By Graham A.N. Wright,
Microfinance Focus, December 29, 2011: Throughout time, all around the world, households have saved as insurance against emergencies, for religious and social obligations, for investment and for future consumption. The importance the poor attach to savings is also demonstrated by the many ingenious (but often costly) ways they find to save. But for a variety of reasons, most informal mechanisms fail to meet the needs of the poor in a convenient, cost-effective and secure manner. As a consequence, when poor households’ are provided a safe, easily accessible opportunity to save, their commitment to saving, and the amounts they manage to save, are remarkable.
This has led to growing interest in savings, Vogel’s (1984) “forgotten half” of microfinance. As a result of the new attention to savings services, a great deal of time and energy is being spent by Central Banks, donors, consultants and MFIs on developing systems for regulating and supervising MFIs offering savings services. With the advent of e-/m-banking, much of the savings-focused agenda is driven by the role that mobile phone-based financial services might facilitate a secure and convenient opportunity for the poor to save. E-/m-banking seems to provide an opportunity to address the key challenges of convenience/access, security and liquidity.
Convenience/access, Security and Liquidity
It is clear that most poor people do not have access to formal sector banks for reasons that include the:
1. Geographic distance from the financial institution;
2. Terms and conditions governing the available financial services it offers;
3. Disrespectful manner in which the staff treat poor clients;
4. Intimidating appearance of the financial institution; and
5. Complexity of the paper work and the difficult process necessary to make a transaction.
The poor look for some system to provide the security and accessibility necessary to save. Acceptable degrees of security are relative, dependent on the available programme, and are never 100%. Almost every poor person has been in, or knows of, a failed Rotating Savings and Credit Association [RoSCA] or crooked deposit collector, but the accessibility of a regular opportunity to save in a disciplined manner is what makes RoSCAs and deposit collectors so popular worldwide.
Access is markedly different from liquidity, and often considered more important by poor people who have little time to make their transactions. While many authors have stressed that “liquidity is the key to local savings mobilisation”, it is important to note that in many circumstances the poor have a strong “illiquidity preference”. This “illiquidity preference” is in response to the poor’s self-imposed need for structured and disciplined savings mechanisms that prohibit them from withdrawing in response to trivial needs and allow them to fend off the demands of marauding relatives requesting “loans” or assistance.
E-/m-banking as a Solution
There is growing consensus that e-/m-banking offers a unique opportunity to address mainstream banks’ two major barriers to serving the low-income market: the need for a branch infrastructure and managing high volumes of low value transactions. In addition, e-/m-banking systems hold the promise of being able to extend centralised banking systems deeper into rural communities.1
Despite this, the many examples of failed e-/m-banking initiatives provide ample warning that offering e-/m-banking solutions is not an easy proposition. Only very few of these initiatives have failed because of technological problems – the technology and security requirements are broadly understood and available. Where e-/m-banking products have often failed is because they have not adequately addressed the customers’ needs. Too often the financial institutions have focused on the technological solution or the savings that it can generate for their business, without considering the needs of the customers or the intermediary agents who usually have to provide the service to them.
M-PESA as the Solution?
M-PESA remains the role-model for e-/m-banking solutions for the poor – it was the first mobile money system to take-off and achieve substantial scale. According to several industry experts, by design or by default, a substantial proportion of the Kenyan population is using M-PESA as an addition to bank savings accounts, and less frequently, as a full-scale substitute. The current pricing structure of M-PESA with its free deposits, does offer a tremendous opportunity for un- or under-banked people to build up what Stuart Rutherford would call “useful lump sums”. In this sense it provides a very valuable service to facilitate saving up for future needs.
The worry among financial inclusion proponents and banks is that poor people will use M-PESA as a full scale substitute for formal institutions. One expert calls this “low equilibrium financial inclusion” – or put simply, “poor quality, high cost and potentially high risk, financial inclusion”. Users of M-PESA do not get access to structured savings (such as recurring deposit) products, they cannot access loans and other financial services like insurance and pension plans from Safaricom, they do not receive interest on their savings balances, they do not receive a statement of their transactions, and often lack privacy because of the close involvement of agents. And with the standard charges of Ksh.30 (US $0.35) for transfer, and Ksh.25 (US $0.29) for cash out, the costs of transacting on the M-PESA platform remain quite high for low-value transactions.2
The biggest benefit for customers is that they need not travel to a bank branch or an MFI’s designated point for transacting into their accounts. They can just deposit money into M-PESA account at the nearest M-PESA agent and transfer from M-PESA to their bank account. It brings to them the following benefits:
Cost savings on travel expenses, opportunity cost of losing wages or turnover etc. (It should be noted, clients may need to pay transfer and withdrawal fees to the telco which may lessen the benefit).
Convenience of transacting whenever/wherever: M-PESA agents are ubiquitous and if a customer already has sufficient balance in his/her M-PESA account for the loan repayment, then he/she does not even need to go to an agent.
Reduced risk of carrying cash. M-PESA agents are nearer than the bank/financial institution’s branch.
But despite the opportunities and benefits offered by M-PESA, it remains primarily a remittance/payment mechanism and not a savings platform. Relatively few M-PESA customers are using it to save – for two key reasons:
1. The wallet is over-liquid: With the omnipresence of agents and other M-PESA users, it is too easy to spend money held on a mobile phone … thus the M-PESA wallet is seen as a transaction account rather than a savings account )(an important distinction).
2. Safaricom is not a bank: Most respondents in the MicroSave research noted that Safaricom, which runs the telco-led M-PESA system, is a communications company, not a bank … and thus by implication, not to be trusted with precious savings. And, of course, they do not get access to the banking services and security outlined above.
Banks at the Centre of E-/M-banking
It is clear that while e-/m-banking systems can indeed offer unprecedented convenience, poor people want more than the wallet plus remittance/payments product mix that the vast majority (usually telco-led models) provide. Banks with a commitment to serving the low income market now have the real opportunity to do this on a commercial basis and further extend their customer base. A well-managed network of agents could provide the safe, convenient and accessible local banking service that so many poor households want.
By diversifying the range of services offered through the agent channel beyond the basic transaction wallet and remittance/payment system, banks can drive the volumes and revenue streams to make the channel profitable. The latent demand for commitment savings is clear. Well structured and incentivised recurring deposit products could yield substantial stable balances and thus float for banks. In a similar vein, bancassurance products, which are largely used by poor households as long term savings mechanisms, are also likely to be a popular use of the agent channel. Over time banks can begin to offer automated overdraft/ emergency loan facilities on the basis of individual account holder’s transaction history.
This type of client-responsive product mix is likely to create the level of activity necessary to make the agent channel sustainable for both banks and the agent network manager, as well as for individual agents themselves … thus creating true and meaningful financial inclusion.
References:
1 This was clearly demonstrated (again) in recent MicroSave research into the widespread dormancy in “No Frills Accounts” in India – see India Focus Note 63 “Why People Do Not Use Present Banking Systems – A Case For BCs” and India Focus Note 62 “Responding to High Dormancy Levels in No Frills Accounts”
2 See Briefing Note # 6 “The Relative Risks To The Savings Of Poor People” and forthcoming publications on loss of savings in India to be posted on www.MicroSave.net.
3 For more on M-PESA, see Briefing Note # 93 “Innovation Adaption on M-PESA Rails”; Briefing Note # 94 “M-PESA Rails Advantages Disadvantages”; and Briefing Note # 95 “Do the M-PESA Rails Contribute to Financial Inclusion?”
4 See India Focus Note 65 “Successful Banking Correspondents Need a Compelling Product Mix”
5 See Briefing Note # 100 “Banks Can Deliver m-banking Sustainably”
Author: Graham A.N. Wright, is Programme Director, MicroSave India
(Disclaimer:The opinions expressed are solely those of the author and do not necessarily represent opinion of Microfinance Focus. Microfinance Focus does not take any responsibility for correctness of the data presented by contributors.)