Tavona Biza discusses how technology could help to increase financial inclusion rates in Africas informal sector
In sub-Saharan African countries, the majority of active adults are primarily engaged in informal market activities, and this situation is expected to continue. The 'informal sector' refers to employment and production taking place in unincorporated or unregistered enterprises.
Many financial service providers have traditionally shied away from the informal sector, but owing to, among other things, increasing competition and changing markets, they are turning to it to find alternative revenue streams.
Access to finance is important for those in the informal sector, who in many cases are facing financial challenges. It allows them to save for the future, as well as to insure against both income and health shocks. Although the rate of financial inclusion in Africa is low, many people in the informal sector have a desire to access finance and have come up with alternative means to access financial services, such as through savings groups and credit associations. These were established largely because of the strict credit and account opening requirements of financial service providers.
Some reports suggest that only 7% to 8% of the population in sub-Saharan Africa have a bank account, and the average insurance penetration rate in this region is 2%-5%. This is in stark contrast to the mobile phone penetration rates of between 50% and 70% in most African countries. These rates are continuing to grow, particularly as costs for mobile telephones and network access continue to decrease.
Mobile phones are primarily used for making calls for social purposes, but are also increasingly used for financial transactions between family, friends and even between customers and service providers.
This broad reach that mobile technology currently provides therefore makes it a potentially attractive distribution channel for financial services companies to increase their reach to the informal sector.
Many companies have previously attempted to access this market,as evidenced by the proliferation of micro-insurance providers over the past 10 years. Some of the attempts have not been very successful or profitable.
However, there are a number of success stories. For example, over the past five years, mobile money has taken off significantly in countries like Zimbabwe and Kenya. This is, however, mainly for transactional services, and the same trend has not been seen in the provision of longer-term solutions, such as long-term savings or long-term insurance products. There have also been a number of successes in West Africa with mobile insurance.
Challenges ahead
Infrastructure that is reliable and cost-effective is necessary for the successful implementation of mobile financial services. Financial services activities and operations require automation. This sometimes hinders progress in Africa, as mobile networks and internet are not always easy or cost-effective to access.
There are also many challenges with respect to the growing risk of potential cyber-attacks. These are more pronounced where the mobile phones are entry-level smartphones and feature phones that have much lower protection mechanisms.
In addition, some in the market are not well informed about the risks involved.
A further challenge is a lack of information on the informal service sector, which makes it difficult for companies to develop appropriately tailored strategies
and products.
There are a variety of reasons for this lack of information, the main one being that the sector has traditionally been excluded in various market research studies and official statistics, such as calculation of gross domestic product.
Key success factors for accessing informal markets
There are a number of factors that could potentially assist companies in penetrating the informal market using mobile technology:
1. Establish trust
Trust is arguably an important success factor when addressing the informal markets, particularly when selling financial services. Trust can be established in a number of ways, such as donations and giveaways ('freemiums'), using trusted people to advertise, or simplifying products and, more importantly, ensuring that the products perform as promised.
When using mobile technology, it is important to get the basics right to build trust. Primarily, the company must make and deliver on basic promises. After consistently delivering on the promise, frills can then be added to delight the customer, which would result in loyalty.
2. Offer simplicity and convenience
One of the ways of achieving trust is through simplicity. This should be demonstrated in the products, servicing and delivery models that the company will typically use when servicing informal markets.
Indeed, regulators may even prevent a product from being sold through low-touch channels, such as mobile technology, where the product is deemed complicated.
Therefore, although traditional insurance and other financial services products are highly complex, often with complex terms and conditions, the solution for this market, particularly using mobile technology, has to be much simpler.
Given that some of the income levels in the informal sector are relatively low, the purchase decision of such customers is unlikely to be an easy one. As a result, customers are only likely to buy products they need and understand. Where a purchase decision happens without understanding, there is a risk of customers subsequently realising that they did not want the product. Customers are likely to tell others about their dissatisfaction, and, with many companies operating in closely-knit communities, this could make selling other similar products very difficult in the sector.
Convenience is also a very important factor in providing services to this sector. The majority of clients in the informal sector are sole traders and employees who are unable to leave their place of work for an extended period. Being able to use mobile technology to access services while at their places of work would be invaluable.
3. Education and awareness
Financial services companies need to be educated on the needs of the informal sector, and there is also a clear need for financial education for the informal sector to get an appreciation of the benefits and importance of financial services. This can be done relatively easily through mobile technology - for example, by introducing short daily financial education tips or mobile applications that bring sector players together in a discussion forum, allowing them to access resources and ask questions to each other and to a financial services expert.
Deliver value, not just price
As with the formal sector, as long as the product or service demonstrates appropriate value, the informal market is willing to pay for it. Obviously, the price could not be inordinately high for this sector, but the margins need not be thin. The reason that many companies struggle in this sector is that they try to service this market using their traditional service and operational models.
If value is to be achieved at reasonable margins and affordable prices, then the delivery model will definitely need to change for this market. Doing this will entail, among others, measures like simplifying products and reducing human interactions.
If the offering is relevant to the customer, it creates the feeling that the provider understands them and their needs. Mobile potentially provides a low-distribution-cost model through which to access customers and provide affordable solutions for them that are also profitable to the provider.
Mobile technology has an important part to play in increasing financial inclusion in Africa. While there are challenges to overcome, an increase in financial inclusiveness has the capacity to significantly improve the lives of many people. There are also potential benefits to the economy as a whole, as well as to the financial services sector, which could see improved revenues and profits. The challenge is for financial services companies to come up with appropriate products and delivery models, which can be trusted and are simple, convenient and affordable.
Tavona Biza is an actuary based in Zimbabwe