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Intermediated use of digital finance: cause for concern or celebration?

Snapshot 7: “What are the roles of intermediated and shared use?” is one of 16 learning themes designed to address a range of questions within the digital finance space. The FiDA Partnership synthesizes and disseminates the digital finance community’s knowledge of each of these learning themes into “Snapshots” that cover a number of client, institution, ecosystem, and impact level topics. The Snapshots give a current view of “What We (in the digital finance community) Know” about the topic in question, highlight “Notable New Learning,” and call attention to “Implications” for future research and investment.

Why we wrote this Snapshot

Not everyone uses digital finance as it was originally intended; digital financial services (DFS) have been repurposed to fit individuals’ specific needs. A prime example is M-PESA in Kenya’s shift — as influenced by customer behavior — from a tool to help microfinance clients repay their loans via SMS to a person-to-person “send money home” transfer service.

Individuals also access digital finance platforms in so-called “non-conventional” ways. By “non-conventional”  we mean that an individual shares either a mobile phone and/or digital finance account to access DFS or uses an intermediary who  conducts transactions on their behalf. Shared and intermediated use of technology are common in less developed economies. In Snapshot 7 we wanted to delve deeper into the shared and intermediated use of digital financial services to better understand the role they play within the digital ecosystem.  

When it comes to shared use, either multiple users  share a digital finance account—with one SIM card, and therefore one account shared between multiple users — or sharing happens at the level of the mobile device; that is, users may have their own SIM cards, and therefore their own digital finance account, but rely on a shared mobile phone to access their digital finance network. Intermediated use is more or less synonymous with over-the-counter (OTC) transactions and direct deposits in which an intermediary (usually an agent) conducts a transaction on behalf of a sender and/or receiver either from the client’s own account or the agent’s account.

Although globally the number of OTC customers is decreasing, more than 44.3 million unregistered customers performed an OTC transaction in June 2016, up from 37.4 million in June 2015 (GSMA). This indicates the prevalence and success of OTC transactions in some digital finance markets. In Pakistan, for example, Finclusion data from 2016 reported that 93% of digital finance users conduct OTC transactions while only 7% of users have a registered account. While we wanted to more fully investigate the incentives and impact of shared use, there is limited analysis of shared use on which to draw. We therefore focus primarily on intermediated, OTC use.

Key findings

In Snapshot 7, we discuss the benefits of intermediated digital finance use as well as the risks involved in such  transactions. OTC transactions benefit clients by allowing individuals  that lack the capacity or capability to use digital finance by themselves, to access the array of services on offer. By using an intermediary, those intimidated by technology; who lack literacy, numeracy, or digital operational skills; or who face issues surrounding registration can access financial services from which they would have been otherwise excluded. From a wider, ecosystem perspective, providers in markets such as Bangladesh and Pakistan continue to support OTC transactions due to the success they have had in driving digital finance in these markets. Agents are also keen to continue to push OTC transactions thanks to the healthy revenues they earn from the power to choose which provider a customer uses, thus ensuring they always benefit from the highest available commissions.

The risks of intermediated transactions include challenges at a range of levels. On the client side there is the risk of being defrauded by agents and a lack of personal agency that prevents clients from moving beyond simple remittance and payment products. On the provider side OTC has been linked to money laundering and terrorism financing. OTC has also been shown to have a negative impact on revenue streams and product growth due to the high operating costs associated with  agents and a lack of focus on product development.

While the question of intermediated use now seems more important, interesting insights may emerge around shared use as smartphone penetration grows and there are cases in which people access more than one “virtual” wallet through a single SIM or device.

Read Snapshot 7 for more details on our findings and a list of the top-10 reads in the space, this year.

Show me the money: is there a business case for digital finance providers?

Learning Theme 8: What is the commercial landscape of digital finance? is one of 16 learning themes designed to address a range of questions within the digital finance space. The FiDA Partnership synthesizes and disseminates the digital finance community’s knowledge of each of these learning themes into “Snapshots” that cover a number of client, institution, ecosystem, and impact level topics. The Snapshots give a current view of “What We (in the digital finance community) Know” about the topic in question, highlight “Notable New Learning,” and call attention to “Implications” for future research and investment.

Why we wrote this Snapshot

Shifts to digital in financial services and the global economy are bringing more formal financial services to mobile-enabled, unbanked populations. The evidence indicates that this makes business sense —financial services providers can save $400 billion annually in direct costs by shifting from traditional to digital accounts while expanding their customer base and increasing their revenue opportunities.

Given this potential, it is unsurprising that as of 2016 there were 277 live mobile money deployments across 92 markets, including two-thirds of low-income and middle-income countries. Moreover, a growing array of actors—from the mobile network operators (MNOs) that forged the way for the mobile money industry, to banks and other third parties—are launching digital financial services (DFS) that build on the foundational rails of mobile money and expand the number and the variety of commercial offerings to include small business lending, micro-insurance, and other products..

Snapshot 8 provides an overview of the steady change in the landscape of digital commercial offerings, with particular emphasis on the rise of digital data trails and alternative lenders. This Snapshot also highlights business case considerations for providers. DFS providers often enter the market with misconceptions about the time it takes to achieve profitability and the investment required for sustainable growth.

What we found

Although the number of deployments and products have increased in the last decade, the majority of services still focus on person-to-person (P2P) transfers and payments—airtime top ups and P2P accounted for 81% of transaction volume and 74% of value in 2016. Encouragingly, providers in many markets are moving toward other digital finance use cases, by offering savings, credit, and insurance products. However, the uptake of more sophisticated services has been slower than hoped.

Why have money transfers succeeded over other products? Perhaps the reason that success with other products has so far eluded providers is that they face a “relevance barrier.” That is, as Ignacio Mas has suggested, many providers have not designed the “right-sized products and services” for their customers. Indeed, the value proposition to a customer—i.e., offering right-sized products and services—is at the heart of any deployment.

Nevertheless, providers have recently begun to leverage digital technology—such as the digital data trails made available by a customer’s smartphone—to better understand their clients’ needs and how they interface with financial products. As a result, not only are providers offering more compelling use cases, but different actors are emerging on the scene. For example, alternative lenders in sub-Saharan Africa are leveraging non-financial data (SMS, voice, mobile apps) as a source of information about potential clients for different borrowing needs, including consumer, micro-, small-, and medium- enterprises (MSMEs). These providers can perform the credit underwriting process and approve (or decline) a loan application based on the borrower’s risk score in near real time. In turn this allows providers to lend in larger volumes and reduces costs.

The steady rise in the number of digitally-provided commercial offerings is exciting. Moreover, there are different business cases through which banks, MNOs, and other third parties can pursue DFS. However, research stresses that implementing DFS requires foresight, patience, and commitment.

Further, more and more customers are weaving digital products and technology into their daily lives—for example, real-time entertainment (both video and audio) accounted for 18% of downstream mobile internet traffic in Africa in 2015, up from about 9% the previous year. As this trend continues, providers will need to continuously innovate such as  by collaborating with traditional foes and diversifying revenue streams.

Read Snapshot 8 for a deeper review of these topics, to learn more about the profound change digital data trails are bringing to the industry, to see our analysis of the path to profitability, and get our list of the top-10 reads in the space.

Investing in digital finance’s growth

Learning Theme 11: What ecosystem improvements will unlock investment in digital finance? is one of 16 learning themes designed to address a range of questions within the digital finance space. The FiDA Partnership synthesizes and disseminates the digital finance community’s knowledge of each of these learning themes into “Snapshots” that cover a number of client, institution, ecosystem, and impact level topics. The Snapshots give a current view of “What We (in the digital finance community) Know” about the topic in question, highlight “Notable New Learning” and call attention to “Implications” for future research and investment.

Why we wrote this Snapshot

One of the persistent challenges to the growth of digital finance is underinvestment. Investment plays a key role in extending digital finance to hard-to-reach customers and can encourage disruptive, innovative solutions. The digital finance community and investors can learn from the experiences of mobile money and branchless banking services, often the first point of exposure to digital finance for a mobile-enabled but unbanked population. However, even the foundations of these aforementioned services have been underinvested. Mobile money services have become the access rails to other DFS innovation, but the underinvestment has had a knock-on effect to both the commercial and social impact potential of digital financial services (DFS).

Snapshot 11 provides a comprehensive overview of how investment can foster the development of digital finance ecosystems, the challenges the industry faces in raising the necessary investment, and the roles of different types of investors.

What we found

A combination of stringent regulatory environments, internal constraints faced by service providers, the lack of the appropriate technical infrastructure, and the absence of diverse financing options in emerging markets all contribute to the fact that  digital finance has yet to receive the investment required for sustained growth.

Mobile money services have primarily focused on rapidly reaching scale—in almost all cases through high volume and low value transactions. This is because profitability has typically been based on earning small margins on large volumes. However, reaching this level of scale requires a lot of capital; indeed, setting up a mobile money service can be prohibitively expensive. Partly because of these high operational costs, it can be difficult to obtain the green light to invest the large amounts of funding necessary to bolster and maintain mobile money infrastructure from senior decision makers at mobile operators or financial institutions.  

The focus on acquiring a critical mass of customers conducting low-value transactions has led to infrequent use of digital finance, mainly in the form of monthly payments discussed in Snapshot 1: Which financial needs can and should be addressed by DFS? However, providing customized solutions (i.e., more sophisticated DFS products) or a tailored product suite responding to specific customer needs can actually propel the number of transactions per customer by encouraging more regular use of DFS products. Thus, such customization has the ability to increase the provider’s revenue, perhaps justifying the needed investment in mobile money services. Although the industry has seen a slow move towards sophisticated products, such as FIBR’s work in Tanzania and Ghana, a lack of funding and technical infrastructure is holding growth back.

Another big challenge to investment in digital finance has been the lack of capital generally available in emerging markets. For example, in 2016 African start-ups disproportionally relied on founder capital while venture capital (VC) and angel investment only represented 12% of the total pool of funding invested across all African tech start-ups. FinTechs seem to be struggling to attract the appropriate funding from VCs. Many VCs seem to have made a strategic decision not to invest in African markets. Perhaps this decision is to be expected from VCs that have not operated in emerging markets before, as they could see the patchy or underdeveloped and protective intellectual property laws in some African markets as a deterrent.

This is not to say that emerging market FinTechs are not as credentialed and committed as their developed market counterparts; there is increasing evidence to suggest that they are. However, capital deficits and a dearth of mentors to support their capacity hinder emerging market FinTechs. So too, the relatively lower penetration of smartphones in emerging markets compared to developed markets restricts access to the consumer-level data on which  FinTechs often rely to build their services and products. This may add an additional layer of concern for VCs that have hesitated to deploy capital to African FinTechs. This Snapshot finds that emerging market start-ups often function in ecosystems that are less networked, less funded, and generally less supported.

Read Snapshot 11 to go deeper on the topics above and learn more about the unintended consequences of philanthropy  in the sector, the role various investors need to play in order to spur the financial development of digital finance in Africa, and the top-10 reads in the space this year.

Baffled by behaviors: understanding nuanced barriers to adoption

Snapshot 2: Which attitudes, behaviors, experiences, and beliefs—including non-digital and non-financial ones—influence DFS adoption and ongoing satisfaction? is one of 16 Snapshots designed to address a range of questions within the digital finance space. These questions cover a number of client, institution, ecosystem, and impact level topics. The Snapshots give a current view of “What we Know” about the topic in question, highlight “Notable New Learnings,” and call attention to “Implications” for future research and investment.

Why we wrote this Snapshot

Understanding what drives customers to adopt and regularly use a product or service—be it a mobile phone, a savings account or agricultural technology—involves more than understanding needs. Behaviors, attitudes, experiences, and beliefs play an instrumental role in driving, or hindering, adoption and use.

Distrust of formal financial institutions can negatively impact perceptions around—and use of—formal financial services.  A 2016 study showed 70% of bankable adults in Nigeria save outside the formal financial system citing reasons such as corruption, instability, and distrust for keeping their money away from banks. We have also observed that cultural norms affect the adoption and use of financial services. Early research into the use of M-PESA in Kenya found that some men denied their wives access to a mobile phone—and therefore an M-PESA account—because they feared their wives would either use it to hassle them for money or to call and receive money from other men. Recent research by GSMA found that safety and harassment issues in Egypt are a significant barrier to mobile internet adoption, especially for women. This will likely have a knock-on effect for customers seeking to access digital financial services across mobile internet platforms.

While Snapshot 1 focused on understanding the financial needs of the poor, and how digital finance can address these needs, this Snapshot focuses on understanding attitudes and behaviors—such as those mentioned above—in the hopes of delving deeper into dynamics of adoption and use. In combination with an understanding of needs, unpacking the unique behaviors of low-income individuals will allow the digital finance community to appropriately design and deliver services that customers will desire, trust, and use on a regular basis.  

What we found

As with financial needs, behaviors that influence adoption are multifaceted, context specific and often unexpected. While there are a vast array of behavioral factors influencing adoption, this Snapshot focuses primarily on the impact of social norms, social networks, and social relationships. From restrictive social standards imposed on women—such as limited mobility outside the home—to the power of “social proof,” the research highlights the enduring importance of social relations and cultural norms in the communities in which we work.

Moving beyond behaviors, evidence suggests that while positive experiences using digital finance build trust, negative experiences can erode it. From complex user interfaces, to poor customer service and privacy and security concerns, it is clear that more work is needed to build services that customers will intrinsically trust and use in place of the existing informal and formal alternatives.

Looking ahead, the Snapshot also highlights the importance of building out an understanding of digital, online behaviors and how these might influence adoption. As more daily interactions move online—from streaming music to chatting with friends across social networks—an analysis of these behaviors and experiences is of equal importance. Along these lines and together with the expansion of smartphones, the introduction of apps and increasing use of digital attributes (from chatbots to data), Snapshot 2 also calls attention to the need to ensure that consumer protection practices are developed in tandem with these technological innovations.

Read Snapshot 2 for more details on our findings.

Announcing 2017’s report on Learning Advances in Digital Finance

Today we are pleased to make the inaugural version of the Learning Advances in Digital Finance report available on the website. This document focuses on a series of “learning advances” identified during the first year of the Mastercard Foundation Partnership for Finance in a Digital Africa.

The report introduces two key concepts to frame the challenge of financial inclusion in sub-Saharan Africa: “Meaningful financial inclusion” (involving not only access, but also the effective use of a suite of financial services products), and the pursuit of these goals against the backdrop of an ongoing “shift to digital” both in financial services and in the broader economy.

The shift to digital, we argue, presents not simply a chance to pursue existing business models at better or lower costs. Instead it is both an opportunity and an imperative to reconfigure the role of financial services in enabling participation in the broader economy.

To illustrate these points, the document consists of interconnected chapters that operate at the three levels of the Partnership’s Theory of Change: client-level insights on “effective use,” institutional level business models, and the growth of open APIs in the ecosystem.

This document is best suited for practitioners, policymakers, and researchers in the digital finance community (especially those with an interest in financial inclusion), but given its modularity, elements of it can be read by anyone with an interest in client learning, emerging digital finance business models, or the suitability and promise of APIs in the African digital finance landscape.

Paving the impact pathway: What do we know about the impact of Digital Financial Services on low income clients?

Snapshot 16: “Digital Finance Impact Evidence Summary” is one of 16 Snapshots designed to address a range of questions within the digital finance space. These questions cover a number of client, institution, ecosystem, and impact level topics. The Snapshots give a current view of “What we Know” about the topic in question, highlight “Notable New Learnings” and call attention to “Implications” for future research and investment.

Why we wrote this Snapshot

The Digital Finance community’s foundation depends on our understanding of and research on the impact of traditional financial services on low income clients. Several studies have explored the impact of traditional credit, savings, and insurance products. From these studies, we understand that the impact on client welfare has yielded mixed results for credit, positive results for savings, and promising results for insurance.

The potential benefits of Digital Finance are highly dependent on the product, its design and delivery, and the target demographic. However, insufficient attention has been given to the ways in which the digitization of these products and services may alter or improve client outcomes.

The Partnership for Finance in a Digital Africa has reviewed a range of studies in order to catalog evidence of the impact of Digital Finance on clients. Based on this review, we have developed the first Digital Finance Evidence Gap Map (EGM).

What we found

The Digital Finance EGM comprises 40 impact studies and covers 21 countries. It examines product types, design and delivery approaches, and a range of potential client outcomes. In the EGM companion report, Snapshot 16, we emphasize that as an industry we have made significant progress in establishing that digital payments and transfers benefit low income households.

While we have learned a great deal about the adoption of Digital Finance products—over a quarter of the outcomes studied focused on product uptake—the examination of longer term effects is largely limited to digital payment and transfer products. Looking beyond digital payments and transfers, the Digital Finance community is not yet comprehensively measuring the effects of digital credit, savings, and insurance products on low income clients.

Despite the growing number of Digital Finance products available and the depth of the client base, evidence of client impact is lacking. Read Snapshot 16 for more details on our findings on the long term effect of digital credit, savings, and insurance products. Click here to sign up for alerts when new Snapshots are released.

We are tracking several “in progress” impact studies. Those studies as well as others released after the initial literature review will be included in the next version of the Digital Finance EGM and its companion reports, slated for June 2018.

The struggles of success: addressing the poor’s financial needs through Digital Finance

Snapshot 1: Which Financial needs can be (and should be) addressed by DFS?” is one of 16 Snapshots designed to address a range of questions within the digital finance space. These questions cover a number of client, institution, ecosystem, and impact level topics. The Snapshots give a current view of “What we Know” about the topic in question, highlight “Notable New Learnings” and call attention to “Implications” for future research and investment.

Why we wrote this Snapshot

It’s been more than ten years since Kenyan mobile operator Safaricom launched M-PESA, one of the first digital finance innovations to hit the developing world. Since then banks, mobile network operators, FinTechs, and other third party organizations have followed suit and now offer a range of digital financial services to underserved customers. Mobile phones enabled Africans to leapfrog the inaccessible and underdeveloped landline networks. Similarly, digital finance has enabled many to bypass the often unreachable and impenetrable banking system. Digital technology and innovation have brought financial services deep into rural, hard-to-reach, poor areas. This access has given digital finance a leading role in the journey to financial inclusion in sub-Saharan Africa and beyond.

While access to these services has continued to grow, meaningful use of the available digital financial services has struggled to keep pace. Despite significant annual increases in account registration, there is a growing gap between adoption and use. At the end of 2016, only 21% (118 million) of the 556 million globally registered mobile money accounts were used more than once a month (GSMA). In this Snapshot we wanted to explore where digital finance has successfully addressed financial needs, and where it is struggling to beat existing informal and formal alternatives.

What we found

We found that while access to digital finance continues to grow, there is a gap between access and use. Limited uptake has been attributed, in part, to a failure to digitally replicate the complex financial needs and money management strategies of low-income populations. Many digital financial services were developed without a solid understanding of the complex means by which the poor manage their money. Consequently, these digital financial services struggle to deliver a superior alternative to customary informal financial tools.  While digital finance has successfully addressed many payment and transfer needs in developing markets, sophisticated financial services — such as saving, insurance and credit— are still struggling to compete with informal alternatives.

What’s more—as the digital finance ecosystem expands—unanticipated, negative consequences are emerging.  These include unsophisticated borrowing behaviour leading credit bureaus to blacklist customers for defaulting on their digital loans, as well as the use of mobile money to finance gambling.  The digital finance community should track and note both these unexpected repercussions and the challenges that limit usage.

Ten years on, while the potential for digital finance is undeniable, using digital technology to meet a range of financial needs in developing markets is a work in progress. Read Snapshot 1 for more details on our findings. Click here to sign up for alerts when new Snapshots are released.

Proudly Introducing The Mastercard Foundation Partnership for Finance in a Digital Africa

We are thrilled to formally launch The Mastercard Foundation Partnership for Finance in a Digital Africa!  The FiDA Partnership (the Partnership), established by the Financial Inclusion Program at The Mastercard Foundation (The Foundation), catalyzes knowledge and insights to promote meaningful financial inclusion in an increasingly digital world.

Led and hosted by Caribou Digital, the Partnership works closely with leading organizations and companies across the Digital Finance space.  By aggregating and synthesizing knowledge, conducting research to address key gaps, and identifying implications for the diverse actors working in the space, the Partnership strives to inform decisions with facts and accelerate meaningful financial inclusion for people across sub-Saharan Africa.

The Partnership has assembled an accomplished team of researchers and practitioners with deep knowledge of and experience working in Digital Finance.  Working closely with organizations supported by The Foundation, this team has been quietly building a resource base, and we are delighted to begin sharing knowledge which we believe will be relevant to a broad audience.  Today, you can access:

  • Learning Advances in Digital Finance report, which puts a spotlight on specific advances in knowledge that will influence the future of Digital Finance
  • Digital Finance Evidence Gap Map is a systematic review of what is known and what gaps exist regarding the impact of digital finance on low income clients
  • Snapshots which are short papers that highlight “What we know” about critical questions in the Digital Finance space and identify implications for future research and investment
  • The Theory of Change underpins the FiDA Partnership

Looking ahead, we will be rolling out additional Snapshots (two today and 14 more over the next five months) and will begin to share business model research and tailored knowledge and insights designed to directly address challenges in delivering on the promise of meaningful financial inclusion at scale. 

As the shift to digital picks up pace, we aim to deliver knowledge and insights which are relevant and actionable to a range of companies and organizations working in the broadly defined Digital Finance space.  We will only be successful if you derive value from the resources we share, and do hope you will let us know what would be most useful to you—ideas@financedigitalafrica.org—and stay connected over time (click here to sign up for alerts when we release new materials).  We do hope you will join us on the journey!