based approach would argue that social audits have underpinned their work for more than 40 years. And SPM has slightly different meanings, depending on who is proposing it as a solution for MFIs and other problems that beset financial inclusion.

In general, however, most can agree that this aspect of social performance measures how well a money-lending/savings institution has translated its social goals into practice. Even more generally, these goals break down as:

  • Intention and Design: MFIs and their supporters’ mission—and how they plan to implement it (easy to assess, equally easy to succumb to dreaded “mission drift” )
  • Output: Number of loans and savings accounts, and average size (relatively easy to monitor and assess)
  • Outcome: Improved money management for small businesses or households (also possible to assess)
  • Impact: Effects on individual and community income, savings, and longer-term effects on education, nutrition, sanitation, health, etc. (more complicated, maybe impossible to assess fully and accurately)

(For an early but helpful overview of SPM, please see this CERISE Social Performance and the CGAP Social Indicators Initiative’s report. For a broader and more in-depth look at Responsible Finance and its many components, please click here.)

All very well and good so far. But how does one actually move the guiding principles above from the reports and PowerPoint slides into early planning and daily practice? We already know the impact assessments are tough, and, no surprise, many MFIs, including credit and savings cooperatives, see SPM as too expensive, too time-consuming, or the wrong solution to the problem.

One way to shift the focus away from the institutions and their hesitations and back to the MFI customers and their needs is MicroSave’s MFI Client Protection assessment tool, known as ServQual.

Tested last year with 357 microfinance clients in India, the Philippines, and Bangladesh, ServQual yielded some rather surprising results. (Research often does which is why it is worth doing and paying attention to). In the first two countries, respondents rated fair and respectful treatment from MFIs as the most important aspect of client protection in their opinion, followed by transparency. Interestingly, complaint resolution and data privacy ranked last in the seven aspects of client protection discussed in the 82 group and individual interviews. For more about this research, please click here.

Other projects seeking to make Output, Outcome, Input and other intangible headings more concrete often use USSPM, or Universal Standards of SPM. This tool helps evaluate systems and processes for both client protection and MFI staff treatment and translates the “mission” into specific goals and measurable results. (There’s more, but these are the basics.)

“We promote breaking-down social performance into practical steps and by a degree of importance,” explains Yamini Annadanam, MicroSave’s Responsible Finance practice group leader. “Most MFIs actually have some existing practices. These standards can give them the confidence to build on what they already have. And that is more a matter of filling in a few key gaps, rather than implementing something entirely new.”

This initial engagement with the MFIs is complicated enough, as anyone involved in SPM in other parts of the world will attest, but the far harder piece is actual implementation and enforcement. One of the reasons many who believe in financial inclusion also believe banks and their regulators must play a more active role in local and global microfinance is because of money, especially other people’s money, need legally binding restrictions and penalties, in addition to universal standards and suggested codes of conduct. This protection is important for all creditors and investors everywhere, but all the more necessary for the clientele microfinance seeks to serve.

Can India achieve financial inclusion without the mobile network operators?

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India is attempting to create financial inclusion using direct benefit transfers as the flywheel that turns the engine of an electronic payment system, the creating volumes and interoperability necessary for real financial inclusion. Currently volumes at rural agents are simply not adequate – resulting in very low commissions and debilitating levels of agent churn. Furthermore, MicroSave has already demonstrated that “integration and interoperability of financial services is good for the poor, and great for banks and governments”.

But India is seeking to do this largely without the mobile network operators (MNOs), preferring a bank-led, bio-metric card-based, model. MNOs offer great advantages, but (in the Indian context at least) also suffer from disadvantages. Nonetheless, worldwide, almost all, successful digital finance services are MNO-led – see GSMA-MMU’s deployment tracker.

In their paper “A Digital Pathway to Financial Inclusion”, Radcliffe and Voorhies outline how basic mobile connectivity and digital remote payments are the first two necessary steps towards an inclusive digital economy.

So can India really achieve financial inclusion without involving the mobile network operators?

MicroSave’s work with Equity Bank has clearly shown that a bank-led model can indeed be successful and rapidly achieve high volumes of transactions. Indeed, Equity Bank’s agent-based banking model looks set to take Kenyan customers to Radcliffe and Voorhies’ Stage 3 of a full range of digital financial services. However, while there are disadvantages in an MNO-led approach to financial inclusion, it is increasingly clear that achieving a bank-led model of financial without MNOs leading the way is unlikely.

MNOs are better suited to managing high volumes of low value transactions (the mere mention of which is enough to give most bankers nightmares). Furthermore, most banks simply do not see the business proposition at the base of the pyramid or are too busy responding to more traditional high value, low volume opportunities offered by the burgeoning middle classes in most developing countries. Furthermore mobile- (as opposed to card-) based systems allow person-to-person and person-to-business payments (utility bills etc.) without using agents – thus offering an important user value proposition.

MNOs can (and perhaps must) play a catalytic role to bring banks into the market and thus achieve Radclifffe and Voorhies’ Stage 3 … by demonstrating that they can and will play an important role in the payments systems, and in the case of M-Shwari, beyond. This is turn will persuade banks leverage digital financial services to serve the base of the pyramid.

Fortunately, the business case for MNOs is based on reducing customer churn and digitising payments for airtime as well as the revenues for managing payments transactions. And 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.

The business case for banks is primarily based on offering a range of products. But 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.

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. Emerging models such as the Axis Bank-Airtel and ICICI Bank-Vodafone tie-ups bode well for the future.

But if the Reserve Bank of India really wanted to turbo charge financial inclusion it would allow MNOs to act as issuers of e-money with proportionate supervision as discussed by Kate Lauer and Michael Tarazi, “Supervising Nonbank E-Money Issuers”, CGAP Brief, July 2012.

This blog was earlier published on GSMA website.

What if six billion people had smartphones?

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Six billion is close to the number of current mobile subscribers around the world, according to the ITU (International Telecommunications Union). Since 26% of the 7 billion total are children, that means most adults, rich and poor, now have access to a mobile device. Let’s consider what this might mean with regard to smartphones:

  •  By 2016, a recent Analysys Mason report predicts, there will be more individuals in emerging Asia-Pacific, Middle East and North African countries with high-speed data-access phones than bank accounts.
  • Already, more Saudi Arabians and Egyptians have smartphones than credit cards.
  • Smartphone penetration is expected to reach 46% in Asia by 2017, double last year’s figure, and almost 30% in the Middle East and North Africa, up from 7% in 2012.
  • The International Data Corporation (IDC) forecasts that these and other emerging markets will account for 70% of all smartphones shipped by 2017.
  • This year, for the first time ever, mobile handset vendors will distribute more smartphones than feature phones.

P.s. For those of you who feel uncertain about “smartphones” vs. “feature phones” vs. anything that isn’t an iPhone or Samsung, you’re not alone. Even the experts can’t agree on a precise definition. Wikipedia offers quite a detailed summary or, for this blog, you just need to know smartphones offer much faster (and more expensive) internet access, “mobile optimized” (easier to read) screens, and many more third-party applications (games and YouTube, but also international commodity prices, local weather, health advisories).

So the obvious question—the one that intrigues mobile operators, governments, international donors, and everyone else working with the half of the six billion mobile subscribers who live on less than $2.50 a day—is how to make this gratifying explosion of new phone technology serve the needs of the global poor.

Google some combination of “smartphones”, “future”, “poverty”, and “emerging markets” for more than 3 million conjectures as to when, where, how, and for whom, all this might work.

Except maybe this is not actually the most obvious rhetorical question to be asking.

At MicroSave, we always start with the customer needs and for mobile customers earning <$2.50/day—which means less than $1,000 a year—even the touted arrival of the $150-170 smartphone, is a staggering expense. Our research indicates it is also a very unlikely investment, at least in India, the world’s second-largest smartphone target market. (For more on mobile money issues and the various players involved in payments and banking by phone, please see our blogs on Mobile Money: Rosy vs. Real and Why Is the Chicken Afraid to Cross the Road?

The second-hand phone resale market is worth noting, of course, although more than half of the overall estimated $34 billion worth of used phones is sitting in a drawer, due to customer inertia and also poor durability. Most recent models, but particularly the very thin Samsung models and all iPhones, crack easily and have a planned obsolescence of approximately two years to boost unit sales.

Here are several more reasons to wonder if the flashy, new device is really better than the old one:

  • 3G coverage: Currently, only 45% of mobile users worldwide, and a very small 8% in developing countries have access to 3G high-speed, high data-volume networks, according to the ITU. So the majority cannot even use many features on their smartphones. In some areas of Africa, mobile network coverage will continue to be based on 2G for the foreseeable future.
  • Cost: Even in those areas where full 3G coverage is available, data packages are often too expensive for subscribers. Voice and text still predominate for the BRICs (Brazil, Russia, India, China) and other fast-growing markets such as South Africa where only 23% of the 20% who have smartphones—which means less than 5% of all mobile subscribers—have ever used their 3G devices to access the internet.
  • In Brazil, where penetration is already ~35% and half of all phones purchased in 2015 are expected to be smartphones, a 1GB data package costs $51/month, compared with $3 in Turkey and $2 in Vietnam. Here only 5% of all smartphone subscribers use internet services regularly.
  • Battery life: If you have a smartphone, you already know what happens every time you forget to turn off GPS or Bluetooth or the radio or bright display when you don’t need them. Now imagine you’re using your phone in places where electricity is erratic, outlets are not readily available, and recharging is a complicated and sometimes a surprisingly expensive chore.

One interesting solution worth noting for these and other deterrents to mass 3G adoption is “virtual smartphones” like biNu. This is a free platform that works on 2G phones and networks and offers access to web browsers, news feeds, weather, even books, and online learning support, in a comprehensive choice of Asian and African languages. Here is a demo (with music much more appealing than most promo voice-overs) if you’re interested in learning more.

Other and more interesting alternatives will emerge for the 3 billion who, for the present, do not easily use 3G. Mobile operators and handset manufacturers have the most obvious stake in helping make these alternatives happen. Cisco predicts by the end of this year, there will be more mobile devices on earth than people. By 2017, global mobile data traffic will increase 13-fold with more than 10 billion mobile-connected devices. Network speeds will grow by seven times what they are today.

Even if much of this is hype and something completely different happens with 4G-n phones, how more than half the world chooses to use these future mobile devices will prove even more significant. The pyramid may invert in mobile markets—and the needs (problems, worries, aspirations) of the new top half will be well worth understanding and addressing.

Understanding complex human financial behaviour: Alternative approaches

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As we discussed in our earlier blog post, MetaMon project was an ambitious one. In the project, we aspired to decipher the inherent thinking process that drives financial decision making of the poor. In MicroSave’s earlier research around financial lives, we realized that conversations about money often turn philosophical. This is because they revolve around deep-seated desires: for your children to lead a better life than you had; to minimize life’s daily hassles and humiliations; to feel like you are keeping up and fulfilling your obligations to kin and kith; to reduce the feeling of present or future dependency and so on. Yet conventional research tools, aimed at designing a specific product or understanding the impact of a specific programme, often overlook those behavioral discussions and focus on facts.

In the MetaMon project, we did not have a clear research protocol in mind. We kept the research process open and relied on iterative and evolutionary learning.  However, common themes emerged as follows:

1.       Start with a diverse team

We formed research teams with diverse backgrounds. We had ethnographers, finance specialists, product designers, folk artists, painters, game developers and several other people from creative domains, who otherwise do not have exposure to either finance or research processes. Apart from the diversity, they brought to the thinking process, each of them played distinct roles in the research process. Ethnographers brought openness, while finance specialists tried to keep the focus. Designers and creative people could generate several new ideas for engaging people, while the researcher on folk music managed to capture their words and expressions in a more meaningful way. The game developer and animation experts could conceptualize innovative approaches for communicating the concepts and the content developer developed the templates that were instrumental in designing the research tools for testing in the field.

 2.      Thinking beyond transactions

Conventional market research tools are limited in their ability to reach beyond transactional information. More often than not, we end up understanding the transactions people do and try to analytically arrive at the behavioral instinct that might have prompted that transaction. For example, we see people saving in different pots or packets, and deduce that their instinct is to diversify risk. In addition to the attribution error in such efforts, the greater limitation is in not being able to decipher the thinking process at all. In some of the improved and new tools tried in MetaMon, instead of tracking transactions, we prompted respondents with hypothetical situations to see their intuitive response to these. By doing this, we completely eliminated the transactional boundaries the person might have and encouraged open thinking.

3.      Capture them in action

In most discussion-based research methods, there is a risk is of getting theoretical/unreal answers or no answer at all, since financial behavior is something people they “do” and not something they “talk about”. An alternative approach to do such research is to catch/observe the person “in action”, as compared to the “static” approach of other tools. In the MetaMon research, we created “games” that people play and where numerous real life-like transactions are involved. In these games (e.g. Grihasthi game developed as part of the project), we asked the respondent to play and conduct the transactions in a simulation world. As researchers, we just observed the transactions they conduct and the way they play the game/s. Since the respondent was engaged in the game scenario, she/he could not escape real instincts and we could gather the real life experience and responses of the people, as compared to their afterthoughts or rationalized responses.

4.      Impersonalise the discussion    

In several of the research tools involving games and hypothetical situations, we eliminated the intrusiveness of the research process and asked for the opinion of the respondents, rather than their experiences. By doing so, we eliminated the intrusiveness of the research. When asked about the steps/strategies the protagonist in the story/situation should/would do, we could see they are responding as they understand such situation.  This reflects MicroSave’s well-established approach of de-personalizing questions in our focus groups by asking about behavior/needs/perceptions “in the community” rather than those of the respondents themselves. Not being intrusive helped us extract critical information, which is unobtainable through conventional market research.

A complete list of research tools and the experience of implementing them is documented in the publication of MicroSave, MetaMon research Tools.

Understanding Complex Human Financial Behaviour: Alternative Approaches

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The limits of digitalization

The sheer magnitude of the financial inclusion gap–two-thirds of households in developing countries are unbanked—calls for pretty radical solutions. The notion that we cannot count on brick-and-mortar investments to massively expand access to finance in developing countries is now widely accepted. We need to go branchless, and to do so safely we have an opportunity to leverage mobile phones that are increasingly ubiquitous.

But it is clear that enhancing access alone will not solve the financial inclusion challenge. Availability does not automatically translate into usefulness, and usefulness of electronic payments does not automatically translate into the usefulness of other electronic financial services. We need to overcome not only an access barrier (last mile infrastructure), but also a relevance barrier (right-sized products and services), and even a usability barrier (friendly and intuitive customer experience).

Seeking more service relevance is taking many institutions down the path of fragmenting customer needs into ever-finer slices so that they can tailor products to each need. But such an approach risks moving away from service concepts that reflect the more holistic way in which people think about their money management and creates a marketing challenge: how can financial service providers, especially those working with mobile and branchless networks explain to the average customer such a specialized portfolio of services.

Integrated services that replicate how people think about money

What we need are service concepts that help people manage their financial lives the way in which they think about them. Customers need to give shape to their own user experiences. That means providers must think of products as tools which customers can use in different ways rather than as products that offer specific, inflexible services.

The key requirement is that the user interface be intuitive, engaging and consistent. This can only be achieved if the user interface, and the products it is linked to, derive from a deeper understanding of how customers are expected to relate to the entire service experience. The ultimate objective is being able to design a single, mobile-enabled, mass-customizable experience that puts customer goals first. Their priorities are the basis for their interactions with the financial service provider. The key driver for this experience is less the underlying financial products that fulfill the service and more the user interface and customer information management systems that guide the customer. It is the customer interaction in the context of their own mental models that will drive uptake and use.

Increasingly, online services, financial education, and entertainment have been brought together, often following the rules, mechanics and incentives of games. Designing services in this fashion might combine financial education with actual usage in a learn-as-you-go approach.

Understanding the why of use

Carol Coye Benson notes in connection with the use of cash: “What research there is tends to focus on patterns of use (diary studies, etc.), rather than on the why of use.” This probably stems from the modern analytical bias: the urge to collect data first –as much of it as possible—with the hope that we can infer from it what went on in people’s lives and minds. This seems like a laborious and round-about way to get at people’s motivations.

There needs to be a deliberate effort at capturing those thoughts and expressing them in cogent mental models. Earlier this year we embarked on a project we called Metamon (short for Money Management Metaphors) specifically with the intent of trying to uncover mental models through a different path: by engaging people at a more emotional level. We set out to experiment with a range of qualitative research tools which might help design financial services that are closer to how people interpret the role of money and finance in their own lives.

Towards simplified metaphors of household financial management

In a follow-up blog post, we will explain in more detail how we developed the metaphors and what we came up with. In the end, the metaphors we developed during our project fell short of capturing entire mental models, but we came out of the exercise thinking that this research approach allowed us to listen to customers more accurately, more free of our own biases. We think that such approaches are a useful complement to the more traditional use pattern-based methodologies.

Why Tech-based Banking cannot Replace Agents for Financial Inclusion?

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Agents act as a vital link for the banks and financial institutions to reach out to the financially excluded segment. But can they be replaced by technology? In this episode, MSC’s digital financial expert Mukesh Sadana reveals why the time is not right for technology enabled banking. In his own words, “Agents play a very crucial role of educating low income customers, many of them experiencing technology enabled banking for the first time. The customer segment these agents cater to, needs human interaction to trust the system and use it regularly, until the time that customers understand the whole gamut of front-end and back-end processes; can operate technology without help and until they have access to efficient customer service department. And that may not be possible in the immediate future, therefore, necessitating the strengthening of an efficient and cordial agent network for success of efforts towards financial inclusion.”