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‘.

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.

The imagery of contemporary tech startups from the African continent

No matter what Google’s search results may show, this is NOT the image of mobile innovation, technology startups, and the African continent’s ICT infrastructure. This is a photograph staged by Oxfam to show a Maasai moran – a young man from one of the pastoralist communities living in the arid lands of Eastern Africa.

This billboard is from Nairobi, the regional heart of fintech and app driven business models, emerging from the numerous co-working spaces now dotting the grid connected city. There is fibre underneath.

When you choose this photograph to illustrate your blogpost, article, or report on contemporary African tech and startup scene, what is the assumption you are making about the young people flocking online? What is the message you are choosing to send them about your opinion of them? Are you able to discern any difference between these two photographs?

Untapped opportunities in Francophone Africa for design of apps and smartphone solutions

Bacely Yorobi shares challenges at the AfDB Innovation Weekend, Oct 2015 Photo: Niti Bhan

Bacely Yorobi shares his challenges at the AfDB Innovation Weekend, Oct 2015 Photo: Niti Bhan

Bacely Yorubi frames the opportunity space for local app design and development in The Toronto Star:

“Lots of young Africans who’ve studied elsewhere and returned home have expectations of mobile services that don’t yet exist,” said Bacely Yorobi, an app developer from Ivory Coast. “So they’re the ones coding and putting new African-made apps out there.”
[…]
“Africans don’t like to put their money in the bank, but they will put it in their phone,” said Yorobi.
[…]
“We have everything we need to build an app, but we don’t have the support to bring it to market,” said Yorobi, during a trip to Paris to court investors.

I find it all the more interesting from the francophone West African perspective, as the nascent tech industry races to catch up with their anglophone neighbours in Nigeria, Ghana and Kenya. Given the waves being made by world class outfits such as Cameroon’s Kiro’o Games, or Senegal’s rapidly maturing tech ecosystem, one might discover they’ll outpace the competition given time and support.

Bacely’s comments also make me wonder why the global giants pushing financial inclusion in Cote D’Ivoire and other WAEMU countries aren’t looking for local partners and developers, given their ongoing struggles for traction. Perhaps its time to discover that not everything imported from abroad is always the best solution.

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.

Why I’m cautious about most mobile platform consumer research in Africa

StanChart’s price tracker rolled out in Nigeria is a great example of where and how mobile phones can really add value in understanding the African consumer market and add substantially to its scarce database. What concerns me however is the increasing promotion of the ubiquitous cellphone as the means to gather consumer insights for all sorts of polls, surveys and sentiments.

Why?

Surveys conducted online and through the phone may not, at this point in time, offer a representative sampling of the relevant population, no matter how random. Ironically, in this context, its this very randomness that creates skewed results. Unless the results and the methodology clearly specify the gender, age, income and education breakdown of those responding to their survey, there’s little basis to assume that they are representative of the population. Reliance on such results should very much be contextual – which country, what are they aiming to show, who exactly did they survey, rather than accepting results from any old location on face value.

Here are some recent stats that help explain why:

The Mobile Africa 2015 study, conducted from GeoPoll and World Wide Worx, surveyed five of Africa’s major markets; South Africa, Nigeria, Kenya, Ghana and Uganda finding that mobile Internet browsing now stands at 40% across these markets – Ghana: 51% Nigeria: 47% South Africa: 40% Kenya: 34% Uganda: 29%

And these are the top 5 markets.

Let’s say you get results via mobile surveys – you’ve already narrowed down your sampling base to less than one third of the population. If you’re not calling them up, then you’re narrowing it further than those who can read and write, and if your survey was in English or French, its narrowed further to those educated in the language. By the time you actually get to the people responding to the survey, you’ve effectively sampled a tiny unrepresentative slice of the national population.

If I wanted to know what young tech-savvy men think, I’d never hesitate to use the results of a mobile survey. If I wished to have a better idea of lower income or female heads of households, or even those in regional towns and cities, I would be sceptical of any research conducted without human intervention. There’s also a high risk of surveys being filled in for the nominal cash or equivalent rewards. There isn’t enough quality consumer research available on the African consumer market that we can risk further muddying the waters like this.

On the other hand, as this StanChart price tracking system shows, there’s a lot of untapped potential for the use of phones in consumer market research across the entire continent. It just may not necessarily be something that works in exactly the same way in the OECD world.

Introducing The Global Prepaid Economy

This week, that venerable newspaper The Financial Times, published an original piece of writing on the World Economic Forum’s Agenda blog. Its not a reprint from their own publication. It proposes the end of “Emerging Markets” (EM) as we know them:

Now, commentators say, it is the world’s mental map that is in dire need of an overhaul, particularly when it comes to the practice of categorising countries as “emerging” or “developed” markets.

The current economic hierarchy, which places emerging nations at the periphery and developed markets at the core of world affairs, no longer accurately describes a world in which EM countries contribute a bigger share to global gross domestic product than their developed counterparts, when measured by purchasing power parity. Nor does the capacious category, which lumps together countries of such diverse economic strengths as China and the Czech Republic, serve to illuminate crucially different realities between these nations.

“The EM term has outgrown its usefulness,” says Michael Power, strategist at Investec, a fund management company. “The term today embraces big and small, developed and under-developed, industrialised and agrarian, manufacturing and commodity-based, rich and poor, deficit runners and surplus runners, and I could go on,” he adds. At issue are not merely the niceties of symmetry and order.

As someone who has been looking at emerging markets, one way or another, for the past 10 years, both in my writing as well as in my work, this comes as a welcome relief. These markets can’t still be emerging, I thought, when I was in New Delhi at the beginning of June this year.

Yet, in some ways, we need the conceptual means to capture their dynamic potential, as they’re still in motion. As the article concludes:

These contradictions threaten to consign the term emerging markets to the dustbin. But if it follows the likes of “third world” into virtual extinction, its passage will raise the question of what, if anything, should replace it.

The Global Prepaid Economy. (Data: GSMA Intelligence)

In November 1996, Vodacom South Africa was the first network in the world to introduce prepaid airtime on an Intelligent Network platform, which made it possible to debit customers’ accounts while they were speaking. Two years later, they went on to win the Global Mobile Award for the “Best GSM Service” for the VodaGo prepay system. Less than twenty years later, prepaid airtime is the dominant business model across the entire planet.

And, interestingly, if you look at the map above, the economies where the prepaid business model dominates are more or less those which were formerly known as emerging markets, frontier markets, developing countries and/or the majority of the erstwhile third world.

Across emerging markets and developing countries, the preference for prepaid mobile services cuts across income range, socio-economic class or type of employment. Choosing to pay as you use seems to have little or nothing to do with regular paychecks, bank accounts, credit cards or age. So vast is it that one can consider it an economic characteristic in its own right.

The global Prepaid Economy.

What do all the regions where the prepaid business model dominates have in common?

Cash intensive
Informal sector employs more than the formal
Still developing
More volatile
Higher uncertainty
Less social safety nets
Faster growth

What does the prepaid business model do for the customer?

It empowers them. Control over how much to spend (the amount), and its timing (the frequency and periodicity of purchases) is in the hands of the end user, the mobile subscriber. There’s no bill at the end of the month, to be paid by a deadline, for an as yet unknown amount. That is, there are no surprises.

Why does this matter?

In cash intensive operating environments, where expenses must be managed within the constraints of cash available on hand, the prepaid model offers manageable access to voice, text and data. Where the informal sector might be the source of employment for a greater majority of the population, uncertainty is a defining characteristic as incomes may be irregular, unpredictable and/or seasonal. That is, there is a greater degree of volatility to be managed. And, where there are fewer social safety nets to rely on, surprises in the form of a bill at the end of the month might make the difference between going hungry to bed or putting meat on the table.

In this series of articles, I’ll be taking a look at the nature of the prepaid economy and characteristics common across many geographies. Next part will look at the relationship between Time and Money.

While you were outsourced: Last 10 years of mobile design, business and emerging markets

There’s a lot to be said here and I’ve been trying to sort it all out into some kind of logical flow. The global landscape of mobile phones is undergoing a huge shift, and like the iceberg that sank the Titanic, much of it is still under the radar. If I hadn’t gone down the rabbit hole of links after seeing peterme’s latest post which led me to Khoi Vinh’s note on the evolution of Apple’s iPhone design language, I might never have noticed the rest of it. When leading design bloggers start questioning design’s leaders, its a signal of greater problems than maybe apparent.

Me holding Matti’s Xiaomi, July 2014

What’s going on? A quick synopsis

There’s a new kid on the block and its name is Xiaomi. To be honest, its not a name that had been on my radar until earlier this summer when a friend working in Shanghai showed off his phone to me. As a Finn, his decision to purchase a low cost Chinese smartphone was unusual, and his explanation was that he saw it taking over the market in the future so why not get used to it from now.

Form follows function

There’s been the usual kerfuffle over who copied whom, yet again, and this time Apple’s been whining about Xiaomi not their old favourite, Samsung. I’d tweeted on this a few weeks back saying that the issue wasn’t one of copycats and imitation, and in fact there was no real problem. There’s been a shift in the form factor of handsets and no amount of patenting and protecting was going to change that fact. Look at this random image of “phones” taken from a quick image search.

A large screen with a control thingamabob or two encased in an approximately rectangular form. This is what symbolizes a mobile phone these days. And it all goes back to 2006, when the conceptual design shown below won an IF award.

Market share churn

The second shift that we’re seeing is one of increasingly shorter durations of leadership positions. Just a couple of years ago, I wrote about Samsung’s rise to the top and reflected on patterns seen with previous leaders such as Motorola and Nokia. I’d said that Samsung should keep an eye out by 2016, and am now surprised at the end of 2014 to discover that their hold on the number one position is already under attack by newcomers like Xiaomi.

Saturation and smartphones

Much of their troubles are in the formerly emerging markets of India and China, and this leads me to speculate on a third and more fundamental shift taking place. Earlier, the emerging markets of India and China were where big names made big gains in sales, allowing them to garner that market share required to catapult them into first position and/or hold on to their leadership, such as was the case for Nokia. This doesn’t hold true anymore. A fact to be noted is that for the first time smartphone sales have overtaken feature phones, globally.

Emerging Trends impacting the global, mobile landscape

What’s interesting here is that I don’t see Xiaomi, who just became the 3rd largest phone manufacturer by sales this past week, becoming the next leading brand either. Certainly not in the way a Motorola or a Nokia did, in terms of market creation, product innovation and global impact.

Instead, their emergence is more a signal of the larger shift that’s taken place. The locus of innovation in handset design, product planning and market strategy has moved it’s center away from the erstwhile first world to the former developing world i.e. India and China.

And along with this recentering, ideas on business models and profit margins have changed to reflect those prevalent and appropriate for these new operating environments.

Just look at this statement from Xiaomi’s Hugo Barra from an interview last week:

“Innovation is not a luxury item. Innovation is for everyone.”

The implications of this positioning are enormous, particularly given the conventional wisdom currently prevalent in the industry that the latest, greatest, cutting edge technology is a much sought after premium piece of hardware.

Looking beyond the cliches at Africa

Once we step back to take a look at this price point strategy, and add an overlooked element to the mix, we have dots that connect in ways they have never done so before. And that’s the emerging African consumer market.

Mobiles are the backbone of Africa’s emergence. [Refuses to insert a paragraph here on the critical importance of this device] And that technology is being democratized.

Tecno is another brand you’ve never heard of that has taken on the African market in the vacuum of innovation left behind by Nokia’s faltering in the race to the bottom a few years ago. They do business only in Africa, have set up manufacturing in Ethiopia and painted every wall in rural Kenya with their blue logo.

While they’re the biggest and the best known among the hundreds of Chinese brands on the market, they’re are neither your “cheap chinese fakes” nor OEM devices distributed by operators. These are the original brands who’ve scaled up the classic OEM–>ODM–>OBM–>OSM value addition ladder and there will be more of them.

So what does all this blather actually mean?

The handset is the next form factor in the evolution of personal computing which began with the desktop computer and progressed its way through ever more portable devices such as laptops, netbooks and tablets.

Its importance and position in the developing world relative to the lack of infrastructure and systems is greater than we are able to see from our own perspective.

This means that innovation in services and applications using this device will come from these new markets. Fintech in Africa is a great case in point.

The era of big brands and market dominance is coming to a close.

In rural Africa, livestock and produce markets exemplify local, social, mobile ecosystem

Mama Mercy taking a call during our visit to her farm. Her new cow is brown & white. April 2013 Kenya

If we can find and support the key enablers of the shamba’s day to day needs, I believe we could assist with increasing the pace of market reach and spread (new market creation). I suspect that we will find patterns identifying these 4 or 5 key actors – a transport owner/manager; a reputable agrovet; something related to animal feed or health but a stall in the market run by an informal trader with a regular market town circuit; someone who overlaps showing up in livestock markets and produce markets (brokers? transporters? aggregators?) – and people matching this description will show up in most regional population centers.

The next question would be whether this “hyper local market” can be assisted by any technological intervention?

I remember discussing something like this with Erik Hersman about 5 years ago, maybe 6 – his words were hyper local and we were musing upon the commercial application of the Ushahidi engine as a hyper local classifieds a la what @chiefkariuki has already begun doing, btw of note.

What are our user interface design constraints, conditions and criteria?