Are the 'small guys' the future of mobile banking for agribusiness?

Recent research has revealed there is a race among commodity buyers to have the fastest speed of payment to the farmer. However, technology alone is not enough, as the reality on the ground is that companies must also find ways to reach local communities, educate people to use — and trust — the system, find enough funds to implement the ideas while continuing to innovate, and ultimately achieve scale so the projects are sustainable in the long term. During last week’s Fin4Ag 2014 conference on revolutionizing finance for agricultural value chains in Nairobi, Kenya, a number of participants shared lessons learned on how to apply market research into analyzing cash usage behavior patterns of farmers, form strategic alliances and better integrate their agriculture extension programming. SmartMoney is one mobile financial services provider working with large cotton and coffee buyers in Uganda to transition their cash payments to mobile payments. Devex caught up with its founder and CEO Michael Spencer on the sidelines of the meeting to discuss how mobile financing can help farming communities in the developing world. What are the main challenges ahead and what needs to happen for this technology to realize its potential as a “game-changer” to lift people out of poverty in the future? Here are the highlights from our conversation: How can digital finance better serve agricultural communities? And are you encountering any resistance from some of the traditional players? First, you need to consider that if digital finance is a house, the foundation must be digital money, because money is the basis of finance. It's a means of storing and exchanging value. The term that people like to use is “mobile money,” but we're of the view that it's a bit of a misnomer, because most of these services are really used as money transfer services from urban to rural centers — Western Union on a mobile phone, if you like. But that's not really money. In a rural community, people are not using this technology to buy sodas, soap and salt from a local shopkeeper. And it's certainly not being used widely as a means of saving. When people get their mobile money on their phone they immediately go and exchange it for cash, and cash remains the local currency. So if you really want to build a house of digital finance in rural communities, you need to start by creating true digital money in the rural community — in other words, a mobile currency that can be used for local purchases and for savings. And what are some of the benefits that come from that? We take it for granted that you can save money. We think people in rural areas don't save because they're not educated, they're not sophisticated. The truth is they want to save, but they don't have bank accounts, they don't have any electronic means of saving. So their only option is keep cash in tins under the furniture. It's logistically difficult to save money in rural areas. However, if you can now safely store your money on your phone, you can now save ... You can save for unexpected crises, medical problems, school fees and you can really start to lift yourself out of poverty. It's also very important how fast money is exchanged in an economy, it literally correlates to the economic growth in the community … Cash is slow, it's very, very slow … so if you can transact very, very quickly over distance, it obviously leads to more transactions happening faster, which ultimately lifts the entire economy up. And that's really the business that we're in. It's a very difficult thing to describe to people, because if we say we're doing mobile money, people naturally assume that we're doing something similar to M-Pesa or Airtel money. But they're not really doing mobile money, they're doing money transfers … What we're doing is bringing a new electronic currency to rural communities, and I think it's something that hasn't yet really been done successfully. So what are the main obstacles to successfully effecting this change? Probably the most difficult issue that we've encountered is building trust … We all have to trust in the value of the shillings, dollars and euros that we're carrying around with us. It's a simple piece of paper, but we've been persuaded that it has value and it will retain value. That's trust. In the same way, if we ask a villager to give us cash and we give them electronic credit on their phone, they have to trust that it has value and will retain value. But how do you persuade people who've never used this kind of value system before to trust it? We've had to learn over time different techniques for building and maintaining that trust. There's no silver bullet here. It's about getting local, working with local communities. All of our staff are from the local community, they're trusted members of the community. We work with the local government and the spiritual leaders to ensure that we're embraced and supported by the existing authorities, and then we have to win over the population. At the end of the day, the most effective way to build trust is to deliver a reliable, quality service. When people can actually use it and find that they can deposit and withdraw easily, they can transact within their community very easily, that is the best trust that you can possibly get. And how do you tackle issues of scalability, as well as compatibility with mobile or branchless banking and all of the associated technologies that go with it — smart cards, scratch cards, point-of-sale devices, etc.? Well, honestly, although I'm a technologist I think the technology is actually the least interesting aspect of this business. Everyone likes to talk about mobile phones and the digital revolution. But the reality is that in order to move a rural community from cash to electronic money, the real expense and challenge behind it is to mobilize local teams who can go door-to-door and spread the gospel. And that's what it takes. There's no television to go through, you can't put up billboards, because the population density is so low. So you have to send your apostles out into the community to explain the benefits and then quickly and conveniently register people. If the registration processes are too complex, or if people have to travel too far to register, they simply won't do it. So you have to literally bring the solution to them … This is not a technology problem, it's a logistics problem. Could we characterize mobile banking then as a potential game-changer for lifting people out of poverty, particularly in rural locations? I believe it certainly has that potential. I'm somebody who likes to affect change on a large scale. If we're successful and we do form the alliances that we need, you're going to see a lot of people developing digital identities, digital credit profiles, and qualifying for credit in ways that they couldn't before. It opens up a whole world of possibility for rural people. And yes, I do think it's ultimately going to lift a lot of people out of poverty. It's an extremely exciting opportunity, given the sort of alignment that's happening right now between the worlds of technology, finance and agriculture. What are your key takeaways from the conference this week, taking into account such an alignment of interests across sectors? The lessons that I've learned from listening to other innovators like us is that there's simply not enough innovation happening in this space … and I think there are several reasons for that. In terms of funding innovation, what you see is there are large aggregate pools of money available: there's the Gates Foundation, there's USAID. Lots of money is lined up to fund innovation. But the problem is that innovation is not always coming from large organizations — it’s coming from the small guys. Guys like SmartMoney that are out there, trying new things. In order to innovate you have to learn, and you can only learn by failing … so in order to encourage learning you need to be willing to fail. In other words, there has to be money made available that's put at risk. I think you have two fundamental problems. When there's such aggregation of development money, the [development financial institutions] don't have the human resources to manage numerous small investments. So instead what they do is to say ‘No, we have a minimum investment amount of $10 million.’ Well, a new company like ours isn’t even worth $10 million dollars, so we can't absorb that amount of money ... There are lots of examples of this kind of structural problem in the market today. [The other problem is that] they have a mandate that says that they have to deliver returns and they have to have a very high degree of success, which again doesn't lend itself to putting capital at risk and ultimately encouraging innovation. If you talk to every single one of these small, innovative companies, the common theme is they're struggling for finance. And it's occupying a tremendous amount of their time. Time that's not being put into managing the business and encouraging innovation. For me, that is probably the single biggest problem that I'm seeing right now and there’s just not the market structure to get the cash to the people that really need it. Check out more insights and analysis provided to hundreds of Executive Members worldwide, and subscribe to the Development Insider to receive the latest news, trends and policies that influence your organization.