The Best of the 2012 Ambassadors

While most other “best of” lists usually hit the press around New Year’s, our calendar here at the Ambassadors Program is a bit different. With 16 new Ambassadors volunteers arriving at our Boston offices this Monday for their orientation training, we thought this week would be the perfect time to look back on some of the best posts from our 2012 Ambassador class.

1.)     In ‘A company with a difference’ by Jerry Brady, read how one social enterprise is making a difference for a group of people long excluded from the financial system: people with disabilities.

2.)    In ‘To be a woman is to…‘ by Kate McGrath, learn about the work of Génesis Empresarial and one of their most successful groups of women entrepreneurs.

3.)    In ‘Inside in the cold’ by Charlene Nemson, see what air conditioning means for development in the country.

4.)    In ‘Can we call him a social entrepreneur?‘ by Guila Angi, meet a client of Paraguay’s Financiera El Comercio and learn about his successful dairy business and the additional support he lends to other budding businesses in his community.

5.)    In ‘The stuff that doesn’t get lost in translation‘ by Asya Tabdili, find out how Accion is providing financial literacy training to thousands of entrepreneurs in India – by watching a video she created.

6.)    In ‘Mobile Money Part I (Strange Bedfellows) and Mobile Money Part II (Different Strokes)‘ by Abhishank Jajur, you can finally get the basics of mobile banking – in a fresh and clear way.

We’re about to kick off another great summer of stories from the field from around the world of microfinance – so stay tuned for the best of 2013 from Paraguay, Guatemala, Mexico, Peru and India.

Mobile Money and Banking (Part II): Different Strokes

Delivering banking services through mobile money platforms has the potential to include many previously un- and under-banked people who did not previously have access to the financial system – those who are at the bottom of the proverbial pyramid.

As I explained in Part I of this series, the expansion of a mobile money network is dependent on the presence of the traditional banking system in the area. Does this mean then that mobile money encroaches on the potential market of banks? Or that banks are wary of mobile money service providers’ dependence on their networks? What we have learned is that, no, that is not generally the case. Mobile money serves a unique segment of the market using a very different business model than do traditional banks.

To understand the value delivered by mobile money, it is essential to understand that the ideal customers of mobile money services have very different banking needs than do the affluent customers of traditional banks.

People living at the bottom of the pyramid need their banks to offer services such as:

• Domestic remittances and the ability to receive payment for casual employment, as the authors of this Harvard Business School (HBS) case study share here.
• Savings accounts that accommodate smaller earnings and a general preference to maintain savings in physical form, either in cash or other assets.
• And, the services must be convenient and low-cost.

WIZZIT, the first mobile money service provider, realized these realities the hard way when its alliance with a South African bank to deliver traditional banking services failed to achieve scale and turn profitable despite several years of operation, as the HBS case notes.

Mobile money platforms, with their cost-light network and ease in which they can increase their geographic reach, are better suited than bank branches and ATMs to serve the specific needs of this unique market. Besides keeping costs low, however, mobile money service providers have also had to tailor their business models to suit the conditions in which they operate.

Banks have traditionally been able to finance expensive brick-and-mortar branch networks by relying on float-based revenue – or, in other words, on the interest income that is earned from the deployment of its deposits. Consequently, consumers are deemed ‘profitable’ by their ability to maintain large account balances or take credit facilities (loans) that are large enough to compensate the bank for the costs (both direct and indirect) of customer acquisition and retention. And while many banks do charge a variety of fees to their customer base, the revenue from these fees is actually quite small when compared to the interest income that I mentioned above.

Since people at the bottom of the pyramid are usually unable to meet the minimum balances and scale of engagement that large, commercial banks require, new business models are needed to address their specific needs and capabilities, while still proving profitable to the financial service provider. Mobile money service providers have reacted by implementing a business model that use:

• Revenue that is derived from transaction fees, charged to customers
• Operating costs that take the form of commissions paid to mobile agents, on a per-transaction basis.

This model ensures that the costs that mobile money service providers incur are operational, and not fixed, as is the case with the traditional banking system. And as such, customers are profitable for these providers on a per-transaction basis, irrespective of the value of the transaction or the frequency with which the service is used. Another benefit is that customers only use the services they need, without having to commit to a particular scale or value of service. And while this model makes for easy roll-out of financial services to customers from any economic class, it is highly relevant to those living at the bottom of the pyramid.

Mobile Money and Banking (Part I): Strange Bedfellows

Over the past decade, the rapid increase in mobile phone penetration in developing countries has created a massive platform for delivery of banking services to the un- and under-banked. Mobile money service providers, like Zoona (formerly Mobile Transactions Zambia — watch out for a future post on this), are capitalizing on mobile phones to offer innovative financial services.

This post outlines the intricate balance of the traditional and mobile banking systems and the challenges for further expansion.

Mobile money service providers typically maintain a footprint of agents across their region of influence to provide an interface to their customers, much like bank branches do. The key function served by these agents is to convert cash into an online record of money on the service providers’ system, or what is commonly referred to as e-money, and vice versa. By doing so, the system can work seamlessly with the real economy, which in most developing countries is highly driven by cash. This is certainly the case in Zambia. This type of service allows customers to withdraw or transfer cash when they – or their appointee – need to make a transaction in the ‘real world’ While this function is similar to that performed by a bank teller, the mode and scale at which a mobile agent operates poses challenges.

The problem of liquidity

The most significant characteristic of the mobile agent network, which sets it apart from a bank branch network, is that the former is composed of disaggregated entrepreneurs, several of whom run other businesses from the same physical location. While this distinction has several operational and managerial implications, the most daunting of them is the need to maintain agent liquidity (a reserve of cash on hand). With no access to a central source of monetary liquidity, like bank branches have at a headquarter bank, each agent has to contribute to and maintain a certain level of liquidity. Such liquidity is essential to drive transactions, since agents are demanded to have enough liquidity in order to settle any type of transaction.

An agent’s liquidity is composed of two parts:

1. The cash in the till
2. The stock of e-money deposited with the mobile money service provider.

The disaggregated nature of the agent network for mobile transactions implies that every transaction must be immediately settled. A transaction where an agent receives cash, also called a ‘cash-in transaction,’ (for instance, collecting cash for a transfer or bill payment) is settled electronically by reducing the agent’s stock of e-money by the amount of cash that was received. Consequently, the total liquidity of the agent remains the same (assuming that commissions are ignored, for simplicity’s sake). Conversely, a ‘cash-out transaction’, (for instance, when an agent pays out cash for a money transfer or loan disbursement) is settled by electronically increasing the agent’s stock of e-money to compensate for the reduction of cash in the till.

Thus, problems can arise both when an agent is starved of cash liquidity (and therefore cannot process cash-out transactions) OR has a low stock of e-money (and cannot process cash-in ones). Since the type and value of future transactions cannot be predicted, agents either need to maintain surplus of both forms of liquidity (not so easy, as I will explain) OR have a low-cost means of periodically rebalancing their liquidity composition (now we are getting to something).

Welcome to Zambia!

My first ten days at Mobile Transactions Zambia Limited (MTZL) have been more exciting and inspiring than I had imagined. Work began early. I drove straight from the airport to the office, where I was driven off to visit an agent (one of the several physical locations across Zambia where the end-users of MTZL’s services can deposit or collect cash) in the heart of Lusaka, the capital city, and to review training of future agents. This anecdote is illustrative of the energy and motivation that flows through the 25+ employees of the company at the office. A motley crew from at least seven countries with experiences across financial services and technology industries, and in implementation of development projects through rural Zambia, mans the office. Their customer-centric focus, improvement through self-criticism, and relentless focus on building scale all flow from their dedication to build a game-changing enterprise.

If the past is any indicator, the odds are stacked in favor of MTZL. In the span of just three years since 2009, when it began operations, MTZL has grown to become the largest private payment service provider in Zambia. The whirr of transactions routed through MTZL’s systems has grown into a roar as the unbanked and poor use its services to transfer money to their loved ones, borrow and repay microloans, receive aid in cash and kind, get paid for sale of their agricultural produce, and receive salaries. Businesses, non-profits, international organizations, and governments have all benefitted from the secure, reliable, cheap, and simple interface with MTZL’s system and the wide reach of its agent network across the breadth of Zambia.

The future of the company will be driven by its ability to graduate into a mature organization: one which can be scaled on the back of a robust information system backbone and with managerial capacity to match its blistering growth, challenges which the senior leadership knows all too well. Accion’s Frontier Investment Group (FIG) believes not only that this this achievable, but doing so will widen financial inclusion for several million financially underserved Zambians, and, with future expansion, other Africans. Consequently, FIG invested US $3.2 million, jointly with the Omidyar Network, in February 2012. FIG also offers strategic guidance to MTZL through participation in the board of MTZL’s parent, for instance in development of performance metrics for the business based on FIG’s experience with its other portfolio companies.

That is where I step in to the picture. My task is to understand the business drivers and aspirations of the company, and suggest key performance indicators (KPIs) that the company should measure itself against. As an independent observer, I hope to bring a fresh perspective to the thought process while applying my skills and professional experience in international development and investment management. Personally, the role is a great learning opportunity as I am new to the context (my first time in sub-Saharan Africa) and the nature of business (never worked for a startup before). I also plan to travel across this part of the world and experience it firsthand. But that will have to wait as it is time to get back to work.