The last-mile challenge in banking for the poor

It has always been thought that lack of access to formal bank accounts prevented poor people from saving more and once accounts were opened they would be able to more optimally manage their finances. But now that we have made some progress, albeit tiny (only 5.5% of 650,000 Indian villages have bank branches and half the adults in the country do not have access to bank accounts), with access through the campaign for total financial inclusion (TFI), have the desired outcomes been achieved for those people?

Surprisingly, it does appear that having a bank account does not automatically translate into its use, much less efficient management of personal finances. Livemint points to a study by Skoch Development Foundation which found that only 11% of 25.1 million no-frills accounts opened between April 2007 and May 2009 are operational mostly because of the high costs.

India Development Blog points to an IFMR study of the impact of TFI campaign in Gulbarga District of Karnataka (claimed to have achieved 100% financial inclusion), which found that 36% of sample households remained without access to formal and semi-formal savings mechanisms and more importantly, access to bank accounts did not translate into bank account usage. It was found that the accounts were used mostly to manage NREGS payments or SHG transactions. Critical to the lesser than expected account usage is the high transaction costs, especially by way of travel costs.

I am inclined to believe that even if access to formal banking systems, by way of opening a bank account, is increased, actual usage is likely to remain low unless bridge the last mile gap and take banking to the door-step of the people, especially in rural areas. The recent decision by the Reserve Bank of India to approve the deployment of mobile bank business correspondents, equipped with electronic terminals, to transact at the sub-branch level is certain to increase the quality of access. This will ensure that, unlike now, rural account holders are more likely to actively transact using their accounts.   

In this context, mobile phones have the potential to revolutionize banking and increase utilization dramatically. Mobile phones-based technologies offer the attraction of directly placing the bank account in the hands of the customer, thereby lowering transaction costs and increasing the likelihood of account usage. It may therefore be tempting to get carried away by this possibility, coupled with a campaign to increase financial literacy, and assume that it will ensure account usage.

However, dovetailing NREGS and other government cash transfers through TFI accounts, extensive use of business correspondents and mobile phone-bassed technologies, and financial literacy, while necessary are not sufficient conditions to ensure optimal account usage.In fact, unless complemented with other initiatives, mere increase in access to banking accounts, could be counter-productive. It could just as easily enable access to debt and other less than desirable financial products, whose extensive adoption could be detrimental to the interests of the poor people.

Behavioural science teaches us that even with access to their accounts and adequate financial literacy, human beings are cognitively constrained. This in turn means that despite firm commitment to save or spend on certain things, people tend to renege and fall short on achievement. People discount the value of later rewards by a factor that increases with the length of the delay. They are therefore tempted to spend on immediate needs as opposed to save for important long-term requirements. Further, drawing from theories of "mental accounting", it has also been found that people tend to save optimally when they they know what they are saving for.  

It is therefore necessary that the bank accounts are structured to address these cognitive biases. This assumes importance since we need to bear in mind that the ultimate objective is not to merely enable access to bank account, but to enable poor people with systems to more effectively manage their scarce finances. What can be done to ensure that poor people save more, optimize on their interest returns, manage their long-term needs like health care, children's education and pensions, make more effective purchase decisions, and so on? In simple terms, how do we ensure that people not only manage their finances effectively, but also overcome their cognitive urges which are often determental to their interests?

I have written about several examples of how innovative financial products can overcome such cognitive biases and increase the likelihood of optimal outcomes for poor people with management of their finances. In fact, bank savings accounts and financial products, with subtle commitment features, have the potential to dramatically increase not only usage but also effective usage of bank accounts. I have bloggged earlier about Save More Tomorrow, default pension savings, lottery savings products, products to increase fertilizer consumption, multi-tier accounts (also here), and budgeting family expenditures. See also this and this.

In this context, there is a big window of opportunity. Bill and Melinda Gates Foundation have just pledged $500 million to helping poor people learn to save money. They propose to fund research and project interventions in this area to emulate the examples like the hugely successful mobile banking for the poor — via cellphone in Kenya and Bangladesh and smart card in Mexico. Spurred on by the low domestic savings rate, this area has been the focus of considerable interest in the US too. It is appropriate that some part of this be leveraged into experimenting with financial products and structured accounts that help overcome cognitive biases.

It needs to be borne in mind that TFI and optimal utilization of bank accounts by the poor needs to go beyond mere door-step acceess to bank accounts.

The Groupon effect - using social networks to address collective action problems

In recent months, the electronic coupon company, Groupon, has revolutionized the way the internet can be harnessed to minimize search and co-ordination costs (the collective action problem) in retailing. Its electronic discount coupons get activated (discount sales happen) only if a certain number of fellow citizens agree to buy the same thing on the same day. The retailer makes up his loss due to lower price with larger number of customers, who not only bring in larger immediate sales but more importantly brings in future patronage.

Groupon subscribers receive notifications of one deal a day, tailored to their location and profile. The local business gets customers, and Groupon takes a share of the coupon proceeds. The average Groupon deal offers 50 to 90 percent off retail goods and services, from restaurant certificates to skydiving lessons. Once the tipping point in registrations is reached, all buyers are locked in, and their investment becomes irrevocable. If the point is not reached, the deal is automatically aborted.

Groupon's spectacular success (it has been described the fastest growing internet company ever and has already crossed 50 million subscribers) since its founding in 2008 by Andrew Mason has naturally generated considerable commercial interest. Attempts by all the major web-service providers, including Yahoo and Google, to take-over Groupon have been rebuffed. The company recently raised a record $950 million from big investors and is considering a $15 bn IPO soon.

For its part, Groupon harnesses the power of psychology to attract customers and retailers. It seeks to leverage the inherent attractiveness of a shopping plan where customers are forced to wait for sometime to find out whether they can win the deal. The one-deal a day strategy also means that the attention bandwidth of customers can be more easily captured.

This psychological attraction of getting deep discounts also means that Groupon like websites are likely to become extremely popular in price-snesitive markets like India. In order to overcome the challenge posed by the limited reach of computers and internet, it may be more effective to use the now ubiquituous mobile phones to deliver such shopping deals in these countries. Further, mobile phones offers the possibility of much greater interactivity, potential for behavioural nudges, and the achievement of more overall efficient outcomes.

A recent article in NYT, in the context of the recent wave of street protests that have swept Middle East and North Africa, speculates on the possibility of solving the collective action problem with street protests. It writes, "Even if we all watch television coverage of demonstrations together and express our enthusiasm for the movement online, we have no guarantee our neighbors will take the physical risk of going out in the streets until they actually do so".

Technology will make it much easier for frustrated societies to express their collective anger. However, I am inclined to believe that translating this collective angst into tangible action on the field will remain beyond the reach of technology (apart from increasing the likelihood of participation) and as much a challenge as ever.

Update 1 (20/4/2011)

Excellent infographic on the rise of Groupon.

Update 2 (5/5/2011)

Felix Salmon identifies the USP of Groupon - the idea that coupons only become activated once a certain minimum number of people have signed up for them. He writes,

"This is essentially a guarantee for the merchant that the needle will be moved, that their effort won’t be wasted. With traditional advertising or even with old-fashioned coupons, a merchant never has any guarantee that they will be noticed or make any difference. But with a Groupon, you know that hundreds of people will be so enticed by your offer that they’re willing to pay real money to access it. That kind of guaranteed engagement is hugely valuable, and more or less unprecedented in the world of marketing and advertising."

Update 3 (5/11/2011)

Groupon debuted in the equity markets 31% higher than its offer price in its first trading day, bringing the online coupon-seller’s valuation to more than $16bn and reflecting a surge of excitement for one of the fastest-growing and most controversial companies to list in recent years. Shares in the company were set at $20 late on Thursday, then jumped as high as $31.14 in the first few minutes of trading before closing at $26.11. Groupon raised $700m in its highly anticipated initial public offering, in a deal which valued the company at $12.6bn, higher than the anticipated cap of $11bn but below the $20bn the company had sought earlier this year.

The company’s co-founders, who own about a third of the company’s shares, became billionaires. Andrew Mason, chief executive, has a stake worth about $1.2bn. Groupon’s buyers included many funds that intended to “flip” the shares to take advantage of their first-day jump. By the close, 49m shares had changed hands, nearly the entire float, making it the second most traded US stock on the day.

The iPhone success in perspective

Nothing captures the essence of Apple's overwhelming success with smart phones better than the graphic below comparing the trends in market and profit shares of all global cellphone makers. Apple has virtually decimated the field by capturing more than half the market profits since iPhone was launched in 2007, and that too with just 4% market share.



It sure helped that Apple could make a super-normal profit of $360 from an iPhone 4 which retailed for $600.

This market share is certain to fall. But it should take nothing away from Apple's spectacular success in such a competitive, dynamic and technology-intensive market.

Nudging with mobile phones on behaviour change

One of the important requirements for achieving behaviour change is the salience of behaviour change causing triggers. Information, presented in the most cognitively salient manner and with some close-enough periodicity, can be a powerful trigger to achieving behaviour change.

Mobile phones, thanks to their near universal coverage even in many developing countries and ubiquitousness in daily lives of citizens, have the potential to delivering such information. They are an excellent channel for doctors and health care professionals to maintain a continuous dialogue with the patients.

In recent years there have been numerous studies on experiments that have used mobile phones to both generate optimal treatment response and more effectively manage disease incidence. They have relied on using reminders to people about medication and treatment schedules and management of their eating and lifestyle behaviours.

A randomized control study on adherence to antiretroviral therapy (ART) for AIDS using mobile phone SMS reminders in Kenya among 431 adult patients over 48 weeks found that "weekly text reminders increased antiretroviral drug adherence from 40% to 53% of participants". The authors write,

"In intention-to-treat analysis, 53% of participants receiving weekly SMS reminders achieved adherence of at least 90% during the 48 weeks of the study, compared with 40% of participants in the control group (P = 0.03). Participants in groups receiving weekly reminders were also significantly less likely to experience treatment interruptions exceeding 48 h during the 48-week follow-up period than participants in the control group (81 vs. 90%, P = 0.03)."

In a study about application of sun protection creams to reduce the risk of developing skin cancer, 70 patients in the 18-72 age group were sent cell phone text messages (along with weather report, at 7 AM) reminding them to apply their sunscreen daily for six weeks. The patients’ adherence to daily sunscreen usage was evaluated with a novel electronic monitoring device, which was strapped onto the tube of sunscreen - when the cap of the sunscreen tube was removed, the device sent a text message to researchers that was then recorded as evidence of sunscreen use.

The study found that text reminders increased the proportion of people who applied sun protection from 30% to 56%. Specifically, the 35 subjects who received daily text message reminders to apply sunscreen had a mean daily adherence rate of 56 percent compared to a mean daily adherence rate of only 30 percent by the 35 subjects who did not receive reminders.

A review of 12 RCT studies which examined the use of text messages to promote weight loss, get people to stop smoking and manage diseases like diabetes and asthma, found evidence to support text messaging as a tool for behavior change in eight of nine 'sufficiently powered studies'. The authors write,

"Twelve randomized controlled trials published between 2005 and June 2009 of interventions for disease prevention and management using text messaging were reviewed. Nine countries were represented, only one of which is a developing country. The majority of the studies (8) found evidence of a short-term effect regarding a behavioral or clinical outcome related to disease prevention and management. Of those that found no evidence of effect, only one had sufficient power to detect an effect in the primary outcome. Evidence for text messaging in disease prevention and management interventions was observed for weight loss, smoking cessation, and diabetes management. Effects appeared to exist among adolescents and adults, among minority and non-minority populations, and across nationalities."

The NYT reports of a mobile phone messaging service in the US, text4baby, "that sends free text messages to women who are pregnant or whose babies are less than a year old, providing them with information, and reminders, to improve their health and the health of their babies". Registration can be done from your cell phone by simply texting the word BABY (or BEBE for Spanish) to 511411. The sender will be asked to enter the baby’s due date or baby’s birthday and zip code. Once registered, the sender will start receiving free messages with tips for pregnancy and caring for baby. These messages are timed to the due date or the baby’s birth date.

The M-PESA success story

It is undoubtedly true that the mobile phone is one of the really revolutionary inventions of our times, with the potential to transform human lifestyles and the way we even do business. Fundamental to its success is its ability to bridge the last-mile connect and deliver numerous services.

I have already blogged about its potential to revolutionize the way people manage their finances. The most famous example of this is the M-PESA - an SMS-based money transfer system that allows individuals to deposit, send, and withdraw funds using their cell phone - that was launched in March 2007 by the Kenyan cell-phone company Safaricom. Today M-PESA reaches approximately 65% of Kenyan households. Similarly, in the Philippines, Globe Telecom operates GCASH, and in South Africa WIZZIT facilitates mobile phone‐based transactions through the formal banking system. An excellent working paper by William Jack and Tavneet Suri documents the rise of M-PESA.

M-PESA is not a banking service. It does not pay interest on deposits nor make loans. It allows users to deposit money into an account stored on their cell phones, to send balances using SMS technology to other users (including sellers of goods and services), and to redeem deposits for regular money. In this sense, M-PESA transfers fungible cellphone talk time.

In exchange for cash deposits, Safaricom issues a commodity known as e-float or e-money, measured in the same units as money, which is held in an account under the user’s name. E-float can be transferred from one customer’s M‐PESA account to another using SMS technology, or sold back to Safaricom in exchange for money. Charges, deducted from users’ accounts, are levied when e-float or e-money is sent, and when cash is withdrawn.

Originally, transfers of e-float sent from one user to another were expected to primarily reflect unrequited remittances, but nowadays, while remittances are still a very important use of M-PESA, e-float transfers are often used to pay directly for goods and services, from electricity bills to taxi-cab fares. To facilitate purchases and sales of e-float, M-PESA maintains and operates an extensive network of over 23,000 agents across Kenya. M-PESA agents hold e-float balances on their own cell-phones, purchased either from Safaricom or from customers, and maintain cash on their premises. They only have to predict the time profile of net e-float needs, and maintain the security of their operations.

M-PESA caters to a specific category of small transactions. The paper finds that the volume of transactions effected between banks under the RTGS (Real Time Gross Settlement] method is nearly 700 times the daily value transacted through M-PESA, and the average mobile transaction is about a hundred times smaller than the average check transaction (Automated Clearing House, or ACH), and even just half the size of the average Automatic Teller Machine (ATM) transaction.

The paper documents many advantagees of mobile phone money transfers. They include facilitation of trade, making it easier for people to pay for, and to receive payment for, goods and services; provide a safe storage mechanism, and thereby increase net household savings; facilitates inter-personal transactions and thereby improve the allocation of savings across households and businesses by deepening the person-to-person credit market; by making transfers across large distances trivially cheap, it improves the investment in, and allocation of, human capital as well as physical capital (say, promote migration); it enhances the ability of individuals to share risk; it enables timely money transfers and thereby provides always-on access to money; empower women, and so on.

The amazing pace of mobile phone penetration

Two graphics that puts the pace at which mobile phone usage has expanded in perpective. First, mobile phones have been adopted more than five times as fast as fixed line telephone services, which took 100 years to reach 80% of country populations.



The speed of its adoption remains unprecedented.



(HT: William Jack and Tavneet Suri)