Domestic Payments Gateway to Financial Inclusion?

Domestic Payments Gateway to Financial Inclusion? Survey Data from 11 African Countries Rodger Voorhies, Director Financial Services for the Poor March 1, 2013

Value Proposition to the Poor We believe effective financial services for poor people will reduce poverty Increased access to financial services could potentially produce the following positive outcomes... leading to reductions in poverty Ability to efficiently move money to/from peers Ability to efficiently move money to/from institutions Access to better value storage and savings options Access to better credit and insurance options Reduce direct costs of financial transactions e.g., reduced time and cost for clients to access services Distribute risks over wider networks e.g., reach out to distant family and friends in an emergency through digital payments Enable investments e.g., increased investment in farm productivity due to reduced cost of borrowing and time spent acquiring credit Connect to the wider economy e.g., small business links efficiently to distant customers and suppliers through digital payments More people move out of poverty faster Fewer people fall into poverty Poverty will be reduced 2013 Bill & Melinda Gates Foundation 2

Customer Activation What If: We could turn a 30 day sign up process into 30 seconds? Distribution What If: Everyone was an agent? Payments Front-End What If: Anyone with a phone could send or receive money? Payments Back-End Integration Products Analytics What If: Payment processing was digital and close to zero in cost? What If: You could send money to any person in the world? What If: Every mobile phone came with a savings account and insurance? What If: Assessing risk for a billion new customers was cost-effective? 2013 Bill & Melinda Gates Foundation 3 2013 Bill & Melinda Gates Foundation 3

Current reality: the "jalopy-led" model of financial inclusion? 2013 Bill & Melinda Gates Foundation 4

Example analysis both scale and operational effectiveness are essential to reach low costs Transactional costs per digital credit transfer USD >0.4 0.3 0.2 Minimum scale needed Operational improvement potential 0.1 0.04 0 0 250 500 750 1,000 3,000 3,250 3,500 3,750 4,0008,550 Electronic credit transfer, volume Millions 2013 Bill & Melinda Gates Foundation 5

An effective system drives many financial inclusion use cases the payments connection is critical! Reduce time and cash costs/risks Employers Agro dealers Prepaid seed and fertilizer purchases Automatic deductions Reduce cash costs and theft Increase sales New revenue streams Reduce disbursement costs Reduce leakage and create data Public/donor institutions Connected account Receive income Store value Move money/pay Merchants Hospitals/ schools Predictable payments Direct debit savings Avoid high credit costs Reach poor profitability Offer additional products and services (e.g., digital credit, savings) Banks/MFIs Load agents New revenue streams Increases foot traffic Mobile network operators Increase ARPU/reduce churn Create valuable consumer data Weddings Savings for a purpose Avoid high credit costs Emergencies Friends Domestic & int l remittance and family Funerals Gifts 2013 Bill & Melinda Gates Foundation 6

Payment behavior survey methodology Gallup World Poll of 1,000 adults (2,450 India) in each of 11 African and 7 South Asian countries (nationally representative, random walk) o Botswana, the Democratic Republic of the Congo, Kenya, Mali, Nigeria, Rwanda, Sierra Leone, South Africa, Tanzania, Uganda, and Zambia o Afghanistan, Bangladesh, India, Indonesia, Nepal, Pakistan, and Sri Lanka Transactions occurring in the last 30 days; payments to/from distant counter parties (i.e., in different areas or cities in the same country) Domestic money transfers, payments for goods, international remittances, government and wage payments, and utilities and other bills 2013 Bill & Melinda Gates Foundation 7

The sending of money to family and friends is the dominant payment activity across Africa 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % of payers/payees reporting 57% of payers/payees report remittances over all 11 countries Remittances G2P or wage transfer Obligation or fees 2013 Bill & Melinda Gates Foundation 8

Broader reach: domestic remittances touch six times as many more people than international remittances and are three times the volume Domestic remittances touch 30.1% of population Foreign remittances touch 4.8% of population Botswana (29.0%) Congo, D. R. (20.6%) Kenya (56.7%) Mali (15.2%) Nigeria (32.0%) Rwanda (12.4%) Sierra Leone (36.9%) South Africa (30.2%) Not participating (69.9%) Tanzania (24.3%) Uganda (29.4%) Zambia (17.8%) Not participating (95.8%) 2013 Bill & Melinda Gates Foundation 9

Different market types include the poor at different rates: mobile payments are more inclusive than bankbased Channels Used To Send Money 100 90 80 70 60 50 40 30 20 10 0 Cash (sent by bus or through someone else) Money transfer service (e.g. Western Union) Other 21 1 3 2 8 20 17 10 68 60 26 90 50 47 2 5 6 43 2 7 26 28 29 30 Transfer from bank or financial institution Mobile phone money transfer Don't know/ Refused 6 5 3 1 3 8 5 12 6 9 24 39 44 24 6 83 83 89 47 51 55 Senders from bottom 40% of income: Bank senders, 8% Mobile senders, 21% How did you send this money? % by country Total = population-weighted average * Less than 10% of respondents in these countries were asked this question 2013 Bill & Melinda Gates Foundation 10

Comparison of market overviews for SSA and South Asia and Indonesia 9% 11% 4% Made no transactions 13% Only informal cash payments 47% 33% 52% Both electronic and cash payments 31% Only non-cash (electronic) payments Sub-Sahara Africa South Asia and Indonesia 2013 Bill & Melinda Gates Foundation 11

Differences in market overview among different income groups between SSA and SA&I draft 100% 3% 4% 7% 5% 7% 6% 3% 9% 10% 8% 9% 3% 13% 10% 10% 11% 80% 37% 30% 35% 30% 36% 34% 31% 17% 18% 23% 60% 28% 27% 27% 40% 20% 53% 61% 55% 56% 51% 50% 54% 45% 45% 39% 0% 2013 Bill & Melinda Gates Foundation 12

Conclusions For policy makers Domestic remittances should be higher on the development agenda in Africa because: o o o o They touch so many people (4.5 times as many as international) They reach the poor (1.7 times as often as international) Large flows may be good for economy (11% of GDP across 11 economies) Many are in cash major pain point, and makes them a good inclusion gateway The mobile players should be allowed to contest the payment space o The poor don t use banks for remittance services, but do use mobile For market players The market for payment services is large in Africa: o o o 134M people sent and received payments in 11 countries in previous 30 days; 79M in cash (should be easy to beat!) $134 Bn received annually in domestic remittances alone (is biggest use case in most markets) Market could be bigger if growth of remittances in Kenya after M-PESA is indicative Senders tend to be richer and urban, work in salaried office jobs; Receivers are more evenly spread over income, education, employment, and geography SMEs are key group as they drive value chain adoption to close the e-loop 2013 Bill & Melinda Gates Foundation 13

Appendix 2013 Bill & Melinda Gates Foundation 15

Example analysis digital channels are cheapest and have smallest cross-country variance Credit transfer transaction costs by channel USD Weighted average Min 0.43 0.11 4.00 Max Digital 0.16 0.04 0.30 ATM 0.17 0.05 0.20 Call center 0.61 0.30 0.90 Mail 0.75 0.40 1.30 Branch 2.36 1.00 6.50 0 0.5 1.0 1.5 2.0 4.0 6.5 Source: McKinsey Global Payments Map 2012 (2010 data) 2013 Bill & Melinda Gates Foundation 16

Transactional frequency and size among rural households in Kenya 2013 Bill & Melinda Gates Foundation 17

Dynamic response? Incidence of remittances in Kenya before and after M-PESA FinScope 2006 and 2009 2013 Bill & Melinda Gates Foundation 18

SMEs are heavy users and may drive viral adoption in the value chain Heavy Users Driving Viral Adoption in Value Chain No Answer 7.30% Other Once every month 0.32% 1.50% Other 8.20% A few times every month 10.62% Sales agent 5.37% Once a week A few times every week 11.37% 43.78% Supplier request 38.61% Every Day 25.11% Customer request 47.81% 0% 20% 40% 60% 80% 100% How often do you use mobile money?* 0% 20% 40% 60% 80% 100% Why do you use mobile money for business?* *Data comes from Lyon, Higgins, Kendall (2012) Mobile Money Usage Patterns of Kenyan SMEs 2013 Bill & Melinda Gates Foundation 19

Remittance sending behavior tends to increase with income, receiving behavior is less correlated with income 100% 100% 75% 50% 84% 71% 75% 50% 73% 66% No money received Received electronically 25% 0% 8% 7% 2% 3% 11% 14% Less than $2/day More than $2/day Sending 25% 0% 11% 4% 2% 6% 21% 18% Less than $2/day Receiving More than $2/day Received electronically and in cash/person Received in cash/person only 2013 Bill & Melinda Gates Foundation 20

Women are not just remittance receivers, they are active senders too 100 100 90 90 80 80 70 60 79 82 70 60 72 70 50 50 40 40 30 20 10 0 5 3 4 3 12 11 Men Women Sending 30 20 10 0 6 6 3 3 19 21 Men Women Receiving 2013 Bill & Melinda Gates Foundation 21

Deeper reach: domestic remittances receivers are more often poor or in agriculture than are international remittance receivers 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Poor In Agriculture Women Rural Residents % domestic remittance recievers % foreign remittance recievers 2013 Bill & Melinda Gates Foundation 22

Sending behavior is more correlated with white collar, educated, formal, employed full-time, receiving is more evenly distributed 100 90 80 70 60 50 40 30 20 10 0 50% 2 86 7 14 1 6 11 13 18 Primary education 74 Secondary education 50 19 Tertiary education 100 90 80 70 60 50 40 30 20 10 0 50% 3 74 10 14 2 5 10 21 20 12 Primary education 66 64 Secondary education Tertiary education 40% 40% 30% 30% 20% 20% 10% 10% 0% Employed full time Self employed, part time, unemployed 0% Employed full time Self employed, part time, unemployed Sending Receiving 2013 Bill & Melinda Gates Foundation 23

The market for better electronic payments is large: 134M adults in 30 days, and not well-served; currently, it's mostly in cash Non-cash payments: 23M adults 9% No payments: 118M adults 47% Cash and Non-Cash: 33M adults 13% Only Cash payments: 79M adults 31% Conducted some form of distant payment to/from family and friends, government, or other formal counterparty in the past 30 days; non-cash implies none of their reported payments were in cash 2013 Bill & Melinda Gates Foundation 24