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Digital Credit—What do we know about the impact on clients?



This post has been co-authored by Niamh Barry from the FiDA Partnership, and Natasha Beale, Carson Christiano, and Alexandra Wall from the Digital Credit Observatory (DCO) at the Center for Effective Global Action (CEGA).

Credit is a powerful tool in providing liquidity: credit can smooth consumption during financial shocks, provide capital to grow businesses, ensure children’s educations, and ultimately enable people to live happier, healthier, and more prosperous lives.

Traditionally, credit providers require agent and client interaction, risk assessment uses previous financial history, loans are disbursed into a bank account, and payments are made through a bank branch. This excludes those without bank accounts, documented financial histories, or access to a branch. Since digital credit is instant, automated and remote, it could potentially overcome these barriers. Digital credit products can assess credit worthiness remotely and automatically using alternative data sources such as call records, mobile money use, and even geospatial and psychometric data, and then lend money directly to consumers’ mobile phones. Currently, the digital credit market landscape is “dominated by short-term, high interest loans made directly to consumers,” often through telco-bank partnerships.

Five years after its launch, 21.1 million Kenyans have accessed credit through Safaricom’s digital lending product M-Shwari. In addition to the telco-bank model, more and more companies are emerging to meet the growing demand for digital credit including numerous fintech companies that provide intermediary digital credit scoring services or directly originate loans to customers through app-based lending using alternative data. However, high interest rates and the volume of clients blacklisted by credit bureaus— often for late repayments or defaults on loans less than USD $2.00 —are cause for concern. Researchers and practitioners must carefully consider both the causes and effects of over-indebtedness.

What are the insights so far?

The EGM, is not confined to products that are digitised ‘end to end’, but also include credit products that have digitized some aspects of their design or delivery. Within the EGM there are just seven studies that have tested the effect of digitally enabled credit products in five countries. These studies are not yet representative of the diversity of all the digital credit products available so it is not possible to make definitive statements on the ‘impact’ of digital credit. The studies involve different markets, client groups, and design and delivery mechanisms. The table below illustrates the diversity of the digital credit products examined.

Table 1: Design and delivery of credit products

These studies include 21 tested outcomes, with ‘healthy borrowing’ being the primary outcome of focus, and just two studies providing insights on the longer-term effects. The diagram below shows the outcomes tested and the number of studies that had a positive, negative, or null effect; 57% of the credit products tested showed only positive results and 43% showed mixed results. The diversity of results is indicative of the early stage of testing and learning. As more products are tested and we continue to synthesize the evidence—with the support of investors, donors, practitioners, and researchers— clearer patterns may emerge.

Figure 1: Digital credit impact pathway

Spotlight on selected digital credit studies

We highlight just a selection of insights from an analysis of the studies within the EGM and invite digital credit practitioners, researchers, donors, and policymakers to interact with the EGM to derive insights related to their own questions.

Integrating behavioral science into repayment reminders

  • CGAP partnered with Busara Center for Behavioral Economics and Jumo KopaCash—a mobile money marketplace that offers digitally delivered credit—to measure client responses to various repayment reminders. Clients were given interest-free loans via mobile money and asked to repay them after a week in order to access a larger future amount. They found that clients who received evening reminders were 8% more likely to repay their loans than those who received morning reminders. They also tested reminders that varied how they communicated the benefits of repayment. Messages either emphasized ability to access higher future loan amounts or the long-term benefits of repayment. The messages’ results varied by demographic, such as positive effects on repayment across the board for male borrowers and negative impact on repayment across the board for female borrowers.
  • Also with support from CGAP and the Busara Center, Pesa Zetu— a peer-to-peer digital lendertested the impact on repayment of content variations. One test varied the messages received by borrowers to see if different framings could improve borrowers’ on-time payments by creating a sense of social obligation to the lenders. 81% of borrowers who received reminders that included the name or number of lenders who contributed funds, were more likely to repay their loans on the day the reminder was sent, compared to only 27% in the control group.

Up front information disclosure

  • The CGAP, Busara, and Jumo KopaCash experiment also tested information disclosure in a lab setting. Participants played a game in which they earned real money by completing various tasks on a computer. To buy into the game, they had to borrow money that they would pay back with what they earned from completing the tasks. Each loan outlined the different costs and repayment periods. They found that separating out the various associated costs with a loan helped reduce default rates from 29.1% to 20%. The experiment also sought to make the terms and conditions (T&Cs) more accessible by moving them up in the product menu: T&C views rose from 9.5% to 23.8% and those who viewed the content had a 7% lower delinquency rate.

Embedding interactive learning

  • In another CGAP supported experiment, M-Pawa—an interest-bearing mobile money savings account that provides micro loans conditional on savings performance—partnered with Arifu, a mobile learning service, to improve savings and borrowing behaviors among smallholder farmers. Using two-way SMS on financial literacy content, researchers observed that after the interaction, Arifu users take larger loans (1,017 TZH/$0.44), repay sooner (by 5.46 days), and have larger first payments (1,730 TZH/$0.76 more) compared to their behavior before interacting with Arifu.

Limiting credit to certain products

  • With the support of the IDB Group, Empresa de Servicios Públicos de Medellın (EPM)—a large retail store—created and tested the ‘Social Financing Program’ in Colombia. The program provided credit to allow EPM customers to buy various home and personal goods in establishments affiliated with the program. By using its own data to evaluate credit applications, EPM required less information than traditional banks. The initiative aimed to serve low-income borrowers with less access to formal finance by enabling them to build a credit history and buy goods. They found no effect on uptake of other financial tools (such as savings accounts and formal credit). However, the results show that the credit card was associated with an increase in the number of household goods owned, such as floors, kitchens, and bathrooms. The intervention showed mixed and limited results on self-reported well-being outcomes.

The value of being in an ecosystem with more than one financial tool

  • In partnership with Safaricom, researchers piloted the use of a mobile banking account (MBA) and a locked savings account (LSA) to encourage parents to save for their children’s transition to secondary school. Use of the MBA increased the likelihood of credit access within the platform. Parents in both treatment groups were between 3% and 5% more likely to draw on an MBA loan than the control group. The treatment estimates also suggest that between 12% and 18% of users who opened an account as a result of the program took advantage of the credit option.

Detailed insights on digital borrowers in Kenya and Tanzania*

CGAP and FSD Kenya recently conducted two large-scale, nationally representative phone surveys of mobile phone owners in Kenya and Tanzania. The survey findings are numerous and a few are highlighted here.

  • The primary users of digital credit products are predominantly young, urban self- or wage-employed men.
  • Most borrowers use the loans to meet business and day-to-day needs. Loans are rarely used for medical needs or emergencies.
  • Digital borrowers use more financial services than the average Kenyan or Tanzanian adult.
  • About half of borrowers report having repaid a digital loan late, and a significant proportion report having defaulted.
  • Digital credit is only one loan source among many. 33% of digital borrowers in Kenya and 25% in Tanzania were juggling loans from two or more sources (digital and nondigital) at the time of the survey.
  • More than a quarter of borrowers in Tanzania and nearly a fifth in Kenya, reported experiencing poor transparency of fees or terms.

It evident that better transparency and consumer protection requirements are needed and regulators, donors, and investors alike will need to play a role in ensuring the digital credit market grows responsibly.

The takeaways

The evidence on the client impact of digital credit is limited, particularly for longer-term welfare outcomes. But insights, particularly for promoting ‘healthy borrowing,’ are surfacing:

  • The framing and timing of SMS reminders can improve repayment rates and protect borrowers. But the differential effects observed between men and women suggest that further testing is needed.
  • Making T&Cs more salient, accessible, and thus viewed and understood by borrowers may lead to better borrowing behavior and repayments.
  • Using interactive learning content on financial literacy has shown promising results for repayment behavior.
  • Being in an existing financial ecosystem may improve use of other financial services, such as using savings to access loans.

Beyond borrowing behavior, we know very little. In 2016, the Center for Effective Global Action (CEGA) at the University of California, Berkeley launched the Digital Credit Observatory (DCO), funded by the Bill & Melinda Gates Foundation, to call attention to open research questions around digital credit. The DCO noted in 2016that, to their knowledge, “not a single quantitative impact evaluation has rigorously measured the social and economic impacts of digital credit.” This is in contrast to the 90 (quantitative) studies included in a more recent meta-analysis of traditional microcredit. Only very recently has a FSD Kenya supported study provides insights on the longer term effects of a Kenyan digital credit product.

In order to advance the discourse on digital credit, the DCO manages a set of coordinated studies answering key questions related to the impacts of digital credit in emerging markets, as well as the effectiveness of promising approaches to maximizing benefits and minimizing risks to low-income consumers. The research portfolio also considers the heterogeneity of effects of products and their design and delivery on different client segments. Such insights from the DCO are possible due to engaged donors, practitioners and researchers. The digital credit community must continue to look for opportunities to gather impact insights so we keep learning how to best move forward in the journey toward meaningful financial inclusion.


*While this study was concluded after the literature review period ended and thus will be included in the next iteration, the findings provide the most current and detailed nationally representative evidence available on digital credit and related consumer issues for users in East Africa.

FiDA is publishing a series on insights derived from an analysis of the latest Digital Finance Evidence Gap Map (EGM) update. This is the third blog, others will include impact insights on payments and transfers, the design and delivery of various products, and where (people and location) we have been looking for impacts. Previous posts:

The studies in the EGM, represent our best knowledge of digital finance impact insights. New studies are ever emerging and thus the EGM will continue to evolve. If you have questions on the EGM, are interested in discussing research priorities, or know of relevant digital finance impact studies that meet the inclusion criteria, please contact ideas@financedigitalafrica.org.

Digital savings—what do we know about the impact on clients?



FiDA is publishing a mini series on various insights derived from an analysis of the latest Evidence Gap Map (EGM) update. This is the second blog, others will include impact insights on digital credit and payments and transfers, the design and delivery of various products, and where (people and location) we have been looking for impacts. 

Previous blog: Launching the Digital Finance Evidence Gap Map 2.0

Saving is a sound financial practice, particularly for people with lower or fluctuating incomes. Savings help people cope with a poor harvest or a sick family member. Sufficient savings can secure the continuation of children’s educations or allow for the expansion or diversification of a business. Those who save may be rewarded with interest or, as they build a financial footprint, access to credit which—when invested in businesses or income-generating assets, can increase earnings.

As simple as it is in theory, many struggle to save effectively. There are several challenges to overcome such as limited discretionary income, fee sensitivity, access to and availability of appropriate savings products, and savings habit formation.

While numerous studies report the impact of various analog approaches to improving savings behavior and the longer-term results of savings, we focus on if and how ‘digital’ has improved savings behavior among low-income populations.

What are the insights so far?

The EGM includes just 12 studies that evaluated the effect of digital savings products (in 9 countries). It is early in terms of the quantity of insights. Accordingly, we should be cautious about drawing conclusions or rendering a verdict. With the exception of the Tanzanian studies on M-Pawa, these 12 studies involved different markets, client groups and design and delivery mechanisms. The table below illustrates the diversity of the digital savings products that were examined.

Table 1: Design and delivery of savings products

These 12 studies, entail 41 outcomes tests. The diagram below, shows the outcomes tested, and the number of studies that had a positive, negative, or null effect. Positive, negative, and null effects have been observed on client outcomes both across the studies and within a single study. This is indicative of the early stage of testing and learning on digital savings. Over time—with the support of investors, donors, practitioners, and researchers—more products will be developed and tested. As we continue to synthesize the evidence, clearer patterns may emerge and eventually allow us to uncover best practices.

Figure 1: Digital saving impact pathway

Spotlight on selected savings studies

We highlight a selection of insights from our analysis of the studies within the EGM and invite digital savings practitioners, researchers, donors, and policymakers to interact with the EGM to derive insights that match their needs and questions.

Interactive learning and nudges

  • In a CGAP supported experiment, M-Pawa—an interest-bearing mobile money savings account that also provides micro loans conditional on savings performance—partnered with Arifu, a mobile learning platform, to improve savings and borrowing behaviors among smallholder farmers. Using two-way SMS on financial literacy content, the intervention observed that if a customer ever interacted with Arifu, they had a larger number of transactions compared to non-Arifu customers (0.64 more). Additionally, interaction with Arifu’s content led customers to have larger running balances (4,447 TZS/$1.94 more).
  • The Technoserve Women in Business program also partnered with Arifu and M-Pawa to trial two interventions meant to improve business outcomes for female micro entrepreneurs. The M-Pawa intervention provided an M-Pawa training session and allowed clients to set savings goals and receive weekly savings reminders through Arifu. The business intervention included the M-Pawa training session in addition to business skills training. The results showed that women in the M-Pawa group saved three times more than women in the control group, while those in the M-Pawa plus business training group saved almost five times more. The intervention increased the probability of receiving a loan by 14 percent. Regarding business outcomes, the study found that the intervention did not have an impact on business survival. There was, however, evidence that the intervention led to business expansion when combined with business training. Here, women were 4.6 percent more likely to operate a secondary business and generate a small increase (4,000TZS/$1.74) in monthly profits.
  • Bancolombia tested two-way SMS, in partnership with Juntos Finanzasto improve savings balances among their clients. Three months after the introduction of two-way SMS, active new accounts increased by 32.5% and average account balances increased by 50%.

Bringing digital to the door

  • Sri Lanka’s National Savings Bank piloted weekly, door-to-door savings deposit collection services to a randomly selected sample of individuals in rural areas using a wireless point of service (POS) terminal. The weekly visits generated an increase in the frequency of transactions, which quadrupled from a control average of .5 transactions per month to an average of more than  2 per month, and overall savings increased by 15% per month.
  • Opportunity International Bank of Malawi deployed roving agents equipped with a mobile ATM to provide savings services to rural areas. It was expected that access to formal savings services would help households cope with adverse shocks by reducing their use of sub-optimal coping behaviors such as depleting assets. However, the results indicated that having an active savings account did not result in a reduction of sub-optimal coping behaviors. However, the study did find differential levels of impacts based on wealth. For wealthier households, an increase in savings was associated with less reliance on asset depletion. But, the effect was the opposite for less wealthy households.

Variation in types of savings account:default, commitment, and locked

  • In partnership with Safaricom, researchers piloted the use of a mobile banking account (MBA) and a locked savings account (LSA), to encourage parents to save for the transition to secondary school. Balances on the LSAs earn a bonus of 1% additional interest, which is forfeited if funds are withdrawn early. The two savings interventions were promoted to parents, in addition to a control, at the school level. Estimates suggest that being induced to open an MBA increased bank account savings by between 1,000 and 1,500 KES ($10-$15), and being induced to open an LSA increased them by about 500 KES ($5). Parents in both treatment groups were between 3% and 5% more likely to access an MBA loan. Further, use of the MBAs and LSAs was shown to boost school enrollment regardless of the analysis used; opening a bank account was associated with a 27% to 40% boost in school enrollment.
  • In Afghanistan, assigning a default contribution was found to increase employees’ savings contributions. The study found that employees who were assigned a default contribution rate of five percent were 40% more likely to contribute to the account six months later compared to individuals who were assigned a contribution rate of zero. However, while default contribution was found to increase employees’ savings contributions, no effect was noted on a well-being index which included measures such as nights without food, life satisfaction, and physical health.
  • In Mozambique, researchers partnered with mKesh to optimize the mobile money channel as a commitment savings device for smallholder farmers. The savings treatment was based on the offer of a bonus of 20% interest for the average mKesh balance held by an individual before planting season.This bonus was paid in fertilizer. The treatment group also received training on mKesh and fertilizer use as well as a mobile phone. In the first year, the farmers’ average daily savings in mKesh increased by 38% to 44%. Looking at agricultural inputs, statistically significant effects were noted for fertilizer use and owning irrigation pumps.

Overlaying digital elements on a traditional banking service

  • The Family Bank of Kenya tested the effects of ATM cards to boost transactions. ATM cards would reduce the over-the-counter withdrawal fee by 50% and allow for out of hours withdrawals. The ATM cards led to a 68% increase in transactions over two and a half  years and increased the value of deposits and withdrawals. However, while the ATM cards had positive effects on joint accounts and accounts owned by men, it decreased the use of female owned accounts. Researchers hypothesize that women were less incentivized to save when their partner could access their account via their ATM card.

The full 360—changing an analog savings service to a digital savings service

  • A bank in the Philippines piloted a mobile banking system for savings and credit. Previously, members deposited through regular village meetings with bank agents and withdrew at bank offices in town centers. When mobile banking was introduced, members individually made repayments, deposits, and withdrawals through corner stores for a fee. The introduction of mobile banking resulted in a 20% decrease in the average daily balance and a 25% decrease in the likelihood of weekly deposits. This was more pronounced for members who had previously lived close to the bank or village meeting point. A follow-up survey suggested that the decline in savings was driven by the weakened peer effect provided by group banking and increased fee sensitivity. Despite the negative effects, mobile banking did increase the convenience of transactions. Estimates suggest a 30% reduction in the amount of time taken for deposits and 70% for withdrawals.

The takeaways

While we are far from a conclusion, digital savings practitioners, donors, and investors should note the following insights as they further develop and test savings products:

  • Two-way SMS and mobile learning platforms have been shown to enable better savings behaviors
  • Coupling the introduction of savings products with client training—either through digital platforms or traditional modes—appears to bolster clients’ ability to optimise the use of savings in the longer term.The effects of simply providing the savings products on longer term outcomes, is less certain.
  • Incorporating digital elements into existing traditional financial services such as ATM cards or roving agents with POS technology has been shown to improve access to savings products and savings behavior.
  • A total change from an analog service to a digital service needs to consider the positives of the analog service (such as agent interface and peer effects) and carefully design for the transition.
  • Default contributions, locked savings accounts, and commitment savings accounts were all found to improve the savings behavior of clients, and when client training was provided, longer-term effects on welfare were observed.
  • Product design needs to carefully consider the potential differential effects on, for example, women and men, higher and lower incomes, rural and urban, etc. There are cases where some groups benefit more than others.

Researchers, and those who fund research, have a crucial role to play in partnering with digital savings practitioners, articulating robust theories of change for a product, and testing those theories. There are clear gaps in outcomes, products, markets, and, particularly, the client segments tested.

The insights gathered thus far are encouraging and, as a community, we should continue to look for opportunities to gather evidence on the effects of digital savings products.

The studies in the EGM, represent our best knowledge of digital finance impact insights. New studies are ever emerging and thus the EGM will continue to evolve. If you have questions on the EGM, are interested in discussing research priorities, or know of relevant Digital Finance impact studies that meet the inclusion criteria, please contact ideas@financedigitalafrica.org.

Can your personality get you a credit score?



Imagine you have just completed a job and are owed money. Your client offers you a delayed payment option where instead of receiving $14,000 today, you will receive $20,000 in six months. Which option do you take?

This is one among many behavioral and personality questions that a psychometric credit assessment asks potential borrowers. By asking questions that measure an applicant’s attitude, integrity, and performance, a psychometric credit assessment can generate a credit score. And, because everyone has a unique personality and characteristics, this type of assessment provides an alternative for thin-file loan applicants (i.e., zero or low credit history) seeking to obtain loans.

Beginning in 2006, innovative firms like Lenddo and Entrepreneurial Finance Lab (EFL) — later the merged company LenddoEFL — were among the first to pioneer psychometric assessments for lending in emerging markets. In early 2018, FiDA spoke with LenddoEFL to better understand their journey in developing psychometric assessments, and, in parallel, learn more about the experience of Juhudi Kilimo (JKL), a Kenyan microfinance institution, in employing the assessment. FiDA’s case study, “Delving into human consciousness: using psychometric assessments in financial services,” offers relevant experiences using psychometric assessments to financial service providers (FSPs) interested in leveraging non-traditional, alternative data to develop credit scores.

The opportunities and challenges of psychometric assessments

We were told EFL could accurately measure character so it was a test, and if it worked then we could start placing more emphasis on people’s character versus collateral.

JKL

JKL wanted to decrease their turnaround time to make credit decisions, and improve their acceptance rate. In 2016, supported by a Mastercard Foundation (MCF) grant, they turned to LenddoEFL and piloted their credit-score model, to explore an objective way of measuring a loan applicant’s character. As a result of the pilot, JKL improved their acceptance rate by 5% and increased the maximum loan amount available from 67% of collateral to 100% of collateral for high-scoring individuals. Moreover, new ‘high-scoring’ clients received, on average, $40 more (the average loan size is $300) than before the LenddoEFL model was implemented and were also offered access to clean energy loans.

However, JKL had to make the following structural, operational, and technical changes over the course of seven months before implementing this technology:

  • Obtain senior management buy-in
  • Recruit staff
  • Revise loan policy
  • Build infrastructure
  • Train test administrators and loan officers
  • Sensitize loan applicants to the technology

Much as JKL had to transform some components of their operations to implement LenddoEFL’s credit score, EFL (pre-merger), went through their own journey to develop the credit-score tool, outlined in detail in the case study. For example, LenddoEFL learned that developing a psychometric assessment tool requires iterations of data-driven models, customizing the test for the target audience, and complementing the model with multiple data sources.

Profitability requires scale and FSPs should have a clear use case for the technology

A key lesson that LenddoEFL learned is that reaching profitability requires scale. For the moment, LenddoEFL charges clients an integration fee, a one time scorecard fee (i.e., building a customized model for the client), and a price per score with a minimum number of scores purchased per month. The price per score decreases as volume increases and thereafter they charge a recurring fee that begins after the scorecard is built. The FiDA case study outlines the fixed and variable costs that FSPs and/or FinTechs should consider in building their own psychometric assessments; for instance, up to three teams to (a) model the test, (b) deliver the test, and c) integrate the test into the core banking system.

Both JKL and LenddoEFL have learned that FSPs must be very clear on what problem psychometric credit scoring could potentially solve. JKL notes that FSPs should, ideally, first assess their in-house credit appraisal system to understand (1) how effective current tools are in assessing an individual’s creditworthiness and (2) identify any gaps that psychometric assessments could fill.

Lastly, JKL encourages FSPs to conduct a cost-benefit analysis because a return on investment depends on the volume reached/scale of the program. Likewise, LenddoEFL recommends that FSPs plan to lend to at least 10,000 loan applicants a year in order to maximize the value of their tool.

FiDA is confident that the journeys presented in this case study provide a critical perspective on both the challenges and benefits of psychometric assessments in financial services.

Launching the Digital Finance Evidence Gap Map 2.0



FiDA launched the first Digital Finance Evidence Gap Map (EGM) in November 2017 with 40 studies, covering 41 different products. A year on, the EGM includes 55 studies, covering 60 products. Each year reveals more insights on the impact of various digital finance products.

Figure 1: FiDA Digital Finance Evidence Gap Map, studies per year

In the coming weeks, FiDA is publishing a Digital Finance Evidence mini series on various insights derived from an analysis of the latest EGM update. These will include impact insights on digital savings, credit, and payments and transfers products; how various products have been designed and delivered; and where (people and location) we have been looking for impact.

Bringing impact insights together

In 2017, The FiDA Partnership embarked on a journey to answer the question: ‘What is the impact of digital finance on low-income clients?’

The complexity of this question was clear. Digital finance is not ‘one thing’, it is dozens of products, designed and delivered in various ways, to various client segments, in various markets. A single study cannot answer this question. Yet, as we aggregate the various impact insights by product and place them in dialogue with each other we are coming closer to the answer.

FiDA’s contribution to the impact conversation: the EGM

To encourage a continuous dialogue on impact, FiDA developed the EGM. After defining our methodology, we screened, coded, and folded digital finance impact insights into the EGM. At its simplest level, the EGM charts  the landscape of impact evidence—be it positive, negative, or null—for a set of digital finance products, plotted against a set of client outcomes. However its interactive design and filters enable users to scan for evidence for questions as specific as ‘Does X product, designed with Y features, delivered in Z ways, to clients in A market lead to B outcomes?’ Thus, if you wanted to search for evidence on a digital credit product using two-way SMS in Ghana, you can—provided such a product has been developed and tested and the resulting insights published.

Using the EGM

We envision several ways in which various types of users might use and benefit from the EGM:

Digital finance product and service developers and practitioners

  • Search for evidence of what has been shown to have client level impact, to inform current and future digital finance products.
  • Derive insights on which design and delivery mechanisms have (or have not) improved the adoption of a given digital finance product.
  • Use evidence to advocate and fundraise for new approaches in areas where there is little evidence(and thus help fill an evidence gap) or to scale existing products.
  • As the EGM folds in more studies over time, it may reach a level of evidence saturation that will allow practitioners to develop guidelines for practice in areas where there is substantial evidence of what works.

Digital finance investors

  • Help make evidence-based, strategic investments in areas where there is ample, high-confidence evidence of what works, what is unknown, and what is untested.

Donors

  • Identify and support the development of a body of practice in infrequently explored areas by funding programs and or research, where there is little evidence on a product, a population segment or a market.

Digital finance researchers

  • Conduct an evidence synthesis on a digital finance product, a client segment, or a market.
  • Review gaps in evidence on various products, populations, or markets and make investments to advance the impact conversation.

What is in the latest version of the EGM?

In the updated EGM there are 55 studies that test 60 digital finance products and interventions from 24 Countries. There are 14 digital finance products and 28 design and delivery mechanisms with various counts of evidence. Study design includes RCTs (23%), panels (18%) cross sections (18%), provider data (10%), A/B tests (8%) and mixed methods (8%). Here, we share some high level findings, which we will investigate further in the forthcoming series.

Geography: While 24 countries are represented in the EGM, Kenya alone accounts for over a quarter of the studies (27%), the East Africa region accounting for over half (52%) of the impact literature.

Figure 2: Number of countries represented in the Digital Finance Evidence Gap Map

Digital finance products: Across the 55 studies, 60 digital finance products were evaluated. Digital payments and transfers account for 52% (n=31) of the impact literature. When general mobile money studies (i.e., studies that did not specify the mobile money product used) are included in this category, this increased to 65% (n=39) of studies.

Figure 3: Number of digital finance products tested

Client outcomes: Across the 55 studies, there are 188 ‘tests’ linked to the 10 client outcomes. The tests are more concentrated at immediate outcomes (adoption: 13% and savings behavior: 16%) and longer term outcomes (resilience: 15%, welfare:16%, and income investing/asset building:11%). The outcomes vary at a product level analysis.

Figure 4: Number of tests per client outcome

Positive leaning results but mixed at a product level examination. While the number of studies currently available is small, considering the growth and diversity of digital finance products, we observe positive, negative, and null effects across the various digital finance products on various client outcomes. 65% of the reported tests were positive, 9% were negative, and 26% were null. However, when we review product level effects in the coming series, we will see that this proportion is varied. For example, when we look at credit products, 57% of the tests are positive, 19% negative and 24% null.

It is important to state that this does not mean digital finance products ‘work’ 65% of the time or digital credit ‘works’ 57% of the time. We are looking at 60 different products where, in aggregate, 188 tests on various outcomes were examined. On average, a single study did three outcome tests (ranged from 1 to 13). Across the 60 products examined, 55% (33) reported exclusively positive results, 0% reported exclusively negative results, 7%(4) reported exclusively null results, while 38% (23) reported a mix of positive, negative, and null results. Just one study reported only negative or null findings. So in 38% of products, some outcomes improve, some are unchanged, and a few regress.

We are at the beginning of our journey toward understanding the impact of various digital finance products. Researchers are, and should be, casting their nets wide—testing a broad range of outcomes—to interrogate various theories around the impact of various products. If a product tested two outcomes and found no effects, it does not mean that the product does not move the dial at all, but rather that what it may move the dial on was not examined. Choosing what to test is important.We refine these choices through continued testing and learning.

Figure 5: Proportion of tests by results per client outcome

We have much to learn as a community; but the digital finance EGM  collates our learnings so that we can better approach an answer to the impact question. As more products are tested, and the findings published, we can form impact pathways for each type of digital finance product and provide the community with a tool to delve into  the design and delivery mechanism, the market, and the social conditions in which the digital finance product was (or was not) successful in catalyzing change.

The studies in the EGM, represent our best knowledge of digital finance impact insights. New studies are ever emerging and thus the EGM will continue to evolve. If you have questions on the EGM, are interested in discussing research priorities, or know of relevant Digital Finance impact studies that meet the inclusion criteria, please contact ideas@financedigitalafrica.org.

AI and Big Data have transformed digital finance in China. Can they do the same in sub-Saharan Africa?



This blog has been co-authored by David del Ser, Practice Director at Bankable Frontier Associates and David Edelstein, Senior Director at FiDA Partnership

The recent FiDA Partnership trip to China was eye-opening in many ways: ranging from the speed of adoption of digital financial tools to the sophisticated ways in which financial services are built around nuanced client behavior to the rapid growth of online to offline linkages.  We heard a lot about “A, B, C and D”: the use of Artificial Intelligence (AI), Blockchain, Cloud Computing and Big Data to transform how financial services are developed and delivered.  

We were particularly impressed with advanced applications of AI and Big Data and the critical “behind the scenes” roles they play.  In this blog we highlight some illustrative examples from China, identify how these approaches can be applied to the African context and suggest some practical approaches to begin to harness the potential.

AI and Big Data Enable Practical Innovation in China

Accelerated Customer Acquisition and Support

The use of AI and Big Data is pervasive in the development and delivery of financial services in China. For example, Yirendai, the largest P2P lending platform in China and a rapidly growing investment platform, relies on AI to help customers evaluate risk and recommend loans.  Their automated bot, Yiri, which provides investment advice and education, has led to an increase of 50% in assets under management and is slated to be the primary entry point to all of Yirendai’s services.

Our group visit Yirendi’s Office in Beijing

Breakthroughs in Core Banking Software

In another example, WeBank, partly owned by Tencent, has built an advanced back-end platform relying heavily on AI and Big Data to support a range of accounts and transactions.  The service, which they white label and license to financial institutions, costs ~$1/customer/year at scale, nearly fifteen times less than a traditional banking platform. WeBank has achieved this impressively low cost through heavy use of chatbots (which handle 96% of transactions) and reliance on AI for preventative maintenance and to achieve other back-end saving.  AI is also used to assess microloans, drawing on tens of thousands of data points using both financial information and WeChat’s social data to assess creditworthiness. With this sophisticated technology in the back-end, one-third of people who draw upon WeBank credit have no previous credit history — and the non-performing loan rate is below 0.7%.

Reductions in Credit Risk and Costs

And Alipay, owned by Alibaba, relies heavily on big data, AI and biometrics to assess credit risk and reduce fraud.  Able to reduce the fraud rate to 0.001% (as compared to 0.2% for PayPal) and relying on large economies of scale, Alibaba has driven down transaction costs to well below 1% (compared to 3% to 4% at PayPal) and close to zero for P2P transactions.  They also proactively “white list” users based on a large number of factors.

These stories of low-cost scale provide a glimpse of how leading companies in China have embraced AI and Big Data to extend the reach of financial services.  Indeed, many consider themselves technology companies first, which happen to provide financial services, and have adopted the TechFin moniker.

Opportunities to extend approaches from China to sub-Saharan Africa

While China does benefit from a somewhat unique enabling environment, there are a number of ways in which companies in sub-Saharan Africa could benefit from strategies employed in the digital finance revolution in China.  

Some of the “lowest hanging fruit” involves extending knowledge gained and approaches taken using AI to the African context.  Talent to effectively use AI techniques has been a barrier in the past — but through a combination of using newly-available advanced tools (e.g., WeBank example), a growing talent base in Africa and the ability to rely on talent from outside the region, these concerns can be ameliorated.  

AI tools typically require large amounts of aggregated data.  Mobile network operators (MNOs), and to a lesser extent financial institutions and PayGo Solar players, possess or are amassing such data.  Through strategic partnerships and adoption of existing tools these companies could be doing more with the information they have, for instance predicting payment behavior to reduce churn.  For now (due to regulatory concerns around sharing/selling data), the use of AI and Big Data may be limited to optimization within companies, but in the future data sharing across companies may be able to provide a more detailed and nuanced understanding of clients.  African companies can learn from the value of big datasets and creative partnerships (to build big and diverse datasets) which we observed in China. While leveraging big data in Africa is still in its early days, the opportunity should be taken seriously.

The opportunities on the “back end” are more immediate than those on the “front end”.  This begins with the low penetration of smartphones (relative to China) and on-going reliance on USSD.  While China made a rapid leap from feature phones to using smartphones to read QR codes and conduct financial transactions, in sub-Saharan Africa the path has involved mobile money and slower adoption of smartphones.  The leap in China has enabled sophisticated use of AI on the front end — such as biometrics for KYC and facial recognition based on selfies — which will only be possible in Africa with big advances in smartphone usage.

The “silver lining” of the African path may be the extensive CICO agent networks — which generate a large amount of data.  While lacking e-commerce and smartphone data, the AI journey in Africa can draw upon the data held by MNOs, financial institutions and PayGo providers, and benefit from the growth of smartphones.  Indeed, we are already seeing companies like Pezesha, Tala and Branch capturing their own data from their apps.

What can be done today — and over time

So what can be done now?  We will close with a few pragmatic recommendations of actions that can be taken by companies in sub-Saharan Africa to benefit from advances in AI and Big Data seen in China.

We were struck by the degree of collaboration between companies in China.  This ranged from sharing data to using advanced tools to better understand and serve clients (see recent blog on this collaboration).  Neobanks in Africa should consider using advanced tools from WeBank and other providers (from China and elsewhere).  To the extent allowed by regulators, MNOs, Financial Institutions and PayGo providers should share data to develop richer consumer profiles.

Companies should consider “non-traditional” types of data — both information that may be lost today (in China factors such as how hard a user pushes on the screen and the angle the phone is held are captured and considered) and “non-traditional” sources of data (companies tapping into alternate sources of data exist in Africa — but much more could be done).  When brought together these often yield unexpected insights about consumer behavior. Knowledge of local context combined with thoughtful, applied use of data holds a lot of potential.

As smartphone penetration expands consider creative approaches to tap into the multiple data streams.  Companies today are just skimming the surface of what can be done.

Over the longer term the home-grown talent base must be strengthened.  Institutions such as Ashesi University in Ghana, the African Leadership Academy in South Africa and the Mastercard Foundations Scholars Program are pioneers — and others can and should learn from them.  

Can China’s Ethos of Collaboration Work for Africa?



This blog was authored by Annabel Schiff – Senior Manager, Partners at the FiDA Partnership – with input from Lesley Denyes – Program Manager and Digital Finance Specialist at IFC

In China, collaborative relationships have played an important role in driving financial innovation and inclusion in the country. In Part 1 of this blog series we discussed the Chinese ethos of building the digital finance space together, based on insights from our recent FiDA Partnership fintech study tour to China. In this blog, I touch on the existing partnership landscape in Africa, as well as some of challenges in recreating China’s collaborative atmosphere.

The Partnership Landscape

Partnerships and contractual relationships between banks and non-banks

Partnerships are happening in Africa. In fact, they are critical to the success of digital finance either to fulfil regulatory requirements, as a means to provide mutually beneficial and essential channels (e.g. funding, distribution, communication), or as an avenue to grow both service offerings and customers.

MNOs partnering with banks to offer more sophisticated products

MNO-led bank partnerships – such as Safaricom and CBA’s M-Shwari product – enable mobile money providers to offer products beyond payments and in turn enable banks to reach a wider audience. These types of partnerships, however, also face challenges. A good example is the unsuccessful partnership between Equity Bank and Safaricom through which the M-Kesho product was launched. Both partners struggled to define a mutually beneficial partnership, in part due to them perceiving each other as competitors rather than partners.  

Banks partnering with MNOs to reach new customers and grow their business

We also see banks and MNO’s cooperating when a bank wishes to develop their own digital finance brand in order to grow their customer base. They therefore partner with an MNO to leverage its infrastructure for the delivery of digital finance. For example, in 2015 Equity Bank in Kenya signed a contractual agreement with Airtel to leverage its access channels to deliver their Equitel service.

Equity Group CEO James Mwangi with former Airtel Africa CEO Christian de Faria (photo credit: www.kachwanya.com)

Partnering for regulatory compliance

Partnerships between banks and MNOs also take place for regulatory reasons. In bank-led markets, such as Pakistan, Bangladesh and to an extent Uganda, non-banks are required to either buy a bank, or partner with one, in order to be issued an e-money licence. While the majority of bank-led services are found in Asia, Uganda also regulates that non-banks must partner with a licensed financial institution to offer digital financial services. In Uganda, these banks tend to sit in the background while the MNOs design, brand, market and distribute the services.

Partnerships to enable wallet-to-wallet interoperability

Wallet-to-wallet interoperability between MNOs is one of the most notable examples of industry cooperation in Africa. In fact, countries such as Tanzania, Rwanda and Kenya that have introduced interoperability at the wallet level are ahead of China where wallets still do not interoperate. In Tanzania providers have noted how interoperability has impacted the quality of services, focusing them on driving “value into the system, rather than growing our own, segregated network”. Despite the potential commercial and financial inclusion benefits of interoperability, expansion has been slow. Even in mature mobile money markets such as Kenya, interoperability has only just been established, and the jury is still out regarding the success of the interoperability pilot.

It is important to note that interoperability enabling transfers between mobile money accounts and bank accounts, is more common and better established. In their 2017 State of the Industry report, GSMA noted that bank-to-mobile interoperability has contributed to a notable rise in funds entering and leaving the mobile money ecosystem in digital form.

Cooperating with the fintech players

Traditional mobile money providers, such as banks and MNOs, are also cooperating with fintechs, who tend to be smaller, more agile, technology-focused organisations. The ecosystem manager at Barclays’ Rise innovation hub in Cape Town highlighted that the reality for fintechs is like the African proverb: If you want to go fast, go on your own. If you want to go far, go together. For small fintechs, partnerships are key to helping them not only access funding, but also reach new customers, overcome regulatory constraints, train data to develop new and better models, and access necessary technology to delivery their services. For banks, the pressure to innovate has led many to invest in and collaborate with fintech start-ups. For example, in 2015 Barclays opened a product lab in Kenya and Standard Bank launched incubator programs in Johannesburg and Cape Town.

Challenges with Building this Collaborative Environment

Heavy OPEX investment can breed competition rather than collaboration

In China the government has invested heavily in driving financial inclusion by mandating state-owned banks to roll-out cheap bank accounts, resulting in 80% of adults having a bank account in China. High bank penetration means that rather than relying on a cash-in, cash-out (CICO) network, customers seamlessly load funds into their digital wallets through linkages to their bank accounts. While customers can cash out at some retail locations, there are no agent networks.  

In contrast in Africa, owing to low bank account penetration, financial inclusion is increasingly driven by mobile money. While digital finance has helped accelerate financial inclusion, most African digital finance providers have had to invest heavily in building out their own CICO agent network. Agent network management is the most costly element of a digital finance business; costing between 40–80% of revenue. Such significant investment not only excludes smaller players, but also reduces incentives for larger players to open up and enable other providers to ride on their distribution channels, hence the slow uptake of wallet interoperability. While some African markets have set regulations against exclusive agents, in most markets mobile money is yet to be interoperable at the agent level. For those who have invested heavily in agent networks, they have also likely invested in building up a brand reputation and trust among their customers. The legacy of heavy investment can breed an ethos of competition rather than collaboration.

M-PESA agent in Nairobi, Kenya

Alternative lenders struggle to partner for loanable funds owing to lack of scale

FIBR’s research in Ghana and Tanzania showed that, unlike China, regulation prohibits non-financial institutions to lend. Beyond regulatory restrictions, funding obstacles exist due to early stage risk. Much of this is related to a lack of scale, data, and thus weak algorithms to develop credit-score models.

In contrast China comes with scale. The online population size is 730 million, twice the size of America. African countries, even Nigeria, are small in comparison. With scale comes data, which not only enables providers to trial products more effectively, but also allows them to more efficiently test algorithms. This is why technology companies in China are able to negotiate low cost loanable funds from banks by proving their credit score model (see the JD Finance example in Part 1 of this blog). In Africa, digital finance players and even large banks are still refining their models and algorithms. Weak, unrefined algorithms have resulted in banks tending to finance on-lenders at a high price due to the risks involved, or fail to provide any funding at all.

Partnerships to help expand data sets have been slow

It is not only scale that helps Chinese fintech players garner huge swaths of customer data, but also their product offerings. In China, merchant payments led the digital uptake, driven by technology companies who layered payments on top of existing use cases, such as Tencent with their social network and entertainment offerings, and Ant Financial with e-commerce.  As mentioned in Part 1 of this blog, payments permitted players to gather valuable data on customers which, along with their existing customer insights, enabled them to develop more sophisticated financial services.

In contrast peer-to-peer payments first drove adoption in Africa. Merchant payments have struggled to take hold, except in Kenya where Lipa Na M-Pesa has gained some traction, and South Africa where bank cards and POS terminals are widespread. The lack of merchant payments means less engagement with customers, and therefore less data. Without the prevalence of merchant payments, there is the question of what data could be used to develop new financial services products, particularly data-driven digital credit products for which there is latent demand. A recent IFC market survey asked “What product will lead DFS adoption in the near future?”: 30% of respondents said credit and 25% said merchant payments, beating out P2P at 23%.  While digital finance players are exploring partnerships with non-financial institutions to help fill these data gaps, the uptake of big data and analytics in the region has been slow.

Conclusion

In the end, partnerships are good for customers.  They create options, promote competition and inspire innovation. The Chinese digital finance journey illustrates the value of collaboration, for both providers and customers. Most African countries present a very different commercial landscape with significant barriers to a similarly collaborative environment. However, as traditional bank and MNO revenue streams come under increasing pressure, we will likely see a shift towards business models with a higher reliance on collaboration. Looking to the Chinese experience may present some valuable lessons when the time is right.

How to study MSMEs in the digital era



In the coming months the FiDA team will be conducting new research at the intersection of two broad themes: financial inclusion in the platform era and enterprises and financial inclusion.

Apart from agriculture, Micro, Small, and Medium Enterprises (MSMEs), are the greatest source of employment in many countries in sub-Saharan Africa. They have have long been a focus of interest to the development community, but as digitization transforms the nature of work—from gig economies to international supply chains—the links between MSMEs and ICTs are increasingly important. We’ll be exploring how, in particular, the spread of ‘platforms’ (Google, Facebook, Alibaba, etc.) creates new models for (and avenues to) financial inclusion.

As we get underway, we’d like to share the results of an exercise we conducted to help focus our research. Granted, it’s basically a 2×2, and as consultants we know these are common, but in this case we think it’s durable and useful to share.

The first dimension in our table is the size of the firms in question. In our discussions, we found that the definition of MSME was quite broad; accordingly, we distinguish ‘Micro’ from ‘Small and Medium.’ However, there is no hard and fast rule for drawing this line. Some countries define microenterprises as firms with <10 employees, others draw the line at <5 employees. For sub-Saharan Africa, where firm sizes tend to be smaller (and the majority of firms are sole proprietorships) we think the <5 delineation makes more sense.

  • Firms with fewer than five employees—both sole proprietorships and microenterprises, are the most numerous type of enterprises. Many are informal, and most struggle to grow. Microfinance rose as a community of practice specifically to address the needs of these tiny businesses, and the literature on them, their use of ICTs, and their challenges is now quite robust
  • By contrast, Small and Medium Enterprises(SMEs) are usually formal, registered, and paying taxes. These firms also face challenges vis-a-vis financial services, but they are not so much challenges of access as they are of suitability or affordability—loan terms might be too short, bank fees too high, etc.

The second dimension refers to the nature of the enterprise as it relates to the digital economy. As Duncombe and Heeks have explained, there’s a key distinction between small firms that benefit from ICTs and small firms that produce ICTs. We see a durable conceptual split between ‘the broader economy,’ which is benefiting from and being transformed by digitization, and the subset of firms with ‘digital DNA’, which are making the products, delivering the services, and writing the code that underpins that digitization.

A related but distinct category of firms are the platforms themselves—the handful of multinational superplatforms as well as a larger set of local and regional electronic marketplaces—that are transforming sectors of the economy in real time. This is what we mean by ‘the platform era’: platform logic has become central to the ways in which digitization and the internet are changing economies, and this platformization is a major theme for our work in the year ahead. Our typology is more clear if we place platforms in a different section of our framework.

The result is a 2×2 with a modified adjunct for the platforms themselves. As you can see, the research topics than emerge are distinct enough to clarify the most relevant research questions:

  • Box 1 involves the largest number of firms in any economy. Here we are dealing with the struggle of the everyday, how firms  from small restaurants and fix-it shops to retail establishments might utilize national and global platforms in new ways. Research here would (and will!) explore how the traditional clients of microfinance institutions are adapting to the platform era. It could focus on the ways in which social media and the personal Internet is being appropriated to fit the needs of the smallest firms, even when the lines between entrepreneur and enterprise are blurred.
  • Box 2 is quite different in that platforms may be providing new opportunities for small-scale economic organizations with ‘digital DNA’ to offer products and services in entirely new ways. The best, and perhaps most controversial, example of this might be gig work whereby individual proprietors or small firms utilize the infrastructures of labor platforms to earn livings in the cloud, mediated completely by the platform.
  • Box 3 involves a country’s established, formal SME class. How do these firms adapt to the platform era? There are a host of innovations, from inventory and product management to advertising and financing, that can be offered at lower cost and higher value to these firms thanks to digitization. How, specifically, are the platforms involved with these new offerings?
  • Box 4 involves digital startups; the stuff of businesses coming out of accelerator programs and preparing to take off. Many are businesses that write the software or design the new hardware that is customizing the global Internet and other digital technologies for African markets. There’s a great deal of enthusiasm around these businesses, but the research that one would do to understand a digital startup differs from the research  one would do to understand the motorcycle repair shop just down the street. Both are enterprises, but they occupy very different places structurally, both in terms of their local economies and their international visibility.
  • Box 5 is our floating adjunct to the 2×2, our acknowledgment that the platforms themselves deserve and require significant scrutiny. From Jumia to Sendy to WhatsApp for business, the terrain of platform-related digital services is shifting and expanding. Yet there is  little work that specifically engages with the interface between platforms and all four of these MSME segments, particularly with respect to financial inclusion outcomes. Recent findings from FIBR, an R&D project of BFA in partnership with Mastercard Foundation, are beginning to fill this void, looking first at how Tanzanian merchants are moving online.

Our next research project, kicking off in late 2018 in Kenya, will explore the connections between “box 1” microenterprises and the “box 5” platforms that serve them.  

All in all, there’s a lot of work to be done. The point of this post is to sensitize readers to the importance of a bit of specificity regarding terms so that a generalized enthusiasm for platforms and/or MSMEs does not get in the way of refined research questions that can uncover new insights. We look forward to sharing updates about the research as it nears completion.

How can platforms improve financial inclusion in Africa?



Authors: Marissa Dean, Jonathan Donner – Senior Directors at Caribou Digital

The Internet does platforms well. By the late 1990s, eBay was growing like gangbusters, partly—but famously—by hosting the exuberant exchange of beanie babies among collectors. Later, Facebook and Google leveraged network effects in social media and search to grow massive multi-sided markets in attention and advertising. More recently, innovators like Alibaba (direct to consumer sales) and hundreds of others are changing not only online experiences but also real-world livelihoods and economies impacting billions of people around the world.

Indeed, the Internet does platforms so well that it’s fair to say that the digital “platformization” of markets is one of the defining forces of change in the shift to digital economies. Moreover, platformization presents both new possibilities and new challenges for developing countries.

FiDA is exploring the impact of platformization on financial and economic inclusion in Africa through Caribou Digital’s multidisciplinary platformization lens, which combines perspectives ranging from management studies and economics to sociology and media studies. In 2018 and 2019, we are extending that lens to identify how platforms can promote financial and economic inclusion.

Platforms are mechanisms for hosting interaction and exchange between third parties in which  the host (a) facilitates value creation (financial or otherwise) and (b) takes a share of that value but (c) doesn’t completely control the scope of interactions or their outcomes. This lens helps us reveal and isolate a variety of platform functions.

Caribou Digital Platformization Lens

Sources: Platform types—Cusumano, Gawer & Yoffie (2018); Market functions in transaction platforms—Drouillard (2017), Palepu and Khanna (2010); Sectors—Caribou Digital Analysis.

Are there different kinds of platforms? The split In the lens—innovation vs. transaction— illustrates a well-documented diversity in platforms. Echoing Cusumano, Gawer & Yoffie (2018), who remind us that some platforms are infrastructures for innovation and others are hosts for transactions.

  • Innovation platforms, like operating systems or developer tools, emerge when an institution invites others to use its code or other assets  to encourage further innovation in the provision of products and services. The more one can do with the host’s infrastructure, the more apps that run on the host’s operating system, or the more records that a host’s database contains, the more value everyone (hosts and contributors alike) can create through the system. Google’s Android operating system, Amazon Web Services, and Ethereum’s blockchain computing offerings are notable examples of innovation platforms.
  • Transaction platforms create multi-sided markets by hosting interactions that match buyers and sellers. Transaction platforms are proliferating and touch every sector of the economy, from goods and shared rides to gig work and advertising impressions. eBay’s marketplace, Google’s paid search, and AirBnb’s homestays are examples of transaction platforms. In 2018 and 2019, much of FiDA’s research will focus on transaction platforms.

How does platformization work? The vertical axis of the grid brings in economics and management thinking about market functions and pivots attention from discrete institutions to the underlying concept of platformization. Drawing on earlier work by FiDA’s Marissa Dean (in turn drawing on Palepu and Khanna), this axis distinguishes four basic functions with bearing on the structure and performance of markets and transactions: 1) aggregation and distribution, 2) transaction facilitation, 3) information analysis and advice, and 4) credibility enhancement.

What are the impacts of platformization? The horizontal axis of the grid illustrates the different ways in which  transaction platforms affect markets in goods, labor, assets, attention and data. Distinct communities of practice, critique, and inquiry have coalesced to explore the social and economic impacts of platforms around each of these domains. The grid allows us to look for commonalities between these conversations while preserving key distinctions.

What happens if platforms are wildly successful? One caveat is important here: this lens does not capture the benefits or risks associated with the runaway success of a handful of the biggest platforms—what our colleagues at the FIBR project call the superplatforms. Thanks to network effects or other favorable structural factors, when superplatforms compete in a winner-take-all market, they exert outsize influence on the shape of an entire industry. If superplatforms extract a greater than merited proportion of the value created or discourage local or regional competitors, then they deserve scrutiny for potential detrimental effects. Additionally, when platforms that are successful in one industry harvest data, market to captive customers, or otherwise leverage network effects in order to enter new or adjacent industries with an inbuilt advantage, there are similar anticompetitive considerations to take into account. Neither of these important policy questions are directly reflected in our lens, but they should be included in broader conversations about platformization and development.

Applying the lens to financial inclusion

The platformization lens allows us to critically analyze digital platforms at the intersection of their marketplace functions as well as the sectors of the economy they touch. The result of this exercise is a set of tactics and partnership strategies employed by digital platform organizations and linked to specific implications for development, prosperity, and inclusion.

For example, if we examine the gig-work platform Upwork, placing it in the labor section of the grid, we see several discrete implications of its model for financial and economic inclusion:

  • Aggregation and distribution market functions: Upwork works with enterprises to disaggregate demand for tasks that can be performed with access to a computer. It also offers a flexible workforce to small businesses and enterprises. Both of these elements decrease slack and matching friction in the labor sector. Moreover, as gig workers use Upwork to expand their trade rings, their income generating opportunities grow.
  • Transaction facilitation market functions: Upwork offers escrow/milestone based payment options and a pathway for recourse if something goes wrong with a transaction. This gated process increases trust among businesses and workers transacting remotely, which in turn impacts the level of formal employment activities (via Upwork and other gig-work platforms).
  • Credibility enhancement: Upwork offers skills tests and certifications, and qualifies certain freelancers as “Upwork Pros”. Both ratings enhance the credibility of workers participating on the platform and reduce the likelihood of fraud. However, these ratings tend to lock suppliers into the platform because, while extremely valuable, they are not portable

Any one of the discrete functions offered by Upwork or its kin could be the the anchor point for an intervention designed to promote financial inclusion and broader-based economic participation in sub-Saharan Africa. But the lens underscores how important it is to unpack the details and acknowledge that these elements may not be equally beneficial to workers at the margins of the digital economy.  

The lens is applicable to a variety of development challenges in the digital era, including employment, innovation, and participation in civil society. Each application would generate a specific set of elements connecting stakeholder behavior, sector dynamics, and outcomes.

In 2018 FiDA is applying this lens to financial inclusion. We see the lens as a powerful tool for exploring literally hundreds of digital platforms operating in Africa—both domestic and international—to assess their prospects for delivering financial services and furthering the economic activity of underserved individuals, small businesses, and developing economies. Later in 2018 and in 2019, we will complement the work currently underway with interviews to better understand how platformization is affecting partnerships with bearing for financial inclusion. We will also look at how platformization is impacting the livelihoods of micro and small enterprises. Stay tuned and please tweet or contact ideas@financedigitalafrica.org to get involved or give feedback.

Tipping the Scale: Can Social Media Drive DFS Adoption and Use?



This blog was co-authored by Adaora Ogbue, Associate Programme Manager at Mastercard Foundation and Renita Nabisubi, Head of Digital Financial Services at Access to Finance Rwanda

Introduction

As we go about our daily lives we engage in basic financial transactions such as making payments or saving and borrowing money. These can hardly be separated from our social lives since they occur to facilitate our day-to-day livelihoods. Looking at how people across the globe interact socially through digital media and entertainment platforms, it is no wonder that these have become key drivers for the adoption and use of digital financial services (DFS) in China.

Social media and digital entertainment in China offer a natural consumer base for digital finance providers, to an extent which might make Facebook and other social media platforms salivate. Having cultivated digital interactions through their existing communities, Alibaba and Tencent have found innovative ways to convince users to live their digital lives within these platforms. This allows Alibaba and Tencent to study their users’ profiles and monetise their behaviour. Chinese internet finance companies have leveraged their vast user bases to drive DFS adoption and use. What can Africa learn from these Goliaths?

Tech Giants’ Large User Bases Drive DFS Growth in China

Social media and digital entertainment are increasingly important in our lives, cutting across social and economic levels based on the entry point of the cost of smartphone ownership and mobile data. This is great news for digital financial service providers in China who own the social media and digital entertainment platforms themselves. They can, therefore, analyse social behaviour in order to develop and monetise new products.

To be worthwhile, however, user bases must be large enough to prove commercially viable, since the model often followed is one of low commissions but high volumes. The large user base in China has proven beneficial to Alibaba and Tencent, who were able to identify and capitalise on trends in the usage of social media and entertainment to create a reusable source of customers for the introduction of new DFS products.

For example, Alibaba’s Alipay mobile and online payment service emerged in response to the need for users of Alibaba’s original e-commerce platform to process payments within the system. Similarly, Tencent’s social messaging service, WeChat, and mobile games such as Arena of Valor, provided natural paths to monetisation through in-app transactions.

Still, these limited use cases did little to generate customer “stickiness”, or encourage customers to make repeat purchases. Simply having a large customer base does not guarantee viability of the business model. This is where the ability to develop products around its knowledge of customer behaviour proved beneficial to Tencent.

Building on the tradition of exchanging red envelopes containing money between family and friends during special occasions (such as weddings and the Chinese New Year), the company developed a digital wallet in WeChat to digitise this age-old custom using P2P payments. Coupled with a media campaign and live interaction during the New Year’s broadcast, and with the requirement that customers link their bank account to a mobile wallet, this proved to be another simple yet effective customer acquisition strategy. Having launched the product in 2014, Tencent reported 2.3 billion transactions on January 1, 2016 alone. Despite a decrease in holiday transactions since then due to competition from new market entrants, more than 768 million WeChat Pay users sent or received red envelopes during the six-day holiday in 2018, a growth rate of 10% year-on-year.

Similarly, Alibaba introduced a competing product, giving away an equivalent of $97m of “lucky money” to users, in order to convert customers to their wallet. It further modified the product so that, when shared with WeChat users, users would be required to download and open the Alipay wallet to access the funds. Despite Alipay’s initial advantage, however, of handling payments on China’s biggest e-commerce platforms Alibaba, Taobao and Tmall, Tencent’s WeChat Pay grew its market share to 40% in Q1 2017, while Alipay’s dropped to 54%.

Tencent has further exploited the popularity of WeChat, known to have approximately 980 million active monthly users, by introducing over 10 million light-weight apps and more than 500,000 social commerce mini-programs. These provide shops with new ways of selling products to WeChat group members, without users having to install additional software on their phones. With such ease of use and various discounts offered for group purchases, WeChat and its popular app-within-an-app model have become ubiquitous in China. It is estimated that 77% of all Chinese mobile phone owners use WeChat Pay, with 30% of mobile use dedicated to WeChat and another 30% spent using other apps developed by TenCent’s subsidiaries, meaning that there is little reason for customers to engage in activity outside of the WeChat mega-app.

DFS and social media in Africa

In Africa, use of social media and consumption of entertainment are on the rise. The African social media market was estimated at 100m users in 2014 but has now grown to over 120m. Facebook and WhatsApp dominate this usage, with over 80% of access being done over mobile.

Furthermore, the number of African internet users in 2017 grew by 20% year-on-year, representing the fastest rate of growth among the four billion new users of the internet worldwide in that year.  Also encouraging is the growth of the mobile gaming market on the continent, with African developers creating African–themed games. Industry associations for developers now have presence on the continent, for example, the International Game Developers Association with seven chapters in Africa.  

Due to the nascent stage of these markets, and the prohibitive total cost of mobile ownership preventing widespread smartphone adoption, the current African user base and resulting social media and entertainment consumption are dwarfed by those of China. This is partly because the African social media user base is owned mainly by US platform holders such as Facebook and WhatsApp, which have yet to integrate DFS into their current service offerings for African markets. Furthermore, DFS providers in Africa tend to be smaller MNOs and banks that struggle to find ways to grow and profit from their small base of customers. Finally, many barriers to bank account ownership persist in Africa, making it impossible for Africa to follow China’s path to DFS growth through social media and entertainment.

With the  growth in smartphone penetration in Africa, however, there has been a reversal in trends that saw smartphone importation surpass that of feature phones for the first time in 2016. Ovum predicts year-on-year growth of 52.9% culminating in 929.9 million smartphones in Africa by 2021. Though still expensive for low-income users, Huawei and Tecno models now cost as little as US$50 to US$100.

As smartphone ownership grows, the popular use of mobile money wallets that are funded using widely-spread agent networks can create opportunities for digital payment services. According to GSMA, the total value and number of mobile money transactions in sub-Saharan Africa grew by 14.4% and 17.9% to reach US$19.9 billion and 1.2 billion, respectively in 2017. Furthermore, East Africa accounted for 56.4% of the continent’s market for mobile money that year, with Central and Western Africa’s uptake doubling over a five-year period thanks to evolving regulatory policy.

The growth of Africa’s budding social media user base can be reinforced by lowering the total cost of mobile ownership and making DFS offerings, such as payments, more affordable. As seen in China, where peer-to-peer transfers within payment services like Alipay and WeChat Pay are free, mobile money customers still pay a transaction fee that, though tiered, is often prohibitive to middle- to low-income earners. This is possibly because Alibaba and Tencent’s business models treat DFS as a value addition to their core revenue streams of social media and entertainment. They prefer to upsell customers to other income-generating services such as e-commerce, digital credit, and wealth management products.

While African financial institutions such as EcoBank have also begun to introduce mobile banking applications that enable free peer-to-peer payments, they remain constrained by low bank account penetration. To overcome this, African providers should consider partnerships with fintechs such as Norway’s Blockbonds. It launched SPENN, a mobile application payment service that offers free money transfers and does not require the users to have a bank account. Customers can fund their accounts at I&M bank branches for free or through fellow customers who opt to perform cash-in and cash-out services at a 2% fee. Having launched the platform in Rwanda as their initial market in June 2018, SPENN’s founders have targeted  Botswana, Kenya, Mauritius, Namibia, and Tanzania as potential markets for expansion.

There have also been reports of Alipay and WeChat Pay being introduced in the East African market. According to Xinhua, in June 2018 Equity Bank and Red Dot Payment, a Singapore-based online payment company, signed an MoU to link the Equity Bank payment gateway to both Alipay and WeChat Pay. Equity Bank is present in Kenya, Uganda, Tanzania Democratic Republic of Congo, South Sudan and Rwanda.

Which model will bring the long-awaited exponential growth in digital financial services in Africa?  Taking stock of the widespread adoption of DFS by Chinese social media and entertainment consumers, African markets can learn much about how to permeate the everyday lives of mobile users by creating useful products and services, which lend themselves to the addition of value-added DFS. Whether it is the introduction of existing Chinese payment services through partnerships between Chinese companies and local financial service providers or the development of completely new services, one thing is clear: scale is important. Regional market creation through policy and regulatory harmonisation will be a key driver in achieving this.

Unpacking the Impact Question in China’s Superplatforms



This blog was written by Lamia Naji, Associate Manager, Learning and Strategy at Mastercard Foundation, & Xavier Faz, Lead, Digital Finance Frontiers at CGAP

‘Impact’ can be defined in different ways. In the context of inclusive economic growth, the kind of impact we look for are meaningful changes in the lives of low-income clients, such as an increase in income or an enhanced quality of life. In context of financial inclusion, we expect these outcomes to be achieved through higher savings (financial and time), consumption smoothing, investments in income-generating pursuits, and asset-building among others.

On a recent trip to China led by Mastercard Foundation’s Partnership for Finance in a Digital Africa and hosted by the Chinese Academy of Financial Inclusion, we had the opportunity to visit a range of businesses to learn and experience first-hand how the internet and technology are driving financial inclusion, an objective central to both CGAP and the Mastercard Foundation in Africa in particular.

On our ‘learning tour’ of the so-called BAT-J companies – Baidu, Alibaba, Tencent and JingDong – and others, we quickly learned about the ubiquity of China’s superplatforms and how they offer alternative channels for financial services. In the process, we noticed a knowledge gap relevant to our work: how much do we know about the impact of ‘superplaforms’ on the lives of low-income clients?

While China is ahead of many markets in making tech-based business models a reality, the associated impact of such development seems less clear. Although an analysis of client impact evidence on digital finance showed mainly positive results for the digital finance sector overall, it also revealed null and negative changes at the client level. Furthermore, it highlighted significant knowledge gaps in our understanding of client impact of digital credit, savings and insurance products. Thus, we must be cautious of assumptions about if and how the development of these models elsewhere, including in Africa, will contribute to positive changes for individuals, institutions and the market. Put simply – what is the causal pathway through which superplatforms lead to positive “impact” for low-income clients when considering access and adoption?

In this blog we will try to unpack the individual (consumer use case) and institutional (firm business case) effects of superplatforms, focusing on three types of digital services: digital payments, social networks, and ecommerce.

Digital and mobile payments (e.g., Alipay, WeChat pay)

Throughout China, mass-market access to smartphones enables a whole suite of mobile transactions between individuals and businesses. We observed how the widespread use of QR codes for electronic payments enables simple mobile payments transactions, and large scale of adoption allows for low user fees. We could infer the following types of effects arising directly from their use:  

  • Simpler and faster purchases, as well as simpler administration of a sales point. For small vendors at Panjiayuan market in Beijing, mobile payments reduce the need to maintain a cash stock and fractional change, facilitating more efficient sales and reducing leakage from theft and fake notes.  Street sellers have a QR code sticker in a visible part of their stall, customers scan the code, enter amount to pay, show the shopkeeper the proof of payment in their screen, and walk away. Selling transactions are reduced to visually confirming payment.  The reduction in the costs associated with cash and the improved convenience and efficiency are hard to quantify. However, both have driven consumer adoption of payments: the total transaction value of e-payments in China is 77% compared to 48% in United States, as we learned at our meeting with Tencent.
  • Easier access to credit for both consumers and merchants. Payment transactions automatically create digital records of sales and purchases for both consumers and merchants. This data can be used to assess credit risk, which is particularly valuable if either are outside the traditional finance ecosystem. Providers such as Alibaba and JD Finance use this transactional data to extend credit access to both consumers and merchants which provide working capital that enable small businesses to grow.  On the consumer side, this leads to uncollateralized loans which can have different kinds of effects – which can be positive, or sometimes negative.
  • Enable participation in the emerging “sharing economy”. People participate in shared schemes by virtue of being able to pay (or be paid) instantly and remotely with electronic money. For a low-income person, the “shared economy” may mean being able to do more with limited resources. For instance, s/he may not be able to buy a bike but may have enough to pay to ride one from a bike-share company, such as Ofo, and reap the benefits that more efficient transport can bring.  Additionally, a person who owns a motorcycle can offer rides via an online ride hailing service, such as Didi, or distribute packages in his/her spare time to earn additional income.
  • In some cases (particularly larger businesses), improved inventory, merchandising and sales processes. Transaction records are used by shop-management systems to access consumer data, track purchasing patterns, and use tools to strategically manage inventory and make better business decisions. An example of such a system is Alibaba’s free retail-management platform, Ling Shou Tong (meaning ‘Retail Integrated’), which we saw in action in Weijun Grocery, Hangzhou.

Social media and networking (e.g. WeChat)

While electronic payments change the way people do business, the effect of social platforms is of a different nature.  While in their origin, social networks facilitate interactions among people, some have integrated a payment mechanism that eases access to a wide array of services. In China, the popular WeChat platform enables users to pay their bills, hail a taxi, split the restaurant bill among friends, or play games and stream videos, all in the context of social interactions across chat groups. While we were not directly able to load funds on our WeChat accounts as non-residents, we had an opportunity to experience these applications courtesy of our Chinese hosts.

We see two direct ways in which social networking can lead to financial inclusion impact:

  • Improved exchange of money in context of social relationships. During our meeting with Tencent, we learned of a fascinating example of how WeChat integrates social custom with technology to creatively produce contextually relevant products for its users. For Chinese New Year for example, families provide their loved ones with red envelopes containing cash. Given many people cannot physically come together during the holiday, WeChat facilitates the sharing of digital red envelopes, which enable even Chinese living outside of China, to also send or receive digital money in the New Year. In 2018 alone, the total amount of digital red envelopes shared on Chinese New Year exceeded CNY ¥ 768 million (USD 115 million).
  • Improved access to credit for thin-file customers. Social networking companies such as Facebook, end up knowing you better than your partner given their access to social data.  Traditional banks can access your financial history, but can’t place your financial transaction in the context of everyday life.  In China, Tencent Holdings the parent company of WeChat also owns a bank, WeBank. Data from social interactions and monetary exchanges enables WeBank to manage a loan portfolio at very low default rates even with clients traditionally classified as ‘thin file’, which is particularly relevant in the absence of credit bureaus in China.

E-commerce platforms (eg. Alibaba/ Taobao, JD.com)

E-Commerce facilitates trade among distant parties who wouldn’t conduct a sale/purchase transaction in the absence of a mechanism to connect demand with supply. Ecommerce platforms also enable a minimum trust needed to purchase something remotely without immediate and tangible validation of product quality (an escrow account).  Here are some of the impact pathways we observed in China:

  • Increased sales and firm growth for small businesses.  For SMEs, particularly those outside urban settings, eCommerce means being able to tap into a larger market, by selling beyond the immediate physical geography where businesses are located.  Businesses that manufacture and sell products (e.g., shoes, textiles, furniture) can sell nationally as opposed to just the town or city where they are based. In China, good roads and availability of different logistics services enable efficient delivery across a wide geography. Electronic records of sales enables access to digital finance (working capital).  The growth of businesses as a result of e-commerce can have a direct effect on job-creation and income-generation for local citizens: Alibaba’s rural-focused entity, Cuntao, has created more than 1.3 million new jobs nationwide through its rural eCommerce solution.  According to Cuntao, this brings RMB 180,000 benefit annually to each village. We were able to see this first hand during our visit to a ‘taobao village’ in Huidong specializing in women’s shoes. We chatted with suppliers and producers to surface their strategies on optimizing sales, learning about increasing domestic and international retail and wholesale trends resulting from selling on online marketplaces. For one factory owner, annual advertising on Alibaba coupled with the branding support provided by the platform dramatically expanded his shoe production business, which in just 4 years grew to employ 200 people and sell 1 million pairs of shoes annually.
  • Access to expanded variety of products and services, which can potentially be better suited and/or more affordable. For consumers, shopping in online marketplaces (in addition to brick-and-mortar stores), could increase access to a wider range of products and services.  These can be options that are potentially better suited for his/her needs or perhaps more affordable. Purchasing online may also bring time-savings, which may lead to having more time for productive activities. More work on the demand side is needed to better understand the benefits of ecommerce for low income consumers.

Concluding thoughts

In summary, there are indications that superplatforms can impact both consumers and businesses, bringing efficiency gains, increased digital data on transactions and social media, and access to capital. However, we think we should remain concerned around the digital divide – the extent to which the shift to digital can touch poorer and low income segments.  We should be well aware of these limitations so that the design and delivery of digital products can be improved. As of yet, there has been limited in-depth exploration of the outcomes ‘after access’ and this is where additional investment could be allocated. Perhaps the next step in the China discussion is to begin identifying the impact of superplatforms on different segments of users, including low-income women, youth and rural residents. In other words, what does this mean in terms of bringing meaningful changes and opportunities for low income people?  Is there growth and job creation in smaller and rural towns? Does self-employment improve and does it change income and expenditures? What other effects can these changes bring in access to education, upward mobility and gender equality? What are the intended and unintended consequences? How would these responses differ across different country contexts in Africa?

Emerging examples of impact stories – through qualitative anecdotal research or more rigorous experimental and non-experimental studies –  can help us understand where to marshal our efforts when advancing digital financial inclusion. In light of this, actors such as CGAP and the Mastercard Foundation can contribute to building the evidence-base on the impact of digital financial services on low-income clients in emerging markets.

Authors Xavier Faz (far left) and Lamia Naji (third from right) pictured outside a shoe factory that is leveraging Chinese e-commerce platforms to expedite growth.