[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.
[From Stanford Social Innovation blog, 6 May 2014]
For mobile money
services to evolve, providers need to support all the activities that go on
before, during, and after customers make payments.
characteristic of mobile money is
that it works in real time. With real time, customers can get immediate
confirmation that transactions related to their account are complete, make
immediate use of funds they receive, and check that their balance matches their
expectation. Real-time transaction processing ensures that all transactions are
properly funded; it also removes counterparty or credit risk, which enables the
safe use of a large number of third-party retail stores as cash in/out outlets.
Mobile phones have
carried real-time practically everywhere. How can bringing together immediacy,
control, and trust not revolutionize money—especially in cases where people
have not experienced that combination before?
But the fact that
real time is mobile money’s basic ingredient doesn’t mean that all services
running on mobile should be evanescent, limited to the here and now. I’ve argued elsewhere that
the transition that mobile money needs to make—if it wants to get into everyday
use—is from making payments to managing payments. Managing payments essentially
means following the lifecycle of different payment types—in other words, adding
a time dimension to the present real-time mobile payment service.
following four categories of examples:
- For individuals, managing payments
means not only facilitating today´s payments, but also preparing for
payments that they will want or need to make tomorrow by helping build up
the necessary balances. This means seamlessly incorporating flexible
notions of budgeting and savings into payments so that today’s payments
don’t end up obliterating tomorrow’s. For instance, you might earmark an
amount for school fees and use a mobile service to “send” money to
yourself on the day it’s due.
- Community-based or self-help
groups often form around a common financial objective (such as group
saving through a rotating savings and credit association)
or a joint financial objective (such as fundraising for a wedding or
funeral). Beyond assisting payment into or from the common pot, mobile
money platforms could play a role in managing the whole
informal financial structure, including setting up the group, issuing
invitations to join the group and reminders to contribute, and maintaining
- For businesses, managing payments
means following the end-to-end process of a typical payment, including an
employee raising a payment request, appropriately notating it and linking
it to an invoice, having the payment authorized by approved officers according
to enterprise policies, and backing up the payment data for
reconciliations. Without this information context, formal businesses will
struggle to identify efficiency and business protection gains that result
from shifting to electronic payments.
- Stores can use mobile money to
track store credit, since store credit is a mutual agreement to defer a
payment. Managing those payments involves tracking store credit—from the
moment customers incur debts at the point of sale to the moment they
settle payment—by structuring installments and issuing payment reminders
to customers as appropriate.
Again, notice how
managing the context of these various types of transactions is about seeing
payments through their logical time. While the basic mobile money platform ought
to remain real-time and credit free, higher-level mobile money services ought
to open up possibilities for credit (through products such as M-Shwari,
which offers small loans on demand) and bring back a time dimension so that
users can incorporate mobile money more easily and meaningfully into their
Based on a recent review of mobile money
product innovations that I conducted with my former
colleague Mireya Almazán, now at GSM Association, there is relatively little
product development progress aimed at managing rather than making more-diverse
kinds of payments. This is partly because we cannot implement the kind of
manageability services described above on simple mobile phones alone; it will
require an evolution to richer user interfaces based on web access and
especially smartphone apps. ICICI Bank’s iWish service in India
is one early attempt to reframe commitment savings products in much more
intuitive terms. But we will soon be at the cusp of rapid smartphone adoption
in developing countries, and mobile money will get a lot more exciting soon.
Bitcoin is indeed a rather surprising mix of frightfully clever ideas and frightfully simplistic mechanisms, as I argue in a recent paper. You can dismiss bitcoin as a doomed monetary experiment, but you must not pass over the opportunity to let your imagination run with it as it can shake some basic assumptions you have on how financial systems must work. Might there be some lessons in there for how to 'fix' what's broken in our financial system? Take it as an invitation to dream about the following three questions, which are based around the three basic design premises of bitcoin.
First: What if digital money was something that I could hold for myself and pass onto others, without necessarily having to go through a licensed financial institution? You can't do that now: you cannot hold digital money without becoming a customer of Citibank, PayPal or M-PESA. We've been delivered into their hands, and yet they do not necessarily see it their business to serve everyone. It didn't use to be that way: you can hold coins and bank notes by yourself, there is decentralized management of that. What if we held the option to serve ourselves financially with electronic payments, on a peer-to-peer basis, even if only as a countervailing power or last resort?
Second: What if we could build an entire digital money network which did not require any specialized infrastructure? Modern finance is burdened by ever more complex core banking platforms. Most other forms of digital content have gotten off specialized networks and converged onto the internet, simply by layering higher-level protocols on top of the basic internet protocol which take account of the unique technical needs of different applications. Bitcoin is just that: a set of higher-level protocols (not hardware!) which ensure that the digital value carried over the ubiquitous internet is uniquely and securely owned by someone and cannot be freely copied or double-spent by their owner.
Third: What if the digital money implemented through such mechanisms was actually an alternative or private currency? OK, to me this is the least interesting part of bitcoin, but unfortunately it's the one that has galvanized most attention. I think there will always be a need for some discretion in the management of money supply to accommodate economic shocks, and I don't see us trusting private entities with that power, much less foregoing it entirely and operating our money supply on a hard rule. Price volatility is inherent in such rudimentary treatment of money supply.
So take the first two ingredients only, and what we have is fiat (i.e. government-issued) money which can be held and passed on in a peer-to-peer fashion and operates over the open internet, resulting in a much more open, interconnected, contestable and lower-cost ecosystems for the delivery of payment and financial services. Centralized issuance but decentralized management of money once it's out there. That takes out the traditional banking gatekeepers (per the first point) and massively reduces the cost of moving money around (per the second point).
It also opens up the floodgates of innovation, because financial services could then be implemented at the customer wallet application level, without necessarily having to touch or even consult any central services or centralized providers. (A crude example: you could set up a time deposit by telling your wallet rather than your bank to not give you access to your money.) Some call it the rise of programmable money. And indeed the most powerful lesson of the internet has been the blossoming of innovation brought on by a great centripetal force which pushes intelligence to the edge of the network.
So what would be the benefits of such a system? The cost of achieving financial inclusion would be vastly reduced, as people could gain financial access simply by downloading a secure application on their smartphone (which are coming for all) without requiring any provider's consent. We could economically extend electronic transactions down to very small transaction sizes, as sending money need not cost much more than sending an email.
We would also go in the direction of giving us more options to prevent or deal with financial crises, by increasing market discipline on banks. There would be a much more credible flight-to-safety option for people if they smelled a weak bank or a bubble. And in the event of banking distress, there would be a more credible let-it-fail option for regulators since our economy need not be so dependent on them.
I'm not saying we should do away with banks, they will still have a huge role to play intermediating funds. They can seduce me with attractive deposit interest rates and on-demand loans which my wallet may not be able to negotiate on a peer-to-peer basis. All I am saying is that we should be able to opt for a self-service option whenever we like — or when banks are failing to include us. This is the same service-versus-application dichotomy which has played out between telecoms providers and Skype to such advantage to end-users.
We are a long ways from being able to implement this sort of solution, from a technical, regulatory and customer acceptance point of view. But shouldn't these issues be at the heart of the ongoing financial architecture debate? We need to think of financial systems much more as a seamless fabric and less as a restricted collection of connected institutions.
Too much of post-microcredit financial inclusion still operates as a numbers game. We declare victors and write up successes based on headline customer acquisition rates, without looking much at underlying usage patterns. We continue to quote customer uptake or account registration numbers when providers give us nothing else to go by. We declare customers active and ourselves satisfied when customers use the service once every 1-3 months – can you imagine the education, electricity, water and sanitation people doing that? We judge customer relevance by scrutinizing average per-customer transaction volumes and sizes, even though those are usually driven entirely by the top ten percent of the distribution. If we looked deeper, we would find that many of those who are deemed to be underbanked are actually irrelevantly banked.
Glossing over usage data is a symptom that we are an industry which thrives on hype, an almost inevitable consequence when you mix a commendable spirit of do-goodism, deep donor pockets, and insatiable social media platforms. But it also has a lot to do with the fact that we actually know very little about what drives customer usage and value of formal financial services, beyond the occasional loan and remote payment.
Especially in the savings space, we are lacking an overall perspective on how to tackle the problem of relevance. We feel we need data, so we engage researchers to run excruciatingly detailed financial diaries, quantitative surveys, and randomized control trials. We feel we need product ideas, so we hire consultants to tell us what is successful elsewhere, though alas that is generally based on those awkward headline customer acquisition numbers. We feel we need processes, so we engage branded designers to run innovative rapid prototyping exercises. But it feels difficult to make all this come together purposefully.
A more structured approach would be based on formulating some key questions which can help sharpen our focus and narrow the solution search space. Let me propose three such questions, again focused on savings:
1. Changing savings behaviors versus changing savings mechanisms. A classic evaluation framework which VCs use to evaluate projects is the is the proposed project targeting an existing or a new product, and is it doing so in an existing or a new market? They will typically shun heroic projects which propose new products in new markets. The analogy in financial inclusion would be: are we trying to get people to save more (changing behavior), or are we trying to create new ways for them to channel their existing savings behavior (new mechanism)? Put differently: are we trying to find new savings triggers (through behavioral insights or financial education) or are we trying to productize existing informal practices? My guess is that the latter will be an easier path than the former, though both are in principle valid. Unfortunately, much current savings product innovation is aiming for a muddled middle: new ways for people to do new things.
2. Primacy of savings goals versus savings vessels. It´s quite clear that separation of money into distinct lumps is core to people´s savings practices, as this helps them budget and maintain discipline in how money is used. But in staging this separation through a formal savings service, is it better to reinforce the savings goals or the savings vehicles themselves? A plethora of new web-based banking services, mostly in developed countries, now require that the customer start by articulating a goal (e.g. SmartyPig, Goalmine, Simple, Coinc). Being goal-oriented is meant to enhance motivation to save and build discipline. These services in fact have a financial education agenda. And yet my own observation is that most poor people do not have very concrete goals beyond some immediate concerns like paying the next round of bills or some inevitable lifecycle ones like marrying a daughter. They don’t lack other goals (like buying home appliances), they just keep them purposely fuzzy. If you have precarious finances, this is advantageous because your objectives must adapt to your evolving circumstances, and you can´t afford to set your heart on any one thing because there is a good chance you won´t get it due to circumstances beyond your control. Instead of fixing on concrete goals, they come to see their savings vehicles (cows, jewels, a ROSCA, etc.) as a proxy for a bunch of things they might buy with them if they achieve their savings goals. Forcing them to pick a goal may not feel natural to them, and that´s not for lack of financial savvy or determination.
3. Help me save versus help me keep it saved. Will formal savings services be more useful to people by helping them fall into a pattern of setting money aside regularly (providing discipline in), or by helping them avoid temptations to raid the money they´ve previously set aside when it is not so justified (providing discipline out)? In other words, should they emphasize rules about when and how much to save, or frictions which lay out conditions for liquidity? This is of course a question of balance. In informal finance, participating in ROSCAs and taking on loans are the main discipline-in mechanisms, while longer-term informal savings mechanism such as cows and jewels offer no rules but have many liquidity frictions built into them (indivisibility, waiting period, social peer pressure, financial penalty,…) which could be usefully emulated by formal financial products.
There may be better questions or better ways of articulating these particular questions. But it seems to me that if we don´t frame the discussion at this level it will be difficult to have a constructive global debate on how to promote formal financial services.
Dear prospective banker,
You have the luxury of building the first bank of the 21st century in Africa. No doubt you are thinking hard about how differently one would build a bank today than one would have done only twenty years ago. We hope your intention is to build a bank that serves everyone: the mass market and the poor, because they are the same thing. If so, may we suggest ten points we think you ought to consider.
1. Technology. That's the biggest area of change since the last round of licenses were given out, surely you can't ignore that. Go mobile: take advantage of the sense of immediacy that mobile phones can deliver to your customers and the drastic reduction in credit risk that real-time payments involve. No sense in distributing an alternative costly payment infrastructure by default, though some may want more. Do beware, though, of building mobile solutions that are too dependent on telco negotiation and goodwill for access, at some point they'll get you.
2. Cash in/out. Your business is digitized financial services but you won't make cash go away from your clients' lives. Rather than fighting cash, you need to infiltrate it so that people feel entirely comfortable crossing the physical-digital divide. The cheapest way of doing this is through extensive cash agent networks. Do recognize that cash agent networks are hungry beasts, though: the economics only makes sense at substantial transaction volumes. Go ahead and share the agents with others if you haven't got the scale on your own; you can differentiate in more interesting ways than mere availability of cash points.
3. Offerings. People's needs and aspirations are quite diverse, but you are not likely to have the distributed marketing wherewithal to offer a broad portfolio of tailored solutions. The better approach is to offer your customers a limited number of money management tools which they can each use in their own way. Don't try to solve their problems; give them the tools and let them solve their own problems. Think more Google than a vertically integrated bank. And don't mind so much whose financial products your customers consume as long as it's done through your interfaces and with your knowledge. Perhaps it's more like Amazon than Google.
4. Messaging. Talk about those things that worry people: reducing risk and stress in their lives, helping them stretch budgets, helping them achieve the things they want, helping them imagine a better future. Again, your job is not to discipline people, but to give them the tools they need to discipline themselves. Don't talk so much about savings (sacrifices) but of future payments/purchases (rewards). No patronizing, no moralizing. Can you be sure that you'd manage their meager income better than they do, if you were in their shoes? Listen to them, and care about their life stories.
5. Channels. You must do everything to position the mobile user interface as a self-service channel of choice. But don't be a purist here: don't give your clients the impression that you have left them to their own devices (literally!). Let them deal with humans when they wish to do so. You'll need a multi-touchpoint strategy to promote, sell and service your suite of financial services. Why not have some (cashless!) flagship shops on main street, appointed agents around market square and the bus station, a friendly call center. Invest heavily in training and monitoring these channels. These sales/service agents are probably going to be distinct to your cash agents, which will need to be much more numerous.
6. Business case. We have no new ideas here: profitability will likely come from credit and payments, as elsewhere and always. But recognize that to prime both you'll need to be successful at capturing people's savings. Observing how people manage their money and discipline themselves is the best way to gain actionable insights for credit scoring. And people will have a natural tendency to pay for things electronically only if they hold their money electronically. Savings is the engine that turns the other financial product cogs. You won't make money on empty accounts, no matter what.
7. Pricing. Don't obsess about offering lowest prices, and certainly don't hammer poor people with this message. They want quality, reassurance, flexibility - just like anybody else. Deliver useful services conveniently and in relevant small sizes, and you'll see how willing they are to pay for things that help them address their basic concerns. You will be more successful in relating the value they derive from your services to its cost if you offer transactional rather than flat charges.
8. Brand. Ultimately, if I was your client I hope I would see your services as a better way of managing my money and my finances, my aspirations and my insecurities. The brand needs to be that mixture of aspiration and reassurance: as a client, I now have more upside and less downside in my life. It has to be more than the sum of the individual products you offer. Brand is the most important asset you'll build up.
9. Partnerships. There is much value to be harnessed from being the one who controls access to people's pockets, the one who has the trusted infrastructure connecting any business to millions of customer account. Grass-roots microfinance organizations have long known that. Seek out national and local partners who can add value to your customer base in financial and non-financial ways: through group purchases and discounting, special business development and education programs, livelihood development, community finance groups, etc.
10. Scale. Embrace scale, for big is the need in Africa. But also because scale may be essential for success on a mobile-led strategy: digital payment services are premised on network effects, and agent networks are premised on economies of density (distributed volume). So: systems need to perform robustly at scale, processes need to be streamlined to avoid future bottlenecks, organizational structures need to help rather than stand in the way of growth and innovation. Your key role as a CEO should be to build platforms that are perceived by your staff as their friend rather than their enemy. If you make sure you build good internal systems, more of your staff will feel they can afford to be more customer-centric more of the time.
There are technically and commercially savvy ways of doing all of this. The developing world needs to draw inspiration from the first successful, truly mass-market bank.
Wishing you all the best, sincerely,