Mark Pickens

We need to start treating willpower as a scarce and important resource. That’s the point pushed in a recent New Republic piece on “What can’t more poor people escape poverty?” And it’s a product opportunity for those designing financial services for the poor.

The article is worth reading start to end, but I might summarize it this way. An increasing number of psychologists believe humans have finite stocks of willpower and “spending” it one place leaves us with less to push ahead in another area of our lives. Ever come home from a tough day full of difficult work decisions and interactions and slide right into a bag of crisps you wish you hadn’t opened? (For slightly more rigorously academic examples proving the point, take a look at this experiment by Dean Spears from Princeton. Also check out the clever work on behavioral economics by ideas42 at Harvard.)

For the rich, most of our choices boil down to whether we want something. For the poor it almost always involves a tradeoff, and their choices are often depressing and emotionally depleting: Do I pay rent, or buy lamp oil so the kids can study at night? And given their low income, even small purchases involve potentially stark tradeoffs that, the school of thought says, cumulatively saps willpower and emotional energy.

This is where financial services comes in. We know low-income people are active money managers, but the informal instruments they use are not very good. If the psychologists are right, anything we do to make it easier for the poor to manage their finances with less stress will leave low-income consumers more willpower for other tasks, challenges and goals.

For example, we could make it much safer and reliable to save than via the mattress by convincing employers to pay wages via mobile money and then offering clients the option of automatic deduction into an illiquid savings account geared to some savings goal (e.g. buying a new motorcycle, or Christmas gifts for the children). By making it almost automatic to save, might the saver then have more willpower to “spend” on ideas that lead to increased income? Maybe. It certainly depends on the person. But it’s also a laudable goal in and of itself to reduce the stress people feel from managing their finances (or feeling like their finances are beyond their control).

There are business opportunities in any service that makes people’s lives feel more in-control and headed towards their hopes… if one can figure out how to productize the initial insight. Product innovation is where a lot of firms fall down. It’s hard. And that’s why CGAP is ramping up its work in this domain. We’re not product design experts: but we hope to aggregate the wisdom of people who are, and direct it toward designing financial services for the poor. We’ll be reaching out to potential partners, and you’ll hear more from the Technology & Business Model Innovation Program about designing new branchless banking products.

- Mark Pickens

How much would you like to pay to save? Zero, most likely. In fact, you probably hate the fees your bank charges for the privilege of holding your funds and disbursing when you ask for them.

So why was it so easy to find people paying huge negative effective interest rates on a recent trip to Uganda?

One man  – let’s call him Richard – used an ingenious method to save for a new motorcycle.  Whenever he had a bit of extra cash he wrapped it in heavy plastic, waterproofed it with industrial-grade resin, and dropped it into the petrol tank of his current motorcycle. After a year when he thought he had enough to buy a bigger, better vehicle, he had the petrol tank removed and cut open with an acetylene torch to recover the currency. The motorcycle cost USD 750. He paid USD 110 to have the petrol tank cut and buy a new one to make his old motorcycle re-sellable. That equates to negative 14.66% annual interest on his savings.

Why would he do this? Same reason a woman — let’s call her Jennifer – dropped coins into her jerry can of cooking oil. She wants to save money to buy some clothes for her children at Christmas (at which time she cut open the jerry can to get to the money).

For both Richard and Jennifer, the requirement to destroy something they owned created an effective barrier against temptation. For the poor, the most salient feature about their incomes, after the low level, is its variability. They may live on an average of USD 2 per day, but rarely see exactly that much. Some days they earn USD 10, other days nothing. But expenses for food are constant, and emergencies arise no matter how much they earned that day. The temptation to raid savings is continual and almost irresistible. Unless big barriers are erected.

Read the rest of this page »

CGAP’s Branchless Banking Database synthesizes a mass of data into a short 12-image “story” about what branchless banking is and the key hurdles we face in 2011. We’ve converted that into a three-part series, which we conclude today. The first part in the series is available here. In the last installment we showed that achieving large scale volume of transactions still eludes most branchless banking services.

Today’s post points to three levers for driving steeper customer adoption: product, pricing, and agents.

PRODUCTS: Most BBIs focus on payment services which reduce the time, cost, and risk of loss with moving money over distance, e.g. a remittance to family in the countryside or a bill payment. Low-income consumers also have major pain points moving money over time, i.e. putting aside money now to use later, or the converse, borrowing now and repaying later. The informal options poor people have are often poor quality: preliminary results from a revisit of the Portfolios of the Poor households in S. Africa found 27% have lost money through an informal saving or credit instrument: on average US$ 113.

This presents an opportunity for BBIs to accelerate client usage via a diversified set of products including savings. Arguably, it was when Kenyans began leaving balances in their M-PESA wallet that the service vaulted beyond the initial target segment of 3 million urban, mostly male remitters and began marching toward serving more than 13 million Kenyans using it for a range of financial needs. In other words, savings may have been the “stickiness” factor — a kind of loss-leader which bridges clients to a more active relationship.

PRICING: There is still room to experiment with pricing. CGAP analyzed 26 branchless banking services and traditional banks to understand how their prices vary across 8 bundles of savings and payment transactions. On average,  branchless banking was 38% cheaper than similar services offered via traditional bank channels. The analysis also revealed multiple pricing strategies in play, but no clear best approach, suggesting opportunities to experiment, even departing from traditional pay-as-you-go to a freemium model which could drive uptake and usage faster.

AGENTS: Having a dependable network of agents is key: branchless banking is still very much a business of having cash when and where customers want it. But agents are not ATMs, built, deployed and operated in identical fashion. CGAP research in Brazil, India and Kenya found as many different agent network configurations as providers. For example, the Brazilian post office is able to command US$ 122/day for its involvement in Banco Postal because of the instant nationwide coverage it gives to its partner, Bradesco. Meanwhile, individually-owned small stores earned less than US$ 1/day, in part due to their lack of bargaining power. CGAP’s Agent Management Toolkit provides in-depth analysis.

BBIs must understand the business case from the agent’s point of view and craft an “ask” (time, risks and costs the agent is required to bear) matched by an adequate “offer” (the benefit an agent derives). Vincent is an M-PESA agent in Kenya. He earns US$ 4.11/day in commissions for being an agent. But do not assume compensation needs to be this high globally, or only comes from mobile money commissions. Denise (Brazil) operates a coffee shop. Though she only earns US$ 0.32 in direct commissions for being an agent, people who come to pay bills often also purchase food or drink, making the benefit to her core cafe business her main rationale. Hasita (India) is a rural school librarian who finds US$ 0.91 to be a welcome, sizeable addition to her low wages, and she enjoys the status of being an agent serving her community.

CGAP is turning its attention on these, and other, challenges in 2011.

CGAP’s Branchless Banking Database is available here. It marshals data from our 2010 field work on agents, business models, customer adoption, and regulation, and combines it with data on banking access, mobile penetration, population, and income in 168 countries. Graphics are easily imported into your own presentations, and the data is presented in Excel, enabling you to manipulate it for your needs.

- Mark Pickens

CGAP’s Branchless Banking Database synthesizes a mass of data into a short 12-image “story” about what branchless banking is and the key hurdles we face in 2011. We’ve converted that into a three-part series, which we continue today.

The first post in this series presented new data on how mobile ownership converts into an opportunity to bank the poor in emerging markets. We immediately need to ask whether mass market consumers are actually adopting such new services when offered.

Some branchless banking institutions (BBIs) have seen strong customer response to payment services, such as money transfer and bill payment. CGAP looked at 7 markets where reliable data is available about branchless banking customers: Brazil, Cambodia, India, Kenya, Philippines, South Africa and Tanzania. BBIs in these markets have 1.7x more active, previously-unbanked customers than the largest MFIs in the same market. BBIs are not replacing MFIs: credit services are complimentary to BBI payment services. But the comparison shows BBIs are also reaching the mass market of unbanked consumers, at scale.

Even with robust growth in users, major revenue requires several years in the best case scenario. Providers should have this in mind when setting assumptions about their payback period. CGAP analyzed the revenue potential of the top 3 African mobile money services (as measured by active users). For two, mobile money quickly surpassed SMS in revenue generation (2 years). One has already seen mobile money begin to deliver more than 10% of company revenue, and another is on the path to reach this target in year 5. Again, this is probably a best case scenario. MNO 3 is facing much longer timelines, possibly beyond the typical expectations of time to see attractive returns.

In fact, most BBIs are following a trajectory similar to MNO 3, or even lower. Globally, there are more than 100 live branchless banking services. Approximately 1 in 5 have made it to a “million client club” of services which have registered 1 million clients. The remainder are struggling to sustain growth in customers and most likely are losing money for their parent company, given up-front costs to enter the space. To put it succinctly, most players in the branchless banking space have a “volume problem” of getting enough clients to drive revenue to hit payback in any reasonable timeframe. The industry needs solutions for steepening the growth curve in numbers of users, the portion who become active users, and the intensity with which they use services. Volume is the central challenge in branchless banking in 2011.

BBIs could drive volume by including governments and other institutional players as users of the platform from early on. Worldwide, there are at least 170 million low-income consumers who receive a regular payment from their government, either for a social transfer, wages or a pension. To provide a point of comparison, 170 million exceeds the estimated number of active microloans worldwide (150 million). But after bulk payors are signed up, there remains the important question of whether payees will use their account for more than just removing all the cash. BBIs must also look at the value proposition not only to payors but also to payment recipients, if they hope to convert them to active, valuable clients.

In the 3rd and final post in this series we will look at product design, pricing and agent networks, all topics which need attention in 2011.

CGAP’s Branchless Banking Database is available here. It marshals data from our 2010 field work on agents, business models, customer adoption, and regulation, and combines it with data on banking access, mobile penetration, population, and income in 168 countries. Graphics are easily imported into your own presentations, and the data is presented in Excel, enabling you to manipulate it for your needs.

- Mark Pickens

There was much movement in 2010 at the intersect of technology and access to finance for the poor. CGAP’s new Branchless Banking Database synthesizes a mass of data into a short 12-image “story” about what branchless banking is and the key hurdles we face in 2011. The focus is on mobile phones, but we quickly add that some of the most interesting work is still being done with debit cards and even simpler technologies, such as bar codes.

Today’s blog starts a three-part series. We first present the latest data about the explosion of mobile ownership in emerging markets and how that converts into an opportunity to boost financial access. The second and third posts will look at performance to date: are we really reaching the poor? Is this proving to be a profitable business for industry? What are the key challenges around products, pricing and channel to pay attention to in the coming year?

Mobile ownership has grown explosively in poor countries over the past decade. In 2005 the mobile phone became the 1st communications device in history to have more users in poor countries than rich. In 2010, mobile phone owners in poor countries accounted for two-thirds of the world’s 4.77 billion phones.

But while people in poor countries became increasingly well-connected via mobile, they remained much less well-connected financially. An emerging market consumer is 2x less likely to have a bank account in their name than own a mobile phone. Access to financial services enables consumers to smooth unpredictable income, acquire productive assets, invest in health and education, and make other purchases that enrich their lives. Fortunately, the explosive pace of mobile connectivity might be leveraged to also fuel financial inclusion.

Providers can reap substantial cost savings from channels that replace branches with “branchless banking” (technology paired with agents, typically merchants who handle deposits and withdrawals and are connected via mobile or card-swipe POS terminals). The figure at left shows the cost reduction for 4 Mexican and Colombian banks from moving deposit transactions from teller to agent. Cost savings will vary by institution, driven by inter alia the fixed cost of branch depreciation on one side and variable cost of agent commissions on the other. CGAP estimates most banks will see 50% cost savings or greater. This enables them to reach low-income clients who were previously uneconomical to serve. Other providers — mobile operators, tech firms — which want to enter financial services for the first time can also employ agents to cost-effectively roll out.

Increasingly, financial sector regulators have established enabling regulation for branchless banking. CGAP’s latest analysis is available in two recently published Focus Notes, which build on the scene-setting “Regulating Transformational Branchless Banking”, jointly produced by CGAP and DFID.

CGAP’s Branchless Banking Database is available here. It marshals data from our 2010 field work on agents, business models, customer adoption, and regulation, and combines it with data on banking access, mobile penetration, population, and income in 168 countries. Graphics are easily imported into your own presentations, and the data is presented in Excel, enabling you to manipulate it for your needs.

- Mark Pickens

I just returned from the GSM World Congress a couple weeks ago which is the annual trade gathering of the mobile phone industry. It’s an excellent place to glimpse what’s coming up next on the horizon. One topic gaining momentum fast is mHealth — mobile phone-based solutions to healthcare challenges. The GSM Association invited CGAP to talk about where mobile money fits in the mHealth universe. My presentation is here.

While most mHealth opportunities in developed countries tend to focus on reducing costs, mHealth in poor countries is often tackling the much more basic question of access. And deeply embedded in the question of access are a number of financial hurdles. mMoney might be well-placed to help. Basic payment functionality is often missing or incomplete in emerging markets. By plugging the gaps, mobile money could help with some very basic issues, like reducing absenteeism from nurses and doctors traveling to pick up their pay. Or it could enable completely new opportunities, like telemedicine.

But perhaps most of all, many poor people forgo treatment altogether or severely ration it simply because they do not have insurance and find it hard to save up for emergencies. In Kenya, 85% of women want to give birth in a formal clinic, but only 44% do so. The number one reason cited by women is the difficulty of accumulating the US$ 40 needed to pay. In other words, poor access to financial services is a big part of why there is a healthcare access problem.

Branchless banking is in a state of creative chaos. The impressive growth of a few pioneers like M-PESA in Kenya has demonstrated the potential, yet most providers are still pushing to achieve success in their own market.

We suspect a big part of the problem is located in the supply chain: by this, we mean agents. At its core, branchless banking is about having cash when and where customers want it: agents are the crucial link for cash conversion. Agents also verify client identity and protect against fraud. Agents are also literally the face of the service when clients have a problem that needs resolution.

CGAP’s Agent Management Toolkit aims to demystify the process of building a viable agent network. The toolkit is based on more than a year of research that yielded data on more than 16,000 agents with institutions in Brazil (Banco do Brasil and Banco Postal), India (EKO and FINO), and Kenya (M-PESA). CGAP conducted in-depth, in-person interviews with 466 agents, agent network managers and providers.

Here are a few highlights:

• Even the most successful branchless banking services have not yet proven the long-term business case for agents. In Kenya, smaller stores that comprise the bulk of M-PESA’s 21,000 agents saw their profits go down from more than US$ 5/day to less than US$ 4/day, largely due to growth in the number of agents outstripping growth in the number of transactions processed in the system. The ratio of transactions to agents is one of the 9 drivers of agent profitability discussed in the toolkit.
• Agent network managers (ANMs) are an oft-overlooked link in the supply chain. CGAP talked to a dozen to understand their business case. Increasingly, ANMs like EKO and FINO – and not banks or MNOs – are at the center of conceptualizing a branchless banking service and driving it to success.
• The branchless banking service must generate sufficient revenue to support all of the companies in the supply chain: the majority of services do not meet this test (yet). The toolkit includes a detailed analysis of the financials of M-PESA (Kenya) and an excel financial model readers can use to test their own business case.
• Too many providers leap straight to the operational nuts and bolts. Only after pinning down the supply chain economics should a provider dive into identifying, selecting and managing agents. Part 2 tackles these topics and the annexes include examples of contracts, commission structures, and other useful documents.

Over the next 2 weeks, CGAP’s Technology Program Blog will host a series of 4 blog posts detailing each of these points. Check back often, and in the meantime download the toolkit in its entirety, the financial model or browse the first sections of the toolkit whose highlights are on the website: 1) Overview of Branchless Banking Agents and 2) the Agent Business Case.

Kenya grabs a lot of attention with mobile money, but is all the innovation happening at the top of the food chain? We don’t think so. In fact, working with FSD Kenya and some great ex-Unitus folks, we’ve found a veritable hotbed of Kenyan entrepreneurs spinning out one exciting idea after another. The next round of mobile money innovation could easily come from the little guys, if only they could gain traction with the right financing and other support. Unfortunately, the entrepreneurs tell us that’s not there in Kenya. There seems to be a clear market failure with willing, able and attractive entrepreneurs finding a wilderness empty of the kind of angel and early VC financing, mentoring plus nuts and bolts advice they need to soar.

I recently spent an intense week in Nairobi scoping out the landscape. We found out 2 things:

1. There are a ton of small entrepreneurs working in mobile money and they are arriving from 4 vastly different directions.

Read the rest of this page »

Nobody gets up in the morning and says “I want an efficient payment instrument today.” Nope. But they might say, “I really want that Hello Kitty lunchbox.” Several clicks, and its yours. There’s a lesson here: what will be desired by BOP consumers, whose tastes might run a little different from the typical American nerds? And how can the incipient mobile money industry tap into that? Is there a metaphorical eBay out there?

That’s why I was so excited to talk, and listen, at last week’s huge mHealth Summit. For those of us in mobile financial services, it may just be that adjacent industries like mobile health drive demand for mobile money through their understanding of what BOP consumers want. Vaccinate your kids? There’s an app for that, and a way to pay for it. If this report is even half right, there could be tens of millions of mhealth clients needing efficient, convenient, safe ways to pay in the not too distant future.

Here’s my presentation from the Mobile Money meets Mobile Health session of the Summit.

- Mark Pickens

Last week, my colleague Claudia McKay continued our blog series on our new CGAP Focus Note which tries to answer the question: “Is the hype around branchless banking justified?”  To dig into some answers, we gathered data on more than 16,000 clients of branchless banking institutions in 10 countries. Today, I’ll discuss the third and final finding from the study.

How do we meet demand for products that go beyond payments?

Most branchless banking services help clients move money over distance : a money transfer to a family member in the countryside, a bill payment to the utility company, a social benefit from the government. Clients also want products that move money over time  – i.e. savings and insurance paid out today to use in the future, credit to be used today and repaid in the future.

We know the poor are very active money managers. Financial diaries used by Collins, Morduch, Rutherford, and Ruthven show low-income families in Bangladesh, India, and South Africa used an average of eight different financial instruments primarily to move money over time, and quite intensively: the average household moved more than US$1,000 through the instruments over the course of a year.

Read the rest of this page »