A recent report of the Gates Foundation, from their program on Financial Services for the Poor, highlights payment systems as a way of “Fighting Poverty, Profitably” – as the report says in its title. Payment systems, according to the report, “could serve as the connective tissue for bringing a broader array of financial services to the poor”.
The report brings together the existing data on payment systems to analyze how potential payments service providers could profitably extend their services to underserved populations in developing countries. They identify four cost and revenue centers – accounts, cash-in-cash-out, transfers, and what they term “adjacencies” – in their framework, and argue for revenue models built on three of the four (cash-in-cash-out, transfers, and adjacencies) to best give companies an incentive to serve the poor.
In countries that have already embraced mobile payment systems, such as Kenya, some of the most exciting action is occurring in adjacencies, which involve offering additional products or commercializing data from payment systems to generate additional revenue and broaden services. The report includes a roundup of such adjacencies, as well as an in-depth analysis of costs and revenues obtained through other account activities for a broader range of payment systems, with access in mind – accessibility for the poor requires the lowest possible costs, and revenue models can innovate to increase access for underserved populations. Mobile money, according to the report, can provide users with accounts at costs 60 percent lower than those for traditional banking.
The supply side is critical. The mobile operators around the world have already reached most of the roughly 2.5 billion people who are unbanked. That’s an order of magnitude greater than what the microfinance industry has accomplished so far. But turning mobile customers into “banked” customers requires not just supply but demand. The report has less to say on the drivers of consumer demand for digital payment systems, and does not, for the most part, speak to the factors that have driven differential take-up rates of mobile products on launch in Kenya, where by some reports 70 percent of adults adopted M-PESA accounts in the few years post-launch (Jack and Suri, forthcoming), and Bangladesh, where more than two years following the introduction of mobile money products, only a relatively small minority of adults have registered for their own accounts.
Some of those questions around household money management and the demand for digital payments are (see more about each of these in our Research section on Payments):
- What is needed to make digital payments attractive for poor households?
There are at least five factors that, at this point, seem decision in driving consumer demand and use: network penetration, availability of cash-in/cash-out points, trust, acceptance of mobile money as a store of value, and service integration. However, there are likely additional factors, such as the salience and perceptions of the cost of individual transactions on electronic platforms.
- Can digital payments be an effective gateway to other financial services?
In Kenya, a leader in adoption of mobile money platforms, pioneering M-Pesa has branched out into a broader range of services, now offering M-Kesho and M-Shwari, interest-bearing savings and credit products based on the mobile platform. Users can access a broader range of savings and credit devices through mobile money platforms, and it remains to be seen what the full potential of these products may be. The direction of impact is still a very real question here too: perhaps greater use of other financial services will be a gateway to more intensive use of payment systems.
- In countries where mobile money adoption has been slower, what is driving resistance to take-up?
Right now we simply don’t know why some markets’ take-up of mobile money products is slower. There are lots of possibilities and theories—better substitutability with existing money transfer services, regulation, competition, network effects, cultural factors, etc. but not much convincing research yet. We need to better understand whether product attributes or other malleable features of product and service design can be changed to better reach and serve the poor.
We’re grateful for funding from the Gates Foundation to think about and help answer questions like these.