Financial Behaviour Patterns Observed Among Households in Rural Informal Economy in Asia

This is the original working paper of the research conducted on rural household financial management, in developing country conditions, pioneering the use of methods from human centered design for discovery, during Nov 2008 to March 2009, aka the Prepaid Economy Project. It was peer reviewed by Brett Hudson Matthews, and I have incorporated his comments into the PDF.

This research study was carried out with the aid of a grant from the iBoP Asia Project (http://www.ibop-asia.net), a partnership between the Ateneo School of Government and Canada’s International Development Research Centre (www.idrc.ca)

The abstract:

The challenge faced by Bottom of the Pyramid (BoP) ventures has been the lack of knowledge about their intended target audience from the point of view of business development whereas decades of consumer research and insights are available for conventional markets. What little is known about the BoP’s consumer behaviour, purchasing patterns and decision making tends to assume that there are no primary differences between mainstream consumers and the BoP except for the amount of their income – pegged most often between $2 to $5 a day.

In practice, the great majority at the BoP manage on incomes earned from a variety of sources rather than a predictable salary from a regular job and have little or no access to conventional financial tools such as credit cards, bank accounts, loans, mortgages. This is one of the biggest differentiators in the challenge of value creation faced by BoP ventures, particularly among rural populations (over 60% of the global BoP population lives in rural areas).

Exploratory research was conducted in the field among rural Indian and rural Filipino populations in order to understand how those on irregular incomes managed their household expenses. Empirical data collected by observations, interviews and extended immersion led us to identify patterns of behaviour among the rural BoP in their management of income and expenditure, ‘cash flow’ and ‘working capital’ and the significance of social capital and community networks as financial tools. Practices documented include ‘conversion to goods’, ‘stored wealth’, ‘cashless transactions’, and reliance on multiple sources of income that mature over different times.

This paper will share our observations from the field; identify some challenges these behaviours create for business and also explore some opportunities for value creation by seeking to articulate the elements that BoP ventures must address if they are to do business profitably with the rural ‘poor’ based on their own existing patterns of financial habits and norms.

The Conclusion:

In sum, it can be concluded that the challenges for value creation can be quite different for BoP ventures interested in addressing the rural markets. From the observations made in the field, we can highlight three key implications for business development. These are:

Seasonality – with the exception of the salaried, everyone else in the sample pool was able to identify times of abundance and scarcity over the course of natural year in their earnings. Identification of a particular region or market’s local pattern of seasonality would benefit the design of payment schedules, timing of entry or new product and service launch, for example.

Relative lack of liquidity – The majority of the rural households observed tended to ‘store wealth’ in the form of goods, livestock or natural resources, relying on a variety of cashless transactions within the community for a number of needs. Conventional business development strategies need to be reformulated to take this into account as these patterns of behaviour may reflect the household’s purchasing power or income level inaccurately.

Increasing the customer’s span of control over the timing, frequency and amount of cash required – Since the availability and amount of cash cannot be predicted on calendar time, this implication is best reflected by the success of the prepaid mobile phone subscriptions in these same markets. When some cash is available, it can be used to purchase airtime minutes for text or voice calls, when there is no money, the phone can still receive incoming calls. Models which impose an external schedule of periodicity, frequency and amount of cash required may not always be successful in matching the volatile cash flow particular to each household’s sources of income.

Prepaid Mobile: The Business Model that Empowers

It feels like a long time since I last pondered the nuances of the prepaid business model, until I came across some words written by Indian social media researcher Swati Janu. She documented her observations on the infrastructure of insecurity from the tenements of New Delhi. There’s value in reflecting on how our understanding only increases over time, and we can never say that we’ve stopped learning

This sentence caught my attention:

From a rural population that is fast going online to the resourceful teens in urban slums, the lower income demographics are choosing to buy internet, through small but recurrent amounts, which enable them to straddle the line between affordability and aspiration.

The small but recurrent amounts – the Rs 10 mobile recharge Janu writes about – are the lifeblood of the prepaid payment plan for voice, text, and data (airtime) for the now ubiquitous cellphone that has changed the landscape of the developing world.

To enable the lower income demographic’s ability to straddle the divide between their aspirations and their ability to afford them is empowering. One could say that:

Prepaid is a business model that empowers aspiration, through affordability, incrementally.

Instant gratification has never been within their purview.

Analysis of the mobile phone’s impact on cash flows and transactions in the informal sector

As we saw, Mrs Chimphamba needs to juggle time and money as part of her household financial management in order to ensure that expenses can be met by income. We also saw that the mobile phone was made viable and feasible by the availability of the prepaid business model that gave her full control over timing and the amount required to maintain it — how much airtime to purchase? when? how often? — all of these decisions were in her hands, within the limits of the operator’s business model. Now, we’ll take a closer look at the impact of the mobile on her domestic economy.

Readily available real time communication has helped Mrs C by speeding up the time taken for a decision on a purchase or a sale. That is, the transaction cycle has been shortened. As the speed of information exchange increases, it increases the speed of transactions — it shortens the duration of time taken to execute them from inception to completion. This, in turn, implies that more transactions can now take place in the same amount of time thereby increasing the frequency and the periodicity. When mobile money is present, one can see that as both quantity and frequency of transactions speed up, so does the cash flow. We’ll come back to this factor.

To explain using a real life example, Mrs Chimphamba does not need to sit at her homestead wondering if today someone will pass by to purchase a bottle of wine. Similarly, Mrs C’s customers do not need to go out of their way to pass by her homestead to see if the wine is distilled and ready for sale, or whether it will still take another day or two for the next batch to be ready. Further, the uncertainty of whether they’ll have cash on hand on that future day, or if they’ll return as promised are all elements that real time communication have minimized.

Now, Mrs C is able to let her regular customers know that she’s making a new batch for sale and do they want to reserve a bottle for purchase? It allows her customers to put aside cash for this purchase. She is even able to accept and execute larger orders for some future date, and even accept some cash advances if her operating environment includes the presence of a mobile money transfer system such as those more prevalent in East Africa. This in turn changes her purchasing patterns and decision making as the pattern of cash flows — timing and amount — changes. She isn’t making do anymore on an unknown and predictable sale based on sitting and waiting for someone to show up to buy her wine.

Real time communication has improved the decision making cycle for both buyer and seller in a transaction as it counteracts uncertainty and information asymmetry even while speeding up the time take for a decision.

As the quantity and frequency of transactions increase— first, in cash conducted face to face, and then later, remotely by mobile money, regardless of the size of each transaction — the change in cash flow patterns begins to smooth out the volatility (the uncertainty factor has changed completely) between incoming and outgoing, as well as the decisionmaking involved. That is, the gap between income and expense starts becoming less in terms of both timing and amount — there is the possibility of a steady stream in the pipeline. Calculus offers hints of how the curve can begin to smoothen out as frequency and periodicity of transactions begins to accelerate.

Size of transactions thus begin to matter less in that the incoming amount now does not need to be so large as to cover expenses for an unknown duration of time before the next incoming payment; nor do expenses have to be tightly controlled constantly due to the uncertainty of the duration of time before the next payment, and the types of expenses incurred during this unknown period of time.

So the boost in decision making — how long it takes to complete a transaction, how often can transactions be completed — enabled by the real time communication facilitated by the mobile phone; plus the attendant immediacy of receiving payment via the same platform is the root of the improvement in the hyperlocal economy and consumption patterns among the informal sector actors. This is why large established traders (with sufficient financial cushion) were heard to observe that both purchasing power and consumption patterns had changed in their market town (Busia, Kenya Jan 2016) in the past 10 years since first the mobile phone, and later, mPesa, were introduced into their operating environment.

Uncertainty and information asymmetry that have long characterized the fragile and volatile nature of the informal sector operating in inadequately provided environments with unreliable systems and scarce data. In the next chapter we’ll step back and take a broader look at communication, connectivity, and commerce in the informal economy starting with the description of the operating environment’s characteristics regardless of continent.

This is part of a newly launched Medium where I will write in detail on economic behaviour and its drivers in the informal economy. Much of it draws upon the original research in the field from 2008-2009 which was shared on the prepaid economy blog. I found that time had passed and increased my understanding and I wanted to explore those discoveries in writing. Much of this is the foundation for recent works on ‘Mama Biashara‘.

Mobile Money in South Africa: The nature of the beast by Flo Mosoane

The 2015 State Of The Industry Report (SOTIR) for Mobile Money published by GSMA, reveals a picture of a service that continues to change the landscape of financial inclusion in developing and poor countries across the globe. In December of 2015, the industry processed transactions in excess of a billion, most of which were in Sub Sahara Africa.

It seems however, that the continued success of Mobile Money eludes South Africa. What with the untimely death of Vodacom Mpesa after millions of Rands of reinvestment. Only 4 months after which MTN South Africa also announced that they are ceasing new registrations, marking the end of (Mobile Network Operator) MNO-lead Mobile Money deployments here.

Despite the large bang that MTN Mobile Money launched with, managing to sign over 2 million subscribers; at the end, Vodacom Mpesa only had just over 75 000 users, and MTN Mobile Money only about 140 000 or so users. A performance that neither of these well-established, successful, multinational MNO’s can be proud of.

We lament the apparent failure of Mobile Money in South Africa. It is well established that it has made a significant contribution to financial inclusion for underserved populations, and still presents significant opportunity to serve unbanked and underbanked communities.

This is a very special contribution by Flo Mosoane, writing from first hand experience on the ground on this subject. Do read the whole article.

Read On…

Design of Digital Financial Services for Inclusion Needs More Respect and Humility to Succeed

Source: https://twitter.com/SharonKith

In the past week alone, I’ve seen three glaring cases of unquestioned assumptions around the design and implementation of Digital Financial Service (DFS) particularly for financial inclusion, but also otherwise. This gives rise to the question whether the industry is prepared to undertake the mission they have set for themselves.

The first is that their technology, in whatever form – the app, the device, the USSD service – will and should (unquestioned, remember) disrupt people’s behaviour completely. While it is true that using a mobile phone to make a payment instead of cash is a change in behaviour, or rather, habit, it is not the same as type of change as transforming the entire culture to become more individualistic as opposed to communal; or less relationship oriented and more contractually transactional. I am finding the words clumsy to use and hope that one of you reading this has the expert knowledge at their fingertips to better articulate what I am attempting to describe. Hofstede had a clue.

There is a fundamental arrogance in framing the need for human intermediaries in the digital financial service transaction model as a “necessary evil” – sounds like a toddler’s bad habit that they need to be weaned off in order to become adults. The bulk of those who are financially excluded live in cultures where human contact and social relationships within the community are more important than faceless, meaningless transactions by the individual isolated with their techno-utopian device. To expect this to change to conform to your pretty little use case diagram is rather presumptuous, if not downright offensive.

The second is more generalized. Its a blithe disregard for any differences in context and operating environment between the more formal economies and those where the informal sector is the majority. Nobody pauses to question whether there are differences that need to be considered. Its like landing on Mars expecting the same atmosphere. This report on the global emergence of a cashless economy ends with offering 3 implications of 4 megatrends.

If indeed two of these implications are the outcome of the single factor of increasing financial inclusion, then how can they be lumped together with the third implication which is clearly one meant for more advanced consumer markets? The interpretation on transaction volume and pricing behaviour is thus rendered inaccurate as it does not distinguish between the digital payment ecosystem currently prevalent in emerging markets from that existing in advanced markets.

When your fundamental premise has no foundation, your extrapolations and projections will not only be in error, but the unquestioned starting assumptions will snowball along the strategy and product development chain leading to a vast gaping void between your original intent and the actions taken, much less the outcomes aimed at.

Lastly, when it comes to fintech in the African context, there’s a pattern of analysis that is either too basic in its assumptions – mobile phones are good for digital financial services and nobody has actually noticed this fact because we never did; or, too ready to read the worst in a chart or the data. This leads to policy recommendations in 2016, ten years after Mpesa was introduced in Kenya, that offer up such insightful suggestions as “Africa must promote the use of mobiles to include the excluded financially.”

This is rather disheartening for the rest of us who have been watching the African digital financial economy move forward in leaps and bounds, in many ways far ahead of the rest of the world. It also takes the current conversation back to kindergarten level rather than the post graduate courses we could be discussing. Given the advancements already actively engaged with across the continent, isn’t it time that policy researchers took the trouble to come up to speed?

And given the importance of financial inclusion, isn’t it time that the stakeholders actively working on digital financial services took their target audience seriously, with some respect, and wee bit more humility? They might discover their efforts move forward much faster.

Mobile Money’s next challenge: Enabling the development of a cashless ecosystem

Equitel billboard, Nairobi Kenya (Photo: Niti Bhan Jan 2016)

The latest GSMA State of the Industry report on Mobile Money is out this month and the numbers look great in the developing world.
The report frames the industry’s next challenge as the need to grow the platform beyond the basics of airtime purchase and person to person transfer.
Here are my concerns, starting with the very first sentence – “to convince customers to actively diversify their usage patterns.”

This is where there is a critical need for MNOs to segment their userbase prior to designing fresh approaches to increase adoption and build an ecosystem. According to the report, only a few MNOs have data on urban vs rural, much less on gender.

The report’s fashioning of the data available into the form of an “average user” will hinder the progress more than it will help. Look at the geographic spread across widely varying economies, there’s no such thing as an average user when it comes to a tool closely related to one’s patterns of cash flow and income sources. Usage patterns reflect cash flows – why else would the prepaid business model be dominant in these same locations?

The hard work of disaggregating the information into region specific customer profiles must be done if solutions are to work effectively beyond teh basics of P2P transfer and airtime purchase – mobile money’s equivalent of a phone call and an sms.

Many of the reasons why its important to segment by rural/urban, and the proportion of users in the informal sector and on prepaid subscriptions are covered in my old posts on Google’s BebaPay fiasco – a smartphone app enabled NFC solution for cashless public transport payments introduced in Kenya a few years ago.

Economic ecosystems, particularly those with a heavy dose of the informal sector, and closer links to rural hinterlands, such as those common in sub Sahara, will need to be mapped out and understood before interventions can be designed to lower barriers to adoption. These use cases may not be plug and play components or readymade low hanging fruit, as imagined by the writers of this report. They need grounding in the context of the existing operating environment – formal or informal, urban or rural – and, the characteristics of the informal and rural economies, depending on the segment.

Is the pay per use business model changing household purchasing dynamics?

The process of writing the previous post on India’s energy efficient cook-stove development efforts made me pause and reconsider my assumptions. Here’s the snippet that struck me in the article.

Philips took its India stove to more mature markets in Africa, where a raft of foreign-funded stove projects had familiarised customers with the product.

This seemed to explain why, when M-Kopa, the pay as you use solar system startup in Kenya, expanded their product line, the most popular first choice for low income consumers were improved cook-stoves.

Energy-saving stoves have been the highest seller to date, while smartphones are also proving popular.

Given the recent hand-wringing over the toilets vs phones stats, I would have expected smart phones to have been more popular than stoves. The fact that they aren’t implies to me that something more is going on than is apparent on the surface. I don’t think its as simple as “sensitization” efforts by NGOs, since the aspiration is still LPG not an improved stove.

You’ll note the assumption made in the pullquote from the Indian cook-stove article:

Women’s time and health were not valued; any family with Rs 1,000 to spare would first buy a mobile phone.

So, the question raised is whether M-Kopa changed this household dynamic, in a market where women’s domestic roles are similar to India’s?

During my exploratory user research study on household energy consumption behaviour for ToughStuff, a now defunct manufacturer of small solar products aimed at the exact same market segment in Kenya, I discovered that one of the barriers to the purchase of the product was the question of “Who would pay for it?”

The phone is a personal asset, purchased by the individual saving bits and bobs from their earnings, over time. Solar power or a cook-stove, is an asset shared by the entire household. Could it be that M-Kopa’s business model, predicated as it is on daily micro-payments to keep the lights running, has changed the dynamics of household purchase (rather than women’s roles)?

Its possible that whoever had the extra 50 shillings in their M-Pesa account sent it to M-Kopa for the day’s payment, and people took turns rather than the burden of purchase falling entirely on one income earner’s shoulders.

And now that more products have been made available for sale through this micro-payment method, it has opened up the opportunity for the purchase of more shared consumer durables, like cook-stoves, rather than individual items of use, like smartphones.

Given the implications of these snippets of insight from M-Kopa, and their importance to both women’s empowerment and the dynamics of domestic finance, I wish that the company would do more to release information, or offer their data for indepth analysis.

Cross-border mobile financial services in Africa are going to be huge

Analysis Mason has an excellent article on the next big thing in mobile money across the African continent – cross border payments. I covered the emergence of these services, through regional operators as well as partnerships based on interoperability earlier. This is what I asked for:

Mapping it all

I’d love it if someone could capture all of this into one map and infographic – not only the cross border transactional ability but also the cross border interoperability as well as in country interoperability. Like the Zambians, I think the potentials for business, trade, e-commerce and biashara are far more than anyone has even considered. Top down reportage on banking and interoperability seems to focus only on the customer’s individual needs, and overlooks their agency as entrepreneurs, traders and business people.

And this is what Analysis Mason’s article has to add:

Cross-border mobile money transfer services enable the informal sector to participate in the formal financial system and avoid opening a bank account, which typically requires more extensive documentation (for example, proof of residence) than registering with a mobile operator. Mobile money provides a safer, quicker, and often less expensive, alternative for cross-border money transfers.

Demand for cross-border remittances is also driven by regional integration, particularly in East and West Africa where regional agreements promote cross-border trade and monetary integration. Significant movement of African labour across borders, to seek higher wages and new employment opportunities (especially within regional ‘blocs’), also creates a mobile population, driving demand for mobile remittance services.

Given the dates of emergence of partnerships extending the reach of well known services such as Mpesa after the publication of this analysis, I suggest going with the data collated here first. On the other hand, they were the first to map it all so I’m surprised my earlier search didn’t turn up this article which shows an earlier publication date on the web page.

Rwanda launches cashless public transport payments – Will they succeed where Google failed in Kenya?

Public transport is going cashless in Kigali, Rwanda, with smart card payments and mobile money schemes being launched simultaneously with much fanfare. Can Kigali succeed where regional giant Kenya failed a couple of years ago?

Nairobi’s attempt to impose cashless payment technologies in public transport (particularly the matatus, ubiquitous white mini buses that ply the roads) began in mid 2013, when tech behemoth Google partnered with Equity Bank to launch the now defunct BebaPay card. What happened next can only be called a case study of how not to introduce service innovation in the informal economy of sub Saharan Africa. And they weren’t the only ones, yet none of the contenders are still operational today.

“So what’s different about Rwanda’s approach, and what are its chances of success?”

The first thing I noticed is that the NFC enabled smart cards are being validated by the device attached to the vehicle, as can be seen in the photograph above.

Read On…

Customer-Centric Business Model Design for Financial Inclusion

The Challenge

Digital financial services (DFS) seek to bridge the chasm between the structures, policies and institutions of the formal economy, and the cash intensive informal and rural economy. Current day approaches tend to take the perspective of the service providers when assessing the market opportunity and the needs of the intended customers. And so the research to inform the design of products and services focuses on the behaviour of the end users apart from their context, and isolates their unmet needs within the narrow bounds of a specific project or purpose.

Given that the user researchers, the concept developers and the service providers, are mostly from the formal operating environment and/or first world contexts, they tend to consider consumer behaviour without the explicit acknowledgement that these user responses to the introduction of digital financial services (DFS) are emerging from the context of very different conditions than they themselves are immersed in. That is, there are implicit assumptions tacitly being made regarding the market and its opportunities, which, if left unquestioned, may obscure the underlying causes of the problem. And, thus, may inadvertently act as intangible barriers themselves.

A Framework for Approaching this Challenge – Pasteur’s Quadrant

The cash intensive informal and rural economies of the African continent are a very different operating environment from the formal, structured economy of banks, service providers and institutions. This chasm in context, and thus customer worldview, is particularly wide for the vast majority who tend to be defined as financially excluded. They manage their household expenses on irregular income streams from a variety of sources, not regular and predictable paychecks.

This means that many of the market assessment frameworks and tools anchored in the characteristics of the formal, calender based economy may not apply directly to a wholly different context with entirely different conditions and criteria, and their use without adaptation or acknowledgement may skew the resulting insights and concepts. Most of the available research tends to fall into either pure social science or design driven user research. As we have seen, when it comes to making markets work for the poor, neither approach alone is enough to make sense of the opportunity.

We are inspired by what is known as Pasteur’s Quadrant – a hybrid approach that integrates the need to understand the context with the pragmatic goal of immediately useful and relevant information. Our objective is identify strategies that lower the barriers to adoption, whilst minimizing the dropout rate. That is, our goal is to craft sustainable concepts that work for the target audience within the contexts and conditions of their own operating environment and daily life. This approach increases the success rate of a business model. We have been inspired by the way the prepaid airtime model bridges this same chasm for telecommunication giants around the world.

Grounding Insights in the context of Informal and Rural Ecosystems

Taking a systemic view of the untapped market for digital financial services, thus, would ground the market observations and the customer insights within the frame of reference of the target audience’s own operating environment. Among the financially excluded, particularly on the African continent, this can safely be said to be the informal sector which contributes a significant proportion of each nation’s GDP and employment, regardless of industry.

Framing the essence of the challenge in the form of these critical questions,

What are the barriers to adoption of DFS ?
What can be done to lower these barriers to adoption?

permits us to take a systemic approach to identifying barriers to DFS adoption, balancing the need for understanding the unknown with the insights required for conceptual design.

The following questions demonstrate the way we can drill down for comprehensive understanding for a particular customer segment or region in a viable manner:

1. What are the common characteristics of the cash intensive informal economy in which this population resides?
2. What are their current means to manage their household expenses – urban vs rural
2a. What are their current options for financial services – which all do they have access to and which all do they actually use – informal AND formal
2b. Why do they use what they use? And why don’t they use what they’re not using but have access to?
3. What are the market forces acting upon the existing DFS market in their region – regulatory, policy, prices, interoperability, tech of the solution, type of phone etc
4. What are the assumptions these DFS are making wrt their target audience needs, behaviour, usage patterns and capabilities? How do these assumptions fall short of the real world context and usage behaviour in the context of their cash intensive operating environment?

And thus, the starting point for business model design are the answers we are able to synthesize from the insights gathered above, in order to answer the following question:

What is necessary in order to bridge the gap between the DFS and the intended target audience?

Our approach offers a pragmatic diagnosis of the situation, from the perspective of the informal economy and the poor, within the conditions and constraints of the current day regulatory and policy environment. It clearly identifies the gaps in the existing system and describes the opportunity space for new business models that would offer value and resonate with the target audience’s needs and context.

We recommend giving technology a backseat and approaching the solution development process from a more holistic perspective of people, their operating environment and their existing financial behaviour.

Read more on these interdisciplinary lenses for innovating for the informal economies of the developing world’s emerging consumer markets.