Archive for the ‘Research’ Category

Lessons from the Informal Economy: Managing on Irregular Payments in the Gig Economy

Last week, an unusual report was released in Great Britain. Lloyds Banking Group (LBG), together with the Resolution Foundation, addressed the question of earnings volatility in the UK, a first for a developed country with a formal economy. Their research and analysis made use of anonymised transaction data from over seven million LBG accounts. That is, technically speaking, the financially included in the erstwhile first world.

To their surprise, accustomed as they were to only considering income changes on an annual basis, three-quarters of all workers did not receive the same paycheck from month to month – the problem being most acute for low-paid workers in the gig economy or on zero-hours contracts.

As the Guardian, when reporting on the household financial management behaviour of gig economy workers discovers:

The Resolution Foundation found that for those on the lowest annual incomes, the average monthly fluctuation in pay was £180 – which can make the difference between paying the rent or feeding the family.

As my research over the past decade, on the financial management behaviour of the lower income demographic (also known in older publications as the Bottom or Base of the Pyramid) in the informal and rural economies of developing countries has found, irregular and unpredictable cash flows from a variety of sources is the norm.

What is different here, however, are the coping mechanisms.

Many are forced to turn to crippling payday loans or high-cost credit cards to make it through to the end of the month

In the developed country context such as the UK, gig economy and lower income workers have no recourse to customary and established coping mechanisms that can be seen across the developed world, from rural Philippines to upcountry Kenya.

Seasonality in rural regions, closely intertwined with the natural year and its direct impact on farming activities is a recognized and known fact of life. Incomes are seen to change by as much as 50% between the high and the low seasons. And, among urban traders and merchants, festivals and harvests mean peak consumer activity, and everyone prepares for the rush.

Knowing this, the informal economic ecosystem leverages social networks and trusted relationships to carry them through hard times and the low seasons; looking forward to the peak sales periods and the harvests to cover the difference. Numerous risk mitigation behaviours and coping mechanisms are established within households, customized to rural and urban contexts, as well as the context of the primary income source. These were the same coping mechanisms heard to be in use among India’s informal sector when hit by the liquidity crunch of the demonetization of 2016.

Just the way you can purchase one single cigarette or a 100 grams of shredded cabbage, depending on what you have in your pocket, you can find ways to adapt your daily lifestyle to your income in the flexible, negotiable, and reciprocal people’s economy of the Global South. The informal economy’s commercial operating environment is designed to maintain the dignity of their customer base.

These options are not available in the UK, or other developed and advanced nations of the Global North. Thus, gig economy workers forced to manage on unpredictable and irregular income streams from a variety of sources in the formal economy struggle to afford their groceries and expenses. In fact, I’d be curious to know if prepaid mobile subscribers (pay as you go) are increasing in proportion to the precariousness of employment and volatility of income discovered by the analysts at Lloyds.

If, as the researchers at the Centre for Global Development have found, the gig economy and the informal economy are the present, and the future of work in Africa, then there are lessons from the established customs and coping mechanisms which can inform beneficial solutions and tools for the developed world, for the UK, and for the Global North.

It’s time we recognized the truth about the future of work in Africa: it isn’t in the growth of full-time formal sector jobs. The future of work will be people working multiple gigs with “somewhat formal” entities. This is already true, and it will be for the foreseeable future.

This is true for the whole world now, not just Africa. And, it will change the way we think of platform design, payment plans, as well as policy frameworks, for our near and emerging future.

Financial Patterns at the Last Mile of the Farm to Fork Value Chain

Source: http://library.wur.nl/WebQuery/wurpubs/454661

This value web illustrates the last mile of the farm to fork agricultural value chain in the state of Maharashtra, India. We’d mapped it during our project/s for the Dutch government back in mid 2013, where we’d introduced human centered design thinking for sustainable agricultural value chain development. Subsequently, I led a multidisciplinary team conducting fieldwork in rural Kenya, in order to compare and contrast the last mile in the African context.

As mentioned previously, while the details of seasonality and crops may change due to geography, the essential foundation and framework of the farm’s financial management behaviour remained the same. And, while the actors and roles in the value web may shift and change between rural India and rural Kenya, the essence, here, too, remains the same. There are intermediaries and brokers, transporters and aggregators, and wholesalers and retailers, along with agrovets and extension agents. Everyone has a part to play in the interdependent web of value exchange, based on trusted relationships for the most part.

Therefore, their cash flows and income streams too, are closely linked to the harvest seasons and the crops, just like the farmers‘. In fact, Indian business magazines go as far as to assess the health of each year’s monsoon season in order to attempt forecasts on the annual peak of consumer activity – the post harvest festival season in the October-November period. They recognize the linkages and networks that connect the rural and urban markets, and the ripple effects of the quality of the year’s harvest. It would not be inaccurate to say that the degree of impact and influence is proportional to two related factors – the proportion of GDP from agriculture and related activities; and, the percentage of the country’s population dependent on agriculture and related activities.

Market town finances

In addition to the linkage, we have observed financial management behaviours among traders, and not just those dealing in agricultural commodities or fresh produce, that resemble those on the farm.

The factors that impact the management of working capital and income streams – uncertainty of amount and the timing of its arrival – remain the same, as do the majority of the characteristics of the operating environment, such as infrastructure and systems. A trader dealing in new clothes also sees seasonal differences in her sales, and, unlike a trader in foodstuffs, is also more likely to see greater impact of a low season as people go without the discretionary purchase of a new shirt. Thus, traders must also manage the volatility, uncertainty, and seasonality of their addressable market, and their customer base, and their cash flows and income streams accordingly. We see the impact of this in their business development strategies, and that will be the subject of the next post.

Furthermore, in market towns and border markets, unlike urban metros with a myriad of occupations, the health of the agricultural season will impact everyone in the ecosystem not just the traders themselves. The internetworked last mile of the farm to fork value web closely links the health of the harvests with that of the rural and peri-urban economies.

 

Collected Works
Work in Progress: An Introduction to the Informal Economy’s Commercial Environment – Links to organized series of articles on the topic

Rural Household Financial Management on Irregular Incomes

While all farms are not alike, and scale and variety and geography differs, the pattern of household financial management holds its fundamental logic across continents.

click to expand image

As we saw previously, an experienced farmer tends to fall somewhere in between a salaried employee and an odd job labourer in their ability to predict with any reasonable degree of accuracy when they might expect cash income to arrive and approximately how much. They are able to estimate the quantum of the crop, and when it will be ready to harvest. They may already have buyers or a market.

However, in practice, farmers rarely rely solely on these infrequent lump sums for managing their household finances – a big harvest once or twice a year, maybe three times depending on the crops and the local geography. Instead, they manage on sophisticated portfolio of investments, each maturing over different periods of time, as a way to mitigate risk, as well as smoothen out cash flows over the course of the natural year, and minimize the impact of uncertainty or shock. The drivers for these goals are the foundation for the variety of business practices observed across sectors in the informal economies of the developing world.

You will find even the humblest farmer, as long as he owns the patch of land on which his homestead is built, even if his fields may be further away, doing some or all of a combination of these activities to manage his income stream over the course of the natural year. I will explain the basics, and then give examples from different regions.

Managing A Portfolio of Investments based on “Time and Money”

The illustration above captures our attempt to map the various cash flow patterns from the farmer’s portfolio of investments. Consider each cluster of elements as a “deposit” with varying times of maturity for cashing out, as the need may be. For example, cows give milk which can be sold for almost daily cash returns, as can the eggs from chickens. The fresh produce from the kitchen garden matures far more quickly than staples such as maize or beans. And, if there is a cash crop such as tea or coffee, this may taken an entire year for the harvest to be monetized. At the same time, various farmyard animals are invested into when young, maturing over time for sale, as an emergency cushion or for earmarked expenses such as annual school fees.

Thus, over the course of the year, cash arrives in hand with varying degrees of frequency, and periodicity, thus ensuring the farm’s ability to manage regular household expenditure on a more or less regular basis, even though there are no predictable wages. Nor, is the farmer burdened with credit and debt over the time whilst waiting for her 2 or 3 major harvest seasons.

Variance in regional seasonality influences coping mechanisms

While the foundational framework of the farmstead’s domestic financial managment remains the same, regional differences due to geography, and thus seasonality, influence crop choices, number of harvests, and the details of the coping mechanisms selected by the farmer to manage her financial portfolio.

For instance, in rural Philippines, in the rice growing Visayas islands, only well situated farms benefit from three rain fed rice harvests a year whilst the majority must manage on two. Thus, farmers invest in piglets, calves, or even cull chicks for nurturing into fighting cockerels which sell for more than 10 times the price of a regular chicken. They stock firewood, coconut husk, and supplement their cash money needs through petty retail during the low season.

In rural Malawi, outside of Blantyre, the farmwife who is a member of beekeeper’s cooperative, distills traditional wine for sales 2 to 3 times a week, boosting her cash flow frequency instead of waiting for the annual honey harvest.

Minimizing volatility to enable financial planning

Thus, we can see that even under conditions of uncertainty, farmers have established the means to manage their household expenses, including periodic ones such as school fees or loan repayments, on irregular and unpredictable cash flows from a variety of sources. Their sophisticated portfolio of investments contain “deposits” that mature over varying times, for different amounts, and their planning, thus, goes into ensuring that the volatility between income and outgoing expenses is kept to a minimum.

Next, we will see how less agriculturally dependent sectors of the informal economy base their financial management patterns on the rural economy’s foundation of portfolio management.

 

Collected Works
Work in Progress: An Introduction to the Informal Economy’s Commercial Environment – Links to organized series of articles on the topic

The Informal Industrial Ecosystem: An Introduction to REculture

The Art of Seeing Beauty in Garbage, Kenya, September 2010

This article introduces and explains some things I’ve been seeing in the informal industrial ecosystem in the developing world context for almost a decade now. First noticed in 2009, I then named it REculture, a neologism to capture the vast and complex ecosystem I saw in the revenue generating facility of recycle, replace, repurpose, reuse and resale. Given contemporary interest in developed country concepts such as the circular economy, and other sustainable and ecological initiatives, I thought it timely to sit down and attempt to synthesize the past work before proceeding to write more on current events.

What is REculture?

I thought I’d start from the beginning – is there, for example, a difference between “the entrepreneur” and “the producer”, “the creator” and “the innovator”, if at all? And if none, then perhaps start to fill in some few blanks based on our earlier thinking on the BoP “consumer” and their mindset, worldview or value system.~ June 2009

In July 2009, I was inspired by my observation of a man sitting under a tree in the administrative district of New Delhi with a visibly large bag of buttons by his side. His service, to the civil servants rushing to and fro from important governmental meetings, was to quickly repair a missing button from their suit jacket or shirt. Not unlike a shoeshine boy, this gentleman’s service was on demand, while you waited, his fingers flying rapidly with the needle as he sewed a reasonable facsimile of your missing button back on for you.

Look at the unusual yet welcome niche he had found for himself! A repair service that could only work in this part of the city where the common uniform was a suit and tie and important visitors the norm.

Once he opened my eyes to what it was I was seeing on the streets – the entrepreneurial opportunities squeezed out of the margins of daily life – I began noticing such services more and more. Repair, re-use, re-purposing, resale, and, in their own inimitable way, recycling of used up or abandoned products of industrialization were turning out to provide a significant chunk of the revenue streams of many of the informal sector’s service providers who now became visible to me.

In June 2009, I wrote:

…many other such observations got me thinking about the whole RE culture among the BoP. Stepping back, if you take the broad space of REuse, REpurpose, REpair and REcycle – its the low hanging fruit for the BoP entrepreneur’s opportunities for income generation. In fact, REpair is an entire professional service area in its own right, perhaps a subset of the opportunity space in the informal economy with varying degrees of skill and ability required.

But coming back to the other three, it seems at first glance that they look to be more or less the same thing i.e. how different is it to reuse a plastic bottle to contain some liquid from recyling it? particularly if the manufacturer had intended for it to be a disposable container? Yet, from the big picture perspective, one can say (and it has been said before) the whole concept of recycling is a cost in the OECD world whereas its actually a source of income, in a myriad ways, among the BoP.

The second thing that struck me, when I pondered these signs of a post-consumption economic ecosystem, was that the actors in the informal sector – whom we now discuss as traders, fabricators, service providers – were still then thought of as the “Bottom of the Pyramid” or the BoP – the economically vulnerable, the marginalized, the low income barely making ends meet on a dollar or two a day. There was no attempt at segmentation, this was the lumpen mass of the next 4 billion. Even though the late CK Prahalad had called them out as micro-producers, creators, and innovators, in his seminal book The Fortune at the Bottom of the Pyramid, those who had grabbed the label with both hands and run with it were still thinking in terms of consumption. “How do we make products profitably for the poor?”

What about the creators, the makers, the innovators, and the producers in the informal economic ecosystem?

Again, back in June 2009, I wrote:

I am attempting to evaluate whether all our previous observations and learnings viz., “Life is hard” (the mindset and values of a customer at the BoP particularly one living on an irregular income) can help us begin to understand the other side of the coin, that is, the “innovator” or “creator/maker” or simply, the “informal business owner or service provider” at the BoP.

At this point at least, it seems to me, that rather than quibble about each individual word choice to describe “who” or “what” they are, perhaps we’re better off looking at the “why” and “how” – by this I mean, that the driver of motivation is to generate an income stream (the why) and the gaps observed, as mentioned above, are the opportunity spaces (the how). That is, the BoP seem to display more of a tendency towards ‘opportunity spotting’ (not quite the same as the word opportunists, though that may also apply in many cases or situations), filling the niche quickly with a service or product. Some of these services have arisen spontaneously around the developing world, mobile phone repair comes to top of mind.

It feels as though its a far more active than passive quality – poverty and hardship can be a powerful motivational driver in itself, though we tend to overlook the ingenuity and creativity involved.

That is, back then, just over 9 years ago, I connected the dots I was seeing in this space – the mindset and values of the low income customers and their post consumption behaviours, taken together with the “RE” space where visibly they were earning income – and framed it so:

That is, the lower income market tends towards maintenance and extending the lifespan of the products (through repair or repurposing it) they purchase rather than disposing it for convenience or replacing it for a trendier style. All very obvious, you say, but its this very same quality that leads to the wide variety of opportunities for the entreprenuerial or the innovative to make some money (or even a living). From the very basic, in terms of skills and ability such as the button repair guy to the complex, such as the mobile phone hacker, all of these services meet an ‘unmet need’ in the market, an opportunity gap which they can fill.

However, what’s interesting about this is the fact that these opportunities would very rarely be either a) spotted as one in mainstream consumer culture; b) not be a gap per se due to a difference in mindset/worldview OR even c) not be profitable enough, given the comparative cost of labour vs the price of the product involved. These conditions for making money, and more so, making money that is deemed a valid ROI seem only to be available among the lower income demographic and in the developing world.

For the precondition to their success is also a sufficient customer base seeking such a service and their willingness to pay for it,  and that, imho, emerges from their mindset as BoP consumers, one quality of which is their need to Maximise the return on their investment (purchase). This shows up in this context as a wish to REpair, REuse, REsell (for REpurpose or REcycling or whatever along those lines) – I doubt if they’ve stopped coming by from door to door among the ‘consuming classes’ in India to buy old bottles, newspapers and other sundry junk. (A sign of development if it stops?)

Once I could “see” the entire post consumption entrepreneurial activity in the informal sector, I went back to my research documentation conducted in rural Philippines and India for the original ‘prepaid’ economy work, and pulled out the patterns seen in the photographs that, when fitted together, showed all the evidence of an entire industrial ecosystem. As a working title for this seemingly vast economic space within the informal economy across Asia and Africa, I had called it REculture – the group blog went on spawn a magazine.

An entire industrial ecosystem within the informal economy based on the discards of the consumer lifestyle

A discarded Kraft cream cheese bottle would be picked out of the garbage by a waste picker and sold to an intermediary who would clean and sort these by colour and size and sell them on to a fabricator, who in turn, would convert these into affordable – and handmade mass produced – kerosene lamps, completed with spot welded wick tube.

An entire industrial life cycle from “raw material” through to “mass production” supported by distribution and retail. The only difference? The informal nature of the entire value chain and the post consumption adaptation of the materials and discards.

My concluding thoughts at the stage in which I’d left my explorations almost a decade ago can be summed up thus:

So, at this point, early stages of exploration though it is, one could say that the whole area of “post consumption” consumer practices – most of which have withered away like the appendix in the ‘rich’ world – forms one major  basis for both products and services, with value addition to varying degrees, in the ‘informal economies’ of the developing world.

There are insights to be teased out here on flexible, adaptable, ‘on demand’ business models ~ but applied outside the virtual world. Scarcity of resources and circumstance force lean overheads and inventory. Constraints of demand and customer purchasing power create their own flows in the chaos. Is there a pattern to the flow of the informal after all?

What next?

I summed up this history so as to provide me with the foundation and backdrop to pick up the threads of this conversation, now with the added insights of the past decade, and the increasingly sophisticated frameworks of framing the informal economy as a commercial environment in its own right, populated with entrepreneurs and niches that the mainstream overlooks.

As the topics of sustainability, resource conservation, and the circular economy become top of mind and critical, the early lessons from the developing world will only become more important going forward. I’ll be writing more under the category and tag “REculture” for old times’ sake.

What can we learn from an informal market?

Documenting Busia Market, Kenya, January 2016 (Photo Credit: Niti Bhan)

I took this photo of Rinku taking photographs during our visit to Busia’s bustling cross border market as a means to document our own work documenting the borderland’s informal trade ecosystem. Sometimes we’re so immersed in our work that we forget to look up and recognize we’re participants too. Document everything, I tell people interested in the how and what of our work, you never know what will be important to capture until later in your analysis, usually when its too late to go back to the field for another look.

So, what can we learn from a visit to an informal market?

The subtext to that question would be “when using human centered design approach to observation and analysis as compared to a regular market visit”?

We’re looking for opportunities. We’re keeping an eye out for what might be missing, a gap or an unmet need. We’re watching closely, often sitting down for a while, or chatting up shopkeepers as often as the fancy strikes us. Its not just window shopping or wandering around aimlessly with a camera. Its entering the market place with a clear focus on learning how it works – what’s the organization of the layout? why are the all these products clustered over there? what is the underlying rhythm of the seeming chaos?

One visit won’t do if you’re looking for opportunities for innovating new products or services for one or more target segments of the market’s population. You might want to make a first recce to get a sense of the whole, and then come back to drill down further into a particular thematic area – is it the delivery men you’re interested in, or the logistics of egg transportation? Or, is it the fresh produce section where you’ve noticed greens wilting in the sun and think you have an idea for a cold chain solution – what would be its business model in this context?

Already, the ideas flow just from thinking about the market. Don’t let the chaos distract you from keenly discerning the system and the structure. That’s where the secret lies.

Ecodesign, Ecolabels and the Environment: How Europe is redesigning our footprint on earth

What do chopped fresh green beans have in common with high definition flat screen TV’s? And how does this relate to design? In Europe, they’re both considered consumer products whose journey from raw material to shopwindow requires energy to process—emitting greenhouse gases that can have an adverse impact on the environment—and are considered to possess a ‘carbon footprint.’ In other words, they are products of a larger global industrial ecosystem.

When the postal service is setting down guidelines on the creativity and production of direct mailers so that their customers can better recycle them, it signals that graphic design needs to evolve the way its practiced entirely.

 

Acronyms and Initiatives
The European Union’s chosen approach to address the issue of environmental degradation and climate change is a combination of regulations, directives and voluntary activities. Industrial designers and engineers around the world are familiar with many of many of these already in effect—the EU Directive on the Restriction of Hazardous Substances (RoHS) and the EU Directive on the Waste from Electrical & Electronic Equipment (WEEE) are top of mind in the field of consumer electronics and other energy consuming products (EUPs)—the first sector to be addressed by these rules.

Just ratified is the new European law on chemicals, REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals), which covers the toxicity and hazards of chemical substances, touching the nascent field of green chemistry. Also to be enforced is the EU Directive on the Ecodesign of EUPs – this will directly regulate the negative contribution to the environment across the entire lifecycle of the product, not just the use phase.

Supporting activities include the Ecolabel—a voluntary certification for a wider range of products beyond those that merely consume energy during their use—helping consumers identify products that have considered all aspects of environmental impact toward minimum ecological footprint, compared to other products in the same category. This includes the chopped green beans, as their total carbon footprint assessed across the supply chain would take into account the energy expended to grow them, process them, package them and deliver them to the neighbourhood supermarket.

All of these and more come under the holistic approach of the Integrated Product Policy (IPP), which can be considered the foundation for such decision-making and the design of the various directives, programs and certifications. The IPP is a systemic look at the environmental impact of the entire supply chain and life cycle of any given product, taking all aspects of the global industrial ecosystem into account: raw materials, manufacture, transportation, distribution, marketing, sales, delivery and waste treatment at the end of life.

 

The Power of Design
While design has been picking up speed in addressing issues of sustainable development, a quick purview of the larger ecosystem helps in understanding the long-term consequences of the decisions made in the studio. It is recognized that a significant proportion (ranging from 70% to 90%) of any given product’s ecological footprint can be addressed at the design stage. But the considerations mentioned above take into account factors all along the product chain that can directly or indirectly contribute to environmental degradation; decisions made at the design stage now become crucial in ensuring the best outcome throughout the entire system.

Carbon Trust UK‘s simplified diagram of the lifecycle of a typical can of cola, for example, enables us to visualize and correlate the relationship between product design choices and energy consumption at every stage of the supply chain.

Read On…

Goal Directed Research for Innovation Planning in Emerging Markets

What differentiates the research conducted to inform the design of an innovative product or service, in an untapped market? Michael Kimani asked me this question during a recent Skype conversation and I promised to write out the answer.

  • Goal directed research for innovation planning seeks to discover opportunities for new products and services for a particular market or population segment.
  • This means the scope must be broad enough to gather evidence of a market opportunity, customer needs and willingness to pay, as well as identify the constraints and barriers in both the environment (such as infrastructure) and the target population.
  • Looking for evidence of a viable value proposition and/or a business model is what distinguishes this type of early stage research from traditional product and service design research whose goals are to discover the optimal design solution for a particular task and target audience.
  • Unlike academic research, there may not always be a hypothesis to be validated at inception, nor the outcome pure knowledge.
  • Instead, there is a goal driving the design of the research, whether broad focused and exploratory, or narrow focused and specific.
  • This initiating goal can be set at three levels:
    • Sector specific
      • An example of sector specific goal setting would be to explore the potential for financial products and services for a bank. Alternately, this can be framed as identifying opportunities for innovation in financial services.
    • Demographic specific
      • A startup with a product or service under development may want to discover which segments of the target population should be prioritized for their product testing and launch. Alternately, a consumer products manufacturer might want to explore wholly new markets and the customization required for their product range.
    • Outcome specific
      • A popular outcome specific research framing that is sector and population agnostic is “What are the barriers to adoption for our intended innovation among this target audience?” We have conducted such research for a wide range of objectives, from the introduction of sustainable agricultural techniques among farmers in rural East Africa, to insights driving product development for a fintech startup.

The challenge in untapped markets is a dearth of legacy data and consumer insights, hence the need for more discovery driven exploration upfront prior to drilling down to specific research focus areas. In the forthcoming post, I will share our customization of Vijay Kumar’s innovation planning methodology developed over the past few years in situ during projects in East Africa. Note that subsequent research to inform the specific concept design of a product or service will have more of an indepth focus on the target demographic and their particular context.

How informal financial services can lower the barriers to formal financial inclusion

Around 2 and a half years ago, I was on a short visit to Abidjan, the capital of Cote D’Ivoire as a guest of the African Development Bank. They were holding an innovation weekend for young women and men in the Francophone West African region who were interested in becoming entrepreneurs.

David O. Capo Chichi, who used to work back then for MTN, a major telco very kindly took me around the informal markets on his day off and we got to talking to market women about their financial management habits. One interesting behaviour linking the informal with the formal came to light.

An established spice seller told us she had a savings account at the bank, but accessing the bank’s services were a huge barrier – the opening times ate into her business hours and the long wait times meant loss of income from potential customers. At the same time, because she was dependent on cash income from daily sales, it was more convenient for her to put a portion of money aside on a daily basis. So what she was doing was paying a tontine collector for the service of showing up at her shop everyday and collecting her small amount of cash set aside for savings. He would hold it safely for her for a month and then she would take the total saved up amount back from him, take the day off work and go deposit it in her bank account. That was the only way she could have the flexibility and negotiability that budgeting on her irregular cash flow required and still access the benefits of a secure safe interest earning savings account at the bank.

Now today I came across this article describing a pilot program in Benin where the private susu (small small) or tontinier, such as that used by the lady in Cote D’Ivoire, have been formalized into a more secure and insured service for the same demographic of informal market women and traders. There’s even a digital component that updates the accounts via the mobile phone.

“The reality is that we can’t be everywhere, and the Susu collectors are near the population. We have to work with them and find the best business model to get them into the formal system.”

Now, this exact same model being piloted by the MFI in Benin may not apply in exactly the same way elsewhere, depending on the conditions prevalent in the operating environment, but its clear that the structures and systems in place at the formal institution can be made more flexible and negotiable – given a “human face” – by working together with the pre-existing informal financial services already in operation.

This behaviour also resembles that seen among the informal cross border traders at the Uganda/Kenya borderland. Teresia who sells clothes under a tree has established a trusted relationship with her mobile money agent. He shows up at closing time to help her transfer her cash into mPesa, thus securing it for her and saving her both time and effort through this personalized service. Though she said she had an account at the bank, it lies dormant, for the same reasons given by the spice seller in Abidjan – “Who can afford to close shop during the day to spend hours at the bank?”

Innovations aimed at increasing inclusion for financial services need not always contain a digital component for them to make a difference for the customer, and lower the barriers to adoption and usage. All it takes is a deeper understanding of the challenges and constraints of the end user in the context of their day to day life.

Context Sensitive Law: What happens when African societal norms meet modern commercial practice?

In short, social forces shape contracts: the stronger the sense of community, the more effective these sanctions are likely to be. The result: A privately ordered system of business behaviour, which exists without reference to the governing law of the state. The underlying adhesive: community.

In the absence of conventional forms of collateral, my contract partner’s knowledge of my financial standing and habits will serve as a guarantor of payment.

While trust may not always be present, and altruistically putting another’s needs before one’s own may be difficult when money is tight and economic needs press, a moderate sense of community does indeed characterise contracting in this setting. This leaves room for private property and individual financial goals, but ensures that one prioritises communal relations when making economic decisions.

This snippet from a short article by Andrew Hutchison and Nkanyiso Sibanda validates our own discoveries from observing the informal trade ecosystem in East Africa. Hutchison and Sibanda’s aim is to  inform the policy question as to whether South Africa needs to develop a dedicated indigenous law of contract. Their research set about moving the study of contracting from the centralised law of the state into the context of what happens in the popular economy – the space where the informal and formal sectors meet.

This is a powerful space for policy and law. Few formal institutions have successfully bridged this space between the formal and informal – my usual go to example are the mobile service providers and their prepaid purchase model as one that fits the needs of the informal context.

Sibanda and Hutchison go on to share some thoughts on their future direction:

We have described these informal rules and regulations as adhering to the concept of ubuntu. Retired Constitutional Court judge, Yvonne Mokgoro, defines ubuntu using the African saying:

a human being is a human being through other human beings.

This means that a person’s individual existence and welfare are relative to that of her community.

Context sensitive law

How are we then to define ubuntu in a given contractual setting in South Africa? “With reference to context,” is our answer. The notion of community described above requires a certain type of social environment. We think that this environment is to be found in South Africa’s popular economy and the relevant empirical literature supports this view. But what about high value contracts between South Africa’s blue chip companies?

We believe that contract law should be context sensitive. This should include which business community’s norms are used in determining the outcome of a given commercial dispute. This is not to say that corporates aren’t African, but rather that the value of community may be different. And even in the informal sector, contracts must be honoured. Under the South African Constitution, common and customary law are presently separate parallel branches. Our research will inform future arguments about how these two branches may influence each other.

I hope they will inspire lawyers and researchers in other African countries to begin looking at the same challenges in their own operating environment. Inspiring policy thinking about customary law in the context of community and business would go a long way to paving the path for an African version of the formal institutions required for a developed economy.

Why does the prepaid model work so well and what are the lessons for business model innovation?

Increasingly, employment is becoming ad hoc and flexible. The gig economy and the informal sector share a common characteristic of incomes which are irregular and unpredictable, unlike the timely wages characteristic of formal employment. Both budgeting and planning thus become a challenge when there’s no predictable paycheck to rely on. Expenses are managed against cash flows to minimize volatility, and payments with calender deadlines become a challenge in planning.

It is in this scenario that the prepaid or pay as you go model works so well for the customer, one of the reasons why its ubiquity across the developing world drives the growth of mobile phones. It puts control over timing and amount of money spent in the hands of the user, allowing them juggle voice and data purchases against available cash in hand.

Here are the lessons for business model innovation applicable for a plethora of products and services, drawn from our decade of research into the financial frameworks underlying the operating environment characterized by unpredictability and volatility, and the success of the prepaid model.

Flexibility

The prepaid model is flexible. There is no rigid requirement on the amount that can be spent, beyond the voucher values of each telcom operator, nor are there periodic calender based deadlines such as those in a monthly bill. In Nigeria, traders have been found to top up their phones multiple times a week or even the same day, yet purchasing the smallest denomination of vouchers. High frequency of small amounts is a purchasing pattern that resembles their own cash flow while trading in the informal market. They don’t want to tie up their liquidity in airtime in case cash on hand is required for business, yet their trade is clearly dependent on mobile communication hence the frequent recharges.

This flexibility built into the business model clearly puts control over timing and amounts spent in the hands of the end-user who must manage a volatile cash flow situation.

Seasonality

In addition to the daily or weekly fluctuations in cash flow experienced by gig economy workers or those active in the developing country informal sectors, there are larger variations in income level over the course of the natural year. Unlike the regularity of a monthly salary, irregular incomes rise during peak seasons, such as festivals and holidays, and plunge during low seasons. Developing country economies are more closely linked to the seasonality of agriculture, given the greater proportion of the population’s dependence on farming. Incomes can vary as much as 300% for instance, for tea farmers in western Kenya’s Kisii region. Climatic effects also have greater impact on cash flows, and the current drought in East Africa is expected to depress livestock prices in the coming half year. On the upside, seasonal peaks in consumer durable sales are predictable as the regional harvest timings are a known factor. North India’s post harvest season in late October/November kickstarts an orgy of consumer spending during the festivals and the weddings which take place during this period.

Business models designed to take expected seasonal changes into account can minimize the dropout rate of customers when their income changes.

Liquidity

One of the biggest challenges we have wrapping our heads around when considering more rural or cash intensive economies is that liquidity is not equivalent to wealth, or even purchasing power. While this factor can apply to anyone relying on multiple income streams from a variety of sources, I’ll use the example of a small farmer to explain its importance to the design of business models.

The homestead is managed like an investment portfolio, with different sources of income maturing over different durations of time over the course of the natural year. This is also why control over Timing – frequency, periodicity – of payments, such as possible in the prepaid model, is so critical for the success of payment plans. A smartphone might be purchased after the major harvest of the annual cash crop, but its the daily cash from the sale of milk that would be used for recharges (and other basic necessities). Similarly, a calf may be purchased to fatten against the following year’s school fees.

Negotiability

This leads directly to a factor more relevant to heavily informal economies where variance in systems and structures means transactions are more human centered, depending on face to face communication, trusted references, and mutual compacts rather than legal contracts to enforce agreements. Negotiability of your business model, and its close relation, reciprocity – “the give and take” – is an element missing from faceless institutions that seek to serve this demographic.

This is one reason many prefer to seek solutions outside of formal banking institutions, for example, as their opening hours might not suit the trader’s business hours. In Busia, Uganda, most women traders had established trusted relationships with a mobile money agent, many of whom would show up at the end of the work day to assist the trader in transferring the cash earning safely onto the digital wallet. And, unlike the bank, the telco’s prepaid model allows customers to “negotiate” when and how much they’ll pay within the constraints of far more flexible terms and conditions than most other models.

A farmer has “purchased” this solar panel after coming to an agreement with the shopkeeper. He will pay off the total, over time, as and when he has spare cash, and collect the panel when payment is complete. There is no interest charge. The shopkeeper has put the farmer’s name on the panel but will keep hold of the item.

The greater the span of control over timing and amounts, the greater the success of the payment plan

The prepaid model bridges the critical gap between the predictable formal structures of the large institution and the dynamic challenges of the informal. The bottomline is that the flexibility, negotiability, and reciprocity of the model are more important factors for its success than the conventional understanding of permitting micropayments in advance. Numerous consumer product marketers entering emerging markets experienced this challenge when their micropayment hire purchase models failed customers who might have to miss one or two week’s payments due to illness or other emergencies – their products were repossessed without any recourse to adjustment. Its the rigid calender schedule embedded in a payment plan that is often the barrier to a high ticket purchase than the actual price itself.

None of these factors are insurmountable with today’s technology, and the field for business model innovation for irregular income streams such as those in the gig economy or the informal sector is still wide open for disruption.