Original abstract for research project

By | March 13, 2009

Whether its schemes like microfinance, loans to small business owners or even the opportunity to purchase a large consumer durable for the home using micropayments over time, organizations wishing to serve those at the bottom of the pyramid must design effective business models and payment programs that can meet the needs of their customers. The biggest challenge they face is the fact that for the majority at the base of the social and economic pyramid, particularly in developing nations, income streams are irregular and unpredictable, earned from a variety of sources such as market trading, subsistence farming, hawking of foods and sundries or odd jobs on daily wages. Few have a regular if limited income from a permanent job.

From nextbillion.net ,
The "advantage" of Elektra is that it offers its customers the opportunity to buy goods and pay for them over a period of 12 to 24 months in very small weekly payments, sometimes even as low as 50 Mexican pesos per week. On the one hand, it’s great because the people can have access to buying TVs and stereos, even iPods. The problem comes when the obligation of making monthly payments over 2 years becomes too burdensome for the consumer, especially when his/her income does not leave much room for contingency spending. When consumers are unable to make their monthly payments, the item under contract can be confiscated and the consumer loses the amounts already paid.

So while these schemes and programs and products and services are all intended to improve the quality of life or add value to the lives of those at the BoP, the fundamental framework on which the business models, transactions, payment plans and pricing strategies are designed is in direct contradiction to the reality of their income streams.

Informal economies are informal primarily because they have the flexibility to adapt to this challenge. If every transaction is based on paying for it only when you have the funds available then the only system of exchange that supports this pattern (random though it may be) is that of “pay as you go” or prepaid models, for example airtime for mobile phones. Precursors to this success of the prepaid model are already being seen in Kenya (mPesa  or airtime as currency ), GCash  by Globe Telecom (Philippines) or even the informal Sente  in Uganda, whereby for a small fee the village broker acts as a virtual ATM and money transfer station for locals receiving money from their relatives in the city. In South Africa, electricity can be purchased on the ‘pay as you go’ model  in rural areas allowing customers to manage their budget and needs accordingly.

With the exception of prepaid (pay as you go) airtime, most transaction models or payment plans are predicated on small amounts being repaid or deposited on a fixed periodic schedule  – research has already discovered that while the ‘small weekly payments’ might be extremely attractive to the BoP customer – whether for a health insurance scheme or for the purchase of an iPod, if they miss a payment even after having made 18 out of 22 payments for example, they are seen as delinquent and the product repossessed or the insurance policy cancelled.

Its not the amount that must be paid which is the burden to the poor but the inherent conflict between the regularity of the payments against the unpredictability of the incomes.

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