This blog was written by Lamia Naji, Associate Manager, Learning and Strategy at Mastercard Foundation, & Xavier Faz, Lead, Digital Finance Frontiers at CGAP
‘Impact’ can be defined in different ways. In the context of inclusive economic growth, the kind of impact we look for are meaningful changes in the lives of low-income clients, such as an increase in income or an enhanced quality of life. In context of financial inclusion, we expect these outcomes to be achieved through higher savings (financial and time), consumption smoothing, investments in income-generating pursuits, and asset-building among others.
On a recent trip to China led by Mastercard Foundation’s Partnership for Finance in a Digital Africa and hosted by the Chinese Academy of Financial Inclusion, we had the opportunity to visit a range of businesses to learn and experience first-hand how the internet and technology are driving financial inclusion, an objective central to both CGAP and the Mastercard Foundation in Africa in particular.
On our ‘learning tour’ of the so-called BAT-J companies – Baidu, Alibaba, Tencent and JingDong – and others, we quickly learned about the ubiquity of China’s superplatforms and how they offer alternative channels for financial services. In the process, we noticed a knowledge gap relevant to our work: how much do we know about the impact of ‘superplaforms’ on the lives of low-income clients?
While China is ahead of many markets in making tech-based business models a reality, the associated impact of such development seems less clear. Although an analysis of client impact evidence on digital finance showed mainly positive results for the digital finance sector overall, it also revealed null and negative changes at the client level. Furthermore, it highlighted significant knowledge gaps in our understanding of client impact of digital credit, savings and insurance products. Thus, we must be cautious of assumptions about if and how the development of these models elsewhere, including in Africa, will contribute to positive changes for individuals, institutions and the market. Put simply – what is the causal pathway through which superplatforms lead to positive “impact” for low-income clients when considering access and adoption?
In this blog we will try to unpack the individual (consumer use case) and institutional (firm business case) effects of superplatforms, focusing on three types of digital services: digital payments, social networks, and ecommerce.
Digital and mobile payments (e.g., Alipay, WeChat pay)
Throughout China, mass-market access to smartphones enables a whole suite of mobile transactions between individuals and businesses. We observed how the widespread use of QR codes for electronic payments enables simple mobile payments transactions, and large scale of adoption allows for low user fees. We could infer the following types of effects arising directly from their use:
- Simpler and faster purchases, as well as simpler administration of a sales point. For small vendors at Panjiayuan market in Beijing, mobile payments reduce the need to maintain a cash stock and fractional change, facilitating more efficient sales and reducing leakage from theft and fake notes. Street sellers have a QR code sticker in a visible part of their stall, customers scan the code, enter amount to pay, show the shopkeeper the proof of payment in their screen, and walk away. Selling transactions are reduced to visually confirming payment. The reduction in the costs associated with cash and the improved convenience and efficiency are hard to quantify. However, both have driven consumer adoption of payments: the total transaction value of e-payments in China is 77% compared to 48% in United States, as we learned at our meeting with Tencent.
- Easier access to credit for both consumers and merchants. Payment transactions automatically create digital records of sales and purchases for both consumers and merchants. This data can be used to assess credit risk, which is particularly valuable if either are outside the traditional finance ecosystem. Providers such as Alibaba and JD Finance use this transactional data to extend credit access to both consumers and merchants which provide working capital that enable small businesses to grow. On the consumer side, this leads to uncollateralized loans which can have different kinds of effects – which can be positive, or sometimes negative.
- Enable participation in the emerging “sharing economy”. People participate in shared schemes by virtue of being able to pay (or be paid) instantly and remotely with electronic money. For a low-income person, the “shared economy” may mean being able to do more with limited resources. For instance, s/he may not be able to buy a bike but may have enough to pay to ride one from a bike-share company, such as Ofo, and reap the benefits that more efficient transport can bring. Additionally, a person who owns a motorcycle can offer rides via an online ride hailing service, such as Didi, or distribute packages in his/her spare time to earn additional income.
- In some cases (particularly larger businesses), improved inventory, merchandising and sales processes. Transaction records are used by shop-management systems to access consumer data, track purchasing patterns, and use tools to strategically manage inventory and make better business decisions. An example of such a system is Alibaba’s free retail-management platform, Ling Shou Tong (meaning ‘Retail Integrated’), which we saw in action in Weijun Grocery, Hangzhou.
Social media and networking (e.g. WeChat)
While electronic payments change the way people do business, the effect of social platforms is of a different nature. While in their origin, social networks facilitate interactions among people, some have integrated a payment mechanism that eases access to a wide array of services. In China, the popular WeChat platform enables users to pay their bills, hail a taxi, split the restaurant bill among friends, or play games and stream videos, all in the context of social interactions across chat groups. While we were not directly able to load funds on our WeChat accounts as non-residents, we had an opportunity to experience these applications courtesy of our Chinese hosts.
We see two direct ways in which social networking can lead to financial inclusion impact:
- Improved exchange of money in context of social relationships. During our meeting with Tencent, we learned of a fascinating example of how WeChat integrates social custom with technology to creatively produce contextually relevant products for its users. For Chinese New Year for example, families provide their loved ones with red envelopes containing cash. Given many people cannot physically come together during the holiday, WeChat facilitates the sharing of digital red envelopes, which enable even Chinese living outside of China, to also send or receive digital money in the New Year. In 2018 alone, the total amount of digital red envelopes shared on Chinese New Year exceeded CNY ¥ 768 million (USD 115 million).
- Improved access to credit for thin-file customers. Social networking companies such as Facebook, end up knowing you better than your partner given their access to social data. Traditional banks can access your financial history, but can’t place your financial transaction in the context of everyday life. In China, Tencent Holdings the parent company of WeChat also owns a bank, WeBank. Data from social interactions and monetary exchanges enables WeBank to manage a loan portfolio at very low default rates even with clients traditionally classified as ‘thin file’, which is particularly relevant in the absence of credit bureaus in China.
E-commerce platforms (eg. Alibaba/ Taobao, JD.com)
E-Commerce facilitates trade among distant parties who wouldn’t conduct a sale/purchase transaction in the absence of a mechanism to connect demand with supply. Ecommerce platforms also enable a minimum trust needed to purchase something remotely without immediate and tangible validation of product quality (an escrow account). Here are some of the impact pathways we observed in China:
- Increased sales and firm growth for small businesses. For SMEs, particularly those outside urban settings, eCommerce means being able to tap into a larger market, by selling beyond the immediate physical geography where businesses are located. Businesses that manufacture and sell products (e.g., shoes, textiles, furniture) can sell nationally as opposed to just the town or city where they are based. In China, good roads and availability of different logistics services enable efficient delivery across a wide geography. Electronic records of sales enables access to digital finance (working capital). The growth of businesses as a result of e-commerce can have a direct effect on job-creation and income-generation for local citizens: Alibaba’s rural-focused entity, Cuntao, has created more than 1.3 million new jobs nationwide through its rural eCommerce solution. According to Cuntao, this brings RMB 180,000 benefit annually to each village. We were able to see this first hand during our visit to a ‘taobao village’ in Huidong specializing in women’s shoes. We chatted with suppliers and producers to surface their strategies on optimizing sales, learning about increasing domestic and international retail and wholesale trends resulting from selling on online marketplaces. For one factory owner, annual advertising on Alibaba coupled with the branding support provided by the platform dramatically expanded his shoe production business, which in just 4 years grew to employ 200 people and sell 1 million pairs of shoes annually.
- Access to expanded variety of products and services, which can potentially be better suited and/or more affordable. For consumers, shopping in online marketplaces (in addition to brick-and-mortar stores), could increase access to a wider range of products and services. These can be options that are potentially better suited for his/her needs or perhaps more affordable. Purchasing online may also bring time-savings, which may lead to having more time for productive activities. More work on the demand side is needed to better understand the benefits of ecommerce for low income consumers.
In summary, there are indications that superplatforms can impact both consumers and businesses, bringing efficiency gains, increased digital data on transactions and social media, and access to capital. However, we think we should remain concerned around the digital divide – the extent to which the shift to digital can touch poorer and low income segments. We should be well aware of these limitations so that the design and delivery of digital products can be improved. As of yet, there has been limited in-depth exploration of the outcomes ‘after access’ and this is where additional investment could be allocated. Perhaps the next step in the China discussion is to begin identifying the impact of superplatforms on different segments of users, including low-income women, youth and rural residents. In other words, what does this mean in terms of bringing meaningful changes and opportunities for low income people? Is there growth and job creation in smaller and rural towns? Does self-employment improve and does it change income and expenditures? What other effects can these changes bring in access to education, upward mobility and gender equality? What are the intended and unintended consequences? How would these responses differ across different country contexts in Africa?
Emerging examples of impact stories – through qualitative anecdotal research or more rigorous experimental and non-experimental studies – can help us understand where to marshal our efforts when advancing digital financial inclusion. In light of this, actors such as CGAP and the Mastercard Foundation can contribute to building the evidence-base on the impact of digital financial services on low-income clients in emerging markets.