This post is written by Jesse Fripp, SBI Vice President.
In October 2012, at a gala event in New York City, the Better Than Cash Alliance was officially launched. With a stated objective to “make the transition from cash to digital payments to achieve the shared goals of empowering people and growing emerging economies,” BTCA represents an important step forward in developing a unified industry voice for the effective deployment of new disruptive technologies. A major emphasis of the initiative is on expanding the universe of government and donor to person cash transfer programs (government to person, or G2P) as a means to enhance efficiencies, increase transparency, and ensure security and minimization of “leakage” through the use of new delivery channel technologies. While the emphasis of the BTCA’s efforts are on policy-makers and the macroeconomic advantages of a “cash lite” society, a big question still remains: is cash lite really “better than cash” for consumers?
In “The Journey Toward Cash Lite” a white paper developed by Bankable Frontier Associates for BTCA, the authors helpfully break down both the opportunity and challenge of achieving a cash lite economy for multiple groups of economic actors – government, donors, businesses, and individuals. However, there are two key areas of the conversation that merit more focused consideration – namely, the assumption that increased use of e-payments equates to financial sector “deepening” and the pivotal place assigned to the issue of “trust” as the major barrier to consumer uptake at scale.
On the first point, the assumption of greater economic value addition is predicated on the argument that “a higher proportion of electronic payments in an economy would imply a higher proportion of deposits in the formal financial system, which would be measured as greater financial depth.” While compelling, the truth remains that in developing economies most electronic payments still originate from cash-in/cash-out agent outlets with a relatively minimal engagement in the formal financial sector, including in the form of stored value and current, savings, and other formal financial sector instruments. To a large degree, this reality is driven by the limited engagement of formal financial institutions in electronic payment platform delivery, often due to the business model challenges that are created where one group of interests (primarily mobile network operators, or MNOs) control the “rails” and another group (regulated banks) controls the access to the financial “products” that enable effective intermediation and durable value-creation.
On the MNO side, the fundamental challenge is that while their business model works quite well with a payments-only approach, it has proven much more difficult for MNOs to enable a wider range of formal financial products. The execution requirements necessary to enable a broader basket of financial service products (deposits, credit, insurance and others), has simply proven too complicated to manage from across a variety of business activities – regulatory compliance, risk management, customer service, data integrity, to name a few – to justify the distraction from the core MNO business of selling voice and data services. From this perspective, electronic payments have incremental cost and are highly complementary to the core MNO business model.
On the other hand, many banks are only interested in alternative channels as a means to reduce the delivery-cost barriers to historically unservable and/or unprofitable consumer market segments. As such, they have demonstrated limited interest in investing in and developing the complex consumer branding, marketing and product development functions – much less technology and agent networks – necessary to be successful in alternative channels. This resistance is even further compounded when MNOs and other platform operators exhibit rent-seeking behavior in creating onerous revenue-sharing terms for providing access to their “rails.” In such a dynamic, the cost-benefit dynamics quickly break down for both banks and MNOs.
On the second point, the issue of trust, the challenge – which the paper’s authors identify – is that trust is built through a series of regular, positive, interactions over time. To achieve this, electronic payments providers have to contend with the two primary drivers of poverty, namely choice and control – or rather the lack thereof. While we may view cash as an imperfect and risky instrument from the policy perspective, at a practical level, cash as a tool maximizes the ability of a low-income householder to control use and access and to make timely choices with their resources. While there are inherent risks to holding and handling cash, the leap of faith required to transfer a tangible physical asset to an intangible one that is subject to electricity failures, agent access, agent liquidity, and the potential of taxation is not as clear cut as often presumed. The significant fees associated with many of these service providers – the much-studied M-Pesa levies up to 30% in fees on small-balance transactions – further weaken the value proposition. While the poor may have limited options, the reality is that they are extremely savvy in their choices and in controlling their financial lives. Cash is a powerful tool in their arsenal.
So while the paper’s authors rightly identify the major obstacle to uptake as one of “triangulation” – of government, business, and consumer interests – and that the BTCA initiative brings a welcome effort to raise important financial inclusion issues at the policy level, much more must be done to engage at the level of enabling and defining effective business and partnership models that maximize the value of alternative channels to the consumer. They are, after all, the ones who will ultimately decide what is better than cash.