Posts Tagged ‘cash’

Insights on the psychology of cash money – Demonetization vs Financial Inclusion

moneyThe flurry of commentary on the Great Indian Demonetization of November 2016 has thrown up some nuggets of insight worth considering more deeply.

Santosh Desai explores the psychology of cash money in the Times of India blog, linking the need for tangible evidence of income to physical labour, as opposed to those of us with the contextual knowledge to understand the virtual concept i.e. digital currency.

“…there is another aspect of this situation that needs more reflection- the nature of the relationship we enjoy with cash. Cash is not merely a symbolic representation of value. Cash is the idea of value captured and owned. It is the product of labour that is an entity by itself and becomes much more than what it can buy. Sitting on a pile of cash gives pleasure both metaphorical and real.”

“…there is some value that is placed on the device of currency notes over and above the value that it signifies.”

This aspect has not been looked at deeply enough, imho, when financial inclusion is talked about, particularly in the context of digital solutions. I suspect that therein will lie behavioural insights that could conceivably drive design changes that lower the barriers to adoption in the strategies to introduce digital currencies and mobile monies to hitherto unbanked populations.

Earning money needs to be signified concretely. Those whose life’s earnings are in the form of a few high value currency notes, do not decode demonetization in quite the same way as those used to money in its conceptual form. The idea that it is possible to de-legitimise their life’s labour is to shake the foundations on which one’s life is constructed. What if some money is not exchanged? What if some paperwork, that bane of those living on the margins, is incomplete?

What if the mobile phone’s battery dies? Do my hard earned monies disappear like other unsaved data?

Trust in technology is a function of our contextual knowledge – our immersion in an environment saturated with electronic communication and screens of all types and purposes provides us with conceptual frameworks that are entirely different from someone whose daily labour is on the farm, or at a mechanic’s garage.

While those who are financially excluded might not face demonetization i.e. the de-legitimization of their labour, as Desai mentions above, the current attempts to convert their cash intensive habits into digital form via various “cashless” initiatives overlook the psychology of cash. Regardless of locale, those at the margins (the excluded) have high levels of mistrust in the system, through their experiences with institutions and the system, over time and history.

The talk of ‘cashless’ is easy, but it ignores that there is a cultural dimension to the physicality of cash. Digital wallets operate on a transfer of intention, where a promise to pay gets converted into an intention to buy. For this to work at scale, one needs to have become comfortable with the idea of surplus and develop the confidence that money will come without having to struggle or having to think about it all the time. One needs to develop trust in institutions, in a context where the evidence around is overwhelmingly to the contrary.

I suspect that if this subject was explored further, we would discover that where mobile money has succeeded, such as in East Africa, the institution that was trusted was the telco – the mobile service operator, and that the early stages of adoption have a different narrative from that being used currently in entirely new markets where mobile money still struggles to penetrate. India and South Africa are two such places where the unbanked and the financially excluded have reasons of history to develop high mistrust of the systems of the privileged.

To convert one’s worth into worthlessness, even if for a small period is to make everyone nervous. Psychologically, money works on a convention of mutual deception. We agree to call something money, and that is good enough. But to have the thinness of this convention exposed in such a way is to cause great anxiety.

The transition to a cashless future can be made gentler and more accommodating to their fears and concerns, generating a sense of security and commitment, with some empathy for an entirely different world-view and life experience.

The hidden cost of doing business #informaleconomy

household shop

Kenya, 2nd Feb 2016. Photo Credit: Emerging Futures Lab

This looks like its a low cost business operation with low barriers to entry. All you need to do is find a decent tree under which to display your wares.

The reality is that these entrepreneurs have numerous fees and costs that they must pay in order to do business, regardless of how informal it all looks. They pay rent for that space on market day, they pay the council in order to transport their wares, they need to pay for transportation, and any assistance they might need for loading and unloading, they even need to pay the various formal and informal “tax” collectors on the road to this market town.

There is a cost to doing business, and there’s uncertainty of income and cash flow. Some of these fees might be fixed or known, but some, like the amounts asked for, along the way, might be dependent on the mood of the officer, or even, the weather.

On the other hand, these fees and taxes and payments ensure that the retailer has a decent location in the market, that they won’t be harassed or chased away during working hours, and that the “system” – chaotic though it might seem to our eyes – will serve their needs.

If you were ask them what they think of this, they would shrug their shoulders and tell you its just the cost of doing business.

Breaking bulk and profiting at the margins

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Photo Credit: Michael Kimani

Michael sent me this information from Nairobi last week. He’d spotted informal retail within the context of a mini-supermarket – known as traditional trade in the jargon of consumer product distribution and retail. He adds,

“So 500 ml of Rina cooking oil retails for 120KES, 1 litre for 195 KES. What the owner of this store found out is buying a 20 litre (which she retails for 2700 KES) and repackaging it into 1 litre  plastic bags in red basket), is more profitable according to attendant doing this – Each bag retails for 135 KES”

Quick math informs us that she’s not giving her customers an out – the retail price for the 20 litre jerry can works out to 135 KES per litre. On the other hand, purchasing an informally packaged plastic bag over the formal product packaging offers you savings of 60 KES and helps stretch the grocery budget a little more.

A search online shows me an e-tail website whose prices for Rina are even higher – 500 ml at 121 KES, 1 litre at 214 KES and the 20 litre at 3,300 KES.

This behaviour isn’t just seen in Kenya or the African continent – I’ve documented it in The Philippines, and in rural India.  Its the natural outcome of the purchasing patterns influenced by cash transactions and irregular incomes – of the retailer as well as their customers.

Without contextual knowledge of the operating environment of the vast majority of trade and services in the informal sector, implicit assumptions left unquestioned pose their own barriers to sustainable growth.

For Mama Biashara, it’s these margins that provide a little wriggle room for profit, while offering some added value to her customers.

Exploratory User Research in the Rural Economy

When I first began developing the attributes by which to select representative user profiles for the original fieldwork to begin understanding the “prepaid economy”, that is, household financial management in rural India, The Philippines and Malawi, it was based on people’s ability to plan and budget.

Sustainable Value Chain 8

One can plan best when one is certain of the amount of money incoming and its date of arrival, thus one is best able to manage household expenses on a regular salary on a periodic calender based schedule.  If we cluster rural residents by their ability to accurately estimate the amount of money against its arrival, then the salaried employee is at one of the continuum of certainty. He or she knows exactly how much they will receive and on which date. The other end, however, is the most uncertain, such as the case of the daily wages labourer who may or may not be called for work on a particular day or week.

The farmer, if experienced, tends to fall in between these two points, as they are usually able to look at their crops and estimate approximately the yield and readiness of the harvest. This simple framework of time and money allowed for a reasonably representative sample of any particular region where geography is responsible for the climate and the seasons. The uncertainties faced by local farmers were broadly the same.

Now, we hope to take a closer look at this segmentation model to better refine our understanding of rural economies. At which point did a farm transition from mere subsistence towards aspirations? How? What distinguished a member of the global emerging middle class (GEMs) from one who was barely able to hold house and hearth together? Which other actors were critical to the rural economy, delineated in this case as the last mile of the agricultural value chain, and who were the supporting cast ? All farmers in a region are not alike – how would we begin to cluster sub-segments and which additional attributes would help us?

As a starting point, here are some of the key insights that have already been consistently identified:

  1. The greater the span of control the end user had over their time and money in a payment plan – the amount, whether it was in cash or kind; and its timing i.e. the frequency, periodicity and duration, the greater the likelihood of its success.
  2. Seasonality was a fact of life and cash flows over the course of the natural year reflected this aspect. High seasons and low; wet seasons and dry – the rural economy was closely tied to the land, the ebb and flows of income affecting everyone in the farming community, from shopkeepers to truck drivers.
  3. Liquidity does not reflect wealth, nor cash expenditures a signal of purchasing power.
  4. Affordability is less a matter of absolute price and more dependent on the flexibility of the payment pattern.
  5. In the majority of the developing world, the rural economy is flexible, informal, local, social and interdependent. Trusted social networks were the basis of looking upon the community as insurance in bad times and resilience in the face of uncertainty and adversity a recurring characteristic.

Risk is dynamic, not static

Exhibition Panel – Samsui Woman, National Museum of Singapore, March 2013

And investor, bankers and venture capitalists imagine they are taking risks that deem high interest rates when operating in Sub Saharan Africa.

Come now, you do not gamble with your next meal, your risk is static.

What every micro entrepreneur, in the informal economy they’re still trying to grasp,* knows is that risk and rewards are dynamic over time. The best one can do is negotiate on time and money and the degree of wriggle room one allows, in order to minimize the volatility of the spikes. Its rarely the amounts that are the problem in cash flow management but the whole pipeline.

This is why ambitious craftsmen across Kenya prefer to save cash money (Savings of anywhere between 18 to 24% interest rates by formal banking industry) to fund their expansion plans, as they’ve noticed the uber frugal Asian traders do across the railway lines.

Would you be paying those rates for your home improvement loan?

* (92% of employment in India is from the informal sector including agriculture)