NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Last week, while checking out some regular blogs, I bumped into a short note about a magazine called “Upsides” in the CGAP Blog.

Upsides is an FMO (the Netherlands Finance Development Company) initiative, supported by other likeminded financial institutions such as Standard Bank, Plantersbank, Triodos Bank and ShoreBank.? As such, the core content of Upsides revolves around finance and development.

Every Upsides issue has, on average, three detailed articles that develop a particular aspect of development finance. These articles are peppered with several case studies that help add flesh to the bone and reflect stories from different perspectives.? Additionally there is a section called 20:20 featuring interviews with important actors in the arena.

Initially, I thought that I would read the four already published issues and give an overview here, but soon it became apparent to me that the magazine is just too good to do it the disservice of a mediocre summary. Plus the contents are well thought out and they develop several important well-connected points. Clearly, the authors are experts and they have put much time into their articles.

Instead, I have chosen to give some mouthwatering tidbits of the fourth issue with the hope of stimulating readership from NextBillion visitors. There were three main topics: remittances, the brain drain in emerging economies and branchless banking.

1) Remittances:

• Remittances are usually nearly totally spent. However, when remittances are channeled into savings accounts, a large portion is saved. These savings contribute to the financing of productive activities. In Nicaragua’s case, it has been proved that emigrants are more likely to return home when they know that their remittances are being invested in something meaningful.
• The constraints consumers face in the remittances market are the informality of the transfers market, the cost of remitting and the lack of access to financial institutions.
• In most developing countries, governments require that only banks should be allowed to transfer remittances. Rural areas with their lack of bank branches are thus underserved. Overhauling this legislation to allow non banking financial institutions such as savings and credit associations (like microfinance institutions) to pay remittances will increase the capillarity of the financial system and competition among market players.
• Consumer education is crucial among the less financially literate to avoid spending on non-basic necessities.
• New technologies can allow for cheaper account-to-account transactions. Mobile phone telephony or prepaid cards are an alternative to facilitate remittances.

Case Studies

• At Nicaragua’s Findesa, if a receiving family member can show six months of stable, continual cash flows, he or she is eligible to receive three times the amount in the form of a loan. There is a sustainable link between remittances (for which customers pay no fee), savings and credit operations.
• The Microfinance International Corporation uses a variation of the above model. It employs its remittance flows as a lending source for microfinance institutions.

2) The brain drain:

• Emigrants are potential entrepreneurs. Their departure aggravates the narrowing of middle classes in many countries. It thus leaves the enterprise scene dominated by informal local micro-enterprises or large companies.
• Africa is the continent most acutely affected by brain drain.
• Skilled emigrants tend to belong to better off families than those of unskilled emigrants. Therefore, they do not need to send as much remittances to sustain their families. Furthermore, qualified emigrants have a stronger tendency to establish themselves permanently abroad.

3) Branchless banking

• Target customers are low income customers, many of who handle many small cash transactions.
• Market outreach strategies are based on multiple points of entry, such as internet banking, point of sale devices, and prepaid cards. Many are keen to have mobile banking services made available through local grocery stores, post offices and gas stations. For a short post about the role of third party-agents, go here.
• The most successful model so far is mobile phone banking. In 2006 the mobile phone industry celebrated the second billionth customer, according to the GSM Association. Of that second billion, more than 80% live in developing countries. The model involves a partnership among mobile telephone servers, mobile software firms and banking service providers. Mobile banking allows reduced banking fees. In South Africa it is up to one third cheaper than the cheapest full service account by other main bank. In countries that offer mobile banking, there are two main business models: bank-led and non-bank led.
• For bank-led models, a bank delivers financial services through a retail agent who typically communicates with a mobile phone or a point of sale terminal. Telecommunications providers simply act as transmitters.
• For non-bank-led models, firms such as mobile operators or prepaid card issuers use retail agents to offer e-money accounts.
• National regulations are pivotal in determining which model to choose. In South Africa and India, regulations require licensed financial institutions to be involved, thus leading to bank-led models. In Kenya and the Philippines, telecom providers are allowed to manage the services, giving rise to non-bank-led models. A well known example of the first model is Wizzit in South Africa; an example of the second model is M-Pesa in Kenya.
• Other possibilities in accessing customers include training agents to process basic card transactions and mobile vans.

Case studies:

• BASIX is a micro savings pioneer in India. It is also a company close to my heart–they gave me my first job. Though no newcomers in the field, they are still innovating. They have come up with the Bank on Wheels concept (a mobile bank branch) to extend their reach to rural areas and a handheld device to record transactions and issue receipts to customers (I had the pleasure of seeing the first trials).
• Nextel (now known as Sprint Nextel) introduced the Push-to-talk feature allowing instant connection between two mobile phones without dialing or connecting to the network like a walkie-talkie. These services are especially useful for taxi drivers and local delivery companies.

If you are still hungry for more, Upsides can be found (and freely downloaded) here.