To be sure, UK consumers have a variety of other formal ways in which they can save for Christmas, as indeed for any defined future need. Some banks and credit unions even offer Christmas-specific accounts.  However, the persistence of ‘hamper savings’ schemes on a considerable scale presents one of the conundrums about savings which is common among poorer households worldwide: why do people continue to use informal or unregulated savings services even when formal, safer substitutes are easily available? While the UK commercial hamper savings market is formal, it is unregulated since it is not considered deposit taking—it is pre-payment for a good. The risks involved were demonstrated very graphically when one of the largest commercial schemes, Farepak, collapsed in October 2006. The resultant loss of savings led to the initiation of a formal review of this market by HM Treasury. The report of the review, which was tabled in March 2007, makes interesting reading, as it describes who uses these schemes, and why they continue to use them: even after the failure of Farepak, the Park group web site reports 2008 orders are 30% up on the same time last year.

All I want for Christmas 2008 is … 

The essence of the answer seems to be that the features of the hamper savings product appeal to a market comprised mainly of women in low income households, many of whom are not financially included. Chief among these features are:

• Target in sight: The fact that the hamper is selected in advance means that the future reward from saving is apparent upfront: as some participants reported in the review “it doesn’t feel like saving”;
• Double Lock in: Possible commitment failure, common in savings schemes, is overcome in two ways: first, it is difficult (and costly) to get money back during the year; and second, the savings can only be redeemed in vouchers or hampers, reducing the ability to use it for some other pressing need.
• Convenience: The main schemes work through agents who collect the savings from the saver’s home (like the UK cousin product on the credit side, home collected credit): not only is this convenient, but since agents are financially motivated to collect savings, they act as ‘personal trainers’ in encouraging regular saving, further increasing commitment.
• Simplicity: The vouchers carry no additional costs or fees: 45 weekly instalments of GBP10 buys you a GBP450 hamper. WYSIWYG! Agent commissions on hamper schemes, ranging 5% to 25% depending on volume, are paid by the company. Of course, the interest foregone on savings during the year should properly be brought to account: however, the Review estimated that the interest earned through depositing the payments above into a bank product could amount to GBP10, a low figure which could easily be exceeded by travel or other fees in making the weekly deposits at the bank or ATM. Participants in these schemes were also more likely to trust the retailer or the scheme, than a financial institution.

Those who would design savings products for the poor, whether in developed or developing countries, would do well to consider these features prominently. Regulators concerned over the possible loss of people’s savings would also benefit from reading the carefully worded recommendations of the Pomeroy review: it did not recommend closing down such schemes, since they clearly fill a niche, but rather putting in place mechanisms to ringfence the savings until they are cashed out for a hamper or voucher; and increasing competition from alternative, more mainstream financial services.

In many emerging markets, consumer credit is burgeoning. An S&P report estimated that in the BRIC countries alone, the value of outstanding consumer credit has increased at an annual rate of 40% p.a. in the period 2001-2005; and is expected to continue at a rate of 30% p.a. in the years ahead: this means that debt is doubling every 2.5 years. Many factors have led to this, including more competitive financial markets in these countries servicing clients with relatively low debt levels resulting from the limited availability of consumer credit before. But underlying all this, the policy paradigm that promoting greater access to financial services, especially credit, is “A GOOD THING” has gained momentum. Nobel prize winner Mohammed Yunus, pictured below, represents the apogee of this view, when he expresses the view that access to credit is tantamount to a human right.

To be sure, Yunus is thinking especially of the poor who generally have lacked this access. Also, many in the sector have dissented, arguing rather that it is savings, or basic bank accounts, which are the human right. 

However, the US experience with consumer credit represents in many ways the high water mark in the access to credit debate: over the past three decades, there has been substantial liberalization of credit pricing and regulation in the US, leading to substantial innovations in risk based pricing and product design as well as strong distribution by lenders of all types (especially via brokers). According to numbers presented at the conference by JCHS, the rate of increase of households carrying all forms of consumer debt has been highest among the lower middle and lowest income quartiles of the population. In many ways, the general problem of access to credit among lower income people has been solved in the US. But the conference indicated that the result of solving the access problem can be to create another problem: over-indebted consumers with inappropriate products, such as variable rate mortgages in an environment of rate increases and falling property values. This is not only a problem for these consumers, but increasingly for lenders of all types, and as the dimensions grow to become system-wide, even systemic, the government itself which is reportedly having to plan a bailout as large as the one following the S&L crisis in the 1980’s.

The JCHS conference reflected on new evidence that borrowers are seldom if ever economically rational in the sense often presumed by theory and by policy makers (although lenders never presumed this, and rather concentrated on exploiting biases in patterns of behavior). In addition, disclosure of increasingly complex product features has little value it seems if people ignore or don’t understand them. One participant went so far as to suggest that allowing access to some forms of credit is akin to allowing children to play with fire. Some form of effective regulation is necessary to prevent getting burned. Much debate will take place here as to what form that might take.

In developing countries where credit is now burgeoning, effective regulation does not mean turning back the clock from today’s concern for access to the bad old days where outdated, paternalist attitudes protected the lucky few who could get formal credit. But it does mean moving beyond the view that access to credit is everything, far less a human right, to asking about what forms and sorts of access are appropriate and when. After all, the US today shows us what can happen when you get what you wish for!

One session (no.6) discussed financial services and social protection through government-to-person payment (G2P) schemes, the integration between which is an area of growing interest (see briefing note and research paper which I completed for DFID last year on the issue). At this session, Laura Cuda of VISA International set out Visa’s approach to this burgeoning area, including the provision of VISA-branded basic bank accounts (as in ABSA/ Allpay’s Sekulula account used to pay grant recipients in South Africa) and pre-paid cards (now used extensively in the US and elsewhere for benefit payouts). David Ferrand of FSD Kenya described the Social Protection Challenge Fund in that country, and how it is seeking to promote more innovative approaches to the delivery of the pilot social protection schemes in that country with its diversity of areas—both on-grid (in terms of power and wireless coverage) and way off-grid in every sense. As an example of a G2P scheme which is considering the payment aspects from the outset, the Kenyan example is well worth watching.

However, as so often happens at large conferences, one of the most interesting meetings took place on the sidelines. Senior officials from Reserve Bank of India gave a presentation to a small audience at CGAP on how they have catalyzed a technology-enabled process for the payment of social transfers. To date, this has been piloted in one state, Andhra Pradesh, over the past three months or so. 50 000 beneficiaries are now able to receive their benefits in their villages during the month by using a smart card at the local business correspondents of five participating Indian banks. These correspondents, appointed under the 2006 RBI regulation enabling this, are equipped with wireless communications devices. According to the RBI presenters, the early success of this approach is likely to mean that this approach will be rolled out to 20 million plus beneficiaries. If so, this would be transformational branchless banking indeed!

Prof Ndungu, Governor of the CBK

In Kenya, at the recent launch of a  report on bank charges and fees, the Governor of the Central Bank, Prof Njuguna N’dungu, suggested “I believe there is scope in this regard through the Kenya Bankers’ Association for the development of a basic, competitive no frills account that can be offered by all banks. Such an account would have low or nil minimum balances as well as minimal charges if any…My challenge therefore is to the KBA to spearhead an initiative in this regard, to develop a uniquely Kenyan Mzalendo basic transactional account. The Central Bank stands ready to support this kind of innovation”. Some Kenyan banks reportedly have debit card products with low or no minimum balances, and (relatively) low transaction charges at ATMs (at least for on-us).

However, in order to incentivize banks to really want to issue basic accounts, the CBK might start looking to creating an exemption for basic bank accounts in the current AML-CFT regulations for banks. This has proven invaluable inter alia in South Africa in removing an undue obstacle. CBK could also explicitly allow banks to offer some services through agents, since non-bank agent networks for cash handling are rapidly proliferating as a result of the payment offerings of the mobile network operators Celtel and Safaricom reported elsewhere in this blog. For basic bank account offerings to be sustainable, they must make commercial sense to issuers; and changing inappropriate or unnecessary regulation can help improve (but not alone make) the case.

I have just returned from a most interesting conference on “Massifying access to financial services” arranged by the Banking Association of Colombia,

First, the organizers did a great job of assembling presenters on a diverse range of leading international models for promoting access to financial services on a commercial basis. These included Banco Azteca which in five years has become one of Mexico’s largest retail banks by number of customers; Banco de Estado de Chile, a public sector bank which has been innovative in promoting new instruments to reach low income segments; ProCredit Holdings, whose assets now exceed $5 billion and continue to grow strongly; and then ICICI Bank from India which continues to innovate across a broad range of retail services; and also new generation mobile payment services G-Cash from Philippines and Wizzit from South Africa. Presentations should be available soon via the Asobancaria events page.

President Uribe greets delegates at the Asobancaria event

Second, the President of Colombia, Alvaro Uribe, appeared on the second day to start proceedings; and showed a remarkable command both of the issue of the financial inclusion; as well as need to balance political considerations such as Colombia’s controversial interest rate cap. This was recently softened through a special provision for higher rates (up to 34.7% effective) for microloans. While in this era of a Nobel Prize winner and of celebrity support for microfinance, it is more common for politicians to endorse the cause. It is not common, however, for Presidents directly to show this level of interest and knowledge—Presidential spouses are often left to carry this flag in countries like Uganda and South Africa! And it is not all talk in Colombia: in recent years, the country has demonstrated a remarkable commitment to pro-access policy reform and is now implementing ‘smart subsidies’ to improve access points through a state program, Banca de las Oportunidades. Increasingly, Colombia offers useful examples of policy and regulatory best practice to the rest of the world. But these are the subject of future blog post.

This was the somber question asked by an Economist article of 16 June 2005. An even more recent edition of The Economist (8 September 2005) updated its global house-price indices and, in the face of slowing increases elsewhere, drew attention to the still ‘red hot’ US housing market: prices here rose 13.4% in the year ended June 2005, the largest real increase in US property prices on record.

Other than China, South Africa is the only emerging market tracked in the Economist house price indices. The year on year increase there of 21.4% was the second highest in the world, as the local press picked up (see Business Day article ).  The major local mortgage lender, ABSA Bank, was reportedly tightening its lending criteria, after observing that the bought to rent component of new residential property developments was now typically 20%; rather than the normal 5%. As the Township Residential Property Markets project found last year, this frothiness in the property market is limited to the suburban property markets: resale markets do not work effectively in urban township areas for most of the one in five South Africans who live there.

Is your house hedged? Hedge Angel House, Emma Butler Gallery© 1999 - 2005

Not surprisingly, fears of the property bubble bursting have led to innovation in retail financial products available to home owners who wish to reduce their downside from price falls. The Wall Street Journal of 17 September 2005 carried an article on “New Tools to Hedge your Home”. Firms such as Merrill Lynch now offer futures contracts linked to house prices, which allow home owners to hedge in part against possible house price falls. The Chicago Mercantile Exchange is developing futures contracts linked to indices of house prices in various cities. The firm HedgeStreet offers Hedgelets as a way to bet on the rise or fall of house prices in six US metro areas. The Wall Street Journal reports that contracts expire quarterly, so there is at present no ability to hedge long term; and there is little liquidity in the contracts.

Nonetheless, these early movers signal that there is likely to be a lot more financial innovation in this space. In general, I welcome the application of sophisticated financial technology to enable ordinary people to manage their every day real risks, which have not been covered by traditional mechanisms of insurance. Economist Robert Shiller has long pointed out this glaring gap in traditional insurance product coverage. However, I would welcome even more renewed efforts which enable the urban poor in most developing countries to unlock the value in their houses, through the development of effective resale markets. That would be worth celebrating indeed.

A recent trip to Africa has given me new perspectives on this latter issue. Inter alia, I saw (and used) a new mobile banking solution being rolled out in South Africa, covered earlier in this blog, as well as a pilot solution starting in Kenya. Cheap, secure person-to-person payments are the ‘killer application’ for mobile commerce; however, until mobile phones become ubiquitous, there is still a need for points at which ‘e-money’ carried on the phone or in a remote account accessed by the phone, can be cashed out or deposited. This is where retailers may play such an important function. They already carry cash in their tills as part of their ordinary business; and as such, have a cost advantage over both new bank branches and even ATMs, which require a large initial investment. By placing mobile phones in the hands of even small, rural merchants in many countries, wireless technology is starting to ‘re-wire the last mile’, bringing basic cash back and deposit services as close as the nearest airtime vendor. This is much closer than any current financial institution for most people in most African countries.

Several recent publications add perspectives on the role of retailers in addressing the distribution problem for financial services.

A May 2005 paper from the Chicago-based Centre for Financial Services Innovation highlights ‘the potential and pitfalls of this burgeoning distribution channel’. It tracks the growing trend towards in-store financial service presence in the US, up from 50 banking offices in supermarkets in 1971 to over 6500 today. Large retailers like 7-Eleven and Walmart at the same time partner and compete with banks and credit unions which rent space in their stores.

Indeed, financial institutions have watched with bated breath as Walmart has sought to broaden its financial service offering through acquiring a bank or its equivalent. As a recent Economist article reported, Walmart has applied to open an industrial loan society in Utah, as a back door means of entry into banking used by US retailers. Walmart has been rebuffed before in its quest to buy a bank in the US, but will know by November whether this latest application is successful. If so, this will broaden the platform from which Walmart already offers various in-store financial services such as money transfers (with MoneyGram) at prices which compete with Western Union, as well as check cashing and bill payment. Walmart already partners with Discover to offer a credit card to its clients.

Such partnerships between high street retailers and banks are also common in the UK. A recent report by Feasibility commissioned by FinMark Trust listed six such ventures, the largest of which in terms of customer numbers appears to be Tesco, a partnership with RBS, which now has over 4million account holders and is seen as “UK’s most successful supermarket bank”. Marks and Spencer, the first retailer to venture into this area with the setup of a fully fledged bank in 1987, has apparently languished with declining account numbers; and was in fact sold by M&S to HSBC in 2004.

The Feasibility report was intended to assess the potential for new types of entity, including retailers, to take advantage of proposed new banking legislation in South Africa. The so-called Dedicated Banks Bill would make entry to certain restricted types of retail banking easier—by relaxing capital requirements, regulations and restrictions on  control by entities other than narrow bank holding companies.  Of all the types of entity considered, including mobile phone companies and microlenders, the report found that retailers as a group offered the greatest potential for using the legislation to provide banking services tailored to the low end of the market. Indeed, several large retailers in South Africa, such as clothing group Edcon and furniture chain JD Group, are already large lenders with millions of customers with store credit accounts. Both retailers have in fact had unsuccessful JVs with banks (Edcon with African Bank, JD with People’s Bank) to extend personal loans, now dissolved. But these failures may well be because the personal loans offered were too close to the core store credit offering of the respective retailers. Banking offerings which go beyond credit may well be more attractive to retailers. Notwithstanding the potential advantages of retailers, the Feasibility report found that strategies and opinions among retailers about direct entry into banking differed widely: an opportunity for some, a non-core business for others. Nonetheless, there is clear interest in this space.

The bank branch of the future—a mobile phone container in South Africa

However, solving the ‘last mile’ issue and reaching remote customers will mean going well beyond large, well-known high street retailers in urban areas, whose clientele may be largely banked. This is where the emerging partnerships with cell phone networks carry more potential, and not only because cell phone reception is expanding rapidly, even in rural areas of Africa. It is also because cell networks have developed extensive distribution channels which enable the sale of pre-paid airtime through ubiquitous points of sale: using large dealers who in turn manage extensive networks of thousands of small, accessible airtime retailers. These small merchants carry cash; and would no doubt welcome additional revenue streams from other transaction fees which can be priced affordably. For the provider, the real time nature of wireless transactions reduces (although it does not eliminate) the fraud risk inherent in such agency-relationships. There remain regulatory obstacles to overcome: KYC regulations (see recent blogpost) and restrictions on using agencies for deposit taking among them. If these obstacles can be overcome, these small vendor networks are likely to become the manned ‘ATMs’ of the future; and crack the last mile problem of inclusive financial services.

What do money laundering and microfinance have in common? Hopefully, not a lot. However, the regime for countering money laundering (AML), and for its sister, combating the financing of terrorism (CFT), have become more stringent in design and application in recent years. These international regulatory regimes could have a severe impact on access to financial services if their application to and implementation in developing countries is not careful considered. This is one of the implications of a recently released Focus Note (No 29) written jointly by CGAP and the World Bank’s Financial Market Integrity Unit (FSEFI), entitled “AML/CFT: Implications for FSPs that serve low income people.”

“Have you any dirty money, mother dear?”

While money laundering usually involves sums of money well in excess of micro-size transactions, terrorist financing may require small sums. CFT concerns arise about microfinance in two main respects. First, remittances may be used to finance the construction of weapons of terror across the globe; hence the need to identify senders and recipients of international remittances. Second, certain types of NGOs, still common in microfinance today, are considered potential risks in terms of being conduits for terrorist financing.

The international AML/CFT standard is set by the Financial Action Task Force (FATF). FATF is made up mainly of developed countries, with a few developing country members such as Brazil, Mexico and South Africa. FATF standards have to be embodied in country-level laws and regulations to take effect at national level. Increasingly, countries which do not implement satisfactory AML-CFT regimes are likely to be frozen out of the international financial system. This is because developed country bank regulators will discourage their institutions from conducting financial transactions with banks in high risk countries.

The impact of such regulation on access comes primarily through two channels. First, new regulation of this kind raises the cost per customer of doing business. The added cost may affect the willingness of institutions to go down market. Second, and perhaps more importantly, imposing inappropriate customer due diligence (CDD) requirements on new accounts will result in higher financial exclusion: for example, the CGAP paper cites the requirement for third party address verification. Although this is not directly a FATF requirement, it is often understood to be part of proper CDD. In countries where most people do not have formal addresses at all, this will automatically exclude many people.

While it is clearly essential to the integrity of the global financial system and to the fight against terror to have appropriate AML-CFT regimes in place, the key issue is the word ‘appropriate’: the view from developed countries with financial exclusion rates of 10-20% of population is likely to differ from that of developing countries with rates of 50-90%. So, in the months and years ahead, it becomes important that developing countries which take the financial inclusion agenda seriously consider carefully the impact of AML-CFT laws before enacting them. But the international regime must also create space for this to happen. This includes allowing for a risk-based approach which accommodates differences in country-level approaches. Entities like the World Bank need to raise their voices in forums such as FATF where international standards are set, so that the interests of the financially excluded are considered there too. I understand that the FIRST Initiative  of multi-laterals and key donors has agreed to finance an impact study which kicks off shortly—I welcome this and await its outcome early next year eagerly.

Last week, I spent 3 days in the fair city of Cape Town at the second bi-annual African Microfinance Conference. According to the Centre for Microfinance at University and the MFRC, which organized the conference, there were some 400 delegates from 45 countries in Africa and elsewhere.

The sheer number of delegates alone is a sign that microfinance has come of age; although the very breadth of attendance—banks, microlenders, microfinance deposit taking institutions (MDIs), member-owned financial institutions (MOFIs), regulators—in some ways portends the end of the age of microfinance as a distinctive niche. As it mainstreams into the financial sector, through conferences like this, microfinance loses its early distinctiveness. Indeed, Barry Herman of the UN presented the UN’s vision of Inclusive Financial Sectors which has emerged in this, the Year of Microcredit, which goes far beyond microcredit. It is this broader vision which seems to be gaining traction, as the field of players in microfinance diversifies.

At the conference, CGAP released research which showed that African microfinance is characterized by much higher relative levels of savings mobilization than on other continents, largely through active MOFIs such as savings and credit co-ops. However, we also heard that the ongoing conundrum has not been solved of how to regulate such small and widespread entities appropriately, where frequent collapse often means that poor people lose their money.

We also heard from the CEO of another type of successful savings-mobilizer: Equity Bank in Kenya, which recently completed its transformation into becoming a regulated bank. Equity Bank now aims to list on the Nairobi Stock Exchange later this year. The listing will provide a first market valuation of microfinance specialist institutions in East Africa. This has been possible in South Africa since 1998, when the early success of first listed microlender Theta Investments (now ABIL, South Africa’s largest microlender) led to a listings boom of microlenders in the late Nineties. I heard at the conference that Capitec Bank, a large listed SA microlender with a growing savings/transaction base now of over 200 000 accounts, trades at a whopping valuation of 6 times book.

Equity Bank is in many ways the poster child of modern microfinance: it has enjoyed spectacular growth in number of clients and in profits; and is a locally owned entity which focused on underserved markets. However, James Mwangi also shared how Equity has struggled to gain admission into the Kenyan payments system—he described the ‘hostile competition’ encountered from incumbent banks. Several small SA banks, including Capitec, have had similar experiences. Creating level playing fields around access to the payments system is clearly becoming an increasingly important issue in microfinance, as newer entrants start to have the scale which upsets existing market structure.

Also present at the conference, although not featured on the program, were representatives from two other new forces in ‘microfinance’: MTN Mobile Banking, launched in SA recently (see recent blog post), and Vodafone, which is developing a mobile transactions platform in Kenya. These convenient ubiquitous platforms offered by large trusted consumer brands are likely to see large take-up. They could up-end traditional banking practice through their greater convenience and accessibility. After picking up a starter account pack at an MTN store, I was able to open my new MTN Mobile Money bank account within half an hour on my cell phone. Such low end disruptions (in Clayton Christensen’s memorable phrase) are likely to be popular not only with unbanked people, but the banked too. This is why the distinctiveness of microfinance is fading; and why the next African Microfinance Conference, penciled in last week for East Africa in 2007, may be the last of that name.

What price the American Dream?

Reading the current complaints of an industry body representing small lenders in South Africa, I was taken back many decades, to 1917, and across many miles, to New York State. US historian Lendol Calder has produced a very fine piece of social history called Financing the American Dream, which tracks the development of consumer credit in the US in the 20^th Century. Reading the book earlier this summer left me with a strong sense of déjà vu with respect to the evolving situation in South Africa, and indeed other emerging markets today.

In the first two decades of this century, a pitched legislative and policy battle was fought in the US over how best to deal with the rising numbers of small loan companies. These companies made loans typically of $25 over 13 weeks, charging rates of anywhere between 20-300% p.a., despite a state Usury ceiling of 6% in New York at the time. They stayed in business only because the law was badly enforced. A much publicized study financed by the Russell Sage Foundation in 1907 found evidence that borrowing from loan sharks was pervasive, especially, but not only, among government employees and low level white collar workers. People in these groups borrowed to improve their standard of living as middle class aspirants, rather than mainly to finance emergency expenditure, as poorer people often had to. At the time, 90% of employees of the largest transportation company in New York were found to be making payments to loan sharks.

Headquarters of the Russell Sage Foundation in New York City, built at around the time of the developments in this post

Efforts to crowd out these lenders included the formation of so-called ‘remedial loan societies’ and other semi-philanthropic lenders such as the Provident Loan Society of NYC in 1894, which charged below market prices. However, Calder remarks that the efforts of these entities, which today we would call microfinance institutions, were a drop in the ocean of private credit demand: they neither drove rates down nor reached the neediest borrowers. Public education campaigns on the evils of money lenders (including the early film The Usurer’s Grip) also seemed to have little effect on demand.

What had a major effort on the price, terms and ultimately availability of consumer credit was a compromise, eventually enshrined in law: this was the agreement reached between the anti-loan shark brigade, led by the Russell Sage Foundation, and the more far-sighted and reputable of the ‘loan shark’ associations. The anti-brigade effectively recognized that high interest rates were a reality on small loans, and that it was better to legalize the sector and seek to improve it over time, than to leave it in the shadow of an unenforceable law; and the industry recognized that they had to accept a rate cap of some sort, rather than live in the twilight zone of the law. This compromise resulted in the passage of the Uniform Small Loan Law in three states in 1917 (and subsequently in many others). This law raised the usury cap level significantly (from 6% p.a. to 3.5% per month). Consequently, a large part of the small loan industry was legalized, under various conditions such as no fees on loans less than $300.

However, not all loan company associations supported or welcomed legalization on these terms: salary loan lenders in particular held out, using such artifices as claiming that they were ‘buying salary’, not in fact lending. But over time, these practices died out, as did the earlier philanthropic lenders, in part because of the much faster growth of the now legalized small loan companies. The widespread introduction of installment plans to buy cars in the 1920’s accelerated the already rapid growth of consumer lending. The US small loan industry, represented by its association AASLB, worked hard to rebrand the industry firstly as ‘industrial lenders’, rather than ‘consumption lenders’ as they had been known; and by the late 1920’s as ‘consumer lenders’,  which has since stuck. Some of the lenders became, literally, household names with nationwide distribution. Household Finance Corp, for example, started in 1878, was the first such lender to list publicly in 1928. By the late 1920’s, observing successes like these, the commercial banks led by National City had directly entered the burgeoning consumer credit business. Today, Household is a major credit card company, recently acquired by the HSBC Banking Group.

And, as they say, the rest is history: consumer credit is widely available to most people on a competitive basis in the US today. To be sure, abuses continue, especially with reckless lending, but the problem is no longer access. As history is being made in South Africa with the passage of the new consumer credit law, I hope that the compromises reached around the new legislation there will lay foundations for a sustainable credit sector. Only with sound foundations can the bankable frontier be pushed out further over time.

Net 1 UEPS Technologies was listed in early August on the NASDAQ exchange. New listings, especially of technology companies, are common on NASDAQ. New listings of companies which claim to have a solution for all the world’s unbanked are rarer; and those which were started in developing countries, rarer still.

A South African-born company created in 1989, Net 1 had previously been listed on the Johannesburg Stock Exchange. Net 1 cut its teeth in the context of SA’s experiments to provide banking services to unbanked people, developing proprietary smart card and payment standards technology which is widely used there. The company recently relocated its head office to the US in a move, linked to its NASDAQ listing, designed to give the company better global reach to roll out its products. The listing showcases the financial success of Net1 to date: revenues have risen more than three times in three years to some $180m; net income after tax up more than five times in the period. The company is now valued on NASDAQ at over $1 billion.

More interesting for this blog, however, are some of the underlying issues which the case of Net 1 brings out. An obvious one first, which follows the argumnent of Michael Porter in The Competitive Advantage of Nations: the challenges of the original home market created the push to innovate. Recognizing this factor, Net1 says that, even after the relocation of its head office to the US, it will continue to maintain its research and development in South Africa. We are likely to see more such technology solutions for low end consumers developed and successfully applied in the ‘south’, especially from growing tech giants such as India.

Second, Net1 has largely built its current customer base on the provision of payment services to pensioners as a provincial/state-level government contractor in South Africa: 3.3 million people are paid monthly using its system. Having a thick market of card holders in these areas has enabled the roll out of other parts of its system: for example, point-of-sale (POS) devices for merchants. At these devices, pensioners can withdraw cash, load their card, buy goods and check their balance/s. The off-line/ on-line feature of the devices is considered an advantage in rural areas especially, where on line communication may be unreliable or expensive; or where electricity to run POS devices may not be available. The point here is products like these subject to network externalities require a solid, critical mass of customers to be successful. And state pensioners, where the state can prescribe the payment system, offer just such a market. Hence the importance of initiatives to convert social grant payments into electronic transfers in developing countries today, covered in a previous blog.

Net1 has also had some success, though fairly limited to date, in developing payment systems in smaller developing countries like Malawi: Malswitch cards which enable ATM withdrawal based on fingerprint ID are available in that country today.

You too can use a smart card at ATMs in Malawi today

Third, the issue of competing payment standards has loomed large in Net1’s past and will continue to do so in its future. Net1 invented and patented the Universal Electronic Payment System (UEPS) some 14 years ago as the standard by which secure payments are encrypted and enabled between cards and card readers. This proprietary standard is one of the jewels of Net1’s intellectual property—or is it? A standard is only a jewel if it is widely accepted as such, and the patent holder can benefit from it. Rather than adopt a proprietary standard for ‘smart’ or chip-enabled credit cards, the major credit card associations chose to develop a co-operative standard for chips (for identification) on their cards: the so-called E(uropay)M(astercard)V(isa) standard, which is widely applied in Europe today, and increasingly in other markets.

The founder of Net 1 is dismissive of EMV: “..it is still in the times of archaic smart card technology. It is just a credit card, you can’t load cash onto it, it is not secure enough and can’t work offline”, as reported in Electronic Payments International 30 June 2005. However, given that the EMV consortium is backed by massive banks with wide reach, little Net1 cannot afford to compete head on: instead, it has developed the ability to ‘morph’ or inter-operate with EMV. This feature may be essential to UEPS having a long term future, in a world of ubiquitous inter-operable acquiring devices like cellphones. As everyone who has heard the examples of QWERTY or Betamax/VHS knows, the standards race is not necessarily to the best, but to the quickest to get sufficient scale. As EMV rolls out, hopefully it will not squash innovation in payments space by smaller rivals, such as UEPS. Whatever one may think of the propriety of proprietary systems for payments, UEPS has earned a reputation as an innovator to watch.

Today, newspapers in SA announced the launch of a significant mobile banking service:  two large players-- MTN (press release here), with some 8 million cell phone subscribers, and Standard Bank, with 6 million banked customers, announced the launch of their joint venture: MTN Banking.

Even though this is the first major announcement of its type in South Africa, cell phone banking is not new: for example, the stories of Smart in the Philippines and Celpay in Zambia were covered in a previous blog post. The same post related how MTN has already been innovative in creating person-to-person transfers of airtime, and broadening the ways credit cards can be accepted by small merchants. Nor is the joint venturing approach between cell phone companies and banks—see the DoCoMo-Sumitomo Card Division post.

What is different about the MTN-Standard launch is that the new Mobile Money account explicitly targets low end customers. Ease of opening an account is facilitated in that the account number is based on the cell phone number. Account charges are similar to those of low end Mzansi accounts—that is, no monthly fee, but transaction-based fees, such as around US$0.5 for a person to person transfer (presumably only within the Mobile Money account base) and around US$0.8 for an ATM withdrawal, using an ATM card. This may signal the bank’s acceptance that the lower account fees made possible by new generation distribution at much lower cost should be generally available, not only on Mzansi accounts. Indeed, if products like Mobile Money really take off, they will make Mzansi accounts in their present form much less relevant; but will increase the pressures for complete interoperability of the new class of mobile accounts too.

MTN and Standard already speak of rolling out the product into other African markets. MTN is dominant in Uganda and Nigeria, for example; Standard has a presence in 17 African countries, and is seeking to grow its retail business in many of these. So the diffusion into lower income markets could be very rapid, not least because competitors like Vodafone/Vodacom cannot be far behind.

This is one product launch to watch carefully. As I have argued time and again, a key success factor is how quickly critical mass is achieved with such network products. This is because a core part of the value to the customer is being able to transfer safely and cheaply to other customers in the network. But MTN and Standard Bank, which are already among the top South African consumer brands, must be acutely aware of this. They are likely to do everything in their marketing power to ensure rapid success of their product, and entrench their first mover advantage. This event is indeed likely to move the bankable frontier in Africa!

However, an article by Rob Rose in South Africa’s Business Day newspaper on 1 August 2005 is the first since the launch to raise questions which qualify the success to date. These questions point to some important issues which are at the heart of the banking the unbanked process. Rose lists three main areas of growing criticism of the Mzansi process, which I comment on in turn.

1.      Banks have dragged their heels to allow debit order functionality which would allow account holders to pay bills or make transfers electronically.  In fact, one Mzansi issuer, the state owned Postbank does offer this feature; that the other private issuing banks do not, demonstrates their concerns that they may cannibalize their existing (higher fee) account base. In Brazil, electronic payment functionality usually does exist for basic accounts.  The underlying issue here is whether the transaction banking market can be segmented into markets for basic and extended functionality. The answer in most markets is probably yes. In SA’s case, it is made more complex because the market already has three tiers, with a ‘basic plus’ level between basic (Mzansi) and full service/ checking. At the ‘basic plus’ level, offerings such as E-Plan have brought debit card accounts to millions of formally employed citizens in the 1990s. A relatively high fee structure has made these accounts money spinners for some banks at least. If this account class is submerged into Mzansi, valuable fee revenue will be lost. And yet this is probably inevitable. The longer banks drag their feet on this, the more they may all lose in the long run by looking defensive and greedy at a time when they are making record profits. However, if they move fast on this, some may even benefit while others lose: a bank such as Nedcor, which has a very weak offering at the ‘basic plus’ level, hence the least to lose, could be a big winner by introducing an extended Mzansi offering.

2.      Banks are now reluctant to allow insurers to use the Mzansi brand for a low end basic insurance product. If true, this is a change on views expressed by banks at the time of the launch of Mzansi. At one level, insurers seem to be seeking a free ride on the back of a very visible new low end brand created at some expense by the banks –by some estimates more than $2m has been spent at industry level creating Mzansi, let alone individual bank marketing and product development budgets. On a narrow view of the issue, banks may be entitled to withhold such rights. However, a mean spirited response here may miss the much bigger potential value created by the Mzansi brand—which is to create a publicly accessible and trusted ‘face’ for appropriate basic financial services. Consumer education initiatives may be built around the brand. There are even positive spin offs to banks from demand for other financial services: people who want Mzansi insurance policies will probably need to have and use Mzansi accounts to pay, which would generate bank fees. In holding on to the early success of the new Mzansi brand too long, banks may in fact damage it. The brand should be licensed (even at a charge) to other financial product categories which share target market and appropriate features.

3.      The account is not cheap: this has been pointed out in a previous blog, relative to say, Brazilian basic account offerings. However, more importantly, Rose says that the account is not even as cheap as the basic bank account issued by private bank Capitec (see previous blog post on Capitec) which has decided to stay outside of the Mzansi process. In other words, if one small bank can come up with a comparable offering which is cheaper than the best effort of the big four banks combined, the presumption is that the big ones must be overcharging. The Mzansi response is that it is a more accesible product than Capitec’s because of interoperability at all 5000+ big bank outlets . The key underlying issue here is: a race to the bottom on account fees is hardly desirable for anyone—not even the consumer in the long run, since service reliability will undoubtedly suffer and the banking system will be debilitated. Mzansi issuers can already compete on the price of most individual transactions.  They should use this to the full, exploiting their different appetites and comparative advantages, while extending the key interoperability privilege to all—including Capitec. In this way, the range of possible pricing will vary—from low to high as with normal debit or credit cards—and the brand will not be tainted by disputes around the overall pricing regime.

Rose’s conclusion: “What all this illustrates is that the jury is still out on Mzansi. And the recent behavior of banks in coveting the Mzansi brand, and seeking to protect their margins in this low cost initiative will again bring their commitment to transforming the industry into question.” 

Rose’s article suggests that this important new initiative is entering a critical phase. Its early success may be its own worst enemy right now. Flushed with success, the main Mzansi issuers may lose sight of the real prize for banks:  that they are regarded by government and civil society as partners in a national development effort, with the continued freedom to price products and select customers as they chose. The alternative would be very costly to all. Any wavering now on the part of banks who either think in 2005 that they have now ‘done their bit’ or else are jealous to protect the unexpectedly valuable brand or product created, will rapidly sour the positive environment created by the Financial Services Charter. It would also waste a golden opportunity.

In my view, the time is right for the Mzansi brand and process to be devolved as fast as possible: from the being a somewhat loose industry consortium run within the Banking Association to a dedicated association, similar to VISA or Mastercard, but with a narrower focus on reaching new customers with appropriate financial services. This body would set the rules for interoperability, which could include Capitec and others, and determine the usage of the brand, which could include insurers (at a price). Only such independence around a far sighted vision of broadly accessible financial services will ensure that Mzansi realizes the opportunity it still has.  “If you love something, set it free…”

However, an article by Rob Rose in South Africa’s Business Day newspaper on 1 August 2005 is the first since the launch to raise questions which qualify the success to date. These questions point to some important issues which are at the heart of the banking the unbanked process. Rose lists three main areas of growing criticism of the Mzansi process, which I comment on in turn.

1.      Banks have dragged their heels to allow debit order functionality which would allow account holders to pay bills or make transfers electronically.  In fact, one Mzansi issuer, the state owned Postbank does offer this feature; that the other private issuing banks do not, demonstrates their concerns that they may cannibalize their existing (higher fee) account base. In Brazil, electronic payment functionality usually does exist for basic accounts.  The underlying issue here is whether the transaction banking market can be segmented into markets for basic and extended functionality. The answer in most markets is probably yes. In SA’s case, it is made more complex because the market already has three tiers, with a ‘basic plus’ level between basic (Mzansi) and full service/ checking. At the ‘basic plus’ level, offerings such as E-Plan have brought debit card accounts to millions of formally employed citizens in the 1990s. A relatively high fee structure has made these accounts money spinners for some banks at least. If this account class is submerged into Mzansi, valuable fee revenue will be lost. And yet this is probably inevitable. The longer banks drag their feet on this, the more they may all lose in the long run by looking defensive and greedy at a time when they are making record profits. However, if they move fast on this, some may even benefit while others lose: a bank such as Nedcor, which has a very weak offering at the ‘basic plus’ level, hence the least to lose, could be a big winner by introducing an extended Mzansi offering.

2.      Banks are now reluctant to allow insurers to use the Mzansi brand for a low end basic insurance product. If true, this is a change on views expressed by banks at the time of the launch of Mzansi. At one level, insurers seem to be seeking a free ride on the back of a very visible new low end brand created at some expense by the banks –by some estimates more than $2m has been spent at industry level creating Mzansi, let alone individual bank marketing and product development budgets. On a narrow view of the issue, banks may be entitled to withhold such rights. However, a mean spirited response here may miss the much bigger potential value created by the Mzansi brand—which is to create a publicly accessible and trusted ‘face’ for appropriate basic financial services. Consumer education initiatives may be built around the brand. There are even positive spin offs to banks from demand for other financial services: people who want Mzansi insurance policies will probably need to have and use Mzansi accounts to pay, which would generate bank fees. In holding on to the early success of the new Mzansi brand too long, banks may in fact damage it. The brand should be licensed (even at a charge) to other financial product categories which share target market and appropriate features.

3.      The account is not cheap: this has been pointed out in a previous blog, relative to say, Brazilian basic account offerings. However, more importantly, Rose says that the account is not even as cheap as the basic bank account issued by private bank Capitec (see previous blog post on Capitec) which has decided to stay outside of the Mzansi process. In other words, if one small bank can come up with a comparable offering which is cheaper than the best effort of the big four banks combined, the presumption is that the big ones must be overcharging. The Mzansi response is that it is a more accesible product than Capitec’s because of interoperability at all 5000+ big bank outlets . The key underlying issue here is: a race to the bottom on account fees is hardly desirable for anyone—not even the consumer in the long run, since service reliability will undoubtedly suffer and the banking system will be debilitated. Mzansi issuers can already compete on the price of most individual transactions.  They should use this to the full, exploiting their different appetites and comparative advantages, while extending the key interoperability privilege to all—including Capitec. In this way, the range of possible pricing will vary—from low to high as with normal debit or credit cards—and the brand will not be tainted by disputes around the overall pricing regime.

Rose’s conclusion: “What all this illustrates is that the jury is still out on Mzansi. And the recent behavior of banks in coveting the Mzansi brand, and seeking to protect their margins in this low cost initiative will again bring their commitment to transforming the industry into question.” 

Rose’s article suggests that this important new initiative is entering a critical phase. Its early success may be its own worst enemy right now. Flushed with success, the main Mzansi issuers may lose sight of the real prize for banks:  that they are regarded by government and civil society as partners in a national development effort, with the continued freedom to price products and select customers as they chose. The alternative would be very costly to all. Any wavering now on the part of banks who either think in 2005 that they have now ‘done their bit’ or else are jealous to protect the unexpectedly valuable brand or product created, will rapidly sour the positive environment created by the Financial Services Charter. It would also waste a golden opportunity.

In my view, the time is right for the Mzansi brand and process to be devolved as fast as possible: from the being a somewhat loose industry consortium run within the Banking Association to a dedicated association, similar to VISA or Mastercard, but with a narrower focus on reaching new customers with appropriate financial services. This body would set the rules for interoperability, which could include Capitec and others, and determine the usage of the brand, which could include insurers (at a price). Only such independence around a far sighted vision of broadly accessible financial services will ensure that Mzansi realizes the opportunity it still has.  “If you love something, set it free…”

These latest developments will come as little surprise to those who follow this rapidly evolving area. However, the conclusion of the article deserves further attention: that, even if DoCoMo is successful in this new venture as it has been with previous offerings (such as internet access via i-mode), this phone-with-credit card approach is less likely to spread, at least to other developed countries.

Two reasons are given:  first, the Japanese credit card industry is much less developed than counterparts in the US or Europe, implying that there is less competitive space in these developed markets for card issuance to current non-card users who nonetheless have cell phones. Second, because iMode vertically integrates its offering of the whole cellular process—from handset to wireless service and downstream products—it relies less on industry co-operation to create technological standards. This cooperation can be time consuming and even eventually fruitless—the article cites the failure of Simpay to establish and profit from mobile payment standards in Europe. Even DoCoMo, however, is reportedly considering making its scanners inter-operable with other FeliCa applications. This surely is the lesson of the original roll out of credit cards in the US in the 1960s and 1970s—that the benefits of interoperable acquiring systems outweigh those of proprietary ones.

However, even if it is right that this application is unlikely to take off in developed markets, does the conclusion hold in developing countries? In these nations, there is usually vast open space for growth in credit and debit cards, more like Japan. With typically relatively few operators and ineffective on-line retail payments in many, convergence on new, effective payment standards may be easier there.  After all, as this blog has previously noted, Zambia has been doing a version of this for a while.

You, too, can buy fuel with your cell phone—in Lusaka

Some version of the cell phone wallet is likely to become an important retail payment instrument in many developing countries over the next 5-10 years. The real question for networks and banks alike is: which version?