New CGAP Research Points to the Potential Game-Changing Power of “Second Generation” Digital Payments Products

October 23, 2024 by

Digital finance has grown exponentially around the world. The GSMA estimates there are more than 60 million active mobile money accounts in more than 84 countries, and these figures continue to grow. So far, growth has been driven primarily by payments – 90% of transactions are either airtime purchases or person-to-person money transfers.

In markets where digital payments have reached scale, financial service providers are using payments as a building block for additional products, such as credit, liquidity savings, and insurance. In this way, digital payments are a stepping stone to broader and deeper financial inclusion.

The cost of frequently collecting small cash payments, or micropayments, can be a barrier to businesses seeking to offer new services to poor or rural customers. But CGAP estimates that digitizing these transactions through mobile money accounts or combining digital finance with large-scale networks of agents could reduce the cost of these payments to just $0.10 per transaction. Getting these costs down allows for greater innovation at bigger scale..

In light of this, some innovators are piloting powerful new value propositions for customers which leverage established digital payments platforms. Taken together, these innovations signal a new class of products that tie more meaningfully to people’s lives. More importantly, they can rapidly scale because their delivery model is entirely virtual. These “second generation” products build their value proposition with any one or more of five attributes. As a public good, CGAP does not endorse any of these products, but they are great examples of what is happening in the space.

1. The digital data trail from the use of transactional services helps providers learn about an individual’s cash flows, assess credit risk, and tailor product characteristics according to needs. Cell phone call records, airtime purchases and other transactional behavior provide an indication of an individual’s income patterns, with sufficient confidence to make small and very short-term unsecured loans. One example of this is M-Shwari in Kenya, a product offered by Commercial Bank of Africa to M-PESA users. It has reached more than 2.5 million customers in a little less than two years, offering small unsecured loans averaging USD$15 each for liquidity management, with an overall portfolio default rate of 3.5%.

2. Real-time customer interactions help providers stay close to customers at all times, and deliver useful information at the moment it is needed. Wise, timely and useful advice can increase a customer’s confidence and trust in the provider. It can also influence how people behave, helping them more effectively manage commitments. Juntos Finanzas, a startup in Silicon Valley, has demonstrated the impact of an automated messaging algorithm that creates personalized dialogues with customers to keep them engaged in savings. In a recent pilot, they showed how these automated dialogues doubled the intensity at which savers saved (average balance increased by 74% as opposed to 37% in the control group). They report that customers engaged actively in dialogue with the Juntos voice with such closeness and trust that 36% of customers sent their platform a “merry Christmas” message during the holidays.

3. Smart and customized user interfaces help customers better understand products and make smarter choices. RevolutionCredit is a California startup that is demonstrating how bite-sized, “gamified,” financial education videos offered at the point of transaction improve how individuals use their credit cards. Customers who choose to watch a series of 1-minute videos and pass corresponding tests prove to better use their loans. In a recent pilot, loan delinquency rates decreased from 12% to 9%. In another pilot, usage of a revolving credit line increased 20% while average balances slightly decreased. One can easily speculate about other cases where a visually compelling interface can influence an individual’s behavior and choices. For example, customers who see their credit score change in real time as they make “good” or “poor” financial choices may behave differently than if they didn’t see such tangible implications of their behavior. The startup Moven is experimenting with applications that provide users a comprehensive view of their finances to improve decision-making. Mint provides advice based on transactional patterns. Cash Tank is an app by Westpac bank in New Zealand that helps users keep an instant eye on their cash to better control spending.

4. Location intelligence can help infer the context of an individual’s specific financial transaction, which can improve usability and reduce certain costs. For instance, Digital Retail Apps offers the multi-retailer SelfPay app that automatically tailors its interface based on where the customer is shopping. Users check out faster since they don’t have to enter a code for the payment recipient. In South Africa, a mobile payments provider is piloting the use of location data as a low-cost mechanism to validate self-reported addresses. By looking at a cellphone’s nightly location patterns, it can be possible to validate with high degree of confidence if the provided address is correct. Other application examples are Zumigo and XYverify, which provide real-time transaction authentication based on location data.

5. Peer-to-peer connections through voice, text, and shared apps can strengthen the management of financial networks, since social and financial networks often involve the same individuals. Studies show that individuals manage multiple concurrent financial instruments (both assets and liabilities), and often these involve friends, family or people they do business with. Chamapro is a beta app that helps circles of friends manage savings and lending within clubs, while M-Changa helps users crowdsource funding for specific needs.

All of these examples are powered by mobile phones. Most are in some sort of test phase, and evidence supporting the viability of their business models is yet to emerge. Customer privacy and information safeguards are also key issues that need to be addressed in all cases. A few are beginning to deliver robust proof points that indicate potential for impact. In all cases, there’s a fundamentally game-changing proposition that can bring high impact innovations to market. We can only speculate about what can happen, but good signals are hard to ignore. And these definitely seem like good signals.

If you know of, or manage a digital financial service or product with any of these attributes, CGAP would like to hear from you! Please tell us about your product in CGAP’s online survey and you could be randomly selected to receive 2 tickets to the 2015 GSMA World Congress.


About CGAP
CGAP (the Consultative Group to Assist the Poor) is a global partnership of 34 leading organizations that seek to advance financial inclusion. CGAP develops innovative solutions through practical research and active engagement with financial service providers, policy makers, and funders to enable approaches at scale. Housed at the World Bank, CGAP combines a pragmatic approach to responsible market development with an evidence-based advocacy platform to increase access to the financial services the poor need to improve their lives.

Our mission is to improve the lives of poor people by spurring innovations and advancing knowledge and solutions that promote responsible, sustainable, inclusive financial markets. More at www.cgap.org.


Wameek Noor
Wameek Noor leads experimentation and research activities that help create an effective and innovative eco-system for digital financial services through the Digital Finance Frontiers Initiative of CGAP. He has collaborated with banks, mobile network operators, technology companies, and CGAP’s strategic partners on a wide range of cutting edge experimentation activities, sharing useful global learning that has helped catalyze the digital finance services eco-system, including conceptualization, design and development of financial products targeting the financially unbanked.


Xavier Faz
Mr. Faz leads CGAP’s work on Digital Finance Frontiers, a global initiative that promotes experimentation in the use of technology and digital channels to expand the offering of financial services to lower income segments. As a technical advisor to CGAP’s agenda on business model innovation, Mr. Faz worked in the analysis of alternative banking models, product and business model innovation, and financial inclusion strategies. Mr. Faz is also CGAP’s Regional Manager for Latin America and the Caribbean.

 

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