MONTHLY ARCHIVES: JULY, 2013
The GSMA State of the Industry 2012 identifies regulation as a critical factor in the growth of the industry as a more open and competitive landscape drives innovative and viable business models. The study highlights the case in Sri Lanka where customers had to open a regular bank account before using the mobile money product offered by Dialog Axiata, the main MNO in the countryIn four years from the launch in 2007, only 15,000 eZ Pay customers had been registered out of Dialog’s 7.4 million GSM subscribers and Lanka’s population of just over 20 millionRegulations were changed in 2011 to allow banks and non-banks to provide mobile money services and KYC rules were relaxed in 2012, with a more proportionate approach to customer due diligenceThe aim behind these moves was to foster inclusionIn April 2012, Dialog launched its telco-led mobile money service eZ Cash and by early 2013, 810,000 customers had signed up for the service.
The rise of eZ Cash in Sri Lanka has many lessons for regulators:
Meanwhile MNOs should be proactive with the regulator: engaging in transparent, constructive dialogue helps to build a more enabling regulatory environment and look at launching launch several types of accounts with different KYC requirements that can ease registration requirements for low-income users while satisfying the heavier transactional needs of power usersAlso, using SIM registration data to support KYC whenever possible makes supervision more effective.
What is particularly interesting is the use of proportional risk based approach in setting transaction limits and KYC procedures:
Customers can activate eZ Cash simply by dialling a number from their mobile phone, and Dialog uses the KYC information already stored in its database from the SIM card registration to verify their identitiesThe SIM card registration process includes making a physical copy of the customer’s original national identity card (the photocopy is later digitised and uploaded to the internal database), which is stored with the signed contractAll Sri Lankans are required to apply for their national identity card on their sixteenth birthday and to carry it with them at all times.
The maximum amount that a new eZ Cash customer can add to their e-wallet is Rs 10,000 (US$80)This "Classic Account allows them to send money (up to Rs 5,000 per transaction), pay utility bills (up to Rs 10,000), and conduct other transactions such as online payments or microinsurance, microfinance loan, or subscription payments. If customers want to conduct transactions that exceed these limits, they can activate a "Power Account with a top-up limit of Rs 25,000 (US$200) and higher transaction limitsTo activate a Power Account, a customer must visit a Dialog Customer Care Centre to confirm his/her identity.
By allowing such flexibility, the Sri Lankans are well on their way to increasing inclusion through an efficient and effective model.
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According to Breaking Free from the Myths of Financial Education (MicroSave Briefing Note 141) and observations of the blanket financial inclusion policies in India, one can say that in financial inclusion domain the normative assumptions underlying the policies are - poor lack basic skills, understanding and rationality requisite for managing their meager financial resourcesHowever, in the light of empirical evidences it is essential to review their financial behaviour; as these observations form the basis of policymaking.
Behavioral finance says that investors are not risk-averse but loss averse and hence investors will engage in investment or other financial activities that are high risk in order to avoid any kind of lossThe financial behavior of poor households of West Bengal who invested in Saradha chit fund is in sync with this loss aversion principleSaradha Chit fund an excellent ponzi game lured low income households into investing in the range of Rs 10,000 to Rs 100,000 and amassed around Rs1200 crore. But the reason this ponzi was successful were the lucrative rates that it offered – 15 to 50 % on various schemesAccording to economist Abhirup Sarkar, West Bengal is experiencing a fall in small savings and deposits in post offices from last two yearsInvestments worth crores of rupees by low income households in chit funds (not all of them are scams) reveal a very significant aspect of their financial behavior –willingness to face risks to avoid losing out on tempting returns which such investment options offerThe poor very successfully mobilize and channelize funds to invest in simplistic and high returns generating chit funds, instead of relying on low returns generating bank deposits for saving.
Bounded rationality says that individuals exhibit rationality in decision making in an environment internalized with constraints and are heuristic in characterThey take into account the social environment with all its constraints rationally and obtain a sub optimal but a satisfactory outcomeNow consider the case of "50 year old Thembi from South Africa whose monthly income was around $169 and needed $1413 for her brother’s funeral (Portfolios of the Poor)She arranged the money by patching together informal loans from burial society, savings club and relativesWithin two months she could repay the loan from burial societyThis shows that despite the absence of cheap formal loans and insurance, Thembi was still able to finance a funeral expense more than 8 times greater than her income and could repay some of her loans as wellShe acted as rationally as she could in a highly constrained social and economic environment and reached a sub optimal but a satisfactory outcome.
Consider another example of a couple in Dhaka, Bangladesh, Hamid and Khadeja who earned an average monthly income of $70 out of which 20% went to rent and majority portion on foodGiven such modest income and matching expenses one would think that there were merely surviving on hands to mouth basis; but reality was far from this perceptionThey not only successfully met all their expenses but invested and saved in a diversified portfolio of 6 different instruments, such as- 1) microfinance savings account, 2) savings with moneyguard, 3) home savings, 4) life insurance, 5) remittances to home village and 6) loans out"Saved $451 of their income and pulled out $514 of savings (by taking out a loan or by guarding money for others), consequently had a turnover of $965, greater than their annual income of $ 840In addition, Khadeja took a microfinance loan to finance her investment in gold- a reliable and secure asset that could be used in the event of crisis (Portfolios of the Poor)A critical point to note is that this illiterate couple kept near accurate mental records of all their financial activitiesThis case study shows that poor under the constraints of marginal resources and limited access to formal financial instruments can very well conduct complex and productive financial activitiesIn addition to maintaining diversified investment portfolios they can also appropriately leverage their investment activities in the absence of owned fundsHence it might benefit all the stakeholders of financial inclusion process to consider Behaviorally Informed Rational Financial Inclusion Policies and appropriately designed financial products and services for the excluded population sections.
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Poor are Rational showcases case studies that reveal that financially excluded poor undertake rational financial activities; they have the zeal to diversify their investment portfolio, drive to leverage their investments, calculating enough to save, repay loans and ultimately can also augment their income with returns from their financial activities. In the new light of greater understanding of poor’s financial behaviour, several emerging economies have initiated a modified approach suiting the needs and financial behavior of excluded sections to achieve financial inclusionFor instance-
1) In a field experiment in 2011, Opportunity International Bank in Malawi devised a saving mechanism through commitment accounts as farmers had difficulty in saving on their own (Commitments to Save: A Field Experiment in Rural Malawi)This allowed farmers to save a portion of their post harvest payouts but restricted their access to their own funds until a future date of their choice. "Randomized impact evaluation of this new product revealed that it led to an increase in the use of agricultural input by 26%, greater crop sales by 22% and a 17 % increase in household expenditures as compared to a situation in absence of such savings product (Commitments to Save: A Field Experiment in Rural Malawi).
2) SEED (Save, Earn, Enjoy, Deposit) a commitment savings product offered by Green Bank in Philippines.
3) Jipange KuSave in Kenya and P9 in Bangladesh experimented with the provision of interest free loans in which a portion of the loan amount was kept as savings (CGAP, Brief Note, October 2012).
These observations juxtaposed with limited success of blanket financial inclusion policies in India (mass opening of bank accounts, etc)- as at present only 58.7% of households in India avail of banking services, out of which 54.4% is for rural areas and 67.8% is for urban areas (Revving up the Growth Engine through Financial Inclusion),emphasizes on the need for a novel approach to achieve financial inclusionPerhaps observing the financial behavior of poor in detail would be the first stepping stoneThe next step would be to formulate innovative behaviorally informed and appropriate financial inclusion policies and suitable financial instrumentsFor instance, complimenting the universal opening of bank accounts with provisions for safe and lucrative options for saving and investment; it would attract the financially excluded poor away from risky informal instruments into the formal financial net and consequently pull them out of the vicious poverty trap.
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Human mediation is a vital process for any mobile money service to garner universal acceptance and consequently for increasing its market penetrationAs discussed in a MicroSave study- Mobile Money- Influencers of Success,- there are two essential components of human mediation–a) registration process and b) account openingService providers such as GCash and M-Pesa ensure ease of conducting such processes for the financially excluded poor by engaging intermediaries such as sales agents, or agents on the ground. This provides the much needed initial handholding to low income customers and as agents are usually hired from their locality i.esome one that low income customers know and can identify with, it imbibes the poor with a sense of trust for such services.
An excellent example of human mediation model for promotion of mobile banking is the one adopted by Wizzit in South Africa Wizzit Payments Ltda provider of basic banking services for financially excluded in South Africa, has employed an effective model of human mediation whereby it engages jobless people called Wizzkids to reach out to the unbanked potential customersMore often than not these Wizzkids belong to the community in which they work and provide continuous support to customersHowever, remuneration of Wizzkids is devised such that they are not only motivated to get greater number of new accounts but to ensure that these accounts are aptly utilizedBesides receiving a commission that is a portion of the account opening charges, they also receive some annuity income based on the transaction levels in the accounts opened by themThis model of agent payments puts in place an efficient model of human mediation where agents are motivated to provide continuous support to the poor in becoming adept in the m-technology and optimally using mobile money services.
Agents like Wizzkids not only reach out to those who are considered inaccessible by banks due to high transaction cost and lack of profitable business proposition, but also provide a very vital link between financially excluded sections and the formal financial sectorAccording to Mukesh Sadana, senior specialist, MicroSave, (Why Tech-based Banking cannot Replace Agents for Financial Inclusion) "agents play a very crucial role in educating low income customers, many of them experiencing technology enabled banking for the first time. He notes that research studies conducted by MicroSave have time and again shown that low income customers prefer approaching an agent point than visiting a bank as the former deals with them with respect and special attentionTherefore despite all the focus on technology in financial inclusion initiatives, for financial inclusion to materialize via the route of mobile money services, human interface through agent customer relationship is irreplaceable by any technology in the near future, as it enables universal adoption and subsequent optimal use of mobile money services by poor and financially excluded population sections.
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Measuring financial inclusion has been one of the daunting tasks for regulators as well as researchersWith reference to published data which could be used to study the progress of financial inclusion, the two important sources are RBI and Department of Financial ServicesBetween March 2011-2012, Department of Financial Services had released state wise data on number of BCs appointed and accounts opened by them in each state each month, however this has been discontinued sinceMoreover, less was said about the transactions happening in those accounts and the characteristics of the population being approached by the BCs for account openingRBI on the other hand, has been periodically putting out data in public domain relating to number of bank branches, number of saving and loan accounts at district levelThis data has been used by CRISIL in its attempt to measure the degree of financial inclusion by creating an index using these three parameters.
However, even as the output of this indexing exercise provides a bird eye view of district’s overall positioning in terms of access to financial channel, it is limited only to the ‘bank branch’ as a financial instrumentIt is nonetheless important to note that there has been enough debate on the usefulness of the brick-and-mortar model in the times when technology has delivered low cost models with wide reach and the efficiency of a "bank branch to serve the inaccessible areas and marginalized sections has been questioned time and again.
The penetration level of formal finance systems can also be studied from the Census data e.g access to banking services by householdsThe information can be disaggregated at rural and urban level for districts which thus makes a better measure of mapping financial inclusionOf course this data comes once in ten years only.
Dormancy of bank accounts is another issue the financial system has been grappling with. Thus, districts with higher bank penetration can still have very low transaction rate which repudiates the basis of financial inclusionTransactions and payment systems are an indispensable part of inclusion process and thus presence of alternate channels enabling transactions at low cost is important instruments for defining and assessing financial inclusionThe RBI has only just begun to gather data from the banks on transaction levels at a disaggregated level.
Similarly, deposit and credit accounts can serve as effective instruments of measuring financial inclusion when put in context of the socio-economic classes being servedWhile the amount of deposits and credit with banks do reflect a district’s overall prosperity levels compared to others, there are also large savings in form of postal schemes, co-operatives and self-help groupsThe same holds true for credit granted in small quantities through micro finance groupsThus, a holistic picture is required to take complete stock of inclusion at sub-national level.
DrK C Chakraborty , Deputy Governor, RBI rightly recognized in one his speeches that " A robust financial inclusion design depends on a multiplicity of parameters encompassing varied socio-economic backdrops and feasible financial service delivery mechanism that would vary from region to regionThis is particularly so for a country like India, which is distinguished by its vastness of topographical, demographic as also socio-economic diversity. Clearly the present understanding of financial inclusion needs to evolve further to capture "Meaningful Inclusion and the design of our present statistical system needs to adapt to capturing the same.
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