The small, uneven cash flows of poor families are the heart of microfinance. From the customer perspective, microfinance instruments – credit, pensions, savings, mortgages, etc. – exist to mitigate the day-to-day risk associated with that uneven flow. From the institutional perspective, those same flows represent a considerable challenge: finding a way to more affordably collect a large number of very small payments (usually a few dollars) on a weekly or monthly basis.
To date, the solution in India has been uneasy on both ends: An expensive cash management process that depends on weekly – or more recently, monthly – collections conducted by loan officers who, more often than not, circulate door-to-door among customers. This labor-intensive process has the predictable effect of driving up the total cost customers pay for microfinance services. Moreover, customers frequently have to forgo an hour of work to attend collection meetings.
Technology – in particular mobile technology – presents one solution to this challenge. For instance, M-Pesa is a mobile platform that allows users to make deposits, redeem money and make payments to other users directly from their accounts. By 2012, the Kenya-based service had generated some 17 million registered accounts.
And as founder and CEO of the BASIX Social Enterprise Group Vijay Mahajan pointed out at the 2012 Access Microfinance Summit the platform for micro payments – mobile phones – exists: mobile phones are widely used nationwide. We make phone calls from an Airtel phone in Delhi to a Vodafone phone in Hyderabad; telecom companies know how to charge and collect the Rs. 5 for that call; no muss, no fuss.
So-called “mobile wallets” have likewise existed for a while in India. But to date, mobile payments have not taken off. Why?
A one way system; a two-way pilot; hurdles ahead for mobile microfinance
The growth of mobile payment systems in India has historically been hampered by one major limitation: you can typically put cash into your wallet, but you can’t take cash out. A new pilot service from Swadhaar, an urban microfinance institution in Mumbai, seeks to change that paradigm. Swadhaar, in partnership with Airtel and Axis Bank, is testing an “open” Airtel wallet – clients can deposit money into the Airtel wallets as well as withdraw it. One additional advantage is that this mobile wallet is backed by an Axis Bank no frills saving account. Clients now earn around 5 percent interest on any money that is in their wallets.
This new platform offers a potential win-win for all stakeholders:
- Customers have the benefit of a savings account, and can use their mobile phones for payments and remittances.
- Axis Bank gets new customers and meets its regulatory obligations on serving the underserved.
- Airtel earns a small fee on all transactions on its platform and also generates stronger loyalty from its customers.
- And Swadhaar reduces its operational expenses by eliminating cash from its field operations.
Promising as this initiative is, however, a number of factors (the same ones that have historically contributed to the functional shortfall of an Indian mobile micropayment solution) make success uncertain:
- Regulatory inconsistency: Airtel, Swadhaar and Axis Bank are all governed by different regulations and have very different know your customer (KYC) guidelines. Surprisingly, the KYC norms for Airtel are the most stringent. Even after having qualified for financial services, many Swadhaar customers will not easily qualify for an Airtel wallet. (The week the Swadhaar pilot was launched, the telecom regulator modified its KYC norms, and the pilot had to be put on hold so that the customer onboarding process could be modified to comply with the new rules.)
- Language barriers: The Airtel wallet app is currently only available in English and not in any of the local vernacular languages – a real limitation given the client base, most of whom speak either Hindi or Marathi.
- Convenience: Airtel and Axis Bank currently don’t have a large number of retail locations that can operate as Airtel wallet kiosk points. Adoption at scale will depend on proximity of these kiosk locations, which are where customers can deposit or withdraw money from their mobile wallets. (One retailer I visited on a recent trip to Mumbai didn’t have the required branding displayed to indicate that he was an Airtel/Axis kiosk.)
- Trust: Perhaps most critical is customers’ acceptance of these new technologies. Customers must get comfortable with and trust this new mode of transaction in order for its potential benefits to be fully realized.
Time will tell whether the pilot will point the way forward to a scalable way for microfinance institutions to address the challenge of lowering operational costs while better serving customers. To date, the Swadhaar team has done a fantastic job. They’ve responded to changing regulations without missing a beat. New training material has been developed and integrated into the financial training that is given to all customers when they open accounts. The team is working closely with both Airtel and Axis staff to ensure that the customer experience in the field is smooth.
India’s urban poor need more reliable access to flexible financial services. I’m hopeful that Swadhaar will succeed where others have failed.
Read more of Rahil Rangwala’s recent posts.