Digital Financial Services: Challenges and Opportunities for Emerging Market Banks

25 Sep 2017

The digital transformation that has upended industries from retail and media to transport and business-to-business commerce is now sweeping the financial services industry, through the wide dissemination of digital financial services. This was inevitable, as ubiquitous computing power, pervasive connectivity, mass data storage, and advanced analytical tools can easily and efficiently be applied to financial services. After all, money was already extensively (though not exclusively) created, used, stored, processed, and delivered electronically.

Immediacy and personalization have become the norm for consumer goods and services. Consumers have rapidly become accustomed to making purchases with a touch of their finger wherever they may be, receiving tailored recommendations, choosing customized products, and enjoying delivery of almost any item directly to their front door. Businesses failing to adapt quickly to these technological developments can fail dramatically, and many have already done so, including Tower Records, Borders Books, Blockbuster Video, and countless travel agents and brick-and-mortar retailers. Consumers’ new
expectations apply to digital financial services as well.

Technology has transformed business-to-business and within business interactions, too, enabling reconfiguration of design, production, marketing, delivery, and service functions through distributed supply chains, freelance design, outsourced manufacturing, and contract warehousing and delivery. These reconfigurations are mediated by online marketplaces and distributors, and assisted by back-end support operations and data analysis that together drive better risk assessment, faster fulfillment and more efficient customer service.

The same types of disruptive market innovations and reconstituted value chains are now emerging in the form of digital financial services. This poses distinct challenges for incumbent providers such as banks, finance companies, microfinance institutions, and insurance companies, as financial technology—or FinTech—innovators enter their markets. Incumbents, too, can benefit from these developments, which will enable them to broaden financial access, introduce new products and services, and serve customers more efficiently by deploying new technologies internally or in partnership with external innovators.

Fraud in Mobile Financial Services: Protecting Consumers, Providers, and the System

09 Sep 2017

This Brief highlights how fraud is impacting mobile money providers, agents, and consumers, as well as efforts to reduce risks and vulnerabilities to fraud in mobile money and related services. While it is not possible to remove fraud entirely from any service—mobile money included—the examples addressed here show that fraud is a major issue in several key markets for consumers and agents, and that there are simple steps providers can take to reduce their vulnerability to common fraud types.

These steps include improving internal controls, building agent capacity to protect themselves and their customers, and revisiting procedures such as account access and SIM swaps, where necessary, to prevent common fraud schemes. With the introduction of new products and delivery channels, the types of fraud will continue to evolve, which means that monitoring mechanisms, such as compliance checks and customer feedback channels, will continue to be key elements to effective fraud and risk mitigation.

Building a Secure and Inclusive Global Financial Ecosystem

08 Sep 2017

The 2017 Brookings Financial and Digital Inclusion Project (FDIP) report evaluates access to and usage of affordable financial services by underserved people across 26 geographically, politically, and economically diverse countries. The report assesses these countries’ financial inclusion ecosystems based on four dimensions of financial inclusion: country commitment, mobile capacity, regulatory environment, and adoption of selected traditional and digital financial services.  The report further examines key developments in the global financial inclusion landscape, highlights selected financial inclusion initiatives within the 26 FDIP countries over the previous year, and provides targeted recommendations aimed at advancing financial inclusion.

Making Change on a Mobile Handset

Zahra Niazi and Amber Davis
06 Sep 2015

Four IPA studies explore how to make digital financial services more effective and affordable

Mobile money is spreading at a rapid pace throughout Asia, Africa and Latin America. There are 203 million registered mobile money accounts worldwide and 256 mobile money services in operation, an impressive 100 percent increase over 2011. The promise of digital financial services is clearly reflected in the number of registered mobile money users and in the formidable example of Kenya’s digital finance revolution. This scope and expansion of digital financial services was one of the topics discussed at last week’s World Economic Forum annual meeting in Davos.

blogpostNBAs both public and private investment grows in this space, more rigorous research is needed to understand the full potential of this digital revolution in financial services for the poor. Usage remains low; according to 2013 data reported by GSMA, only 30 percent of the 203 million registered mobile money accounts have been used at least once in the last three months. Evaluations can help uncover effective strategies to encourage adoption and usage of digital payment channels, improve the design of financial products, and understand whether improved access translates into welfare effects for moderate and low-income households.

The limited evidence available to date suggests that mobile payments may help foster risk sharing across households. Research in Kenya found that access to M-Pesa lowered transaction costs and led to increased transfers between households, who were then better able to withstand economic shocks, an effect which was particularly marked for poorer households. Another study in Nigerindicated that distributing welfare transfers over mobile money led to substantial time-savings and increased intra-household bargaining power for women. Women were better able to conceal when the funds were available and were thus able to discuss with their husbands how the funds should be spent. As a result, households also saw an increase in the diversity of their diets and the number of meals that children consumed each day.

More work is needed to overcome some of the key barriers, to fully take advantage of these services and to understand whether digital financial inclusion can make the poor better off. To this end, Innovations for Poverty Action’s Global Financial Inclusion Initiative is partnering with researchers and financial service providers to implement several evaluations on digital financial services, with the support of the Bill & Melinda Gates Foundation and the Citi Foundation. Below, we highlight four of our ongoing studies that offer particularly relevant insights on how research can help advancements in this field. In these studies, we test hypotheses on how digital financial services can help people conduct transactions more securely, at lower cost, with different information on financial decisions and behavior, and experiencing fewer social constraints.

Digital channels for salary payments. Garment factory workers in Bangladesh receive their salaries in cash or through digital channels, as a mobile money payment or as a direct deposit into a basic bank account. This study examines to what extent digital channels lower the costs of distributing payments (payroll administration) and receiving payments (transaction costs for workers). It also looks at effects on workers’ wellbeing, financial behavior and work productivity.

Advertising a mobile commitment savings account. A mobile network operator (MNO) in Rwanda is offering its customers a mobile phone-based savings product. With this new product, customers are able to send money to themselves in the future and therefore commit to saving until a pre-specified date. The MNO and researchers are testing the impact of price and the framing of advertising delivered via text message on adoption, usage and welfare.

Default contributions to a mobile savings account. Employees at a large firm in Afghanistan, who receive their salary payments via mobile money, can automatically set aside a percentage of their salaries to be transferred to a long-term savings account on a mobile platform. We are testing various incentives and informational text messages to encourage enrollment and long-term savings.

Mobile savings account for education expenses. In Kenya, parents wanting to save for their children’s high school education are offered a new account that is designed to help them save for these expenses. The account allows clients to deposit money into a mobile money “lockbox.” If clients reach their savings goal date, they will earn an interest rate bonus on their balance. This study tests the impact of this product on savings and school enrollment.

Results from these evaluations on innovative applications of the mobile platform for financial services will help policymakers and practitioners uncover key insights to improve the design of these products. More fundamentally, our research can be used to determine how the mobile platform can effectively foster and scale affordable financial services for the poor.

This post originally appeared on the NextBillions website.

Improving Client Value from Microinsurance: Insights from Kenya, India and The Philippines

18 Jun 2015

The primary goal of the International Labour Organization (ILO) is to contribute with member States to achieve full and productive employment and decent work for all. The Decent Work Agenda comprises four interrelated areas: respect for fundamental worker’s rights and international labour standards, employment promotion, social protection and social dialogue. Broadening the employment and social protection opportunities of poor people through financial markets is an urgent undertaking.

Housed at the ILO’s Social Finance Programme, the Microinsurance Innovation Facility seeks to increase the availability of quality insurance for the developing world’s low-income families to help them guard against risk and overcome poverty. The Facility, launched in 2008 with the support of a grant from the Bill & Melinda Gates Foundation, supports the Global Employment Agenda implemented by the ILO’s Employment Sector.

Research on microinsurance is still at an embryonic stage, with many questions to be asked and options to be tried before solutions on how to protect significant numbers of the world’s poor against risk begin to emerge. The Microinsurance Innovation Facility’s research programme provides an opportunity to explore the potential and challenges of microinsurance.

The Facility’s Microinsurance Papers series aims to document and disseminate key learnings from our partners’ research activities. More knowledge is definitely needed to tackle key challenges and foster innovation in microinsurance. The Microinsurance Papers cover wide range of topics on demand, supply and impact of microinsurance that are relevant for both practitioners and policymakers. The views expressed are the responsibility of the author(s) and do not necessarily represent those of the ILO.

Quality Of Delivery Study: FSD Kenya

08 Jun 2015

Financial Sector Deepening Kenya (FSD Kenya) has worked since 2008 with CARE and, since August 2012, with CRS, to develop, test and perfect different models or channels for forming, training and supporting Savings Groups (SGs). In 2013, FSD Kenya commissioned the Quality of Delivery Study (QDS) which had four objectives:

  • Measure the outreach of SGs, both breadth – how many people are members of SGs, and depth – to what extent SGs are reaching the principal target population of poor and otherwise excluded people. ƒ
  • Determine the usefulness or valued added by SGs, and the extent to which the services they offer meet the wants and needs of members. ƒ
  • Answer questions about SGs and consumer protection: are SGs a safe and transparent place to save, or are they putting members at risk of losing their savings or being exploited in other ways?
  • Determine the relative outreach, value-added, and consumer-protection performance of the various delivery channels to help FSD Kenya tailor its investments to produce the best outcomes in terms of efficiency, sustainability and consumer protection.

In short, the QDS was designed to compare the SGs formed by the two international non-governmental organisations (INGOs) with each other, and with the many spontaneous or community-formed SGs.

How M-Shwari Works: The Story So Far

15 Apr 2015

M-Shwari represents the next frontier of digital financial services as it demonstrates that mobile money infrastructure can be leveraged to offer higher value financial products at scale.
“Shwari” means calm in Kiswahili, yet M-Shwari, a bank account offering a combination of savings and loans, has taken the Kenyan market by storm. Offered as a collaboration between the Commercial Bank of Africa (CBA) and mobile network operator (MNO) Safaricom through its ubiquitous mobile money service M-PESA, M-Shwari has piqued the interest of mobile money watchers looking for the next innovation to drive financial inclusion globally. M-PESA is rightly lauded as a global success story: It is used by two-thirds of Kenyan adults, has more than 80,000 agents, and processes nearly $20 million in daily payment transactions. Yet M-Shwari represents the next frontier of digital financial services as it demonstrates that mobile money infrastructure can be leveraged to offer higher value financial products at scale. M-Shwari has already brought millions of poor, previously unbanked Kenyans the full benefits of a banking product (including interest, deposit insurance, and access to credit) using M-PESA’s unparalleled mobile money infrastructure. M-Shwari is also the first large-scale product that taps into digital information (in this case, telecommunication data) of poor and unbanked customers in an emerging market to make credit-scoring decisions.

At the heart of this success is a product that emulates the way low-income Kenyans manage their money. Kenyans constantly balance the need for short-term liquidity with providing a return for the future. The M-Shwari product allows customers to save for the short term while also increasing access to credit options in the future, which makes customers feel that their funds are “working” for them. In addition, the product is easy to figure out and highly engaging as it rewards customers for “good” behavior quickly. The fast, virtual nature of the product does exacerbate the usual challenges of customer education and disclosure but represents an unprecedented new channel of access to short-term loans and secure savings for a swathe of the population who has not had previous access to formal financial services.

Beyond Codes: The Foundation for Client Protection in Microfinance

02 May 2014

Beyond Codes was an action research project of the Center for Financial Inclusion at ACCION. The project was designed to provide a body of experience and knowledge from leading financial institutions serving low-income people about how consumer protection codes of conduct are implemented. The two-year project started in mid-2008 and ended in June 2010. The project aimed to develop the tools and experience that could inform the subsequent work in client protection by grounding it in practices of financial institutions.

Twelve financial institutions (FIs) participated in the project. FIs were of various ages, from less than three to more than ten years. The institutions included banks, non-deposit finance companies, NGOs, and credit unions. Some were large operations with close to one million clients, while others were medium-sized and even small, with fewer than 10,000 customers. The countries represented in the research were: Bosnia, India, Kenya, Mexico, and the Philippines. All the FIs engaged in lending including a range of loan products using various methodologies. More than half also offered savings, transaction accounts, and insurance.