Beyond Kenya: Examining Digital Payment Usage in Africa

At the After Hours Seminar #60 on April 23, I had the pleasure of moderating a session with Jake Kendall, Research Program Officer for the Financial Services for the Poor (FSP) Division in the Bill and Melinda Gates Foundation.

Jake talked about three main things: first, the recent strategy refresh of the FSP team; second, the findings of research on domestic remittances in 11 African countries; and last, how policy makers and market players might use these findings.

The FSP strategy refresh focused on findings from extensive research that shows that the poor aren’t always poor. Hundreds of millions transition in and out of poverty as different financial events occur. They may receive funds from an employer one month, but not another. They may have extensive health expenses one week, but not another. So, creating access to an array of financial tools is important to try to mitigate exposure to shocks, income variability and this low “margin for error.”  If the poor can access these financial tools, it can reduce the number pushed back into poverty every year and increasing the number who can climb out.

The existing options for financial services are mostly cash based. They are completely inefficient, unreliable, risky, costly and do not comprise a full suite of tools. Jake describes how a typical transaction might occur, by using what he called the “jalopy-led” model of finance. A city relative gets a call for help and puts some money on a jalopy which goes out to the rural homestead. And that’s the best existing option!

This weekend at the World Bank Spring meetings, the Gates Foundation launched the Global Findex project, which has household survey data on financial access in 150 countries:

• 58% percent of adults in developing economies report having no account at a formal financial institution;
• Approximately 2.6 billion adults do not have a formal account, with the majority – 2.4 billion – residing in developing economies.
• 78% of poor adults (>$2 day) do not have an account (number for credit is even lower)

So working in cash is not the best option, and most poor people do not have access to formal financial services. How do we support or create a sustainable system (in other words, profitable to the private sector) that will avail these services to poor people? The Gates team modeled some basic supplier economics to understand what the key barriers are to the commercial market supplying these services. They found that the cost of doing cash-based transactions was the key barrier to profitability. As technology became integrated into the transaction, and as the funds became digitized, the costs significantly reduced and therefore became more affordable (to the provider and the client). All of these findings contributed to a “tighter” strategic focus:  the FSP team’s new strategy and programs will concentrate on connecting poor people to digital payment platforms and enabling them to access savings, credit, and insurance services over those platforms. Read more about it here.

The research Jake presented is from a Gallup World Poll of 1000 adults in each of 11 African countries (South Africa, Zambia, Nigeria, Kenya, Tanzania, Uganda, the Democratic Republic of the Congo (DRC), Sierra Leone, Botswana, Mali, and Rwanda). It tracks transactions occurring in the last 30 days that are payments to and from distant counter parties (i.e. in “different areas or cities” in the same country), which include domestic money transfers, payments for goods, international remittances, government and wage payments, and utilities and other bills.

The study shows that there is a very large market for digital payments – about 134 million adults send and/or receive payments, and 31% of whom use  cash. Of the adults sending funds, in almost every country, domestic remittances are by far the largest use-cases (more than G2P or retail payments). The research also shows a comparison of domestic to international remittances, and shows that not only do domestic remittances touch six times as many people as international remittances, but that they also touch more poor, female, and rural residents, and more individuals in the agricultural sector.

Policymakers and market players are likely already taking note of this research. There have been many discussions on international remittances, but perhaps domestic remittances should be somewhat higher on the development agenda, as they touch so many more people.  As digital payment providers, especially mobile payment services are valuable and user-friendly for the poor, policymakers should consider the use of these systems in the development of any of their programs, including agriculture, health, and climate change. Market players should pay close attention to this market. Deployments of digital payment systems that are targeted towards the poor don’t always work because they haven’t done their marketing homework as to who is sending, and who will be receiving, and how to motivate them to use services. There should also be a strong focus on working with SMEs, as they can drive growth and value chain adoption, making the system even more sustainable and profit-making in the long-run.

We also had a lively Q&A session, wherein I think some important discussions were had. I’d like to highlight a few:

• The impact of mobile financial services on women, especially rural areas in developing countries. One of the audience members made the important point that many times, mobile phones are not available to women, so they cannot avail themselves of these services. It is important to acknowledge that mobile phones will not “solve every problem” for women – it is not a panacea. And access – in terms of literacy, energy resources (to recharge the phones), and ability to even own a phone is an issue, for men AND women. And for women, in many countries, these issues are even greater for them, because men have first priority over resources. However, it is often much easier to put a phone in a woman’s hand than it is to give them access to formal financial services (through a bank or MFI). This ease of access can make a big difference in women’s lives, as Jake mentions in his presentation. 
• The impact of digital payments on value chains and SMEs. Jake notes that SMEs are heavy users of digital payments and may even drive the viral adoption of these payments in their respective value chains. Studies have shown that by adopting digital payments, many value chains see the cost of production drop. Transportation costs, security costs, and other overhead costs associated with cash payments are significantly reduced. In agriculture, it can even give the farmer more time. Instead of spending the time to travel to collect funds, they can automatically receive them.
• The importance of being able to “plug-in” to the services of an electronic or digital payment system on the back end. In order for digital payments to become de rigueur, it cannot just be governments and donors that use them for bulk payments, like salary payments, welfare payments and the like. Businesses, such as SMEs and MFIs, will need to see value in making and accepting payments through these digital payment systems. In order for this to happen, these systems will need to have the capability of easily “plugging in” the financial systems of these businesses to help capture these funding movements and easily integrate them into standard financial management tools.