Reducing Friction To Succeed

Posted on by MSC

A wage labourer from Bihar, India, swipes a metro rail card, as he runs to catch a train to a construction site he works at in Delhi. A mother enters a few digits on her Equitel mobile phone to pay the monthly school fee of her daughter in remote Eldoret, Kenya. A small shop owner outside of Pokhara, Nepal, pays cash to an IME agent to transfer to a consumer goods supplier in the capital Kathmandu. A housewife in Badlapur in the deep suburbs of Mumbai, India, orders a new thirty-dollar smartphone through Amazon and selects the option of ‘cash on delivery’. The smartphone is delivered to her next day by a boy running a small store around the corner. A garment worker in Dhaka hands over some savings in cash from his weekly earnings to a bKash agent to transfer to his wife in rural Chittagong, Bangladesh. A retired soldier swipes his fingers to authenticate and withdraw his monthly pension in cash at a SAVE agent in distant Gonda, Uttar Pradesh, India. A coffee farmer in Masaka, Uganda goes to a MTN agent to withdraw cash paid into her account by an aggregator for Nescafe.

What is common in these events? These are examples of massive and thriving, consumer demand-driven business models in emerging markets around the world. What leads to these success stories that many a business in the payments space would aspire to? A vital element is the low friction of these transactions from the standpoint of the consumers and the distribution/delivery channels. And what constitutes “friction”? Inconvenience, high tariffs, system downtime, low commissions, slow speed, poor service quality, inaccuracy, lack of an underlying compelling need and technology instability, to name the important ones.

Reducing friction can make a difference

An ability to reduce friction makes all the difference between the winners and the also-rans. For every Safaricom, bKash and MTN, there are hundreds of mobile money offerings that haven’t reached any noticeable scale (a mere 21 out of 255 mobile money deployments across 89 countries, tracked by GSMA-MMU, had more than one million active accounts as of December 2014). Likewise, for every Alipay, Amazon and Flipkart, there are countless “alsoran” payment services and wallets.

In this blog, I present a perspective on the upcoming Payment Banks in India – what they will be up against; a reality check amidst the hype; and the acute need for a sharp focus on reducing friction through disruptive innovations and business models.

Understanding the limited degrees of freedom for the Payments Banks

Payments Banks is somewhat of a misnomer. They can certainly do more than provide just payment or remittance services. They can accept demand deposits (current and savings deposits) with an end of the day balance of up to INR 100,000 per individual customer. They can issue ATM/Debit cards and provide Internet banking; function as a business correspondent (or an agent) for a (full service) bank; distribute simple third party financial products such as mutual funds, insurance and/or pension products (albeit after prior approval from the central bank); and undertake utility payments.

However, unlike full service banks, they cannot accept time deposits or undertake any form of lending activities. At least 75% of their ‘demand deposit balances’ have to be invested in government securities or treasury bills as statutory liquidity ratio (SLR). The remaining can be held in current and time deposits with scheduled commercial banks. They need to maintain the stipulated cash reserve ratio (CRR) with the central bank for their ‘outside demand deposit and time liabilities’.

This does considerably limits the degrees of freedom for Payments Banks. RBI data for all scheduled commercial banks for the period 2012 to 2014 shows that 66% of their total earnings are from interest on advances; another 21% are from investments; fee, commission and brokerage income is in the range of 6% to 7%; while 1% is earned on balances with RBI and other inter-bank funds. Therefore Payments Banks have an opportunity to target less than 10% of the revenue streams available to scheduled commercial banks. However they are expected to be game changers and should not be limited to traditional revenue streams. For one, they can potentially earn a lot more on fees from remittances, transfers and payments. Let us take a closer look at how that might pan out.

Avoiding the danger of over dependence on consumer tariffs for a business case

The most prominent, and much written about, remittance and payment business models in Africa, particularly East Africa (e.g. Lipa na M-PESA, M- Shwari, Equity Bank, MTN, Airtel Money), earn primarily from customer tariffs. Below is a comparison of tariffs for diverse mobile money models to transfer an equivalent of USD 100 in the respective local currencies on a purchasing power parity (PPP) basis.

As can be observed, the tariffs for most of the East African providers, and in Pakistan and Indonesia are quite high on a purchasing power parity (PPP) basis. Some providers like M-Shwari charge as high as 7.5% facility fee on small loans for 30 days. This is a flat rate and remains the same even if the loan is taken just for a day; and it translates to an annualised interest rate of at least 138%.

In India, earnings which are solely from high consumer tariffs are coming under pressure. The payments space is witnessing hyper competition with several national banks doing quite well along with many of the PPI (PrePaid Instrument) licensees or business correspondent partners who have not received a Payments Bank license (Oxigen, ItzCash, Suvidhaa, SAVE et al). In addition, new players/models are emerging. These include: Apple Pay, Samsung and Android Pay, besides a multitude of wallets (Chillr from HDFC Bank, Buddy from SBI, Pockets from ICICI Bank, FreeCharge from Snapdeal to name a few). Payments Banks’ pricing models will compete head on with many of these, and face an added pressure to offer highly attractive tariffs to even draw the attention of consumers in such a crowded market place.

Constant innovation to compete with disruptive models

The second and perhaps a more important factor will be disruptive pricing models. In China and India, some of these alternate models have already taken deep roots. Alipay and AliExpress with 800 million registered (and 400 million active) users making 171 million transactions daily, do not charge the buyers anything for their services.  Instead, the business model depends on generating revenue from sellers or partners. Flipkart, Snapdeal and Amazon follow a similar model in India. In Nepal, eSewa virtually offers most of its services free to registered users. These include merchant and bill payments. Remember how mobile voice (and now data) tariffs fell from INR 16 per minute to a per-second pulse in a period of five years?

Coopetition with the right partners will be crucial. Partnerships to offer innovative micro-credit, micro-insurance and other financial products will be crucial to go beyond the limited 10% revenue streams that Payments Banks can target on their own. Fino PayTech and Snapdeal’s announced partnership and Janajeevan prepaid card from Janalakshmi (a small finance bank licensee) with DCB Bank illustrates this need. Though collusion might prove to be short-sighted.

Navigating the dynamics and limitations of retail distribution

Beyond reasonable price points, and assuming Payments Banks’ products have a consumer pull, convenience through widespread, 24 hours and 7 days (or even 12 by 5) availability, and quality of service at the transaction points are very important considerations for consumers. To offer these, financial service providers are highly dependent on distribution channels. Nearly two thirds of the Payments Banks have received the licenses partly on the strength of their distribution networks. The caveat is – these are diverse, third party and multi-brand distribution / retail networks that function entirely on sound commercial opportunities. There is no aspect of loyalty or permanency to them. (This is one of the reasons that despite extensive distribution and outreach, MNOs as PPIs could not make significant inroads into mobile money business. What they will do differently as Payments Banks is yet to be seen).

Moreover, and sadly so, retailers can have considerable downward influence by bad-mouthing a product or simply by limiting its visibility on their shelves, until the product or service (even from a renowned brand) has attained high consumer pull. In their one-upmanship to gain adequate traction with distributors and retailers, Payments Banks will be required to offer large commissions. In the end, those with deeper pockets might survive this war. And as Vinod Khosla, the renowned investor put it, ‘Bad ideas, and copycats will throw a lot of money in blowing each other’s tanks, but might not eventually survive’.

Retail networks in India are best suited for quick, low-involvement, sales transactions – not for selling of new products or ideas. In a descending order of priority, retailers’ strategy is to: (a) push what fetches them a higher commission; (b) sell what consumers ask for, without a willingness to explore alternatives; and (c) spend time on what provides a high return on time invested (ROTI) to them. As a result, achieving a desired service quality or directing retailers’ behaviour is quite an uphill task (except within the organised retail outlets – company/franchisee owned and operated (COCO/FOFO), that, given their cost structure, can usually be very small in numbers).

Does this mean, one of the fundamental reasons why several Payments Banks received a license in the first place, the strength of their distribution, might come to a naught? Possibly! Unless they can apply implement the various lessons learned and do more of what is really warranted.

Making the right technology and user interface choices

Another key factor that determines user experience (more importantly retailer experience, as self-service transactions by the masses are still a distance away) is technology – the cost and ease to install/access; the user interface design; the steps to navigate; the speed to transact; the accuracy of transaction fulfilment; the ease of exception management and grievance management. While the USSD channel is the most prevalent form around the world, in India, Internet enabled and POS devices (including micro-ATMs) have a substantial adoption and acceptance rate. Payments Banks with MNO lineage will enjoy some advantage with USSD. After all, the MNOs managed to vanquish Movida India, a joint venture of Visa and Monitisethat was heavily dependent on viable pricing and availability of USSD channels.

Nevertheless, interface options beyond USSD will continue to be vital and so would be seamlessness of transactions routed through national switches. During a MicroSave internal market research, several retailers were found to be swapping providers that provided better navigation options or managed to contain failures of / delays in transactions routed through NEFT or IMPS at the back end. The decision to swap was taken almost instantaneously, without pondering much about the vintage of their previous relationship – so much for their loyalty! While this can be interpreted as an opportunity for the incumbent Payment Banks to make inroads into competitive retailers, it will require them to be always at the cutting edge of delivering a seamless retailer (and user) experience. And of course, there is always the risk that another smarter player will arrive and snatch a well-oiled network, proving MicroSave’s oft-repeated early mover disadvantage in mobile money and payments.

Bottom line: Inevitable need for a compelling consumer value proposition

The bigger question is, will efforts towards reducing friction eventually lead to a higher consumer demand and adoption? Not necessarily. These are necessary but not sufficient requirements. Consumer demand is the outcome of a compelling value proposition delivered through suitable products and services that address needs, better than prevailing options. Lower friction is a critical constituent but it does not complete the equation.

Nevertheless, as Nanden Nilekani says, ‘There will be winners and losers in any hyper competitive market. The good news is, the sector will be transformed and customers will benefit”. Watch this space for more views on strategies for Payments Banks.

Digital wallet adoption for the oral segment in india

Posted on by M1croSave!2025

A lot of financial inclusion efforts around the globe are targeted towards people who are new to technology and perhaps new to the formal financial system. Many of these people belong to Oral segment of society. “Oral” people are not comfortable with written numbers, they also do not know how to read and rely on mental calculation when it comes to any mathematics. Learning about them is critical for all of us who are working to make digital financial services work for financial inclusion, as these people form the financial excluded segment largely.

The objective of this research was to develop conceptual wireframe of a mobile wallet for ‘oral’ people to use. The user interface was developed keeping in mind the cognitive usability constraints of oral segment.

The result of our work is first ever wallet design for Oral ; that’s what we call it –  MoWO – mobile wallet for oral. We believe MoWO is the first step in the right direction when it comes to financial inclusion of Oral people.

UNHCR Cash-Based Intervention in Meheba refugee settlement in Zambia: The Journey to Digitization

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It was a hot and dusty day as our team drove into Meheba refugee settlement in the North-Western Province of Zambia. Our energy was high, though it was the adrenaline that kept us going after a couple days without sleep. We were going to see the initial results of a nine-month journey towards digitization of cash-based intervention (CBI) payments to refugees in Meheba, a joint project of the Office of the United Nations High Commissioner for Refugees (UNHCR) and the United Nations Capital Development Fund (UNCDF).

As we neared Block D, a woman waved at us. We recognized her as Judith, a refugee from the Democratic Republic of the Congo. She, on behalf of her family of eight, receives CBI payments once every two months. Judith is 67 years old and lives with her husband, two daughters and their husbands, and three grandchildren. During the SIM card registration process that was part of the digitization pilot, her husband was registered to receive the CBI payments on behalf of the family. However, Judith came to us and insisted that they had jointly decided to have the SIM card issued in her name as she is responsible for the household expenses.

We waved back at Judith, pulled out a mobile phone and showed it to her. She immediately understood, held up her SIM card and pointed towards the administration centre, where she can cash out from her mobile wallet. Judith joined us as we were setting up the desks for Airtel Money staff to help refugees cash out their CBI payments. She was the third customer in the queue that day. After cashing out, Judith sought us out with tears in her eyes to share her experience: “I did not believe you when you said that it will take less than two minutes to withdraw my benefit money from the SIM card. We put my SIM card in the agent’s mobile phone, put [in] my secret number and, see, I have money in my hand. It is like magic. This is the first time I have received money so fast. Thank you so much.”

The smile on the face of many beneficiaries like Judith was enough to rejuvenate us. The journey to digitize CBI payments, like other digitization initiatives, had been fraught with challenges. These challenges, along with the financial needs of the residents, were identified during research conducted in Meheba in September of 2017, which is detailed in the research highlight ‘Can digitization of social cash transfers improve the lives of refugees in Zambia?’. This blog, however, focuses on lessons learned during the sensitisation process and two digital payments piloted in Meheba in April and July 2018.

Sensitization of beneficiaries

Communication with beneficiaries: In a settlement the size of Meheba (720 sq. km with a population of over 20,000), it was very difficult to identify the beneficiaries. The beneficiaries live in significantly dispersed locations in six different blocks across the settlement. During the first test, several different sensitization approaches were attempted: conducting house-to-house visits, employing word-of-mouth, utilizing megaphones, and using Community Development Workers and Community Youth Workers to mobilize CBI beneficiaries for sensitisation and for SIM card registration. Megaphones had the maximum impact and were used in subsequent sensitisation and SIM card registrations, leading to the successful mobilization of beneficiaries.

Venue for sensitization: Meheba is arranged into various blocks, from Block A to Block H. Each block has several internal roads. Initially, door-to-door and road-wise sensitisation approaches were used, with the aim to reduce inconvenience to beneficiaries. However, most beneficiaries were not at home, as they were away working on farms, in trading areas, etc., which meant that sensitisation took longer and was inefficient. Therefore, another approach was sought. In the end, the most effective means to sensitise a large number of people was to conduct the sessions in a central area (a town hall) in each block.

Nomination of a household representative: Traditionally, CBI payments were distributed to the head of the household (focal point) who collected the money on behalf of the family. In the digitization project, the decision was made to register the SIM cards and mobile wallets at the household level as well, rather than the individual level, to avoid practical challenges such as issuing SIM cards to minors. During the sensitization process, instead of registering the heads of household by default, beneficiaries were asked to nominate a household representative to receive the digital money on behalf of all household members. It was important for the beneficiaries to choose the right representative who would be available to receive the CBI payments and use them for the benefit of the family.

SIM card and mobile wallet registration

Training of the GSM and mobile money team: SIM card and mobile wallet registration failures mainly occurred due to technical challenges (system upgrade), poor network quality, poor document quality for know-your-customer (KYC) requirements (crumbled or faded ID documents) and human error. It became clear that it is very important to train both GSM and mobile money team members on the importance of understanding the beneficiaries, error-free data capture and alternate KYC documentation validity. The training helps to ensure more successful SIM card and mobile wallet registration from the start, which results in more satisfaction by the beneficiaries and lower costs for the mobile money provider.

Sharing of registration reports: The key stakeholders needed to agree on the turnaround time for different reports related to successful and failed SIM card and mobile money registrations and reasons for failure, as well as the method for re-registration of SIM cards without any inconvenience to the beneficiaries. Coming to an agreement is crucial to ensuring that beneficiaries have a positive experience from the registration process onwards and start trusting the communication from different stakeholders. Further, the stakeholders must have a prior agreement on the format and turnaround time for validation of SIM cards and KYC documentation, which is vital for seamless transfer of funds to beneficiary accounts.

Stakeholder engagement

As with any digitization initiative, strong partners are critical for its success. The stakeholders in the CBI digitization project in Meheba are depicted in the figure. Strong partnerships allowed UNHCR to disburse the first digital payments within 24 hours of the final decision.

The highly motivated stakeholders and the strong relationships between them also helped in finding alternative mechanisms, such as the use of a cash-in-transit facility to disburse cash to the beneficiaries who were not part of the first digital payment.

Clear communication

Continuous communication to the beneficiaries about the venue and date for SIM card and mobile wallet registration, the required documents for withdrawal and the disbursement date for the first payment was crucial to ensuring the efficient utilization of resources from UNHCR and its partners.

Although SMS text messages were sent to confirm the digital payment transfers to the beneficiaries’ mobile numbers, the digital transfer information was also communicated through word-of-mouth and through megaphones to those without mobile phones. These approaches proved to be effective means of communication.

Support of beneficiaries during cash-out

Research indicated that only 52 percent of the beneficiaries owned a mobile phone. To support the beneficiaries who did not have a phone during withdrawal, Standard Chartered Bank organized for extra mobile phones to be provided to every Airtel Money agent in the settlement. The agents assisted the beneficiaries, who came only with a SIM card, to withdraw using these extra mobile phones. This approach helped to reduce the overall cost of digitization as well as to make sure that all beneficiaries were able to cash out their payment easily at an agent location.

It was important to create a positive experience by supporting the beneficiaries, especially those who were first-time users, to check their balance, withdraw their money and see the other services available on the mobile phone.

Reporting

Developing reporting requirements regarding timelines and formats among all stakeholders helps to ensure smooth functioning of digital payments.

Key success factors
As with any pilot, it is critical to identify lessons learned that could drive improvement of products and services in the next iteration of the project. The digital payments in Meheba were a great success: 57 percent and 100 percent of payments were sent to beneficiaries’ mobile wallets in the first (April) and second (July) digital payments, respectively. Ninety-seven percent of beneficiaries were able to withdraw from their mobile wallets immediately. The cash-out process took only about three days as opposed to the manual process that used to take 10 to 13 days. It is expected that, as beneficiaries gain trust in the services over time, they will not immediately cash out all of the money in their wallets. This shift will also depend on the continuous availability of agents within the settlement to enable cash-out at any time.

The success of the two digital CBI payments lays the foundation for developing a digital ecosystem in Meheba by identifying additional services that could be digitized. This effort will include offering mobile wallets to other residents in the settlement, guaranteeing the availability of well-trained agents in the settlement with sufficient liquidity and, finally, moving towards digital means of paying for goods and services (merchant payments). These achievements could not have been possible without rigorous pilot preparation, continuous community engagement and concerted efforts from the multiple stakeholders who were involved in the testing and iteration of the digitization processes. Other assistance programmes provided by UNHCR that are also being considered for digitization include the distribution channels for non-food items and the DAFI scholarship programme that helps to fund the education of refugee students to access tertiary education. A similar approach is intended to digitize CBI payments in Mantapala refugee settlement in Zambia, which hosts over 10,000 refugees.

Overall, feedback from the beneficiaries as well as from various stakeholders was positive and encouraging. UNHCR and UNCDF are working together with Standard Chartered Bank and Airtel Money to streamline processes and to develop solutions to address some of the challenges identified.

The hope is that, with these successes, digital ecosystems can be replicated in the other two refugee settlements in Zambia, thus ensuring that humanitarian assistance can be delivered in a timely, transparent and efficient manner that achieves its main goal: to assist refugees as they acclimatize to a new way of life in their new home.

With testimonials from the beneficiaries and the implementing partners, this video summarizes the journey to digitizing payments to refugees in Meheba, Zambia.

Dowload the full report here

Aadhaar verdict – SC strikes the right balance between delivery of benefits and privacy

Posted on by MSC

The long debate on the constitutionality and purpose of Aadhaar may not end with the judgement of the Supreme Court but it will certainly become more specific and narrower. In a landmark judgment, the five-judge Supreme Court bench opined with a 4:1 majority that Aadhaar is legitimate and proportional. The judges observed that although Aadhaarinfringes on the right to privacy slightly, the benefits it provides to the marginalised sections of society serves a much larger purpose. It provides rightful benefits and dignity to the marginalised that outweighs the perceived harm.

In the judgement, the judges struck down section 57 of the Aadhaar Act that deals with sharing of data with corporate bodies. It is not yet clear whether corporates are barred completely from using Aadhaar infrastructure or if they can use it as one of the options to provide services to customers but cannot mandate it. From the verdict, it is yet unclear if it is left to people to choose if they wish to share the data (or not) or if it is a blanket ban. For instance, if someone wants a mobile connection to be activated instantly, then it is still unclear if that person can use Aadhaar-based e-KYC instead of waiting for 3-4 days for paper-based KYC. This conundrum would be the same for bank account opening.

Repealing section 57 may have a huge impact on Aadhaar-enabled services, especially on e-KYC, and Aadhaar-enabled Payment System (AePS). Over the past few years, AePS has become the default method for people to withdraw money from local banking business correspondents, especially in rural India. Using biometrics to conduct a financial transaction, which in most cases is limited mainly to withdrawals and deposits, had removed several barriers. These include the need to remember the PIN for debit card and fill withdrawal or deposit slips, which become particularly difficult for illiterate and innumerate people in rural areas.

The process of using AePS is intuitive and simple for people, as they do not have to learn anything new. The only change is that they have to apply their thumb on the biometrics reader instead of on a piece of paper. This is in contrast to a debit card or other modes, which call for considerable efforts to educate users. And even then, they may need assistance to either fill up a form or enter the PIN correctly. This makes these users susceptible to fraud.

Since the government transfers most benefits, such as pensions, scholarships, and others electronically, people only need to access their bank account to withdraw this money. If AePS is scrapped, people may have to go through the ordeal of traditional technologies, such as debit cards or go back to filling and signing or putting their thumb impressions on papers!

The Supreme Court has allowed the government to continue using Aadhaar to deliver benefits and services where money is drawn from consolidated funds of India. This is a welcome move. The Direct Benefit Transfer (DBT) programme primarily relies on Aadhaar to uniquely identify and target beneficiaries. This led to reducing leakages by removing duplicate and “ghost” beneficiaries. Current government estimates point to savings under DBT to be around INR 90,000 crore. Aadhaar authentication for lifting ration through the Public Distribution System (PDS) ensures that identity fraud is reduced and denial of the ration is also controlled.

Our studies show that beneficiaries are aware that transactions now leave digital trails and the Fair Price Shop (FPS) owner can be challenged in case of identity fraud or denial. This is also altering the social fabric of rural India, where FPS owners had absolute authority on providing or denying ration to people. Our studies show that now these cases have reduced.

However, issues related to technology still exist. These include non-functioning biometrics, issues with connectivity, among others, which have led to a denial of benefits in a few cases and led to more severe implications for some. The Supreme Court clarified that the government should create alternate mechanisms for people who cannot authenticate using biometrics. A few states already use alternate methods of authentication for the population that cannot perform biometric authentication.

For instance, the Jharkhand government introduced the concept of Apwaad Pustika (exception book) to provide ration to people who cannot authenticate using Aadhaar. Similarly, Andhra Pradesh made multiple provisions to handle exceptions in case of biometric failures, such as One Time Password (OTP) and making a list of such people and granting them exception, etc. However, the efficacy of such mechanisms has come under question and needs scrutiny. The central and state governments must take note of the Supreme Court judgement and review processes and systems thoroughly to handle exceptions so that no one is denied benefits.

The Supreme Court has also clarified that banks, educational institutes, or other corporates cannot force people to provide their Aadhaar number. Even the government can seek Aadhaar only from people who want to draw benefits from the consolidated funds of India. PAN is the only exception where such linking has been made mandatory. Limiting purpose and period of storing metadata is another landmark step. This allays some fears of people around breach of privacy. However, the debate would continue and the government will have to come up with rules or legislative changes to comply with the verdict. We expect more details to emerge as the detailed copy of the judgement is read and analysed.

How the poor borrow

Posted on by MSC

Details of the poverty levels of our 50 ‘diarists’ can be found in the article on savings listed on the publications page there. In short, they fall into four classes, ranging from extreme poor to near-poor. In this article, we look at the borrowings of our diarists, using daily data for the period from March to October 2016.

The daily costs of debt: Problematising repayment

Posted on by MSC

For Bangladesh, more than any other country, microfinance also symbolizes the nation’s economic and social development, with growth in the sector and the sustainability of its institutions coalescing with the persistent decrease in poverty and extreme poverty rates at the national level.  Its fame has,  however, drawn tough scrutiny from international donors and researchers concerned with its impacts on the ground.