This post is written by Joshua Kirton, FINCA International.

Digital financial services have shown the immense potential to extend formal financial services to unbanked and underbanked populations in developing economies. Emerging digital technologies have substantially lowered the cost of delivering financial services for providers, such as mobile network operators (MNOs) and banks, transforming the economics of working with lower-income and more remote customers. But in cash-based societies, customers need a cheap, reliable and convenient way to convert that electronic money into usable cash, and vice versa — in other words, access to cash-in/cash-out services. In developed economies, this infrastructure takes the form of widely available automated teller machines (ATMs) and brick-and-mortar bank branches. In developing economies, this infrastructure is traditionally lacking, particularly in rural areas, and agent networks have emerged to fill this gap. In a franchise-like model, financial services providers (FSPs) recruit, train and manage networks of pre-existing businesses to perform financial transactions, including cash-in/cash-out services, on their behalf, making them agents of the FSP.

The need for agent networks to provide, at a minimum, cash-in/cash-out services is most acute in rural areas, where a large portion of the unbanked and underbanked reside. However, this critical enabling infrastructure for financial inclusion faces several operational challenges that threaten its sustainability. The most persistent of these challenges is liquidity management, the practice of maintaining enough liquidity on hand to perform cash-in/cash-out transactions on behalf of customers. In situations where an agent lacks enough liquidity, cash-in/cash-out transactions are denied, resulting in reduced commission revenue for agents and leaving a negative impression on the customer and their trust in agent networks and digital financial services more broadly. Liquidity management is a particularly prevalent challenge in rural areas where agents lack quick and convenient access to rebalancing services, such as those offered by banks or FSP-supported super agents.

FINCA Forward, an innovation fund supported by USAID Partnership to Accelerate Entrepreneurship (PACE) and managed by FINCA International, worked with early stage financial technology startup Kuunda Digital to test a new approach to solving the agent liquidity management challenge. Kuunda's product, Hapa Cash Overdraft, is designed to address liquidity management issues by enabling agents to go into a negative balance on e-float for one day to continue meeting customer demand for cash-in transactions. The product integrates directly into the same mobile-based interface agents typically use to conduct customer transactions on behalf of FSPs, eliminating the need to use multiple platforms and facilitating a seamless user experience. An analysis of historical transaction history determines agent eligibility for a one-day e-float overdraft, and eligible agents gain access to individualized limits based on predicted business needs. Interest charged to agents on the one-day overdraft is, by design, less than the commission received from completing cash-in transactions. In doing so, this product attribute ensures that agents always make a net profit on cash-in transactions when using Hapa Cash Overdraft.

FINCA Forward partnered with FINCA Microfinance Bank Tanzania (FINCA Tanzania) and Vodacom to run a six-month proof-of-concept (PoC) of Hapa Cash Overdraft with a sample of Vodacom's M-Pesa mobile money agents. The PoC was successful in proving that the product addresses e-float-related agent liquidity management challenges, while at the same time representing a viable commercial opportunity for all product partners.

Between mid-December 2019 and the end of June 2020, the product made over 300,000 overdraft disbursements to agents, totaling $2.2 million in customer cash-in transactions that would otherwise have been delayed or denied because of liquidity issues.

For agents, the business impact of using the overdraft to finance cash-in transactions without the need to rebalance when they ran out of e-float was significant. Agents transacting with Hapa Cash Overdraft increased their commission revenue by between 30% and 75% by the end of the PoC. In addition to the monetary benefits, interviews with agents confirmed that the product allowed them to avoid the reputational risks associated with denying customer cash-in transactions. For customers, particularly in rural areas without ready access to traditional banking infrastructure, the product enabled greater access to essential cash-in services.

FINCA Tanzania, Vodacom and Kuunda immediately began commercializing and scaling Hapa Cash Overdraft after the successful PoC. Kuunda has leveraged the insights from the PoC to secure partnerships with mobile network operators and other distribution partners to begin deploying Hapa Cash Overdraft in markets beyond Tanzania. Scaling the product to new markets will directly contribute toward empowering increased numbers of underbanked individuals to utilize digital financial services by ensuring access to reliable cash-in/cash-out infrastructure. FINCA will continue to provide Kuunda with investment capital and technical assistance to support this effort.

To read more about the FINCA Forward-managed PoC of Hapa Cash Overdraft and the next steps for Kuunda Digital and its partnership with FINCA, download the full case study.