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.