Executive Summary Youth take up an increasingly greater portion of the total population in the global South, but largely remain financially excluded. Setting up a savings product for poor youth in the developing world is extremely costly. For reasons such as low or unstable account balances, and frequent transactions, operational expenses are high. The uncertain nature of youth savings makes these deposits ill-suited for on-lending and therefore deprives financial institutions of a primary source of revenues. For youth savings to be viable, financial institutions must take different approaches to scaling up youth savings products in a sustainable manner. Mobile technology has been heralded as the future for financial inclusion of the poor. Indeed, mobile banking can particularly offer microfinance institutions (MFIs) some significant cost reductions. Personnel and travel are important cost drivers for an MFI, due to its relatively strong client interaction. At the same time, the costs of setting up a mobile banking system are becoming increasingly within reach for MFIs. This report demonstrates through various examples how the design and implementation costs are approximately equal to the annual running costs of one single bank branch. However, mobile banking cannot be viewed as a magic solution for financial inclusion and the enhancement of financial capability. Clients have found mobile banking sometimes difficult to use and not in line with their financial needs. Others do not always have trust in the agent, system infrastructure or network coverage. Then there are those who simply do not feel comfortable with technology and cannot take advantage of the new product innovations. It can be hard to justify setting up a cost-reducing mobile banking system if people are reluctant to use it. This is where youth savings products come into the picture. Mobile phone penetration rates in developing countries among youth aged 15-24 are generally higher than among the 25+. Youth are usually keen to test new innovations and are still receptive to - and quick to take up - substantial education in financial literacy and product usage. Youth fully familiarized with mobile banking can act as a gateway to educating and building trust among the less tech-savvy generations. However, there are a few caveats that could limit a large-scale uptake among youth. Regulatory Subscriber Indentity Module (SIM) registration requirements are in some countries increasingly limiting the scope for those below the age of majority to legally acquire a SIM card. This adds another layer to the often already stringent regulatory environments that exist concerning youth access to financial services. Yet even under a favourable regulatory environment, the uptake of youth savings products cannot be guaranteed and will instead largely depend on their perceived relevance and how comfortable and satisfied youth are with using them. As new consumer financial protection concerns emerge, MFIs will need to gain great awareness of the distinct needs and vulnerabilities youth face depending on factors such as age, gender, socio-economic status, level of education, patterns of income and expenditure, financial and household responsibility and phone ownership. Particularly the poorest and most vulnerable youth may, for instance, share one phone with several relatives or friends, which raises important digital privacy issues. Child and Youth Finance International has defined general Child and Youth-Friendly Banking Principles to guide financial institutions in a youth-centered product design1. In addition to these principles, this report offers additional youth mobile banking-specific recommendations. Providing youth savings through mobile phones will remain expensive. Previous business case analyses have argued that – through cross-selling other, profitable financial products to the family members and peers of youth clients – MFIs could somehow manage to keep youth savings products financially sustainable. However, the true value of youth clients may lie elsewhere. If properly executed, youth can become champions of a revolutionary mobile banking system. It would be a triple win for youth, MFIs and adult customers. Youth are critical to the future of mobile banking.
1
Child and Youth Finance International and Mastercard Corporation, 2014, p18.
2
Table of Contents Executive Summary 1. Introduction 2. Setting the stage: the rationale for youth savings 2.1 Rationale for serving youth clients 2.2 Rationale for youth savings 3. The Rationale for M-Banking 3.1 Revenue generation model 3.2 Cost reductions 3.3 Challenges to M-Banking 3.4 Moving towards a cashless economy as an additional rationale for m-banking 4. M-banking and youth savings 4.1 Youth savings affecting the prospect of m-banking 4.2 M-banking changing the business case of youth savings 5. Recommendations for sustainable youth-friendly mobile savings products 6. Conclusion Annex A – Bibliography
2 5 6 6 7 10 11 13 14 15 17 17 19 21 23 24
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1.Introduction In recent years, microfinance has started to broaden its attention from credit provision towards microsavings. As part of this trend, youth savings have started to attract considerable attention. Contrary to common preconceptions, findings indicate that youth in developing countries, including poor youth, do save.2 Demand for microsavings products is the largest, overshadowing the demand for microcredit on which the industry has traditionally been based. Nevertheless, only few microfinance institutions (MFIs) have begun offering youth-tailored savings products. Could mobile banking be the solution for turning youth savings products into a lucrative investment? Many financial institutions in developing countries perceive savings products for youth to be financially unsustainable.3 Opening and sustaining the account and doing transactions is costly. Additionally, the financial institution should ideally provide a financial education component to encourage responsible and sensible use of the account and reduce account dormancy.4 Compared to other financial institutions, MFIs tend to pursue more social goals and be less oriented on profit maximization. Until now, however, the provision of savings products to adults in general, and youth in particular, has been low. Among the approximately 1400 MFIs reporting to the MIX Market in 2014, 481 offer adult voluntary savings products, compared to 175 for youth.5 The business case for youth-tailored savings products, or the regulatory barriers to offering deposit services, may simply be too bleak for most MFIs to invest in. In recent years, however, the prospects for financially sustainable microfinance services have improved. The industry has traditionally relied on close face-to-face client contact to monitor its loan portfolio and collect loan repayments and deposits. As a result, personnel expenses often take up a large portion of the total costs. However, mobile technology has the potential to decrease reliance on human capital. Eighty percent of the 2.5 billion unbanked people in the world are estimated to own or use a mobile phone.7 With uptake of mobile technology being particularly prevalent among youth, mobile banking (m-banking) could perhaps partially compensate for manual contact and manual transactions of youth financial products.
Youth – a definition There is no strict single age definition of youth and definitions tend to vary within a 10 to 30 years age range. This paper refers to youth being within the 15-24 age band as employed by the UN6, unless otherwise mentioned. Given the financial exclusion angle used in this paper, references to ‘youth’ are meant to broadly comprise the low-income, excluded and/or marginalized 15-24 year olds in developing countries.
This report examines the commercial rationale for MFIs to offer youth savings through m-banking channels. The study first provides a broad overview of the rationales for youth as a client segment, youth savings products and m-banking separately, as well as the distinct challenges faced. The subsequent section will zoom into the rationale for m-banking youth savings, examining both how m-banking changes the business case of youth savings as well as how youth savings affect the prospects of m-banking. Recommendations will be provided for setting up youth-centered savings products. The goal of this business case assessment is to provide MFIs insights into the feasibility and relevant dimensions of mbanking based deposit services for youth. Central to the report is its finding that the excessive costs linked to savings products for youth in the Global South is unlikely to be sufficiently overcome by the introduction of m-banking. Although m-banking does have the potential to offer significant cost reductions for MFIs for all of its banking clients, many client segments remain distrustful of the mobile-based banking system and reluctant to change. The report argues that youth are generally better-positioned to take up the m-banking model and can introduce this cost-saving way of banking to the wider population. Besides youth being a low-cost client segment for cross-selling and up-selling banking products, the true value of youth clients therefore lies elsewhere. If properly executed, youth can become champions of a revolutionary mobile banking system. It would be a triple win for youth, MFIs and adult customers.
2
MEDA, 2013, p19; YouthSave Consortium, 2015b, p24. CGAP, 2014, p1. 4 Research stresses the importance of financial capability, meaning “having both the knowledge to make financial decisions and access to financial services and products”, on saving behaviour and uptake (Youthsave, 2015a, p40). 5 MIX Market Cross Market Analysis, 2015 6 United Nations, 1981. 7 WSBI, 2012, p1. 3
2.Setting the stage: the rationale for youth savings 2.1 Rationale for serving youth clients Youth in developed countries are relatively well catered to with financial services. Their peers in the developing world – facing unique financial challenges – are no less in need of such services but do not enjoy the same rates of financial access. With on average shorter school enrolment, these youth tend to enter the labour market at an earlier age. Similar trends can be seen for marriage and independently heading a household, especially in Sub-Saharan Africa8. These tasks and responsibilities call for the provision of services by the financial sector to facilitate asset creation and building resilience. Yet youth have long been ignored as a client segment for the financial sector. Various reasons exist for this exclusion. Many countries have yet to include youth as a specific segment in their national financial regulations. Opening a savings account tends to be seen as a contractual agreement. With minors not being allowed to sign a legally binding contract, they are consequently being excluded from the financial sector. Several national financial regulators and financial service providers have in recent years been looking for ways to overcome this challenge. Efforts included defining a specific minimum age for opening and operating an account (overriding the legal age to enter into contracts)9, proceeding through co-signers, using proxies,10or exploiting judicial loopholes.11 However, despite improvements, many youth under 18 remain barred from financial services. Even youth above the legal contract age often face difficulties with getting access, particularly in developing countries. Staff of financial service providers may not be used to, or trained in communicating with this young age segment. Alternatively, they may consider youth below the age of 25, sometimes even 30, as too risky to serve.12 In other instances, youth may not be perceived as (sufficiently) profitable as a client segment, and hence be left to their own devices.13 Lastly, some financial service providers do serve (typically somewhat older) youth customers, but do not segment their (adult and youth) clients according to age.14 As such, these youth are not considered any different from adult customers and hence lack the often much needed additional support. Despite the abovementioned challenges, many financial institutions have started providing financial products targeting youth. Youth financial inclusion has been particularly well-advanced in OECD countries, where adult financial inclusion rates also tend to be highest and hence financial markets are most competitive.15 Yet in much of the developing world, youth financial inclusion is in its infancy phase.16 Studies have indicated that particularly under competitive circumstances, financial institutions start to show an interest in underserved client segments like rural, women and youth markets as a means of reaching scale.17
8
New America Foundation, 2013. See for country cases of age regulations: Child and Youth Finance International, 2014. 10 One of the Child and Youth Finance International SchoolBank implementation models proposes schools to open an aggregate account that includes separate wallets for each pupil. Schools act as the account holder and are the contractual party, hereby acting as a proxy for pupils, who are not the legal owners of the account or a party to the contract. This model hereby bypasses legal age requirements yet does remove pupils of legal rights governing deposit holders. 11 Ethiopia for example maintains a legal age of maturity of 18 years. However, under labour laws, youth starting from the age of 14 can sign labour contracts for ‘light employment’ and other contracts. Consequently, working youth have been able to sign contracts for opening and operating a financial account. Source: Women’s World Banking, 2010; Similar contract signing judicial loopholes were exploited in the case of Mongolia and Peru. Source: New America Foundation, 2014. 12 Storm, Porter and Macaulay, 2010, p310; MicroCapital, 2014. 13 CGAP, 2014, p1. 14 Storm, Porter and Macaulay, 2010, p309. 15 World Bank Findex 2014 Data reports that 99.1% of young adults aged 15-24 in the Netherlands own a bank account, compared to 99.7% for those above the age of 25. In France, Spain, the United States and Japan, young adult account ownership is around 80%, with adult (+25 years) account ownership being close to 100%. 16 World Bank Findex 2014 Data on developing countries uncovers that financial inclusion of youth aged 15-24 in Sub-Saharan Africa is 20.5%, compared with 33.1% of the +25 years population. For Latin-America, these numbers are 36.9% and 56.0% respectively, whilst 6.9% and 17.4% respectively in the Middle East. 17 GSMA, 2015, p19. 9
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The commercial rationale taken by existing research in favour of financial products offering for youth clients has broadly rested on two pillars.18 Firstly, taking a lifecycle perspective, youth can easily become a profitable future customer base. Youth with financial products may find it convenient to stick to the same financial institution upon reaching the age of majority and beyond. As youth progress in their lives, their demand for more complex and profitable products will grow. Investing in youth is therefore a long-term investment. By attracting clients at an early age, financial institutions can keep their acquisition costs low. The market for youth products is less competitive and in some countries largely untouched. Fewer resources therefore need to be spent on marketing. Once youth have established and used an account for several years, considerably higher costs would have to be necessary to persuade them to change to the competitor. The second pillar applies particularly to contexts of low financial inclusion among adults. By targeting youth, the financial institution may gain a more favourable reputation among the general adult population whilst simultaneously increase the institution’s exposure to parents of youth clients. This may result in subsequent cross-selling of (profitable) banking products to parents. Parents may be more easily inclined to consider the financial institution’s products when seeing the positive banking experiences of their children as opposed to when approached through conventional marketing techniques.
2.2 Rationale for youth savings In recent years, several initiatives have been set up to cater to the need for financial services among youth in developing countries. These initiatives involve both savings products as well as loans.19 Providing loans has a better financial sustainability outlook, as deposit-taking in itself is not a revenue generating activity. Whereas the demand for youth loan product does exist (especially among elder youth as they become increasingly financially independent and entrepreneurial), data shows it is overshadowed by the demand for youth saving products.20 21 However, the supply of youth savings products is in most parts of the developing world not yet meeting the demand. 2.2.1
Immediate costs and revenues for youth savings accounts
The limited youth savings product supply side makes sense from an immediate commercial perspective. Studies have highlighted that the operating costs of a voluntary savings account often outpaces the actual amount deposited. With regards to poor adult savers, an IADB study estimated the average operating costs to be 250-300% of the average account balance.22 CGAP deconstructed the total administrative costs based on deposit level to be 120% for accounts with a balance lower than $50 and dropping to a ‘mere’ (yet still substantial) 20% for accounts with a balance of $50$100 among a Peruvian MFI. 23 Based on these numbers one can easily conclude that a regular savings account for youth in developing countries is immensely costly. For adult savers, an MFI may decide to partially transfer the high costs of a deposit account to the client. Market research stresses that the poorer segment of the market is often willing to pay substantially for deposit services.24 MFI revenues from deposit account clients could therefore partially consist out of account and transaction fees. Yet research by GSMA finds that currently Mobile Network Operators (MNOs) are the main beneficiary of such commissions, on average
18
CGAP, 2010a; UNCDF, 2013, p24; CGAP, 2014; MEDA, 2014. For an elaboration on a number of interesting youth financial savings and loan products cases, see European Microfinance Platform, 2012, and European Microfinance Platform, 2015. 20 USAID, 2009, p7; Moreover, usage data from Safaricom’s M-SHWARI savings and loan product in Kenya underlines that depositing (72% of users) and withdrawing (45% of users) money top the list of actions undertaken, as compared to only 30% who used the product to take out a loan, although the data does not exclusively cover youth customers. Source: Kaffenberger, 2014. 21 Although the uptake of existing youth savings products has often been inhibited by the inconvenience. Youth participating in the YouthStart programme mention “unclear and costly transaction charges”, “costly or complex requirements to open an account” and “high minimum balances necessary to keep that account active” as major barriers. Moreover, youth also desire flexibility to operate the account, especially since many are time-bound and mobility constraint. Source: New America Foundation, 2013, p7. 22 cited in Rozas, 2012. 23 CGAP, 2007, p7. 24 E.g. a study on women in Ghana uncovered that 70% of those surveyed paid a monthly charge of 5% of their total savings for deposit collection services. Source: GSMA, 2012a, p17. 19
comprising 52% of their total gross profits.25 Nonetheless, there could still be room for MFIs to also reap some of the benefits, as clients are often also willing to have a de facto negative interest rate on their account.26 The underlying need for savings stems from the poor generally having irregular income revenues and being in need of means of smoothening this out. However, youth might be less willing to pay for similar fees. Being generally less involved in the household finance, the immediate need for a deposit account might seem less urgent for them and will only become more visible when youth grow older. Yet instilling a savings habit and personal financing skills is most fruitful at a younger age.27 The difference between the perceived and the actual need for a deposit account requires incentives for youth, or at least removing disincentives like high fees. At the same time, this reduces the ability of youth savings accounts to provide any revenue source for the financial institution. 2.2.2
Liquidity generation
If not for the immediate revenues generated, why would a financial institution invest in youth friendly deposit-taking services? One often heard argument is liquidity generation. Financial institutions generate their earnings mostly from interest on loans, and to a lesser extent from insurance. The provision of loans, however, requires liquidity, which traditionally comes from deposits. Particularly in competitive liquidity markets, reaching out to youth as a source of liquidity might hence be beneficial. However, looking at the balance sheet of a typical MFI, one will find that the smallest segment of savers, be it youth or the very poor, only bring in a small, almost negligible portion of an MFI’s total liquidity. Research by IADB on MFIs in Latin America found that poor customers only contribute 3% of total deposits mobilized, even though they account for 75% of the active accounts.28 Different MFI models have different funding structures. NGOs typically depend on development funds made available to them either through grants or concessional loans from institutional or government actors. More commercial MFIs will have to rely on deposit taking from customers. Rather than solely aiming at the lower spectrum of the market, these MFIs will typically attract a few high-value customers for their liquidity. The IADB study uncovered that in the MFIs it examined, 50% of the deposits came from accounts with more than $50,000 stored, yet these accounts comprised only 0.4% of the total number of accounts.29 30 These clients were attracted to an MFI because of the high interest rate it could offer on its savings. Similar skewed distribution patterns can be found among MFIs offering youth savings products as part of UNCDF’s YouthStart Programme. A profitability analysis of Faîtière des Caisses Populaires du Burkina (FCPB) youth savings product shows that the bottom 50% of account holders in terms of savings levels comprise only 2.66% of total deposits, compared to almost 25% by the two largest youth deposit account holders31. Despite the seeming unequal distribution, it must be noted that FCPB actually takes a relatively profit-oriented approach by not only targeting the wealthier and more economically active youth in urban areas, but also limiting the number of low balance accounts through relatively high minimum deposit requirements for opening an account.32 Regardless of FCPB’s profit-oriented business case, its highest deposits-providing clients still remain quite smaller than that of adult savers in the IADB study. The account distribution according to savings levels among the FCPB and the other, more socially oriented YouthStart MFI partners uncovers that the vast majority of youth accounts are characterized by low account balances.33 Combined with their typically highly volatile account balances with high transaction frequencies,
25
GSMA, 2012b, p8. As found in a study among rural micro entrepreneurs in Western Kenya. Reasons cited for this willingness includes the substantial costs involved with alternative, informal savings mechanisms combined with the positive business returns that savings (either formal or informal) can have. Source: Dupas and Robinson, 2007. 27 Whitebread and Bingham, 2013. 28 IADB, 2006, p8. 29 Ibid. 30 Also MIX (2009, p4) finds a skewed distribution of sources of deposits. 31 UNCDF, 2015, p36. 32 Ibid. p.35 33 Ibid. p30-38. 26
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this makes these deposits ill-suited for on-lending. 34 Given these conditions, liquidity is a negligible reason for MFIs to offer deposit services to poor youth. 2.2.3
Indirect financial benefits: cross-selling and acquisition
With youth deposits neither being profitable as a service in itself, nor necessarily bringing in liquidity, the question remains as to what attractive aspect this type of service brings. Cross-selling of products seems to be the answer to the question. Studies have reported that, whereas deposit-taking services by MFIs are not profitable for the poor and youth, the two client segments are as a whole35. The possible scope for cross-selling loan, insurance and remittance products to youth seems limited, particularly younger ones. Nevertheless, when an MFI manages to offer products with high consumer satisfaction, it may expose parents, other relatives or community members to the institution and convince them to take up a loan with the institution. Alternatively, with youth clients growing older, their demand for more profitable financial products may grow whilst their satisfaction with the MFI may tend to encourage them to remain loyal. Among the various MFIs examined in the CGAP study, these factors resulted in sufficient revenues to establish the youth savers business case. Investments in youth savings products also have a social rationale, which affects acquisition. The ability to save in (semi-) formal ways is believed to be an essential tool for ending the poverty cycle. Benefits of providing access to youth as evidenced in research include improved school performance and long term planning,36 as well as peace of mind, empowerment and resilience to shocks.37 MFIs offering savings products to youth typically do so without being exclusively driven by profit. Customers will tend to appreciate the MFIs efforts to help them, rather than perceiving the relationship to be the opposite, with customers having to help MFIs to get profit. These investments hence tend to translate into a boost in reputation, particularly when the MFI is a pioneer in the youth savings market. A favourable reputation may subsequently result in a larger client base and higher eligibility for development funds and hence leads to financial benefits. 2.2.4
Challenges
Strict regulations might limit the scope of deposit services for MFIs. Contrary to credit services, deposit-taking requires a legal charter from the financial authorities. Several countries, among which most notably India, prohibit MFIs from taking deposits.38 Even in those contexts where deposit-taking is allowed, overly stringent regulations can still reduce access. Particularly smaller MFIs do not always have the human resource capacity to meet the extensive criteria for deposit-taking institutions. Supervision of MFIs required for meeting the regulator’s reporting requirements may be much more costly than for traditional banks, particularly due to MFIs’ generally smaller asset base yet much larger number of accounts.39 Also the high personnel costs associated with inspecting the MFIs portfolio add to the financial burden. One often overlooked component of youth saving products further complicating the picture is pursuing a client-tailored approach. Youth are easily perceived as a homogenous group. However, several dimensions exist, among which gender, socio-economic background, household (financial) responsibilities, employment status, geography (rural/urban), exposure to shocks, expenditure pattern, schooling, marital status, geographic mobility, etc.40 Additionally, youth comprise a very dynamic client segment with quickly changing banking needs as they grow older. These distinctions translate into financial products needs where one might wish immediate access to savings, whereas others can afford their savings to become available only after a pre-determined timeframe. MFIs investing in savings products therefore
34
See UNCDF, 2013, p24, for an overview of projected future profits from on-lending. By distinguishing on-lending profits between those with account balances above 100$, it becomes evident that the small group of rich youth savers are essential for securing any sort of prospect for reaching financial sustainability within a reasonable time frame. 35 See CGAP, 2010a; CGAP, 2014; European Microfinance Platform, 2015. 36 The YouthSave Consortium, 2015a, p84. 37 Plan and MasterCard Foundation, 2014. 38 ResponsAbility, 2014, p10. 39 Christen and Rosenberg, 2000, p11. 40 For an overview of experiences with the implications following market segmentation on the basis of age, enrolment status, gender and geographic location, see SEEP, 2013.
need to have a solid understanding of youth’s needs and design their products accordingly. This might complicate the commercial rationale for youth savings. Nonetheless, savings products will in many instances still be the most suitable means for reaching scale in the youth client market. Demand for youth loan products is mostly limited to the older and more entrepreneurial youth and those needing to make large and/or sudden investments (e.g. school fees). On the contrary, demand for savings products can, if appropriately tailored and priced, potentially be extended to the entire youth population. Norway for instance has a financial inclusion rate of 100% for youth.41
3. The Rationale for M-Banking The uptake of mobile phones in developing countries has been spectacular. Of the 2.5 billion unbanked, it is estimated that 80% possess a mobile phone42 and younger generations are particularly eager to use them.43 The potential impact of mobile phones on improving the lives of the poor is very promising, for instance for smallholder farmers acquiring market information of agricultural goods through mobile information channels. Also in the financial sector, mobile technology has huge potential, and many fintech and mobile network operators have entered the market to compete with traditional banks and MFIs. What is m-banking? M-banking (short for mobile banking) is an umbrella term for a wide range of financial services offered through mobile phones. Developing countries, particularly those in East Africa, have seen an enormous rise of m-banking services. Many of these m-banking services involve mobile payments using stored value. Prepaid mobile airtime minutes is still a popular means of stored value to be used as alternative currency, but mobile money (which is, contrary to airtime minutes, seen as an official currency and regulated by the central bank) is becoming increasingly important.44 M-banking, however, encompasses more than merely mobile payments. Examples of services include getting insights into the account balance, requesting an overview of past transactions, virtual support, personal financial management, biometric security features, and marketing. Several MFIs have leveraged m-banking to (partially) replace the existing services of loan application, loan disbursement and repayments, portfolio monitoring and savings mobilization. The service can also be used to locate the closest ATM/agent/bank branch. M-banking activities can be operated through internet-, unstructured supplementary service data- (USSD), interactive voice response-, wireless application protocol-, or SMS connection (including SIM Application Toolkit (STK)).45
The demand for offering m-banking services among MFIs does seem to exist. Among 73 MFI respondents to a TripleJump survey,46 13 already had m-banking service provision in place. Another 56 MFIs indicated to be interested in m-banking services in the near future. 63% of these had already taken initial steps to develop the m-banking channels. Only 4 MFIs expressed a disinterest in m-banking, at least for the near future. Although one might question the representativeness of the survey, the seemingly overwhelming interest in m-banking may well be indicative of great enthusiasm of the beneficial potential of m-banking. Perhaps more importantly, MFIs of all sizes expressed an interest, suggesting that mbanking service provision is not only perceived as an option for the happy few. The majority of the positive responses came from Africa, reflecting the already high uptake of mobile money transfers.
41
World Bank Group, 2014. WSBI, 2012, p1. 43 Pew Research Center, 2015, p14. 44 The Economist, 2013. 45 GIZ, 2015, p13. 46 TripleJump, 2013, p6-15. 42
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M-Pesa-based m-banking service provision using USSD/STK. After choosing for option 3 in the left screen, one will reach the STK menu on the right47
The positive attitudes among MFIs towards m-banking might be a reflection of this field of service provision becoming increasingly affordable. One study estimated the costs for setting up the IT system for mobile banking to range between $50.000 and $100.000 in the case of Kenya.48 Another study noted the m-banking investments, including IT systems, marketing, training of staff and product management, to account for $320.000 in the case of Urwego Opportunity Bank (UOB), a Rwanda-based MFI.49 Of this amount, UOB spent approximately $80,000 on IT infrastructure. A study by the Grameen Foundation has emphasized the crucial importance of doing research for product development to contain costs.50 A successful implementation relies on understanding what the customer wants and needs, as well as ensuring that the system works. The researchers find that a successful roll-out does not have to be costly. However, most of the costs concerned are one-time upfront investment costs. However, too little investment in the design and implementation phase may cause functional errors and create a lack of trust in the system among customers. The study’s conclusion stresses that once this basis of trust is gone, the amount of investment needed in later phases to rebuild the customer trust tends to be many times higher than the ‘savings’ gained during the earlier phases.51
3.1 Revenue generation model 3.1.1
Higher value proposition
Part of the financial case for m-banking rests on increased revenues. MFIs offer significantly higher value proposition to their products if they adopt m-banking as a service. Under non-m-banking systems, clients tend to spend considerable time travelling to bank branches, waiting in queues, and submitting their bank service request at physical desks. Brickand-mortar banks may have inconvenient opening schedules that conflict with clients’ working hours. Moreover, clients often have to visit the bank branch several times to first submit a request for a service and, once the request has been submitted, return for necessary follow-ups. M-banking services could be used for a range of banking activities, among which setting up an account, applying for loans and insurance, sending remittances, bill payments, mobilizing savings,
47
Enjoy Digital Life, 2014. CGAP, 2013, p4. 49 TripleJump, 2014, p4. The publication also provides a breakdown of the different cost components and the periods over which the costs were incurred. UOB is a Tier-2 MFI with +/- 280K depositors, 34K active borrowers and 25.9 million USD in assets in 2014. Source: MIX Market, 2016. 50 Yousif et al, 2012. 51 Ibid. 48
loan disbursement and repayment, and information on the account. Musoni, a Kenyan m-banking-only non-deposit taking MFI, reports that with the switch to m-banking, it managed to reduce its loan turnaround time from 72 hours to 652. The time savings gained with m-banking services might be effective for attracting new customers. 3.1.2
Analytics and monitoring
Secondly, m-banking can be leveraged to gain better insights into performance and client needs to subsequently create a better product that boosts usage. Account dormancy is a significant issue for MFIs in developing countries.53 Reasons could include a lack of product understanding among clients, a lack of interest, and distance to access points. Yet the exact drivers of dormancy rates are not always known. In some cases, focus groups and other interviewing techniques could be used to uncover these hidden barriers. In other instances, tracking of behaviour may uncover patterns. In both instances, m-banking could provide a solution.
SMART Mobile Banking Service STK menu for BDO bank account holders in the Philippines with a step-by-step process for transferring money from the current (CU) to the savings (SA) account. Once the m-PIN code has been entered, SMART sends an SMS confirming the transaction.54 Children starting from the age of 13 are eligible for using m-banking.55
M-banking provides financial institutions with a wide range of data on consumer behaviour. For instance, being able to analyze meta-data on mobile and other digital payments would allow greater insights into income generation and expense patterns. This data can subsequently be used to predict default of loans and determine loan repayment schedules that better suit the creditor’s needs. Data on financial behaviour also has the potential to be used for establishing a credit rating for the client. Similarly, reminder messages can anticipate large expenses by encouraging customers to save more during the preceding period. More generally, regular follow ups tend to stimulate usage of the account. Research shows that reminders are as
52
Accion, 2015, p5. In Sub-Saharan Africa 20% of youth aged 15-24 owned a savings account in 2011. However, only 11% of youth actually used the account, which means that almost half of the accounts were dormant. Source: Demirguc-Kunt and Klapper, 2012; Dormancy is not only prevalent among youth. Microsave (2011b) estimates that 80% of the 50.6 million microsavings adult accounts opened in India for accessing government-to-person transfers are not actively being used. 54 SiĂąel, 2012. 55 BDO, 2016. 53
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effective in this regard as face-to-face contact, suggesting that it is the reminder itself, rather than social pressure, that encourages savings.56 This can help MFIs to reduce account dormancy. Moreover, m-banking services can be a cost-efficient tool to collect feedback from customers on products. Although often limited in depth, these tools offer the possibility of large scale and instant data collection. Such services have been used in several contexts. The United Nations World Food Programme for instance uses mobile phones for data collection on remote rural market price levels. This data subsequently shapes the organisation’s food security programming for that area and the subsequent in-kind or cash-based transfers it provides. Feedback collection and data insight functionalities of m-banking combined can create a better suited and user-friendly financial product. 3.1.3
Service fees
MFIs can decide to charge extra for m-banking services offered, especially given that m-banking brings customers significant time-savings and convenience. However, the extent to which clients are willing to pay fees may be limited and may affect the uptake of mobile banking. In the ideal scenario for both clients and MFIs, service uptake reaches sufficient scale so that revenues per each service action can be kept low. However, scope for growth in m-banking services especially lies in the domain of transfers, whereas, on the contrary, MFIs’ strength primarily lie in loan products. Moreover, several MFIs have indicated that charges from m-banking services have overall been fairly insignificant.57
3.2 Cost reductions 3.2.1
Staff costs
Some research suggests that the business case for m-banking for MFIs is instead based on cost reductions. Due to their specific nature of close client contact, MFIs spend a considerable size of their costs on personnel. Studies of several MFIs have revealed personnel costs to comprise 30 to 70 % of MFIs total costs.58 With an automation of services, these have the potential for significant overall cost reductions. The exact personnel cost savings again are dependent on many factors. One of these components is the user-friendliness of the system. A poorly designed m-banking platform will more strongly rely on call and support centers, among others to correct for errors in data-entry. 3.2.2
Branch infrastructure costs
M-banking can replace many of the services traditionally offered at brick-and-mortar bank branches. Microfinance institutions therefore become less reliant on their physical presence and can hence reduce the density of their physical operations. Musoni Kenya has even fully refrained from establishing its own brick-and-mortar bank infrastructure. This cuts the organization off a large fixed cost component; In the case of Pakistan, CGAP estimates bank branch costs to be 28,000 USD per month.59 This would theoretically mean that an MFI can easily retrieve the estimated m-banking investments described above within a year by closing one of its bank branches. 3.2.3
Travel costs
Another major cost component for MFIs is travel costs. Depending on factors such as rural outreach, fuel prices and the density of the customer base, and types of transportation (having your own vehicle, using public transport or – if neither are available – having to use taxis) these costs could comprise 2 to 30 % of the total costs.60 MFIs with m-banking services have indicated to have cut these costs considerably. A mobile-banking MFI pilot by PlaNet Finance NGO for example managed to reduce its travel costs for its savings clients in South East Asia by 79%.61 Moreover, with loan disbursement and repayment conducted where possible through m-banking, Musoni has projected increasing field staff caseload levels from around 375 customers to 600 as customers do not need to be visited as often.62
56
Kast, Meier and Pomeranz, 2012. CGAP, 2013, p10. 58 Freedom from Hunger, 2014, p15. 59 CGAP, 2008b. 60 Freedom from Hunger, 2014, p19. 61 PlaNet Finance, 2012, p7. 62 MicroSave, 2011a, p11. 57
3.3 Challenges to M-Banking Despite the significant developments in the field, introducing m-banking services may still be challenging in particular contexts. Particularly stakeholder coordination and collaboration has at times proven difficult. A common complaint of MFIs is the distinct financial incentives compared with MNOs, on which they rely for signal and data transfer. MNOs are not always willing to open up their channels to MFIs without asking for a substantial part of the revenues from service fees.63 Whereas mobile transfers have become an interesting revenue source for MNOs64, MFIs report these revenues to be fairly insignificant.65 Simultaneously, the incentive structure for the development of m-banking differs for MNOs and MFIs. Incentives for MNOs to engage in m-banking is to reduce prepaid user churn and airtime top-up costs through purchases with the mobile wallet. Additionally, MNOs gain from mobile payment transactions and withdrawals through fees. MFIs, on the contrary, gain more from mobile service provision that replaces those traditionally offered at bank branches. They would prefer to see a reduction in customer withdrawals and an increase in savings deposits. Although MNOs might be willing to initiate simple m-banking payments, they have little incentive to move beyond that to offer the more advanced mbanking services that aid MFIs.
M-PESA STK-based steps for retrieving money from one’s wallet at an agent. In step 2 one enters the phone number of the agent/person one wishes to retrieve the money from. The first 5 steps are performed within the STK interface. As step 6, the owner of the account receives a confirmation SMS. The final step involves a confirmation/instruction SMS to the agent66.
MFIs theoretically have the option to build their own mobile phone banking channel and agent network instead. However, the majority of MFIs surveyed by TripleJump indicated that they partnered up with an MNO. Whereas some MFIs did pursue m-banking independently, these tended to be the larger MFIs with extensive funding and human resource capacities.67 Also interoperability among MNOs has in the past proven challenging to arrange. This is particularly important for mobile transfers to clients of other MNOs, as well as accessing agents of other MNOs. However, MNOs are increasingly realizing
63
Di Castri, 2013. MNO MTN Uganda reports that for its domestic money transfer and mobile top-up services, transfer and withdrawal fees (excluding the commission paid to agents) comprise 52% of the service’s total gross profit. Source: GSMA, 2012, p8. 65 CGAP, 2013, p10. 66 Image taken from CGAP, 2008a. 67 TripleJump, 2013, p7. 64
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that a closed payment system inhibits usage of the transfer service. Especially the absence of agents for cash-in and cashout transactions is often a prime driver for mobile money account dormancy. The power game with MNOs extends beyond MFIs. The Central Bank of Nigeria has expressed extreme caution to the entrance of MNOs onto the financial service provision market. With their extensive potential for rapid scale up (MNOs have approximately 90 mln customers, compared to 15 mln for banks), they could quickly dominate the formal financial sector. The Nigerian financial regulators have consequently been reluctant to provide money licenses to MNOs68. The strictness of m-banking regulations consequently affects who is allowed to provide the services, the maximum accepted size of the wallet, on-lending of deposits and the type of transactions (e.g. cross-network and cross-border).69 Yet Nigerian financial regulations are not an exception in this regard. GSMA finds that of the 89 markets where mobile money is active, in only 47 of these do the financial regulators provide an enabling environment70. Besides interoperability, also intra-operability is a must. MFIs will need to have a solid back-office management information system (MIS) to capture, manage and provide information and data analytics to staff and clients. The backoffice MIS will additionally need to be sufficiently flexible to integrate front-end applications and delivery channels, among which mobile banking. The back-office MIS is often forgotten when it comes to front-end technological innovations, with integration between the system too easily taken for granted.71 Without a proper integration, MFIs would be highly hindered in monitoring the different client profiles’ performance and needs. The proper functioning of the system is an increasingly growing concern within the security industry. SMS-based mbanking apps are vulnerable to attacks inside MNO’s networks, and research on 46 m-banking Android apps in developing countries found that many lacked proper communication encryption.72 Security- and identity theft-related financial losses are the customer’s responsibility. M-banking fraud can therefore seriously corrode trust in the system and halt the scaling up of the initiative. Other challenges involve the maturity of the mobile market, such as the reliability of the network, geographical coverage (especially in remote rural areas) and the height of service charges.73 Several projects are in place to enhance mobile internet coverage in the global south. Google is experimenting with solar-powered high altitude balloons that establish speedy and affordable wireless internet access to rural and remote areas.74 Facebook is with its internet.org project undertaking similar efforts using solar-powered drones.75 These efforts could help overcome the challenge of reaching the digital have-nots in a financially sustainable manner.
3.4 Moving towards a cashless economy as an additional rationale for m-banking What does m-banking ultimately lead up to? Developed countries have in recent years seen the emergence of a near cash-less economy. Governments have shifted to transferring welfare payments, salaries of government workers and pensions electronically. Simultaneously, tax collection is cashless, and both the private sector as well as consumers are conducting purchases using digital money. Digital services have enabled this change. Although initially primarily led by credit and debit card use, m-banking is now catching up as a major pillar for supporting the use of digital money. Several developing countries are also moving closer towards a cash-less society. An increasing number of governments start to act as drivers of electronic transactions by only allocating budgets and paying salaries electronically. Examples involve the governments of Haiti, Kenya, the Philippines and Uganda.76 The government of Brazil uses general purpose reloadable prepaid cards for the disbursement of the Bolsa Família social welfare grants to approximately 12 million
68
Di Castri, 2013. SWIFT, 2012, p5. 70 For an overview of what countries do and do not have a regulatory enabling environment in place (as well as the criteria for defining what corresponds with a mobile money enabling environment, see Di Castri, 2015. 71 As experienced by the MFIs in the YouthStart programme. Source: UNCDF, 2015, p46. 72 Reaves et al., 2015. 73 Raftree, 2014; 74 Epstein, 2015. 75 The Guardian, 2015 76 Zimmerman, 2014. 69
families.77 Also humanitarian aid and development agencies are increasingly turning towards electronic cash transfers using pre-paid cards and mobile transfers, hereby replacing traditional in-kind goods distribution.78 The consumers are increasingly relying on mobile payments as the go-to option. Card penetration rates are often low, with mobile technology being a more widely available channel for digital money. GSMA finds that an increasing number of mobile money accounts in developing countries are being used as a savings account for storing value. The organization reports that in June 2014, 54.5% of these accounts had a positive balance in June 2014 and 19% of the accounts having a balance of over $20.79 Although there is still room for further development, cash is reducing its prominence as the prime tool for conducting payments worldwide, increasingly moving to the margins of minor consumer purchases. The advantages of a cashless society are manifold. One aspect involves security. In instances where robbery after salary payments is common, electronic payments offer a significant security benefit.80 Users of mobile money accounts at Musoni confirm this. Fifty-nine percent of users of Musoni indicate to prefer m-banking services for safer loan disbursement, and another 37% note it helps them avoid handling too much cash. This might be beneficial not only for physical security reasons, but also for avoiding social pressures to lend to peers when money is more visible. Moreover, the risk of corruption is reduced as money starts leaving behind a digital trace. There will exist less room for staff members at financial institutions but also the transacting parties to demand unfair charges for personal gains. Transactions can be conducted instantly and payments can be tracked transparently from the payer to the payee. Perhaps most importantly for the business case for m-banking youth savings, however, is that the necessary process automation generates transaction cost savings. The extent to which cost savings can be incurred will vary per MFI and across markets. KPMG estimates the transaction costs to be 43 times higher at a bank branch than via mobile banking,81 although the report does not specify on which market conditions this figure is based. With a decrease in transaction costs, the financial case for services to youth becomes much brighter. 3.4.1
Challenges for a cashless society
Nevertheless, cost savings related to mobile/digital payments do not materialize proportionally to its uptake. Whereas mobile payments do take place throughout the developing world, these are often still conducted in a manner that is costly for the financial institutions. The act of sending remittances has become an important area of growth for digital payments. Sending money over large distances electronically saves someone significant travelling time, whilst simultaneously the receiver has quicker access to the funds. However, an electronic remittance transaction typically involves a ‘cash in – cash out’ transaction, in which upon reception mobile money is almost immediately exchanged for physical cash. Cash in – cash out transactions are costly exchanges for the financial institution or its agent, as it involves both liquidity planning as well as customer service costs. Simultaneously, in the absence of any actual storage of value, financial institutions cannot leverage the liquidity for loans to create a business case. Though electronic payments do occur, these economies consequently tend to remain largely cash-based. As such, the benefits of a cashless society can be reaped at full scale when societies start to reduce the role of expensive agents in mobile money transfers by making the move from over the counter (OTC) transactions to account-based ones.82 In addition, the currency shift requires significant investments in infrastructure by financial institutions. Retailers for example need to establish point of sale (POS) hardware to offer consumers sufficient opportunities to make electronic payments. Moreover, the phase between a cash-only and a fully cashless economy requires consumers being able to exchange digital for physical money and vice versa. As such, financial institutions need to set up an extensive network of agents and/or ATMs that can conduct deposits and withdrawals and other basic financial services on the financial institution’s behalf.
77
Partners in Prepaid, 2012. For an example of mobile transfers, see: UN World Food Programme, 2015. 79 GSMA, 2014, p59. 80 Quartz Africa describes how, due to the ongoing political instability in Somalia, people prefer to avoid carrying cash whilst the banking system has been devastated. As such, mobile money has had a much deeper impact in replacing the cash-based economy than it has in neighbouring Kenya. Source: Quartz Africa, 2016. 81 KPMG, 2015, p22. 82 Gilman, 2015. 78
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But perhaps the largest hurdle is the adoption of electronic payments by consumers. A lack of trust in the system and mobile phone network (among both merchants and consumers), social and cultural norms regarding cash, unease with the use of technology and high transaction fees are common reasons against the adoption of electronic payments. Particularly, illiterate clients may find data-entry challenging and are prone to make errors that may result in money transfers to unintended accounts. Additionally, their (financial) illiteracy make them easy targets for fraud, and personal identification codes could easily get forgotten. Musoni, though advancing m-banking throughout its operations, acknowledges that technology cannot fully replace loan officers. Some degree of face to face interaction will be necessary to establish trust and keep customers satisfied.83 A 2011 B-Kash m-banking pilot by BRAC in Bangladesh underscores the challenges with uptake among adults.84 Following 8 months of required mobile-banking use, 21% of the clients continued to use m-banking exclusively. Whereas the majority decided to use both the m-banking option and branch visits to conduct financial services, 37% of the clients rejected the use of m-banking. Reasons for ending the use of m-banking included clients not feeling comfortable with the technology and problems with the agent. This underlines the need for a mature agent network and an educational campaign.
4. M-banking and youth savings The field of m-banking-based savings accounts is still in its inception phase, and MFIs generally tend not to be on the forefront of technological innovation. GSMA mapped 26 dedicated mobile savings services in 22 different countries by the end of 2014.85 The size of mobile savings services geared towards youth comprise even a fraction of these services. However, despite m-banking deposit services not having been taken up by the microfinance sector at full scale, many MFIs may nonetheless find it an attractive option for youth savings mobilization. Saving with M-PESA M-PESA is currently the most widely used mobile banking platform in East Africa. Whereas it officially started out as a service for mobile payments, clients have also started using it for mobile value storage, changing its payment purpose into a savings/current account function. Safaricom, owner of M-PESA, is a MNO without a banking license. The M-PESA value therefore is not a regulated currency by central banks and informal M-PESA savings hence do not fall under the deposit insurance system. This poses financial risks for users in case the system collapses or Safaricom faces liquidity issues. Moreover, the account does not provide an interest fee on savings. To combat these challenges, Safaricom partnered in 2012 with Commercial Bank of Africa to launch a mobile savings and loan product in Kenya called M-SHWARI. Users can take out microloans as small as 100 KSh (1 USD) and can transfer money between their M-PESA wallet and M-SHWARI savings account free of costs. For this account, users receive an interest rate and savings are protected under the deposit insurance system. In 2015, Safaricom has also started a partnership with KCB to offer a rival mobile-based (micro-) savings and loan product, the KCB M-PESA. This product is largely similar to M-SHWARI but for some fees, rates, loan amounts and repayment periods. Loan sizes range from 50 KSh (0.5 USD) to 1 mln KSh (10.000 USD). Both products offer the option to lock savings for a specific amount of time. Interest rates vary between 2-6 percent.86 The minimum age for opening an M-PESA account and one of its associated banking products is 18 years.87 Youth will have to present a Kenyan National ID (obtained at the age of 18), passport or military ID.88
4.1 Youth savings affecting the prospect of m-banking Youth have a considerable potential to introduce m-banking to the wider population. Young people have been particularly eager to take up mobile technology and are most conscious of the developments in this field. Mobile phone
83
Scharwatt, 2012. Hanouch, 2013. 85 GSMA, 2014, p61. 86 FSD Kenya, 2015. 87 Safaricom, 2016b. 88 Safaricom, 2016a. 84
penetration and internet usage rates across developing countries is higher for youth than for adults.89 Smartphone ownership in Thailand is almost twice as high among 16-24 year olds as those above 24.90 A survey by GSMA on youth in Algeria, Egypt, Iraq and Saudi Arabia found that 15 is a common age for youth to acquire their first mobile phone.91 Yet in Egypt and Saudi Arabia, already 80% of youth own a mobile phone by the age of 10.92 Moreover, it is not uncommon for young people without mobile phones to have their own SIM card whilst sharing a mobile phone with relatives or friends, hence further increasing youth access to mobile services. Combined with the fact that youth in many developing countries comprise a significant part of the population, youth form an important growth market for m-banking. Besides the potential size of the market for m-banking, youth also are a particularly suitable client segment. Young people are characterized by their high usage of the consumer technology available. Moreover, youth are best positioned to learn the facets of m-banking through school and/or mobile phone based financial education. FINCA Mexico targets youth with a financial education programme that focuses on financial technologies, including m-banking.93 Ideally, any financial educational component should be developed and administered in partnership with educational experts, outlining among others both the opportunities of m-banking as well as the risks that come with them. The more eager clients are to use-banking services, and the more knowledgeable and comfortable they become with their use, the uptake of these services will be much higher. Being new to the financial system, quick to learn and largely unshaped by traditional financial habits, youth are well-positioned to advance the uptake of m-banking services.
Adult and youth mobile ownership rates in the developing world94
Once youth have become financial and technological citizens, they form a subsequent gateway to m-banking services for the rest of the population. Leading by example, youth can be a driving force for adopting innovation. A study of technology uptake among families in Chile found that approximately 40% of parents were taught how to use social networking, mobile internet and computers from their children. The knowledge spillovers turned to be particularly
89
Pew Research Center, 2015, p14. Ericsson, 2014, p2. 91 GSMA, 2013a, p11. 92 Ibid., p7 93 MasterCard Foundation, 2011, p12. 94 Graph taken from New America Foundation, 2013, p5, based on data from Pew Research Center and InterMedia. 90
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prevalent among mothers and families of lower socio-economic backgrounds.95 M-banking youth savings may therefore be an important tool for the financial empowerment and inclusion of marginalized and underprivileged groups in society.
4.2 M-banking changing the business case of youth savings 4.2.1
Cross-selling
M-banking youth savings enables cross-selling through stronger customer relationship building and marketing. Youth do seem to have an interest in financial products other than a savings account. Among the youth savers of the non-mobile banking based ADOPEM programme in the Dominican Republic, almost half went on to eventually borrow from the bank.96 There are reasons to believe that m-banking can act as an effective and cost-efficient advertising channel to further boost this cross-selling potential. By analyzing the data of which is provided through m-banking usage, one can better enrich the customer profiles that can subsequently be targeted with appropriate product offerings.97 A simple text message can inform users of the basic functions of the product. M-banking also offers easy feedback mechanisms for products, as well as insights into the financial needs of youth clients, thus providing subsequent channels to improve the products and services on offer. Mobile banking youth savings and the age divide Youth are, however, not a homogenous group. Particularly with regards to the minority age, a clear division line emerges between those who will find it relatively easy to get access to mobile banking youth savings and those for who this may be much harder. One underlying factor for this divide is the recent rise of SIM card registration requirements emerging out of national security concerns.98 Mandatory SIM card registration regulations have particularly been prevalent in Africa, with only Lesotho, Mauritania, Namibia, Somalia and Swaziland not having some form of restrictions currently in place99. Not adhering to the registration requirements can lead to hefty penalties, including high fines and imprisonment. In some countries, SIM card ownership is limited to those above 16 or 18. Other countries require specific identification documents that place youth, poor and marginalized persons at a disadvantage. However, SIM card registration requirements do not fully exclude youth below the minority age from having access to a mobile phone entirely. In Rwanda and Kenya, youth below 16 have to be accompanied by an adult who will register the SIM card in the adult’s name,100although signals are emerging that regulators wish to limit the number of SIM cards to be registered under one adult.101 Yet it is the combination of barriers that combined make m-banking savings for youth a lot more challenging. One may find loopholes for bypassing age limits for opening and operating an account at a financial institution, or providing alternative documentation to comply with Know Your Client requirements. Yet when multiple barriers add up, it becomes increasingly discouraging for minors to set up an account. Depending on the context and the regulations in place, extra marketing and support may therefore be necessary to also attract youth below the legal contract age to the savings product. M-banking also offers potential for cross-selling to new customers. A MEDA study shows that youth do cross-sell through word-of-mouth to other people, with the MFIs Ardi, Attadamoune and INMAA having 50%, 60% and 73% of youth customers introducing new loan clients to the MFI respectively.102 M-banking could boost cross-sales to new customers further, for instance by allowing current youth clients to easily exchange SMS codes or internet links with information on financial products to potential clients.
95
Correa, 2013. Women’s World Banking, 2015, p8. 97 See IAfrikan, 2014, for an overview and (hypothetical) examples of how basic M-PESA data can generate profound company and marketing insights. 98 GSMA, 2013b. 99 Donova and Aaron, 2014. 100 Rwanda Utilities Regulatory Authority, 2016, p1. 101 Okuttah, 2016. 102 MEDA, 2014, p28. 96
One of the main targets for new cross-selling opportunities are the relatives of youth clients. Youth savings accounts often need to be operated under supervision of a parent or legal guardian. This provides an opportunity to commit them to financial products. One means of supervision could be text-based verification measures through the guardian’s mobile phone. Besides supervision, this tool would simultaneously allow guardians to become introduced to the MFI as well as offering an additional advertising channel for their financial services. ADOPEM’s non-m-banking based youth savings programme was successful at cross-selling savings products to parents (who were new clients in 44% of the cases).103 However, these products were of mandatory nature and dormancy rates were high. Still, cross-selling should not be taken for granted. Financial institutions are prone to overly pushing products under the guise of cross-selling.104 Instead, the products offered ought to be well-matched with the clients’ needs and demand driven. This could include being able to opt-in for a mandatory savings account for school fees that allows parents in rural areas to vary the size of the installments. This would better adapt the financial product to the household’s revenue model, in accordance with the harvest and lean season for example. With regards to creating demand for financial products, the MFI could offer discounted youth health insurance for basic coverage. Once guardians have become familiar with the health insurance, they might be more willing to take up health insurance for themselves and other relatives. 4.2.2
More effective and cost-efficient integrated financial education services
Using youth as a gateway to familiarize adults with m-banking and an agent for cross-selling, however, is built upon the assumption that young people are sufficiently financially literate. These two points of synergy hence create a compelling case for offering integrated financial and educational services to youth. Financial education programmes generally consist of in-class teaching methodology. The effectiveness of these programmes has lately been called into question. A meta-analysis of programmes in both the developed and the developing world found that financial education has a strong effect on knowledge gains, but with a lower effect on financial attitudes and behaviour. Further analysis finds larger effect sizes when the education was delivered through media rather than in-classroom settings.105 M-banking can in this regard offer an effective education channel through SMS message reminders, mobile games and tools or even interactive voice response-based testing. Besides more effective education, m-banking can also reduce the costs of financial education programmes by substituting parts of the physical classes. The scope for cost savings is significant. Non-m-banking-based MFIs with youth products report spending approximately 7-14% of staff time on integrated financial education.106 This figure boils down to an average cost of $17-$27 per youth client and makes an attractive case for offering financial education through mobile channels. 4.2.3
Challenges
Despite the many opportunities, replacing human interaction with digital platforms can carry significant risks. In the case of loans, initial fears existed that the weakened social and peer pressure would affect loan repayment rates, although data suggests that this phenomenon does not necessarily occur.107 Yet the results of the automatization of human relations may also be found in other domains. Learning experiences may be less profound for some youth clients when experienced through digital channels. People may feel less incentivized to learn or adopt desirable financial behaviour when encouragements come through digital channels as opposed to when fellow humans express them. Simultaneously, humans are better equipped to personalize learning experiences, to sense when youth are in doubt and insecure about what to do, and for some may pose a lower threshold to ask for help. Hence, especially with regards to first-time usage of the product and follow-up education, one should not solely rely on
103
Women’s World Banking, 2015, p8. Bankable Frontier Association, 2015, p2. 105 O’Prey and Shephard, 2014. 106 Freedom from Hunger, 2014, p15. 107 CGAP, 2013, p4. 104
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technology and instead use it as a complementary medium. In this regard, particular attention should be given to vulnerable youth, including girls, the illiterate and innumerate, and the youngest of youth. The reliance on technology opens up a whole range of other financial consumer concerns for which MFIs should be prepared. One such concern is digital privacy. Particularly the poorest and most vulnerable youth may not have exclusive ownership of a phone and instead share it with relatives or friends.108 Whereas parental oversight could be used as an advantage in securing safety and responsible usage, one does need to consider the possible negative consequences that phone sharing may pose for youth. In the end, much of the success of the m-banking youth savings implementation will depend on a positive consumer experience. Youth will be eager to try out the novelty. However, this makes them vulnerable as well and the initial enthusiasm can easily be replaced by a deep and long-term distrust if reality does not meet their expectations of the product. To set up a sustainable youth savings product, MFIs should focus from the very start on making it as youthfriendly, and demand driven, as possible. This involves a careful consideration of the variety of youth needs, capacities and financial behaviours, as well as the financial consumer protection risks the different sub-groups of youth face.
5.Recommendations for sustainable youth-friendly mobile savings products 


Help youth to more easily meet the requirements for accessing financial services o
Employ low or tiered Know Your Client requirements for the savings product
o
Make use of existing SIM registration process to remove further identification requirements for those above the legal contract age
o
Have no minimum deposit requirements in place for opening an account
Ensure a client-centered needs-based design of the financial service o
Construct multiple youth client profiles based on among others age, gender, literacy and numeracy levels, distance to urban area, socio-economic status, employment, household responsibilities and phone usage.
o
Conduct extensive market research on consumer needs of, and risks faced by, each of the youth client profiles to be a guiding factor in the design of the product
o
Focus on creating a simple and easy to use product
o
Pilot the product thoroughly among the client target group prior to its launch and on that basis be flexible to make adjustments if necessary
o
Collect disaggregated data and manage performance
o
Put in place an easily accessible and free of charge recourse mechanism that is 24/7 accessible and ensures a proper follow-up
Encourage consumer confidence in product usage through education o
108 109
Use youth-friendly written and/or spoken language109 when marketing the product. Keep terms and conditions simple and easy to comprehend and ensure that customers have a full understanding of all features when setting up the account
Raftree, 2016. If applicable to the context, provide information in official languages as well as local languages and dialects
o
Provide sufficient hand-holding during the early stages of usage of the product
o
Design appropriate, multichannel (digital, in-print and face-to-face) financial and product-usage education packages, tailored to the needs and capacities of the specific target group to be provided over a long-term time-span
o
Frequently remind consumers of common youth financial consumer protection concerns (inadequate documentation provided, unnecessary charging, system failure, forgotten PIN code, agent or staff misconduct, fraud, etc.) and what steps to take to prevent and/or address them
Ensure cost transparency o
Set up a low and easy to understand fee structure
o
Communicate the overview of fees, charges and limits related to the account in a youth-friendly manner prior to setting up, making use of monetary examples of different usage scenarios
Encourage responsible usage of the account o
Put in place positive financial incentives to stimulate positive savings behaviour
o
Make use of the digital medium to set personalized behavioural incentives for saving, such as reminders of savings goals or progress updates
o
Examine suitable options for offering budgeting and cash-flow planning tools for youth clients
Reduce physical safety risks for youth o
Provide registration and activation services at home or in a safe environment in the vicinity of youth’s homes.
o
Put in place mechanisms to prevent and address cases of theft or coercion
Ensure quality, accessibility and stability of services o
Allow validation and usage of the account immediately upon account registration
o
Provide an open-loop system with multichannel and interoperable features
o
Guarantee quality of service through agent selection, training, support and evaluation and provide agents with the right incentives to advance uptake and usage by youth
o
Monitor agent liquidity
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6. Conclusion Will m-banking make youth savings in and of itself a profitable financial product? Decreased investment costs, sufficient potential for cost savings and a high enthusiasm among MFIs seem to indicate that the business case is improving. Yet given the colossal costs associated with youth savings accounts, even the cost savings through m-banking will not likely help generate any significant immediate profits. MFIs should nonetheless not simply dismiss m-banking youth savings products on these grounds. M-banking and youth savings each independently provide MFIs with significant additional benefits. Staff, travel and marketing costs, which comprise a large portion of the total costs, can be reduced. The analytics of m-banking offer insights that can improve the product to better suit the clients’ needs. Also m-banking in itself offers convenience and time savings for clients, thus contributing to an improved value proposition. Youth comprise an easy and low acquisition cost client segment that – even if remaining poor during adulthood – can still become profitable through insurance, remittance, payment and loan services. Offering youth products enhances the MFIs’ social reputation, aiding in client acquisition and eligibility for donor funds. These components combined already provide a sufficient financial reason for MFIs to invest in m-banking and/or youth savings. The combination of the two, however, also offers additional synergies. Prospects for cross-selling improve. Moreover, the provision of m-banking services can be a defining factor for youth to choose one MFI over another, as well as a defining factor for MFIs to choose to invest in harder to reach youth with high mobility. Perhaps most importantly, however, youth can be the leaders and champions of the uptake of m-banking services among the general population. A cashless economy with a branchless financial institution would lower the costs of financial services drastically whilst simultaneously offering many opportunities for time savings and efficiency. Besides financial gains, the economic benefits for society as a whole can also be a real game changer. M-banking tools can reduce the costs of financial education to youth and can, in combination with financial curriculum delivered through schools, make them financially empowered economic citizens. Equipped with these skills, they are well-positioned to pass on their knowledge to both elder generations as well as future generations to come. In societies built upon the habits of cash, youth can teach parents, relatives and community members the dimensions of personal finance, mobile technology and financial products. Especially those MFIs that are considering to invest in m-banking services may find it wise to invest in youth saving products as a starting point to a successful uptake.
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