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“Wealth Management is the right approach”

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“In conversation” is a new series of Q & A blogs from the IFMR Blog team where we ask questions on behalf of our readers to leading personalities in the field of financial inclusion.

In the first episode of this new series, I spoke to Ignacio Mas-Ribo, Deputy Director, Financial Services for the Poor, Bill and Melinda Gates Foundation on his recent paper on financial inclusion.

You argue in your paper for a “safer” place for the rural people to save. Do you see the current informal options as unsafe? After all, these options have survived for many years now?

I would use the word “unreliable” over “unsafe” which is a more broader term, because a lot of the savings is in physical form. I don’t want to overstate the risk that things could get stolen and therefore they are unsafe. The second concept behind unreliability is the issue of “correlation”. For example, just when I need to liquidate my savings, because a lot of the informal options are very local, that could precisely be the time when most of the others in the neighbourhood would want to do the same thing. Or when I want to liquidate my savings in a group, probably every other member wants to do the same thing. So the notion of savings works better when the pooling of risks are more uncorrelated. The third concept is that savings options are just not liquid. In ROSCAs for example, it may not be your turn to liquidate or, if you have livestock, you cannot partially liquidate them. So there are many facets of unreliability. Each informal savings option may be right for a certain circumstance but it may not always give me access to my money when I need it most. But what if I had better options?

So you’re saying the rural people should have better options to save?

Yes. If you look at our program, our stated purpose is to put more emphasis on the savings side. And that is for three reasons – first, we think that the option to save is a basic option that everybody should have and that is because, options like credit or insurance may not be relevant for everyone but the option to save is definitely relevant for everyone. Secondly, from a donor point of view, we think savings is a neglected service. Thirdly, we think that by focusing on savings, we are naturally forced to deal with one of the major issues in microfinance, which is the high transaction cost. A customer will be willing to travel long distances to take a loan and repay it every week or month, but he or she would not do that for savings. So automatically, we are forced to look at efficient solutions for this problem.

Why do you think formal institutions don’t see profit in offering savings products to the rural people?

In a ‘credit world’, the focus is on two things – products (that have to be structured properly) and financial education (abuse of credit can hurt). In a ‘savings world’ these two become less important. Instead the focus would now be on ‘Brand’ and ‘Distribution’. The institution now has to sell itself, because there is no natural inclination by the customer to give you his/her money. So branding becomes an important exercise. Secondly, the institution needs to be so much more closer to the customer and so distribution of the institution at the right location becomes very important. I emphasise in my paper as well that there is no business case for banks to setup such an infrastructure.

Could the cost of technology or any other cost be a limiting factor?

The cost comes from two things – one is the marketing cost. Who is going to invest to tell the customers about the new service that has been rolled out and why they should be trying it out? That is precisely what the big banks in India are not doing. They are signing up BC’s [Business Correspondents] but they’re not funding them with adequate marketing costs. The second cost is signing up the stores and training them. Not just training them once, but supervising and re-training them every two or three weeks, consulting with them, helping them understand how to optimise the business. That is again is not happening in the BC model in India today. There is a lot of focus on the “card issuance” and not enough focus on acquiring the right stores and helping them through the process.

I think technology is perhaps the lowest cost in the system. Of course, there is always an expensive way to do things. But I strongly argue for leveraging on the existing infrastructure like stores that already exist, wireless network that already exist. Rest of the cost is negligible.

Do you think convincing people to move from hard cash to electronic cash will be a challenge? Would people be willing to experiment? Is that a concern?

I think the emphasis needs to be shifted from “education” to “marketing”. I would say the best way to deal with it is by creating compelling value propositions to the customer. Poor people are not that different from rich people in this respect. If you and I could use bank accounts and electronic money, why would they be more different from you and me? A classic case would be the M-PESA model where there was a compelling value proposition and result was 45% of the adult population of Kenya being enrolled as customers.

But many say that M-PESA’s success can be largely attributed to the already existing market share of Safaricom. India, on the other hand has many players in the telecom segment and getting everyone to talk to each other would be a challenge in itself?

Absolutely. It would not be done in the same as way it’s done in Kenya. Regulators would insist on different features, market structure is different and customer needs are different. The desire to understand the customer’s needs and serve him are perhaps most important. This is where I think the work of KGFS is very impressive. If I may say more on this…

Sure, please.

I really like the idea of a microfinance institution being almost like a private banker to the poor. As we emphasise on savings, ultimately what people want is not just savings but a broad range of financial services. In order to meet a broader range of financial needs, I think people will need much more of a financial advisor. I think “Wealth Management” is entirely the right approach and it’s my personal belief that that would not be done by banks. They would have much like a retail wealth management approach.

This wealth management approach would be even more powerful if microfinance institutions took “cash” out of the equation. I think cash is just a commodity end of the business and it would be a misallocation of manpower if trained microfinance staffs are delegated to just deal with cash. What makes the economics not very attractive for an MFI, is the combining of highly scalable activities like cash management with non-scalable activities like customer interaction. So if cash were taken out of the system and handled through a separate channel, MFIs could then focus on products and unleash the power of wealth management.

[The conversation with Ignacio will continue in the form of “Mobile Money” series of blogs starting next week. Watch this space for more!]

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