Financial inclusion and the case for micropayments and m-Commerce
Today the term microfinance is still used by so many as a synonym of microcredit. Credit is only one form of finance. In recent years microsavings and microinsurance have grown into the market. However, what about micropayments? In this post, we`ll discuss the potential and importance for microfinance institutions to support micropayments and deliver m-Commerce services.
Traditional microfinance services
Microfinance institutions (MFIs) have traditionally (and successfully) focussed on giving small loans targeted to the base of the pyramid. These loans are generally delivered in cash or commercial bank cheques. Consequently, borrowers spend their loans using cash.
Though in most developing countries there are still practices of barter (particularly in rural areas), the poor population organizes its economic activity mostly on a cash basis.
Borrowers have to earn and save cash to pay periodically their loan installments at the microfinance branch or commercial bank correspondent. Hence, the whole loan cycle stimulates demand and fierce competition for cash in the local economy.
The problem with cash!
Now it is highly questionable that cash is the best option available for delivering credit, for economic activity, or for creating a culture of microsavings. Some important pitfalls of cash are:
Cash is not efficient for microcredit since delivered by third parties or commercial banks
Cash is risky for loan delivery, economic activity, and savings
Cash is not easy to store for households or businesses and rolls away quickly
Cash leaves the local economy fastly and does not plug the leaks (no multiplier effect)
Cash is difficult to track and does not provide any transactional information over time
Cash is not safe and facilitates the transmission of viruses and bacteria
Cash is not a commodity of microfinance institutions but of commercial banks.
Potential for micropayments
Micropayments is the practice of purchasing goods or services in very small quantities. This phenomenon is known to be common in most developing markets where the population relies on cash for all trading and can only afford to buy provisions for just a few days' consumption.
Poor people's payment needs are very large. They actually perform more transactions than you and me. They receive money in daily or weekly doses rather than in monthly lumps, they engage in more microentrepreneur activities, and they have broader family and social networks through which money flows.
Poor people and microentrepreneurs need safer, cheaper and less time consuming payment options. There is suficient evidence that they are also willing to pay for these payment services.
Mobile commerce (m-commerce) is the use of wireless handheld devices like cell phones to conduct small payment transactions.
What has been done so far?
The proliferation of mobile services in developing countries has created a unique opportunity to provide financial services over the mobile network, including micropayments and m-Commerce, to the base of the pyramid.
So far, mobile telecommunications operators have most attempted to make these services increasingly relevant to the poorest. One successful application is the transfer of low-value prepaid airtime and its convertibility into cash.
As big telecom corporations, their comparative advantages are plenty: product backing (air-time), vast customer base, easy-to-use technology, a large network of sales points, corporate image (trust), and lobby capacity for appropriate regulation.
Successful m-Commerce and micropayment services for the poor have are already emerged in Latin America, Africa and Asia!
Microfinance and micropayments
Microfinance institutions can cater to micropayments and m-Commerce services to increase profitability and create more value through product integration and linking micropayments to savings, remittances, and credit services.
Savings and remittances
The ability to receive and send money electronically adds value to a savings account. It makes it easier for people who regularly receive funds (from employers, relatives, or the government) to make saving a default behavior. It also gives instant liquidity for people who need to access their funds.
Loans in electronic units
Microloans can be delivered faster and contactless in electronic units which can then be used by borrowers to make mobile payments or converted into cash through the banking system. Digital loans are much more efficient to deliver, can be restricted to special purposes (business, housing, etc.), and create extra loan capital.
Handling customers' payments also give microfinance institutions a unique opportunity to construct more complete financial histories for their customers, which helps credit evaluations.
Making electronic payments easy for people is not just a matter of convenience, it's fundamentally about helping poor people make more productive use of their time: not having to travel distances and line up to receive a loan, collect a remittance or make a payment!.
"Financial institutions targeting the base of the pyramid need to put payments at the core of their value proposition". Worldbank
Strategies for micropayments
Micropayments through m-Commerce are a unique opportunity to create value, in particular for microfinance institutions with a larger customer base. However, some strategic issues must be considered: regulatory frameworks, technology, and network building.
Access to national payments systems is met with regulatory roadblocks for MFIs and other organizations. As a result, MFIs are compelled to make special arrangements with commercial banks to gain access to the national payment system or to create their own micropayment network as we suggest. New regulations will certainly be in line with pioneers' good business practices!
The utility and benefits of a micropayment service for users depend largely on the number of businesses and people that accept it. Convertibility to cash should be an option at some point of the payment chain and is crucial for people to accept micropayments with less resistance. Other growth strategies include:
Referral programs that transform users into active promoters of the service
Partnerships with other MFIs and organizations serving the base of the pyramid
The vast proliferation of mobile services in developing countries has created a unique opportunity to provide financial services over the mobile network, including micropayments. Low-end mobile communication technologies such as SMS or USSD combined with secure modern payment software can efficiently deliver financial services to the base of the pyramid.
Cyclos is affordable best-in-class and award-winning payment software for the base of the pyramid.
Micropayments for microfinance!
Nowadays, it is not only technically feasible and profitable to deploy micropayment services over mobile networks, but there is also significant and growing demand. In fact, micropayments address a major service gap in developing countries and contribute to economic development.
To capture this interesting market, and compete with mobile phone operators, credit and debit card operators, commercial banks, and even blockchain currencies, MFIs can take advantage by adding value to their financial services portfolio, exploit regulatory frameworks, and partner with other organizations.
As digital currency architects, we have vast experience in digital micropayments for financial inclusion. We help microfinance institutions build and grow secure and affordable micropayments and m-Commerce networks in compliance with local regulatory frameworks.