The launch of M-Pesa in 2008 and its subsequent exponential growth heralded a new era of digital financial inclusion: one which promises to bring the unbanked and underbanked into the formal financial sector. A definition of digital financial inclusion is, “…digital access to and use of formal financial services by excluded and underserved populations. Such services should be suited to the customers’ needs and delivered responsibly, at a cost both affordable to customers and sustainable for providers.’  By incorporating these four elements, Karandaaz Pakistan, along with public and private sector partners, aims to realize the goal of universal financial inclusion. We foresee a future in which, for example, a worker in the informal economy has access to effective and affordable health insurance schemes for himself and his elderly parents. Or a small shop owner has access to credit. And we believe that digital financial services are central to this vision.

Recent legislation mandating biometric verification of all SIMs along with permission granted by regulators for remote account opening has spurred growth in mobile wallet account registrations. However, in order to achieve a lasting, positive impact, these newly registered mobile wallet users have to become regular mobile wallet users. And this gets to the heart of the question that every organization interested in the promotion of financial inclusion in Pakistan has been asking themselves: how can a customer be compelled to regularly conduct financial transactions directly from their mobile phone? Examples from around the world illustrate some of the key elements of digital financial inclusion which can answer this question.

LEVERAGING THE FEATURES UNIQUE TO MOBILE PHONES

A key attribute of mobile phones is the digital trail of data that each user accumulates. This digital data trail, made up of calling, texting, and top-up patterns, enables providers to ascertain a customer’s credit worthiness and has led to some very interesting digital credit products. Perhaps the best known example of this is M-Shwari  – a digital credit product that builds on the rails of the M-Pesa mobile wallet. Each M-Shwari customer can request a loan directly from a USSD menu on their phone whereupon an algorithm is run to determine loan eligibility and limits. The data points included in this algorithm are: airtime usage, length of time as customer, M-Pesa transactions, M-Shwari balance, and the mobile service providers own airtime credit data. For repeat customers, loan repayment timeliness is another data point. With repayment expected in 30 days, the premier use of these loans is to, “cover unexpected short-term cash flow needs” or emergencies. This sort of innovation would be beneficial to many Pakistanis as the 2014 Financial Inclusion Insights report showed that almost two-thirds of adults in the country do not have funds to cover emergencies. And even though the facilitation fee equates to more than double the average rate for a microfinance loan in Kenya, customers perceive the benefits of convenience, speed, and privacy associated with M-Shwari credit to outweigh this cost. The results have so far have been encouraging: the percentage of non-performing loans hovers around 2.2%.

CUSTOMER INCENTIVES ARE IMPORTANT

In order to grow customer usage of mobile wallets, it is important to design a product or service that aligns with customer incentives. A digital finance product aimed at merchants that does exactly that is Kopo Kopo which was launched in 2011 as a payments solution for small- and medium-sized merchants. Like M-Shwari, this is also built on top of the M-Pesa mobile wallet rails. Kopo Kopo acquires merchants for M-Pesa’s merchant mobile wallet account. However, in order to ensure that these merchants not only register but actively use the product long enough to recoup costs, Kopo Kopo has developed a very customer-centric focus on its delivery by developing value-added services that align with the merchant’s needs. One of these needs is access to credit: GROW is a value-added service that analyzes a couple hundred data points from the merchants mobile wallet transactions to determine credit worthiness. The loans are unsecured and repayments deducted automatically from mobile wallet as percentage of transactions making this a very convenient form of borrowing for a segment that has been traditionally underserved. Repeat borrowers get better terms if they pay back quickly. This is an excellent example of a digital financial product that owes a large part of its success to understanding what will make their customers stay and designing around that.

PAKISTANI CONTEXT

The Pakistan market is very different from the Kenyan market. For one thing, there is not any one telco in Pakistan that has the market share that Safaricom, and therefore M-Pesa, commands making interoperability less of an issue. Other regulatory and social hurdles exist which may prevent the next M-Shwari or Kopo Kopo from being created in Pakistan. An M-Shwari like product is difficult partly because it would fall under microfinance regulations which has heavy KYC requirements. And the particularly strong reliance on cash for most transactions in Pakistan makes Kopo Kopo a tough sell.

However, the fact remains that the key ingredients which led to the successes highlighted above – leveraging mobile phone’s technical capabilities and designing customer-centric products – are available for any organization willing to innovate and create similar DFS products or something completely new. Our next blog in this series will cover more elements that are key to building a robust DFS market locally. Karandaaz Pakistan is keen to uncover the unique advantages in this market while seeking to address the disadvantages so that an environment of innovation and experimentation in the digital finance space can prosper.