[IBGC blog, Fletcher School, 5 April 2016, with Kim Wilson]
Money is a complex human convention with deep cultural derivations and an elaborate social etiquette. It is part of the fabric of bonds within family and community. It is also mired in psychological biases and mental heuristics through which we personally come to terms with the barrage of decisions we need to make on a frequent basis.
Given this contextual cocktail, it is not surprising that behaviors around money often appear irrational on first analysis. However, there is always some hidden logic that explains, without necessarily justifying, most observed behaviors. (Critical distinction here: you can explain why a thief took something, but that doesn´t necessarily justify it.) These behavioral idiosyncrasies operate in the background and we easily identify them in others, but we rarely confront them in our own lives.
In our courses on digital money and financial inclusion, we find that getting students to think about their own idiosyncrasies around money is the best antidote against developing excessively judgmental attitudes in interpreting how others, and especially poor people, manage their money. In the Fletcher School´s Leadership Program for Financial Inclusion aimed at financial regulators and the DFI-Fletcher Certificate in Digital Money aimed at emerging market fintech professionals, we ask our students to tell us an interesting story from their own lives or those close to them that has to do with money, which made them look at money in a special or different light. We thought we’d show you the kind of stories that come up.
Ahmed Kamal of the Cairo Governorate in Egypt explains how his grandfather inculcated some lessons on the usage of money around saving, sharing, caring, and celebrating. It nicely sets up an apparent conflict when the grandchildren are first taught to save, then to give it away. The story speaks to the positive moral vlue we can give to money.
In his story, Joseph Maina, Managing Consultant at Jeypent Limited, tells us of a banana seller who refused to sell all her bananas to one customer. Sounds odd, until you reflect on it and see that one clearance sale would have disrupted her daily rhythm of business, it would have upset a host of regular customers who will be there long after the one windfall transaction is over, and it would have prevented her from interacting with people the rest of the day.
Many stories echo the same themes – grandparents passing along important traditions. Rats and termites eating cash. The crashing wave of fear that suppliers are predatory and that there is not much any of us can do about them. No one really trusting the digital system.
They are also about surprises: the rural grandparent of Mankolo Beyani of Zambia who stored beyond the urban grandchild’s imagination. They are about wisdom: the savings club in Fiorella Arubulu’s story, which more than once rescues families in Peru from being short on a school fee.
And finally, it’s about about an old adage: you are damned if you do and damned if you don’t. This story by Rochelle Thomas of the Philippines sums up what all of us know – you are damned if you save in a bank and damned if you don’t. Generations respond to the lessons of previous generations and come to alternating and opposite conclusions. In his story, Brendan Pierce, of the FinMark Trust of South Africa tells of the awkwardness of only having digital money when people around you are still expecting cash for things like tips.
Cash is “in.” Cash is “out.” Banks are “in.” Banks are “out.” What will be said of digital finance a generation from now: “in” or “out?”
Injecting meaning into digital customer experiences
[Center for Financial Inclusion blog, 4 April 2016]
Digital has killed many products (think of the music CD, then the newspaper, and next, possibly, the book) but enables much broader, more flexible customer experiences (think iTunes, Google Alerts, the Kindle).
After reading just the first sentence of this post you may already be squirming: that marketing buzzword again, customer experience. Like all good terms, it is so often abused that it has come to represent an almost mystical quality that tautologically defines successful products and services: you can detect it but only in hindsight (think of the iPhone, Uber), and it´s oh so hard to put your finger on it during the development process. I think a large part of the failure of digital financial services to entice the poor, informal majority of people in the developing world beyond making/receiving the occasional remote payment and paying the odd bill has been a failure to recognize the difference between products and experiences.
Let me try to give meaning to the term customer experience with reference to the Kindle. In an old post I explained the three things I really like about the Kindle, and the Paperwhite 3G version in particular: (i) I can buy and download books wherever I am, whenever I am feeling bored; (ii) I can always read it wherever I am without needing any kind of supplementary reading aids (no need to wear reading glasses as I can increase —and standardize— the font size, no need to find light as I can illuminate the screen); and (iii) I can instantly look up the dictionary and other books referenced, thus preventing my inherent laziness getting in the way of learning about new words and works.
And yet there are certain important ways in which the Kindle presents a clearly degraded reading experience relative to the old fashioned book: (i) I cannot write things on the margin of the page, flexibly and visibly (notes must be in text form and hidden under a highlighted passage); (ii) the difficulty in browsing (the e-book is structured as the codex of former millennia, when you could only scroll through text sequentially); and (iii) how invisible the e-book (as opposed to the e-book reader) is when you are in fact not reading it, to the point that I often do not remember the author and title of the book I am currently reading.
Notice that my perceived disadvantages all have to do with the book as a distinct entity: writing on its pages, flipping its pages, casually gazing at the book cover. The superiority of traditional books is contained within the physical book itself. Any deficiencies in the environment are not held to be the book´s fault. How could one possibly judge the quality of a book by the amount of light in the room you happen to be in or the absence of a bookstore nearby?
In sharp contrast, the advantages of the Kindle all have to do with things that are extraneous to the book itself: a bookstore at your fingertips, no need to scramble for eye glasses or light, the incorporated dictionary and the seamless bundling and interconnecting of books. The Kindle does more for me than just convey the text in any given book.
So when staunch physical book readers tell us (usually rather self righteously) that they will never give up the touch and smell of books, they are talking about a particular experience – that of the book itself. They really are comparing the Kindle with one book. And when I counter with some pro-Kindle advocacy, I am talking about a much broader experience: it´s a book + bookstore + eyesight correction + lighting + dictionary combo. To me, a device that improves my experience on all these fronts is well worth sacrificing some browsing and margin-scribbling flexibility – important as these are.
In general, for physical goods the experience is limited by the product itself. One didn´t use to talk about experiences in the analog world where product = experience. But when that product is digitized, the opportunity is to create experiences that go well beyond the particular job that the analog product was designed for.
You can analyze what is so seductive about Uber in exactly the same way: it gives you more than just the ride from point a to point b (peace of mind around seamless booking, invisible payment, transparency of route taken, etc.).
But in the world of financial services, digital still tends to be seen as either an extension or a cheaper alternative of what financial institutions have always done. We are building digital products, not experiences.
If you design digital savings pots with the narrow idea of making them better than recycled jam jars, you are likely to fail. If you design digital merry-go-rounds with the narrow idea of making them better than the physical group meeting, you are likely to fail. If you design a merchant or bill payment system with the narrow idea of making that more convenient than pulling out a few bills from your pocket to pay for the school fee, you are (only slightly less) likely to fail.
You might have a much higher chance of succeeding if you broaden the definition of the problem that you are trying to solve. For instance: making sure that somehow you have enough money available to pay the school fees when they are due next month, by making it natural for you to be setting some money aside whenever you can, to borrow some money when you can´t get there all the way on your own, and to pay it conveniently once the money has been put together.
One job that financial services ought to do is to help people manage their money gaps – getting the money they don’t now have but which they know they´ll need at some point in the future. Digital ought to be well placed to support solutions that deal with that more holistically than your standard bank products.
Ultimately, the main challenge digital financial service providers face is to build customer propositions in a way that goes well beyond that savings account, that overdraft, and that life insurance policy. What aspects of people´s life are you aspiring to make easier or less anxiety ridden? Or, to use Clayton Christensen´s formulation, what is the real job you want them to hire you for?
[From NextBillion blog, 7 March 2016, with I Ephraim and D Minha]
Like their counterparts in countries across Africa and around the world, a large number of Tanzanians have flocked to emerging mobile payment solutions, whether it’s to send money home, facilitate informal business transactions, pay bills or buy pre-paid electricity. The reality, however – in both Tanzania and many other markets – is that most digital accounts are empty and serve mainly, if not exclusively, as a pass-through for such payments. This limits the transformational potential of mobile money.
In a recent Financial Sector Deepening Trust (FSDT) Focus Note, we point out several factors that make digital accounts an illogical store of value for people who live precariously on low and uncertain incomes, and face health or weather-related shocks which can easily overwhelm their means. From it we derive six ways in which providers can help make digital storage of value more attractive.
PROVIDE BOTH FRICTION AND FLOW
First, digital accounts need to deliver both fast and convenient payments (“flow”) as well as illiquidity features to support people’s mental hierarchies for different kinds of money, based on their origin or purpose (“friction”). How can one savings account or mobile wallet deliver both friction and flow? Features need to be introduced that give users more of a sense of control over when they need flow and when they want friction. Only then can digital accounts play a significant role in helping people manage their money tensions, which, unlike day-to-day payments, play out in time.
AVOID JUDGMENT AND EXTERNAL DISCIPLINE
Second, providers need to stop thinking of savings products as devices to discipline poor people (I won´t let you touch your money!), and instead focus on tools that help people discipline themselves (I can´t justify to myself touching my money now). Poor people will reject savings products if they feel that they carry or invite implicit judgments by the bank. Dedicated school fees accounts, for instance, do not work partly because if you have had a rough month and haven´t been able to contribute to your children´s school fees account, the last thing you want is for the bank to think that you are a bad mother.
PITCH SAVINGS AS A PAYMENT SOLUTION
Third, providers need to talk of their savings services in a way that makes it seem more relevant to poor people. For poor people, saving is what you do when you have extra money – except that never seems to happen to them. Their problem is not that they have too much money, but rather that they have too many payments they need to make and too many things they want to buy, today and in the future. So saving products should be pitched as a payment solution – to build up to and protect tomorrow´s payments. Money management is all about not letting today´s payments unduly undermine tomorrow´s payments.
Also, many poor people view savings not as money that is not yet spent, but rather as money that is not yet spoken for. Most people who save money for school fees in a jar would not think of that money as savings. Rather, they would think of savings as money that does not yet have a clear purpose, and as such is vulnerable money – money that is begging to be used. Savings are hard to hang on to; but stick it into the school fees jar (ie: give it a story) or buy a chicken with it (ie: think of it as an investment) and now it´s a lot easier to hang onto. Insisting that people should “save” undermines their instinctive financial logic.
MAKE MONEY MULTI-PURPOSE
Fourth, poor people can´t afford to have dedicated pots of money for single purposes, the way richer people do. Money always must do double, if not triple, duty. A key reason why informal savings mechanisms like savings groups, money guards and livestock are so entrenched is precisely because you might think of each as savings for a purpose (that motorcycle I want to buy), but also as insurance (a fund I can raid if I need to take my daughter to the hospital), as well as a tool to build up your future credit potential (accumulating social capital by displaying my success and financial capacity). Bank savings products need to incorporate this multiplicity and fuzziness of purpose – that´s what lets people feel like their money is working for them.
BE TRANSPARENT ABOUT ILLIQUIDITY FEATURES
Fifth, to the extent that discipline needs to be supported by illiquidity features, these should be highly intuitive to people and not be driven by what customers perceive as arbitrary impositions and small print. Nobody blames the cow for being indivisible, but most would blame the bank if they are not able to make a small withdrawal from a large savings account they hold. Any illiquidity features embedded in an account need to be readily obvious in the name and visual representation of the account on the phone menu.
WORK TOWARD INTEROPERABILITY
Sixth, in countries where there is little or no interoperability across digital financial service providers, digital money appears to people as a confusing mess of monetary islands – each with its own rules and menu structure, maybe requiring a specific mobile operator connection. This is in stark contrast to cash, which appears to them as a consistent monetary universe. They may learn to use specific digital monetary islands to make specific remote payments (ie: this island to send money to my mother in the village, that other island to pay a bill). But what they will not want to do is to leave money stranded in these diverse monetary islands. They´ll always return to cash, the universal solution. Without interoperability, what we call digital money will never feel like digital cash to them. It is just too hard to figure out.
The common denominator across all these factors is that digital accounts will not be useful money management and savings tools unless they give users a greater sense of control over their money. The feeling of control doesn´t come from agreeing to certain conditions that the bank has imposed on your account; it comes from being able to take the action that you feel is right. Action is what creates a sense of control. Yet if you get money on your mobile wallet today, the only action you can take today to feel in control of your money is to cash it out. For people to store value in their accounts, there needs to be a far richer set of digital actions that they can take with their money the moment they receive it.
[From CFI blog, 23 December 2015]
Here are my best wishes for the CFI community, to be sung to the tune of the last bit of the twelve days of Christmas:
On the twelfth day of financial inclusion my true donor sent to me:
Twelve human centered designers
Eleven ground truths validated
Ten agent trainings
Nine peer networks learning
Eight logs a-framing
Seven innovation challenges
Six rapid prototypes
Five fast failings
Four big data thingies
Three evidence bases
Two RCTs evaluating
And an e-money issuer license.
[From the Institute for Business in a Global Context at the Fletcher School, 3 December 2015, with Kim Wilson]
Most of us in the digital financial services space have had to learn about digital payments and digital financial services on the job. While there are business school courses in banking and supermarket distribution networks, they don’t prepare you for a career in building the basic 21st century infrastructure of Digital Money. Digital money is our term for any transaction that securely enables the sending, receiving, storing, or tracing of money on digital networks.
As a result, the increasing number of companies building out teams in the emerging Digital Financial Services space face severe capacity bottlenecks, especially in developing countries. Their employees may come to develop deep operational expertise in the specific aspect of the industry they are involved in, but often lack a broader perspective of industry trends and issues, and remain unaware of alternative models that exist elsewhere.
In order to address this, the Digital Frontiers Institute (DFI), which was recently co-founded by David Porteous, Gavin Krugel and Ignacio Mas, is partnering with the Fletcher School to create the first university-certified course in Digital Money. This is an intensive, 12-week online course, and it will be offered for the first time this February, in English (see the course brochure).
The course is a foundational one, exposing students to the full lay of the land around digital payment ecosystems. It´s more about the forest than the trees; we focus on the big picture and integrate the component parts (banks, utilities, governments, third party providers) into an understandable whole.
We have designed a student journey that uses online to technology to move beyond a classic classroom experience. Students will not experience the course as a list of steps they need to take – videos they need to watch or assessments they need to complete. Rather, the whole course will be structured as an online discussion, which faculty stimulate by injecting teaching materials, cases, and open questions. Students can earn points towards their certificate requirement in a variety of different ways, so they can concentrate on those that best suit their interests and work commitments.
The course takes advantage of the broad range of Fletcher faculty interests and experiences in the form of a weekly “food for thought case,” which relates digital money to a variety of real-world issues, such as digital marketing, business digitization, migration, and ultra-fragile identities.
The global experience with online learning points to the benefits of blending online pedagogical resources with facilitated face-to-face classroom discussions. We will invite local organizations anywhere to work with us to create a blended offering for local targeted communities of professionals and students who enroll in the Digital Money course. By joining our Communities of Practice program, partner organizations can, if they so choose, create their own additional programing to be used in conjunction with the DFI-Fletcher Certificate in Digital Money curriculum. They can use this to develop closer relationships with industry participants, and perhaps also further their own capability assembling objectives and programs, building on top of the basic course curriculum.For the DFI, this course represents a first step in its objective of creating an ongoing professional development network around digital payments. For Fletcher, it represents a deepening involvement in the inclusive digital finance space, along with its Leadership Program for Financial Inclusion (FLPFI), Cost of Cash studies, and other research programs.
David Porteous, Gavin Krugel and I have teemed up to build capability in digital financial services and payments. We have now officially launched the Digital Frontiers Institute (DFI), as a non-profit.
Ultimately, our aim is to create:
Our first offering will be a 12-week online course in Digital Money, co-certified by our partner university, the Fletcher School. It will be offered for the first time next February, in English. This brochure describes the course in detail.
We are now accepting applications from individual students and organizations that want to sponsor a set of students. We have some scholarship funding which students can apply for as well.
We are also seeking partners who can help us ‘blend’ the course, by hosting weekly physical discussion forums for local students in their offices, and possibly adding content of their own to the basic structure of the DFI Certificate course. These partners might be financial institutions and payments-related companies wanting to create an in-house training facility; consultants and industry vendors wanting to develop an ecosystem of like-minded customers and partners; business schools wanting to create their own digital money offering; NGOs; etc.
[From NextBillion blog, 9 September 2015, with Ross Buckley]
The essence of banking is taking calculated risks, and banks’ profitability comes from taking such risks. That is not to say that bankers are inherently risk loving; they often display a strong conservative bias, which is a natural form of self-protection against excessive risk-taking. Calculating risks appropriately requires getting as much information as possible on the underlying sources of risk. Bankers therefore seek to establish ongoing relationships with their customers as a path to capture further information.
On the other hand, the essence of payments is offering transactional services with the minimum amount of risk. Profitability comes from customer service and convenience, not taking risks on behalf of customers. So payment systems are designed to offer customers maximum functionality, speed and convenience, at adequate levels of security and certainty for all parties. Modern payment systems seek to minimize risk by conducting transactions on a funded basis and by operating as close as possible to real time. Technology, rather than relationships, lies at the heart of transaction speed and certainty.
In a new paper, we analyze the ways in which digital payments are emerging as a specific field of expertise, and how and why it differs from banking. The principal differences between the two fields are that banks prosper greatly from managing risk and little from network effects, whereas payments providers typically seek to avoid risk and prosper greatly from network effects. This leads to fundamentally different outlooks between the practitioners in each field.
For payments providers, being able to handle transactions on a funded basis and in real time is enormously liberating because it enables transactions with less well-known parties. It makes it possible to opt for mass-marketing channels, without having to worry as much about screening customers. It also makes it possible to engage indirect service channels; for instance, offering cash in/cash out through a network of thousands of retail outlets. This is not to say digital payments do not carry risks, but the aspiration is always to limit them.
In payments, the quality or depth of individual customer relationships matters less than their number and breadth. This is because payments can only be understood in the context of a network, and the size and breadth of the user base are defining characteristics of the network itself. Payment systems are subject to strong network effects (the more users on it, the more valuable the service is to any given user) and operate in a multitude of two-sided markets (there needs to be buyers and merchants, bill payers and billing companies, wage earners and employers).
That´s not necessarily the case with banking: There may be scale effects because serving more customers is cheaper than serving few, but one customer doesn´t directly benefit from there being a large number of other bank customers. Banking is fundamentally about the functioning of institutions (how they manage risks and build enduring customer relationships), whereas payments is more about the functioning of ecosystems (who is in it and how big it is).
As payments become more deeply researched and its practitioners more specifically educated in it, these differences in economic drivers of banking versus payments ought to create a differential regulatory treatment. Traditional banking regulation seeks to limit the risks banks assume, because when banks fail the money they lose belongs to ordinary people, who vote, and the broader economic consequences of bank failure can be severe. For both these reasons, politicians feel the need to bail out failing banks. Payments are traditionally regulated as part of banking regulation, and often by the same regulatory institutions, but the imperatives that drive banking regulation should not drive payments regulation. A failure of a payments provider should not necessitate a bailout with public funds. While it may prove highly inconvenient to many people, it is difficult to imagine the failure of a payments provider causing financial market contagion, as did the collapse of Lehmann Brothers, for instance.
Payments are their own industry and they deserve their own regulatory regime, finely attuned to the relatively minor risks that payments generate. Changes in banking in the past 20 years have been substantial, but the greatest changes and opportunities in the next 20 years are likely to arise in payments.
[From CGAP blog, 21 July 2015]
When it comes to understanding the needs and behaviors of low-income people, the financial inclusion literature is full of contradictions. Experts celebrate poor people for their complex, active financial lives, but then seek to educate them financially. Researchers document how resilient and purposeful their informal practices are, but then investigate ways to protect them against their own financial habits. Giving the poor a wide range of financial choices is an admirable goal, but do we really need to “nudge” them to change behaviors, as if the choice had already been made for them?
Education is often identified as a barrier preventing customers from using digital financial products. In reality, however, teaching someone to use money in a new way - digitally - by starting with education may be the toughest path. Change only comes with practice, and people will see little reason to change without a compelling reason. It may be easier to inspire the use of digital financial services if we flip the script around.
[From Helix Institute´s Digital Finance in the Field blog, with Mike McCaffrey, 14 Jul 2015]
Agents are critical to the customer experience of digital money services because they represent the first and most tangible service touch points for most end users. Agent networks are also probably the most operationally burdensome and costly element of the digital financial service value chain, typically costing anywhere between 40 and 80 percent of revenues generated from the business. Providers therefore need to approach agent network development and operation with a high degree of strategic clarity to drive a sufficiently tight operational focus.
The importance of agent networks is only rising. The MMU´s State of the Industry reports shows that since 2011 the amount of active agents providing digital finance services has grown by almost 800%, while the average number of agents per provider has increased by over 260%. Further, this has not just been happening in East Africa, but in regions around the world, like South Asia where bKash in Bangladesh and MobiCash in Pakistan have scaled much faster than any network in East Africa ever could have dreamed.
The successful design of an agent network must ensure that it is structured appropriately to deliver a specific value proposition to a chosen target market, while making business sense for the provider. In a new paper, (Designing Successful Distribution Strategies for Digital Money), we document the variety of ways in which digital finance service providers (including banks, telecoms and third parties) have gone about assembling and then managing networks of third-party retail agents. We start our analysis with some strategic decisions involved with choosing stylized agent management models. However, based on seven case studies included in the report, and additional ones published on the Helix Institute website, we found that providers often evolved and especially hybridized their agent network strategies over time. We identified several core reasons behind the increasing diversity of models employed by the more mature providers.
Some providers who initially relied heavily on flat, centralized channel structures feel they need to embrace more scalable models to grow faster and avoid overly burdensome operations. For instance, Airtel Uganda evolved from a centralized build model to a master agent model to better manage growth, and UCB in Bangladesh opportunistically partnered with a third party specialist (MobiCash) that was building its own agent network.
Once they have successfully built a strong proprietary agent network, some providers have tended to feel safe in bringing in partners to complement their own agent network. For instance, both UCB in Bangladesh and Equity Bank in Kenya have been opening up to partnerships with retail chains.
But the trend is not always towards more outsourcing and partnering. Some providers who initially relied heavily on retail chain partners to roll-out their agent network may feel they need to regain some control over geographical coverage. For instance, BBVA Bancomer in Mexico and Eko in India added a centralized channel build to areas in their network with low coverage, while M-Sente in Uganda implemented master agents, to better extend their coverage into specific rural areas.
A related situation is where providers who were initially happy to work with non-exclusive channel partners or share retail agents with other providers in order to grow faster feel they need more control over the customer experience and bring back some differentiating elements. For instance, BBVA Bancomer in Mexico needed a direct, exclusive channel that could focus on customer acquisition (rather than merely cash in/cash out) and recruited agents directly that could do this to complement their retailor partnerships. Islami Bank (IBBL) in Bangladesh found that it had to provider better liquidity management services for agents, and brought in master agents for support. In the case of Easypaisa in Pakistan, an increasing level of competition in the market meant that more control was needed over at least part of the network, therefore increasing the strength of the direct relationships they have with the agents.
A change in the agent network model may also be required when a new service is added that puts pressure on the existing agent network, either because the new service requires a higher touch sale and service model or because it is targeted at a demographic that is not adequately served by the existing agents. This has been observed with banks that agree to distribute Government-to-Person (G2P) benefits and suddenly need to build a denser network in rural areas.
Sometimes the changes in agent network structure and operations happen organically over time, as the agent channel itself differentiates and it becomes clear to providers that certain agents are better at registering customers, or tend to have more float and do substantially more transactions. It becomes evident that not all agents are equal, and it does not make sense to treat them as such. In this case, providers usually implement systems to start segmenting their agent network and offering different levels of support based on performance or other salient criteria. These trends all seem to be natural progressions that channels make as they become larger and more sophisticated overtime, and are certainly a sign of a continually maturing industry.