The challenges of digital finance

18 August, 2014

RECOMMENDED BY UPSIDES – Digital finance presents a potentially game-changing opportunity to more effectively reach the world’s unbanked populations. But challenges remain, for example, while more formerly underbanked individuals now have access to digital financial services, many of these new accounts remain relatively inactive. Further, extending outreach for these digital services beyond their existing footprint will present numerous challenges, ranging from physical technological infrastructure to financial literacy. These challenges were discussed at the Asia Microfinance Forum 2014 in Shanghai by frontrunners in the field. Read a summary of this interesting session below.

Participating in the session were Arjuna Costa, Investment Partner at Omidyar Network; Moinuddin Rahgir, Chief Financial Officer at Bkash; Jenny Chang from Shanghai F-Road Commercial Services; Lito Villanueva, Innovation, Ecosystem Build & Alliances Head at Smart e-Money.

Digital footprint Arjuna Costa described how technology, driven by the mobile phone, is changing the dynamics of accessing financial products. Cost distribution was his first topic of interest, with 60 to 80 percent of people lacking access to a banking sector. How is technology changing the development of ‘last-mile’ pro-poor services? He praised branchless agent banking in which transactions are conducted over the phone – a win-win in which costs are brought down by 60 to 80 percent for banks, while customers gain easier access.

‘The cost identification, verification, and risk assessment is the second challenge we have,’ he said, describing how the microfinance sector has addressed these problems largely by spending considerable time face-to-face with clients in the field – a high cost proposition.

‘There’s a lot of analytics that are coming out that are changing the dynamics of how to identify and how to make that assessment piece,’ he said, describing the rise of the ‘digital footprint’ which can be analysed at a low cost. ‘The way we use technology tells a lot about our behaviour, and that behaviour is predictive of how we’d use financial services, and if we’d be a good client or not.’ This decrease in cost and access, as well as these improved analytics, could help the poor develop digital footprints instead of a formal credit history.

How can access to services be improved, including services such as insurance – a critical social safety net? ‘There are companies now that are using the channel that has been built by mobile operators to bundle free insurance inside their cellphone usage, and it works very simply,’ Costa said. If someone spends $3 on a network, a person is given $500 in life insurance, while $5 garners $1000. ‘The phone operator is buying loyalty, and for the consumer, it’s buying life insurance.’

He noted that sixty to eighty percent of those in most markets have cellphones, allowing them to reach much wider markets. ‘A large percentage of the rural poor live off the electrical grid,’ said Mr. Costa, noting that companies selling solar systems have found it’s hard to sell $300 home systems to the poor, as they don’t have that one-time amount of money. ‘What we’ve learnt from mobile phones is that people are used to buying air time at $1 an instance,’ he said. Some companies have begun using this in solar systems, in which people are able to pay a small sum to keep their solar system running, instead of being forced to pay a large lump sum. ‘Some even set their weekly payment at what they would have spent on diesel or kerosene.’

I Bkash, you Bkash Moinuddin Rahgir described the scenario in Bangladesh. ‘People at the bottom of the pyramid are our best customers. Obviously, that meant Bkash had to provide a low cost to his customers.’ Bkash can be used on the cheapest of the cheapest phones (as well as high-end smartphones), Rahgir said, noting that mobile is much more accessible than Internet for most of the poor – with over 85 percent having mobile access and thus access to USSD. ‘This meets the objective of how we provide mobile services to people at the low end of the pyramid.’

The financial services provided by Bkash include cash in and cash out, a person to person transfer, salary payments and disbursements, and other services. The average transaction is about $1.5 million per day, said Mr. Rahgir, with about 90,000 agents across the country helping people get access to these basic formal financial services. ‘You just have to step out of your door and walk a few meters, and you’ll probably find a Bkash agent who can serve you. Bkash has a ninety percent top of mind awareness – it’s almost a verb now,’ he said. ‘People will go to the store and ask to use another competitors service, but will say “Please Bkash it.” That’s an example of our success.’

Device agnostic chip Jenny Chang described her company as a mobile banking services provider which partners with other financial institutions. She described the Sang Overlay Card, a chip which contains both a security element and mobile banking applications and can be overlaid on a regular SIM card in a mobile phone. ‘This allows us to provide mobile banking services separate from the operator,’ she said. It is device agnostic and can be used with both cheap phones and smartphones, and does not require the user to have Internet or mobile data access.

The card provides basic services such as bill payments, processing and repayment, remittances, and account management, among others. ‘One unique thing about China as compared to other developing countries is that we have a very high bank account penetration rate,’ said Chang, with about 8o to 90 percent of households containing at least one bank account – accounts which are cheap to open and maintain. ‘But a high bank account penetration rate doesn’t mean people get the financial services they need,’ she warned, explaining that the cards help people tap into their already-established habit of using smartphones. This is particularly helpful for rural people who lack education or access to basic financial services. They now serve six million customers in 26 out of China’s 31 provinces.

Access versus usage Finally, Lito Villanueva described the Philippine situation. ‘At the end of the day we need to enable the largest network of cooperatives in the Philippines,’ he said, describing the nation’s largest MFI network. He stressed the importance of grass-level work, ensuring an MFI member will be able to do loan applications and loan organisation by mobile, as well as basic services in rural areas.

Pricing will define a project’s success or failure, Villanueva said, describing a ‘one click speed’ business model in which each SMS is charged by the cell phone service. SMS in the Philippines, he said, is usually considered a value-added service, and costs around 5 US cents per message.

Smart e-Money has changed that: for its financial services SMSs, people will be charged a one-time yearly fee instead. ‘This is a major breakthrough, by which we are very encouraged.’ But the balance between access and usage is important, Villanueva said, addressing the undesirability of many dormant accounts. Smart is now actively pushing more services such as bill payment through mobile phones, including a new system for online purchases. ‘We are trying to come up with wireless solutions to push usage.’

(source: Microfinance Focus)

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