Thursday, January 19, 2017

Enhancing DFS in Nigeria: the State of the Market

by Olayinka David-West, Lagos Business School

In January 2016, the Lagos Business School (LBS) launched a research project seeking evidence-based sustainable business models for the delivery of digital financial services (DFS) to the unbanked poor in Nigeria. Supported by the Bill & Melinda Gates Foundation (BMGF), this two-year initiative aims to provide evidence-based insights to support the mobile money conundrum in Nigeria as well as enhance ecosystem capacity. The initial stage of the project employed periodic industry dialogues, global expert knowledge sharing sessions, and in-depth global case studies produced by student-teams from the Pan-Atlantic University (PAU) community. These processes led to the writing of the State of the Market Report and the formation of the first ever Stakeholder Forum on DFS. The next phase of the project will focus on market-enabling policies for a thriving DFS ecosystem. This blog post summarizes the initial findings documented in the State of the Market Report.  

     For me as the team lead, this project titled "Sustainable Business Models for Delivering Digital Financial Services to Lower Income Unbanked Citizens of Nigeria" has personal significance and correlates with my broader interest--understanding the role and application of information and communications technology (ICT) in business and society. Since the mid-1990s, the Nigerian banking sub-sector has been extremely active in their adoption of ICT, capitalizing on various technologies to enhance service delivery and operations and has thus been focal to ICTs role in business and society. In 2013, I commenced scholarship with the Institute for Mobile, Technology & Financial Inclusion (IMTFI), coordinating the project on mobile money utility and financial inclusion in Nigeria and Ghana. It was a study in which my colleagues and I analyzed findings from each market and highlighted some adoption and utility contrasts between Nigeria and Ghana. In Nigeria, we empirically validated that in spite of the high mobile penetration rates, mobile money adoption and utility were exceptionally low, as a result of factors such as poor market development, trust and inadequate service delivery practices. 

      Unlike the widely recorded success of M-Pesa  and mobile money utility in Kenya, Nigeria is yet to reap similar benefits. As of 2014, 60 percent of adult Nigerians were financially served. Closing the gap to meet the national financial inclusion strategy (NFIS) target of 80 percent by 2020, would involve the acquisition of about 18 million consumers as well as contributions from all ecosystem actors. Consequently, this project is a scholarship initiative to support the achievement of the national financial inclusion strategy. In view of low mobile DFS utility, we sought to unlock insights and sustainable business models to propel mobile money operators (MMOs) in the creation and delivery of DFS to the financially excluded. 

     The consumer insights were derived from detailed analyses of multiple secondary data-sets on mobile money utility and access to finance (A2F) collected between 2008 and 2014. From the analyses, consumer profiles and value propositions of the under-banked and unbanked were articulated. On the supply side, the assets, resources and capabilities required and available to create and deliver sustainable mobile DFS to under-banked and unbanked consumers were examined. We discovered that suppliers require a complement of physical (technology, people, locations, finance and processes), human capital (competencies, partners and knowledge) and institutional (execution/leadership, competitive strategy, brand equity and culture) resources and capabilities for the effective and sustainable mobile money operations. The business model canvas highlighting the various components of the MMO business model is illustrated in Figure 1.

Figure 1: Business model canvas (BMC) for DFS.
We went a step further to dimension the spectrum of competencies, understand network (channel) management from the fast moving consumer goods (FMCG) industry and compute the cost-to-serve. We learned that MMO competencies range from technology, business, network and field service operations or management to customer support/service delivery. From FMCGs, we discovered that distribution channels are built around effective route-to-market (RTM) and trade promotion strategies. Finally, using cost- and process-based approaches, we computed average self-service and over the counter (OTC) costs. From the cost-based analysis, we estimate average self-serve and OTC costs of N132 ($0.42 ) and N604 ($1.92) respectively. Alternatively, self-service and OTC estimates from the process-based approach yield average costs of N91 ($0.29) and N172  ($0.54) respectively by using exchange rate of $1 to N314.7 for currency conversions. 

In presenting the DFS state of the market in Nigeria, we concluded with recommendations that once implemented could close industry gaps and move Nigeria closer to attaining the NFIS goals by the target date of 2020: 
  1. Build network effects: the need for demand-side economies of scale or network effects through collaborative market development.
  2. Adopt new business models: we propose either focused or specialist models or a hybrid (see Figure 2) that may be deployed nationwide or in limited geographical markets. 
  3. Alter financial model to reduce transaction costs: cost reduction suggestions include the adoption of alternative and cheaper technologies, access to patient (inexpensive) capital and the   possibility of additional revenue streams.
  4. Develop capabilities: the need of specialist capabilities in areas such as payments systems programming as well as more complex human capital and institutional capabilities are in short supply and in need of systematic and structured development. 
  5. Alter industry structures: finally, we believe that some changes to the current supply and agent industry arrangements are required to facilitate better collaboration and interoperability amongst operators.

Figure 2: Sustainable business model proposals

All through 2017, we shall extend our scholarship pursuits and focus on understanding the role of another critical ecosystem participant, the regulators and market-enabling policies for DFS. Notwithstanding, we believe that adoption of these supply-side recommendations will lead to a more vibrant DFS ecosystem as well as the attainment of the national goals and the intended benefits of financial inclusion for all Nigerians.

Mobile Money Utility & Financial Inclusion: Insights from Unbanked Poor End-Users in Nigeria and Ghana by Lite J. Nartey and Olayinka David-West. IMTFI Blogpost. Nov, 15, 2015.

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