The Base of the Pyramid

The Harijans of the financial world have just had their lexicon upgraded. Jerry Rao, at a recent seminar, proposed that the term "Base of the pyramid" be used to refer to the "around the poverty line" clients. IBM's initiative for this sector is called "Banking the unbanked" (a la Untouchables). Whether that makes any difference is a moot point, though. In any case, with the top of the pyramid crumbling and the falling debris impacting the middle of the pyramid too, even the large financial institutions and software players seemed to have suddenly found the base of the pyramid an attractive option. The spotlights are now focused on this segment of the market, which until now had been a rather unattractive option.

Microfinance has seen a gradual shift from a socialistic "not-for-profit" initiative to more recent efforts by organizations that have driven these initiatives quite successfully as capitalistic ventures. With the success of the Nobel prize-winning Grameen Model, microfinance has suddenly found favor among banks and bigger financial institutions as a means of profitably deploying funds. In combination with philanthropic NGOs and Corporate Social Responsibility initiatives by large organizations, microfinance now has a better than never before chance of actually causing socio-economic transformation. As pointed by Prof. Satchidananda Sagala, sustainability is the key to successful transformation for any microfinance institution. As one of the keynote speakers at the Microfinance and New Technologies Summit he remarked: "Unless, an MFI is able to run its programs in a sustainable manner, there is not even a glimmer of hope that we will be able to transform the lives of the people that we wish to serve under these programs". The real question then is whether technology can help in bringing about that sustainability. And for technology to be able to do that, the cost of such technology needs to be affordable.

There have been several initiatives from a technology perspective that have sought to bring down the cost of operations (per-transaction cost) and increase outreach. Some of them are beginning to show signs of pay-offs while others have drifted off into new directions. FINO, for example, which started off by being a pure-play technology company began to realize that this was perhaps a non-starter and transformed itself into a services company. Today, they have begun to see results as a service provider to banks which are implementing Financial Inclusion initiatives and for the National Rural Employment Guarantee Scheme. Technology, as always, has not been very successful in bridging the last mile. In the microfinance world too, the human intervention is becoming inevitable in bridging this gap. Banking correspondents and animators are playing a significantly large role in reaching out to the rural poor.

Another aspect of this problem seems to land us in a catch-22 situation – that of literacy levels. One of the reasons why this segment has not been viewed as commercially viable in the past has been the low levels of literacy among this section, and the consequent cost of training and associated cost of distribution (higher media, marketing and distribution costs). A corollary to this is the lack of knowledge about the customer (lower KYC compliance) resulting in these institutions being unable to assess the risk adequately. I don't know if technology can play a role in this very effectively. There is going to be a cost associated with increasing levels of literacy, and educating this segment about the usage of technology, which in turn can help in lowering the costs of operations. However, there is an upfront capital expenditure involved…and until someone bells this cat, the slow rate of progress is going to be a challenge.

From a software perspective too, the tendency of most players has been to retrofit existing solution to the perceived needs of the market. However, this is unlikely to work because of the above mentioned reasons. Implementation of these solutions will pose huge challenges and the return of investment is quite unlike what is obtainable when implementing solutions for cash-rich financial institutions. The solution will need to be designed and developed to meet the specific market needs of this segment. More importantly, it will need to solve the twin challenges of high ease-of-use (low literacy levels) and low cost (low spending power among MFIs). This is a still-evolving segment, and therefore the processes too are going through various stages of evolution and maturity. Any software, to be successful, will need to accommodate a level of flexibility that reflects this evolution.

Lastly, I think we are still grappling with the issue of what the customer actually wants. The bouquet of products and services that are on offer leave a lot to be desired; and this is inextricably linked to an understanding of the customer's environment. As we get better at acquiring knowledge about the customer and her environment, we stand a better chance of offering appropriate products and services. In the end analysis, if the intention is to cause socio-economic transformation, then it cannot be an isolated effort at just providing him with credit or addressing his economic concerns. To be able to witness a next generation that is truly emancipated, the transformation needs to address social concerns (education, hygiene and medicare are top on my list) along with provision of financial services. Only then can we actually say that this has been a sustainable operation.