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(1)

“Time for Cash to Cash

Out?”

Wall Street Journal 11 February 2012

Scoping Kenya’s Path to a Cash

Lite Society

(2)
(3)

What’s wrong with cash?

1. It’s costly.

An electronic payment costs 1/3-1/2 of a paper

payment.

Estimates from US, Australia, and EU project

1-2% GDP in cost savings from shift to electronic

payments.

European Payments Council

Humphrey, D; Willesson, M; Lindblom, T; and Bergendahl, G (2003)

2% of Kenya’s GDP (2010) is about

Kshs 29 billion.

(4)

What’s wrong with cash?

Bank A (Rural) Bank B (Urban) Bank C (Rural & Urban) M-PESA (Rural & Urban)

Time in banking hall

(minutes)

32

87

21

8

Time to travel

(minutes)

17

19

22

11

Cost of travel (one

way)

$0.41

$0.20

$0.27

$0.04

% of income over a

month

7%

2%

4.5%

1.3%

(5)

5

And are no help in making financial service

business models work in the low-income

segment.

-$1.30 -$1.62 -$2.06 $2.18 -$3.00 -$2.00 -$1.00 $0.00 $1.00 $2.00 $3.00

Monthly net income per transactional account by balance

quartile (US$)

Quartile 1 Quartile 2 Quartile 3 Quartile 4

Source: Stylized product model based on actual portfolios of underlying transactional savings accounts at 8 banks; BFA 2011

(6)

2. It’s vulnerable.

Causes losses/theft

within business handling

Consumer theft, loss,

damage in fire, flood,

etc.

Prone to

graft--untraceable

Possibility of counterfeit

What’s wrong with cash?

In the USA, an

estimated 14% of

income is hidden from

tax authorities due to

unreported cash

income.

What might that level

be in Kenya?

(7)

When ING started offering online-only

banking—thanks to pervasive

e-money in the US—all people had

access to a new, attractive savings

option regardless of their physical

address.

What’s wrong with cash?

3. It’s restricting.

Required geographic

proximate transactions

where travel may be

necessary to transact and

where prices or services

may be unfavorable

(8)

8

Imagine a more financially connected

world…

In 1905, a third of US households had access to grid electricity. A century later, close to 80% of the world’s population is connected to the electrical grid.

“Social and economic development is largely about connecting people to

ideas and opportunities around them…why shouldn’t we apply that

same platform logic to financial services?” Mas & Porteous (2012)

(9)

9

Living in an ‘

i-Fi

’ world

‘i’

i

nclusive

i

nterconnected

i

nformation

‘Fi’

Fi

delity=trusted

It is an “inclusive cash lite” world. NOT cashless but

1.

Every person has an

electronic account

with a regulated

institution

2.

Electronic transfers are

real time

and close to

free

3.

Application/ content providers thrive on

information

rich products

(10)

10

18.4

8.7 30.7

6.2

Average US consumer share of

payments per month,

2009

Cash Cheques Payment card E-payments

Does anyone yet live in an i-Fi world?

Source: Boston Fed Survey of Consumer Payment Choice (2011)

UK (2010)

Median cash transaction $5

94% have a plastic payment

card; debit card holder used 15X

per month vs cash 32X.

Gradual decrease in volume of

cash payments but it is still

double the number of all

e-payments.

20% relied exclusively on cash.

Source: The Future for Cash in The UK, Payment Council (2010)

US consumer now uses cash and cheques less frequently than

(11)

11

How to get there (an

i-Fi

world):

There are at least three necessary components

1. Infrastructure:

Build “bridges to

cash”

2. Instruments:

Make e-money useful

to consumers

3. Products:

Connect with consumer

(12)

12

FSD-Sponsored Study:

Purpose:

Understand cash movement in Kenya to

identify research needed to guide a transition to a

cash-lite economy in which technological solutions

dramatically

reduce costs of cash,

and those benefits

reach the poorest and most vulnerable segments of

Kenyan society.

Research Questions

1.

How does money (cash and e-money) move through a small, fairly

contained economy?

2.

What are the current payment habits of different strata of this

community’s economy: producers, consumers, service providers,

merchants, and financial institutions and aggregators?

(13)

More hopeful for i-Fi

Two Current Views of the Kenyan

Payment Space—

Consumer Perspective

Integrated

Payments

Space

G2P G2B Payment Silos P2P B2G P2G B2B B2P P2B

The nature of this payments universe is determined by:

• Consumer perceptions • Product features

(14)

About 4,000 people;

No banks or chains

Major livestock market

About 8,000 people;

No banks or chains

Most households engaged in

some form of agriculture

About 200,000 people;

Paved road connects to NBO

Home to bank branches, major

distributors, and some national

chains (ex: Naivas)

Core Site, Linked Market, and County Hub

“County

Hub”

“Core Site”

“Linked

Market”

1.25 hours, KES 150 one way for transport 30 minutes, KES 90 one way for transport 45 minutes, KES 100 one way for transport

(15)

15

Two paths towards “cash-lite”:

1. Increase local recirculation of

cash

(reduce cost of moving large amounts of cash over space)— “Bridges to Cash”

2. Increase prevalence of

e-payments to decrease use of cash

in total.— “E-Payments”

Already happening on pretty significant scale: mobile merchants deposit at M-PESA after market-day sales.

Cannot eliminate costs of transporting large sums of cash, because 1) Agents are incapable of large transactions for security reasons 2) We cannot assume cash equilibrium.

• Cashless (but not necessarily electronic) payments already account for 65% by value of non-local stock (purchases for resale)

purchases.

• But, VERY uncommon for most consumer transactions.

M-PESA & Bank Agents

$ E-value

A single mango trader may pay out KES 400,000 in a day to local producers in cash. No local M-PESA or bank agent holds more than KES

(16)

“Bridges to Cash”

(17)

17

CORE SITE: Yes, there is a lot of movement,

but quite a lot of cash stays local.

Airtime

Labor (farm and business)

Food (especially among poor)

Clothing (especially among poor)

Rent for homes and businesses

Stock for smaller traders

Transportation (large part)

Water

Chamas

About 85-90% of cash transactions are local for poor households*

About 60% local for richer households*

(18)

18

• Stock purchases by visit and mobile distributors • Mobile vendors • Health care • Shopping by salaried people/wealthy • Asset purchases • Banking • Fuel • Entertainment

Overview of cash

(not value)

movements

out to linked geographic zones

Core Site

County Hub

Mombasa/ Nairobi

Smaller locations/ sub-locations surrounding site

Linked Market

More distant grain producers

• Stock purchases (small value in cash)

• Cereal purchases in times of shortage

(19)

19

CORE SITE: Summary of

cash leakage

channels

(ranked by magnitude)

Cereal purchases in times of shortage

Stock purchases by visiting and mobile distributors

Mobile market vendors

Stock purchases by merchants purchasing direct from outer

towns and cities

Health care

Shopping by salaried people/wealthy

Asset purchases

• Banking

• Fuel

Account for KES 6.6 million leaving core site in cash every month*

(20)

20

Most large value of non-local stock purchases is already

done cashlessly.

That KES 6.6 million in cash leakage from stock purchases is only 35% of the value of non-local stock purchases.

Variable

Sum

(Entire Site)

Mean

(per merchant)

Median

(per merchant)

Total monthly spending on stock

21,900,000 116,345

12,000

Total monthly value of supply purchased

in cash

9,589,940

51,010

9,000

Total stock purchased

in cash

going outside

core site

6,549,180

34,836

0

Total value of non local stock purchases

18,800,000

99,969

1,000

Local suppliers account for 33% of all suppliers to the core site, but only 14% of the value. Larger values of stock (for mostly larger businesses) are purchased from outside the core site.

(21)

21

Most stock purchases by number are done in cash,

but these tend to be lower value. Mobile money

and cheques tend to be used for larger purchases.

90%

6%

2%

3%

KES 2,000

KES 7,000

KES 2,000

KES 20,000

KES 0

KES 5,000

KES 10,000

KES 15,000

KES 20,000

KES 25,000

0%

20%

40%

60%

80%

100%

Cash

Mobile

money

Credit

Bank

cheque

Median

tx

siz

e

% Suppliers paid this way

Median tx size

(22)

22

• Saturday market day shopping

• Cattle sales

• MPESA daily brings cash

• Teachers/ salaried workers bring portion of salary in cash from bank/SACCO

• Schools bring cash from bank

• Mango buyers

• Cereal traders during harvest

• Portion of remittances carried in cash (mostly Mombasa)

• Medical visitors

Overview of cash

(not value)

movements

in from linked geographic zones

Core Site

County Hub

Mombasa/ Nairobi

Smaller locations/ sub-locations

surrounding site

Linked Market

More distant grain producers

Cash in

• Saturday market day shopping

(23)

23

Each of 13 MPESA agents brings about

KES440,000 in cash per week to accommodate

withdrawals*

KES 22.9 million shillings per month

Often transported via motorbike or matatu with no

security; very limited concerns re: security of cash

Grain and mango traders pay each farming

household about 20,000-100,000 per season in

cash in one payment**

MPESA agents and agricultural product

buyers appear to be primary suppliers of

large cash inflows.

(24)

24

Estimated net inflows can and do appear to

vary significantly over the course of the year.

Making some estimations on actual aggregate flow values, we see a trend something like this:

-20,000,000 -15,000,000 -10,000,000 -5,000,000 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Cash In Cash Out Net Cash Inflow

Businesses have enormous seasonal fluctuations, and so do remittances. Urban senders report sending more frequently during the dry/hungry season.

(25)

25

Bank and M-PESA agents help keep cash local, but

they cannot accommodate large deposits and

withdrawals, which are “Heavy”/expensive for the

economy.

30,000 70,000 200,000 50,000 75,000 100,000 0 50,000 100,000 150,000 200,000 Maximum Deposit Maximum Withdrawal Maximum Cash Held

Maximum Transaction Sizes for Cash in/Cash out

M-PESA Agents Equity Agent

avg-=5,000

avg-=2,300

(26)

Electronic Payments

Converting transactions to more

efficient electronic/mobile

(27)

27

Conceptual overview of cash movement

between tiers

Financial Institutions

Informal

Formal

Central Bank of Kenya

Consumers

Merchants/Service Providers

Suppliers

(28)

28

Consumers…

How people are paid

The only substantial non-cash income payments are for formal workers and remittances. Agriculture payments stand out, because they are large, infrequent, and yet done in cash.

Type of

Income

Median Pmt

Frequency

Median

value

% in Cash

% MPESA

% Bank

water sale

333

225

100%

0%

0%

boda boda

300

325

100%

0%

0%

business

48

1,500

92%

8%

0%

informal

work

25

300

100%

0%

0%

plowing

15

2,000

100%

0%

0%

remittance

12

2,000

16%

79%

5%

teaching

12

20,000

0%

0%

100%

agriculture

2

5,000*

100%

0%

0%

dividend

1

14,000

0%

0%

100%

*There is a wide range here from households that sold one bag of maize last year and those who sold several or sold mangoes and have large, lumpy revenues.

(29)

29

Consumers…

How people are paid

And people PREFER to be paid in fairly lumpy values

electronically than in cash or in small values.

Daily workers would prefer to be paid monthly. They

say that small value payments make it

too easy to

spend

—they don’t value the payment as much and

feel it’s easier to be wasted.

Respondents told us that electronic payments

institute

discipline

, because the act of having to go

withdraw forces you to think about what you need

and have at least a rough budget in mind.

(30)

30

The majority of transactions are very small, under KES100

Lumpy payments (>KES500) tend to happen in the following

situations:

Formal salaried households shopping in large supermarkets once

monthly in county hub

Secondary school fees, especially when paid by wealthier

households (poor families pay in small increments)

Remittances sent (already electronic)

Business license payments

Some medical expenses (though often in small increments)

The Foundation: Consumers

(31)

31

There is a clear tradeoff between

transaction frequency and size.

0

500

1000

1500

2000

2500

3000

3500

4000

4500

0

200

400

600

800

1000

1200

Fo

od

A

irti

me

W

ater

Ch

urch

Pos

ho m

ill

Hosp

ita

l

Tr

anspo

rt

ation

Cli

nic

Hair

cuts

Fuel

Pr

ima

ry

sc

hool f

ees

Secon

dary

school

fees

Labo

re

rs

Re

m

itt

ances

Cloth

in

g

A

gricu

lt

ure inp

uts

Goat

pu

rc

hases

Li

cens

es

Appr

o

xim

at

e

tr

ansaction

siz

e

(KE

S)

Fr

equ

enc

y

of tr

ansaction

per y

(32)

32

• Larger, lumpy, predictable income. Receives salary into financial institution in county hub.

• Leverage salary for large, infrequent loans from formal institutions.

• Spend much greater share of earnings in town

• Larger transaction sizes

• Less frequent transactions for day-to-day needs, like cereals

• Pay school fees in bulk using cashless method (pay per term)

• Frequent, small cash inflows for work.

• Receive larger, less frequent income from remittances paid via M-PESA, but cash withdrawn immediately and in full.

• Agricultural produce sales done once per year in 1-3 transactions and paid cash by single trader.

• Frequent, very small transactions for day to day purchases.

• Larger payments (like clothing and school fees) divided into small cash installments. School fees paid daily or weekly.

• Because of small, daily expenses,

reluctant to lock up funds in a financial institution.

*20% HHs interviewed earned <KES 10,000/mo; 60% at <KES 30,000

Richer/More Formal Earners Poorer, Informal Earners

In flo w Outfl o w

Consumers: Rich vs. Poor

Cash handling differs significantly across richer/formally

employed and poorer/informal households.

(33)

33

Our census identified 188 Merchants.

Duka (small) 16% Green grocer 16% Open Market Stall 14% Boutique 6% Hawker (at dedicated site) 5% Mali Mali 4% Clothing Shop 4% Butchery 3% Cafeteria 3%

Spare Parts Store 3%

Other 26%

(34)

34

Data from merchant census.

MERCHANTS: Median merchant monthly revenue is

around KES22,000. Larger merchants source more of

their stock from outside the Core Site.

Variable

Sum–

Entire site

Mean

(per merchant)

Median

(per merchant)

Avg. estimated monthly revenue for all merchants 12,000,000 63,786 22,282

% of shops with 100% local suppliers

36%

% of shops with at least one non-local supplier

64%

Avg. estimated monthly revenue for locally supplied

merchants

2,515,016 37,538 10,440

Avg. estimated monthly revenue for merchants with

non-local suppliers

9,476,900 78,322 27,380

Merchants with highest revenue sell hardware and cereal. They also tend to

make large purchases of stock for resale with non-local suppliers.

(35)

35

Saturday market traders have some unique features.

Vendors come from all over

the county to sell their

products here.

Most visit multiple markets

every week, hitting key

markets throughout the

district or county over the

course of the week.

Median daily cash revenues

on average day=Ksh3000

Important source of cash

outflow unless they deposit

locally.

(36)

36

While about ½ of market traders leave with

cash, the other half instead actually does

deposit cash locally at a bank or M-PESA agent.

Where do you deposit your business

cash?

Non-Market

Merchants

Market

Merchants

Bank branch

19%

9%

Bank agent

9%

6%

MPESA*

24%

44%

House

45%

41%

But, since only small

scale traders, only

blocks an estimated

KES 56,096 from

leaving the

community.

*Across both merchants and consumers, we were told that funds deposited on M-PESA were for very short term cash flow needs and small emergencies. Banks are used only to save towards a goal. Data from merchant census.

(37)

Gates Foundation-Sponsored Retail Merchant Study, July 2011

Retail merchant census

: Payment methods accepted, supplier relationships,

number customers per day, average transaction size for 4,262 merchants in two

areas;

Merchant transaction recording

: 61 merchants for 4 days each, record every

transaction, payment method, size during full trading hours;

Customer exit interviews

: 466 interviews on payment choices; and

Retail merchant interviews

: 61 interviews on payment device perceptions and

preferences.

When it comes to retail payments, we see very similar

patterns, even when we look rigorously at a larger

sample of merchants.

(38)

Mobile money is the most accepted electronic form of

payment, but it is still only accepted by 18% and 20% of

merchants in the sample. Many offer financial services on site

with credit, layaway, and installment repayments.

15% 18% 53% 20% 20% 48% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Vouchers Card Uplifting Layaway Bank cheque Instalments Mobile money Credit Cash

Payment methods accepted by merchants in census (% merchants)

(39)

39

Neither place is anywhere near “cash lite” yet.

99% 0% 0% 1% 0% 0% 99% 0% 0% 0% 0% 1% 0% 20% 40% 60% 80% 100%

Cash Cards Mobile Money Credit Bank Check Hire purchase or layaway

Kayole Kerugoya

There were 5 card and 4

mobile money transactions

out of 6,382 total transactions

recorded in Kerugoya.

(40)

40

Average transactions are—unsurprisingly—

higher in value when e-payments are used

(but remember small number of e-payments and all were recorded

at only one merchant, a hypermarket)

359 5,161 6,152 0 1000 2000 3000 4000 5000 6000 7000

Cash

Card

Mobile

K

sh

Mean Transaction Size by Payment Method

(Kayole)

14% of all transactions above Ksh4000 are done using e-payments

(41)

41

And, average transaction sizes are VERY small.

But, if you imagine we could convert all transactions >Ksh500 to electronic, that would mean 12% of transactions by number, but 59% (Kayole) and 53% (Kerugoya) of all transaction value.

68% 18% 8% 4% 1% 1% 72% 14% 6% 4% 1% 2% 0% 20% 40% 60% 80% Less than Ksh200 Ksh 200-500 Ksh 500-1000 Ksh 1000-2000 Ksh 2000-3000 > Ksh 3000

Share of Transactions by Size

Kayole Kerugoya

Median transaction sizes

were slightly higher in

Kerugoya at Ksh100

(compared to Ksh 65 in

Kayole) (unweighted)

(42)

42

0%

20%

40%

60%

80%

100%

0 50000 100000 150000 200000 250000

Avg. Tx Val per Day

Share of transactions <Ksh200

Where is the “heavy” cash?

Here, there are

fewer clear “low hanging fruit,” with few businesses

experiencing both large transaction sizes and large gross daily

revenues.

(43)

43

0

100

200

300

400

500

0 100 200 300 400 500 600 Nu mb e r of Tx p e r D ay Med ian Tx Siz e

Avg. Median Tx size Avg. Number of Tx/day

And, Where are the “hot zones” for

transaction volume?

These could be “big wins” for affecting the payments landscape. Most are in the formal economy.

>100 TX/ day

Last mile

(44)

In this study, 95% of customers interviewed had M-PESA

accounts and use them fairly often…just not for merchant-level

purchases.

0% 25% 50% 75% 100%

M-PESA Debit/ATM Card Cash

Top reported uses of

M-PESA by customers:

Money transfer

Electricity bill

School fees

(45)

45

Non-cash payments methods are actually only

making major inroads few types of

transactions.

Wages G2P payments International Remittances P2P Bill payments Retail shops Online merchants Cash merchants Distributors Wholesalers Manufacturers Payments of salaried workers moving to bank transfers.

M-PESA capturing person to person domestic

remittances.

Non-local, high value stock purchases are moving towards

cheques. But 35% non-local (and 100% local) still in cash.

School fees (especially among non-poor) moving towards M-PESA or bank transfers

(46)

46

Consumers

resistant to use, because:

Bear high fee to send and

cover merchant withdrawal

cost;

Most consumer transactions

are small, <KES 100 making

M-PESA fees appear a high %

of transaction; and

Sending an M-PESA payment

takes more time than cash.

Merchants

resistant to accept

more widely, because:

Inconvenient because they

make purchases and payments

in cash;

Fear of fraud & client reversals ;

Usually means “paying later”;

Network delays & outages;

Increased transaction time; and

Fear of tracking, tax

enforcement.

Moving towards cash lite requires prevalent usage

of an electronic payment mechanism, but M-PESA is

currently ill-suited for this purpose.

(47)

47

Why hasn’t MPESA been adopted, even for

free

transactions, like Safaricom airtime purchases?

Budgeting/Self-control.

Most of our respondents purchase one KES 20 scratch card every day. They

say that purchasing the scratch card and not developing a habit of buying

airtime over

M-PESA enforces self-control

. Since they would have to go out

again to buy a new scratch card, they are less tempted to overspend on

airtime, a temptation good for many poor households.

(48)

48

So, M-PESA scores high marks, then, for…

Accessibility

Testability

Consumer recourse

…But since it’s just a payment mechanism, it comes

up short on internal mechanisms to help users

(49)

49

Consumer drivers for payment device

ADOPTION and USAGE are not much different

from those identified statistically in the USA.

Kenya

United States

• Assistance as a budgeting/record keeping tool • Cost • Security • Convenience • Reliability • Setup (Adoption)

• Assistance as record keeping tool (Adoption)

• Cost (Usage) • Security (Usage)

• Convenience (Usage)

Providers agonize over consumer “readiness” to adopt and use, but there is

little evidence that these choices are driven primarily by demographics

(education, income, etc.), and much more suggesting that it is a function of

(50)

Integrated Payments Space G2P P2P Payment Silos B2P P2B P2G B2B G2B B2G

Strong existing case; unexploited opportunity. Very strong existing case. Weak immediate case.

Viable case, but very little progress to date

Preventing these payment types from becoming silos

means proactively going beyond P2P, focusing first on

dimensions with biggest immediate opportunities.

(51)

Getting to this asks a lot of private providers:

Big

opportunity

, but also big

risk

especially as

they move into new payment domains

Integrated

Payments

Space

Providers know they need

pervasive high volume payments

to make business model work, but

uncertainty about consumer

response:

1) Speed of adoption and behavior change?

2) Price elasticity of demand?

What is happening now that M-PESA tariffs have changed?

3) What are the possible spillovers across payment domains?

(52)

There are opportunities for public entities to help

accelerate Kenya’s path to i-Fi by decreasing some of

that uncertainty with leading and monitoring research.

Obj.1: Reduce risks to private providers by

investing in information generation around

key design issues.

Obj. 2: Highlight opportunities to introduce better e-payment mechanisms in payment dimensions where demand is already ripe. Obj. 3: Encourage e-payments to grow in a socially-inclusive way. Obj. 4: Monitor progress towards an

inclusive cash lite economy.

Building a

Cash-Lite Research

Agenda for

Kenya

(53)

53

Julie Zollmann

Bankable Frontier Associates

jzollmann@bankablefrontier.com

References

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