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

Tune into any current conversation on financial inclusion, and one topic is likely to inspire particular excitement: digital finance. With over 70 percent of adults in many developing countries now owning cellphones, and the cost of processing a digital transaction around zero, the potential for both customers and businesses is clear. Combined with the huge wave of innovation that’s currently taking place in the sector, this potential has drawn the attention of the broader global development community, from Bill Gates on down. It no longer sounds unrealistic when development powerhouses talk about achieving universal financial inclusion by 2020.

Accion (a NextBillion content partner) has been at the forefront of the movement to promote digital finance as an anti-poverty tool, and we recently spoke with Carol Caruso, Senior Vice President of Accion’s Channels & Technology unit, about how they’re driving the use of digital financial services. In part one of this Q&A, she discusses Accion’s efforts to help financial technology (or “FinTech”) companies and traditional financial institutions leverage mobile technology to reach base of the pyramid clients. (You can read part two of the interview here.)

James Militzer: Could you summarize Accion’s overall approach to digital financial services?

Carol Caruso: We believe that achieving financial inclusion is not going to be realized without smartly leveraging technology. And one key aspect of being financially included is the ability to use money, to make payments for example, conveniently and affordably – so digital financial services (DFS) is core to a lot of what we’re doing. We take for granted in developed countries how easy it is to pay expenses, bills, etc. In developing countries, particularly for the base of the pyramid that we focus on, it’s very costly and inconvenient just to pay a medical bill, school fee or loan repayment. So we believe we can make vast improvements by leveraging the mobile phone and other tools, which are accessible to the majority at the base of the pyramid. To do this, we deploy a few different levers.

First of all, through Accion’s Channels & Technology unit, we drive the use of digital financial services by providing advisory services to our financial institution partners, so they can plan and implement DFS. We work with a network of microfinance banks globally, and we’re helping them to employ these innovative channels and technology by leveraging agent networks and data analytics, using digital field applications like tablets or smartphones to conduct services in the field. And what we do is provide strategic thinking and effective planning so they can sustainably deploy DFS. This involves deploying a methodology that will help them achieve things like defining a strategy and a business case, so that a digital channel could be sustainable. We help them think about the objectives they want to achieve and how digital financial services can enable that, so they can make educated decisions: picking the right partners, designing solutions based on client needs and behaviors, and choosing the right technology, customer education approaches, etc.

(Above: Carol Caruso)

Second, we aim to make an impact by providing services to FinTech companies, particularly our portfolio partners within our Frontier Investment Group and Venture Lab – Accion impact investment vehicles. We work with these Fintech companies to help them extend their impact. We can help them solve different types of bottlenecks, for example, doing a product review, maybe helping them add additional functionality for a new target market they’re trying to reach, or doing a diagnostic on a payment platform or an agent network to make efficiency improvements, or addressing gaps and helping them design better solutions for their clients. We also look at ways these offerings could potentially be used by our microfinance bank partners, so perhaps we can create synergies with those vendors, when suitable.

The third component of our approach is working with our Center for Financial Inclusion, which is really driving the financial inclusion agenda globally, and is definitely looking at how DFS can have an impact – for example, in regards to having conducive regulation. We’re also looking at ways that consumers can be protected through the Smart Campaign and the Client Protection Principles, making sure consumers are protected if they use DFS.

JM: Regarding the partner institutions that you work with to help deploy DFS – do you have an example of one that wasn’t doing that previously and how you helped them to do it?

CC: Sure. For example, in the past couple of years the team in Bogota has been helping deploy several agent networks to a couple of our microfinance bank partners. For one of those partners, Finamerica, we helped them develop an agent network to allow more client convenience. What was interesting about the approach was that they had clients that they had been providing loans to through the years and these clients had really grown their businesses and grown with the bank, and were hence loyal to it. Finamerica thus created a loyalty network of these clients, conducting annual get-togethers and creating business synergies. So when the bank wanted to build up their agent network, it was a natural reaction for them to reach out to this loyal client network, particularly those that had small shops, and offer them the opportunity to be an agent. Many of them had shops in and around Bogota, and hence well matched Finamerica’s agent profile. Now as agents and loyal clients, they work hard to provide quality service since they represent their bank. This is essential to the success of an agent network: When you outsource financial services beyond your branches, you need high-level service. So we would love to see that as a good practice globally for financial institutions, in terms of reaching out to current clients to find potential synergies when creating or augmenting agent networks.

Another example is one of our financial institution partners in Mumbai, named Swadhaar. We had helped them pilot a partnership with Airtel, the largest MNO in India, to leverage their mobile money wallet, so that clients could do mobile banking – deposit savings, check balances and reimburse their loans. What was an interesting success was that we invested quite a bit of time and brainstorming into creating client education activities and a Peer Leader program to really help drive clients’ usage and adoption. It’s a very nascent environment, and they focus on women who are not necessarily using the mobile phone as a business tool. So there was quite a lot of work to explain the system and the benefits. But we found that the effort put into client education really paid off, because it provided not only an explanation of the service, but the value add and everyday benefits these women would get by using the system. The Peer Leader program was a way of reaching out to the community to find those leaders who are more inclined to use mobile money, train them and then compensate them to essentially teach and promote the service, and be sort of a guide for other clients who were not transacting regularly. And we’ve seen some promising uptake, both from peers and clients. It’s challenging, but quite promising.

JM: Do financial institutions, go into partnerships with a pretty firm grounding of what mobile money is all about? Or are you training them and their customers from ground zero? And has that changed over the years, as mobile money has become more prevalent?

CC: Those are great questions, it just depends on the country and market maturity. Solutions like M-Pesa, of course, are known globally. But there’s a big difference between reading about something and actually having to implement it – it’s entirely different when you’re face to face with a mobile network operator (MNO) or other solution provider, and you’re negotiating on commissions, solution design, business models, or processes and integrations – you really need to know what questions to ask, what are the risks, and how to mitigate those risks. So that’s part of what we bring to the table. And there’s a lot of learning along the way, there’s nuances and differences with each relationship from vendor to vendor. There are some similarities, but you also have to look at the local context and the business case for the financial institution as well as the vendor (and any other involved player). The expectations and business requirements of all partners have to take precedent over any assumptions. Regarding clients, customer education should always be a key component factored into the business case to ensure adoption.

JM: If you’re looking for a solution provider, such as a mobile network operator for a financial institution to work with, how do you determine which organization they should partner with?

CC: We’ve created a channels methodology to help organizations think and plan through this work. It includes walking financial institutions through an external and internal analysis. This helps them make the decision of who to partner with – whether it’s an MNO or other type of provider – how to make sure they can carry forward the channel sustainably, if they have the human and financial resources, the organizational readiness, etc. When it comes to choosing a partner, you really need to know your business requirements, especially customer needs, and the priorities of the financial institution to decide if a solution is useful. Is it too complex for the end client to use? Does it allow the functionality you need for the types of services you want to offer? Is it affordable? How strong is the agent network they may be offering, and are there quality agents in geographic locations where you operate? There is quite a list of criteria and vetting that should be conducted.

Our partner Akiba Commercial Bank in Tanzania has connected to an interoperable platform, which is really important in countries that have multiple mobile money offerings from various MNOs. In Tanzania I think there are seven or eight licensed MNOs, and three or four leaders in terms of market share. So it doesn’t make sense in that environment to try and figure out how many clients have which service and how to best reach them. Akiba partnered with Selcom, which has an interoperable platform integrated to those market-leading MNOs. Now the bank doesn’t need to worry about what solution their clients use. Clients connect through the platform and can reimburse their loans and check account balances. They’re also making utility payments or sending money into their savings account directly from their M-wallets such as M-Pesa, Airtel, or Tigo. And that’s also a very interesting learning on how interoperability can really help a bank’s clients to leverage a mobile money system without worrying about which particular wallet they have.

Note: We’ll run the second half of our interview with Carol Caruso next week, where we’ll discuss how various ecosystem players work together; best practices in managing agent networks to meet client needs; digital payments; the future of cash-in/cash-out; and some trends that will shape the future of money in the developing world over the next 10 years.

James Militzer is the editor of NextBillion Financial Innovation.