Posts Tagged ‘banking’

Customer-Centric Business Model Design for Financial Inclusion

riskinformal

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.

pasteur

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.

First world trends: Financial inclusion, the unbanked, and the prepaid business model

20150905_USC606

The Economist explains just how expensive banking can be for the lower income population, even in the United States. Financial inclusion for the unbanked and underbanked must include cost/benefit analysis based on the limitations of income streams of those whom they hope to serve. The cost of ownership is often overlooked in current day literature, which tends to focus on access to formal financial services, whether digital or otherwise. As the data clearly shows, value for money is a critical part of access, and a deciding factor in the choice to remain unbanked.

Life is expensive for America’s poor, with financial services the primary culprit, something that also afflicts migrants sending money home (see article). Mr Martin at least has a bank account. Some 8% of American households—and nearly one in three whose income is less than $15,000 a year—do not (see chart). More than half of this group say banking is too expensive for them. Many cannot maintain the minimum balance necessary to avoid monthly fees; for others, the risk of being walloped with unexpected fees looms too large.

Increasing popularity of prepaid business models

The GSMA expects the North American prepaid market to grow to 31% by 2020 and its hovering around 29% at this time. This is just over double the proportion of prepaid vs postpaid subscribers in the past 5 years.

In fact, US telcos like Sprint have recently announced their intent to drop the 2 year contract business model, offering smartphones on lease just like competitors Verizon and T-Mobile. And phone maker Apple has gone as far as to offer their own rent to own program, one which resembles SUV leasing arrangments with a new model every year.

Screenshot-2015-09-10-10.02.44-600x283This is an interesting trend as it points to the reluctance of consumers to commit to 2 years of unexpected bills at the end of the month, preferring the certainty that prepaid offers over your spending. Concurrently, there’s been a noticeable rise in prepaid credit cards and other similar facilities.

As of 2012, roughly 12 million Americans used a prepaid card at least once a month and we collectively loaded $65 billion to them – double the amount loaded just three years prior. That figure is expected to rise to $337.8 billion by 2017, according to Mercator Advisory Group – an increase of 420%.

The prepaid business model empowers customers by putting control over timing – frequency & periodicity, as well as amounts spent, in their hands. Flexibility to manage one’s expenses, against incomes, is another aspect that’s attractive about this business model. Companies love it too as cash flows accrue in advance, minimizing the risks of defaults.

Consumer income streams are changing in America

Do these trends reflect the changing patterns of cash flow among consumers, as indicated by the rise of such revenue generators as Uber, AirBnB and others of their ilk?

Irregular and unpredictable income streams are part and parcel of the independent worker, regardless of label, as they are not guaranteed a known amount in the form of a salary arriving on a predictable calender schedule.

This app offering to help you manage uncertainty seems to imply so.

Lessons for Formal Finance from Informal financial services

 

On one of my many field explorations on rural financial services,  I found out, that for one mama biashara, as soon as payment checks in, she withdraws all her funds from her local coffee SACCO account, and spreads it out via micro-deposits across her more than 5 local informal savings groups (from right to left on diagram).

 

Choice of Informal Formal financial services – continuum

 

A report conducted across East Africa using data from [Finaccess, Fin survey – ’09,’12,’13] Kenya, Uganda, Tanzania, Burundi and Rwanda, found that on average, 60% of survey participants saved with informal groups and places – ASCAs, ROSCA, SECRET place

 

“Determinants of Household Savings Mobilization across EAC Countries: An Exploratory Analysis.”

 

Even M-Shwari – “a new [mobile] banking platform that enables customers to save, earn interest, and access small amounts of credit instantly via their mobile phones”, on paper an ideal tool for banking the unbanked, faces the same challenge as per CGAP’s How M-Shwari Works: The Story So Far Report (pdf).

“The main competition to M-Shwari as a place to deposit and store money temporarily comes from informal savings groups and banks”

There is mounting evidence of widespread use of informal and semi-formal financial services, despite efforts to shift to digital financial services (DFS). While in formal circles they may be perceived as ‘a risky place to borrow/put your money’, based on evidence, there is an allure that does not readily lend itself to be seen. Often, what is lost in countless narratives, is the fact that before banks (B.B.), people weren’t necessarily unbanked per se. As creative social beings, they devised ways to meet typical banking functions  eg credit, saving, credit rating etc Not devoid of shortcomings, but filled a role all the same.

How, do they [informal financial services] compete so well with formal finance with nil marketing budgets?

 

Consider Financial Historical Data

In the formal world of finance, any unrecorded financial history before Banks or Telcos proprietary mobile phone spending history is non-existent. Mobile phone history instead, is preferred as a surrogate for credit history. In turn, the bank provider

“partners with Safaricom (telcos) to use one’s mobile phone usage data and Mpesa transaction data as a credit score for how much in instant loans you qualify for”

Here, there is a rather obvious disconnect. For starters, majority of transactions in rural and informal economies (where the poor, unbanked and underbanked likely found) occur in cash – forms of savings, micro-loans and micro-transactions! Secondly, rich peer to peer (P2P), business to consumer (B2C) and business to business (B2B) credit exchanges, occur frequently in this domain, based on social ties, trust and familiarity in rural and informal economy transactions. Both inherently valuable credit histories.

Yet, all these financial exchanges that take place in these groups and the informal cash intensive economy are not considered as valid credit history.  If we consider mama biashara’s alternatives (as per my formal -informal continuum diagram above), for emergencies, she is likely to turn to her informal devices for plugging her short term credit needs – P2P credit, B2B credit, Business Self Help group etc than say a bank. As a function of trust therefore, these informal devices, rank favorably in her implicit trust continuum scale seen here.

 

Trust Continuum – informal and formal financial services

 

Takeaways from Informal

If by their own admission, telcos and banks admit informal savings groups are their biggest competitors, shouldn’t the first step be to understand the competition ?

by Damien Newman https://revisionlab.wordpress.com/that-squiggle-of-the-design-process/

Cash intensive rural and informal domains are a rich data mine semblance of spaghetti balls, unlike digital data that lends itself to direct measurement. The nature of this data is more qualitative – the kind collected from exploratory research, people, immersion, observing behavior, cues picked up from dialogues, and time spent interacting in environments. While we focus on readily measurable metrics, we are missing out on an even bigger source.

 

 

Glossary:
ASCA –        Accumulating Savings and Credit Associations
ROSCA –     Rotating Savings and Credit Association
SHG –          Self-help group of mamas with common business interest
Chama –      Informal cooperative society used to pool and invest savings
P2P credit –     peer to peer credit eg mama to mama
B2C credit –     business to consumer credit eg mama to her customers
B2B credit –     business to business credit eg a supplier to mama
MFI –          Micro Finance institution
SACCO –     Savings and Credit Cooperative

Financial Inclusion survey and the informal economy

bankaccount_WB_2012

Gallup conducted the survey on behalf of the World Bank and their comprehensive synopsis available online (with links to the full report) offers a few more charts in addition to the map above. These look at bank account ownership among adults in different regions comparing rural to urban, genders as well as the reasons stated for not having one.

What I’d be interested in would be to map those resulting patterns against a comparative map of the percentage of the regional economy that was identified as “informal” – I wouldn’t be surprised to see a link there as well.

This is a map from 2001 using ILO data on the informal sector while given below is a more recent one which maps the percentage of the economy dependent on the informal sector.


I see a pattern that perhaps formal institutions such as those conducting this banking inclusion study are not able to, due to their preference, ideology and metrics for success. Still, Gallup concludes with:

Although half of adults worldwide do not have bank accounts, at least 35% of them report barriers to account use that public policy could address. Among the most commonly reported barriers to having bank accounts are high cost, physical distance, and lack of proper documentation, though there are significant differences across regions and individual characteristics. These barriers suggest that a key to reducing the gap in financial inclusion is the expansion of new processes, products, and technology, such as mobile banking, that can provide affordable and accessible banking services, particularly to the rural poor.

Banking on Trust

Following up on the Reserve Bank of India announcement mentioned below to allow small shops and phone kiosks, etc to handle basic services on behalf of banks – I directed questions around potential receptivity today.

I spoke to a woman who runs a terracotta pot making business. It is unusual in this area for a women to do so but her husband is an alcoholic so she manages the operation herself. She currently uses a local community savings scheme on which she receives interest if she makes regular payments for 5 years. She can also take a loan from the scheme to cope with seasonal fluctuation in earning – at slightly lower rates than banks. I carefully described the upcoming developments and her response was that she wouldn’t use shops, etc for banking as a few years back many people in her area got burnt after using outside middlemen for banking services for 6 years and lost all their money. One imagines that perhaps over time she would use such a scheme but she certainly wouldn’t be an early adopter.

This raises the issue of trust in new banking ventures… and indeed any new services.
I noted in the
white paper from the CGAP blog about their initiatives in Malawi that they have: “found that catering to local opinion leaders, developing a road show to build brand awareness, and utilizing radio as a key medium of communication are important components of their strategy that have evolved through their experiences.”

These communities are very close knit and trust is not won easily but is essential to adoption of new services. A further concern was access to her money anytime – which she has with her savings scheme if an emergency arises and is another reason she cited to not wanting to use a formal bank in its current capacity.

My informant also mentioned that she preferred her private savings scheme as she fears a bank account could be accessed by her husband (Indian banks probably need to a better job of countering this assumption if indeed it is not the case). She seems quite successful in keeping her family’s money safe from him but he does menial work at a local liquor store in exchange for alcohol.

Although she doesn’t own a mobile phone… many men and women in the area do. One notes that Indian mobile banking does not include as inclusive initiatives as M-Pesa. It seems that this is partly because the RBI approved banks over mobile network operators to conduct services. The resulting offerings haven’t effectively reduced barriers for the unbanked at the bottom of the pyramid.

Indian Banking Widens Reach

Yesterday’s Times of India pointed to a development by the Reserve Bank of India (RBI) to extend its services.

“Very soon, the kirana shop and the PCO in your neighbourhood… and the nearby petrol pump, could provide you with a slew of banking services like deposits and withdrawals, opening of accounts etc from their premises. On Monday, RBI permitted banks to appoint these entities to act as their agents and carry out several of the bank’s operations…

In August, an RBI working group was of the view that since the traditional ‘brick and mortar’ banking model had limitations penetrating remote areas of India, the BC model could give banks a workable solution to provide banking services in inaccessible areas in a cost-effective manner. ‘‘Banks need to accept the BC model as extremely vital for achieving the goals of financial inclusion,” the working group had recommended.”

It has yet to be seen how this initiative will be taken up by BoP users both rurally and in urban neighbourhoods not currently not served by banks. And indeed whether it will be appropriately tailored for those on low and unpredictable incomes. Given seasonal income for farmers which need to support them across the year, such services could prove relevant. I’ll be paying close attention to informants’ discussion of savings methods and imagine that Niti (and others who have been researching here) may have relevant field insights and information to add on this development.

Image from Dinesh Cyanam on Flickr