Why is the term microfinance still used by so many as if it were synonymous with microcredit? Credit is only one form of finance. All the more thoughtful commentators on the Andhra Pradesh crisis agree that debt should not be the only financing option available to poor people.
In a recent blog post, my colleague Jake Kendall and I explained how the Financial Services for the Poor team at the Bill & Melinda Gates Foundation focuses on savings because it’s an option that everyone should have and because we felt donors have neglected it in the past.
But there is another service that has received even less attention from the microfinance community: payments. When is the last time you were at a microfinance conference and someone mentioned the payment needs of the poor with any degree of passion? And why do academic researchers devote so little attention to it?
In a thought-provoking comment on our blog post, Nachiket Mor reminds us that savings accounts need to compete against the legacy savings instrument provided by government: currency. Currency works well because it offers the dual advantages of being a store of value and a means of payment. It is directly useful in exchange, immediately deployable in any situation. As Nachiket notes, currency is so convenient to get in and out of savings positions that people don’t need to be rewarded with interest in order to use it. (Government-issued currency is also the only savings instrument free of Know Your Customer requirements, but we’ll save that rant for another occasion—see here for a sneak preview.)
To compete with cash, financial institutions targeting the base of the pyramid need to put payments at the core of their value proposition. They can offer additional value to customers on the basis of connected savings, a concept my colleague Dan Radcliffe and I wrote about recently. The ability to receive and send money electronically adds value to a savings account. It makes it easier for people who regularly receive funds (whether from employers, relatives or the government) to make saving a default behavior. It gives instant liquidity for people who need to access their funds. And handling customers’ payments also gives financial institutions a unique opportunity to construct more complete financial histories for their customers, which may come in handy in credit evaluations.
Over the last couple of decades, microfinance institutions have flown the flag of business productivity. Their impact model highlights the link between debt financing and investment and entrepreneurship. Convenience has not been their rallying cry—all those weekly group meetings are hardly a model of convenience.
Equally, making electronic payments easy for people is not just a matter of convenience, it’s fundamentally about productivity. Electronic payments help people make more productive use of their time (not having to travel distances and line up to collect your cash); being able to source productive inputs from further afield; minimizing customer debts because you can now receive funds electronically prior to shipping the goods; and managing your inventory and working capital more tightly because all payments are in real time. At the household level, payments can also help individuals manage risks more efficiently.
Poor people’s payment needs are large. There is no reason to think that poor people perform any fewer transactions than you and I do. They actually probably do more, since they receive money in daily or weekly doses rather than in monthly lumps, they engage in more microentrepreneurial activities, and they have much broader family and social networks through which money flows.
Poor people—microentrepreneurs among them—need safer, cheaper and less time consuming payment options. There is ample evidence that poor people are willing to pay for payment services. Financial institutions catering to them can use this to increase profitability and create more integrated service propositions that link their payment offerings to savings and credit services.
Of course, payment services are harder to deliver because they require interconnections to a broader network infrastructure. That’s why we need to be thinking of finance-as-utility, and not just of finance-as-product.