[From MicroSave´s Financial Inclusion in Action blog, 15 October 2014]
We do most of our work in a historical vacuum. We tend to think of today's problems and opportunities as unique. That's a natural bias in an age imbued with a sense of inexorable progress reliant on technological solutions. But if we lift our gaze over historical time, we find numerous references to issues and debates that are not unlike those prevailing today. There's nothing like historical perspective to temper one's excitement about the latest idea or trend. Maybe that's why we shy away from probing too deeply in our history books.
Let me share three things about the past that I've recently become aware of that relate to contemporary discussions of financial inclusion.
Big history: G2P payments and the origin of coinage
In his sweeping historical account of the development of credit and money systems, David Graeber, author of Debt: The First 5000 Years, makes the claim that it was governments, not markets and the spirit of enterprise they embodied, who had the burning need that led to the invention of coinage. Markets could function just fine with credit arrangements when people bought stuff from one other, with trusted parties clearing (or discounting) debts between people from different localities who didn't know each other and were not likely to meet again. Hence the observation, which I wrote about in this blog a year ago, that money has always been largely virtual.
But governments of the time had a specific need for a readily exchangeable, portable, tokenized form of value that could be used for mass micropayments: for the victualing and quartering of troops as they marched and spread across the territory. Governments then stepped up taxation as a means of getting those coins back from the people, so that they could be recycled. So markets worked on ledgers, but armies needed cash. Of course, once coins became widespread, markets readily adopted them, but the vector for mass adoption lay elsewhere.
I am struck by the similarity with the situation today. The new burning micropayment need of most developing countries is the distribution of cash-based social welfare payments to a rising share of the population. And indeed we see that in many countries –and for many donors— it is the need to make G2P payments that is driving the agenda around digitizing money, for finding something that is Better Than Cash. These schemes may help many needy people, but at its core it is about meeting a pressing government need.
Family financial histories
We often go out searching for financial tidbits in poor people’s lives, but have you wondered about the financial history of your own family? Try asking your parents and grandparents the kinds of questions we so mechanically ask total strangers in foreign lands.
I asked my parents, who grew up in an impoverished, conservative, isolated, economically mis-managed, post-civil war Spain. They were the first in their families to go to college. I learned that their parents didn't have bank accounts, but neither did most everyone else they dealt with. When my parents were growing up, cash was hidden around the house, and some of it was spread over several envelopes. What if they needed money? My father made the gesture of a finger slipping in and out of a ring: my grandmother's wedding ring doing regular financial duty at the pawnshop. Both my parents agreed that in case of need within their respective families, the main option was to scramble for more work. It's almost like their parents were purposely holding back from doing more work regularly in order to leave some room for extra income in case of need.
All this may sound familiar. But what really struck me was how uncomprehendingly my parents looked at me when I insisted on knowing how their own parents managed without a bank account. It just didn't seem that important to them, at the time. My parents both became doctors, and learned to avail themselves of the convenience of modern banking. But they are clear in their minds that the account came with their economic and professional success, not the other way around.
Do you know your family's financial history? When and how did a bank account first enter your family's life, and how momentous did that seem to them?
150 years of financial diaries
It is said that writing evolved from the need to record debts. We tend to look at money matters like they hold an important key to understanding broader personal and societal matters, which may be why we have such fascination for understanding how others manage their money.
It should be no surprise, then, that there is a long tradition of conducting financial diaries. In her study spanning the period 1870-1930 in the United States, Viviana Zelizer discovered numerous instances of “household-budget studies” that “richly documented how the working class and lower-middle class spent their money,” at a time when the consumer society was being established. Even our research methods are not so new.
[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.
· Technology 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 services.
· 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 services.
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]
Branchless banking 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.
Tackling financial 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 through specialization.
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.
First, regulators 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 lower risk).
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:
3. Preventing 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.
4. Preventing 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 about.
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 bullet?
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’…
Mobile financial services: Is there room for the small, the independent, the different, the nichy, the innovative?
[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 experience:
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, for sure.
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 of the poor. But we really should be talking about their financial .
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 and they really need it: recurrent expenses come due, and 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 cash flow.
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 on NextBillion, we explained liquidity farming; here we discuss income shaping, and the relationship between these two concepts.
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 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 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 downside.
A similar dynamic occurs in , 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 , 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 cash.
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 price.
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.
More interestingly 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 . 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.
Liquidity farming 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 the community;
· occasional conspicuous displays of wealth and consumption which demonstrate success and hence resourcefulness;
· 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 their determination
All these 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 time.
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 as well.
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 .
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 , partly a collectors album of , and partly a . 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.
Editor’s 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.
To start 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.
That 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.
In many 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 future.
Men would 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.”
Women in 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.”
It now 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 family commitments.
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 without us?