There is a much excitement in the development community about business model innovations that link poor households in developing countries to better basic services. Community-based water stations or solar energy supplied through micro-units installed on people's roofs are just two examples of possible solutions. A number of these business model innovations are becoming economically viable by advances in the digital retail payment infrastructure that allows for the collection of a large number of tiny payments that would simply be too expensive to handle in cash at a traditional bank counter.
At the recent IMF/World Bank Spring Meetings, a number of innovators came together to present and discuss their new businesses. The room was packed, and energy levels high.
A number of lessons are emerging of how to advance the nascent field of what we are calling "Digital Finance Plus (DF+)". The "Plus" after Digital Finance stands for delivering tangible, real-life improving services than the underlying financial innovations in of itself.
Here are the three lessons we've learned so far:
1. Importance of the right deal between service innovator and digital payment provider
DF+ innovators need to work closely with digital payments providers, such as M-PESA and Airtel Money in Sub-Saharan Africa or bKash in Bangladesh, in order to get the frequent, digital payments at small ticket sizes done. Across Africa, mobile network operators (MNOs) are particularly important partners because they provide equally critical telecom and mobile money services. For example, some innovative service providers, like Mobisol in the energy space, have installed SIM cards in their solar-powered devices, which make it possible to give each device its own mobile wallet, turn it on and off remotely, and collect usage data.
However, structuring partnerships between innovative service start-ups and MNOs is not trivial, and DF+ companies report varying degrees of ease of doing business with digital payments providers. A big part of the challenge is that, in most markets, MNOs have yet to develop differentiated pricing packages for their services to these businesses or implement consistent operational and technical approaches. MNOs might also be keen to offer these new services themselves under their own brand, which makes the digital finance plus innovators nervous. MNOs and innovators would be smart to jointly grow the pie of otherwise yet unproven markets.
One approach for MNOs to enable market development would be to allow access to the mobile money application programming interfaces (API), which make it easier to configure and customize payment offerings and don't preclude them from structuring a broad range of revenue sharing arrangements with the services innovator. Developing such an open API-approach could create the required business bridge between the current potential and the future reality of DF+.
2. Enabling Base-of-Pyramid Customers to Manage Bigger Cash Flow Spikes
One key feature of digital finance plus solutions is the ability of ubiquitous retail payment mechanisms to enable small value payments under pay-as-you-go and rent-to-own models. However, innovators are only scratching the surface of the financing needs of base-of-pyramid consumers who experience irregular incomes and cash-flow spikes and might benefit from sophisticated digital financing either in the form of more flexibility and customization in the pay-as-you-go payment itself or small value, instant "overdraft-like" loans linked to the use of the service.
DF+ providers are trying to figure out how they could partner with banks and MNOs to enable such financing. Algorithmically underwritten credit products based on payment history such as M-Shwari in Kenya for M-PESA customers, and its recently launched Tanzanian variant, M-Pawa, could be linked to digital finance plus solutions but that has not happened yet. More experimentation is needed to unpack the potential.
Banks, on the other hand, need convincing that underwriting loans for rent-to-own solar devices is not an unduly risky proposition but a promising growth market. The underlying digital payment data itself could help. Commercial Bank of Africa's decision to underwrite a working capital facility to solar device provider M-Kopa in Kenya was in part motivated by transparency in the payment history the model had collected. In fact, the data that DF+ providers are collecting could enable them to become post-paid financiers themselves, much like utility companies in the developed world today essentially extend credit before collecting payment at the end of the billing cycle.
3. Don't get ahead of infrastructure capabilities
Promising DF+ models are emerging across a range of sectors. The pace of development is partly determined by the technical capabilities of today's mobile telephone networks. Innovations in energy and water are taking off faster because most services can be configured within 2G networks, although the ability of the devices - a solar lantern or water ATM--to remit real time data would benefit from networks that can carry more data. In fact, the real time transmission of even basic data for energy and water services requires consistent network and connectivity performance, which continues to be an issue even in peri-urban areas in emerging markets. However, other DF+ innovations for example in education or healthcare information are more content heavy and it is unclear whether they will flourish without the growth of 3G network across emerging markets.
DF+ innovations aimed at providing better basic service to poor families in developing countries hold great promise. The race to figure out what works when and how to meaningfully scale the innovations has begun.
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