Posts Tagged ‘service innovation’

3 Myths of Financial Inclusion

DSC06443

Mama waiting for biashara in Sagana, Kenya (Photo: Niti Bhan)

This article has been co-authored with Michael Kimani @pesa_africa

Banking the unbanked is very popular right now, as financial inclusion is seen as a key milestone on the path to development. In parallel, a plethora of “cashless” or “cash lite” solutions have begun permeating the cash intensive informal economy. These can be broadly described as digital financial services aimed at financial inclusion as they leverage the popularity of the mobile phone as an affordable delivery platform. Yet, their uptake has not been as viral as hoped.

We take a closer look (i) at the challenge from the perspective of market women and micro-traders who form the backbone of informal trade in daily necessities. Without her cooperation, the mass market adoption of digital currency is highly unlikely to become a mainstream part of life. We’ll call her Mama Biashara, from the Swahili word biashara meaning commerce, trade or business.

The United Nations defines the goals (ii) of financial inclusion as follows:

  1. Access at a reasonable cost for all households to a full range of financial services, including savings or deposit services, payment and transfer services, credit and insurance;
  2. Sound and safe institutions governed by clear regulation and industry performance standards;
  3. Financial and institutional sustainability, to ensure continuity and certainty of investment; and
  4. Competition to ensure choice and affordability for clients.

 

Myth 1: Mama Biashara is financially excluded

All of this assumes that Mama Biashara has no option (iii) but to stuff her savings under the mattress. Since Kenya is the world’s leader in digital financial solutions for the unbanked, grabbing visibility with the undisputed success of its M-Pesa mobile money platform, we decided to choose its context for our analysis. Given below are the various financial services and tools available to Mama in the rural context, placed along a continuum from most informal to most formal.

Informal Formal final QZ africa

As you can see, Mama has a large variety of solutions that she avails for her financial needs – its just that they can’t all be classified as “formal”. Yet, technically, by the UN’s definition given above, can we actually say that Mama Biashara is financially excluded from “Access at a reasonable cost to a full range of financial services, including savings or deposit services, payment and transfer services, credit and insurance”? Many of these locally grown alternatives such as Chama*, ROSCA* or ASCA* have been institutionalized in the Kenyan context, able to match the UN goals for points (2) and (3) as well as proving to be valid and viable competition offering choice and affordability (4).

If Mama Biashara’s basic financial services needs are being met right now by the variety of options and alternatives easily accessible to her, then what is the value proposition of a bank?

Her long standing reputation in the community, her relationships with her friends, family and peers, her “credit history” if you will, all becomes null and void when she approaches a faceless formal institution such as a bank. Due to the cash intensive nature of her business, little hard data on her financial history might be available for formal financial service requirements. On the other hand, her social recognition and long standing business relationships serve this purpose in the informal sector. Daily variances in cash flow which might require a quick loan or flexibility in payment can be easily covered by her ecosystem of financial options, something that the formal procedures and processes of financial inclusion solutions aren’t designed to accommodate. There’s an inbuilt component of trust that  the formal system is unable to overcome at scale.

 

Myth 2: Trust lies in the regulations, standards, governance and continuity of formal financial institutions

Trust in financial institutions, as implied by points (2) and (3) of the UN Goals, is embodied in their continuity, their regulations and performance standards, their governance by the laws of the land, and all the rest of the formal structures in place to create sound and safe solutions. This assumption, emerging as it does from the point of view of the sophisticated systems of the developed world, places the onus of trust on the rules and regulations governing the institution rather than the reputation of the individual or their worth in the community.

Yet, over and over, we see that Mama Biashara barely ends up using her bank account even if she manages to obtain one (iv) or is slow to adopt an innovative digital financial service. So we reorganized her financial tools on a continuum of most trusted to least trusted to see what patterns we could observe when we compared the same against the formal vs informal continuum. Was formality indeed the driver for trust?

Trust Continuum QZ africaWe were surprised to note that the least trusted was the most common metric of financial inclusion – the bank. These insights, based on interviews with women in Nyeri by Michael, reflect what Susan Johnson wrote on Kenya (v) –

But the difficulty of gaining loans through them (banks) means that the evidence confronting poor people is that a relationship with a bank is not a dynamic system of exchange in which funds are lent in both directions. The bank does not therefore represent a social relationship of equality and a means through which social connections are developed in ways that offer access to resources.  

The very nature of the formal system – in this case, the regulated and institutionalized bank – is the barrier to adoption among those active in the informal sector. The system is faceless, nameless and cannot provide the basis for an equitable, social relationship, as compared to a network of peers, a self help group (SHG*), or your friends and relatives. You cannot negotiate with the system as it offers no flexibility to accommodate the individual’s peculiarities or sudden needs.

Sustainable Value Chain 1

And the issues of trust and performance, in closely knit communities, depend upon social relationships, word of mouth and reputation built up over time. If someone doesn’t repay a loan, or if the semi-structured self-help group faces issues with their treasurer, these matters not only become common knowledge but can be dealt with directly by the affected members. For the most vulnerable segments of society, most of whom also fall in the category of being “unbanked”, whom do they turn to if a national bank or large telco fails them? Even M-Pesa is fronted by a human intermediary, the mobile money agent, a locally known member of the community.

 

Myth 3: Financial inclusion is an individual matter, or for the nuclear family

In Mama’s environment, social connections and belonging is very important. It is the foundation of her business, and it matters a lot. Especially in the rural context, your friends, neighbours and extended family are most likely to be your customers. The vast majority of your daily financial transactions are conducted within the community. This is reflected by the patterns seen in the two continuum diagrams of trust and formality. Each points towards local networks and social relationships as an important component of money management by the unbanked.

As Johnson discovered, reciprocity is as much a critical part of the functioning of the informal financial group, as negotiability (vi) is for successful adoption in cash intensive operating environments. The prepaid business model offered by telcos empowers Mama Biashara by giving her control over how much money to spend on her mobile phone, when to spend it as well as how often. In contrast, banks may penalize the early payment of a loan or impose a rigid payment schedule based on the calender year. Give and take is part and parcel of the community life. Groups help Mama in self control, restraint on spending, planning and saving for goals, together with social support in ritualized form.

Yet, the financial inclusion industry focuses counting the number of bank accounts rather than the number of people accessing one together under some umbrella of cooperation – a self help group or a chama might collectively bank their pool of money for safekeeping.  A group account is not about labels eg. Chama,  or a type of bank account, or the social features in a digital solution. There are rituals, practices and human connections embedded in the sharing of value. Entire cultures revolve around the community spirit and coming together in times of need – harambee, it is called.

When what is measured is what gets done, the financial inclusion industry overlooks all these elements in their goal to sign up each individual with a bank account (vii). No wonder such a high percentage of bank accounts become dormant within a year.

 

Mama Biashara’s perspective: What does financial inclusion mean to the unbanked?

These three myths are very powerful ones and they drive the design and implementation of financial inclusion programmes for the unbanked. Assumptions made by the stakeholders immersed in their formal, structured environments from the outset, when left unquestioned, act as intangible and unseen barriers across the formal/informal economic divide. “Banking the Unbanked” is such a catchy slogan that it took M-Pesa’s success in Kenya to expand the definition of financial inclusion in the latest version of the World Bank’s Findex report. Now, we see digital financial services rapidly becoming the holy grail for reaching the unreached. Yet not a single program or research project has begun from the perspective of their target audience of their aims and objectives. What does financial inclusion mean to Mama Biashara? Is there a need not being met by her existing solutions? What are her current alternatives? Until the informal sector is taken seriously in its own right as a vibrant & dynamic market and operating environment, offering stiff competition for Mama’s few extra shillings, we don’t see any of the technological marvels being introduced as viable or desirable in the long run.

 

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

 

End Notes

(i) Qualitative interviews on digital currency with rural women micro-entrepreneurs in Nyeri, Kenya in February 2015
(ii) http://aid.dfat.gov.au/Publications/Documents/financialservices-fullstrategy.pdf
(iii) Mobile Finance: Indigenous, Ingenious or Both? http://www.pcworld.com/article/154274/article.html
(iv) One out of four accounts ‘dormant’ as mobile money takes over banking http://www.theeastafrican.co.ke/business/1-in-4-accounts-dormant-as-mobile-money-takes-over-banking/-/2560/2727556/-/he4s34/-/index.html
(v) How Does Mobile Money in Kenya Affect Financial Inclusion? http://www.cgap.org/blog/how-does-mobile-money-kenya-affect-financial-inclusion
(vi) “Payment Strategies for those with irregular income at the BoP” (2009) – The Prepaid Economy project by Niti Bhan (UNIID SEA 2012)
(vii) Financial exclusion http://www.economist.com/news/economic-and-financial-indicators/21648642-financial-exclusion

 

Emerging Futures Lab brings to life concept design of innovative products and services by applying years of immediately actionable primary research in the cash intensive informal sectors of the emerging economies of the developing world. We see opportunities and markets where others see adversity and scarcity. Contact us now if you’re interested in the exciting frontier markets of Kenya, East Africa or elsewhere on the African continent.

How e-commerce leadership is driving innovative business in Nigeria

While it’s still under construction, there’s an unusual mall coming up in Nigeria. Reports say its aim is to combine the virtual and real shopping experience – retail outlets and shopping alongside with a bonded warehouse and ecommerce facilities.

Nigeria’s retail opportunity has been garnering international attention; its economy surpassed South Africa’s last year to rank #1 on the African continent.

image-1-704x1024

The infographic above puts the development of the formal retail sector in Nigeria – from its infant stage in 2006 to its projected capacity this year, in greater perspective.

Less visible in the global media has been the rapid growth of Africa’s ecommerce sector. A recent report by market research firm Ipsos, on behalf of PayPal, puts the Nigerian ecommerce as the frontrunner on the continent.  65 % of the country’s 50 million internet users having at one time or the other shopped online, surpassing the usual contenders – South Africa and Kenya.

Ecomm

Infrastructure and delivery channels will be make or break for up and coming ecommerce players hoping to succeed outside of the urban markets such as Lagos. Of note will be ambitious initiatives like this recently funded startup focused on e-commerce logistics – Africa Courier Express:

Eksin said the startup filled an important gap as logistics in Sub-Saharan Africa is difficult given the lack of infrastructure and poor addressing across the continent.

“These, coupled with the fact that most logistics businesses today need expertise in pay-on-delivery services, and this makes our job quite difficult,” he said.

“Another challenge is the poor road infrastructure we encounter across the markets we operate in. However, the opportunity in Africa is so much larger than the challenges and we are excited to tackle all challenges and help our customers grow and move their goods across the continent.”

All of this seems very exciting, stay tuned as I keep my eye out for more insights on how this will play out in an operating environment (Nigeria’s) where the vast majority of retail is still informal and cash transactions dominate.

M-PESA and the service innovation framework (review)

A former student of mine just mailed me this article “Extracting Key Lessons in Service Innovation” (pdf) by S.Wooder and S. Baker, recently published in the Journal of Product Innovation Management, January 2012 edition. Here is the abstract of the article:

This paper describes how Sagentia—working with Vodafone, Safaricom, and other organizations—played a significant role in the creation and delivery of a landmark mobile money transfer and payment service for emerging markets, starting in Kenya. In this profile we examine the organization aspects and approach that contributed to the success of the service: the lessons we learned as the technology provider and how the experience has informed and strengthened our service innovation processes.

Reading through, what I found most valuable among the basic principles so simply and clearly articulated, was this insightful description of service innovation, as pertaining to the ways that a human centered design innovation team can work to improve the customer experience for any company, large or small:

What Is Service Innovation? Creating and Delivering Value

We are familiar with service innovation examples such as music download, loyalty programs, franchise chains, ticket/check-in kiosks, and online tax returns.

Service innovation can be described as a combination of technology innovation, business model innovation, social-organizational innovation, and demand innovation, with the objective of improving existing services (incremental innovation), creating new value propositions (offerings), or creating new service systems (radical or transformational innovation) (IfM and IBM, 2008). The key components of service innovation can be distilled down to “participative” value delivery; […]

So if the service is considered to be:

• something that may or may not entail physical product delivery or consumption
• a value delivery mechanism that connects the enterprise to the customer
• the combination of a value proposition, a delivery mechanism, and a customer’s experience

Then service innovation is simply innovation applied to one or more of the following areas:

• new concepts and/or value propositions
• new delivery mechanisms and/or business models
• new experiences

[…] Successful service or product innovation encompasses progress from the creative act (the so-called fuzzy front end) to the commercialization act (execution) and beyond that to sustainability and evolution of the innovation. Our simple framework for service innovation is shown in Figure 3

And they share with us the mapping of MPESA on to this service innovation framework.

The authors conclude their informative article with the following words:

Key lessons that were highlighted by our experience with M-PESA include:

• Learning in a detailed sense the needs of users in new markets and ensuring that it is possible to implement these needs and requirements as part of a pilot process;
• “Keeping it simple”; particularly in the early stages of the service, it is important to focus on a small set of compelling, marketable functions and features;
• Ensure that flexibility and agility, the ability to react and to respond to changes in the business model, are designed into the system; and
• For a service to succeed, it requires a critical mass of users as soon as possible; identifying mechanisms to motivate users to take up the service is an important part of the service innovation process.

The results of the study cannot claim to be generally applicable; however, it has allowed the “usefulness” of the conceptual stages in the service innovation framework to be empirically tested in a real-world example, and the vulnerabilities and strengths are better understood as a result.

This post was published previously in December 2011

M-PESA and the service innovation framework (extract)

A former student of mine just mailed me this article “Extracting Key Lessons in Service Innovation” (pdf) by S.Wooder and S. Baker, recently published in the Journal of Product Innovation Management, January 2012 edition. Here is the abstract of the article:

This paper describes how Sagentia—working with Vodafone, Safaricom, and other organizations—played a significant role in the creation and delivery of a landmark mobile money transfer and payment service for emerging markets, starting in Kenya. In this profile we examine the organization aspects and approach that contributed to the success of the service: the lessons we learned as the technology provider and how the experience has informed and strengthened our service innovation processes.

Reading through, what I found most valuable among the basic principles so simply and clearly articulated, was this insightful description of service innovation, as pertaining to the ways that a human centered design innovation team can work to improve the customer experience for any company, large or small:

What Is Service Innovation?  Creating and Delivering Value

We are familiar with service innovation examples such as music download, loyalty programs, franchise chains, ticket/check-in kiosks, and online tax returns.

Service innovation can be described as a combination of technology innovation, business model innovation, social-organizational innovation, and demand innovation, with the objective of improving existing services (incremental innovation), creating new value propositions (offerings), or creating new service systems (radical or transformational innovation) (IfM and IBM, 2008). The key components of service innovation can be distilled down to “participative” value delivery; […]

So if the service is considered to be:

• something that may or may not entail physical product delivery or consumption
• a value delivery mechanism that connects the enterprise to the customer
• the combination of a value proposition, a delivery mechanism, and a customer’s experience

Then service innovation is simply innovation applied to one or more of the following areas:

• new concepts and/or value propositions
• new delivery mechanisms and/or business models
• new experiences

[…] Successful service or product innovation encompasses progress from the creative act (the so-called fuzzy front end) to the commercialization act (execution) and beyond that to sustainability and evolution of the innovation. Our simple framework for service innovation is shown in Figure 3

Service-Innovation-FrameworkAnd finally, they share with us the mapping of MPESA on to this service innovation framework.

mpesa matrix

The authors conclude their informative article with the following words:

Key lessons that were highlighted by our experience with M-PESA include:

• Learning in a detailed sense the needs of users in new markets and ensuring that it is possible to implement these needs and requirements as part of a pilot process;
• “Keeping it simple”; particularly in the early stages of the service, it is important to focus on a small set of compelling, marketable functions and features;
• Ensure that flexibility and agility, the ability to react and to respond to changes in the business model, are designed into the system; and
• For a service to succeed, it requires a critical mass of users as soon as possible; identifying mechanisms to motivate users to take up the service is an important part of the service innovation process.

The results of the study cannot claim to be generally applicable; however, it has allowed the “usefulness” of the conceptual stages in the service innovation framework to be empirically tested in a real-world example, and the vulnerabilities and strengths are better understood as a result.