Date archives "December 2017"

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.

The power of technology and the persistence of paper: An analysis of advances in digital finance UX

Snapshot 5: How can advances in UX and other emerging digital attributes help meet user needs and enhance user engagement and satisfaction?" is one of 16 Snapshots designed to address a range of questions within the digital finance space. Covering 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 Learnings,” and call attention to “Implications” for future research and investment.

Why we wrote this Snapshot

Digital finance fundamentally changes the dynamics of how low-income individuals interact with their finances. Previously defined by face-to-face interactions—from transacting through a banking clerk, to sending money via a bus driver, or requesting store credit from a local merchant—in the digital era, financial transactions have lost their "social" aspect.

User experience designers working across digital finance platforms have a tough act to follow. Stripping out personal interactions and age-old customs and replacing them with unfamiliar, confusing, and often mistrusted technological interfaces creates a number of access and usage challenges. While USSD transactions and menus mimic existing airtime top-up behaviors, these challenges are amplified across more sophisticated, complex technology channels, such as smartphone apps and other web-based services. Even for some users of USSD-based services, tangible, paper-based confirmation of transactions are still important.

Smartphone penetration, however, is on the rise, and will undeniably be the channel of engagement for future digital finance users. Therefore, while advances in digital finance UX must continue to improve USSD applications, and play to the persistence of paper, the UX opportunities brought on by more advanced technology channels are worth noting. In this Snapshot we discuss how advances in UX—both at the USSD and smartphone level—are helping to meet financial needs, improve customer experience, and drive the uptake and usage of digital financial services. We also discuss these advances in light of dynamics of inclusion and exclusion, such as gender and literacy.

What we found

Improved user experience and user interface design, and therefore ease of use of digital finance applications, can persuade customers to transact more frequently, build trust through transparency, and drive positive financial behaviors. Although USSD poses many design challenges—such as poor discoverability and navigation—its familiarity has driven its continued popularity. Therefore advances at this level must still be implemented. Smartphone and other advanced technology channels bring more opportunities for improved customer experience and engagement. Beyond graphical improvements at the interface level, UX is expanding beyond interface with the introduction of “digital attributes” from chatbots to gamification. These advanced attributes are being used to break down barriers to entry, and ultimately (we hope) to guide customers on the journey towards meaningful financial inclusion.

However, we mustn’t run before we can walk. While technical innovations provide exciting opportunities, we must ensure customers feel comfortable and protected during their "shift to digital." Key to success will be a focus on responsible, human-centered design as providers work through their UX strategy and engagement.

Read Snapshot 5 for more details of our findings, and a list of the top-10 reads in the space this year.