Digitising the Informal Economy, the Bankly Way
Bankly set out to transform informal savings and transactions and is now challenging digital banking's biggest competitor - cash
Nigeria's informal economy is massive.
It contributes about 57.7 percent of Nigeria's GDP with over 80 percent of Nigerians (or 85 million adults) making ends meet outside formal systems, according to the International Monetary Fund.
From mom and pop shops, commercial vehicles and food vendors, to laborers, artisans and roadside traders, the informal economy is so pervasive even formal workers habitually participate in it (maybe due to our deeply entrenched love for haggling).
Though excluded from the banking system, informal workers still engage in commerce, operating almost exclusively in cash.
So there's all this money changing hands but it's entirely offline. How do you move that activity online into formal systems?
Bankly’s Proposition
Bankly is helping informal workers digitise their cash, and giving them digital tools to access, transfer and spend the funds digitally. They leverage a network of agents across Nigeria who help customers open accounts or digital wallets. Customers are then able to pay the agent cash, who proceeds to credit their digital wallets with the commensurate amount.
“One major drawback of saving informally is it’s expensive”, said Tomilola Majekodunmi, CEO and cofounder of Bankly. “If you’re a market woman saving with a thrift collector, contributing N100 every day with a thrift collector for 30 days, the first contribution for the month goes to the thrift collector. So basically, it costs them 3% to save monthly. Whereas, in the formal system, you make money when you save. Many of the people we spoke to didn't even realise how much saving informally was costing them.”
In spite of its drawbacks, these informal systems remain popular because they are built on visceral relationships. A thrift collector, for example, makes daily rounds visiting each saver at their shop and develops long term relationships with his customers over time. That kind of (high touch) experience is difficult for any app to replicate.
“We considered how to integrate the best of both worlds for our target customers - a way to digitise their savings while also giving them a high touch experience. We needed an interface that could operate offline and online. And that’s why we use agents.”
“So we launched our agent network. Our agents enabled us expand beyond just thrift collection systems and become gateways for informal workers to come into the banking system. This way, their funds are safer in a regulated institution. And because agent networks are decentralised, informal workers are able to digitise and access their funds across different locations using their mobile phones and from any Bankly agent.”
Today, Bankly is over 30,000 agents strong (with ~40 percent of them in the north), serving more than 1.5 million Nigerians since inception.
The Trouble of Banking the Unbanked
One major challenge of banking the informal sector is the difficulty of accessing their source of funds since most of it is informal. If you can digitise a person’s source of funds, you’ve solved 80 percent of the financial exclusion problem. (A ‘source of funds’ refers to the source of your income).
Think about it. Majority of the people who are banked today got banked because their source of funds got digitised.
Tomilola explains that financial inclusion often occurs when a person’s source of funds becomes digitised. “As a student, when you leave home for college or the university, your parents need a way to send you money so naturally, you open a bank account. Or when you get a job and get added to your company’s payroll, your source of funds changes which is then a prime opportunity for financial inclusion.”
Tomilola’s explanation is enlightening and corroborates what I wrote in A Clash of Kings and Strategies; Why Exclusion Lingers:
"Real financial inclusion is when people not only open bank accounts but use them frequently, till it becomes integrated into their daily routine... financial inclusion is about behaviour change."
Digitising people’s source of income works because there’s a higher chance for digital money to stay digital (due to default or status quo bias). It’s way more difficult to compel someone getting paid in cash to digitise their money.
Unless you have a magic wand to make over 85 million people go to school or get corporate jobs, you need another approach. This is why Bankly started out transforming an aspect of their target market’s financial habits that was unoptimised - saving.
“Solving the source of funds problem is difficult but it's possible. It would just take some time. There’s something we call the three-phase process of financial inclusion. We solve distribution first, then focus on the consumer, after that full digitization. This is how we reach financial inclusion.”
What Tomilola is highlighting is a staggered approach to financial inclusion. The first layer is solving for access. For Bankly, this meant building out a distributed agent network where customers can digitise their cash. The customer is able to pay the agent cash, and the agent credits the equivalent into the customer’s digital wallet.
The second layer is customer success and satisfaction. This requires building tools that enable customers to keep transacting digitally without disrupting their regular day to day activities.
The third phase is an outcome of the second. Eventually, network effects will take over leading to a surge in the number of customers as well as volume of transactions happening digitally compared to offline. Eventually, we will have more people transacting digitally instead of in cash.
Picking dance partners
In spite of record breaking inflow of venture capital into Nigerian fintechs, financial inclusion has barely budged.
Tomilola explains that the type of funding coming into the fintech space is not really designed to tackle financial inclusion. “Financial inclusion requires patient capital. But most of the funding going into fintechs is from investors who prioritise rapid growth and profitability. This is like the antithesis of financial inclusion.”
Financial inclusion is not like bitcoin trading — it is not a cash-out-in-one-year kind of business. Especially in a market like Nigeria where many of the bottlenecks to financial inclusion are systemic, the staggered approach is more realistic and sustainable.
“If we really want financial inclusion, then the stakeholders have to back companies with a social mission of going after the unbanked. And then patiently wait for the results, because this is a hard business.”
“Also, innovation usually follows money. Entrepreneurs will go after problems in sectors where investors are ready to support them. That’s why it’s important to invest in businesses addressing financial inclusion head-on, not those treating it as a Corporate Social Responsibility (CSR) project but as a core mission.”
Financial inclusion in the north
Northern Nigeria is home to about 26.7 million excluded Nigerians. It is also a region of interest for financial institutions.
With 40% of their agents located in the north, Tomi reveals that it costs a lot more to deliver banking services compared to the south. Aside from the infrastructural requirements, financial institutions have to invest in education, awareness campaigns, and even greater duty of care.
“It's definitely much more expensive to operate in the north and the margins are lower. We also see more cases of people falling for social engineering scams. In spite of the numerous awareness and education campaigns, people still share their PINs and passwords. Sometimes when customers log complaints on the platform, they send video recordings trying to explain what their challenge is and their PIN is showing inside the video. Or in cases of reported missing funds, when you investigate you realise the customer shared their PIN with someone or asked a third party to help them open the account and so this other person receives their OTP. Those are common issues.”
“Doing it right requires long term investments into expansive customer support systems, continuous education, marketing and training, all this expenditure and you're not yet talking about profits. So yes, while the north has opportunities, it's also laced with big challenges and tackling them requires patience and capital. And not every fintech is ready for that.”
Aside from funding, Tomi highlights regulation as another major bottleneck to tackling financial exclusion.
Regulators have the responsibility of setting up strong policies and procedures to discourage bad actors and protect customers from fraud. This is also connected to the literacy gap. Because customers are vulnerable, the regulator has to protect them. But then, regulation is a double edged sword. Innovation can be regulated to death.
Epilogue
With so much financial activity going on in Nigeria’s informal economy, digitising these activities will unlock major gains in financial inclusion. While this is easier said than done, Bankly’s measured approach to onboarding excluded Nigerians is yielding the right results.
Understanding your customers, building solutions that replicate essential offline customer experiences, providing the necessary duty of care to ensure a seamless transition from offline to online, and growing sustainably - these are the pillars of their success.
“You have to understand the business you're in. And we're blessed to have investors who understand our business and the problems we're trying to solve.”
What I’ve Been Reading…
Every writer I’ve ever mentored has read this article at least once. This is the gold standard I always try to live up to when I write (it’s also the article that made me pick writing as a career). Written by the ubertalented Joan Juliet Buck, it features an interview with Gisele Bundchen at the height of her celebrity. Celebrity profiles usually peel back the curtain and show us how human celebrities are. Joan did that but somehow she also left Gisele's mystery intact. It's a powerful example of storytelling at its finest. Had to revisit it when I heard the sad news of Tom and Gisele’s divorce.
What Happened After India Eliminated Cash
In light of CBN’s plans to introduce new naira notes, I revisited this analysis of the outcome of India’s 2015 demonetisation exercise. I see several similarities between our regulator’s radical approach to curbing black money hoarders and theirs. Spoiler alert: there’s a lot of pain ahead, especially for the poor. And eventually, the hoarders still got away with it.
That’s all for this month, thanks for reading.
Enjoying Inclusion Notes? Have ideas on how to improve the newsletter? Or is there someone you’d like me to interview? Drop me a comment and I’ll do my best. Also share and tell others.
Thank you Ibukun. I enjoyed every bit of the article. Financial service providers need a new approach to financial inclusion and I think Bankly is on the right track.
I think I know a few people you need to interview. I will take you up on that.
This was so beautiful to read. Now I know what Bankly does and can appreciate them for it. I really like what they're doing in the North.
I know one of the issues they also face there is proximity to financial institutions. So many of those parts are still underdeveloped. Let's say we have a lady that sells kunu. The closest bank to her is in another town, so she has no way of digitising her funds. But thanks to Bankly, she has access to an agent and other benefits.
Also really like the part on financial literacy. Educating these awesome people to know better and do better.
Thank you, sir.