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The Digital Financial Services landscape


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Digital financial services (DFS) are rapidly rewriting the landscape of financial access in developing markets. This deck is meant to serve as a primer to the DFS space by explaining the basic concepts and strengths of DFS models; showing how they are so successful because they correspond to the weaknesses of traditional delivery; and showcasing some of the next generation of DFS products in order to illustrate that this is just the beginning of a cross-sectoral revolution of access.

Published in: Government & Nonprofit
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The Digital Financial Services landscape

  1. 1. Digital Financial Services: The current landscape Peter Zetterli January 2015
  2. 2. • Global partnership of 34 org’s focused on financial inclusion; housed at the World Bank • Mission is knowledge driven: • Spur innovation in financial services at BOP • Generate insights on what works / doesn’t work • Disseminate best practices to practitioners • Key learning partners and audience: • Financial services providers (MFIs, banks, MNOs) • Regulators and policy makers • Donors and development partners • Pragmatic, evidence-based advocacy at the leading edge of innovation CGAP is a multi-donor think tank dedicated to access to finance
  3. 3. 2.5 billion people have no access to formal financial services
  4. 4. 1.9 billion of them have a mobile phone
  5. 5. 5 On average, how many different financial services or products do poor families at the base of the economic pyramid use in any given year in the informal economy? But do poor people really need financial services? a) 0-3 b) 4-10 c) 10-15 d) 16-20 e) More than 20
  6. 6. …yes they do 6 Poor households in the informal economy use, on average, 17 financial instruments each year
  7. 7. A large number of actors have now understood this opportunity 250+ providers of digital financial services in 84 countries Together they serve over 340 million customers 38% of these – 128 million people – are low income Source: CGAP and GSMA MMU State of the Industry 2013 Sub-Saharan Africa: 52% of deployments 70% of active users
  8. 8. Models differ across the globe, depending on the context In Latin America, over 95% of DFS accounts are card based In South Asia, vast majority of DFS customers don’t have accounts at all but transact over the counter (OTC) In Sub-Saharan Africa, 90% of DFS accounts are mobile Source: GSMA MMU State of the Industry 2013
  9. 9. DFS: Key concepts
  10. 10. Terminology: Trying to make sense of the landscape MOBILE MONEY Transactional wallet mostly used for local remittances and airtime M-COMMERCE Remote purchase of goods, services via mobile M-BANKING Use of mobile for banking transactions E-BANKING Use of electronic channels for banking (such as internet, ATM) E-COMMERCE Remote purchase of goods, services via computer M-INSURANCE Insurance models tied to mobile phone/wallet use M-CREDIT Loans accessed and repaid through a mobile wallet M-SAVINGS Interest bearing accounts accessed via mobile wallet MERCHANT PAYMENTS Retail purchase of goods & services using mobile DIGITAL FINANCIAL SERVICES (DFS) Delivered over a digital channel (mobile, internet) using any electronic instrument (card, phone, computer) Accounts, products and services can be accessed remotely (outside a physical branch or outlet) MOBILE FINANCIAL SERVICES (MFS)
  11. 11. The basic DFS model E-money walletE-float AgentsAgent wallet
  12. 12. Key concept 1: E-money Standarddefinition Closed-loop store cards are not e- money • Monetary value represented by a claim on an issuer • Electronically stored (on a server or–rarely–a card) and exchanged • Widely accepted means of payment by others than the issuer • Can be redeemed as cash Bank accounts and prepaid bankcards fit the description E-money accounts can be issued by non-banks. They are regulated more lightly than bank products.
  13. 13. Key concept 2: Agents • Offer services on behalf of the provider • But are separate entities—not provider staff • Provider typically fully liable for agent • This liability cannot be contracted away • Usually has a different core business • Often small retailers or airtime vendors • In advanced markets, dedicated agents exist • Transact against own funds in real time • Don’t at any point hold customers’ cash
  14. 14. Verify client identity • Comply with KYC standards • Guard against fraud Help clients transact • Cash-in and cash-out • OTC payment transactions Act as face of the service • Sign up clients • Educate clients about the service • Troubleshoot clients’ problems Agents fulfill 3 important functions in a DFS service
  15. 15. CGAP research on the activity rate of customers registered by best vs. worst agents Agents are central to the success of the business Providers often focus on agent quantity, but agent quality is more important: • If agents are weak, customers will not use the service • Registering inactive customers is only a drain on the business Top 20% of agents by # of registrations Top 10% by activity rate Bottom 10% by activity rate Top10%Bottom10% Activity Rate Customers registered by these agents make up 5.7% of total customers Activity Rate 39.9% 0.9% Profile of customers registered by these agentsAll Agents Top 20% of agents by # of registrations Customers registered by these agents make up 5.1% of total customers
  16. 16. Why are DFS transformative?
  17. 17. Traditional financial services are inaccessible to the poor 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% World Developing countries Of adults earning <$2 /day Global financial inclusion Excluded Included Source: World Bank Findex 2012
  18. 18. Why are traditional financial services inaccessible to the poor? 1. High cost of bank branches  Branch infrastructure is small & heavily urban 2. High documentation requirements  Large share of population cannot qualify  Illiterate clients often more or less shut out 3. Low income clients find banks intimidating  Actually prefer informal, risky, expensive svc  Products, experience not designed for them 4. Most banks don’t want low-income clients  Rather, they consciously try to keep them out  Opening fee, monthly fee, minimum balance, etc DFS models help overcome them all
  19. 19. Technology dramatically lowers cost of outreach *Includes costs for physical set up (e.g. brick and mortar branches, hardware) only. 1
  20. 20. Case in point: Financial infrastructure in Kenya Bank branches have been built over the past 100+ years. Today, there are 1,200+ bank branches in Kenya.
  21. 21. Case in point: Financial infrastructure in Kenya The ATM network has been built over the past 24 years. Today, there are 2,300+ ATMs in Kenya.
  22. 22. Case in point: Financial infrastructure in Kenya Today, there are 120,000+ DFS agents in Kenya. DFS agent networks has been built over the past 7 years. Low cost of infrastructure translates to high access.
  23. 23. The same goes at the global level Points of presence for traditional financial services…
  24. 24. The same goes at the global level …are dwarfed by mobile phone connections. 6,800,000,000 Mobile Phone Connections Source: GSMA Wireless Intelligence
  25. 25. Risk-based KYC has lowered documentation requirements It now aligns with what most people actually have …in return for restricting those accounts: • Limited maximum balances • Limited transaction amounts • Limited types of transactions Bank High DFS Low DFS Basic details Y Y Y National ID Y Y - Proof of address Y - - Regulators are allowing lower Know-Your-Customer (KYC) requirements for DFS accounts: 2 Ghana Low DFS: • $300 • $100/day • $1,000/month Endorsed by global standard setting bodies and watchdogs for Anti-Money Laundering and Combating Funding for Terrorism (AML/CFT)
  26. 26. Mohammad Moniruzzaman, 2009 CGAP Photo Contest Local agents are far more inviting to poor people • Less formal • No paperwork • No queues • Familiar setting • Often known in the community • Agent is a peer 3
  27. 27. Distribution of agent transactions by day of the week and hour % of total transactions within a sample of agents Mon Tue Wed Thu Fri Sat Sun 10 2 3 4 5 6 108 12 14 16 18 20 2221 2397 11 13 15 17 19 22.6% 36.0%1.2% 40.2% Business hours at Agent Partner Business hours at bank branch network Agents are also more accessible and convenient Source: Akya/CGAP analysis; Note: Based on sample of 3,961 transactions
  28. 28. If banks aren’t getting it (and they’re not), others will (and are) • 4/5 of deployments are led by non-banks • Mostly mobile network operators (MNOs) who have strong business reasons for DFS • Direct revenue from transaction fees • Acquisition and retention of voice customers • Cost savings from digital airtime sales 4
  29. 29. Here’s why MNOs are so active in developing DFS Average MNO revenue per user, 2000-2014 $ 0 $ 20 $ 40 $ 60 $ 80 $ 100 $ 120 Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010 Q1 2012 Q1 2014 Developing countries Sub-Saharan Africa Source: GSMA Intelligence (2015) 55% 70%
  30. 30. This isn’t about charity or CSR but real business (and that’s great) Source: GSMA MMU State of the Industry 2013 $300m Doesn’t include indirect revenues: • Customer gain + retention • Cost savings from digital airtime
  31. 31. …and this is with a single use case! DFS has been primarily centered on domestic remittances (and airtime) DFS are evolving to become considerably more than that
  32. 32. DFS innovation 33
  33. 33. Lots of different payments are moving onto DFS channels …and creating a sea of new acronyms • P2P: Person-to-person transfers/payments • G2P: Gov’t payments (social transfers, salaries) • D2P: Donor payments (beneficiaries, staff) • P2G: Person-to-gov’t (fees, fines, taxes) • P2B: Person-to-business (retail, online purchases) • B2P: Business-to-person (salaries, allowances) • B2B: Business-to-business (suppliers, clients)
  34. 34. Savings & credit Water Energy Insurance Agriculture Transportation Health Mobile Money Moreover, DFS enables a whole range of other products 35 Diversification of financial products Other applications that improve the welfare of very low income segments Some of which are completely new business models Digital Finance +
  35. 35. Savings: Tigo Wekeza (Tanzania) • Mobile wallet as savings account • Tigo earns interest from its partner banks on its customers’ e-float • Regulation limits use of the interest • Decided to distribute the funds to customers in quarterly payments direct to wallets • $10m to 3.5m clients in first two payments • Amounts small since balances small (for now) • Interest >9% vs bank current accounts 0% …other MNOs are now following suit
  36. 36. Savings and credit: M-Shwari (Kenya) • Savings and credit account • Partners: Safaricom (MNO) & CBA (Bank) • Customer gets a limited bank account • Opened and accessed only via MM menu • Can only hold money or move to MM wallet • 2-5% interest on any balance (even KES 1) • No minimum balance or opening fee • 30-day credit of $1 to $220 at 7.5% interest • No collateral or credit history needed • Initial credit score based on phone+MM use
  37. 37. $1.1b $193m • Analogues already out in Tanzania, Zimbabwe • Expect to see many more launch in 2015 • A lot of customer side research under way • Consumer protection debate rages on the risks of easy access • Either way, potential for very rapid uptake is proven CBA went from 50k to 8m accounts in 2 years
  38. 38. Insurance: Tigo Family Care Insurance (Ghana) $1.5 $61 $122 $13 $332 $664
  39. 39. The same rapid scaling is happening in a range of markets We are witnessing not isolated cases, but a new business paradigm evolving 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% Country A (36m) Country B (18m) Country C (12m) Country D (11m) Total policies prior to MMI MMI policies today 36 mths 18 mths 12 mths 11 mths
  40. 40. Mobile models are transforming microinsurance in Africa …less than four years after the new business models were invented Source: Making Finance Work for Africa (2013) and MicroEnsure 8 of those 9 have done this with mobile microinsurance Microinsurance growth in Africa 2010-2012: 200% 9 markets with >1m lives insured
  41. 41. Airtel Ghana’s new free three-in-one policy: Customer value propositions are also getting better Product diversification is only beginning Over 1m customers covered in one year
  42. 42. Digital Finance + 43
  43. 43. Access to mobile has grown far faster than to energy and water 1 kWh of energy costs $2.30 in rural Bangladesh 1 kWh of energy costs $0.30 in Western Europe Source: GSMA, World Bank, IEA 2012.
  44. 44. 1.2 billion people have no access to electricity
  45. 45. M-KOPA: Pay-as-you-go energy solutions Rugged 8W solar panel 2 LED lights + 1 LED torch light Phone charger (5 plug types) Portable radio 2 year warranty Sold in Kenya, Tanzania, Uganda (Ghana) Costs ~$200—too much for many people
  46. 46. Customer pays $33 up front Then pays $0.50/day to use Zero balance > Turns off Tops up account via MM After a year, it’s paid off No more payments needed Model was impossible prior to mobile money >100,000 customers since Oct 2012
  47. 47. 750 million people have no access to safe water Across rural Africa, 50,000 water supply points have failed. There is little point in drilling wells if there is no system to maintain them. Jamie Skinner, International Institute for Environment & Development
  48. 48. Grundfos LifeLink: Pay-as-you-go water solutions Solar powered system Well + Submerged pump Automated water dispenser Remote monitoring & service Customer pays per use w/ RFID token Token is topped up via mobile money Commercially sustainable at $1/cubic meter
  49. 49. 40 projects in East Africa 100,000 people served Model impossible prior to mobile money
  50. 50. What do these innovations do that’s transformative? Enable collections across vast distances Enable tiny payments very frequently Create “new” financing models > Fit amounts payable to people’s cash flow Ties payments directly to use—100% pre-paid > Stable, reliable revenue stream for company Makes payments direct, instant & transparent > Reduces leakage, fraud and corruption Payments are not fungible > Opens new avenues for gov’t and donor support
  51. 51. DF+ innovation is concentrated in mature DFS markets 52 • 60 services across energy, water, health, agri, transport and education • 70% in Africa with over half in Kenya and Tanzania; In India, services leveraging a variety of branchless mechanisms • 50% of businesses in energy or water and sanitation sectors Countries with global share of digital finance+ businesses* Kenya, 43% India 23% Tanzania, 8% Uganda, 5%Zambia 3% Other, 17% *as of July 2013
  52. 52. 2.5 billion people have no access to formal financial services
  53. 53. Finally, real progress on financial inclusion As exemplified by the changing landscape in Tanzania 0% 10% 20% 30% 40% 50% 60% 2009 2013 Active MFS accounts Financially excluded
  54. 54. Advancing financial inclusion to improve the lives of the poor