Archive for: Africa

Dr. Susan Johnson is a Senior Lecturer in International Development at the Centre for Development Studies at the University of Bath.  Her primary research interest is the means through which social and cultural factors influence the economy and in particular how these factors influence the operation of markets in developing countries.

The rapid uptake of mobile money transfer in Kenya has ignited enthusiasm globally over the potential to bank poor people via the platform of mobile phone technology. On the basis of research undertaken for Financial Sector Deepening Kenya, I argue that the evidence suggests an alternative explanation which means that formal service provision for poor people needs to be thought through in a very different way.  It means going beyond the expectation that mobile technology can adequately lower transactions costs to produce a revolution in inclusion, to recognising that managing financial resources has important social dimensions.

The research examined the reasons behind use of the whole range of services and so explores how mobile money transfer fits into the financial landscape as a whole.  For years the popularity of informal financial groups in the form of ROSCAs and ASCAs has been evident.  Indeed, many of those who are banked also use these mechanisms. Mobile money transfer has now overtaken informal financial groups as the most used service.  In our survey, based in three more rural towns and chosen to cross-cut poverty levels but particularly focus on the low-income group, some 61% were registered mobile money transfer users, 51% were using informal financial groups and 36% were using banks (higher than the last FinAccess 2009 survey figures of 22%).  So how can we explain why banks lag so far behind when from an objective perspective they appear to offer a safe and secure place to save?

The reasons people give for using mobile money transfer have now gone a long way beyond the original “send money home” remittance rationale.  Mobile money seamlessly facilitates inter-personal transfers to their close and extended family and friends for school fees, investments, celebrations and funerals, “assistance” and “help”, borrowing and so on – that is, any reason that people might need to send money to each other.

These interpersonal transfers operate within social networks that involve relationships of ‘give and take’ that can operate over long periods of time and in which resource transfers may be given in one form, for example, cash and returned in other, for example, support with resources of many different kinds or social connections to a job and so on.  Hence mobile money transfer has brought a range of financial transactions that involve a reciprocal dimension.

Informal financial groups offer, first, discipline and commitment in saving through the regularity of the contribution; second, the ability to access small but useful lumps sums; and third, proximate liquidity in the event of particular emergencies or needs. The latter is achieved through the social connections groups offer which allow people to negotiate access to funds directly from the group or indirectly from other members. These groups can also be characterised as operating through a reciprocal dimension. Hence they operate with some similar characteristics to the transfers being captured by mobile money transfer:  there is reciprocity and negotiability over how funds are borrowed (or ‘saved’ with others) and returned.

Our evidence indicates that the logic behind bank account use is often related to the need to receive payments rather than make voluntary savings and this helps explain high levels of dormancy.  Access to loans from banks is limited and they can be hard to manage when they are received.  Since interest on small amounts of savings is effectively irrelevant and loans are hard to get, putting funds in the bank secures neither access to financial support nor useful social connections. That is, banks lack an attractive reciprocal dimension and there is little negotiability involved.

Hence this argument suggests that the rise of mobile money transfer is evidence of extensive informal financial behaviour which has characteristics similar those to informal financial groups.  Hence rather than suggesting that mobile money is a short cut to formal sector financial inclusion, this analysis suggests that mobile money transfer has revealed an alternative underlying logic to which the formal sector needs to respond if it is to attract savings – it must offer an acceptable reciprocal relationship.  In order to provoke discussion an alternative approach might be for banks to pursue a “credit-led savings” strategy in which they offer easily accessible small personal finance loans in order to demonstrate that they can enter into valuable relationships with their customers.

For further information click the following links for the summary and the full report.  Also, for more information, check out Dr. Johnson’s recent post at Accion’s Centre for Financial Inclusion blog.

For those of you in Washington D.C, Susan Johnson will be discussing the challenges that formal services face in the search for financial inclusion in Kenya at an event hosted by CGAP on April 25^th.

To attend this event, please register here by April 23. 

Nick Hughes and Gautam Ivatury are two of the founding members of Signal Point Partners, a company created in 2009 to build innovative mobile services in emerging markets. Nick was previously at Vodafone, where he started M-PESA, taking it from a concept to a multi-million-dollar business in five years. Gautam’s previous role was leading the technology program at CGAP, where he focused on branchless and mobile banking.

When we launched Jipange KuSave – a mobile-only savings product – in Kenya in early 2010, our goal was to out-compete the mattress. Back then, Safaricom’s M-PESA service was in hyper-growth phase and ramping up to become the de facto national retail payment system. But even more exciting was M-PESA’s potential as a pervasive and low-cost delivery channel for a wider set of financial services.

With this in mind, we decided to attempt for savings what M-PESA had done for money transfers – get millions of Kenyans to abandon informal mechanisms and instead become our paying customers. But if Kenyans were going to save with us instead of the mattress, we’d need to solve two challenges.

First, a ‘traditional’ bank-type savings proposition would never work. Poor people have never abandoned the convenience and enforced discipline of informal savings services for a couple of percent interest.  In Jipange, the combination of micro-loans and savings in a structured program met several customer needs, notably the need for cash when cash flow is low (liquidity) and steady progress towards a lump sum (a savings goal).

Second, our costs would need to be radically low. As ING Direct had shown, “pure” mass-market savings plays can make money, but only at high volumes and low margins. And that was in developed markets with larger account balances. For us to succeed, we would need to “throw out the rulebook” and design from scratch the most efficient and lowest-cost processes to manage relationships and transactions.

With our two “first principles” in mind, we gathered the essential ammunition for an attack on the mattress:  a radical product design, drawing heavily from Stuart Rutherford’s work; a set of web-based processes to run the product solely via M-PESA (limited physical contact with customers); a stellar project lead to manage implementation; and passionate, risk-seeking funders in CGAP and FSD Trust Kenya.

Interested readers may find it useful to read more about our product development and trials here in MIT Innovations. Also, this evaluation produced by FSD Kenya. In short, the Jipange KuSave product gave customers small amounts of credit at zero interest, while placing a portion of the credit into a “forced” savings account. As customers repaid the credit at whatever speed and in whatever amounts they wished, they became eligible for a bigger zero-interest loan. By borrowing multiple times and being forced to save a portion of each loan, they gradually accumulated savings.

The short version of our battle report is this:

1. Customers are hungry for better ways to save. They deal with cash flow complexity everyday and use a range of high cost / high risk methods to achieve liquidity. Some product designers would consider blending credit and savings as too complex – that was not our experience.  Clear, structured program, yes – but too difficult for customers to grasp, no.

2. Silicon Valley-style discipline and lean startup principles are keys to success. This starts and ends with customers. We quickly acquired a first trial cohort and modified and iterated the ‘offer’ on the back of real evidence from users.

3. A brand-new, mobile-oriented deposit-taking institution has the best chance of beating the mattress. This is perhaps the most difficult stumbling block on the way to scale. Only a regulated institution can take deposits — but hungry, highly innovative regulated institutions are rare beasts.

Chrissy Martin is a Senior Project Manager at MEDA, a non-profit organization that is partnering with Mobile Transactions on product development and agent network expansion, with a specific focus on reaching rural clients through services designed for the agricultural market.  Azalea Carisch is a Rural Microfinance Intern with MEDA who is currently based in Lusaka supporting Mobile Transactions on agent network monitoring and compliance. 

Mobile Transactions Zambia - courtesy of Chrissy Martin

Until recently, Mobile Transactions could have been considered the best kept secret in Africa.  Operating in Zambia on a shoe-string budget, they have been developing their own unique business model for electronic financial services slowly and with little media attention.  Now, as of February 2012, this small company has secured investments from three big investors, Omidyar Network, ACCION Frontier Investments, and Sarona Asset Management. All three are banking on the fact that Mobile Transactions’ experience and innovative approach to serving a range of consumers situates them to fill crucial gaps in the mobile money transactions and payments market in Africa.

Mobile Transactions offers services to both individuals and institutional customers.  For individuals, they offer both mobile wallet peer-to-peer transfers and over-the-counter money transfers through their agent network (a mobile wallet with a stored value is available but not compulsory.)  For institutions, they are providing e-voucher services to donors, governments and private corporations (including Dunavant, FAO and WFP).   They are also testing a variety of bulk payments products, including microfinance loan payments and utility payments.    Finally, they are working with Zambian Breweries on supplier payments, often referred to as business-to-business (B2B) payments.   These products are at a variety of different stages, with money transfers and e-vouchers reaching the most customers so far.  This product mix is extensive, but is not in and of itself enough to distinguish Mobile Transactions from the many other mobile payments start-ups.  So the question is what makes Mobile Transactions different?

• Mobile Transactions is an independent operator:  Readers of the CGAP Technology blog know that the market has developed past a simple MNO-led or bank-led model. Increasingly, the market is facilitating new business models which do not partner exclusively with any one mobile network operator or commercial bank.  Mobile Transactions is one of these independent companies, due in part to the regulatory environment, which allowed them to become an independent, certified financial transactions company.  This allows them to think creatively about their technology and go beyond the mobile phone when developing services. For example, the e-voucher service mentioned previously can by delivered to end-users either through a mobile wallet or via paper scratch-cards.  Paper-scratch cards are printed with a unique transaction code that is linked to the recipient’s identity and is redeemable at certain retailers.  The paper-based distribution method works better in rural communities in Zambia, where many people do not have a mobile phone but everyone trusts and understands scratch-cards, which are extensively used for mobile airtime top-up.  A mobile phone company, on the other hand, is interested in promoting their core business, airtime, and would not have an incentive to offer a service that does not require the end-user to make a transaction via a mobile phone.  Of course, there are drawbacks to the independent model, mainly the lack of an existing capital base, brand recognition, or distribution network, all of which are crucial to any branchless banking business.  Yet, Mobile Transactions has managed to find alternative solutions to provide quality service for people and institutions needing to move cash within Zambia.

• Mobile Transactions relies on independently owned and operated agents: Mobile Transactions’ original market-entry strategy looked much like M-Pesa in Kenya, which meant that they recruited and trained existing retail outlets to grow their agent network as quickly as possible.  However, they quickly saw that this strategy was not sufficient to drive customer acquisition.  The retail outlets weren’t motivated to act as sales people for a company with little brand recognition or to push a new product that few Zambians understood.   As a result, Mobile Transactions decided to recruit, train, and set-up their own “Champion Agents”.  Champion agents operate in much the same way as franchises do: each store is independently owned and operated by a trained individual who receives marketing and commercial support from MTZ.  This model has driven brand recognition and has provided Mobile Transactions with a backbone of core agents who are devoted entirely to selling their products and services.  Although this model is much more expensive than the retail agent model and therefore results in slower agent network growth, the benefits are accrued in the quality of the network, the customer-facing entity of any branchless banking operation.

• Mobile Transactions’ products are derived from a service-led approach. Mobile Transactions does not experience the low activity rates of many other mobile money operators.  Most other operators offer one product, the mobile wallet, and then build value-added services on top in order to drive higher customer use of the m-wallet.  Mobile Transactions, on the other hand, provides a variety of services (business to business payments, payments to farmers or microfinance loan payments) that respond to a specific customer need, and these services may leverage the mobile wallet, a paper-voucher, or simply an agent-based transaction (for example, the scratch card voucher mentioned previously.)  The commonality is in the central Mobile Transactions IT platform, where each type of transaction is processed regardless of the delivery channel. The challenge of this approach is scale, which is reliant on the agent network and the agents’ ability to adapt quickly to new services and to serve multiple customers segments.  As they deal with these challenges, Mobile Transactions is continually growing services through a learning-based approach to product development that allows it to develop services based on Zambia’s market realities, rather than success from other markets.

Mobile Transactions’ model is not without its challenges, as any member of the company’s small and dedicated staff will tell you.  However, the experience of this independent operator with a service-led approach challenges many of the commonly held assumptions about mobile money implementation, and their patience is starting to pay off.  Our guess is that it won’t be a secret for much longer.

This is the third post in a series on remittances. Stefan Staschen works regularly as a consultant for CGAP’s Government and Policy Team and is an Associate with Bankable Frontier Associates. 

Tajik migrants, courtesy of Stefan Staschen

My colleague Olga Tomilova and I recently were in Tajikistan and Russia to learn more about the large remittance flows between these two countries. We were most interested in the potential to link remittances with other financial products, such as loans and savings accounts in order to increase access to finance on both ends of the remittance corridor.

Having lived and worked in Kenya for many years, I inevitably started comparing Tajikistan with Kenya, and I realized that this is actually quite an interesting comparison.

For example, taking one point of comparison, in Kenya there is a lot of talk about the high aid-dependence of the economy (5.7% of GDP). But it turns out that it is still small in comparison to the “remittance-dependence” of Tajikistan, which peaked at 50% of GDP in 2008 (i.e. just before the effects of the global financial crisis could be felt) and stood at 40% in 2010 (according to the World Development Indicators). Obviously remittances and donor funds are not the same, but if we are concerned about the changing mood of donors and its potential effect on Kenya, how much more should we be concerned about fluctuations in remittance flows to Tajikistan!

Such large remittance flows do not only benefit the recipients, but can also be great business for banks. (In the case of one bank, the revenues from commissions corresponded to 46% of its net interest income in 2009.) But they create the risk of precarious living conditions for Tajik labor migrants and expose the recipients and the Tajik economy as a whole to the whims of Russia’s immigration policy, which has already been tightened several times.

There is actually another analogy between Kenya and Tajikistan: in both countries remittances boom, only that in Kenya it is mostly domestic remittances exemplified by the run-away success of Safaricom’s M-PESA mobile money service. While every Tajik receives about $325 in remittances annually (of which at least 90% originates from Russia), domestic transfers flowing through the M-PESA system alone amounted to about $200 per capita in 2010. Mostly as a result of M-PESA, the percentage of the population excluded from formal financial services dropped substantially between 2006 and 2009.

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CGAP, Grameen Foundation and MTN Uganda are introducing Grameen Foundation’s AppLab Money Incubator, a new initiative that develops mobile financial products for the poor. In this blog post, Project Manager Olga Morawczynski and Operations and Strategy Manager Lisa Kienzle introduce AppLab Money and explain how customer insights will be transformed into viable products offered by MTN Uganda. This is the final post in a series about product innovation in branchless banking.

Courtesy of AppLab

If we want to move the mobile financial services sector beyond payments and create products that reach every level of society, we have to be creative. The industry requires product innovation that focuses on customer desires, use patterns, and needs, and then translates these findings into viable products. In Uganda, Grameen Foundation’s AppLab is partnering with MTN and CGAP to do this by launching a product incubator: AppLab Money.

At AppLab Money, we will dedicate 100% of our time and resources to researching, prototyping and testing innovative products in line with AppLab’s approach to sustainable product development. Our agreement with MTN Uganda enables us to sit in MTN’s office, test on its network, analyze the company’s data and swap ideas with its staff. If we find that there is demand for a product that is commercially viable for MTN, we will work to scale it in Uganda.

The key to innovation is a strong research process, and AppLab Money uses several complementary research methods to understand the financial lives of the poor. Data mining and surveys help us make generalizations about the needs and habits of potential customers. Financial diaries and ethnographic methods allow us to determine why such habits exist. What follows is one example of an interesting insight that emerged on a recent field visit that could be translated into a product that poor customers could find exciting: on our trip, we noticed that everyone loves gambling.

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David Porteous is Managing Director at Bankable Frontier Associates. This is the third blog in a series on G2P and financial inclusion, based on CGAP’s new Focus Note Social Cash Transfers and Financial Inclusion: Evidence from Four Countries. Read the first two posts here. 

We are also releasing today the four accompanying Country Notes which were distilled into the Focus Note. For much more detail on the link between social cash transfers and financial services in each of these countries, read the full reports on Brazil, Colombia, Mexico and South Africa. 

In our last post, Chris Bold discussed the second of three questions that our new paper on G2P tried to tackle, namely:

1. For governments: Is building inclusive financial services into social cash transfer programs affordable for the social programs?
2. For recipients: Will poor recipients use financial services if these are offered to them?
3. For providers: Can financial institutions offer financially inclusive services to G2P payment recipients on a profitable basis?

Today, I will finish off the discussion by focusing on the final question regarding the business case for providers to offer financial services to social cash transfer recipients.

The biggest challenge when it comes to the business case for banks is that the amount per grant payment is small, and as client research has shown, very little of each payment is left behind in the form of savings. However, compared with other small value accounts, G2P recipient accounts have a regular dependable cash inflow ensuring that they stay active. And there is usually a government agency that is willing to pay for the service. But these anecdotal observations alone do not make or break the business case: it all depends on how the financial institution defines a business case.

To introduce greater precision to this discussion, we identify five different levels of the business case, as the figure below shows. The first level is each individual account. Small balance bank accounts are notoriously difficult to make profitable at the individual account level. But a business case may be sustained at this basic level for G2P payments if governments are willing to pay a regular fee to the banks, as they do in the four countries from our research. Without this fee, the account-level business case would be much harder to sustain. This is rather like the case for basic bank accounts which are considered loss leaders at this level by many banks, but which are nonetheless offered for strategic reasons (other profitable government business may be sold as a result of a good record) or to satisfy regulatory requirements (without regulatory support and forbearance, the bank may struggle to obtain approval for what it considers core business).

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Chris Bold spent two years on secondment from DFID to CGAP where he worked on G2P-related issues, among other things. He has since returned to DFID where he is an Adviser on Private Sector Development in Fragile Countries. This is the second blog in a series on G2P and financial inclusion, based on CGAP’s new Focus Note Social Cash Transfers and Financial Inclusion: Evidence from Four Countries. Read the first post here.

Our recently released Focus Note on Social Cash Transfers and Financial Inclusion looks at the evidence from four large and well established programs in Brazil, Colombia, Mexico and South Africa to attempt to answer three broad questions that are relevant to different stakeholder groups:

1. For governments: Is building inclusive financial services into social cash transfer programs affordable for the social programs?
2. For recipients: Will poor recipients use financial services if these are offered to them?
3. For providers: Can financial institutions offer financially inclusive services to G2P payment recipients on a profitable basis?

In the first post, Sarah Rotman looked at the costs to government. Today, I am going to expand on what we found about the recipient experience of receiving payments electronically and into “mainstream financial accounts”. David Porteous will look next at whether there is a business case for providers to offer financial services to social cash transfer recipients.

Last week, Sarah explained our characterization of payment approach into three categories: (i) physical cash, (ii) limited purpose instrument and (iii) mainstream financial accounts. We set the bar quite high for what we deemed to be fully “financially inclusive” – to earn the title of a mainstream financial account it must allow a recipient to store funds indefinitely, access them through the mainstream financial infrastructure (think ATMs and POS devices) and deposit additional funds. Some schemes only enable some of these features and while we recognize the steps that they are taking toward being fully financially inclusive we label these accounts “limited purpose”.

The data show a very clear trend over the past few years away from recipients receiving their payments in physical cash and toward electronic payments. Three of the four countries also showed increases in the number of customers receiving their transfers into a mainstream financial account with South Africa leading the way by paying 59% of transfers paid into mainstream accounts.

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This is the first blog in a series on G2P and financial inclusion, based on CGAP’s new Focus Note “Social Cash Transfers and Financial Inclusion: Evidence from Four Countries”.

While I was in West Africa a few weeks ago, there was a recurring theme running through all our meetings. Whether we were meeting with MFIs, commercial banks, mobile network operators or third-party e-money issuers, they all came back saying about the same thing: their branchless banking business viability depended on capturing more flows of money to turn into consistent, revenue-generating transactions.

Branchless banking is, fundamentally, a business built on high-volume, low-value transactions. Over two years ago, colleagues and I published a Focus Note on the potential for government-to-person (G2P) payments to bring banking to the poor by leveraging the consistent flow of money that goes from governments to its citizens. In particular, social cash transfer programs were just beginning to make innovative changes to the way payments were made, mostly by transitioning from cash to electronic delivery. We wondered about the extent to which electronic payments could go even further by landing directly into the newly opened bank accounts of the beneficiaries.

But the evidence base at the time was sparse because these transitions were just getting started. Our paper was largely forward-looking by presenting the potential of this space, while posing still unanswered questions around three main topics:

1. For governments: Is building inclusive financial services into social cash transfer programs affordable for the social programs?
2. For recipients: Will poor recipients use financial services if these are offered to them?
3. For providers: Can financial institutions offer financially inclusive services to G2P payment recipients on a profitable basis?

A lot has changed over the past two years. Our new Focus Note “Social Cash Transfers and Financial Inclusion: Evidence from Four Countries” attempts to answer these questions by building off of the evidence base from four large social cash transfer programs: Bolsa Familia in Brazil, Familias en Accion in Colombia, Oportunidades in Mexico, and Child Care Grants and Old Age Pensions in South Africa. We selected these countries because they are the few that have pursued the twin objectives of electronic government payments and financial inclusion at scale. Admittedly, these countries are all large, middle-income countries with relatively well-developed financial infrastructure. But unfortunately, and quite telling I think, the evidence base does not yet allow us to speak to the situation of low-income countries because G2P-linked financial inclusion is only happening at a pilot level in these countries, if at all.

Over the coming weeks on this blog, my two co-authors, Chris Bold (DFID), David Porteous (Bankable Frontier Associates) and I will provide an overview of the answers to the three questions posed above. Today, I tackle the first question regarding the cost to governments. I have found this question in particular to be asked quite often by social protection practitioners, for good reason. But before I get to that, I first need to frame the discussion with an updated categorization of payment approaches that our paper presents.

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“Cash is easy.” “Cash is what I know most.” “There are no charges when I use cash.”

Ghana Market Seller (Photo Taken by Adam Jones)

I was sitting in a little room in the outskirts of Accra listening to a group of tomato sellers talk about the financial tools they use to manage their finances. As a part of CGAP’s work in Ghana, we have commissioned Bankable Frontiers Associates (working with Easy Errands, a Ghanaian market research firm) to conduct a market research study on the financial needs of low-income customers in Ghana. One of the first steps was to conduct focus groups throughout the country and listen to diverse groups of Ghanaians, including farmers, taxi drivers, traders and students, talk about their strategies for moving and storing money. They discussed bank transfers and drivers and the use of family and friends but more than anything, they talked about cash.

The trite expression ‘Cash is King’ is over-used in our line of work, but as I sat in that little room listening to these people whom mobile money services have spent millions of dollars trying to woo, I realized yet again that the biggest competition we face in scaling branchless banking is not a rival MNO or bank or even the expensive money transfer operators – it’s cash. (Read some recent posts on our blog about this topic here and here.)

Cash is far and away the preferred method for storing and sending money in Ghana, no matter how inconvenient. One tomato seller, Charity, wraps her cash in no less than six black plastic bags and hides it in the back of her refrigerator, underneath her tomatoes and meats, so that the rest of her family does not suspect it is there.  A timber seller, Emmanuel, told us he keeps his cash under the carpet in his living room. When asked whether the cash does not form a noticeable bulk, he replied with a big grin, ‘That’s why I spread it all around so that people walk all over my cash but have no idea it is beneath their feet!’

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This is the third post in our series on interoperability and related issues in branchless banking and mobile money. Read the first post that presented the overall framework for the discussion and the second post that looked at the interconnection of mobile money platforms. Today, we discuss interoperability at the agent level as it relates to agent exclusivity. We include agent exclusivity in the topic of interoperability because it raises many of the same issues as platform interoperability.

Agent exclusivity revolves around the ability of a customer of one provider to use the agent of another provider for cash-in and cash-out services related to that customer’s account. Non-exclusive agents can expand financial access by providing more access points to a greater  number of customers, while limiting the rise of a dominant actor which could ultimately reduce competition. But as with platform interoperability, regulators are cognizant that prohibiting exclusive agents could deter private actors from entering the market. What service provider would invest in identifying, training, and equipping agents if competitors can piggyback off their investment?

To be clear, when we speak of agent exclusivity, we are only referring to the cash-in and cash-out services performed by agents – not other services (where permitted) such as customer enrollment, related KYC, and processing of loan documents. Agents providing only cash-in and cash-out services are often called “cash merchants”. We distinguish the cash merchant services from other services because cash merchant functions arguably present less risk to the financial service provider since agents typically transact against their own accounts. Think human ATMs.

We identify at least four different ways to share cash merchants:

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