Archive for the ‘Flexibility’ Category

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‘.

Systems design and the Monster who squats between the formal and the informal

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This framing of the real challenge to development and poverty alleviation comes from Ken Wong writing on his experience in Malawi:

We can only win the war on poverty and hunger in Malawi by targeting the real enemy – and that enemy is the system of how the world tries to help. Specifically:

The system that demands foreign aid be funneled through the government or large NGOs

The system that creates a hierarchy of aid and government workers whose job security and quality of life depends not on their wanting what is good on the ground, but pleasing whoever is above them in rank

The system that discriminates against on-the-ground, local initiatives because of a lack academic credentials, English-speaking skills, and the ability to complete unwieldy applications and fulfill misguided metric targets

If we are to win the war against poverty, we need to face the truth and admit that the system has not only not worked in Malawi, it has made the situation worse.

The system itself is the barrier to progress. The System Monster, as I dubbed it, is quite a nice fellow really, rather well meaning and all that, but he doesn’t see how he’s just stuck there inbetween, unable to adapt to the context on the ground.

Here’s is a 5 minute video where I introduce the concept, from the BankInter Foundation’s Future Trends Forum on Inequality and Technology held in Madrid in early June 2016.

Platforms that aggregate small businesses can integrate the informal with the formal economy

Continuing my thoughts on Nilekani’s vision introduced in the previous post, I want to use this post to focus on the key element of what captured my imagination from his article “The New Road to Nirvana“:

So manufacturing is squeezed on one side by Chinese overcapacity and on the other side by extreme automation. So the service sector is where the action is.

The era of large companies as we knew them is also over. It will be a world of platforms that aggregate small companies.

Amazon and Flipkart will aggregate goods made by lakhs of vendors and provide a platform to sell them. Similarly, Ola or Uber will aggregate millions of drivers who will work on the platform, Practo will aggregate doctors and patients and so on. Aggregation by platforms is the way that jobs creation will happen.

This platform aggregation will also lead to formalisation of the economy. India’s economy is largely informal. But once, say, a taxi driver becomes part of Ola, then in fact he becomes part of the formal economy.

He is able to use data, get a loan, buy a car, start paying taxes. So the formalisation of a few hundred millions of Indians will spur growth and that is where our focus should be.

My larger point is that it is now all about domestic not export, services not manufacturing and platform aggregation not big companies.

I will be writing further on this concept and exploring its implications for the African context, particularly East Africa.

 

Introducing the concept of Biashara Economics, underwritten by a value web of trusted relationships

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The true value of social network lies not in its actor’s activities but in their relationships to each other. When social networks attempt to monetize their users, they tend to identify them as discrete individuals rather than interconnected actors all acting in a wave at a concert. The ripple effect seen in biashara informed us of the presence of an underlying web of value exchange seen as form of social digital currency.

Social digital currency can be said to consist of the following component parts that symbiotically work holistically as an integrated whole.

  1. Social capital – Trust.
  2. Virtual capital – see research on the metafilter community
  3. Live capital – livestock, chickens, fish, rabbits et al
  4. Skills and information capital – experience of paperwork for instance
  5. Cash or easily liquid capital

Thus, in the informal sector we saw instances of extremely cooperative economic behaviour bordering on barter characteristics, with cash as one of the many instruments used.

How can we bank on this richly layered wealth in rural human capital?

Uber’s app lowers barriers to formalization for unorganized taxi industry in Kenya

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Nairobi Taxi stand, Kenya. February 2016 (photo: Niti Bhan)

This interesting article in the Kenyan news made me think about the role that an app like Uber could play in markets where there’s a high proportion of informal & unregulated business activity.

As with much technological advancement, resistance comes with change. Mpesa and the internet were once thought to be passing fads and have later changed industries. Uber’s disruptive strategy strayed from the normal operations in the local taxi industry. However, its benefits cannot be slighted. The app organizes the industry while creating a registry of taxi operators complete with their personal details and revenue earnings.

[…]

Deal with the local taxi organization or the app. Under the current laissez-faire model, the taxi associations are unregulated with the government unable to protect the consumers. Uber has stepped in to shape an unstructured industry into a formal operation.

What’s really interesting here is that same elements of the sharing economy that disrupt the more structured, formal markets in the industrialized world, are those that could provide structure and organization to the chaos of the cash based, informal sector in the developing world.

In effect, the gap between teh formal and the informal required something that could provide flexible, negotiable business models and organization structures in order to bridge effectively. Prepaid business models are one that work for the informal sector’s cash flows but they don’t provide any facility for an industry to organize – here, taking the necessary elements of flexiblity, negotiability, and reciprocity one step further into an app, the Uber solution offers information neatly captured and accessible at your fingertips.

Infrastructure has a direct relationship to how much your rural business can scale

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Busia market, Kenya Feb 2016 (Photo: Niti Bhan)

This is a micro-wholesaler and retailer in a staple commodity. Infrastructural constraints limit the stock she can manage at one go – seen as the sack with her name on it. This indicates that it was sourced from some distance away, as this is the matatu’s informal package tracking service. It could have come from rural Uganda – some of the most productive agricultural land is in Eastern Uganda within 60km of the Kenyan border. Food is ridiculously cheap in Uganda and the fish in Busia was swimming a few hours before it landed on your plate with dhania sprinkled over it.

Similarly, that poor fish can only go so far, though the traders have built their own jua kali cold chain and can assure you of 24 hours freshness. Its the tomatos and the cabbages that wilt miserably in the searing sunshine and thus limit Mama’s daily income to the purchasing power in her neighbourhood market. She can’t wait for two days to sell her produce.

Its a natural cap on her ability to scale. Both volumes traded and distance supplied are a function of the quality of the cold chain at the very last mile of the farm to fork sustainable agricultural value chain. They need good logistics and reliable infrastructure. We can’t have the fish spoil during a power outage.

Therefore, you can see the economic importance of good infrastructure and also how such minor easy to implement tweaks can boost and trigger all sorts of emerging opportunities for entrepreneurs.

There’s more to informal trade than meets the eye

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Busia, Kenya 2nd February 2016 Photo Credit: Niti Bhan

This photograph captures the way micro entrepreneurs in the informal economy perceive their business. There is more here than meets the eye at the first instance. Note the green logo of the Kenyan mobile money transfer system M-Pesa in the background of the cash transfer taking place, by hand, in the foreground.

The customer is the lady in the beige dress on the right hand side. She probably needs small change that the market woman selling tomatoes might not have had on hand. The lady “next door” passes the change, and the two businesswomen will settle up later.

Can formal business processes allow for the flexibility of an instant cash advance to the shop next door?

What marketing 101 can teach development practitioners and academics

The entire universe of people with an unmet need that you expect your solution to fulfill is not your target audience.

The fundamentals of market analysis include the basic calculations that allow marketing managers of all stripes to calculate (guesstimate) their potential market size, and thus a realistic assessment of its value. That is their marketing universe, within which they will set targets for the acquisition of customers. That potential customer base is the targetted audience for their marketing efforts, in order to get them onto the customer journey ladder to “loyal advocates” your brand or service.

This simple yet powerful understanding is known even to Ghana’s market queens, the ladies who trade. They don’t imagine that they can serve the 100 million people without tomatoes that day. Yet these are the kinds of grand targets that development, and its little cousin once removed, social enterprises announce day in and day out in press releases.

I was lucky. Yepeka Yeebo reached out to me before a trip to Accra, where she had been commissioned to write a profile of such an entrepreneur.She has permitted me to use her photographs and to write this story of Auntie Matilda, the tomato trader of Accra, Ghana.

Yeebo_Market_01The market mummies, the market queens – the informal retail sector across most of West Africa is dominated by women. Women inherit their mother’s social and commercial networks, the goodwill of her mother’s trading relationships and thus, her social capital and repute. As Yeppi writes, there was a time when the intricate webs of economic power wielded by these ladies took the full might of the Ghanaian army to dismantle.

Gerry van Dyke has studied the customer experience design strategies the ladies use to distinguish themselves, though selling the exact same unbranded commidity. Even Unilever comes to learn at their feet, and Maggi Cubes know they can’t win if the mummies are unhappy at the margins for breaking bulk of one of those long boxes we all have at home.

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Break bulk is visible across the developing world’s informal economies. Just like the prepaid business model, the irregular income streams of the vast majority of the informal sector, even those who would the upper middle class of their milieu, mean that wherever one can negotiate some flexibility of time and money, their business is assured. It is a mark of trust to be able to agree to accept a payment over time.

This extends then to the way the products are sold. There is no concept of discounting for bulk purchase, simply because you’re unlikely to sink  your daily working capital into a huge bag of toilet paper. Liquidity is the real king, cash is only the manifestation in the real world. Flexibility is one of the ways to mitigate the risk of uncertainty that small business owners face daily.

Auntie Matilda’s business choices, marketing and customer development strategies, and the health of her cash flow, all depend upon her ability to build a network of working relationships predicated on trust, references, and thus, proof of performance. One wonders if the only reason she might not be formal is that there isn’t any particular segment or category in the current forms of registered businesses that apply to her kind of business.

Its time we overturned the ivory tower’s disdain of filthy lucre and trade in the city center and gave these ladies their due.

When would you buy life insurance for a week? New products for the informal market

A South African company has figured out the back-end technology required to provide easily accessible prepaid or pay-as-you-go insurance products that can be serviced via your smartphone. Their solutions are designed for the unbanked, informal trader, typically living on an average household income of US$8 a day.

At first glance, I wondered who on earth would want to purchase health insurance or life insurance for just a day or week, or, even a month. The article just leaves it at “in case that’s all you can afford” – which doesn’t make sense from the informal trader’s perspective. Intermittent insurance is a form of gambling.

On the other hand, what’s left unsaid, is that South Africa’s informal traders face unpredictable violence whenever a bout of xenophobia shakes the community. That’s an unmistakeable period of insecurity and the risk is obvious, since most of those targetted in these riots are the informal traders themselves. If you can quickly purchase health and/or life insurance, through your phone, for a short duration of time, you’ve covered your responsibilities to your family in case of an accident.

The duo realised that while low-income consumers were willing to insure themselves against risk, these products needed to cater to their specific social and economic circumstances. They came up with a voucher system, where insurance could be purchased in more affordable packages to cover shorter timeframes. For example, life or medical insurance could be bought to cover just one day, a week, or a month – perhaps while a consumer makes a risky trip to visit family…

While their use cases mention funerals, I have a suggestion for a product meant specifically for small businesses like informal trading, particularly on irregular incomes. Can they design a insurance product that falls in between health and life categories? One that’s not quite disability, although it might include this.

Mitigating the random effects of uncertainty is what insurance is about. The challenge for many in the lower income segments, such as these traders, is that there will be times when their income will be affected by factors out of their control – an illness, when they’re the sole head of household/single parent; or drought, as is happening in SA right now. Or even, a known season of low income – informal manufacturing has a low season over the Christmas holidays unlike retail – such an insurance product could be purchased a few months in advance and money put away towards a payout at the start of the New Year.

These are just ideas based on what I’ve seen during my fieldwork over the past 8 years. There are probably more such opportunities available that can be fleshed out with a bit of research. The point is, that if you’ve worked out the technical aspects of how to make “Insurance on Demand” work, why stop at conventional categories from the formal economy like health or life?

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

africa_webAnalysis 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.