5 Sources of Untapped Innovation in Digital Finance
Digital payments have grown exponentially around the world. The GSMA estimates there are more than 60 million active mobile money accounts in more than 84 countries, and these figures continue to grow. So far, growth has been driven primarily by payments – 90% of transactions are either airtime purchases or person-to-person money transfers.
The GSMA also notes that in markets where digital payments have gained scale, financial service providers are beginning to migrate the delivery of services through these “digital rails,” furthering the notion of payments as a stepping stone into broader financial inclusion. There is some logic to this. CGAP estimates that the cost of crediting a mobile money account with cash or deducting cash from it (cash-in/cash-out transactions) through a large-scale network of cash points can be in the range of USD $0.10 – sufficiently low to enhance businesses like microfinance and microinsurance, where frequent collection of small cash amounts poses a significant barrier to reaching poor and rural customers.
Photo: Gates Foundation/Flickr
Digital channels, however, have broader attributes that open a larger space for innovation in digital finance. Innovators, often in developed markets, are separately piloting powerful new value propositions for customers building on digital channel attributes. Many of these solutions do not target the poor, but the implications can be easily extrapolated to poor and low-income customers. Taken together, they signal a new class of products that tie more meaningfully to people’s lives. More importantly, they can rapidly scale because their delivery model is entirely virtual. These “second generation” products build their value proposition on any one or more of the following attributes:
1. The digital data trail from the use of transactional services helps providers infer an individual’s cash flows, assess credit risk, and tailor product characteristics according to needs. Cell phone call records, airtime purchases and other transactional behavior provide an indication of an individual’s income patterns, with sufficient confidence to make small and very short-term unsecured loans. One example of this is M-Shwari in Kenya, a product offered by Commercial Bank of Africa to M-PESA users. It has reached more than 2.5 million customers in a little less than two years, offering small unsecured loans averaging USD$15 each for liquidity management, with an overall portfolio default rate of 3.5%.
2. Real-time customer interactions help providers stay close to customers at all times, and deliver useful information at the moment it is needed. Wise, timely and useful advice can increase a customer’s confidence and trust in the provider. It can also influence how people behave, helping them more effectively manage commitments. Juntos Finanzas, a startup in Silicon Valley, has demonstrated the impact of an automated messaging algorithm that creates personalized dialogues with customers to keep them engaged in savings. In a recent pilot, they showed how these automated dialogues doubled the intensity at which savers saved (average balance increased by 74% as opposed to 37% in the control group). They report that customers engaged actively in dialogue with the Juntos voice with such closeness and trust that 36% of customers sent their platform a “merry Christmas” message during the holidays.
3. Smart and customized user interfaces help customers better understand products and make smarter choices. RevolutionCredit is a California startup that is demonstrating how bite-sized, “gamified,” financial education videos offered at the point of transaction improve how individuals use their credit cards. Customers who choose to watch a series of 1-minute videos and pass corresponding tests prove to better use their loans. In a recent pilot, loan delinquency rates decreased from 12% to 9%. In another pilot, usage of a revolving credit line increased 20% while average balances slightly decreased. One can easily speculate about other cases where a visually compelling interface can influence an individual’s behavior and choices. For example, customers who see their credit score change in real time as they make “good” or “poor” financial choices may behave differently than if they didn’t see such tangible implications of their behavior. The startup Moven is experimenting with applications that provide users a comprehensive view of their finances to improve decision-making. Mint provides advice based on transactional patterns. Cash Tank is an app by Westpac bank in New Zealand that helps users keep an instant eye on their cash to better control spending.
4. Location intelligence can help infer the context of an individual’s specific financial transaction, which can improve usability and reduce certain costs. For instance, Digital Retail Apps offers the multi-retailer SelfPay app that automatically tailors its interface based on where the customer is shopping. Users check out faster since they don’t have to enter a code for the payment recipient. In South Africa, a mobile payments provider is piloting the use of location data as a low-cost mechanism to validate self-reported addresses. By looking at a cellphone’s nightly location patterns, it can be possible to validate with high degree of confidence if the provided address is correct. Other application examples are Zumigo and XYverify, which provide real-time transaction authentication based on location data.
5. Peer-to-peer connections through voice, text, and shared apps can strengthen the management of financial networks, since social and financial networks often involve the same individuals. Studies show that individuals manage multiple concurrent financial instruments (both assets and liabilities), and often these involve friends, family or people they do business with. Chamapro is a beta app that helps circles of friends manage savings and lending within clubs, while M-Changa helps users crowdsource funding for specific needs.
All of the examples mentioned above are centered on mobile. Most are in some sort of test phase, and evidence of business model viability is still far away. A few are beginning to deliver robust proof points that indicate potential for impact. In all cases, there’s a fundamentally game-changing proposition that can bring high impact innovations to market. We can only speculate about what can happen, but good signals are hard to ignore. And these definitely seem like good signals.
If you know of, or manage, a digital financial service or product with any of these attributes, we want to hear from you. Please tell us about your product in our survey and you could be randomly selected to receive 2 tickets to the 2015 GSMA World Congress.
Xavier, this is an interesting article and it's good to see how many products are building on the rails of mobile money. Is there more information on the $0.10 figure that you quote from CGAP in the beginning of this article?
This is a rough estimation based on work we've done in the past on branchless banking. Something worth noting is the difference between cost and price - payments providers who achieve large scale and adoption (hence lower tx costs) may adopt different strategies to price access to the channel.