[From Financial Access Initiative blog, 21 February 2012]
The notion that we cannot count on brick-and-mortar investments to massively expand access to finance in developing countries is now widely accepted. We need to go branchless, and to do so safely we have an opportunity to leverage mobile phones that are increasingly ubiquitous. That’s clear at an infrastructure level, but I don’t think there is much understanding of what that means at the service level. Let me paint the picture as I see it, at the risk of sounding all high-level and new agey.
For me the starting point is recognizing that financial services are primarily about information. Mechanically, financial services are about recording a bunch of credits and debits: how much you’d like to transfer to whom, how much you have, how much you owe, how much you’ll be owed if certain events occur. More fundamentally, financial services are about trusting or being trusted, and that’s a function of the information you have on the other party.
Information wants to be accumulated, but mostly it wants to be shared. We need to look at poor people’s money in the same way. The microfinance worldview has been mostly about accumulation: helping micro-entrepreneurs build up the capital they need. But what poor people need most is to be connected. With connections come opportunities. Financial inclusion is then about connecting poor people to a digital payments grid that allows them to transact more cheaply and broadly with each other (support networks across friends and families), larger service providers (utilities), their business relationships (clients and suppliers), government entities (getting social welfare payments or pensions), and yes, financial institutions. Primacy has to be given to the network; financial products will follow if that network allows for efficient distribution.
A microfinance mindshift: finding value in payments and platforms
There are two implications for the microfinance industry. First, we need to embrace the facilitation of payments as a core element of their service, and not relegate payments to a lower level of do-goodism. Second, we need to get over the obsession with finding silver-bullet products and focus much more on the platforms that create the basis for proper service innovation and delivery of whatever it is that customers need. I’m talking about a platform that puts customers in control of how they think about their financial needs and aspirations, that collects relevant insights from customers, that presents all the information that is pertinent to customers in a simple framework, and above all, that makes transactions commercially viable so that they become the friend rather than the enemy of the bank.
What we need to do: digitize and extract information value
Viewing finance as an information service has two implications. First, money needs to be digitized –i.e., turned into pure information—as much and as quickly as possible. I’m not saying going cashless, I’m saying that we need to create a cheap and extensive infrastructure that allows poor people to convert cash into electronic value on demand, in small amounts that are relevant to them, as close as possible to where they live and work. How many physical points do banks make available for poor people to cash in their meager wages? (ATMs don’t count, those are still mainly about de-digitizing money, aka withdrawals.)
Second, information about money has value in and of itself. Financial service providers must try to extract as much information value as possible from each interaction they have with their clients, and indeed they must seek to maximize the number of interactions so that they can create a fuller picture of each client. That can power service propositioning and credit scoring algorithms.
Banks tend to do neither when it comes to the poor: they don’t go near where poor people live and work, and when poor people go to them they tend to discourage transactionality through charges and long lines. Indeed, in banking the poor there are two key service attributes which are often neglected: convenience and immediacy. Formal financial service providers lose out to a range of informal services or practices mostly because they are not so easily and reliably available. Convenience is about finding service points nearby which truly want to serve me; or better still, giving me some straight-forward tools so that I can help myself. Immediacy is about being able to take action the moment I make a mental decision (pay the electricity bill, set some money aside for that bicycle I want to buy). Exercising responsible finance is about having discipline, and putting hassles and delays in front of the customer is an excellent excuse to avoid it.
Who’ll drive the revolution?
It is not surprising that mobile operators have taken the lead in branchless banking in developing countries. They’ve seen the power of letting people communicate and share pictures here and now. They reworked their distribution around prepay to allow people maximum buying convenience. They know they are payment layer enablers rather than packaged product providers.
But I think mobile operators’ role will remain limited. In their core voice and data services, operators deliver basic connectivity but struggle to supply the value added platform layers on top (content management, unified communication or business support services). In the same way, other financial service providers will need to ride on operators’ mobile money systems to build the kind of rich, tailored customer experiences that people and entrepreneurs at the base of the pyramid want.
Who will these financial players be? I don’t think these players exist yet: existing ones would require too much reinvention. There isn’t much evidence worldwide of larger commercial banks going down-market successfully, they lack the conviction that it’s feasible or at least that this activity can meet the profitability rates they are reaping in their core market niches. Microfinance institutions may have the vocation, but their sub-scale, vertically integrated model saddles them with high costs which can only be recouped through expensive credit.What we will need is precisely the opposite: nimble players that are specialized in horizontal segments of the value chain. That’s what being a platform player means: you do only a small part of the total job, but you feel secure doing that because you can do it better and more cheaply than others, and you come up with frequent innovation. These are players who will think more in terms of customer interfaces and tools rather than in terms of financial products and education. Actually, they have started to emerge, in the U.S. That’s also not surprising: that’s the country where society and business has gone furthest in understanding what the information age is all about.