Is registration for mobile accounts (wallets) really enough? What is an ideal measure of financial inclusion? The Alliance for Financial Inclusion (AFI) defines a core set of indicators for measuring financial inclusion. The first dimension is access to the services and products that formal financial institutions offer. Yet to achieve meaningful access, we have to solve the significant problems related to float and cash liquidity at the agent level – even in many mature digital financial services markets. Indeed this begs the question – are we serving wine to customers who need blankets?
Services such as KopoKopo add value to merchant services by providing them credit to expand their business. Meanwhile M-Kopa Solar and similar PAYGO providers connect thousands of households to affordable solar power through mobile money. While we acknowledge the accomplishments of such existing services, we are still far from getting the fundamentals right.
In this post, we highlight the need for digital financial service (DFS) providers to invest even more in adapting their products and services for this segment, even in the so-called mature digital economies.
The flood is still here
A story is told about a great flood that was threatening to wipe out an entire island. On the There were many people on the island who were in danger. Some could swim, a few had small boats, but the majority were helpless. A ship that was passing by arrived to rescue the people. In desperation, a number of islanders started taking to the waters with makeshift equipment – the kind that they use to try to cross the Mediterranean from Africa to Europe. The ship got there on time. A significant number were ‘on-boarded’, albeit in bad shape. At least their lives were saved.
A middle-ground solution to this dilemma could be to toss the wine and give blankets to those on board while trying to save more people. I am not an expert in nautical matters, but the message is straightforward. If we wish to help people out of poverty through basic access to financial products, it would require us to ensure that this access can provide the products that deliver meaningful value and help low-income customers manage their lives better.
There were, however, a much bigger number of islanders yet to be saved, but people feared that the ship was already too overloaded. A great debate then began between the master of the ship and his handlers. Should they give some blankets and wine that the ship had in stock to the people on board who were cold and starving and then take them to safety? Or should they toss the merchandise overboard to reduce the weight, then save some more islanders in need? The flood in the story represents poverty and the ship represents basic access to products for financial inclusion. The blankets and wine are value-added digital products and the drowning islanders would be the financially excluded.
Access: The cost of cash-to-digital-to-cash exchange
Even though digital financial service providers offer digital wallets to many who would not otherwise have formal financial services, the micro-economies they operate in are largely cash-based. This means agents have to incur the cost of rebalancing frequently or deny service to their customers. Some agents have improvised and developed coping mechanisms like private social media groups to ensure that they have the money or float to serve customers. The onus is, however, on DFS providers to invest more in smart cash and float management solutions that help agents ensure that cash or float is always available, regardless of whether they are in urban or remote areas.
The second dimension of financial inclusion according to AFI’s core-set is sufficient ‘usage’ of these services. We may assess this by how often and how conveniently low-income users are able to receive, send, and spend their money. This requires solving the cash conundrum to create an environment where even low-income customers can easily spend their money digitally.
Usage: Illusive digital ecosystems and merchant acceptance
The digital ecosystem is not yet ubiquitous enough in many countries, including East African markets. This prevents users from using digital funds to pay for very much. As a result, digital funds must be converted, often at significant expense, into cash to be used. This, in turn, discourages poor people – and particularly micro-entrepreneurs – from accepting digital value.
Ultimately, we need a largely digital ecosystem that allows even a street vendor to spend most of their money at other small and micro-businesses. Merchant services are typically designed for medium-sized enterprises that may already benefit from more advanced banking services at the back-end. Point-of-sale devices for merchant services such as Quickteller in Nigeria and 1-tap in Kenya typically exist either at a steep price-point or make overbearing demands on micro-businesses. Safaricom’s One-tap partially addressed this by pricing their device at a relatively affordable KES 2,000 (USD 20). However, this is an exception and there are few other examples in developing markets.
Some providers such as Equitel1 in Kenya and Paytm in India have offered free peer-to-peer transfers for customers. Customers indeed use them to send and accept micro-value payments. We recognise that such users who accept payments in this way may not meet relatively stringent requirements, such as tax compliance for small and micro-merchants. Considering that a significant proportion of micro-businesses in developing markets operate informally, merchant services designed for them must be both simple and affordable. These small merchants require a tailored and targeted design of products. Targeted design of services may require more creative incentives but could graduate these merchants to become long-term business partners for providers.
Policy can also encourage digital payments by waiving charges for low-value transactions. Towards the end of 2017, the Government of India waived the merchant discount rate2 (MDR) for transaction values below INR 2,000 (approximately USD 30). The Government of India has been paying the banks on behalf of merchants and customers to encourage usage and acceptance of digital payment methods.
Quality: Products not tools
The quality of digital financial products is AFI’s third dimension of financial inclusion and is, at best, still nascent for low-income consumers. Remember those who could swim and had small boats from the story of our drowning island? These are those who we colloquially refer to as ‘cuspers’ – a demographic that is just shy of the proverbial middle-income or thereabouts. We recognise that laudable efforts have unlocked more financial services for the cuspers and the middle income, who comprise the wine from our analogy. But wine is not the best sustenance for our islanders – in the same way that the digital products on offer are not the most appropriate.
The swarm of digital savings and credit products that have invaded developing markets offering easily accessible loans is a good example of this. Unfortunately, the results bear striking resemblance to microfinance in its early years. As highlighted in MicroSave’s recent research in Kenya, the burgeoning digital credit products do not yet offer low-income borrowers real value. In contrast to the celebration of digital transactions and consumer loans, there is very little discussion around or evidence of digital micro-savings. Typically, users do not save for a future expense or aspirational investment. Instead, they only save to try to game digital credit systems to qualify for higher value loans.
There is a real need for appropriately designed tools to help the low-income segment manage their limited resources more effectively. As we can see from the growing array of fintech offerings, the digital revolution enables us to do this. But it will require real focus as fintech is irrelevant for most people in the low-income segment, as providers have made little effort to tailor interfaces or use-cases for this market.
The vast majority of fintech providers develop solutions for the affluent and middle classes. This makes logical sense – these segments have the money and connectivity to use the solutions. Furthermore, fintech developers typically come from this background. They, therefore, understand the challenges this segment faces and thus the opportunities it provides. In contrast, when and if fintech developers focus on the low-income segments, they tend to create solutions and then look for problems to solve in preference to understanding the needs, aspirations, perceptions, and behaviour of the poor first.
Ultimately all that matters is impact – do not let them drown!
The fourth dimension of financial inclusion according to AFI is impact. Digital financial services have definitely had an impact on the lives of both users and non-users of such services, including through direct and indirect employment. However, we are yet to solve a number of fundamental design issues with these products. A few exemplary outfits such as Twiga Foods have taken an ecosystem-based approach to understand the low-income segment and solve their financial and social inclusion issues. Real value, as Twiga has shown, can go beyond accessing formal financial accounts to solve day-to-day problems like accessing markets to buy and sell products.
Such success needs to cascade further down the consumer income brackets. Improving access to financial products, usage of the services, and quality of those products and services for the lower-income segment requires significant investments from financial service providers, and especially fintechs, if they wish to look beyond offering traditional one-size-fits-all products.
1Equitel has recently withdrawn their free peer-to-peer mobile money transfers, although their website maintains that on-net (equitel-to-equitel) transfers are still free.
2MDR is the fee that the store accepting your card has to pay to the bank when you swipe it for payments. The MDR compensates the bank issuing the card, the bank which puts up the swiping machine (Point-of-Sale or PoS terminal) and network providers such as Mastercard or Visa for their services