Digital financial services (DFS) is big business and growing: between December 2013 and 2014, GSMA MMU reported a 41% increase (from 73 million to 103 million) in active mobile money accounts, with a total of $7.5 billion moving through 479.5 million transactions in December 2014 alone.
But the MMU numbers don’t show the full picture. Research conducted for "Doing Digital Finance Right: The Case for Stronger Customer Risk Mitigation" reveals strong evidence that providers are actually not realizing the full potential of digital financial services. This is because, in many cases, customers experience challenges or problems that erode their trust and as a result limit their use of digital financial services (often to over-the-counter (OTC) transactions, which do not require an account, or they reduce or stop using the services altogether). When non-users (potential customers) observe friends and family struggling with digital platforms, they frequently conclude that the services are simply too risky.
Global evidence points to seven common challenges facing customers of digital financial services, which include service downtime, agent illiquidity, and poor interfaces that increase the risk of sending money to the wrong number (and thus losing it), among others. In addition, many agents are charging fees on top of the official transaction rates (which are often not displayed at agents’ outlets) or compromising the confidentiality of their customers’ PINs. Customer care should help address many of these problems when they arise, however, customers are not always aware of their options for recourse. In other cases, customers become so frustrated by sub-par service that they simply give up.
Investing in first class platforms and agent training, monitoring and management systems are a necessary component of a strong and successful ecosystem of digital financial services, and can address and prevent many of these challenges. Making these investments can separate the providers of digital financial services that are “sprinters” from those that are “limpers.”
Initially many providers underestimate the sheer number and diverse nature of transactions that run on even moderately successful digital platforms and the investments needed to keep the platform running smoothly. In addition, the risks involved in moving financial services from a small number of branches, ATMs and POS devices to a large number of touch points run by relatively poorly paid agents have been largely ignored in the struggle to get DFS to profitable scale. Now, however, there is evidence that addressing these risks through investments in the agent network is an essential part of profitably scaling digital financial services.
For many providers, investments that address customer risks must be made early on, in order to achieve profitability later. Successful deployments typically have three phases:
- Start-up phase, when providers need to invest six to eight times the level of revenue. Investing in an effective agent network is critical here.
- High-growth, remittance-based phase, during which revenue comes primarily from person-to-person transactions and withdrawals. Profit may occur in this phase, but it will be limited.
- Mature ecosystem-based phase, when a high proportion of transactions are digital and do not involve cash. At this point, most providers start to see their earlier investments pay off in terms of high profits. What’s critical here is that as providers introduce a broader range of products and services, the ability to achieve higher margins increases. I
t’s critical for providers to invest heavily in infrastructure and networks in the first two phases in order to reach the profit-generating phase three.
With these phases in mind, the digital financial services industry is taking note of what’s needed to lay the groundwork for a profitable and scalable platform – addressing risks and investing in the underlying infrastructure and network. Twelve of the world’s largest mobile network operators, providing to service to more than 80% of all active mobile money users, have recently signed the GSMA Code of Conduct: a commitment to strengthen the whole digital financial ecosystem by focusing on mitigating risks. This commitment is immensely important because it signals a recognition of both the challenges facing providers of digital financial services and the importance of addressing them.
Getting to a strong and successful ecosystem of digital financial services will largely depend on providers’ willingness to improve the key operational drivers of the customer experience – the transaction platform and the agents that service its customers. Indeed, emerging global evidence revealed in Doing Digital Finance Right suggest that the level of commitment by providers will probably be the key differentiator between DFS “sprinters” and those that are left limping behind.