“Time for Cash to Cash
Out?”
Wall Street Journal 11 February 2012
Scoping Kenya’s Path to a Cash
Lite Society
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.
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
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 $3.00Monthly net income per transactional account by balance
quartile (US$)
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
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?
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
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
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
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
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
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?
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 P2BThe nature of this payments universe is determined by:
• Consumer perceptions • Product features
•
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 transport15
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
“Bridges to Cash”
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
• 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
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
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
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
• 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-locationssurrounding site
Linked Market
More distant grain producers
Cash in
• Saturday market day shopping
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
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
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 HeldMaximum Transaction Sizes for Cash in/Cash out
M-PESA Agents Equity Agent
avg-=5,000
avg-=2,300
Electronic Payments
Converting transactions to more
efficient electronic/mobile
27
Conceptual overview of cash movement
between tiers
Financial Institutions
Informal
FormalCentral Bank of Kenya
Consumers
Merchants/Service Providers
Suppliers
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
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
•
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
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
• 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
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
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
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
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.
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.
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
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
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
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
0%
20%
40%
60%
80%
100%
0 50000 100000 150000 200000 250000Avg. 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
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 eAvg. 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
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
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
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 acceptmore 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
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
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
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
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.
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?
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
Julie Zollmann
Bankable Frontier Associates
jzollmann@bankablefrontier.com