[From Bill &
Melinda Gates Foundation´s Impatient Optimists blog, 12 August 2014]
Digital finance encompasses the
notions of: (i) electronifying poor people´s monetary
holdings; (ii) creating end-to-end cashless payment ecosystems
reaching down to the base of the pyramid;(iii) pushing financial
transactions outside of costly bank branches and into normal retail shops;
and (iv) inducing a shift from riskier, traditional, informal
financial practices into structured financial services (savings, credit,
insurance) from formal, regulated institutions.
That´s a tough combo.
If I were grading the
performance of the developing world as a whole on these four dimensions, I´d
only give a comfortable passing score on (iii). Of course it´s
still early days, countries have been on this agenda for anywhere between 0-10
years, and it will no doubt take another decade or two before we see
substantial inroads. I do think there is an inevitability about this journey
that will ultimately carry us through. But the hype about all the progress on
the ground is, in my view, exaggerated.
Still, are the efforts well
directed? I am certainly impressed with the number of providers that are having
a go at it, though I´d like to see more banks and third parties joining the
telcos in this club. But the main worry I have is the very limited extent of
innovation and differentiation that I see as I go from country to country, and
from provider to provider. It is hard to imagine, in these early days, that
anyone has fully figured out the magic formula, and yet we seem to be trying
very few formulas.
Over the last year, I have been
looking at the pace and constraints on innovation in digital finance, under
research I have conducted under a Gates Foundation-funded Fellowship at the
Saïd Business School at the University of Oxford. In a sequence of four papers,
I have looked at it from different angles:
· Client view. The paper “Digitizing the
Kaleidoscope of Informal Financial Practices” contrasts
the psychological and cultural richness of informal savings mechanisms with the
simpler, more rigid and yet less intuitive format of digital savings products.
The paper argues that financial inclusion should not imply a rejection of
informal financial practices but a synthesis of the informal and the digital.
· Provider view. The paper “Product Innovations on
Mobile Money” (co-authored with former BMGF colleague
Mireya Almazán) contains a thorough review of the state of product development
and innovation on mobile money platforms. We find that the range of product
categories such platforms support is still rather narrow, but the specific ways
in which services are defined and packaged do vary significantly across
operators and markets.
view. The paper “Why You Should Care about
Bitcoin – Even if you don´t Believe in it” explores
what a truly innovation-friendly electronic currency system and payments
infrastructure might look like. A software-protected currency operating with a
public ledger system –the key technology elements behind bitcoin— has the
potential for supporting the development of more open, contestable and
interconnected ecosystems for the delivery of payment and financial services,
much like the internet did for the delivery of communication and content
· Regulatory view. The paper “Shifting Branchless
Banking Regulation from Enabling to Fostering Competition”
argues that regulations on e-money issuers, retail agents and account opening
need to be recast so as to reduce the cost of entry and give much more scope
for service and business model innovation. In addition, there is a growing need
for policymakers to ensure there is a level playing field across all players,
and that mobile operators do not exploit their dominance in the mobile
communications market to gain advantage in the new market for mobile financial
My main take-out from this work
is that there is still much we need to learn and many approaches we need to
experiment with before technology-based approaches can become a reliable tool
for financial inclusion across the developing world.
[From World Bank´s All About Finance blog, 8 August 2014]
and mobile solutions in developing countries tend to be dominated by
very few large (mostly telco) players, focus narrowly on the payment function
of money that calls for a national footprint, elicit relatively infrequent
usage from the majority of customers, and exhibit low levels of service
innovation. There are few examples globally of what I call an intensive model:
smaller players making the business economics work by driving much greater
usage from a much smaller customer base.
inclusion — that is, making financial services truly a mass-market offering —
will require more, and more diverse, players contributing variously their
resources, inventiveness and goodwill. We need more players jumping in: to create
more competitive tensions and force more service and business model
differentiation, but also because in most markets the usual path to scale is
In a recent paper,
I argue that the prevailing regulatory “best practices” in branchless banking
and mobile money focus on enabling participation in the market
but are not sufficiently strong in fostering competition. There are
two sides to this.
can reduce the cost of entry and give much more flexibility for new entrants
wishing to contest the market, while still entirely protecting the integrity
and safety of the system. There are usually strong barriers to entry embedded
in the following types of regulations:
1. Agent regulations,
and the need to secure a retail cash in/out footprint. The obligation on
financial service providers to appoint retail outlets as agents has the
perverse effect of fragmenting the retail base across a multiplicity of
providers, each seeking locational advantages, and forces each financial
service provider to assume daunting operational and legal responsibilities. A
more scalable and entry-friendly approach would for the financial authority to
license (and supervise) cash in/out networks as independent entities, giving
them the freedom to serve any and all financial service providers they wish
merely by maintaining customer accounts with each. When transactions occur on a
real-time, prepaid basis, financial risks are few; regulation of cash in/out
networks would therefore major on consumer protection aspects. Shifting the
contractual basis between issuers and cash in/out networks would naturally lead
to broadly shared and interconnected agent networks.
2. E-money licenses,
and the need to operate under a ´sub-banking´ license. Many countries
have opened up the possibility of providers getting an e-money license, but
this license is generally conceived as an inferior form of banking. It is
common for e-money license terms to preclude paying of interest on saved
balances, impose lower account caps, ban their marketing as savings accounts or
using the term banking at all, and exclude them from deposit
insurance. What is required is a license that does not constitute an
alternative to banking, but an alternative form of
banking – one that entails fewer risks. E-money licenses ought to be conceived
as narrow banking: it is like a normal bank on the liability side
of its balance sheet (and hence not subjected to the limitations enumerated
previously), but is heavily restricted on the asset side (hence presenting much
Second, there is a
growing need for policymakers to ensure there is a level playing field across
all players, whether they are large or small, whether they have one type of
license or another, and whether they are banks, telcos or any other type of
players. The following issues need to be placed more squarely in the
center of the emerging regulatory framework for digital financial services:
regulatory arbitrage. Regulations must not provide any unjustified regulatory
advantage to one type of license holder over any other, and in particular
should not be more burdensome for banks rather non-banks (including telcos).
License terms can be different only insofar as different types of license
holders are exposed to different types of risks, based on the activities they
are allowed to carry out. Thus, it is legitimate for banks to have more
intermediation freedom than e-money issuers, in return for which they are
subjected to higher capital requirements and more intrusive prudential supervision.
But it is not reasonable for banks and e-money issuers to be subjected to
different regulations for agent banking or account opening, which are common
functions to both types of licensees.
anti-competitive practices by dominant players. Network-based
markets, of which electronic payments is one, are characterized by economies of
scale and network effects, which confer strong advantages to the larger
players. Regulators must therefore take steps to prevent larger players from
exploiting their scale advantage to lock out smaller competitors, by driving
towards interconnection of platforms (interoperability) and precluding pricing
below cost (anti-dumping).
5. Preventing mobile
operators´ abuse of essential service elements under their exclusive control. Mobile operators´
participation in retail payments presents competitive challenges which banking
and telecoms operators will need to monitor closely and address jointly. The
problem is that mobile operators are both component suppliers and direct competitors
to financial institutions wanting to offer mobile financial services. There is
a risk that mobile operators transfer market power from their core telecoms
market to the emerging retail mobile payments market, in such a way as to
effectively shut banks out of mobile payments. Competition policy needs to be
vigorously applied to ensure that mobile operators do not use their market
power in the communications market and their control over the telecoms
numbering range to gain unfair control over financial service providers who
must use the telecoms services of mobile operators.
[From Center for Financial Inclusionblog, 6 August 2014]
I guess it happens in all human endeavors; we sometimes get
carried away wishing things were the way we think they ought to be. Let me
provide three cautionary observations relating to financial inclusion: about
how we measure it, how we talk about it, and how we assess it. The point is not
to dampen enthusiasm about the possibilities, but to reflect on our progress in
a more realistic way.
Industry Showcases and the Numbers Game
Through numerous industry conferences and blogs, certain players
get put up as shining examples for the industry to follow. M-Shwari is perhaps
the latest one, I guess because it delivers large customer numbers to an
industry that is still largely focused on coverage rather than usage, and it
represents the kind of telco-bank partnership that many have been fantasizing
M-Shwari may indeed be every bit the financial inclusion success
that it is made out to be, but how is one supposed to judge that, based on the
sparse numbers that have been released? This is pretty much all we know:
as of March 2014, 6.8 million registered customers, of which 3.6 million were
active, collectively had $46 million in deposits and $14 million in loans
outstanding; 15 percent of loan requests were approved, and 2.7 percent of
loans were non-performing. Now, is the savings balance total the result of each
of the 3.6 million active customers squirreling away $13 for a rainy (more like
drizzly) day ($46m ÷ 3.6m = $13), or is it more likely that most of the savings
comes from fewer than 100,000 busy traders who are saving $500 ($46m ÷ $500 =
92,000) in order to create more transactional head-room for their linked M-Pesa
account? We just don´t know. But then, how can we have an opinion on M-Shwari’s
efficacy as a financial exclusion buster?
We must refrain from unduly extolling cases on which we have not
been invited to know enough. We need to look beyond average balances, which are
typically highly skewed by large balances at the very top of the distribution.
Donors, policymakers, and pundits must start asking for customer distributions
before parading any savings effort as a success.
Digitization of Payments and the Journey to Cash-Lite
What do we mean when we talk about digitization of
G2P payments? Most government payments have for a long time been digitized, at
least at source. No ministry holds a huge cash stash to pay pensions and
welfare benefits. Now the trend is to pay these directly into beneficiaries’
digital accounts, rather than to intermediary entities for onward distribution
of the cash. But when beneficiaries are paid digitally, the practice pretty
much universally is for them to withdraw the money in cash immediately and in
full at local shops acting as agents, who have the thankless task of procuring
the cash. So, in what sense has the payment been digitized? The same amount of
cash is still involved, it just got to beneficiaries through a different
channel. All we’ve done is outsource last mile cash
distribution to retail outlets, via a financial service provider.
This is not to say there is no net benefit: account-based G2P
payments are much less prone to corruption, and bank agents may be closer to
where beneficiaries live than the old government cash distribution points. But
people’s money is for the most part no more electronic than it
was before. And by the way, this is true as much for P2P as for G2P payments,
and in Kenya as much as everywhere else.
Moreover, because most electronic accounts are largely empty,
users do not have a natural preference for paying electronically at the corner
store, so local electronic acceptance by local merchants does not take off.
Contrary to frequent commentary, digitization of payments is therefore not
leading to a cash-lite world. We are confusing the
digitization of payments (how money moves around) with the digitization of money (how
money is held).
Impact Evaluation and Silver Bullets
Few would argue that there are any silver bullets—understood as
simple solutions to complicated problems—in development. We know that progress
occurs from the interplay of various forces and interventions—access to
education, information, markets, finance, infrastructure, legal and physical
security, etc.—and that none of these individually stands a chance to transform
lives. The impacts of finance happen mostly through indirect channels, through
a process not unlike multiple particle collisions. So when we insist on
measuring the impact of financial inclusion programs by carefully isolating
single treatments/collisions, aren’t we secretly wishing to find a silver
While I understand intellectually the need to conduct impact
evaluation, how realistic is it to expect to find sustained,
systematic impact from narrowly defined and precisely controlled financial
interventions? How much mileage will we get from building ever-more precise
Hadron Supercolliders in the social sciences?
I’m just sayin’…
[From MicroSave´s Financial Inclusion in Action blog, 5 August 2014]
We have seen in a number of countries how, when they work well,
branchless banking and especially mobile money systems can reach millions of
people. But beyond the headline numbers on customers reached, the record of
such systems as a vehicle for financial inclusion is still mixed: we can hardly
talk about a globally-proven solution.
Let me draw some stylized facts from the international
Branchless banking systems have only tended to work at large
scale. There does not appear to be an easy, gradual incremental
path for providers wishing to deploy branchless banking solutions.
There seems to be a chasm between the large numbers of institutions that have
run sub-scale pilots and the much smaller set that have succeeded in
establishing commercially sustainable branchless banking operations. As a
result, there are very few examples of smaller entities –whether banks, mobile
operators, microfinance institutions, or other third parties— successfully
incorporating branchless banking solutions in a sustainable, impactful way.
The space is still dominated by mobile operators. Few banks in the
world seem to have made sizable bets to develop agent networks, and most of
those who have built agent networks have tended to see them as an add-on for
specific services (e.g. utility bill or credit collections, social welfare
payouts) or for specific segments (e.g. poor, rural people) rather than as an
extension of their core business. Non-financial companies with a retail or
distribution background have been reticent to jump into the space. Therefore,
the space has been left largely to mobile operators, who have an easier time conceiving of a
transactional, high-volume, low-touch approach.
Customers tend to use branchless banking systems relatively
infrequently, and only for a limited range of applications. The median active
user is likely to make a transaction only once or twice a month – typically a
remote person-to-person or bill payment, and some mobile airtime purchases. It
is not common to see branchless banking being a “stepping stone” or “gateway” into
the use of a fuller range of
financial services. In fact, where mobile money has
flourished, it is far more common to see the opposite: fully-banked people
adopting mobile money as “liquidity extension” to their banking service.
Branchless banking is not fundamentally reducing people´s
reliance on cash. Most mobile money transactions start and end in cash. We may
refer to it as a mobile or electronic transaction, but most customers would
understand it as a cash-to-cash money
transfer, akin to what Western Union has always done.
The payment may be electronified, and as a result the distance that cash needs
to move is much reduced. But the underlying money is not electronified, since
the value is largely held in cash before and after the transaction. Branchless
banking systems have generally failed to position the store-of-value function
of customer accounts among the previously un- or under-banked, and the result
is that the majority of accounts are actually or practically empty.
Branchless banking systems tend to exhibit relatively low levels
of service innovation. Branchless banking –and in particular mobile
money— systems are about exposing financial service platform functionalities
directly to the customer by digital means. But this has not brought on the kind
of constant innovation that has been the hallmark of internet business models.
Of course, the need to work on basic phones has hampered the ability to
innovate, but the fact remains that most branchless banking providers have brought on new services or
optimized their user interfaces not more frequently
than annually, if at all.
There are of course counterexamples to each point, but they are
few. Zoona in Zambia is a small, independent organization growing a purely
mobile-based money system incrementally by exploiting specific niche
opportunities. The much larger bKash in Bangladesh operates largely as an
independent entity, even though it is backed by BRAC Bank that is part of one
of the most influential organizations in the country. Equity Bank in Kenya is
making a big push into the mobile space with its acquisition of a mobile
virtual network operator (MVNO) license.
The above factors are all inter-related, like distinct symptoms
of a broader malaise. The pattern of starting and ending in cash most
transactions in cash raises costs and presents a brutal business challenge of
having to ensure sufficient density of liquid agents in each locality served. Higher
transaction costs make the system less compelling for lower
customer-value-adding transactions, such as savings or face-to-face merchant
payments, which on the other hand, offer the highest potential pool of
transactions. In the face of low usage levels per customer and the inherent
network effects of payment businesses, the economics can only work for those
able to aggregate the largest number of customers, and in particular mobile
operators with a mass-market transactional business model. Other big players
such as banks may not see a positive business case, or if they do, may fear
that the new branchless banking activity may cannibalize their core business or
be margin dilutive. As a result, few players in each market enter the business,
and when they do they tend to underinvest in IT platforms, staffing and
marketing spend. With such shoestring resources, they become easily overwhelmed
by day-to-day operational issues and do not devote much attention to the
service roadmap. With lack of effective competition, innovation falters.
Let´s not concede that
branchless banking must push the unbanked into the arms of the larger banks and
telcos in the country. Now that we have a good decade of experience with mobile
financial services, it behooves us to look back on the trajectory and see what
course-corrections can be made to spur more competition and innovation for the
benefit of the world´s poor. This should start with regulation, which needs to
shift from being merely enabling to being pro-competitive,
as I argue in this paper.
[From BusinessFights Poverty blog, 27 June 2014]
Despite the usual protestations
that their country is not like Kenya, that they are not as
dominant as mobile operator Safaricom is in its home market, and that their
regulator is not as flexible as the Kenyan one has proven to be,
most mobile money providers that I have seen largely follow the early M-PESA
model in Kenya.
Of course this depends on how
you define the early M-PESA model. I tend to look at it fundamentally as an extensive model:
focused on getting lots of customers to do one or two transactions per month,
made up largely of higher-value ($15 and upwards) transactions occurring in a
remote (i.e. not face-to-face) setting. Safaricom was able to build powerful
network effects on this usage pattern: a testament to the size of its customer
base, powerful brand, and focused marketing efforts.
The math works if you have low
usage per customer but a very large customer base (see my mobile money maths here).
It doesn´t work so well if instead of 15 million customers and a mobile
telecoms market share of 85% you only have a million or two customers and a
third or a quarter of the mobile telecoms market. If that is your lot, you need
to go for an intensive model: get a lot more usage from your
reduced customer base.
What I find particularly
disheartening is to see sub-scale players attempting the early M-PESA extensive
model while dispensing with some of the more important lessons from M-PESA.
Such as spreading the meager transactional business over too many agents, who
are then not sufficiently incentivized to hold adequate liquidity. Or trying to
organize the mobile money agent channel around existing airtime distributors,
who are used to very different margins. Or promoting abstract notions of “a
bank in your pocket” rather than concrete use cases.
M-PESA itself is of course
trying to entrench its position by attempting to go intensive.
Having largely saturated its customer base, the game has shifted to driving
greater usage per customer. One successful approach has been to connect with
all major banks, so that banked customers can send money to un- or under-banked
people they deal with routinely (maids, drivers, gardeners, carpenters on house
calls) and take advantage of the impressive liquidity cloud constituted by
M-PESA agents. M-PESA has made banking so much more satisfying.
A second, in my view less
successful, approach has been to drive greater formal business usage of M-PESA
through services like bill payment and bulk payment. Here M-PESA has been
hampered by inflexible systems and clunky user interfaces. See here for
a (somewhat dated) list of ways in which M-PESA is just not a satisfying way
for more organized businesses to handle their payments. And it will remain so
while M-PESA doesn´t publish Application Programming Interfaces (APIs) that
allow formal businesses to hard-wire M-PESA transaction flows into their
corporate IT systems.
A third major thrust of
M-PESA´s intensification effort has been in merchant payments, through its
heavily advertised Lipa Na M-PESA service. This has sought to take price out of
the in-store payments equation: it´s free for customers and carries an
internationally unprecedentedly low 1% fee on the merchant side. Safaricom reported having
acquired 122,000 merchants by end of March 2014, and yet only one out of five
of them have done as many as one transaction in the last month. This is a
remarkably poor outcome in a country where the majority of store customers have
in their pocket the capability to pay electronically.
I have stated elsewhere that I
don´t see why ordinary people would want to pay electronically at the store if their electronic
account is empty. I wish I could share the widespread
belief that jumpstarting merchant payments is about throwing lots of electronic
money at people (by electronifying G2P and other schemes) or about blanketing
the country with even more acquiring points. We need to make informal, unbanked
people –the majority of the population— comfortable with the idea of leaving
money money in their account. In Kenya, as in other countries where so-called
mobile money has taken root, we have been attempting to electronify payments without
electronifying money itself. This is the opposite of what
happened in developed countries: first people transferred money into bank
accounts, and later they were shown how they could pay directly from there with
cards and later mobiles.
So how does one intensify usage
of mobile money? In my view it´ll take two related efforts. First, recovering
the money safekeeping function
of the account, and reconstituting the full value
proposition of electronic money as a means of payment and as a
store of value. Second, offering services that take account of the full lifecycle of payments,
i.e., that play out people´s needs through the time it takes to plan, complete,
share and reconcile payments. These two efforts come together in the notion of money management:
people (and businesses) will incorporate mobile money into their daily lives
only if they feel that it´s a tool that helps them be in control of their
money, play out the mental discipline and budgeting games they are used to, and
not only make today´s payments but also plan for tomorrows´. It´s a tall order,
Listen to this podcast interview that provides a short overview of my presentation at the CSAE´s annual conference.
[From CGAP blog, 18 June 2014, with John Staley]
If you are an African gadget manufacturer, you do not want to have to produce your own electricity to run your machines. But if your local electricity company's service is unreliable, you take matters into your own hands: you buy a generator or solar panels. Now you are in the electricity generation business, and you may even sell some back to the grid. Would this be a case of gadget-electricity convergence? Would that be a case of you wanting to eat the electricity company's lunch? No: you did it because you wanted to retain control over your business. Total dependence on a single electricity supplier would have simply become unacceptable.
Something like that is happening to banks in Kenya. Clearly, money is tending to go digital, and digital content is tending to go mobile. So just like the gadget factory needs to secure reliable electricity, banks need to secure reliable access to the mobile channel through which so much of their service is increasingly served up to their customers. And in Kenya, the mobile telecoms scene is dominated by one player.
There are three reasons why Equity Bank determined it would be risky to invest heavily on a new mobile banking business that relied on that operator. First, without access to the secure elements (or encryption keys) embedded in the chip in the SIM card, Equity Bank could not guarantee the security of transactions as they travelled over the operator's network. That's hard for a bank to accept.
Second, you must remember that this dominant mobile operator is also a keen competitor of banks in the basic money transfer and microfinance business. So a key competitor was deciding at which price banks could buy access to the mobile channel through which they had to offer their service. This problem is aggravated by the fact that the specific mobile channel banks need (USSD, for security reasons), is not very extensively used commercially by anyone other than banks. So it becomes too easy for the operator to offer very expensive USSD service – and just impact their bank clients with that.
Third, without access to the mobile phone menu, which is controlled by an application in the SIM card, banks have to send their service menu options back and forth over the air each time a customer enters a piece of information about the transaction they wish to do (e.g. what type of transaction do you wish to do, enter amount, enter PIN, etc.). All this over a USSD channel whose quality has been highly variable – again, only impacting banks and practically none of the rest of the operator's business. Thus, the speed of banking transactions, and hence the quality of the customer experience, has been erratic and transactions often time out.
So these are the three elements of mobile channel control that Equity Bank felt it needed to take back: full security, reliable speed and fair price. By becoming a mobile virtual operator, Equity Bank can take control of its customers' SIM cards, and through that of the secure elements and banking menu on their phone. It has also secured favorable pricing on substantial volumes of mobile connectivity across all channels.
Equity Bank's only purpose in becoming a Mobile Virtual Network Operator (MVNO) is to gain more direct control over the experience that its customers will have when they access Equity's mobile banking services. To the extent that Equity customers use the telecommunications services that come along with their new SIM card, that will help to pay for costs associated with the roll out of the MVNO. But Equity does not see it necessary to fight the operator in its core business: all it needs is to break-even on the telecoms part.
As an MVNO, Equity will run all the services that mobile operators typically offer, but without managing the network infrastructure or owning the radio spectrum over which they run. All that is outsourced to the MVNO host: the mobile network – in this case, Airtel – from which Equity has negotiated a basic connectivity service off-take agreement.
Banks shouldn't have to become telcos in order to deepen their mobile banking offer. But if banking, telecoms and competition authorities do not address the fact that increasingly telcos are an essential-component supplier as well as a competitor to banks – a clear conflict –, the choice for banks will be stark: sit out the mobile money revolution until such time that everyone has smartphones, or else join the telco club and get on with the job of financially including people.
[From NextBillion blog, 18 June 2014]
We often talk about the financial needs of
the poor. But we really should be talking about their financial concerns.
The purpose of finance is not just to help make ends
meet, but to create a sense of opportunity and provide peace of mind. To that
end, poor people´s financial concerns revolve mainly around making money appear as and when they
really need it: as recurrent expenses come due, and when one-off
needs and emergencies arise.
If this sounds a
little like performing a sequence of magical financial acts, indeed that´s
often how they experience it. In money matters, as in magic tricks, self-deceit
plays an important role. That´s why people will often look at lotteries as yet
another potential liquidity sourcing mechanism rather than senseless gambling.
And also why people are invariably positively surprised when they break their
piggy bank and count the money they've put into it. But as with magic tricks,
when it comes to conjuring money, the real action is what’s happening behind
the curtain, in the intricate preparation that lies behind the poor’s flexible
Poor people employ
two fundamental strategies to make money appear on cue: income shaping and
liquidity farming. These two terms are metaphors for collections of behaviors
which one can observe, in different forms, across markets and cultures. In a previous post on
NextBillion, we explained liquidity farming; here we discuss income shaping,
and the relationship between these two concepts.
Income shaping is about diversifying income sources so as to achieve a
more stable and secure cash inflow profile, one that matches as much as
possible one's desired recurrent expense patterns (daily food, monthly rent,
quarterly school fees, etc.). The poor tend to be more concerned about closing the
gap between regular income and recurrent expenses — by shaping income to
match their recurrent expenses, and failing that, by adjusting their level of
recurrent expenditures — than about bridging the gap by engaging in more
sophisticated budgeting and savings behaviors.
Income is shaped,
for instance, when the micro-entrepreneur extracts small surpluses from her
business in order to buy an egg-laying chicken — even if the eggs have a lower
ROI than her main business activity. It happens when the farmer does some
trading on the side to generate more frequent, recurrent cashflows – even if it
detracts from the time and working capital he can dedicate to his farm. It
happens when people seek three smaller wage jobs rather than a single main one
– even if it limits their ability to excel at any. Though these tactics may
come at a cost, the increased frequency of payoffs they bring outweighs any
A similar dynamic
occurs in liquidity farming, where people cultivate a
variety of sources of future liquidity among their family, friends and
acquaintances, which can be tapped whenever there is a shortfall in regular
income, a special need (usually driven by lifecycle events) or an emergency. It
takes considerable time, effort and money to build up and maintain this
network. Indeed, maintaining the liquidity farm can be thought of as one more
job that people take on. The little spending they incur to fertilize their
liquidity farm is often incorporated into their recurrent expenditures, and
might look to outsiders like non-essential expenses. But these relationships
and resources can be harvested for liquidity at any time, each a
potential lifeline. Without access to them, people would have to more often
sell off assets or down-shift recurrent expenses (eg: move to a cheaper house,
cut down meat consumption from once a week to once a month, take the older
child out of school) – anxiety-ridden scenarios.
For poor people,
finance is therefore much more about planning how to make money than it is
about planning how to spend it. It´s about managing the timing of cash inflows,
and then calibrating their routine expenses accordingly so that the need to
manage saved household balances is minimized. This set of priorities may be at
odds with the ones often instilled through financial education, where spending
goals tend to be set upfront and become the basis for budgeting, and where the
management of money is separable from how it was gotten and how it will be
spent. For the poor, this separation doesn’t exist. More effective approaches
to helping them manage their finances would take into account the complex
alchemy through which they turn countless relationships and resources into
Editor’s note: To illustrate
how the concepts of income shaping and liquidity farming play out in practice,
Ignacio Mas collaborated with John Gitau, CEO of Kenya Financial Education Centre.
He shares his insights below.
I find the
distinction between liquidity farming and income shaping quite subtle and
fascinating – not because of their distinctive nuances but because of the
drama and panache that characterize each. In many ways, the two tactics are
analogous to flirting and marriage. Where liquidity farming has a coquettish
social ostentation, the revenue assurance element of income shaping has a
distinctly nuptial orientation.
While income shaping
calls for meticulous and deliberate lining up of income streams to meet known
consistent expenses, liquidity farming has an element of play and fun due to
its reciprocity. I can’t help laughing when I remember an incident that
demonstrates this. In one of my visits to my mother at the countryside, a
neighbor popped into our home after seeing my car parked at the roadside. As
she sauntered into our homestead, she loudly and jokingly said “Now nobody
is greater than you because your son has visited you, and you plan to eat all
the goodies by yourself so that you can get fat alone as we walk displaying our
bony shoulders.” My mum burst out laughing and responded, “So now I cannot hide
and eat alone? Have a seat.” The neighbor was welcomed with tea and believe me,
she walked away with half a kilo of rice and I gave her Ksh 200. Note the
playful nature of that encounter and you can understand the flirtatious nature
of liquidity farming.
Income shaping, on
the other hand, comes with a deliberately calculated aura - it streamlines
income with a definite assurance that’s devoid of comedy. In my rural area,
specialized labor providers get hired by their more affluent neighbors to do
planting, weeding, pruning, harvesting and picking. They leverage their labor
with other social qualities and tactics such as reliability, diligence, going
the extra mile and treating their hirers’ family members exceptionally well,
including bringing their children goodies. That way, they get assured of work
whose income gets earmarked for certain expenses, such as school fees, food and
investment. Their labor is a form of income shaping. Whatever they do to
enhance it is meant to create the assurance that they’ll be able to meet their
financial obligations when they come due.
It may not be seen
as purely commercial, but sugarcane and tubers grown around rural homesteads
are timed revenue streams posing as homestead foods. One realizes their
economic importance when they are hurriedly harvested and displayed at the
roadside upon sight of vehicles going to a funeral, wedding or other ceremony.
The idea is that visitors on their way back will notice the fresh sugarcanes or
tubers and buy them at a good price. It is intriguing how members of the
homestead internalize the economic value of their produce or livestock as
income-in-waiting, since they don’t know when it will be time to convert it
into cash. But such opportunities do come.
In many instances,
men fatten sheep and goats with their slaughter consciously and quietly timed
with public holidays or the sighting of many visitors within the village. I
remember one time we passed by a village going to a funeral, and there was no
sign of meat in any butcher shop. But on our way back, we could not resist the
roast meat aroma coming from villagers’ homes, and we didn’t mind the enhanced
Indeed, there are
many such examples, from hides and skins used for grain drying but timed to be
sold to a dealer who comes twice a year, to tents that are bought and stored to
be rented for occasional village events. Market day visits are used to get
bargains on store-of-value products that will be liquidated at specific times
known only to the income shapers.
is how networking is used to sniff out upcoming social, religious or political
ceremonies within the village. Local priests, pastors, village elders and
sub-chief are all reliable sources, and rewards and favors are easily shared
with them to keep the information flowing. Such ceremonies are channels through
which income shaping opportunities are liquidated or incomes harvested. Knowing
them up front helps people match their assets to upcoming income liquidating
opportunities. Bananas ripening will be timed, utensils for hire will be
cleaned, chicken, calves and goats ready for market will deliberately be fed
along the roadside - all as income shaping opportunities on display.
[From NexBillion blog, 26 May 2014, with John Gitau]
Poor people tend to engage in many schemes to make money
materialize. These may be income-generating activities, such as farming,
trading, artisanal work or laboring for others. They may be investment
activities, such as buying a cow that produces daily milk, or a piece of land
that they expect will rise in value. But a large portion of their industry is
directed at farming liquidity.
This involves cultivating a variety of avenues for getting liquidity, beyond
their income and fixed assets, which they can then harvest when they need some
extra money to meet daily shortfalls or emergencies.
entails nurturing potential sources of future liquidity. For instance:
· spending a little money
at the village festivities in order to demonstrate belonging and commitment to
· occasional conspicuous
displays of wealth and consumption which demonstrate success and hence
· gifting and participating
in communal fund-raising efforts to demonstrate solidarity with kith and kin;
· shopping regularly at
popular stores to build up trust;
· saving with people in the
community, in the form of money guards, or loans to friends or village groups,
to build interdependence;
· buying things that are
more easily pawnable or replaceable if they need to be sacrificed;
· putting cash in a locked
box and hiding or giving the key to a friend whom they expect to impress with
relationships and resources can be tapped for liquidity, in case of need. For
instance, by requesting a reciprocating gift or loan from a friend; asking your
employer for an advance and the store for some credit; asking the savings group
to allow you to take this week´s pot; or pawning a tool.
The key attraction
of liquidity farming is that liquidity can be harvested at any time, on demand.
This sets it apart from income generating activities, which tend to have more
rigid or uncontrollable cash flow cycles. The liquidity farm is about
cultivating a set of lifelines, creating options in case you need to scramble
for liquidity at any point. The liquidity farm exists in everyone´s mind, all
The value of one´s
liquidity farm is assessed by scanning every person, group, institution and
asset one comes into contact with. It´s a complex information-processing task.
People might not do it explicitly or even consciously, but they are constantly
scanning their liquidity farm to identify opportunities and weaknesses. Their
peace of mind depends on it.
Richer people don´t
need to farm liquidity so much as track and warehouse it. We benefit from fixed
salaries, various insurances and accumulated savings balances, so the need for
emergency liquidity is much less frequent. But there is one sense in which we
still need to farm liquidity: through our credit score. If we want to build our
capacity to borrow in the future, we have to borrow regularly. In this sense,
our liquidity farm is mono-crop: growing our credit rating, upon which any creditor
will base his or her decision. Our liquidity farm doesn´t exist in our minds,
but in a far-away land called big data.
In contrast, most of
the elements in poor people´s liquidity farm are not tangible, they are tied up
in their notions of community and self-esteem. They can readily imagine value
being locked up in a relationship and transferred on a word or a handshake. It
is a virtual garden, and as a result people´s sense of money is mostly
This suggests that there need not be any disconnect for
poor people as money becomes digital. The trouble is not in digitizing or
virtualizing the concept of money, but rather in representing the liquidity farm
digitally. How can you expect people to “liquidate” the liquidity farm they
have so carefully nurtured, and stick all their money –i.e., all their worries
and hopes—into a single digital savings account? There is a huge challenge in digitizing the
kaleidoscope of people´s informal financial practices.
It is quite a leap to believe that digital liquidity
farms can exist on mobile phone screens. The user interface would have to be
partly a social networking
site, partly a collectors album of intuitive money pots,
and partly a magnet for vivid
money stories. A tall order. But while we fail to
translate the liquidity farm digitally, don´t be surprised that people withdraw
any electronic funds they receive immediately and in full – they will prefer to
invest any surplus in their liquidity farm.
note: To illustrate the concept of liquidity farming, Ignacio Mas collaborated
with John Gitau, CEO of Kenya
Financial Education Centre. He shares his insights below.
When I read
Ignacio’s post on liquidity farming, it felt like the last piece of a jigsaw
puzzle. Looking back on my experiences in Kenya, I recognized many of the
tactics he describes in the ways the poor people I’ve known have approached
their money and their relationships.
with, my memory takes me to Fred, a boyhood friend, now a university professor.
He once described to me how his sister would come to him looking for school
fees for her three children. He would tell me jokingly, “Back in the ghetto, if
you ask my sister how she manages to educate three children, she will tell you
it is God. She will tell you how she works hard and how God helps those who
work hard. But in her mind, though she can’t tell anyone, I am her God and she
prays for my health as I am one of her lifelines.” When seen through the lens
of liquidity farming, her reluctance to disclose that support to others makes
sense. If she did, she would then lose the credit of hard work, cherished as a
virtue that can be farmed and harvested.
reminds me how my aunties would get wind of my visiting with my mum in the
countryside. Upon arrival, they would shower me with praise about how healthy I
was looking and what a wonderful wife I had to have taken care of me so well.
Now I wonder: could their compliments be liquidity harvesting tools, since I
would give them cash at their time of leaving, and my generous mum would share
with them the food stuff I had brought? Similarly, it is not uncommon to hear
women or men praising their friends to their face, saying, “You see Jacob here,
when he has money, I count myself as having money as well. We are like blood
brothers.” That may sound like just another conversation, but a favor has been
planted and a favor will be reaped.
cases, I’ve seen the seeds for a liquidity harvest sown through more tangible
means than reputation or words. For instance, at the shopping centers during my
rural visits, I would witness a villager calling several people to come and
share a small piece of roasted meat he had bought. Not bigger than half a
kilogram, he would end up calling five people to have a bite and each would
pick not more than a piece before the plate was empty. I am now wondering at
what point reciprocity starts and ends. I can’t rule out the possibility that
the villager’s generosity is insurance toward future meal invitations from the
invited friends. By forgoing some satisfaction today, he may have secured the
possibility that the others would invite him to even larger meals in the
also announce to their village mates that their cows were about to calf. Such
information suggests impeding liquidity, with immediate dividends in the form
of favors, such as being invited to share meat or beer. It also makes it easier
to invite friends to help in some chores. Those who assist are aware that they
could benefit from free milk for the first week as “close friends.”
the villages are not left out. They happily announce to their friends and
village mates in advance when their adult children come visiting - especially
those working in cities. The children would naturally come with goodies for
their mothers, which get shared among friends. The purpose of early
announcement is to position the seeking of favors ahead of such visits. These
favors can be harvested up front, with the favor-givers expecting to benefit
through reciprocal favors - or possibly even through cash, since visitors will
always give some money to their mother’s friends who have come to “greet” them.
Relatedly, I have witnessed older men remove their hats and bow when greeting
young men from the city who would drive to the villages to visit their parents.
They would laugh at their stale jokes and even reminisce about how humble the
young men were as boys. This always resulted in the young men giving the older
men “something small to buy a drink with.”
dawns on me that all the episodes I witnessed make sense when seen against the
backdrop of liquidity farming. It’s an ingenious system that helps the poor
survive with minimal earnings whose inflow is never guaranteed. Or perhaps the
preservation of cash achieved through these tactics could itself be equated
with earning? It’s easy to hypothesize that to the poor, any money meant for
expenditure that is not consumed because there was an opportunity to harvest
another favor is treated as income. If a man meant to roast meat at the shopping
center but his friend welcomes him to eat with him, he gets to save the money
intended for meat roasting. That savings is income ploughed back to other
Now that I
recognize the extent to which liquidity farming is used, I wonder if the farm
could be expanded. Can those of us who work to help the poor support these
networks, to help them operate better? Or should we simply step back and leave
them to the people who have cultivated and maintained them so successfully
[From #access, May 2014 issue, published by IFC
under its Parternship for Financial Inclusion program]
What do you think are the most important trends in mobile financial services at
We clearly see pent up demand for remote
payments and a lot of confidence in electronic payments. That’s not a problem.
There is an immediate value proposition to customers in terms of convenience
for remote payments, being able to send money to family far away for example, and
there are no big trust issues. What’s missing is digital money as a way of
storing value. Many accounts are empty, just used for payments. It’s a more
efficient way of transferring cash, but it’s not changing behavior. The
challenge now is to get people to leave money on their electronic wallet. The
more money people store electronically, the more electronic payments they will
make at the local shop. I see it as a virtuous cycle, and we need to get into
How do we get there?
My hypothesis is that we need the e-system
to replicate the way people think about money, and the way people do that is by
separating it into different pots. Different pots for different purposes.
People don’t keep all their money in one place, mentally and likely also
physically. As it is now, digital accounts don’t give people sufficient sense
of control over how they separate their money out. We don’t have a way of doing
digital pots, conveniently and intuitively. That’s where the challenge is.
If this is what customers want, then why are market players not providing this
A lot of providers care primarily about profitability,
which is in credit and payments, not in savings. But if you can’t capture
savings, you will get much fewer payments; and if you only capture a few remote
payments and little savings, you gain little insight which you can use for
credit scoring. Savings is the engine that drives payments and credit. Most
institutions are going for direct profitability rather than the engine. We also
need to design a system with multiple accounts on the phone, similar to
internet banking. We need to develop apps that are user friendly. This is
difficult to do with the simple mobile phones, but now we can start thinking in
terms of smartphones. Smartphones are
not sufficiently cheap yet, but they will be in a few years. If people know
that they can use a smartphone to control their finances that might well be a
reason to buy a smartphone. We don’t have to wait for smartphones to be
everywhere before we start figuring out how to use them for financial services;
we can actually help to make the shift happen.
Do you see any developments in the current market towards these kinds of
I don’t see a huge amount. I am working with
an institution that is trying to use the notion of sending money to self,
me-to-me payments, which is a way of helping people to separate money without
having to open several accounts. I can send money, for example, to my own
account at the end of the month when I need to pay school fees for my children.
Or I can send money to Friday this week, when I want to pay off my microcredit.
What will it take for an African microfinance institution to successfully
implement mobile financial services?
In general, as a small institution you can’t
afford to build your own mobile financial services platform. You need to be
more reactive and engage with a system that already exists. As soon as there is
a viable mobile money system, engage with that particular system in a
constructive way. Not just as a client, but to add value, for example through
agent management. Microfinance institutions should also look into going
cash-less. If I were a microfinance institution I would be very keen to take
cash out of the system as a way of adding customer convenience, gaining real
time information on all operations, minimizing working capital requirements,
and reducing fraud.
What do you think are the big issues regarding regulation of mobile financial
There has been much progress in many
countries, but causing change is difficult because regulators tend to converge
to the mean and few want to stick their head out, and do something different. The
regulatory barrier is too high for the smaller private sector players to
respond to the opportunity. For example, cash-in/cash-out functions should not
have to be handled by agents of banks. This is the biggest regulatory hurdle.
If a bank or a mobile financial services provider has to own the
cash-in/cash-out system, then it can only be for large players. I should be
able to do a small start-up, but it’s difficult when you have to set up a
cash-in/cash-out network. There is no reason for this as cash-in/cash-out is
not touching bank money. There is no difference between this and walking into a
store exchanging cash for rice or exchanging your 100 dollar bill for however
many pennies you want, and you don’t need a specific license for that. Anyone
should be able to do cash-in/cash-out as long as they have money in their bank
accounts to trade against cash, and anyone should be able to do it for all
mobile money operators. That’s not to say there couldn’t be a license to do it
still, motivated by consumer protection concerns. Licensed cash in/out networks
might be required, for instance, to post tariffs at all their outlets and have
a call center to capture customer complaints. But the market should be open for
everyone, and once I am licensed to be in the cash in/out business I should be
able to do cash in/out for any financial provider with whom I have an account.
What made M-Pesa such a success and what would it take to replicate such
success in other markets?
The lack of a rigid regulatory framework
helped a lot. Another big factor was its size. M-Pesa’s customers don’t individually
do that many transactions, but it has a hell of a lot of customers. Most
players are not that big and that’s why it’s been difficult to replicate. You
can reach scale in two ways; either by getting many customers or by getting
your customers to do many transactions. If you’re small, you need to offer more
services. M-Pesa also thought it out very well and executed flawlessly. The
proof is that in the first couple of years they didn’t need to change a thing.
Everything was right. In many other players, I don’t see the same quality of
business. The other way to achieve viable scale, if you are not a big player
like M-Pesa, is to work together. If you have 25 percent of the market you are
too small to do it, but if you get together with three other players that also
have 25 percent of the market then you collectively have 100 percent of the
market. You don’t need to be large independently; you just need to work
together. Unfortunately, many players are precious about going it alone.
Why is that the case?
It goes to the reason why they do this. MNOs
are not doing it necessarily to get into a new payments line of business, they
are doing it to increase their market share in their core communications
business. They want to maximize their part of the pie. It’s about getting an
edge on your competitors, about gaining advantage. For banks it is difficult to
rethink their model of a direct relationship with the customer, which is so
ingrained in banking. Banks are not at all comfortable with franchise models.
Coke has a great relationship with its customers wherever someone buys a Coke.
Banks don’t think in those terms. They should move from direct distribution to
indirect distribution. But it’s like moving from a tricycle with support wheels
to a bicycle, in the early days it feels very wobbly and uncomfortable. It’s a
control thing for banks, it’s in their DNA.
Where will mobile financial services be in 5-10 years?
In my mind, it’s not possible to overhype
the potential of mobile money. It’s clearly the way things are moving. Money
wants to get off the paper the same way that music got off the disc and news
got off print. It will happen. What you can easily overhype is the progress we
have made so far against that vision. We know what the future will look like,
but it´s not clear how quickly we will get there, who will take us there, and
how. In my view, and it might change, it will happen with a start-up, not an
existing player. Someone Amazon-like. It will happen by disruption rather than
reinvention. In a way that’s what happened with M-Pesa. It was not an existing
player. I don’t think it’ll be an MNO though, but rather someone from the
internet space. Once smartphones are more widely available, that’s when it’ll
happen. Currently, internet providers are too dependent on MNOs, which is
another huge barrier. Also, if players weren´t required to set up their own
cash-in/cash-out systems by regulation. The way it’s set up, it dissuades the
visionary Steve Jobs out there. The vision is really possible, but we need to
reduce barriers to innovation and competition. We´re only at half time.