[From CGAP Microfinance blog, 3 January 2012]
The sheer magnitude of the financial inclusion gap –70% of households in developing countries are unbanked— calls for pretty radical solutions. We need to overcome an access barrier (last mile infrastructure), a relevance barrier (right-sized products and services) and a usability barrier (friendly and intuitive customer experience). The problem is that we tend to think of these separately, or at least we think we can tackle them sequentially.
The emerging standard view of branchless banking is that mobile phones, in combination with retail shops acting as cash in/out points, could provide “transactional rails;” once those are in place, we can then devise the right products to ride on those rails. I may have played some role in propagating this kind of language, but it’s now clear to me that this logic ties us up in knots. Without the necessary range of products, we can’t ensure sufficient usage of the rails, which undermines the case for the necessary infrastructure and marketing investments. But it’s not clear how you get new-to-banking people to understand and use such a variety of financial services on a simple mobile phone (or, much worse, on a card). Moreover, the rails part sounds telco-ish while the products part sounds bank-ish, and it’s not clear how you can “phase them in” as their role becomes more or less critical in that rails-then-products journey.
Perhaps we need to start our thinking at the other end. What we need is a single mobile-enabled customizable experience that puts customers’ goals and needs as the basis for the interactions between the bank and its customers. The key driver for this experience will be less the underlying financial products that fulfill the service and more the user interface and customer information managements systems that guide the interactions. Telcos and banks will certainly play a role, but perhaps what we really need is a third party playing an Amazon-like role: managing customer insight, presenting relevant offers and organizing the delivery chain behind them.
We do not yet know what shape these solutions might eventually take, but we can guess at some of the constituent elements of the solutions by looking at what has been successful in a number of related sectors. Below I ascribe two success factors or lessons to each of microfinance, informal finance, mobile money, mobile telephony and the internet.
Microfinance success stories are many and diverse, but two common factors stand out across all of them. The first is the value of proximity: they all found ways to get physically close to the customers they wanted to serve. The second is simplicity: they focused on streamlining the product set and standardizing features.
There are now high hopes for mobile money as a new platform for financial inclusion, following M-PESA’s success in Kenya. One lesson is the importance of cultivating the edge of the electronic payment network: make conversion in and out of cash easy and reliable. The other major lesson is that profitability in financial services need not come from credit alone: there is substantial willingness to pay for some types of payments which are costly or inconvenient for people to do today.
The rampant growth of mobile telephony even in the poorest countries has shown us the power of two additional drivers of demand. The first one is the immediacy of the service, which is inherent in the technology: being able to communicate here and now, on demand. The second one, slashing price barriers, came with the shift to prepay: introducing tiny top-up amounts (as low as 20¢) and eliminating fixed fees and usage commitments.
From the internet, we have learned about two new key sources of value enabled by digitization of services. The first one is the packaging of individual offerings into a fuller, friendlier, customizable customer experience. The second one is the customer information that can be gleaned from their transactions or interactions with the service, which can be used in turn to tailor products and further optimize the customer experience.
The informal money management practices that people use in their daily lives have two characteristics that set them apart from what banks normally conceive. First, they blur the boundaries between savings, credit and insurance (think of savings-led groups or lending money among friends). Second, they use a range of discipline devices beyond sheer time commitments (fragmentation by purpose, indivisibility of savings vehicle, peer pressure and assigning social/family value).
Let’s now connect all the bolded keywords: to crack the financial inclusion problem all we need to do is to: design a customer experience which (i) combines features of savings, credit and insurance and a offers a variety of self-discipline tools, (ii) is manageable by the customer within a simple-to-use, logically consistent framework, (iii) is delivered as and when people need it in any amount they need, and (iv) has convenient local liquidity options.
I do think this has ‘mobile phones’ written all over it. Colin Mayer of the Saïd Business School at the University of Oxford and I have been thinking about how that customer experience might be framed. We are thinking about a single customer experience encompassing payments and savings, where the only difference between these two is that payments are money transfers between people arrayed in space and savings are money transfers to oneself arrayed in time. You could implement a full scheme of commitment savings accounts on a mobile money scheme by adding a single, optional field to the standard money transfer menu: a value date (i.e., a date of effectiveness) for the transactions. Observe how regularly people set and meet these commitments and you have rich information for credit scoring.
I look forward to the day when the main challenges lie not in infrastructure but in user interface and customer database design.