September 28, 2014

Quick Poll Results: Why choose prepaid mobile services even if you had choice of postpaid

I just asked this question on the @prepaid_africa timeline and the findings were not only insightful and illuminating but also validated my observations in the field.




Concluding thoughts

I'd thrown out the idea that the cornerstones of financial services innovation for the vast majority of the African market where 96% of hundreds of millions of mobile phone users are all on the prepaid (pay as you go) business model were the following three elements:

Flexibility ~ Uncertainty ~ Negotiability

That is, the greater the span of control the customer (end user) has over the timing and amount to be paid, including frequency and periodicity of payments, the greater the chance that such a business model or payment plan would be successful.

These findings from a quick poll only serve to validate and underline these thoughts.

September 13, 2014

New Market Analysis: It all boils down to Interpretation

This isn't a new diagram for anyone familiar with my writing. Its a diagram I've been using to explain where my work fits into the innovation development process since I first saw it on Luke Wroblewski's blog back in 2006. However, I've just been struck forcibly by the realization that there's a very important piece of this process that's missing. And that is Interpretation.

What do I mean by Interpretation? 

Lets start by taking a look at the ever popular user centered design process, simplified in linear form, although we all know there are numerous feedback loops and iterations constantly happening in real time.

The understanding we seek in order to conceptualize and design emerges from the immersion in the new operating environment we wish to enter. This where we go and meet people and talk to them and watch and listen and learn. Its when we get back and analyse our findings that our aim is to synthesize them in the form of actionable insights that can drive the design and development of a new product, service or business model. The space between Insights and Design is when and where we conceive the ideas we wish to develop into workable constructs. Its a given that the process isn't as linear as diagrammed and ideas and concepts occur much earlier but what is critical, and this is what I realized today, is in how we interpret our findings from the field.

This is the bit I've circled in red.

This is where our assumptions, especially those we don't recognize, and our presumptions, are most likely to let us down. Two people, present in the same user observation study, meeting and listening to the same people, can interpret the raw data in very different ways. So much of this has to do with our preconceived ideas of the target audience not to mention especially important when you're looking at such a study in a culture and society very different from your own, that its no wonder specialists in the field of design ethnography or user research keep emphasizing the need to able to step outside of yourself in order to observe and understand someone else.

While this is naturally important in all kinds of human interaction, it becomes far more crucial in the context of a professional user research project.

That's why there are any number of case studies and examples of products and services that fail to match people's needs or meet expectations *even* after extensive and expensive exploratory user research studies.

Did we manage to interpret our findings correctly? Did we understand what someone was saying in the context of their own culture and mindset and society? Or did we interpret their words and actions from the perspective of our own frame of reference?

I'll end this with a simple example that comes to mind as I write this. A couple of years ago I was in the field for a small solar power manufacturer who could not comprehend why the very sensible decision of being able to save oodles of money on kerosene by investing in an affordable solar lamp was not being made by his intended target audience. Why were they not purchasing this product even though it made so much sense to do so?

In fact, it turned out, the real question was, did it make sense to the potential customer in the context of their own cash flow, income stream and household management?

August 29, 2014

Segmenting the African Middle Class without dollar figures

Continuing the thinking from my previous post on the various attempts to size and value the potential of the emerging African middle classes based primarily in dollar figures, I thought to take a step back from income data to see if I could approach the challenge of segmentation in a different way. Below is the chart estimating the size of the original emerging African middle classes as posited by the African Development Bank back in 2011. 

That is, rather than simply segmenting by range of daily expenditure i.e. $2 to $4 or $10 to $20 a day, what if we took a closer look at the reasons behind the spending and segmented by consumer mindset and buyer behaviour. After all, given the size of the informal sector in the majority of African countries and the percentage of population relying on irregular income streams from a variety of sources, few can confidently expect to spend exactly $4 each day. There might be times of abundance when hundreds of dollars may be available, and big ticket items purchased like colour television sets, offset by times of scarcity when one might just be making ends meet. Variability in cash flow is an inherent characteristic of entrepreneurship, regardless of income bracket or revenue sources. Furthermore, we can add geography as a factor, since urban expenditure is of a highly different nature than that in rural regions. Taking all of this (and more, based on years of observations in the field among consumers) here is my version of consumer segmentation of the same demographic as covered in the chart above.

Descriptive segmentation of consumer behaviour

The Middle class - traditional definition, white collar jobs, steady paycheck, education/professional qualifications, closely aligned with "upper middle class" in the AfDB chart.

Emerging "middle" or rather the increasingly visible African consumers - non traditional (OECD cite), rapid upward mobility, primarily based in informal sector trades and services, newly successful entrepreneurs, small businessmen, extremely ambitious

Floating class 1 ("Brass Ring Syndrome") - seeking status signifiers that are the 'brass ring', that is, they are ready to leap upwards, are almost there, focused on investing in future revenue generation opportunities, aspirational, may tend to be seen more in rural areas than urban.

Floating class 2 ("Fragile" or "Newborn") - seeking footholds to gain enough stability to balance upon so as to make the leap for the brass ring, saving to invest in future revenue generation, hungry for more (not food but a mindset, as in hungrily seeking upward mobility), they may include the youth startups, tech entrepreneurs and all looking for the "something", maybe more urban, and in the African contextual usage of the word "hustling" for the opportunity.

"Bottom of the Pyramid" -  The $2/day demographic made famous by CK Prahalad,  they are the pool from which the above three segments are emerging and are critically important in Africa in a way that they aren't in opposed to India for instance because they don't think of themselves as permanently poor, just temporarily cash crunched, especially migrant workers. Very, very different consumption behaviour between urban  and rural in this segment. They may indeed form the rural version of Floating Class 2.  I include them here because AfDB segmentation starts at $2.

Concluding thoughts

Once one's mindset has evolved into considering oneself as part of a certain lifestyle, even if one's income is "floating", there are changes in buying habits that remain as part of this upward mobility. An example is that of the milk ATMs in Kenya. That is why I believe that taking a closer look at shifts in household consumption patterns as indicators of emerging into the so called "middle class" may offer more valuable insights for consumer market analysis than attempting to segment by dollar figures alone.

August 27, 2014

My 2 shillings worth on the size or value of the emerging African middle classes

There's been a lot in the news of late about the size and worth of the emerging African middle class subsequent to the release of an as yet unseen report by an economist, Simon Freemantle, at Standard Bank, South Africa. The various headlines conflict each other, some say the middle class isn't as large as earlier reported, others say its growing at a rapid clip. Their tone seems to depend on which aspect of this alleged report they support.

Instead of simply defining the middle classes by available daily spending power, as the African Development Bank did back in 2011, when they first announced the emergence of these new consumers, the Standard Bank report goes on to assess households by using the South African Living Standards Measure (LSM) as a means to segment them. But because we have yet to find a copy of the actual report itself, only articles referencing it (via a press release, to hazard a guess), there is no clarity on whether the South African LSM segmentation was directly applied to the households under consideration or whether the LSM was adapted for regional, social and cultural differences.

Even the SAARF, the South African body responsible for this evaluation tool has been questioning the validity of the LSM as it is structured at the moment. There are a few different approaches under development, from what I can tell based on a quick search online, including one which seeks to regionalize the LSM so that it can be far more accurately applied across the continent rather than for South African conditions alone. Again, we are not sure which version has been used in this new Standard Bank report.

The bottom line is that the emerging African middle class may indeed be smaller than imagined, though growing rapidly, or, that its as large as the AfDB originally estimated. That is, we still don't know the size and worth of this consumer market. I suspect the reason for this that we're trying to measure volatility, the underlying characteristic of the informal sector's income streams, and that is why the goal posts seem to keep shifting.

The OECD had once said that the global emerging middle classes of today are not the same as those that emerged after the industrial revolution and established the foundations of the highly industrialized nations of the so called 'first world'. That these new upwardly mobile and aspirational consumers were in fact emerging from the population segment originally designated as the 'base of the pyramid' and were less likely to have university degrees or salaried jobs.

This was also the point that Bright Simons made in his HBR article, that while it was undeniable that there was an increasingly visible pattern of conspicuous consumption happening across sub Saharan Africa, it should not be conflated with the concurrent rise of a "middle class" as the term is commonly understood.

I would first ask why are we trying to put numbers on the size of the middle class?

Are we conflating the concept of an educated white collar bourgeoisie with the corporate need for market analysis required to estimate the size and value of a market opportunity before making the decision to invest or enter a new market?

And, if so, then are the two necessarily the same thing?

August 13, 2014

The African Consumer Market: Where the Informal meets the Formal

Informal Business: Township Hair Salon, South Africa, January 2008 Photo Credit: Niti Bhan
Formal retail:Haircare products, South Africa, January 2008 Photo Credit: Niti Bhan
While still largely based in the informal economy, the African haircare business has become a multi-billion dollar industry that stretches to China and India and has drawn global giants such as L'Oreal and Unilever. ~ Reuters, 6 Aug 2014

This snippet captures what I'd said in my HBR article on the challenge to marketing posed by the African consumer market. The size and value of the opportunities are undeniable as are the impact and influence of the informal sector.

Chaos, uncertainty, word of mouth, personal relationships and far too much flexibility is how those accustomed to the muted muzak of their local supermarket would describe an open air bazaar bustling with matrons ready to haggle with their favourite merchants over the price of onions while tramping through the narrow muddy paths in between the umbrellas and the rickety wooden structures.

This stymies the multinationals accustomed to ever increasing efficiencies in supply chains and distribution. L'Oreal's website goes as far as to explicate all the challenges faced in distribution. The demand is there, how do we satisfice it in a profitable manner? seems to be the message.

Fragmentation of the retail space, prevalence of informal markets, a preference for 'break bulk' shopping daily in small quantities, all add up to a distinctly different consumer culture - an African one - that has been evolving quietly under the radar. It is only now that Africans are being perceived as consumers in their own right and the emerging middle classes capturing the attention of global giants. The hair care industry's size and value, is not so much an overnight development as it being taken seriously as a viable opportunity.

If we go by the plethora of management consulting reports highlighting the African consumer market's opportunities,  there's an underlying assumption common to all that existing systems can simply be put into place, if only there wasn't so much informality. Is that a realistic wish in the near term given the vacuum of infrastructure? 

Simply building a supermarket in suitable locations will not work, as Shoprite discovered in Arusha, Tanzania, people's purchasing patterns were influenced by so many more factors than just a lack of modern retail. It makes sense, then, to look at the consumer culture that exists, than to bemoan the fact that its completely unlike what 'global giants' are accustomed to dealing with, or to attempt to introduce solutions without taking the entire ecosystem into account.

If we are indeed to begin to address the challenge of satisfying the demands of Africa's emerging markets, then we need to step back and look at it from an entirely different perspective. CK Prahalad once described what he called the tyranny of dominant logic and offered an alternate way to look at the challenge of dealing with the fragmentation, informality and inadequate infrastructure of the developing world. He proposed turning the problem on its head and looking at it from the lens of the constraints and conditions that are existing, then innovating to meet the criteria rather than attempting to force fit success metrics from one operating environment into the context of a wholly different one.

What if we were to do the same for the African consumer market? To begin from the point of view of understanding entire ecosystem of trade and how it works, mapping the existing landscape, and then seeking to develop solutions that would fit contextually.

This conversation will be continued. 

July 25, 2014

Why social enterprise marketing tends to fail - hidden competition, invisible consumers

A couple of years ago, I was frequently in East Africa, consulting with a consumer product company  set up as a social enterprise in the renewable energy sector. An extensive distribution network across Kenya had been established through what they called TT - traditional trade. Yet their sales were nowhere near the figures one would expect from such an extensive exposure to the market. They were struggling to reach their target audience efficiently and cost effectively. Soon after starting fieldwork, I began to get the sense that there are some fundamental issues with the way social enterprises were developing, creating and implementing their market entry strategies.

Many of these issues also apply to consumer product companies targeting the emerging middle class, given the size of the 'floating class' and the prevalence of informal retail. Purchasing power assessments as well as hard currency conversion create their own confusion regarding consumer segmentation as "poor". Some may choose to set the bar at 5euros a day, to identify those at the "Bottom of the Pyramid" (BoP) while the African Development Bank pegs the same amount as "middle class".

Assuming there’s no competition

 Most of these firms, particularly those coming in from the outside and seeking to serve the ‘poor’ in the developing world seem to be operating in a vacuum. Observing their market entry actions point to an underlying assumption that they are entering a virgin market where no competing solutions for their product or service exist.  If this fundamental premise is mistaken then every element of their marketing, communication, distribution and pricing strategy will naturally suffer.

A caveat here is that it might indeed be a virgin market for branded international solutions for that product category in the formal market but this is where overlooking the informal markets and existing practices in user behaviour can be far more dangerous since this is where the competition will come from in the form of substitutes or alternate solutions.

Because of the above assumption, little effort is made to uncover information about the customer, the market or competition or the operating environment. Whether this is due to a vacuum of information on lower income markets or the developing world, or this subject simply not being taken into consideration in a social enterprise, the fact remains that this oversight then gives rise to a series of errors (like the domino effect) – those in marketing strategy viz., marketing communications, value propositions and positioning not to mention pricing.

Conflating company mission with marketing strategy

While this is most commonly found among well meaning social enterprises entering these markets for the first time with their life saving products for the poor, large multinationals with previous experience in the developing world are not immune the minute they choose to focus particularly on the mass (or "poor") market.

Tata Nano is the most obvious example of this although here one wonders how much of this had to do with their actual marketing communications and advertising for the Nano and how much to do with all the media hype around the car being specially for the ‘common man’? All the positioning and branding in the world through formal advertising and communication channels could not overcome the public perception of the Nano as the ‘poor man’s car’ created by every other article – from engineering news to international styling.

Similarly, if all the marketing communications, press reports and online information is geared towards the ‘poverty alleviating” mission of the company or product line then this lack of clear focus or understanding of who the target audience is will come through in the positioning and branding of the product in the marketplace.  The vast majority of social enterprise messaging is targeted towards their funders and investors not their potential customers.

And no one will aspire to buy the ‘poor man’s product’ if it means a clear signal of having failed to succeed or admitting defeat among their friends and neighbours. Everyone aspires to a better quality of life, regardless of perceived income segmentation.

Confusing value proposition with need

This lack of clarity and understanding about the target audience for a product or service and thus, its marketing communications and messaging then snowballs into incorrect positioning of the product or incorrectly identifying the value proposition for the end user.

The end result might be the same – the customer choosing to buy your product – but the pain points may differ tremendously across geographies and regions, not to mention socioeconomic strata. An example is water saving flush toilet mechanisms being sold in Nairobi as a sustainable, greener alternative – that is, the same positioning and value proposition as that used in the eco-conscious parts of the Northern European continent. Sales are sluggish. But when you take into consideration that there is a water shortage or that many communities need to purchase water in tankers to fill their household storage tanks, a simple shift in positioning to “Spend less money flushing down the toilet” or some such clever quip could in fact make a more sensible approach in this situation for the very same product.

This gets more obvious the lower down the income stream you go – Mama Mboga with her vegetable stand may not have the same priorities nor relate to the same value propositions that social impact investors do.

Winning awards vs building a trusted brand

And finally, this lack of customer orientation manifests itself in the development of the company's brand. Awards may be won, and brand recognition created online with press mentions and social media, but the company still remains an unknown entity that nobody has heard of in the markets in which it should be sold.

In a sense, its overestimating the ability of a faceless brand to communicate value to the target audience. Some have called this issue one of Trust and in the past, I’ve referred to it as Commitment but the fact remains that this aspect is the most challenging and difficult to overcome as a barrier to acceptance. Even megabrands accustomed to instant global recognition such as Google may find that not only is their brand unknown and unheard of in these new and emerging markets but others may have gotten there before them.

Which, in a way, brings us back to the first point in the assumptions made at the very beginning of considering market entry strategies in the rising global middle class.

July 19, 2014

Human centered design for financial inclusion: Lessons from fieldwork in rural India, The Phillipines and Kenya


Financial inclusion has become mainstream thinking in economic development. The vast majority of the unbanked live in the developing world, and a significant proportion of this population are rural residents. One can easily surmise, without recourse to statistics, that the bulk of the target audience for institutions seeking to offer them affordable and accessible financial services are part of the rural economy.

Now, the role of human centered design and its toolbox of methods and processes is being recognized as mission critical for successfully enabling these initiatives. So little is understood about the rural economy, particularly that of the developing world, that without the insights that design ethnography (also known as user research or more broadly, exploratory user research) among the end users can provide, barriers to adoption will remain unaddressed.

With this in mind, I thought to share lessons learnt during the past 6 years of experience in the application of human centered design processes in order to observe and understand household financial management behaviour in rural Africa and Asia.

Human Centered Design

Human centered design traditionally applies the insights from user research to inform and inspire the design of a product or service. At the Institute of Design, IIT Chicago, there were scores of methods and frameworks for every step of the entire process. In particular, the analysis and synthesis phase after fieldwork was completed was considered critical in identifying the actionable insights that would drive the conceptual design and subsequent development of solutions. All of this required that we frame the problem correctly at the very beginning, in order to ensure that our findings would be relevant and appropriate. Here's a diagram that captures the entire concept:

Adapting human centered design for understanding rural household financial behaviour

Back in late 2008, when I first began framing the original problem statement for the iBoP Asia Project's first Small Grants Competition, I quickly realized that the methods and tools as developed and disseminated in Chicago, could not be directly applied without adaptation to the distinctly different operating environment, and, the then unusual objectives of business model design.

Firstly, the tools and techniques for user research developed and refined in a first world sophisticated consumer market accustomed to decades of market research, telemarketing and surveys of all stripes wouldn't work among lower income rural residents in a developing world context. They had little or no exposure to market research or design research of any sort, and surveys and questionnaires tended to imply government census takers or some kind of social study by an NGO. After all, it is only now that we are taking the "financially excluded" seriously as potential customers with wants and needs in their own right.

Secondly, back then, nobody had yet applied human centered design methods for intangible outcomes such as insights on household financial behaviour or the conceptual design of a payment plan for a community. User research conducted as part of the human centered design process was for consumer facing client companies looking to improve existing products or develop new ones i.e. very tangible outcomes. My research question was:
What insights can we derive from observing and understanding how those at the BoP currently manage their household budgets to inspire new transaction models or pricing strategies for businesses wishing to serve the poor more effectively, yet profitably?
Thus, I found myself not only having to adapt the methods and tools available to me, but also develop frameworks to sample a representative segment of the rural economy given the conditions and criteria of the operating environment. This I will share now for everyone else who will now be using the human centered design  approach for financial inclusion.

Framing the problem correctly

This was the most important element in ensuring the successful outcome. Tina Seelig has written on how REframing a problem can unlock innovation, a valuable insight when you're already immersed in your own environment like a fish in water. But when we step outside of our accustomed operating environment to one which is dramatically different - a poor rural region for example, we can so often be overwhelmed by the sensory overload that we are unable to contextualize the challenge from the end user's perspective. We're too busy noticing all the differences and unable to distinguish the important from the mundane or identify macro patterns of behaviour because we are distracted by the minutiae of daily life.

 The impetus for this line of research came from observing the success of the prepaid business model as mobile phone sales took off across the developing world. So my initial problem statement had been "What makes prepaid mobile airtime work so well for this demographic and what can we learn from this successful adoption to inspire business models and payment plans for other products and services?"

That emphasis on the mobile phone and its attendant business model would have narrowed the focus of my research and thus, influenced my questionnaire and observations. On the other hand, by shifting the focus away from what interested me, and broadening it to encompass the challenges of daily life, I would be able to perceive the entire context within which any particular business model or payment plan worked. That is, I took a step back from just the mobile phone or any one particular payment plan to understand the rhythm and the patterns of the rural economy. I framed the research as follows:
The focus of our exploratory and user research in the field will be to understand the challenge of planning household expenses and budgeting when incomes are mostly irregular and unpredictable.
This allowed me look at the larger patterns at play in the rural economy and as I was find out later, provided a foundation for understanding the cash based informal sector prevalent in both urban and rural regions of the developing world. That is, it formed the basis for understanding what makes the informal economy tick, something that I wouldn't have been able to do if I'd kept the original focus as narrow as why prepaid airtime enabled the rapid adoption of mobile phones among the lower income demographic.

Takeaway for framing the design research problem statement

When you approach your client's particular interest area in the broad space of financial inclusion, don't just focus on their specific interests without considering the entire ecosystem within which the intended produce or service will reside.*

Rapid prototyping to test research protocol and questionnaire

The beauty of the human centered design is that nothing is expected to work the first time its built. Prototyping and refining the design based on user feedback and observation is embedded in the iterative nature of the process. This is also part of design thinking - the willingness to experiment to see what works, usually with the participation of the end users.

Thus, when I first set out to use design methods in this wholly new way (seeking to understand household financial management among the rural poor), I insisted on a 'prototype' location first. This allowed me to test the questionnaire - it was completely thrown out right after the very first attempt to interview someone - as well as develop the framework for sampling uncertainty in the informal sector. 

Don't imagine that your carefully prepared questionnaire and the rest of your research protocol will hold up in the field. Be prepared to evolve it in order to see what works. That's why its so important to frame the problem statement first so that you know what you're trying to understand. We're talking about sensitive topics when researching for financial inclusion, and our goal should be tread respectfully towards greater understanding rather than rigidly following research protocol.

User profile identification matrix for sampling a representative pool

Design ethnography aims to gather an in-depth understanding of human behavior and the reasons that govern such behavior. The qualitative method investigates the why and how of decision making, not just what, where, when. Hence, smaller but focused and representative samples are more often needed, rather than large random samples.

Since the object was to understand how those on irregular incomes planned and managed their household expenses, a variety of claimed income sources such as farming, shopkeeping, job or minicab driving was deemed important to be identified in each location.

In order to ensure that the sample best represented the local context and situation, a qualifying chart was developed ad hoc in the prototype location (India) as a method to approximately evaluate an individual's ability to predict the timing and amount of their income, and thus plan their expenses.

This found to be useful in ensuring that the widest possible variety of local influences on cash flow were represented in the sample pool, not merely the majority of the population who were farmers, all of whose fields of wheat or rice would tend to ripen for harvest around the same time.

For example, in the Philippines, the representative sample pool, by primary stated source of income, included a rice farmer, a minicab owner/operator, a sari sari shop owner, a door to door frozen food seller and a furniture craftsman with his own workshop.

It was also ensured that the range of remittances (from zero to only for savings) received by the individuals was also varied. Individuals with full-time jobs were not considered nor were those whose sole source of income was remittence from abroad.

Takeaway for developing your own matrix for sampling the local populace

This chart formed the basis for sampling across various income streams. The employed have a regular salary, they are able to say with accuracy exactly how much money to expect and on which day. The odd jobs labourer, at the other end of the spectrum, cannot predict if he will get work on any particular day nor how much work. The farmer (generalized here) is able to estimate approximately when the harvest will be ready for sale and its value, though naturally not as accurately as a regular paycheck.

If you are only looking at farmers' incomes then consider a spread across cash crops, size of harvest, crop mix and produce sales patterns. There are high potential farms and low potential ones.  The idea is not to end up with your entire pool of people with similar patterns of cash flow. If you're looking at a village or rural population cluster, consider agribusiness services such as shopkeepers and transporters, as well as other service providers such as water delivery, small kiosk, market traders etc.

The reason for this is due to the variance in people's ability to plan for savings, loans, mortgages, credit or other financial products based on their ability to predict their cash flow. The more uncertain your income stream, the more risk averse you're likely to be. 

Locations in country

Choosing locations to sample depends on the aim of the design research study - are you looking at the  entire country? Or just one particular region? Based on geography, different parts of the country may have more or less food security, so again it makes sense to sample from at least two if not three distinctly different areas based on their economic standing.

From the perspective of financial inclusion, it doesn't make  sense to only look at two similar economic regions with cash crops, unless your study's focus is a middle or higher income level demographic.You may also wish to consider a spread of profiles based on their distance to the nearest market town or financial services institution. Patterns of behaviour will differ based on time and money it takes to travel. For instance, even if your income streams gave you the confidence to consider a loan, the cost of travel may not make it worth the effort.

Final thoughts

The informal and rural economies are far more sophisticated in their financial management than we are able to perceive in the first instance. Designing solutions that work with the rhythms of the natural seasonality are more likely to be adopted than those which impose calender schedules. Negotiable flexibility and trust based webs of cooperation are part and parcel of the hyper local rural economies. How can we retain these pillars of community life and resilience in the face of adversity and uncertainty even as we seek to include the marginalized with our modern tools and technologies?

* See the problems with introducing Google's Beba Pay design without taking entire ecosystem into consideration

July 14, 2014

What is The Prepaid Economy anyway and does it even have a future?

Young Kenyan digital currency blogger Michael Kimani has been asking questions on the future of the "Prepaid" economy, given the rapidly evolving financial landscape of his home country. While Twitter might be good enough for a rapid give and take, it's constrained as a platform for any meaningful dialogue requiring more than 140 characters at a time. This post is an attempt to synthesize my own thinking about The Prepaid Economy - a project name that evolved beyond its original research mandate of "Why does the prepaid business model work so well for the low income demographic?" - and what I've learned since 2008.

Background and origins of the concept

Back in 2006-7, when the rapid adoption of mobile phones across the developing world was making headlines (and profits for emerging market pioneers Nokia), I used to live in the pre-iPhone United States. There was something very different happening in the GSM world of SIM cards and SMS. These millions of new phone owners weren't signing up for unlimited monthly plans or subscriber billing (i.e. postpaid) paying extra to send a text message. Instead, they were purchasing airtime blocks in advance, to be used for as long as it lasted.

It seemed as though it was the prepaid business model propelling the extremely rapid adoption of mobile handset use lower and lower down the income stream.

Back in 2008, thanks to CK Prahalad's groundbreaking work, the concept of the Bottom of the Pyramid aka the BoP was trending. We were going to do business with the poor, and together, sustainable social enterprises would alleviate poverty through profitable business models, offering myriads of goods and services to the vast majority of the world's population. But very quickly, a challenge was observed, and I framed it so:
The challenge posed by current business models and payment plans is not the amount that must be paid but the inherent conflict between the regularity of the payments, usually on fixed schedules, against the unpredictability of funds available and irregularity of cash flow.
Yet this very same demographic had embraced the prepaid business model enthusiastically. In South Africa, you could purchase electricity and in Malawi, watch satellite TV. I summarized my findings thus:

What made prepaid work so well for those who managed their household finances on irregular and unpredictable income streams? 

And what could we learn from this in order to inspire business models and payment plans for the majority who managed without regular paychecks and access to credit cards and other financial tools?

There is no "Bottom of the Pyramid" market

Back then I conflated the prepaid business model and its adoption by those on irregular income streams (both rural and urban) with the Base of the Pyramid. I assumed that the informal economy and the Bottom of the Pyramid's "survival markets" were one and the same. It took a series of projects in the field, undertaken from summer 2010 through to the end of 2012 that opened my eyes to the realization that the cash based, informal markets operated on their own rhythm and patterns.

And, increasingly, as the insights from my own observations and interviews demonstrated, I realized that there was not only no such thing as "the BoP" - the concept itself often hampered the success of enterprises seeking to serve this intended audience. The consumer mindset and buyer behaviour that I'd observed (and erroneously labeled as "bottom of the pyramid") was an outcome of a variety of factors, not just income level or purchasing power.

Then GSMA's 2013 Mobile Economy report showed the global preference for the prepaid business model, not just in Africa. There was a 'prepaid economy' that seemed to be more related to the informal economy rather than poverty per se. I took a look from various angles.

At the time, I was lucky enough to be involved in a project that let me observe and compare the performance of 4 pilot programs meant to test payment plan and business model variations in two different East African countries for a client's current and future product range. It led me conclude that what seemed to work for the majority of the customers was linked to the degree of flexibility inherent in the design.

Flexibility is the underlying principle of the prepaid economy

The vast majority of transactions across the continent are still in cash money (although this may change, given current innovations) and the informal sector dominates, especially in retail, in most countries in sub Saharan Africa. Bank accounts and plastic are not yet the norm.

Your purchasing patterns are linked to the amount of cash you have in hand, at any given time. 

Prepaid puts you in control of your spending

This combination of factors drives the preference for payment plans that put the greatest amount of control in the hands of the end users. The prepaid model's attractiveness has less to do with paying in advance and more to do with the span of control over when you spend, how much you spend, how often you spend. There is no mystery bill at the end of the month, more so when you have no idea how much you're likely to make this month or week or day. 

Will mobile money change this behaviour? 

On one hand, the fact that a mobile money account allows you to keep some float implies that you are now able to consider purchases unrelated to the amount of cash money you have in your pocket. Michael points out various forms of consumer credit being made available and how that is already changing spending patterns. Once an ecosystem of financial services evolve around the core mobile money transfer (payment systems), credit ratings would be available spurring further debt fueled consumption. Would this encourage people to move to postpaid billing? The data from across the world seems to imply not.

What are your thoughts?

June 16, 2014

How can a bank account help the unemployed?

Wizzit solves this problem by using what it calls Wizzkids, who help new subscribers sign up and show them through the system. In cases such as Johannes', a pilot like Coetzee flies in to do the paperwork. Coetzee was invited to Elandslaagte Farm by its co-owner Marisa van der Heever. She not only wanted to give her employees access to banking, but also to reduce the hard cash in circulation, which is often a target for rural criminals. It also allows workers to save their money more easily, she says. What's more, Coetzee was able to open accounts for her 54 workers in less than an hour.
Once a Wizzit account is open, deposits can be made electronically and transferred to other Wizzit users or to pay accounts, including such things as utilities accounts. Wizzit has a range of retailers and stores who accept payment from it, as well as Maestro debit cards and access to internet banking and ATM-based banking. ~ Receiver Magazine, Toby Shapshak
This paragraph from Toby Shapshak's article on mobile banking and digital currency in Africa in the latest Receiver magazine inspired me to share a story of a man we met in Alexandra township, one of the most dangerous parts of Johannesburg, South Africa. Dave and I were meeting someone in connection to our project with Experientia in January and Father Nazareth (not his real name) dropped by our host's house.

Curious to more about what we were doing, he shared with us that he was a Wizzit account holder! Naturally I offered to buy him lunch if he'd share his story with us. He painted a picture of life under apartheid - he is in his fifth decade - and his struggles both within the system and later, as a member of the militant arm of the ANC. He seemed resigned to the fate that his past as a 'freedom fighter' was held against him in this new South Africa, seen as a 'trouble maker' he was more often unemployed than not. Both he and his wife had Wizzit accounts although neither had a working phone at the moment. Nor any money in the account. But he added, the beauty of the account was that it wouldn't expire just because no transactions had been made - it seems regular banks in South Africa cancel accounts if there has been no activity for the preceding 6 months. And opening the account had been so easy - no paychecks, proof of residence or regular income was required, just his ID and his mobile phone number.

At that point, he looked up from his pizza (he only ate half of it and planned to take the rest home with him to share the treat with his youngest children still at home) and asked me a question that led to a conversation that totally changed my perspective of him. In an instant he went from an unemployed artist and initerant preacher to a visionary with dreams of changing the quality of life in his community and instilling civic pride amongst the residents again.

How can a bank account help the unemployed, you tell me?

When I asked him what difference did having a bank account make when he had no money he talked about the sense of empowerment that comes from having this tangible symbol of being part of the mainstream establishment. Though unemployed and supporting his family through odd jobs and piecework, he was now a bank account holder! They were part of Wizzit's community and he felt it added value to his standing in his church - he is the leader of a 1000 member church and his community. Now the question was how could this kind of bank account - easy to open and easy to own - with all the intangible benefits that having a bank account, something that seemed out of reach for the majority of the residents in Alex township become a platform for civic development. Just like the story mentioned by Shapshak above, Father Nazareth had a vision.

"If you remove temptation, "he said, "you will remove the motive for the robbers."

Then he took his background as a trade union leader and organizer to start brainstorming around using mobile phone bank accounts and the local civic organization to work towards a community based solution for lowering crime.

Community cash deposit system to help lower crime in townships

The temptation being the cash that everyone is forced to keep or carry, including spaza shop owners, tavern owners, tuck shops and all the hair salons in the township as well as all the other residents who work infrequently or irregularly and thus do not have bank accounts. He was began talking excitedly about organizing all the shop owners together, getting them access to their own accounts with Wizzit and then organizing daily protection for collections or deposits so that there would be no money at the end of the day in cash form that can be easily robbed or stolen.

He could see the potential for lowered crime rates if every earner in the township could have an account and even they went out to do some piece work for daily wages, they could deposit the money before walking home from the train or bus (majority of robberies take place at the bus or train station at night when they know people come back from work). He began mapping out a way the old civic street and yard model of organization back in the 'bad' old days could be used to coordinate and manage the activities, giving people a sense of security instead of everyone having to sleep with hard cash under their mattress.

He said crime was so bad at night that if he stepped out to the corner shop at night he would carry his old phone in his pocket just for the tsotses (literally means 'bad men') - they'd kill him if he had nothing to give them, he added. At that point, our conversation had to end but I had a feeling that Father Nazareth had left me with insight on exactly what the real power of possessing a bank account meant to the underemployed and those at the bottom of the pyramid. In turn, he'd designed himself a concept that just might make a real difference if it can be prototyped and then scaled up across the country using the same principles of grassroots organization that they had already developed during their freedom struggle.

This article was first written in July 2008. 

May 31, 2014

Kenya: Leapfrogging the informal economy into the digital economy (without MPesa)

With Equity Bank's recent announcement of the upcoming launch of their MVNO, one can easily surmise that we're going to see a whole new kind of leapfrogging of legacy infrastructure take place in East Africa's foremost economy.

The initiatives planned by Equity have the potential to trigger the cash based, informal economy's catapult over traditional means of formalization, straight into a cashless digital economy, that too on the mobile platform.

Speculation has been rife ever since Equity won a license for mobile virtual network operations (MVNO) that the bank would compete with telcos for a share of Kenya's highly competitive and forward looking mobile telephone business. But if one listens carefully to their livestreamed press launch earlier this week, one can see where their emphasis truly lies.

This MVNO has been established in order to provide the bank with a wholly new distribution channel in addition to their existing points of service. Forming  their own mobile operations allows them to ensure secure, stable and reliable IT infrastructure and data services. In fact, they've just announced the establishment of a new $34 million data centre in addition to their existing facilities. 

Their objective is not to compete with telcoms or mobile money transfer, said CEO James Mwangi during his presentation, it was to compete with cash. That is, Equity Bank has identified their potential opportunity space in the fact that 96% of transactions currently taking place in the region are made with cash money. To quote the Daily Nation from February 2014,
The market for cashless payments in Kenya is expected to expand significantly in the coming months. Last year, President Uhuru Kenyatta directed that cash payments be banned from the public sector beginning April 1, 2014. By the end of July, all public transport vehicles are expected to be using electronic payments, according to regulations gazetted by the National Transport Safety Authority earlier this year.
Therefore, if Equity Bank can provide the market with an integrated ecosystem with which to handle all these payments seamlessly, then this could provide a fresh and robust revenue stream. The management knows the benefits of going mobile.

“To really bank the unbanked, we need to go cashless because the biggest cost of doing financial transactions is actually cash,” Mr Staley added.
Earlier, I'd covered Beba Pay, their joint initiative with Google to provide NFC enabled cashless bus fares and speculated on the challenge faced by introducing technology requiring massive behavioural change by the end users. There had been resistance to adoption by transporters and the scheme wasn't turning out to be as popular as imagined.

Why should this launch be any different, and why am I framing this initiative as a genuine disruption of  both the informal economy as well as financial services, both on and off the mobile platform?

From my earlier post:
From the commuter's perspective

Cash in your pocket is the most flexible payment mechanism when managing daily expenses. A prepaid card locks in your cash, particularly if its only usable for one type of purchase. For example, you might need to purchase milk and bread on the way and make a decision trading off your matatu fare for food, choosing to walk home instead.  At the moment, prepaid payment cards have not yet scaled beyond the transport sector, so if you have 200 shillings in your Bebapay card, it becomes an inflexible tool without options for alternatives. How likely are you to lock in extra cash when you're accustomed to the flexibility required to manage expenses, especially if you too are employed in the informal economy? And how convenient is it to top up your card at the nearest Equity Agent as opposed to jumping on the nearest bus with cash in hand?

From thinking about today to planning for tomorrow, without the accompanying infrastructure.

The system imposes planning for the future out of context of the entire 'prepaid' or kadogo economy's rhythms. This is a huge change in behaviour required from all the end users of the system. To go from the daily rhythms of irregular income streams where coping mechanisms are habituated to minimize the volatility between expenses and cash flow to suddenly budgeting transport costs, planning in advance to top up your matatu card, changing the way you think about money is far more complicated and challenging than simply adopting a new transport payment service.
 Essentially what I'd been saying back then was that the cashless transport payment solution had been introduced in isolation from the entire ecosystem of the cash based informal economy. Now when we look at what Equity is proposing to launch in July, we see an entire payment ecosystem. One that seems to offer the flexibility of cash without the friction of being locked into a system.

 In addition to the infrastructure, they are lowering the barriers to adoption by offering a few key freebies:

1. A special SIM to all 8 million of their customers, a good majority of whom are among the lower income segments or part of the rural economy, an act of inclusion on which they've  made their name.
 “Users who want to stick with their current mobile lines and at the same time enjoy Equity’s banking solution will be able to do so with our slim card,” Equity Bank chief executive officer James Mwangi said in an interview. “The SIM Skin gets married to the existing card and turns your phone into a dual SIM although it has only one slot. If somebody calls you on your Equity line, you can pick it and if they call your other network, you do the same.”
 It comes with the mobile wallet and allows secure mobile banking and payments.

2. At the same time, they are distributing 300,000 NFC enabled smartphones to merchants around the country.
On Monday 21st April 2014, Equity Bank announced it will distribute 300,000 NFC-enabled smartphones free of charge to supermarkets, restaurants, kiosks and barbershops as it seeks to boost income from the payments processing business.
Taken together, you can see the seeding of a critical mass of technology being made available among buyers and sellers for cashless transactions. Frictionless payment processing comes into being when the costs of the middleman's infrastructure are able to be absorbed by the single window provision that a bank which is also a telco can enable.

When the myriads of other details of their strategy are taken into account - opening a new Equity account would be as easy as sending a shortcode message, or the content platform hinted at during the press conference but yet to be revealed, one can conjecture the potential for disruption inherent in this space when everything goes live in July. There's mention of offering mobile innovators a global payments platform to further spur commercial activity.

This won't just stay within Kenya like Safaricom's MPesa. Both Equity and their mobile infrastructure partner, Airtel, refer to their operations across the East African region, which when seen in light of the increasing regional integration taking place for trade and cooperation, imply scale in the forthcoming near future that will impact socio-economic development as much as the mobile phone originally did.  This just might finally put that bank in your pocket.