In the Fast Lane: Innovations in Digital Finance In the Fast Lane: Innovations in Digital Finance MARCIA PARADA AND GRETA BULL Acknowledgements The authors would like to thank the IFC team: Aiaze Mitha, Charles Niehaus, Joseck Luminzu Mudiri, and Scott Stefanski for their contributions to the development of this paper, as well as the continuous intellectual support throughout. The authors would also like to acknowledge the following industry observers who agreed to be interviewed for this research and thank them for generously sharing their knowledge and views on the industry: Andrew Lake, Annie Smith, Arjuna Costa, Camilo Tellez, Claudia McKay, David Porteous, Denis Moniotte, Graham Wright, Ignacio Mas, Ivan Mortimer-Schutts, Janine Firpo, Jennifer Isern, Kai Schmitz, Lowell Campbell, Margarete Biallas, Mark Flaming, Mark Wensley, Matt Gamser, Paul Breloff, Paul Reynolds, Roux van Zyl, Ruth Dueck-Mbeba, Susie Lonie, and Tillman Bruett. Finally, the authors would like to note that any errors, either of omission or commission, in this document are entirely their own. The views presented herein represent those of the authors and the IFC team working on this paper, and are not an official position of the World Bank Group. Authors Marcia Parada is a consultant with both the IFC Africa Greta Bull is the Program Manager for The Partnership Micro-Retail Advisory Services team and CGAP’s for Financial Inclusion and also manages IFC’s Micro- Technology and Business Model Innovation team, Retail Advisory Services programs in Sub-Saharan Africa, advancing the research and project agenda on branchless covering microfinance, mobile financial services and banking in order to expand financial services to the insurance. She has 24 years of experience in international unbanked. She has previously worked for IFC in Lima, Peru development, with 15 years of work in the development and Citigroup in New York. She holds a Master’s Degree finance field. She has previously worked in Eastern Europe, in International Policy Studies from Stanford University. the former Soviet Union and Latin America. She holds a Master’s Degree in Public Policy from Harvard University. ii In the Fast Lane: INNOVATIONS IN DIGITAL FINANCE Contents Introduction........................................................................................................................... 2 1. Distribution: The Missing Link ........................................................................................... 5 Trend: Apps and tools to digitize and speed up the account opening process.............................................................................. 5 Trend: Finger and voice biometrics as additional options for customer authentication.................................................................. 6 Trend: Optimizing distribution – field-force management tools to track field staff, agents, and/or merchants................................ 7 Trend: Emergence of third-party agent aggregators offering provider-agnostic agent services .................................................... 7 2. Back-office Innovations: Connecting the Dots...................................................................... 8 Trend: Application developers supporting financial institutions with mobile money integration ................................................... 8 Trend: Technology companies enabling merchant acceptance of digital payments in-store........................................................... 9 Infographic: The Future at Hand - innovation in digital financial services................................................................................... 10 Trend: Payment aggregators enabling online payments and e-commerce.................................................................................. 12 Trend: Leveraging alternative data sources for credit decisions ................................................................................................ 13 Trend: Leveraging alternative data sources for business intelligence ......................................................................................... 14 3. Product Innovation: Reaping the Benefits of Robust Infrastructure ................................... 15 Product Innovation for Consumers ................................................................................... 15 Trend: Pay-as-you-go for essential goods and services leveraging mobile payments infrastructure and machine-to-machine connectivity............................................................................................................................................. 15 Trend: Mobile on-demand micro-credit is in demand................................................................................................................ 16 Trend: Mobile micro-insurance making its way into poor African households............................................................................. 17 Trend: Formal products building on or leveraging observed informal behaviors and group capabilities....................................... 17 Trend: Proliferation of financial products offered by non-mobile money providers riding on top of the mobile money platform. .. 18 Trend: Consumer financial education – innovations in financial capabilities and rewards-based strategies................................. 19 Product Innovation for Business: The Case of Agribusiness................................................ 19 Trend: Pushing mobile payments from buyers to farmers for their produce................................................................................ 19 Trend: Index-based insurance dominating the agricultural micro-insurance space...................................................................... 20 Trend: Collective purchasing and selling in agribusiness made possible through mobile apps .................................................... 20 Conclusion........................................................................................................................... 21 1 Introduction Sub-Saharan Africa (SSA) poses many challenges to financial between 2009 and 2013, the proportion of Tanzanian adults who inclusion: basic infrastructure is relatively underdeveloped, were completely excluded from the financial system declined from populations are still very rural and therefore widely dispersed, 55% to 27%, with the proportion of adults using non-bank formal and a large proportion of the population (48.5%) lives below financial products rising from 7% to 44%. This had a measurable the international poverty line of $1.25 per day.1 As a result, it knock-on effect on access to bank accounts, with the proportion is estimated that only 17.5% of adults across the continent of people using formal bank products rising from 9% to 14% over have access to an account at a formal financial institution.2 And the same period.4 Data for Kenya show similar trends, with the yet, poor families receive wages, run businesses, and purchase proportion of adults using a bank account increasing from 13% goods and services, and therefore have a need for basic financial to 29% between 2006 and 2013.5 Clearly, mobile financial services services that help to manage economic decisions and risk. are having an impact on access to formal financial services; in Excluded from formal finance, unbanked individuals resort to fact, in nine emerging markets – all in SSA – there are now more informal mechanisms such as savings groups, moneylenders, or mobile money accounts than bank accounts.6 As a region, SSA has social support networks in lieu of banking and risk management 98 million7 registered mobile money users, representing 48% of products. These informal mechanisms are imperfect and can be the global user base. costly and risky substitutes. The primary obstacle to offering formal financial products to low-income customers has generally Over the last three to four years, successful mobile money been the cost of delivery, given the relatively small transaction operations have emerged in places like Tanzania, Zimbabwe, sizes involved. Although financial products for the poor have Uganda, Ghana, and Cote d’Ivoire, demonstrating that the existed for decades in the form of microfinance, the inability Kenyan M-PESA experience was not a one-off and mobile to deliver these products cost-effectively has made it difficult money is here to stay. Although operators continue to struggle for microfinance institutions (MFIs) to reach significant scale, with challenges around distribution, liquidity management, particularly in SSA, where population densities remain relatively product development, risk management, and fraud, the basic low. foundations for the industry have now been proven to work in multiple markets, based on the twin pillars of technology and Over the last few years, however, certain parts of Africa distribution. Will the industry look exactly the same in 10 years’ have experienced remarkable advances in financial inclusion time? Almost certainly not. But the elements are beginning to using digital financial services3, which leverage information and be well understood and a clear basic business model is emerging. communication technology and agent networks as a cost-efficient What is less well established are the possibilities for innovation distribution channel. These innovations have had a profound once the foundation for mobile financial services is in place. impact on financial inclusion in markets where they have taken root, and appear to leapfrog traditional banking and microfinance Why does innovation matter in digital financial services? infrastructure as a means of delivering financial services to the Although its contributions to financial inclusion are increasingly poor. A FinScope study conducted in Tanzania in 2013 found that well documented, this is an industry that is still in its infancy. It 1 World Bank, World Development Indicators, 2010. 2 World Bank, Little Data Book on Financial Development, 2013. 3 The terms “digital financial services” and “mobile financial services” are somewhat different in meaning: “digital financial services” is broader, encompassing electronic payments, including retail payments by card or mobile phone. “Mobile financial services” is restricted to phone-based payments, and is sometimes also referred to as “mobile money”. Mobile payments are a large subset of digital financial services in the African context, where card payments are relatively small. As such, for the sake of simplicity (and given the increasing convergence between the two outlined in this paper), the two terms are used interchangeably throughout. 4 FinScope Tanzania, 2013 report summary. FinMark Trust and Financial Sector Deepening Trust Tanzania. 5 Alliance for Financial Inclusion presentation, “Where are Mobile Financial Services in Africa?”, John Owens, 5 February 2014. 6 Pénicaud, C. & Katakam, A. State of the Industry 2013: Mobile Financial Services for the Unbanked, GSMA MMU, 2014. The nine countries are Cameroon, the Democratic Republic of Congo, Gabon, Kenya, Madagascar, Tanzania, Uganda, Zambia, and Zimbabwe. 7 Ibid. 2 In the Fast Lane: Innovations in Digital Finance has clearly had a disruptive effect on the financial services and Distribution payments industries in Africa, and there is growing convergence Maintaining and growing networks of ubiquitous, liquid and between the world of mobile network operators (MNOs), banks, well-trained agents is a formidable challenge. Even in places MFIs, and payment services providers. These disparate entities like Kenya, still only a small proportion of transactions are are increasingly being tied together in an ecosystem that not only made through digital means. Cash is still king: customer trust, enables the participation of low-income people in the formal platform integration, and interoperability issues stand in the way financial sector for the first time, but also provides business of replacing paper with virtual currency. opportunities for international players and African companies alike, from agents in rural Kenya to technology start-ups in Back-Office Provider Systems Nairobi or Silicon Valley. Many of the innovations described Integration between mobile money systems is imperfect and in this paper will potentially act as the “glue” that will bind this hampered as much by business arrangements as by technological new ecosystem together and make it function efficiently and shortcomings. Beyond basic interconnection, there are still at sufficiently low cost to reach the mass market. For a fully challenges with managing data from customers to providers and integrated, inclusive financial system to emerge, many changes connecting data points in ways that benefit end-users. Many of are required in regulation, technology, interoperability, product, the innovations we surveyed are focused on addressing these and process. It will also require strategic rethinks of traditional inefficiencies, and will help to improve the customer experience business models, particularly in the banking sector. Innovation is as well as facilitate a broader range of products and services driving those changes and the rapid evolution of the ecosystem is available to consumers. pointing to the possibilities that digital financial services offer. On the continent, Kenya and Tanzania are leading the way, but other Products markets are catching up and innovations originating in other parts In mid-2013, 92.6% of mobile money transactions globally were of the world are rapidly being adopted in Africa. either airtime purchases or person-to-person (P2P) transfers.8 This shows that even where robust digital platforms are in place, Challenges remain in the current ecosystem, and many of the the industry still has challenges going beyond transactional innovations we found are aimed at making the system function services and offering additional products such as savings, more efficiently. We have grouped these into three broad and credit, and insurance. Many of the innovations surveyed in this interconnected categories, listed to the right here: paper leverage technology to offer a wider range of consumer products. Penetrating beyond the retail customer segment While we do not rule out the emergence of a completely new to digitize business-to-business (B2B) value chains remains digital financial services ecosystem in the medium to long term, particularly difficult, but it is beginning to be tackled. we believe the process will more likely be evolutionary and build on existing systems. Bit by bit the challenges will be chipped away and new solutions will emerge for consumers. The cast of 8 Pénicaud, C. & Katakam, A. State of the Industry 2013: Mobile Financial Services for the Unbanked, GSMA MMU, 2014. 3 characters may change, but many basic functions will remain the the changes under way in the digital financial services industry in same – albeit perhaps managed in different ways. For example, Africa today and to offer a glimpse of what these innovations may as cash is increasingly kept in the system, the need for cash-in/ mean for mobile money on the continent in the coming decade. cash-out agents may diminish. But a digital system will still require acceptance points for payments, and so agents may eventually The paper is structured as follows: Section 1 summarizes key evolve into merchants. And someone will still have to go out and innovation trends in the distribution of digital financial services, acquire those merchants, just as today’s mobile money providers including solutions for customer registration and activation, are acquiring agents. In short, the larger trend observed in many and improvements in agent network management. Section 2 of the innovations cited here is a growing convergence between discusses back-office innovations enabling, first, the integration mobile money and traditional payment systems, which has of mobile money systems with merchants, or with financial important implications for many financial sector businesses. services providers (FSPs) other than the mobile money provider. Secondly, back-office innovations are identified in the area of The purpose of this paper is to describe trends in the growing data analytics – the leveraging of large datasets of customer number of innovations in the mobile money and digital payments and transaction information to score potential borrowers, or for space, and to understand how these simple systems are evolving to business intelligence purposes. Lastly, Section 3 focuses on users deliver a more effective and diverse portfolio of financial services. of basic financial services and product innovations available to We have intentionally focused on innovations that have practical them. Innovation trends in financial products and applications applications for financial inclusion in Africa. We do not pretend (“apps”) for both individual consumers and agribusiness value to have captured all innovation in digital financial services, and chains are highlighted, including mobile micro-insurance, categorizations are not perfect, as many solutions meet multiple pension products and pay-as-you-go solutions for utility services. needs. Nor do we offer opinions on any given innovation or its Reference to specific service providers is made throughout the chances of success. Our aim is simply to provide a snapshot of paper. The final section summarizes and concludes the paper. 4 In the Fast Lane: Innovations in Digital Finance 1. Distribution: The Missing Link The lack of infrastructure is a key challenge in Africa, and immediately, or in the worst case discourages potential distribution is often the missing link between innovation and customers from registering for the service altogether. impact. Even in countries with nearly ubiquitous agent networks, such as Kenya and Tanzania, distribution remains a principal In response to these shortcomings, FSPs have experimented challenge in the development of mobile money: with innovations and product solutions to improve customer registration and activation, and agent network challenges. 1. Agent liquidity: Agents in rural areas – where conventional financial infrastructure is virtually non-existent – often have trouble rebalancing their float, leaving many customers Trend: Apps and tools to digitize and speed up the account dissatisfied and diminishing trust in the service. opening process One of the most pressing distribution challenges providers face 2. Interoperability: Mobile money solutions are usually not in acquiring an active customer base is the slow account opening interoperable between providers. For instance, a Vodacom procedure at the point of sale (agents or branches). Although subscriber cannot easily send money to a Tigo subscriber, improving, user activity rates remain low: only 30% of registered just as a mobile money agent providing services on behalf users globally conducted one or more transactions within the of both Vodacom and Tigo cannot rebalance between both last 90 days, which is conventionally regarded as the minimum wallets, locking in liquidity that could have been used to serve threshold to consider a user active. What has been found to additional customers. be a determinant of user activity is whether users were able to 3. Fraud and network downtime: Rapid agent network growth has transact immediately after registering. A recent study found that resulted in incidents of fraud and service downtime in some 49% of users that conducted their first transaction at registration markets. For example, according to a report by MicroSave remained active versus 39% of users who did not transact at and the Bill & Melinda Gates Foundation,9 a median of registration. Consequently, digitized and automated account 10 10 transactions per day per agent is being denied due to opening procedures are expected to increase customer activity and service downtime in Uganda. Ugandan agents could increase retention, following the registration process. KYC regulations, their daily transactions by 33% if this issue was resolved. in particular, mandate the collection of certain identification documents before an account is opened. Mobile money providers 4. Trust: Any failure in the system, including those mentioned and specialized vendors have now developed mobile apps and above, leads to loss of customers’ trust, which is generally tools to digitize and ease the client on-boarding process. difficult to repair. • Financial institutions such as Equity Bank, KCB and CIC 5. Slow account opening procedures: In certain jurisdictions, Insurance Group in Kenya have developed tools in-house onerous Know-Your-Customer (KYC) regulations delay that provide a first step in the electronic collection of account activation, which prevents users from transacting documentation of clients, which is later sent securely to a 9 http://helix-institute.com/data-and-insights/agent-network-accelerator-survey-%E2%80%93-uganda-country-report-2013-0 10 Note: According to data from one mobile money operator. http://www.gsma.com/mobilefordevelopment/the-big-payoff-getting-customers- active-at-registration 5 server. This speeds up customer registration on the system • Other companies offer fingerprint biometrics solutions for and allows for the reconciliation of documents that may have staff or agents authenticating customers: AuthenTec and been lost in transit. Remote Harbor in the United States offer low-cost solutions globally for fingerprint identification on computers and • FINO, a branchless banking provider in India, offers a full mobile devices. suite of biometric products for enrolment, storage, and verification of documents, with all back-end system elements • Both the latest iPhone and Samsung cellphones feature a to complete customer applications. biometric fingerprint scanner used to unlock the device, and now to power payments. Samsung has recently partnered with Mobile imaging is also being used to speed up registrations, Paypal to offer payment-by-finger.12 authenticate users and transactions, and reduce fraud. This new element risks dis-intermediating the MNO from • Jumio, Mitek Systems, Card.io and Abbyy – all specialized the dedicated secure space, provided the user has access to a vendors in optical character recognition, document capture, smartphone. and processing – offer mobile imaging and dynamic data capture solutions globally. Jumio enables smartphone cameras • An example is that of Tangaza Pesa, a money transfer and webcams held by agents or merchants to image identity system in Kenya that has been operating a successful documents (IDs) and credit cards for verification and payment. business registering and authenticating customers using a Jumio also recently expanded its identity verification tools by fingerprint biometrics solution, obviating the need for an ID. launching “Face Match”, a feature matching ID photos with Facilitated registration and user authentication has become an end-user’s face.11 one of Tangaza Pesa’s principal differentiating advantages: finger biometrics is high security and low cost, requiring Trend: Finger and voice biometrics as additional options for no paperwork and providing the added convenience to customer authentication customers of not having to remember a PIN. However, the Illiteracy is still a real barrier preventing people from engaging interoperability of the fingerprint is still quite low in Africa, with technology-enabled financial services. For example, making it difficult for providers to offer its customers the transactions that require personal identification number (PIN) convenience of transacting or withdrawing cash at a partner authentication are troublesome for number-illiterate users. While network. Furthermore, fingerprint readers require agents finding a secure two-factor authentication mix appropriate for the to be well trained at guiding clients in recording a readable target population is still a challenge, lower-cost finger and voice fingerprint. biometrics options are opening up the spectrum of solutions • Another example is UBL Bank in Pakistan, which recently available. announced it will partner with VoiceTrust to deliver voice • A range of specialized vendors (Nuance, VoiceTrust, InAuth, biometrics solutions for authentication of its retail customers. and VoicePay) sell voice biometric solutions globally to Voice identification, like fingerprints, reduces the need for financial institutions to authenticate transactions and reduce customers to remember PINs, passwords, and security fraud. questions. The voice solution will provide interactive voice response (IVR) authentication in both Urdu and English.13 11 http://techcrunch.com/2013/09/18/jumio-adds-facial-detection-to-its-web-mobile-identify-verification-service-netverify/ 12 http://www.technologyreview.com/news/525996/pay-with-your-fingerprint/ 13 www.voicetrust.com/news/ubl-selects-voicetrust-for-voice-biometrics/ 6 In the Fast Lane: Innovations in Digital Finance Trend: Optimizing distribution – field-force management Trend: Emergence of third-party agent aggregators offering tools to track field staff, agents, and/or merchants provider-agnostic agent services Building, incentivizing and managing an agent network that In a competitive race for market share, MNOs in Africa have results in a positive and consistent experience for customers built closed-loop mobile money services with proprietary agent is critical to building trust in the system. This entails selecting networks. Such systems don’t bode well for customer convenience, strong-performing agents to operate in strategic and convenient as an Orange customer cannot cash out at an MTN agent, nor locations that receive ongoing training and business support. As can a Tigo and Airtel agent tap into his Airtel wallet to serve a agent networks grow in size and complexity, providing consistent Tigo customer. In an effort to improve the customer experience business support to agents has become difficult. The Grameen and alleviate agent operations, “aggregators” are offering agency Foundation’s App Lab in Uganda, for example, identified the and payment services that serve clients of all mobile money following gaps in the distribution value chain: “the head office deployments. These aggregators are solving problems of long needed transparency of their sales agent activities, the trade queues and bringing agent services closer to home for users. representative needed a mobile relationship management tool, and the agent needed more effective business support”.14 Models • Maxcom has aggregated agency and payment services of to logistically support field agents and network infrastructure are many FSPs in Tanzania and Rwanda, including Airtel, Tigo, now emerging: Vodacom, and Sasatel. It also provides over-the-counter (OTC) payment services directly for government, and utility • Grameen Foundation’s Uganda App Lab in partnership with and pay-tv companies.17 Selcom in Tanzania is similarly Salesforce, an application developer, developed a mobile field providing cash-out and bill payment solutions for mobile force management tool (Taroworks), which was deployed money providers and banks through a single device at Selcom throughout mobile operator MTN’s sales force in Uganda, agents. and has managed to increase the speed of mobile money registrations.15 Tool capabilities include monitoring and • BeyondBranches in Nigeria has recently started to offer evaluation, portfolio, transaction and performance tracking, agent services to clients of banks and MNOs through an and training delivery. interesting business model. The start-up identifies and trains retailers to become agents equipped with an Internet-enabled • Field marketing support agencies Afrikings and Top Image have mobile handset. Once they pass a quality-control test, agents introduced field management tools; Kenya’s leading merchant are entitled to offer BeyondBranches branded services that acquirer Kopo Kopo has introduced merchant management include cash deposits into bank accounts and OTC bill pay tools. Even though no single organization has developed a transactions, including airtime. On the side, BeyondBranches complete set, the tools available are many times linked to a plans to offer its agents a suite of small business services portal, which also tracks the logistics of agent applications, such as inventory management, store credit tracking, credit delivery, and performance. As an example of how effective provider assessment, insurance purchase, and mobile-based these tools can be, in 2012, MTN in Cote D’Ivoire outsourced advertising.18 Such value-added services are designed to help its distribution network management to Top Image, resulting agents manage day-to-day business and make them savvier in a 400% increase in agent profitability.16 Top Image managed mobile users, thereby increasing the quality of agent services agent performance more closely with such tools, developed and support clients receive. stronger agent recruitment requirements, and provided them with additional liquidity. 14 http://www.microfinancegateway.org/p/site/m/template.rc/1.26.18774/ 15 Ibid. 16 Pénicaud, C. & Katakam, A. State of the Industry 2013: Mobile Financial Services for the Unbanked, GSMA MMU, 2014. Textbox 3: Mobile Money in Cote D’Ivoire: A Turnaround Story. 17 http://www.humanipo.com/news/6814/tanzania-based-maxcom-africa-to-make-inroads-in-kenya-uganda/ 18 http://www.beyondbranches.com/index.php/news-room/agent-network-3-0 7 2. Back-office Innovations: Connecting the Dots Achieving higher rates of customer registration and activity by sole lender, while using the MNO’s services of mobile money innovating on distribution challenges is not the only important payments merely as a low-cost payment platform. If the lender aspect of attaining a successful mobile money business. In and the owner of the payment platform are separate institutions, parallel, the business should crowd-in other businesses and FSPs the need arises to integrate their systems, allowing customers, for so that e-payments are accepted in as many places as possible, instance, to service their micro-loan with mobile money. Given driving up revenue for the mobile money provider and improving the absence of standard APIs, integration is a daunting task customer convenience. Challenges preventing mobile money for financial institutions, particularly for small MFIs with low from becoming the instrument of choice include: institutional capacity. Some specialized IT firms and application developers, however, have connected the dots and spotted a 1. Integration: Smaller financial institutions with low institutional business opportunity providing integration services.19 capacity cannot integrate with mobile money systems in the absence of standard Application Programming Interfaces • Tangazoletu, a software company in Kenya, developed an (API). application called Spotcash that allows clients of Savings and Credit Cooperatives (SACCOs) and MFIs to deposit and 2. Merchant value proposition: Mobile money is still only being withdraw cash to and from their savings account by sending used for a minority of payments in SSA, primarily for remote an SMS to the financial institution. The money is then payments and P2P transfers. Retailers and businesses still lack transferred to or from the client’s M-PESA mobile money incentives to offer mobile money to their clients as a method account. of payment in-store or online. • Cellulant and Coretec Systems in Kenya offer small financial 3. Limited product offering: Mobile money providers for the institutions similar M-PESA integration services. most part offer purely transactional services to clients. In • For financial institutions seeking MNO-independent many cases, this transactional data are not being exploited solutions for mobile banking, F-Road in China offers a to better understand customer segments or to design new service that enables even basic feature phones to benefit from products. high security and functionality. F-Road uses a SIM overlay In response to these market gaps, several application developers technology – a paper-thin sheet with an embedded chip – that and data analytics companies offering back-office services (such connects with the SIM card but does not require collaboration as integration, aggregation, and data analytics) to both FSPs and with an MNO. Touch points built into the overlay filter businesses have emerged. information between the two layers. The hardware provides a means to store and carry program logic independent of the Trend: Application developers supporting financial SIM, allowing F-Road partner banks to provide a SIM-neutral institutions with mobile money integration solution to their clients, while at the same time minimizing communications costs driving mobile banking functionality Mobile banking’s principal value, vis-à-vis traditional mass- for customers.20 market models, is that it leverages customers’ mobile phones as its distribution channel. Consequently, MNOs in partnership For companies seeking to outsource their branchless banking with financial institutions can offer mobile banking services most operations, Tyme in South Africa offers bespoke end-to-end conveniently. In some cases, however, banks or MFIs remain the services across the value chain on a hosted basis. Services include 19 For more details on these integrators, please refer to “An Emerging Platform: From Money Transfer System to Mobile Money Ecosystem”. http:// www.gsma.com/mobilefordevelopment/wp-content/uploads/2012/06/ssrnid1830704.pdf 20 http://www.cgap.org/blog/china-%E2%80%93-future-leader-branchless-banking-poor 8 In the Fast Lane: Innovations in Digital Finance User Centric Design (business models, processes, and products), but not necessarily entirely convincing yet for merchants Hosted Solutions (cloud-hosted technology, integration of operating and accustomed to cash-heavy environments different payment and loyalty products, core banking, merchant (or merchants who are M-PESA mobile money agents and and retailer interfaces, and KYC solutions), and Branchless receive a payment to perform a cash-out transaction). Despite Operations (field marketing, activation and support, back office the dominant agent economics in Kenya, by November 2013, functions, communications, and data). Tyme currently hosts and Kopo Kopo had around 10,000 merchants on its platform operates mobile money services for MTN in South Africa and is and was adding 1,500 new ones a month.22 also providing hosted services for EBank in Namibia, which is • Vastech in Tanzania offers its merchants transaction expected to launch during 2014. validation, branded text message notification, and flexible fund settlement in a mobile wallet or bank account at a 1% Trend: Technology companies enabling merchant acceptance of transaction value charge. The added benefits these services digital payments in-store offer (added analytics, efficiencies, security, and reduced fraud) will hopefully drive businesses and customers into Despite high mobile money user penetration in countries such using digital means of payment in-store. as Kenya and Tanzania, e-money is still only used for a small minority of payments (as opposed to P2P transfers or airtime Recently, MNOs have also started to acquire merchants directly. top-up). For proximity (as opposed to remote) payments, cash Safaricom is acquiring its own merchants to accept mobile continues to dominate. Some entrepreneurs have connected the money as a form of payment under the Lipa na M-PESA brand. dots and offer brick-and-mortar merchants a chance to accept Similarly, Telesom in Somaliland and Econet in Zimbabwe have mobile money for payments in-store, on behalf of mobile money cited developing merchant payments as a critical success factor in providers. their business strategies.23 Tigo in Tanzania is also experimenting • In 2010, Safaricom had only 100 formal merchant accounts with a merchant payments model. signed up under the M-PESA service in Kenya. They Growing interest in mobile money merchant payments directly enabled a start-up called Kopo Kopo, along with two other overlaps with the more traditional card business, and it is therefore companies, to acquire merchants on the Safaricom system. relevant to highlight briefly a number of innovations taking place Merchants who sign up with Kopo Kopo receive a new SIM in the card space. card that works on any phone, allowing it to work as a simple point-of-sale (POS) device. The company then aggregates all • A number of operators have developed low-cost POS devices M-PESA payments from customers into a single account. In for smartphones (mPOS), based on inexpensive dongles plus addition, cash flow summaries are displayed on a dashboard apps, including Square in the United States and Clip in Mexico. in the merchants’ online accounts, summarizing information Other providers have developed inexpensive card readers on customers and daily sales in a readily accessible format, that attach to the audio jack of smartphones or high-end practically eliminating all back-office work for the merchant. feature phones. Some mPOS players have also built merchant For its services, Kopo Kopo charges the merchant a 1% aggregation (or payment facilitator) platforms, allowing them flat rate of the value of every transaction. This is a more to reach further down the merchant channel. attractive proposition to the merchant compared to the 3% to 5% charge21 most credit card companies levy on payments, 21 Quoted on Kopo Kopo website. http://www.kopokopo.co.ke/ 22 http://pando.com/2013/11/11/kopo-kopo-building-the-square-of-africa-amid-terrorism-monopolists-and-huge-opportunity/ 23 http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2013/07/Telesom-Somaliland.pdf http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2013/07/EcoCash-Zimbabwe.pdf 9 the future at hand innovation in digital financial services $ LOANS INSURANCE SAVINGS PAYMENTS POS TV ON DEMAND MACHINE PAYG SOLAR POWER MOBILE PHONE PAYG WATER CUSTOMER PRODUCTS Innovations leverage technology to offer a wider range of consumer products, like pay-as-you-go water distribution for example. 10 In the Fast Lane: Innovations in Digital Finance 100 100101 00 10100 10110100 100100 001 Loan assessment 1010100 10010100 11000 11 10010100 Product development DATA ANALYTICS $ LOG $ IN go PERSONAL e-commerce FINANCE APP Marketing FIELD MANAGEMENT TOOLS MOBILE IMAGING BIOMETRIC IDENTIFICATION AGENT SERVICE PROVIDER DISTRIBUTION BACK OFFICE Innovations and product solutions to improve customer Includes innovations leveraging alternative data sources, registration and activation and agent network management, online and generated through the mobile money system, such as biometric identification. for business intelligence and development. Infographic: Bonny Jennings www.itldesign.co.za 11 • Near field communication (NFC) enabled devices make it easy Without low-cost, interoperable payment solutions – involving to take payment with a simple wave of a card or phone with an cards, phones, or both – the capacity of mobile money or cards embedded NFC chip or NFC sticker. Jib Technologies have to evolve into a ubiquitous payment instrument in-store in Africa developed an NFC sticker that can be attached to the back of will remain limited. In some markets, such as Nigeria and Ghana, the phone for payment. The shop’s accepting device needs to regulators are trying to build interoperability into mobile money have the same local radio capability, either into a traditional systems from their inception. In others, for example Tanzania POS terminal or into a smartphone or tablet. and Indonesia, industry is coming together to try to develop scheme rules for interoperability. In other instances, technology • A number of POS devices are offering additional business solutions are being developed that enable interconnectivity in solutions and value-adds. Zoop (in Brazil and the United States) mobile money systems. offers a pocket-sized bluetooth mPOS device that accepts chip and PIN, magstripe, and NFC/contactless cards and phones. In addition, the company offers integrated services Trend: Payment aggregators enabling online payments and including sales data tracking, contact management, real-time e-commerce inventory management, staff time-keeping, and a dashboard Payment aggregators are enabling businesses to accept payments with analytics. iZettle (in Brazil and Europe) offers a free app, online, using mobile money or cards at “multiple payment a secure card reader, and analytics that help merchants keep gateways”. On these payment websites, users have available a one- track of their business. Ezetap (India) accepts card payments stop-shop to make routine payments such as school tuition, utility through a mobile phone or tablet and an Ezetap card reader bills, and mobile airtime, or to shop for goods. For businesses, and application for transactions under $50. The service also payments received from customers using different payment includes daily settlement, paperless reconciliation, and online methods are aggregated into a single account. Historically a records. common service for card aggregation, these services are now being extended to include mobile money as a means of payment.24 It should also be noted that the traditional card players, MasterCard and Visa, are introducing new products and • Pesapal is one of the best-known payment gateways, currently functionalities to complement their traditional business models to aggregating 11 payment options for 12,000 schools and 10,000 accommodate growing demand for merchant services in Africa. businesses all over East Africa.25 Consumers can make web Initial experiments with virtual card overlays on mobile wallets in and mobile payments for bills, school fees, tickets, airtime, 2011 have given way to new products aimed at the mass market. and shopping for a small percentage of the transaction Visa has launched two initiatives: mVisa, an interoperable mobile amount. Merchants pay Pesapal 3.5% per transaction value money solution in Rwanda, and Visa Mobile Payments (VMP) in on average.26 Botswana, which provides Visa payment functionality for holders of Orange Money mobile wallets through a linked Visa pre-paid • 3G Direct Pay focuses on aggregation solutions for hundreds card. MasterCard is exploring similar mass-market products by of travel-related businesses in East Africa and Southern developing a national ID with payment functionality in Nigeria Africa. It recently announced27 a partnership with Kopo and launching the Phone Cash mobile wallet in partnership with Kopo to enable merchants to accept mobile money both in- NBE Bank in Egypt. The wallet is a downloadable payments app store and online. that is MNO-neutral and can be linked to a MasterCard credit • iPay Africa enables businesses to accept multiple digital card. payments, both online and in-store. 24 Note: For a review of the different payment modalities for online purchases through the mobile, please see Ignacio Mas and Mireya Almazan’s “Product Innovation on Mobile Money”: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1707704. 25 http://blog.pesapal.com/pesapal-payment-options/ 26 This can reduce to 2.7% depending on monthly volumes. For ticket sales, the merchant cost per transaction is 5%, reducible to 4% depending on monthly volumes. 27 http://www.3gdirectpay.com/blog/partnership-between-3gdirectpay-and-kopokopo/ 12 In the Fast Lane: Innovations in Digital Finance Trend: Leveraging alternative data sources for credit decisions • Cignifi (in Brazil, Ghana, Mexico, and Chile) and First Access (in Tanzania) offer FSPs customer targeting and credit scoring In today’s “Big Data” world, data analytics providers harness services for a fee, using patented algorithms and models. advances in computation power and the ever-growing availability of data to innovate and solve complex business problems in a • Experian Microanalytics (international) is providing full wide range of areas. Online and mobile banking are poised to loan cycle management for FSPs, including loan origination, benefit in particular from improvements in data analytics, as the underwriting, and servicing. identity and consumption behavior of users are instantly digitized and transmitted to service providers. • Mobile Decisioning (MODe, in Kenya) advances airtime to customers on behalf of the MNO, using prior airtime Data are being analyzed for an array of purposes in digital purchase and usage as credit variables, and assumes the risk financial services, including to prevent fraud and to improve of airtime repayment. decision-making in almost every part of the business. But lately, • Tiaxa (in Latin America and Southeast Asia) offers emergency alternative data analytics has been making headlines for its credit and airtime advances for pre-paid cell phone users, also promising potential to revolutionize loan underwriting. In Africa using airtime usage and purchase patterns as credit variables. and in other parts of the developing world, the poor usually cannot be assessed properly by lending institutions to measure Other mobile money providers have built data analytics repayment risk. Credit bureaus either do not exist, or hold very capabilities in-house. limited information on individuals. • Safaricom and Commercial Bank of Africa in Kenya score In the absence of information on creditworthiness, microfinance M-PESA users wanting to access the M-Shwari loan product. has experimented with several models to manage default risk. In As of 2014, the M-Shwari product had extended $92 million group-lending models, for instance, peer pressure effectively acts in loans, with a 3.1% default rate, 1.9% lower than the 5% as loan collateral, but requires a close net of social ties ex ante, Kenya average.28 usually found in small villages, and is therefore not suitable to scale. In individual lending models, loan officers interact heavily In summary, mobile money providers have three options at their with prospective clients, driving up the production cost of loan disposal when leveraging mobile data for credit scoring: purchase underwriting and concomitantly higher interest rates. analytics services from an external vendor, purchase analytics together with full loan cycle management (“managed service”), Mobile phone customers leave digital footprints every day, with or build analytics capabilities in house. every transaction: airtime purchase and usage patterns, SMS messaging patterns, and mobile money transactions. When As an alternative source of data to mobile transactions, some combined with information gathered directly from the borrower startups have developed mobile apps to support businesses such as income and marital status, data analytics companies or individuals with financial management decisions, thereby gauge the creditworthiness of potential clients and estimate loan generating data later used for credit scoring. amounts that can be extended to them. 28 http://www.itwebafrica.com/mobile/309-kenya/232389-140000-default-on-kenyas-m-shwari-loans, and http://www.theeastafrican.co.ke/ business/Hard-times-for-banks-as-NPLs-rise--growth-slows-/-/2560/2226814/-/usqkdjz/-/index.html, citing Central Bank of Kenya data as of December 2013. Five percent system non-performing loans reported on Central Bank of Kenya website from March 2013. 13 • InVenture in India developed an accounting tool called is then used to produce a credit score. A company designing such Insight, which helps businesses and households track daily a platform for FSPs is Entrepreneurial Finance Labs. revenue and expenses via SMS. Furthermore, behavioral data company Revolution Credit offers • In Kenya, the same tool is being tested with MFI Musoni FSPs online financial education videos and quizzes for its clients clients, in an effort to obtain additional data points for credit to take throughout the loan process, allowing the company to scoring. gauge which client would be a better risk profile. With the advent of Facebook and other social media sites, lenders are mining social media data to determine borrower identity and Trend: Leveraging alternative data sources for business creditworthiness. intelligence Obviously, analyzing mobile money transaction data can have • In the Philippines, and now in Mexico and Colombia, Lenddo an even broader use for MNOs: identifying strong performing uses social media sources such as Twitter and Facebook to agents, understanding customer activation patterns, and improving determine borrower creditworthiness and extend loans online. marketing and services.30 As a result, specialized companies have • LendUp in the US attempts to gauge social network strength emerged that offer analytics services to MNOs and FSPs to better of prospective customers by looking at the characteristics of understand customers and improve efficiencies in distribution their relationships online and using that to make inferences networks. about social collateral and, by extension, creditworthiness. • Real Impact Analytics from Belgium offers mobile operators Even though Facebook users in Sub-Saharan Africa are half the data mining tools with social network and mobility analytics, number of mobile money users, services such as Whatsapp are 29 as well as sales and distribution analytics, to help operators increasingly gaining traction. improve their distribution network.31 Targeting a more middle-income demographic, a large number of A related application of sales transaction data is used in the fast- online lending platforms across developed and emerging markets moving consumer goods (FMCG) industry. are already making use of alternative data sources as inputs in • Scanntech, based in Uruguay, offers digital POS solutions their loan decisions. Examples in this category include Wonga in to small retailers, allowing them to manage inventory and to the UK and South Africa, and Kreditech and Kabbage in the US. record sales. Sales data (captured through a barcode scanner) is sold to FMCG companies such as Unilever and Pepsi, and Yet another innovation to score prospective clients is psychometric used to determine promotion strategies. The device is offered tests. Loan applicants are asked to complete tests administered on to retailers for free, and Scanntech derives its revenue from a PC or tablet in the form of a questionnaire based on psychometric on-selling the data. In the future, such sales data could also be principles such as abilities, attitudes, beliefs, and character, which used for FSPs to credit score prospective clients and extend working-capital loans to small businesses. 29 Pénicaud, C. & Katakam, A. State of the Industry 2013: Mobile Financial Services for the Unbanked, GSMA MMU, 2014. 14 In the Fast Lane: Innovations in Digital Finance 3. Product Innovation: Reaping the Benefits of Robust Infrastructure Most product innovation in mobile financial services in Africa has 3. Budget limitations: Mobile money divisions within MNOs come from markets that have already reached scale, such as Kenya operate on small budgets and have pressure to deliver results or Tanzania. Mobile money deployments in these countries share within short periods of time. This lack of flexibility leaves several characteristics: a widespread agent network that rewards little room for the necessary experimentation that usually well-performing agents and a mobile wallet proposition that results in product innovation. emphasizes customer care and customer education. New products offered today in Kenya and Tanzania include on-demand loans, Regardless of these innovation barriers, FSPs have launched new pay-as-you-go models for utility service consumption, and mobile products for low-income consumers and increasingly for the micro-insurance. agribusiness sector. A next step in the evolution of the mobile money industry will be penetrating into other B2B ecosystems Yet, product diversity at a global level leaves much to be desired: and value chains. 74.8% of mobile money transactions globally are airtime purchases and 17.8% are P2P money transfers.32 A precondition for product development and innovation is a well-managed Product Innovation for Consumers agent network and a habituated customer base, since a strong mobile money payment infrastructure will crowd-in other service Trend: Pay-as-you-go for essential goods and services leveraging providers. This includes, first, financial services that can be mobile payments infrastructure and machine-to-machine delivered more easily via the mobile channel by MFIs, banks, and connectivity the MNOs themselves. Secondly, institutions such as government As of 2011, 51% of the rural population in SSA had no access agencies, utility service companies, schools, and merchants can to clean drinking water. Some 88% had no access to the energy leverage the low-cost payment channel to distribute payments (in grid.34 New business models have now emerged that leverage both the case of government) or to collect payment for their services. the existing mobile payments infrastructure and the cost decrease Finally, third-party application developers will help with data of machine-to-machine (M2M) solutions to provide essential analytics, integration management, and application development services such as energy and water in an affordable and sustainable to facilitate and accelerate the delivery of these services. manner.35 More specifically, “pay-as-you-go” solutions have been developed whereby consumers pay for essential services in small Unfortunately, there are a number of barriers preventing further increments through mobile money: a portion of the device is innovation in products:33 down-paid at purchase and the balance is paid through small 1. Inadequate APIs: Mobile money providers operate closed- increments remotely via mobile money (lease-to-own). Using loop systems without adequate APIs, preventing others from mobile money for micro-payments thus remedies the problem of experimenting with additional product offerings and apps. revenue collection for off-grid energy delivery. 2. Regulation: Regulations also inhibit smaller non-bank players Furthermore, the M2M technology also allows retailers to mitigate from building credible mobile money offerings that would the risk of fraud or theft: solar home systems or water pumps create a more competitive marketplace conducive to greater serviced by these companies have embedded micro-controllers product innovation. that allow for remote operation and monitoring through 30 For details, please refer to CGAP’s work on customer data analytics with five providers: http://www.cgap.org/blog/mobile-money-even-data- analytics-has-limitations 31 For an example, please see: http://www.cgap.org/blog/can-voice-corridors-be-used-predict-mobile-money-hotspots 32 Pénicaud, C. & Katakam, A. State of the Industry 2013: Mobile Financial Services for the Unbanked, GSMA MMU, 2014. 33 http://www.ignaciomas.com/announcements/introducingacatalogofproductfunctionalitiesandinnovations inmobilemoney 34 GSMA, IEA, World Bank. Obtained from GSMA’s “Sustainable Energy and Water Access through M2M Connectivity”, 2012. http://www.gsma. com/mobilefordevelopment/wp-content/uploads/2013/01/Sustainable-Energy-and-Water-Access-through-M2M-Connectivity.pdf 35 For more information, see GSMA’s “Sustainable Energy and Water Access through M2M Connectivity”, 2012. 15 GSM/GPRS connectivity. In addition to preventing fraud, the Pay-as-you-go models have also gained traction in other sectors technology also facilitates data collection of user consumption such as in health, education, and even in cable TV services. and tracks potential operational problems remotely. As of year- According to the GSMA, there are around 250 m-Health services end 2013, CGAP had identified 28 companies offering off-grid currently in operation across SSA, some of which use mobile energy solutions of which 23 are based in Africa. In addition, money for payments.40 Similarly, in education, Kytabu in Kenya CGAP identified 15 water turnkey solutions of which nine are is offering a textbook subscription service allowing customers to based in Africa.36 buy or rent pages or chapters of books that can be downloaded onto mobile devices with micro-installments. • M-KOPA in Kenya and Angaza Design in Tanzania sell solar equipment varying from basic solar lanterns to more sophisticated solar home systems that have the capacity to Trend: Mobile on-demand micro-credit is in demand power larger household items such as a TV or a fan. Both As explained earlier, traditional microfinance models are either companies are now expanding into other African markets. very costly to produce, or difficult to deliver in remote places. The devices sold by M-KOPA are GSM/GPRS enabled, Mobile money is beginning to shift the center of gravity for the while others such as Angaza Design use Frequency Shift delivery of financial services in some markets. Keying (FSK)37, bypassing the need to install a costly chip in the device sold by MNOs. The disadvantage of the FSK • No other micro-credit and -savings product has had as high model is that the provider does not have complete control user uptake as M-Shwari in Kenya. Leveraging the M-PESA of the device, as connectivity requires the customer to brand, M-Shwari offers users an interest-bearing account with open the communication channel. Regardless of the model, the possibility to access 30-day loans in real-time. The product MNOs stand to benefit substantially from such solutions by accumulates $2.35 million in daily savings from about 6 million an increase in average revenue per user (ARPU) of 10% to users, and extends 30,000 loans on an average day, with an 14%.38 average loan size of around $1041. The high user uptake in only one year’s time is a strong indication of the significant • Clean water service companies such as Grundfos Lifelink in demand for short-term, paperless, real-time credit in Kenya. Kenya and Sarvajal in India supply, install, and service turnkey Other MFS providers in Africa are now following suit, trying to water solutions for communities. They leverage low-cost emulate the M-Shwari service. M-Shwari’s biggest innovation GSM/GPRS-enabled water meters whereby communities is its seamless on-boarding process. Loans are approved in can pay as they go for water through smart cards or RFID real-time based on credit-scoring models evaluating mobile key fobs that can be recharged with mobile money (in the transaction data of the user. No formal paperwork or case of Grundfos). The embedded smart technology enables interaction with a bank representative is required. When the remote monitoring and control of filtration operations, while loan is approved, the funds are immediately available on the capturing operational data. Mobile-enabled access to drinking user’s M-PESA account. Significantly, the user’s M-PESA water has also facilitated leak and theft detection, improved account serves as collateral against non-payment. monitoring, and increased water pump resilience.39 Depending on the business model, people pay as little as $0.001 per liter • A related, on-demand micro-credit product has been launched of purified water in Kenya and $0.003 per liter in India. by MTN in conjunction with MFS Africa for formally salaried workers. KwikAdvance, a cash-advance product launched in 36 http://www.cgap.org/topics/digital-finance-plus 37 The customer sends the mobile payment and immediately receives a phone call from the operator who plays a “tone” back to the customer who holds the phone up to the system (for transmission). The device then releases another tone that is transmitted through the phone to the operator with information on energy consumption. 38 GSMA’s “Sustainable Energy and Water Access through M2M Connectivity”, 2012. 39 A full list of impact to water providers, consumers and MNOs is provided in GSMA’s Sustainable Energy and Water Access through M2M Connectivity. http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2013/01/Sustainable-Energy-and-Water-Access-through-M2M- Connectivity.pdf 40 http://www.gsma.com/newsroom/sub-saharan-africa-leads-world/ 41 http://www.itwebafrica.com/mobile/309-kenya/232389-140000-default-on-kenyas-m-shwari-loans 16 In the Fast Lane: Innovations in Digital Finance Ghana, Cameroon, and Liberia, allows MTN mobile money coverage, or extend the coverage to an additional family users to access 40% of their net salary before the end of member, for a small monthly premium. Premiums are paid the month. Users then receive the proceeds in their mobile either with airtime (46%) or mobile money (54%).43 money account within one minute. • Cooperative insurance companies M-Bima (life insurance) and Linda Jamii (health insurance) in Kenya offer micro- Trend: Mobile micro-insurance making its way into poor insurance products for a regular premium payable through African households mobile money. Even though operational only since 2013, Perhaps the most challenging financial product to explain and Linda Jamii has already signed up 100,000 customers. sell to the poor is that of insurance: a buyer of insurance pays periodic premiums to a provider, with no tangible assurance that Trend: Formal products building on or leveraging observed he or she will ever see the money again. Despite this, insurance informal behaviors and group capabilities providers have continued to innovate to deliver insurance services to a low-income demographic. CGAP counted 84 live mobile Unbanked people in Africa and other parts of the developing micro-insurance products as of August 2013, 54% of which were world usually rely on informal financial practices that protect found in SSA.42 Some 76% of these products offer life insurance, them against risk rather than accessing formal financial services. while the rest offer some variation of health, accident, cattle, crop, How can informal financial practices be translated into formal and travel insurance. The simplicity of a life insurance product product features that appeal to the unbanked? A few different in terms of sales and claims administration processes makes it models are taking the experience of informal savings groups perhaps the most suitable product to market through the mobile (Tandas, Roscas, and Chamas) online to broaden the reach of phone. users, improve convenience and quality, and reduce cost. • Emoneypool and Yattos in the United States provide an Interestingly, micro-insurance products were originally pushed online platform for savings circles – groups of people saving by insurance companies looking to penetrate new customer together, taking turns to access the collective savings and segments. Nowadays, non-insurance entities such as MNOs seem leveraging the existence of online social networks. to be playing a more important role in the development of the product, beyond simply providing the delivery channel. • In Kenya, Bank of Africa and Safaricom are launching a mobile platform for Savings Loan Group management called • Airtel uniMobile (Ghana), TNM Moyo Cover (Malawi), and M-Chama. YuMobile yuCover (Kenya), in partnership with specialized micro-insurance B2B service providers such as Microensure In developing countries, the poor will generally turn to family and and Bima, are offering life insurance coverage free of charge social networks in times of need. Microfinance has leveraged this (no premium) to customers meeting minimum transaction or informal asset as a form of collateral: loans are extended to social airtime balance requirements, thereby seeking active customer groups, using peer pressure for repayment. loyalty. • Lenddo is leveraging social networks such as Facebook and • Other MNOs (Tigo Family Care in Ghana and Vodacom Twitter for peer-to-peer vouching to extend loans online. Faraja in Tanzania) have innovated a bit further, offering a Lenddo also uses alternative data, such as social media, to so-called “freemium” model whereby the user gets basic more cheaply assess borrower creditworthiness. Such a model insurance free of charge, but can choose to double the 42 For additional details on mobile micro-insurance products, refer to CGAP’s “The Emerging Global Landscape of Mobile Microinsurance”, 2014, and GSMA’s “State of the Industry 2013: Mobile Money for the Unbanked”, 2014. 43 Ibid. Note: Regulation in some countries does not allow for insurance to be paid with airtime, while lack of e-regulation in other countries prevents insurance from being paid with mobile money. http://www.cgap.org/blog/designing-mobile-microinsurance-products-premium-payment- methods and http://www.microinsurancefacility.org/publications/mp26 17 could be disruptive enough to achieve what traditional finance ultimately to mortgages. Whether this will remain a P2P network has not so far: broad reach at affordable interest rates. exchange or turn into a different sort of funding platform is still unclear, but volumes are significant enough to merit attention. • LendFriend in the United States allows borrowers to choose their loan terms and draft a pitch online to send to their social network to get funded. Trend: Proliferation of financial products offered by non- mobile money providers riding on top of the mobile money • South Africa’s Maana Mobile is leveraging people’s social platform. networks by supporting handshake loans, pawning, and group savings/lending management on feature or smart phones. Its A nascent financial service is the emergence of micro-pension apps give users direct access to their phone contact list, making products, helping informal workers save for retirement. it easy for users to include their social network for financial • Mbao Pension Scheme members in Kenya deposit a voluntary management. Maana is currently assisting small shops with minimum of 20 Kenyan shillings ($0.30) per day using either their informal store credit management and utilizes the data M-PESA or Airtel mobile money through the PayBill feature to later extend working capital loans to these shops. When (Mbao is slang for 20 Kenyan shillings in Kenya). With an referring to group capabilities, interconnectedness is cutting 8.5 million informal worker addressable market in Kenya, out the need for a middle-man, and enabling crowd-sourcing products such as the Mbao Pension Scheme can make a big as an innovative alternative business model for financial impact on financial inclusion. Like a regular pension plan, services (P2P lending, P2P invoice discounting, and P2P members benefit from tax advantages and investment income currency exchange) – all for a more affordable price. Online generated from investing the contributions. It is nevertheless P2P lending platforms are connecting individual borrower important to highlight the payment costs associated with and individual investors. products that are not run by mobile money providers, but • Zidisha (Benin, Burkina Faso, Guinea, Kenya, Mali, Niger, rather only use the payment channel. M-PESA for example, and Senegal) offers P2P lending platforms managed by charges $0.03 for an $0.12 to $0.57 mobile money transfer. volunteers. The borrower and lender determine interest If an Mbao pension member deposits 20 Kenyan shillings rates (and perform risk appraisal) bilaterally, without an ($0.30) daily from his M-PESA account, he is effectively intermediation service. paying a 15% surcharge on each payment. • Kubo Financiero (Mexico) also offers a P2P lending platform, • MFI Musoni in Kenya reduces loan distribution and but analyzes individual lender risks and sets interest rates used collection costs by leveraging mobile money to operate by the transacting parties. virtually cashless, as all loan repayments and disbursements are made via M-PESA mobile money transfer. It operates five Crowd-funded finance is in its early development stages and branches but none of them offer cash services. The branches long-term success is still uncertain, but volumes are growing are instead being used for customer service. Although not at to significant levels, augmented by institutional funds. Lending the speed of M-Shwari, loans are currently being disbursed 72 Club, a leader in the United States market, has grown to over $4 hours after application. This is still an improved time frame billion in loans, with over half sourced from individual lenders. 44 when compared to traditional microfinance. Since May 2010, To gauge future prospects for this model, it will be important to Musoni has disbursed 18,000 loans for a total of 500 million monitor efforts of seasoned players as they go public and seek to Kenyan shillings.45 expand their offerings to broader consumer credit offerings and 44 Stefanski, email exchange with Lending Club, 1 May 2014. 45 For a case study, please see GSMA’s “State of the Industry, 2013: Mobile Money for the Unbanked”, text box 18. 18 In the Fast Lane: Innovations in Digital Finance Trend: Consumer financial education – innovations in clients to drive customer engagement and increase savings financial capabilities and rewards-based strategies balances. A financial product aimed at low-income populations may struggle • An interesting text-based service, also designed to introduce to be successful absent a strategy to educate the customer on its savings discipline, is that of Piggymojo in the United States. use. Improving consumers’ “financial capability”46 has become When a user is tempted to buy something they could probably an important strategy for bringing the unbanked into the formal do without, he texts Piggymojo the dollar amount he wants financial system. to save and a short description of what he is not buying. The user can then visualize his savings at the end of the day. • Revolution Credit in the United States offers FSPs a set of online financial capability development programs in the • Save Up in the United States offers a reward program linked form of videos and quizzes offered at different stages of to financial and savings goals that employs gaming mechanics the lending process – customer acquisition, underwriting, to induce desired behaviors. or account management and collections. Revolution Credit reports to have reduced delinquency rates on loans extended Mobile app development challenges such as MyMobileApp- with such quizzes by 30%. Retention has been improved by Challenge and the FinCapDevChallenge are innovating next- over 67% by identifying better risk profiles across both thin- generation mobile tools using these ideas. file and no-file customers.47 For borrowers, such services offer the opportunity to learn about Product Innovation for Business: The financial management through engaging online videos. Some Case of Agribusiness have likened Revolution Credit to a more enjoyable traffic school In the quest for scale, MFS providers are also attempting to for credit, giving borrowers a second chance to access credit.48 go beyond the consumer segment and are looking to digitize Importantly, the videos are designed specifically for the respective B2B value chains. One example of such developments that step in the lending process, rather than having the education is particularly relevant to SSA is the case of agribusiness. The completely separate from the product. agriculture industry accounts for 25% of Africa’s GDP and • Payperks in the United States uses illustrated education and 70% of employment.49 Largely composed of small-scale farms, sweepstakes-based rewards for holders of pre-paid cards. farmers are typically limited by lack of machinery and capacity, Financial institutions add Payperks as a feature on their large information asymmetries (market prices and market access), products, such as pre-paid debit cards, to increase adoption, and lack of financial safety nets. To this end, mobile technology retention, desirable usage, customer self-service, and loyalty. has the potential to improve the information asymmetry gap throughout the agribusiness value chain, and provide farmers Prize-linked savings products or features that use behavioral with low-cost, risk-mitigating financial services. economics principles to incentivize savings behavior by making the act of saving fun and rewarding are also emerging. Trend: Pushing mobile payments from buyers to farmers for • MaMa accounts, launched by First National Bank in South their produce Africa, reward savers with monthly prizes. FSPs are increasingly leveraging mobile technology in the delivery • In Colombia, Juntos Finanzas has partnered with financial of agriculture financial services. Farmers have started to repay institutions to make their SMS savings coach available to micro-loans using mobile money at financial institutions such 46 The World Bank/OECD Russia Trust Fund defines financial capability as “The internal capacity to act in one’s best financial interest, given socioeconomic and environmental conditions. It encompasses knowledge (literacy), attitudes, skills, and behavior of consumers with respect to understanding, selecting and using financial services, and the ability to access financial services that fit their needs“. 47 FinnovateFall 2013 Revolution Credit demo. http://www.finovate.com/fall13vid/revolutioncredit.html 48 http://www.americanbanker.com/issues/178_232/behavioral-data-startup-combines-big-data-with-credit-traffic-school-1064039-1.html 49 IFC, Agribusiness in Africa, http://www.ifc.org/wps/wcm/connect/region__ext_content/regions/sub-saharan+africa/investments/agribusiness 19 as Musoni, Juhudi Kilimo, and One Acre Fund in Kenya, and Another interesting micro-insurance product in the agribusiness Opportunity International Bank in Malawi. space leveraging weather and forage reading technology is that of index-based livestock insurance. Mobile money providers, large produce buyers, and implementing partners are jointly piloting several efforts to channel payments to • APA Insurance, in partnership with Leapfrog, ILRI, and farmers through mobile money. World Vision, have developed a micro-insurance product in Kenya that covers livestock in the event of drought and • In Zimbabwe, produce-buyer KAITE piloted the distribution which uses mobile money for premium and claim payments. of 448 farmer payments through Ecocash.50 The product uses satellite readings to monitor when rain or forage falls below the required level, which would then trigger • In Ghana, Agribusiness Systems International and major rice a claim payout. producer GADCO will pilot mobile payments to 500 rice farmers using Tigo Cash.51 Trend: Collective purchasing and selling in agribusiness made • SmartMoney in Tanzania and Zoona in Zambia have also possible through mobile apps experimented with mobile payments, resulting in lowered cash-handling costs for suppliers, and in higher perceived Given that the African agriculture sector is predominantly payment security for farmers.52 composed of small-sized firms, having a mechanism for farmers to group easily and collectively bargain for lower prices of inputs Just like in other areas, mobile money in the agribusiness space can be ground breaking. Farmer associations and cooperatives will only gain real traction when a large part of the value chain thus far have attempted to play this role, but mobile apps and transacts in e-currency, obviating the need to withdraw cash. mobile money payments hold the promise of a lower-cost, more Unfortunately, there is still a long-way to go from today’s closed- convenient, and seamless experience. loop and frequently subsidized pilots to the full digitization of • Application developer Virtual City has developed the agricultural value chains. Fertilizer App for small and medium farmers in Kenya. The app aggregates fertilizer orders sent in from farmers through Trend: Index-based insurance dominating the agricultural SMS or Unstructured Supplementary Service Data (USSD)54 micro-insurance space from various regions, and specifies local drop-off points where farmers can pick up their fertilizer. This allows them to Mobile technology is also leveraged for micro-insurance products obtain better prices for their farm inputs. in the agriculture space. • In Kenya, the app M-Farm offers an SMS and web-enabled • Kilimo Salama, offered in partnership between the Syngenta platform linking farmers to farm input suppliers for collective Foundation, UAP Insurance, and MNO Safaricom in Kenya, purchasing and selling. provides affordable index-based weather insurance for small farmers. Using automated weather stations to determine Additionally, smallholder farmers do not have readily available weather conditions, Kilimo Salama has set up a system that access to business-relevant, real-time information such as automatically triggers claim assessment and payouts based weather forecasts, market prices for inputs, or market prices for on weather data without the need for costly onsite claim their produce. As a result, several foundations and development verification. The cost of the service is further reduced by organizations have supported the development of mobile apps claims being paid out through mobile money. Now the most that can bridge this information gap and make this information popular agricultural insurance program in Africa, Kilimo mobile. Salama had insured 187,000 farmers across Kenya and Rwanda by the end of 2013.53 50 http://www.mercycorps.org/research-resources/case-study-lessons-buyers-experience-mobile-money 51 http://www.asintl.org/our-experience-Ghana-Rice-Mobile-Finance-RiMFin.html 52 https://communities.usaidallnet.gov/ictforag/node/362 53 http://www.syngentafoundation.org/index.cfm?pageID=562 54 Unstructured Supplementary Service Data (USSD) is a protocol used by GSM cellular telephones to communicate with the service provider’s computers. USSD can be used for WAP browsing, prepaid callback service, mobile money services, and location-based content services. 20 In the Fast Lane: Innovations in Digital Finance • App m-Farmer in Tanzania and Esoko in Ghana offer delivering the service. It will also provide the data needed to farmers information on weather forecasts and market prices, supply a better service offering to consumers and, increasingly, to and provides agricultural tips and advice on dealing with pests businesses. Product innovations will expand the range of services and diseases. available to consumers, but will also increase the transactional traffic flowing through digital payment systems. This growth Although these are interesting innovations with much potential, in transaction volumes will help bring costs down and make it lessons from Mercy Corps’ Agri-Fin Mobile Program suggest that increasingly possible to offer digital financial services to the base disseminating agricultural information through mobile phones of the pyramid cost-effectively. As transaction volumes grow, will not be easy. Radio and face-to-face consultations were still distribution capabilities will expand and make it possible to deliver cited as farmers’ primary sources of information, proving that more to distant locations, as the cost for marginal investment their demand for information needs to be better understood.55 reduces over time. Looking beyond consumer and agribusiness product innovation, As markets take off, new entities enter the ecosystem and the FSPs have already started looking at digitizing other B2B value network effect grows. Three years ago, African mobile money chains (for example, FMCG companies and the intersection with was delivered by MNOs, with a few rare but notable exceptions retail stores). Although still in the early stages, a next wave of like Equity Bank in Kenya. Today, a number of banks are building innovations is poised to come from this space. large-scale mobile money operations, as are independent payment services providers. MFIs are also beginning to leverage the twin pillars of technology and distribution to extend their footprints. Conclusion As these systems evolve, other businesses, some old and some new, will increasingly tap into the larger mobile money ecosystem to deliver to the market. One has only to visit Nairobi today to Mobile financial services have evolved rapidly in Africa since see the energy and ingenuity of Kenyan entrepreneurs hoping M-PESA was launched in 2007. Some “leapfrog markets” have to meet the huge demand for goods and services that has been made remarkable advances in delivering access to financial uncovered by that country’s remarkable mobile money journey. services for the mass market. Those countries that have built the basic infrastructure are now able to deliver a much larger range of Traditional FSPs will need to adapt to rapidly changing events on goods and services over that new payments infrastructure. Other the ground or they will find themselves left behind in increasingly “aspiring markets” will need to focus on building the distribution niche market positions. As in other parts of the world, African rails for a number of years before they can do the same. Variation consumers value convenience, security, and customer service, by country is driven by a multitude of factors, including mobile and are willing to pay for these attributes regardless of where phone penetration, financial and conventional infrastructure they stand in the economic pyramid. Those who are alert to the development, population density, regulation, and the appetite of opportunities in the mass market will benefit as economic growth private players to pursue the opportunity. The good news is that increases the purchasing power of the growing African middle the region no longer has to look to Kenya as the only example of class. The mobile money landscape may look very different in ten successful mobile money on the continent. years, but what seems beyond doubt is that we are at the starting point of a fundamental change in how financial services are The role of innovation is important in this process, as it will delivered to the mass market in Africa, and innovation is helping to continue to stimulate improvement in the rapidly evolving drive that change. In a global marketplace, innovations developed mobile money ecosystem and provide new opportunities for anywhere in the world can rapidly be adopted and shaped to local those willing and able to seize them. Process innovation will conditions, creating a virtuous cycle that will benefit consumers at make existing infrastructure work better for operators and all income levels. The mobile money story has been a remarkable consumers. It will lower the cost and reduce friction points in one, but it has only just begun. 55 http://www.cgap.org/blog/series/understanding-demand-smallholder-financing 21 The PARTNERSHIP FOR FINANCIAL INCLUSION is a joint initiative of IFC and The MasterCard Foundation to expand microfinance and advance mobile financial services in Sub- Saharan Africa. The Partnership is also supported by the Bill & Melinda Gates Foundation and the Development Bank of Austria (OeEB, Oesterreichische Entwicklungsbank AG), and collaborates with knowledge partners such as the World Bank and the Consultative Group to Assist the Poor (CGAP). An important objective of the Partnership is to build and share industry knowledge for the public good. This publication is part of a series of research reports published by the program. www.ifc.org/financialinclusionafrica CONTACT INFORMATION Anna Koblanck Communications Officer 14 Fricker Road, Illovo 2196 Johannesburg, South Africa akoblanck@ifc.org May 2014