Making a Case for the Business Case: New Ways to Provide Sustainable Financial Services to Low-Income Communities
The most challenging part of alleviating poverty is not just finding a solution to a problem that works right now, but which is sustainable. As a member of the global financial inclusion community, we at BFA see our most important role as helping financial institutions succeed by offering commercially viable products and services to their customers. However, the business case – an important justification for making business decisions – is often treated merely as a “checkmark” as a product goes to market. But we have observed instances where business case requirements can be a tool for innovation – a way to push products in a strong new direction and enhance their effectiveness for low-income segments.
The Savings at the Frontier (SatF) program is a solid example of this type of innovation. A joint initiative of Mastercard Foundation and an Oxford Policy Management-led consortium, the goal of SatF is to link savings groups and other informal mechanisms with formal financial institutions through savings, credit, insurance and other financial services. SatF partners with financial service providers (FSPs), such as banks, mobile network operators (MNOs) and other formal financial institutions in Ghana, Tanzania and Zambia. The program develops, tests and implements sustainable business models enabled by these partnerships, ultimately expanding product offerings to end users.
Since its inception, SatF has unapologetically focused on requiring the business case from financial providers at the initial stages of an engagement with a financial institution. And as the business case adviser to SatF, BFA has witnessed firsthand how the business case often helps expand ideas rather than diminish them.
With SatF, BFA met with a range of different types of FSPs – banks, MNOs, microfinance institutions (MFIs) and payment aggregators – using a pro-forma business case modeler that leverages existing data as well as assumptions. We designed this business case modeler not only to enable FSPs to tweak assumptions to best reflect the realities of their business, but also to compel FSP teams to focus on the main business drivers, and to think innovatively about how to acquire low-income people as customers in a sustainable way.
Not just bringing water to the horse…
It’s critical that FSPs acquire and service informal savings groups (typically based in rural and peri-urban communities) in a cost-effective manner. During one of our stakeholder meetings, a manager at a commercial bank shared his experience in a donor-funded pilot project to acquire village savings and loans associations (VSLAs). The bank partnered with an international NGO that formed VSLA groups to open bank accounts for some savings groups. However, some of the selected savings groups were based in communities that were approximately 100 kilometers (62 miles) from the nearest bank branch.
The manager highlighted an instance where a team from a branch embarked on a two-plus hour drive (navigating difficult road conditions) to a savings group. They only mobilized $7 in deposits. This linkage pilot project was not commercially sustainable from the onset and ended when the NGO and its FSP partner used all the donor funds.
This bank’s experience was similar to others and underscores the need for FSPs to determine the commercial viability of linkage projects prior to implementation.
The choice of channels – bank branches, automated teller machines (ATMs), agents and mobile phones – deployed by FSPs and their proximity to group members not only impact the cost for FSPs and individual members, but they also affect usage by members. Convenience and ease of use matter.
Bank and mobile money agents are examples of channels that can be readily deployed near savings groups without the capital expenditure associated with branches and ATMs. Agents can also be trained to explain products and support or teach customers to perform simple transactions.
Further Innovation Supports the Business Case
Improving the revenue stream
From our business case model, it is evident that focusing on the savings opportunity alone is not enough to ensure commercial sustainability.
Therefore, FSPs need to explore whether to expand the range of products offered to savings group members. Identifying opportunities to cross-sell innovative financial services, such as microinsurance and informal pension products, enhances the value proposition to savings group members and generates additional revenue to improve FSPs’ business case.
In addition, when savings group transactions are digitized, FSPs will be able to accumulate and aggregate volumes of data on individual members’ financial behavior. This aggregated behavioral data can be monetized, where data protection laws and guidelines permit, to further improve the FSPs’ business case.
Driving the right partnerships
We note that banks, mobile money operators and payment aggregators are increasingly building successful partnerships that leverage their core capabilities to deliver financial services to the unbanked and underserved low-income segments.
Banks are licensed to develop and own financial products, while mobile money operators and payment aggregators, through integrations with multiple FSPs, have the technology and distribution channels that are increasingly accessible to savings groups and individual members. Establishing new partnerships that align incentives and leverage core capabilities can produce a win-win scenario. An example is deposit mobilization for deposit-taking institutions and transaction activity for mobile money operators.
We find that FSP partnerships with institutions such as NGOs that focus on low-income communities are helpful for effective product design. NGOs have studied and tested how to create and sustain savings groups for more than a decade. They are typically trusted amongst savings group members. These NGOs have deep insights about the characteristics of the savings groups that can help significantly with designing products.
Digitized savings products that do not fully replace the cash processes nor replicate the governing rules of VSLAs are destined to have low usage levels, even if initial sign-up is high.
The high numbers of people who participate in informal savings groups is appealing to FSPs. There are hundreds of thousands of active groups whose self-selected members – approximately 20 to 30 per group – save weekly for a year, and share their accumulated savings and any related interest income. However, the complexity of tapping into this segment in a commercially sustainable manner cannot be underestimated.
From our experience with SatF, the business case for a standalone linked or digital VSLA product is not easy to make; profitability is not assured. This is important to acknowledge upfront as providers need to think carefully about critical drivers. Starting with a business case forces the most critical drivers to become immediately obvious, allowing FSPs to focus quickly on their competitive strengths and weaknesses.
We strongly encourage FSPs to use the business case as a catalyst to stimulate creative and innovative thinking on product development and go-to-market strategies in acquiring and servicing informal savings groups. The reward for all stakeholders is substantial.
Roland Amoah is a senior associate in business insights at BFA.
Photo of a weekly meeting of a Savings at the Frontier savings group in Tanzania, courtesy of BFA.