Monday, July 15, 2013

What are the trade-offs necessary for financial inclusion in G2P Payments?

We all know the mantra that financial inclusion will bring benefits to the poor by allowing them more access to savings as a protection against risk events and credit as a way to improve their livelihoods, but what are the practical considerations that are involved if we try to use a G2P (Government-to-Person) payment to increase financial inclusion?
Indonesia is currently facing this issue with its PKH (Program Keluarga Harapan, or Family Hope Program). It currently pays more than one million recipients, mostly through cash-based payments as Post Office outlets, but has migrated many recipients to postal account-based transfers or bank accounts. A detailed report supported by AusAID and published by the National Team for Acceleration of Poverty Reduction (Tim Nasional Percepatan Penaggulangan Kemiskinan or TNP2K) highlights some of the problems that have been experienced along the way and makes some recommendations for improvements to the program. You can download the report here:  
The report looks at the demographics of recipients and finds that they are a heterogeneous group, so there may be no “one size fits all” approach to paying them.  This presents a quandary for the administrating agency, who would prefer a standardized approach in order to deal with the large-scale payments.

PKH Recipients attending a Focus Group Discussion in North Sulawesi.
Credit: Michael Joyce
In analyzing the migration of services to bank accounts, there were a number of logistical issues that caused major headaches to the Ministry, the bank and recipients. For example, the names registered with the Ministry of Social Affairs and printed on the program ID cards didn’t always match the names on the official ID cards of the recipient. A postal account payment was flexible enough to deal with this, but bank processes weren’t and often meant the beneficiary had to apply for new ID cards in order to access their money. 

Despite all this, the majority of beneficiaries are happy with their current payment services. This might seem like a non-statement – people are happy when they receive money, and have never experienced a better alternative. A closer look at the data, though, indicates that some recipients in remote locations spend up to 30% of their received payment on travel costs. Surely agent banking or mobile money can make an improvement here?

Although Indonesia now has a mobile penetration in excess of 100%, it is still a long way off the universal access needed to make payments to the poorest of the poor. According to this report, 75% of households have a phone, but that still leaves 25% who would be unable to access the service (without a tedious process of keeping an active SIM card available).  More importantly, PKH payments are distributed to female household heads, and only 20% of the recipients state that they are the owner or main user of their phone. Making payments to mothers is a crucial feature of Conditional Cash Transfers, and a migration to mobile money might undermine this if the program requirements are not made clear.

The news from this report is not all gloom and doom for mobile money, though. Indonesia is currently testing some pilots for Branchless Banking, and the Guidelines issued by Bank Indonesia make specific reference to G2P programs, for example by using the PKH identity cards as sufficient ID to open an account (despite the lack of a photo on the card), many of the name-matching problems currently experienced will be eradicated. The Government of Indonesia has stated that it would like to expand the PKH program to three million households by 2014. With a potential regular payment stream this large, there are sure to be payment providers who are willing to adapt their services to this market. A high level of  understanding of the customer (both the beneficiaries and the organization making the payments) will be key to success.

Wednesday, June 19, 2013

Mobile Money Maths

Ignacio Mas is an independent consultant on mobile money.

Creating a viable mobile money service is fundamentally a question of marketing (driving appropriate use cases tapping into clear customer pain points) and distribution (creating a sufficiently dense, liquid agent network). But success on both fronts requires getting to scale quickly: on the marketing side because payment solutions are only really useful if enough other people and businesses have already joined; and on the distribution side because customers won’t join if there aren’t already many agents, while agents won’t come if there aren’t already many customers. Building a mobile money scheme entails breaking these two powerful vicious circles; no wonder so many are floundering.

Indeed, network effects work against you when you are small, and carry you seemingly effortlessly when you are large. New mobile money providers need to make a dash to that critical mass point where vicious circles turn virtuous. But what defines that point? Because it’s a matter of scale, it can be defined fairly precisely mathematically.

The basic mobile money tracking equation

The basic equation mobile money systems need to track counts the total number of cash transactions occurring through the system:

       [# of clients] x [% active] x [# of e-transactions per client per month]
       x [# of CICOs per e-transaction] =  [# of active agents]
       x [# of CICO transactions per agent per day] x [30 days per month]

This is an identity: it must always hold, because the left-hand side of the equation counts the total number of cash in/out (CICO) transactions that customers demand (responding to marketing levers), and the right-hand side counts the total number of CICO transactions that agents perform (responding to distribution levers).

See for instance how this might fit for M-PESA in Kenya, based on published half year FY13 results. They report 15 million active customers, KES 80bn in monthly e-transactions, KES 69bn and 62b in monthly cash-in and cash-out value, and 45k agents. Assume, since this information is not disclosed, that the average transaction size is USD 30 on both electronic and cash transactions, and that around a quarter of agents don’t do much business at all.

With this information we can estimate that the average number of e-transactions per active customer per month is 2.1 ([KES 80bn total transaction value] / [exchange rate of 84 KES per USD] / [15mn clients] / [USD 30 average transaction size]), and that the number of CICO transactions per e-transaction is 1.6 ([KES 69mn cash-in] + [KES 69mn cash-out] / [KES 80mn e-transactions]). Using the above equation we can then back out the average number of transactions per active agent per day: around 50 (try it).

The conditions for assessing critical mass

So do these numbers constitute critical mass? Let me posit two conditions, again relating to the two key success factors we started with, marketing and distribution:
  • Marketing wow condition: There is a compelling proposition for customers if mobile money delivers at least an order-of-magnitude (i.e. 10x) increase in convenience over alternative payment systems. In the case of Kenya, the largest banks have less than 200 branches at which people can cash in and out – against M-PESA’s 34,000 active agents (remember that was assuming that one quarter of agents are inactive). That’s a staggering two-order of magnitude (almost 200x) improvement in convenience.
  • Distribution wow condition: There is a compelling proposition for agents to strive to maintain adequate liquidity at all times if the M-PESA agency pays for at least a daily salary. In Kenya, a daily salary for a store clerk might be $3 (perhaps less in rural areas), and an agent doing 50 transactions per day at an average commission of 8 cents per transactions will make $4 per day.
M-PESA works and expands because customers and agents alike see value in joining. But of course we already knew that: we just formalized it mathematically.

Let me make two clarifications on these critical mass conditions. On the marketing wow condition, I am basing the customer convenience calculation on the number of cash outlets because that’s the starting and/or ending point of all transactions, at least so long as people are living in a predominantly cash economy. On the distribution wow condition, I am not including the non-monetary benefits for agents (drawing foot traffic into the store) because most stores would see this as up-side rather than in itself justifying the activity. I know many disagree with me on this, but try selling your brand of toothpaste through the store at low/no commission, arguing to the store owner that when people buy toothpaste they also might buy toothbrushes and soap and so it’s really in her interest. There might be something to the argument, especially in rural areas with fewer shops, but that can’t be the essence of the agent business case.

The degrees of freedom for newer schemes

If you are a new scheme, how do you get to the point where you can meet these two conditions for critical mass? You must tread carefully, because a mad dash to sign up many agents to fulfill the marketing wow condition (a common temptation) will dilute the volume of business per agent and get in the way of fulfilling the distribution wow condition. In fact, one of the most remarkable features of the evolution of M-PESA in Kenya is how Safaricom maintained balanced growth in both customer and agent numbers – thereby keeping transaction volume per agent and hence agent remuneration stable.

There is probably relatively little you can do to increase dramatically the number of e-transactions per active client. Mobile money, at least initially, must focus on those transactions were cash presents the biggest pain points: transactions which involve two parties that are apart (transporting cash is costly and slow), involve larger amounts (cash is unsafe), or occur at unattended points of sale (like parking meters, where it’s costly if not impossible to offer change). But these transactions will be few in the daily lives of most poor people in developing countries, so don’t count on the number of e-transactions per active client per month being larger than say 1-3, at least initially. You can prime e-transaction volumes with things like airtime top-ups, but remember that for this type of transaction the marketing wow condition is not likely to be met (there are likely to be many more prepaid airtime outlets than mobile money outlets) so it will only grow rapidly if you provide enough discounts for topping up from the mobile phone.

And finally keep in mind that some of the services that may trigger additional mobile payment uses –such as encouraging bulk payments, bill payments, merchant payments or airtime top-ups— entail a cash transaction on only one side, and hence will not contribute as much to the agent transaction volumes and business case (i.e. they have a coefficient of [# of CICOs per e-transaction] of less than one).

So there is no obvious way of growing your way fast into critical mass. But what did you expect. Mathematics provides clarity about the dynamics of the business, but not a recipe on how to succeed.

                                                                                          - Ignacio Mas

Tuesday, May 21, 2013

Ten Practical Ways to Enhance the Mobile Money Offer

Here is a collection of concrete ideas I’ve put forth in the past to make mobile money more useful for customers. Sadly, I have yet to see any taken up, even as a pilot. Since this is a virgin blog for me, I thought I’d recycle these ideas here.

1. Allow money transfers over time to oneself

Don’t just help people move money once they have it: help them put together the money they need to make a payment. Invite customers who receive e-float to directly assign this money to some purchase(s) or payment(s) they need to make in the future, thereby preventing the money from being withdrawn today. Mobile money has broken the distance barrier in payments, and it should be extended to help people manage payments across time as well. That’s what money management is all about. This can be done simply by adding one optional question on the standard send money menu (transaction value date), and letting people send money to themselves: Me2Me. (Watch short video on the full idea here).

2. Receipts website

Customers want to be able to show a printed receipt if there are any questions around a bill paid or a business transaction settled with mobile money. This can easily be provided through a dedicated website service: enter your phone number and the unique transaction ID from the transaction confirmation SMS, and the website generates a printable bill for you. The possibility of getting a receipt at a cybercafe will offer peace of mind for business uses of mobile money.

3. Business account numbers with automatic error detection

A common form of fraud is for people to buy something with mobile money, and immediately reneging on the transaction by claiming that the money was sent in error to the wrong number. This can be eliminated by making all transactions irreversible, but that seems harsh because people do make errors from time to time. A better solution is to let business users of mobile money get a business account number distinct from their mobile phone number, which would incorporate a single check-sum digit. (Checksum digit is the result of a fixed mathematical operation on the rest of the digits in the account number, such that if a digit is mis-typed the new checksum digit does not match the one appended to the account number.) This allows automatic detection of erroneous account numbers.

4. Optional description field on all money transfers

Another common complaint of business users of mobile money is that they cannot identify who they got the money from (e.g. if the sender has used a relative’s phone instead of their usual one) or which order or invoice it is meant for (if it’s a repeat customer). This can be addressed easily by providing an optional reference field on all money transfers, so that the sender/buyer can enter any appropriate information agreed to with the seller to identify the payment.

5. Lending through peer vouching

Microcredit has shown us that lenders don’t need to know much about their borrowers as long as the borrowers know a lot about each other, and there is an incentive mechanism for people to screen and monitor each other. Mobile money customers who want credit could get other customers to vouch for them, with the weight attached by the lender to each person being based on their vouching track-record. Given some positive incentives for good vouchers and enough time for the system to learn, certain customers would naturally self-select themselves as de-facto loan agents in their town.

6. Community-level incentives to promote savings

Peer pressure has been a core tool to instill borrower discipline, but has seldom been used to promote savings discipline. One idea might be for a mobile money provider that is expanding into a new village to agree on a community-level reward once total e-money balances reach a certain level. The reward would be agreed to with the town elders (e.g. paint for the school), who could then be expected to play a role in promoting savings and the mobile money system behind it around town. Total community savings could be displayed on a thermometer at prominent place, for all to see, prompting people to want to save so as not to fall behind everyone else.

7. Simplified phone menu structure

Mobile money menus are getting long, as mobile money providers seek to promote more diverse reasons for doing essentially the same thing: sending money to someone else (to another mobile phone, to pay a bill, to buy airtime, to buy physical goods at a store, to get cash, to park money in a bank account, etc.) For basic users, this menu clutter may be causing substantial confusion and hindering adoption of new uses which reside in as yet unexplored parts of the menu. It may be better to consolidate all these uses into one menu item –send money—and let the system detect which application the customer wants to do based on what destination number he/she types in (a phone number, a biller code, an agent number, etc.) In this way the provider can still market many and diverse use cases, but need only educate customers on one standard send money process.

8. Depositing money without requiring IDs

Once you are registered as a mobile money customer, the phone and PIN should be the only things you need to do any transaction. Except that you are usually asked to show an ID to make a deposit: the regulator wants to be able to trace who the money came from, and the mobile money provider wants to ensure that you are depositing it into your own account and not bypassing P2P charges by depositing it into someone else’s. A solution to all this is to make customers request a deposit from their mobile phone at the agent and authenticate with their PIN – essentially turning the deposit into a pull transaction.

9. Withdraw through a friend

One common reason why people share PINs is so that you can ask a friend going into town to pick up some cash from your account on your behalf. It’s an entirely legitimate use case, an especially common one in the early phases of a mobile money deployment when agents are thin on the ground. But PIN sharing of course compromises your entire account. Instead of badgering customers for it, why not design an appropriate solution for it: create a withdrawal request against a one-time password which you can then share with your friend. Your friend can run away with the requested withdrawn amount, but no more. This would work much like when one sends money to an unregistered customer.

10. Focus on the basics

OK, this last one may sound like a cop out, but we need to recognize that features alone cannot drive demand. In the end, there are some basics that need to be gotten right if anything else is to work: marketing concrete use cases rather than general capabilities; driving a consistent customer experience at the agent; not skimping on agent commissions; maintaining system uptime; not growing agent numbers wildly ahead of transaction numbers, because that will kill the business case for most agents.  And, despite all I’ve said above, guard against productitis: product proliferation that aims to satisfy ever-finer needs of excessively narrow customer segments.

- Ignacio Mas

Ignacio is an independent consultant on mobile money. 

Monday, May 20, 2013

Cashing In on Mobile Money in the Cocoa Farmer Supply Chain in Indonesia: New Study Reveals Farmer Interest in Mobile Money Applications and Agent Banking

This is a guest post on Mobile Money Asia by Brian Dusza, Shelley Spencer and Grace Retnowati. 

Cash is the primary currency of trade for the 80,000 farmers harvesting cocoa in Indonesia’s rural districts of Luwu and Poelwali Mandar on the Island of Sulawesi.  Farmers use cash to purchase their inputs, sell their harvest and pay their living and farm expenses.  While transactions that follow the purchase from the farmer are performed through established channels in the banking systems, only a small percentage of cocoa farmers in this section of Indonesia have a bank account or any formal credit.  Mobile technology, however, can change the farmers’ current reality and usher in a new era of financial inclusion.  Findings from a recent market research study, commissioned by USAID’s mobile money program in Indonesia, e-MITRA, and performed by MicroSave, reveal that cocoa famers are receptive to this change.  The market research studied the financial behaviors and patterns by surveying 549 cocoa farmers (a statistically significant sample) and conducting in depth interviews with farmers in four focus groups.  The research provides a glimpse into the promise for mobile payments and agent banking to reach this community revealing that sixty seven percent of small holder cocoa farmers are willing to use their mobile phones and pay for a mobile money solution to conduct their financial transactions.  These findings are likely to apply across Indonesia’s broad agricultural sector that employs 34% of the workforce in Indonesia.  You can access a copy of the report here.

The new market research advances work by USAID in 2011 that outlined a business case for a mobile-based banking system in this value chain.  You can read a copy of the 2011 report here.  Cocoa farming is an important segment of Indonesia’s agriculture sector; Indonesia is the world’s third largest producer
of cocoa beans.  Despite the size of this industry, the farmers producing the cocoa typically are poor and face significant financial challenges.  Smallholder famers that produce most of the cocoa on Sulawesi earn annual incomes averaging $2,000 a year from the sale of their crops. 
The recent market survey study moves the program one step closer to introduction of a mobile money product for these farmers by identifying the financial patterns of the farmers that can influence mobile money product design.   The most significant findings are highlighted below:   

Cocoa Farmers are Willing to Use and Pay for Mobile Financial Services

Cocoa Farmers Willing to Use Mobile Money 
  • Two thirds of the cocoa farmers (67%) surveyed expressed a willingness to adopt a mobile money solution for their financial transactions. 
  • Seventy-five percent (75%) of the farmers believe mobile money would help save them time and offer a convenient way to conduct their financial transactions.
  • Eighty-six percent (86%) of farmers willing to use mobile money are willing to use agents for cash-in/ and cash-out transactions.

Perceived Benefits of Mobile Money 
Cash and Cocoa
The study found that cocoa farmers, similar to other small holder farmers in rural districts, transact mainly in cash.  Farmers use cash for transactions including the sale of their cocoa harvest and to pay their bills:   
  • Ninety-eight percent (98%) of the farmers receive payment for their cocoa sales in the form of cash.
  • Ninety-seven percent (97%) of cocoa famers pay their bills with cash.

Savings a Rarity for Cocoa Farmers
Farmers who Save
The study found that most farmers do not save and seek to supplement their income from cocoa production by planting other crops:
  • Less than half of the farmers (46 %) reported that they currently “keep” or save cash (using either formal or informal channels).
  • Of those famers who save, more than half of the farmers (54%) save in banks or BPRs (rural credit unions). Other farmers (46%) save in semi-formal and informal channels.  Ninety-nine percent (99%) of farmers who save in banks also save in semi-formal and informal channels.

Cocoa farmers Lack Credit and Don’t Borrow Money
Sources of Loans for Farmers
The report chronicles the different sources for credit and borrowing for cocoa farmers including formal channels, like banks.  It also delves into the use of informal lenders including: (i) cocoa collectors and traders who purchase the farmers’ crops and typically reduce the price paid for the crop as the “cost” of the loan, (ii) farmers’ groups (Gapotkan) Gadai , (iii) the practice of leasing out land for a loan, and (iv) borrowing from pawnshops (Pegadaians).     
  • Only thirty-six percent (36%) of farmers report that they borrow money and then generally borrow from a bank only when the loan is subsidized by a program of the Government of Indonesia.
  • Women farmers are more likely to borrow from PNPM, a government community development program.
  • Farmers who borrow from banks continue to borrow because they now are familiar with banking process and have an established credit history.  

Remittances will Not Drive Mobile Money Adoption for Cocoa Farmers in Indonesia 
Unlike other countries where remittances has driven mobile money adoption, cocoa farmers in Indonesia do not generally send or receive money from 3rd parties making this an unlikely entry point for mobile money adoption:
  • Two-thirds (66%) of the farmers reported that they never received money from their family members/friends.
  • Less than one third of the farmers (27%) sent money to their family members or friends (living within or outside the country). 

Recommendations for Mobile Money Product Development
As suggested by USAID in 2011, the cocoa farmers of Indonesia present a valuable control group for the introduction of mobile payment and agent banking products.  This new market research reveals receptivity by farmers to the adoption of mobile money products but thoughtful product design and development of a trusted agent network will be essential.   The market research study includes several insights for product design and roll out.  Providers entering this market can use this research to inform their product and entry strategy and use those lessons as agent banking becomes permissible in Indonesia and mobile payments systems continue to spread into the rural and poor communities of Indonesia.   Getting it right the first time will be important for as one farmer said:  “If such a [mobile money] service is available, we will surely try it.  We may decide to not use it later on but we will at least try.”  The time has come to try and providers should answer that call. 

Bank Indonesia recently released guidelines for pilots by banks and telecommunications companies using mobile technology and third parties to provide limited banking services to important sectors like the cocoa industry.  

Brian Dusza is the Deputy Director for the Office of Economic Growth at the USAID Mission in Indonesia, Shelley Spencer is the Program Director of the Payment Innovations Group at NetHope, Grace Retnowati is the Country Director for MicroSave in Indonesia.