Graham A.N. Wright founded MicroSave and is currently its Group Managing Director. He has had a career of three decades of development experience underpinned by five years of experience in management consultancy, training and audit with a leading accounting firm in Europe. He is a reformed Chartered Accountant. Graham has been deeply involved in digital financial services (DFS) from the days he sat on the original steering committee for M-PESA and supported its initial pilot-testing process. He has worked on a wide variety of DFS projects with banks and telcos in 9 countries.
Gateway: The European Microfinance Week has a special plenary on Digital Finance this month where you are participating as one of the key panelists. The title of the session raises an important question: “Digital finance: full inclusion or empty promise?” Can you tell us in what way is digital technology making finance more inclusive?
Graham: There has been much hype of the ability of digital financial services (DFS) to turbocharge financial inclusion. We all saw an opportunity to significantly reduce the costs of delivering a range of financial services, and an opportunity to finally make the business case for mass market deposit mobilization. After the initial, rapid success of M-PESA in Kenya, I think we collectively under-estimated the investments made, and the pilot-testing and rollout work done by Safaricom to ensure that M-PESA succeeded. Too few providers seem to have the vision or appetite to make these investments, and so for every one of GSMA’s “sprinters,” there are around eight to ten deployments limping along, inadequately funded and poorly implemented.
Furthermore, currently, the vast majority of deployments are simply offering payments services. Poor people need a range of financial services – just like you and I. There is a real risk that having discovered that the poor cannot run the marathon out of poverty on the credit leg alone (wow – what a revelation!), we are now expecting them to do so on the payments leg alone. Where digital savings and credit products have been introduced, the savings seem to be an after-thought and the credit is typically high-cost consumer loans. While these loans have proved invaluable to many customers, for others the results have been sub-optimal – over 400,000 Kenyans are now blacklisted by the Kenyan credit bureaus for loans of less than $2.
However, there are more promising signs beginning to emerge in some markets. India provides an interesting glimpse of what might happen if we get the DFS revolution right. A combination of digital identity (Aadhaar), a mass campaign to open bank accounts to give the poor access to a range of financial services (PMJDY), and an ambitious program to directly transfer not just salaries and pensions, but also social security payments, has resulted in the average balance in PMJDY accounts of over $25. Shortcomings persist – the cash in/out agent network is fragile, few overdrafts have been sanctioned to date and most poor people are entirely dependent on agents for information and assistance on using the system – but the signs of real financial inclusion are emerging.
Gateway: There is clearly much work to be done to get digital finance right. What do you see as the key barriers affecting user adoption of digital financial services? What kinds of innovations are needed to overcome such barriers?
Graham: Several barriers remain, key amongst these is perhaps trust. DFS depend on customers’ trust in the systems and agents used to deliver the service even more than traditional financial services. Protecting the customer and minimizing the risks as s/he uses the service is essential to build and maintain that trust. And yet in most of the 20 markets where MicroSave has worked on DFS, a combination of service/system downtime, agent illiquidity and churn, USSD/SMS-based user interfaces, and poor customer recourse means that there is limited trust in DFS. As a result many users prefer to perform over-the-counter transactions rather than take the risk of keeping money in their wallets or sending it to the wrong recipient.
As highlighted above, many of these issues require providers to invest more in their platforms and agent networks in order to build a comprehensive and thus profitable digital ecosystem beyond an OTC-based and payments-dominated one. This is a “hygiene factor” pre-requisite for transforming DFS into real financial inclusion and rolling out a range of services.
Smartphones may provide the key to realizing the full potential of DFS ecosystems. Smartphones allow us to build interfaces that are much more intuitive for the end user, and to reflect the mental models that poor people use to manage their money. (Curiously enough, these mental models do not resemble the way traditional financial institutions offer their services). In addition, smartphones will lower the cost of mobile data communications relative to traditional mobile channels (such as SMS or USSD). Smartphone applications will also allow banks, as well as fintech and other providers, freedom to program services without needing the agreement or participation of a telco. Finally, smartphones will provide opportunities to capture more customer data with which to enhance customer value and stickiness and to make better informed credit decisions.
Gateway: What are some of the key risks associated with digital finance and what can be done to address them?
Graham: In addition to the opportunities described above, DFS comes with a new range of risks. We have already seen how providers can lose substantial sums of money if they do not have effective risk management procedures in place. However, as highlighted above, many of the risks are strategic and reputational in nature. These then play out in the operational realities for agents and their customers. The Helix Institute of Digital Finance’s latest survey of agent networks in Uganda highlighted just how commonplace fraud and robbery is for agents, not just in Uganda, but worldwide. And customers continue to experience trust-eroding problems in accessing their money. Fraud risks seem to evolve and expand as the DFS rollout matures, so we can safely expect to be learning, often the hard way, for the foreseeable future.
To respond to emerging and evolving DFS risks will require the development and implementation of risk management frameworks – both for internal systems and procedures, and for the customer-facing agent networks. Providers will need to coordinate carefully with their agents and train them regularly to protect them. Fortunately, there are a growing range of good resources to support this. IFC’s DFS and Risk Management Handbook and GSMA’s Managing Risk in Mobile Money Toolkit are good places to start – and of course, The Helix Institute offers a range of world-class training on this and related topics.
The excitement around fintech in India is palpable. Many see it as a market-led solution to the policy objective of financial inclusion. Fintech regulation must therefore be designed carefully to prevent and mitigate risks while also preserving the potential for financial inclusion.