Archive for: Savings

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.

Our discussions on branchless banking on this blog do not often touch on the role of microfinance institutions (MFIs). The main actors in this space seem to be mobile network operators, commercial banks, larger microfinance banks and technology companies. We have done a bit of thinking on microfinance and mobile banking, notably in this Focus Note and at this Virtual Conference.

In our last post of the year, we bring the discussion squarely back to the role technology can play for MFIs. Our guest author is Leo Tobias, Grameen Foundation’s Technology Program Manager of the Solutions for the Poorest Microsavings Initiative. 

Cashpor Officer processing loan payments on mobile

Grameen Foundation’s Microsavings Initiative is a three-year project funded by the Bill & Melinda Gates Foundation. It was launched in November 2009 with a goal of reaching 1.45 million new savers across 3 MFIs in the Philippines, India and Ethiopia.

Offering voluntary savings is demanding. Financial institutions compete with the alternatives that exist to formal savings accounts (home, relatives, neighbors, etc.). A common theme in our savings market research is the customer’s desire to have easy and convenient access to their funds. To deliver on those desires, our MFI partners face common technology challenges.

Here are two major challenges:

1. Front End Technologies 

To meet customer demands, financial institutions must develop delivery channels that offer accessibility and close proximity to the end client.

Selecting the right technology is an important first step. The 3 MFIs are at various stages of investigating or implementing mobile technology. In India, CASHPOR (CASHPOR Micro Credit) incorporated mobile in both their credit and savings processes. In the Philippines, CARD Bank (Center for Agricultural and Rural Development) implemented an SMS system for an on-demand savings deposit pickup service. The use of mobile phones is clearly a powerful venue for bringing the transaction closer to customers. However, it is not the only technology to be considered.

In Ethiopia, ACSI (Amhara Credit and Saving Institution) is planning to use cards (most likely smart cards) and POS devices as their first front end technology implementation. With only approximately 14% mobile penetration in the country, all indicators point to the fact that the majority of the rural poor will not have access to mobile phones in the next couple of years. In the Philippines, the majority of microfinance customers are in provinces classified as “urban” or “semi-urban”. In many of these areas, ATM machines are accessible. CARD Bank chose to provide access to the national and international network of ATMs as a feature of its voluntary savings product in addition to the use of mobile phones.

Integrating all the sophisticated technology requires the help of external providers who can bring a wide array of specialized expertise to the organization.  However, managing relationships with outside technical providers can be new and difficult since most of the technical needs of MFIs had previously been met by in-house expertise.

The MFIs are ultimately responsible for the relationship with their customers.  The MFIs therefore have to provide the training and support needed to make sure members are comfortable with and trust the technology. A component of our holistic program has been to recognize this need and to develop educational programs to introduce not only the savings products but the technology associated with them.

2. Core Infrastructure Upgrades

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Reaching the poor with a range of useful, convenient, and affordable financial services is challenging for all the reasons we know. In the context of Mexico, access has increased significantly in the past few years (nearly 60% of all households), and changes in regulation enabling correspondent banking are likely to bring the access barrier down even further. However, the challenge of delivering a relevant offering, tailored to the needs of the lower-income population still remains. This may be one of the reasons why many people who have access to formal financial services are not using them.

While consumer goods companies have developed an understanding of these segments, few actors in the financial services space have a deep knowledge of how “bottom of the pyramid” (BoP) customers use money and financial products, and what sort of products these customers may want in the future.

We conducted a study (available in both English and Spanish) in collaboration with McKinsey and Company, seeking to provide a closer look at the financial habits, needs, and wants of low-income customers in Mexico. The goal is to provide the kind of information that will enable financial service providers to design better products (i.e. products that reach more people and solve felt needs) and to implement products and business models with a greater chance of success.

We hope this study will help orient assumptions about customer behavior that can lead to improved product design and less risk in business models. Even though the study is intended to serve the Mexican market, we intend it to be useful and applicable to other markets.

Here are the key findings:

• Segments at the BoP save significantly. Deposits (both short term and long term) represent an amount equivalent to 20.4% of these segments’ annual aggregate income. If these deposits were to be held in formal financial institutions, the current deposit base in the formal financial sector would increase by 23.4%. Read the rest of this page »

Tanzania is one of the fastest growing mobile money markets in the world. Today mobile telephone penetration is 49% according to Wireless Intelligence as of Q3 2011. There are four active mobile money businesses, the largest of which is Vodacom’s M-PESA which has over 2 million active users.

A visit to community-based women’s savings groups in Arusha provided an opportunity to find out how people are using financial services. Savings groups are expanding rapidly in Tanzania as well as other countries in Africa. Group members save weekly, take loans as needed, and distribute profits and return share capital at the end of a year (what the experts call “time bound distributing accumulating savings and credit associations”). The groups we met had accumulated $6,000-7,000 in capital and were capable of approving loans to members that went from $100 to as high as $1,000, usually requiring repayment in three months. They had been together for almost two years and clearly knew their business well.

Twenty five percent of the more than 50 women we met with have bank accounts, and groups keep some of their accumulated capital in banks. The women live on the edge of a major city and some have salaried jobs in addition to their side businesses. Salaries might be paid into a bank account and a few individuals have personal bank accounts to accumulate larger amounts of savings than what they keep in the savings group. But what is interesting is that they do not use these bank accounts to transact any of their day-to-day business nor do they try to get loans from banks, for all the well known reasons.

The surprise came when we found out that all but one of these fifty women owns her own mobile handset and SIM connection. What was even more interesting was that two thirds have a mobile money account and many of the rest of the women want to get one. Given the fact that they are members of good, active savings groups, have access to banks if they so desire, and can even get services from MFIs if they so choose (none have so far), what exactly do they use their mobile money account for? It turns out that they use these accounts to send money to children studying or living in other towns, receive money from relatives living far away (to help them make their group payments amongst other things), load airtime for themselves and other family members, and in some cases receive payments from customers who make telephone orders for goods or services. These women took to using mobile money on their own and see it as a natural, useful addition to the value they derive from their savings groups.

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ASHAs (Accredited State Health Activists) in Bihar receiving their incentive payments through Eko's mobile money transfer service

We often write on this blog about the potential to link government-to-person (G2P) payments to financial services. We also closely follow branchless banking developments in India and have recently shared our take on the market. So imagine our excitement when we can talk about both together!

India is just one of a handful of countries that is implementing financially-linked G2P payments at scale. And of course, “scale” in India – a country with nearly 1.2 billion people – means something a bit bigger than in most countries. In India in 2008-2009, 22 welfare schemes paid out a total $65 billion to tens of millions of Indians – which doesn’t even include the substantial G2P flows for government salaries and small savings schemes. The yearly budget of the National Rural Employment Guarantee Scheme (NREGS), one of two welfare schemes that dominate the G2P payments space is $6.7 billion. And, most excitingly from our perspective, these schemes are leveraging emerging branchless banking models to disburse these payments, moving from the former branch- and cash-based distribution model to the distribution of funds into no-frills bank accounts serviced by business correspondents outside of branches.

Not surprisingly, though, this is only the start of the story. While the ambitious link of G2P payments to bank accounts is exciting and can be a source of learning and inspiration for other countries, challenges and complexities persist. We visited India this summer to learn more about G2P payments as they relate to financial inclusion. Our full overview note is available here, but here’s a summary of our key insights.

• State governments exercise significant control over the management and administration of central government-mandated G2P schemes, and there is great variability in the fees paid by state governments to banks for disbursing funds to citizens – some states pay 2% of values disbursed (or more), but others refuse to pay anything. This weakens the business case for banks and fails to generate enough money to feed the many mouths in the G2P value chain.
• Business correspondent network managers (BCNMs) are particularly squeezed, as they must compensate their network to keep them engaged and reliable, but the current fee structures from banks leave little money left over.
• In the absence of transaction fees, many banks appear motivated to disburse G2P transfers because they view this as a “foot in the door” for future business from governments, an especially compelling prospect for private banks who have traditionally been boxed out of this business by public-sector banks.

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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.

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This is the third post in our series on G2P, branchless banking and financial inclusion. Our first post on Pakistan can be found here and our second post on the Philippines can be found here.

In this post, our guest bloggers discuss the Government of Colombia’s efforts to use Conditional Cash Transfer (CCT) programs as a gateway to financial inclusion. Beatriz Marulanda is the CEO of Marulanda Consultores. She headed the team that advised the Colombian Government in the design and implementation of Colombia’s financial inclusion policy, Banca de las Oportunidades. She was also part of the team that helped in the design of the payments strategy for Familias en Acción through deposits into savings accounts. Mariana Paredes is an independent consultant with Marulanda Consultores. She worked on the design and implementation of Banca de las Oportunidades and also worked on the design of the savings pilot with Familias en Acción.

Familias en Acción is a CCT program administered by Acción Social in Colombia providing cash transfers to poor households on the condition that their children attend school and follow preventive health care measures. The program was launched in 2000 focused exclusively in rural areas, and by 2002 it had reached 300,000 families in 627 municipalities with less than 100,000 inhabitants. By 2005 the program had expanded to even smaller rural municipalities that did not have bank branches, making the payment of benefits a real challenge.

After the program’s first impact evaluation, the government decided to aggressively expand Familias en Acción to cover all 1,100 municipalities in the country, thus becoming an integral part of the government’s RED UNIDOS strategy to fight poverty. By 2009, 2.2 million families were being paid an average of USD 90 every two months.

The initial payment system was based on cash transfers paid at the branches of the public bank, Banco Agrario. This meant that many mothers had to walk for hours to reach the closest municipality with a bank branch to claim their payments. In response to this challenge, Banco Agrario began to use a strategy of “extended cashiers” that would transport cash in helicopters to recipients in rural municipalities on payment days. Even in the cities, bank payments were a challenge because the demand for liquidity on payment days surpassed most branches’ capacity.

Familias en Acción knew that it needed a more innovative payment system. In 2007, they introduced prepaid cards. 450,000 beneficiaries in seven cities were able to withdraw their payments at the ATM network of a private bank. Even this proved challenging at first…the bank’s ATM network collapsed the day after the first payments were made available because the network had breached its maximum transaction level. By 2008, Familias en Acción had a mixed payment structure as shown below.

Source: Prepared on the basis of information of Acción Social

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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

We’ve been thinking about the link between government-to-person (G2P) payments and financial inclusion through the innovative use of technology for the past couple years.  We co-authored a paper with David Porteous on behalf of DFID on this very topic last year called Banking the Poor via G2P Payments. Since then, we’ve been engaging with several social protection programs around the world that want to improve the manner in which payments are made to beneficiaries to be more efficient and timely, and also to include a financial inclusion component.

A diverse group of practitioners, researchers, policymakers and funders from the financial inclusion and social protection worlds gathered together a few weeks ago at the Ford Foundation in New York to discuss the increasing synergy between these two fields of work.  The 2010 Global Expert Colloquium on Savings and CCTs was co-sponsored by the Ford Foundation, Citi, UNDP, New America Foundation and Proyecto Capital.

Some of the pioneer social protection programs that have already made this link with financial services were in attendance, including Juntos in Peru, Bolsa Familia and Caixa in Brazil, McKinsey and BANSEFI on behalf of Oportunidades in Mexico, ACCION Social in Colombia, Bankable Frontier Associates (BFA) on behalf of the Hunger Safety Net Program in Kenya, and the Department of Social Development in South Africa. There were even two women beneficiaries from the Juntos program in Peru who came to share their experiences about their new savings accounts.

The discussion over the two days was very rich, so I could write about many different aspects of the dialogue. But let me attempt to summarize the key messages that emerged around three main areas of discussion: the business case, the delivery system and the beneficiary demand.

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