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The Great Financial Inclusion Juggling Act

The sheer magnitude of the financial inclusion gap –70% of households in developing countries are unbanked— calls for pretty radical solutions. We need to overcome an access barrier (last mile infrastructure), a relevance barrier (right-sized products and services) and a usability barrier (friendly and intuitive customer experience). The problem is that we tend to think of these separately, or at least we think we can tackle them sequentially.

The emerging standard view of branchless banking is that mobile phones, in combination with retail shops acting as cash in/out points, could provide “transactional rails;” once those are in place, we can then devise the right products to ride on those rails. I may have played some role in propagating this kind of language, but it’s now clear to me that this logic ties us up in knots. Without the necessary range of products, we can’t ensure sufficient usage of the rails, which undermines the case for the necessary infrastructure and marketing investments. But it’s not clear how you get new-to-banking people to understand and use such a variety of financial services on a simple mobile phone (or, much worse, on a card). Moreover, the rails part sounds telco-ish while the products part sounds bank-ish, and it’s not clear how you can “phase them in” as their role becomes more or less critical in that rails-then-products journey.

Perhaps we need to start our thinking at the other end. What we need is a single mobile-enabled customizable experience that puts customers’ goals and needs as the basis for the interactions between the bank and its customers. The key driver for this experience will be less the underlying financial products that fulfill the service and more the user interface and customer information managements systems that guide the interactions. Telcos and banks will certainly play a role, but perhaps what we really need is a third party playing an Amazon-like role: managing customer insight, presenting relevant offers, and organizing the delivery chain behind them.

We do not yet know what shape these solutions might eventually take, but we can guess at some of the constituent elements of the solutions by looking at what has been successful in a number of related sectors. Below I ascribe two success factors or lessons to each of microfinance, informal finance, mobile money, mobile telephony and the internet.

Microfinance success stories are many and diverse, but two common factors stand out across all of them. The first is the value of proximity: they all found ways to get physically close to the customers they wanted to serve. The second is simplicity: they focused on streamlining the product set and standardizing features.

There are now high hopes for mobile money as a new platform for financial inclusion, following M-PESA’s success in Kenya. One lesson is the importance of cultivating the edge of the electronic payment network: make conversion in and out of cash easy and reliable. The other major lesson is that profitability in financial services need not come from credit alone: there is substantial willingness to pay for some types of payments which are costly or inconvenient for people to do today.

The rampant growth of mobile telephony even in the poorest countries has shown us the power of two additional drivers of demand. The first one is the immediacy of the service, which is inherent in the technology: being able to communicate here and now, on demand. The second one, slashing price barriers, came with the shift to prepay: introducing tiny top-up amounts (as low as 20¢) and eliminating fixed fees and usage commitments.

From the internet, we have learned about two new key sources of value enabled by digitization of services. The first one is the packaging of individual offerings into a fuller, friendlier, customizable customer experience. The second one is the customer information that can be gleaned from their transactions or interactions with the service, which can be used in turn to tailor products and further optimize the customer experience.

The informal money management practices that people use in their daily lives have two characteristics that set them apart from what banks normally conceive. First, they blur the boundaries between savings, credit and insurance (think of savings-led groups or lending money among friends). Second, they use a range of discipline devices beyond sheer time commitments (fragmentation by purpose, indivisibility of savings vehicle, peer pressure and assigning social/family value).

Let’s now connect all the bolded keywords: to crack the financial inclusion problem all we need to do is to: design a customer experience which (i) combines features of savings, credit and insurance and a offers a variety of self-discipline tools, (ii) is manageable by the customer within a simple-to-use, logically consistent framework, (iii) is delivered as and when people need it in any amount they need, and (iv) has convenient local liquidity options.

I do think this has ‘mobile phones’ written all over it. Colin Mayer of the Saïd Business School at the University of Oxford and I have been thinking about how that customer experience might be framed. We are thinking about a single customer experience encompassing payments and savings, where the only difference between these two is that payments are money transfers between people arrayed in space and savings are money transfers to oneself arrayed in time. You could implement a full scheme of commitment savings accounts on a mobile money scheme by adding a single, optional field to the standard money transfer menu: a value date (i.e., a date of effectiveness) for the transactions. Observe how regularly people set and meet these commitments and you have rich information for credit scoring.

I look forward to the day when the main challenges lie not in infrastructure but in user interface and customer database design. 

Comments

24 August 2012 Submitted by Stanley (not verified)

Your article is very interesting and quite on point. I will be reading your paper(savings as foward payments..) later so I hope my comments have not already been addressed.
First I note that there is no discussion of how the proximity was achieved especially for mobile platforms and the associated costs/incentives to achieve this critical proximity. I believe this is critical to anyone setting up in new regions, i.e. no mobile coverage. (This would also apply to non mobile schemes – public education on schemes by any means)
Second is that, from my experience with mobile money and with different informal groups, it appears that people who us mobile money already have the need to transfer or recieve money.Thus targeting a new group who are not already using the mobile platform would require a further incentive for them to accept to adapt. (E.g. their informal microfinance group joins a microfinance bank in order to access credit and have to use mobile money to complete all transactions e.g Faulu Kenya).
Without digressing, it is worth noting that the factors surrounding the success and reach of a mobile money or agency platform are crucial especially the platform providers having sufficient financial incentive to spend money ensuring adequate reach to the unbanked. It is also useful to look at social networks and understand how information on various microfinance schemes are learnt without the aid of agencies and microfinance companies – as seems to the the major factor (at least) in Kenya.

24 August 2012 Submitted by Dr V.Rengarajan (not verified)

Dear Ignacio Mas,
Great Interesting journey through the ‘Transactional rails’!! . It no doubt facilitates the journey for financial inclusion for all including rural, unbanked, under served and ‘also’ the poor. It is a boon to them as far as financial services such as savings, and other payments are concerned in terms of low cost, and low risk .
However under micro finance platform a few moot points
1. Does the journey through branchless mode reach the poor in general and the poorest in particular intentionally or incidentally or accidently after any derailment in the journey? In the commercial market world, would it be difficult for this kind of journey to reach bottom pyramid? Are there any unique barriers for them? In that case won’t it lead to tech divide and widening inequity gap?
2. Is the journey complete with just reaching the people in the case of credit? Unlike savings and other services, the journey is to continue in the filed level as functioning process of the credit is to take place productively for income generation purposes in a given potential and then make return journey thro the same Track for making repayment . Here if the branchless mode helps more flow of credit money only to the poor segment without any supporting services for productive functioning of credit , then the journey is not safe and dangerous too due to overcrowding and over heating effect. (lessons from the recent MF crisis)
All these queries are not necessarily addressed against the use of mobile mode but the concern is that it should not become ‘ end’ in itself in the process of poverty cure through microfinance with equity. Besides proximity and simplicity some more ‘compatibility’ in the infrastructure may be needed. In the same semantics, isn’t perhaps necessary for laying T.rails for further extension of e-track to reach and accommodate the bottom pyramid passengers also with all needed complementary goods for getting the benefit of journey equally.
Thank you for sharing my views. Wish you a happy new year 2012
Dr Rengarajan

24 August 2012 Submitted by Dr V.Rengarajan (not verified)

Dear Ignacio Mas,
Great Interesting journey through the ‘Transactional rails’!! . It no doubt facilitates the journey for financial inclusion for all including rural, unbanked, under served and ‘also’ the poor. It is a boon to them as far as financial services such as savings, and other payments are concerned in terms of low cost, and low risk .
However under micro finance platform a few moot points
1. Does the journey through branchless mode reach the poor in general and the poorest in particular intentionally or incidentally or accidently after any derailment in the journey? In the commercial market world, would it be difficult for this kind of journey to reach bottom pyramid? Are there any unique barriers for them? In that case won’t it lead to tech divide and widening inequity gap?
2. Is the journey complete with just reaching the people in the case of credit? Unlike savings and other services, the journey is to continue in the filed level as functioning process of the credit is to take place productively for income generation purposes in a given potential and then make return journey thro the same Track for making repayment . Here if the branchless mode helps more flow of credit money only to the poor segment without any supporting services for productive functioning of credit , then the journey is not safe and dangerous too due to overcrowding and over heating effect. (lessons from the recent MF crisis)
All these queries are not necessarily addressed against the use of mobile mode but the concern is that it should not become ‘ end’ in itself in the process of poverty cure through microfinance with equity. Besides proximity and simplicity some more ‘compatibility’ in the infrastructure may be needed. In the same semantics, isn’t perhaps necessary for laying T.rails for further extension of e-track to reach and accommodate the bottom pyramid passengers also with all needed complementary goods for getting the benefit of journey equally.
Thank you for sharing my views. Wish you a happy new year 2012
Dr Rengarajan

24 August 2012 Submitted by Milford Bateman (not verified)

Two questions. First, where is the evidence that resolving the unbanked issue is the best way to spend our time and scarce financial resources compared to, say, providing better access to clean water or better health care? I also can’t find any evidence of this choice being expressed by the poor. Second, where is the discussion of the rather important issue that when we actually DO resolve the unbanked issue, as in Andhra Pradesh, Bosnia, Nicaragua, Cambodia, Mexico, etc, we actually create far many more longer-term problems for the poor than we resolve.

It seems to me that CGAP has decided that the only way to keep the tottering microfinance edifice upright for a few more years it to find another goal it can proclaim with a straight face to be deeply passionate about. But just as in the case of microfinance itself, the whole fraudulent exercise called ‘universal financial inclusion’ is largely being undertaken on the back of zero evidence but persistent PR outputs, such as is this ill-advised one.

24 August 2012 Submitted by Ignacio Mas (not verified)

Whoa Milford, you came on pretty strongly!

On your first point, yes, I’ll concede that providing drinking water and health care is most impactful. The nice thing about mobile money schemes is that those can work commercially with small/no donor interventions, so I’d propose not waiting until the water and health care problems are solved before embarking on making banking services work for those not on a predictable payroll like you and me.

On your second point, what I wrote about is for people to have a better way of making payments and smooth consumption inter-temporally first and foremost through savings. It seems to me that the ability to store and exchange value are two very basic survival and improvement strategies people can follow. The impact evidence on those is summarized by Jake Kendall at http://microfinance.cgap.org/2011/12/07/the-poor-need-better-payment-se… and http://financialaccess.org/sites/default/files/FAI%20Focus%20Note%20-%2…. In fact, I think that the benefit of giving people a means of sending and receiving money conveniently an securely is much broader that “financial inclusion” because it supports social, commercial and government welfare activities which may not be directly related to financial services. So I see this as an activity with huge option value for development.

I won’t comment on your third point because I am not associated with CGAP, and I don’t see myself as anyone’s pawn.

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