Reflections on the formal – informal divide for the mobile money phenomenon

General positive aspects and critiques

Regarding the general phenomenon of mobile money in the African continent, many of the evaluations of the digital financial services possibilities highlighted their positive sides and impacts. Benefits are to be found in the reduction of both physical and institutional transaction costs for business operations; improved payment transparency; enhanced possibility to tailor financial services to the needs of the poor; decreased utilisation of commercial intermediaries; improved possibility of control of savings and operations, also by disadvantaged groups, such as women; and creation of local jobs (lazzolino, 2017; Maliehe & Sharp, 2018). The topic has been included in the stream of literature on business and services for the BOP with enthusiastic considerations. As Maurer (2012) explains, mobile money technology appears as an example of convergence of corporate and public interests. Mobile network operators and the device industry target a large market populated by the worlds “unbanked” poorest with the goal of creating revenue. According to many views (Maurer, 2012), the service that is consequently offered increases the degree of financial access for the poor, improving income and triggering development processes. In this framework, the formal actors are represented by the industry and by public institutions that provide a favourable business environment; the informal actors, on the other hand, are seen as a new pool of consumers.

Furthermore, evolutions within the BOP narrative led to considering the poor of the informal sector also as “frugal innovators”, that is to say, actors engaged in collaborations with the formal sphere for the “co-creation” of affordable and accessible products (Meagher, 2018). In this view, formal actors take inspiration from existing experimental and innovative practices of the informal sector and scale them up. This formalisation of what has been informal leads to an increase of revenues for the formal sphere, creating an apparent win — win situation. Mobile money enriches this general perspective, since targeted individuals are at the same time consumers, when they utilise the technological service, and product innovators, when they develop new streams of service use and goals, such as creation of micro-savings mechanisms or of markets among subcontracted mobile money agents (Maurer, 2012; Meagher, 2018).

However, scholars also identified a number of shortcomings linked to the mobile money diffusion. The success of this technology for effectiveimprovement of financial inclusion and access is highly context-dependent, and there is still a lack of accepted guidelines for the overall good performance of the service. It is not clear whether the benefits of digital financial services are evenly distributed both on a social and a territorial level, or whether they rather reinforce pre-existing inequalities and exclusion patterns. For example, in some cases, women still lack the formal elements required by regulations for financial service providers. Zins and Weill (2016) find that mobile banking and mobile money use is driven by the same determinants that drive regular banking, and it is therefore positively associated with being a man and having high income and education levels. The gap between urban and rural areas is still present, mainly because private investors need a solid business environment for long-term investments, and these are lacking in remote areas or among customers who would exchange very low amounts of money, such as small-scale farmers. The issue of customer data is also crucial and controversial. The new technology allows to analyse data left by the past track of customers’ financial activities. On the one hand, this is favourable for the unbanked poor, since these unconventional information channels for the first time allow formal financial providers to be reassured about the adequacy of the customers placed into the informal economy, and this increases the tendency to include them in the service provision. On the other hand, however, the analysis of customers’ data also includes information related to the social surroundings of an individual. If this social environment does not meet the required standards, it may become an obstacle to inclusion in the service, playing a counterproductive role with respect to the customer (lazzolino, 2017). Finally, cash money is hard to be replaced in contexts in which gifts and money-based contributions play an important role in social interactions (lazzolino & Wasike, 2015).

Successes and controversial issues in the M-PESA case

The experience of the M-PESA service in Kenya has been widely studied by scholars and corporate managers. It attracted much attention for different reasons. First, it represented a pioneering attempt in the mobile money field, and thanks to its success, it was able to expand to other African countries, and subsequently to countries in Asia and Europe. Second, it offers a particular example to reflect on the interaction between formal and informal spheres in the domain of mobile money development and use, and on its interpretation according to both positive and more critical narratives of BOP markets.

Positive assessments place M-PESA among the success stories of the BOP business models, in a framework in which social needs are seen as stimulus for developing technological solutions that target poor customers in a commercial and possibly financially sustainable way. In this vein, they highlight that M-PESA was launched by a multinational company (Vodafone) and funded by the UK development agency, and they declare that its “primary aim was to contribute to the Millennium Development Goals by offering easy access to micro-loans for the unbanked market segment” (Linna, 2012,130), therefore promoting the

Reflections on the formal — informal divide 241 coupling of social and commercial goals. Some scholars focus on the formal — informal sector interaction as one of the key drivers of success. They praise that local enterprises could benefit easily from the so-called “grassroots-level knowledge” as a source for BOP innovation (Linna, 2012, 131), and that local informal hubs and social networks have been effective channels for testing ideas and receiving feedback to be used for business modelling and concept development. Moreover, local knowledge, local organizational networks, and systems of relational contracting of the informal domain were also beneficial for product diffusion in remote areas (Meagher, 2018). Another link which is considered fruitful is the one between local enterprises and multinational companies. Both are considered as winners from the relationship: the former need resources, technical knowledge, additional finance, and access to wider markets. The latter, in turn, could gain smooth access for the provision of tailored products for low-income customers.

One more point in favour of the M-PESA experience is its capacity to reach the economy of scale needed to attain financial viability, as this has not been the case for many other innovative mobile money providers worldwide. This has been possible thanks to the platform technology used to host a wider set of services in addition to the original ones. The new additional software applications were provided free of charge by Safaricom with the aim to generate new demand and strengthen customer loyalty to the providers primary products. Thanks to this business model, Safaricom could enlarge the partners’ network. For example, it has been contacted by actors who proposed ideas for the development of new products, such as Equity Bank, a Kenyan microfinance institution (Linna, 2012).

Other scholars are more critical in their interpretation of the interplay between formal and informal economic actors that generated M-PESA success. With the notion of “adverse incorporation”, Meagher (2018) challenges the concept that “frugal innovation” and the vision that co-creation of new ideas for business through collaboration between formal and informal domains always bring win — win situations. In contexts of power and status disparity, agents belonging to the BOP and to the informal sector could be involved in interactions with more powerful actors of the formal sphere with an adverse effect. Control and value extraction could be shifted simply from local informal actors to corporate stakeholders. Meagher argues that narratives on inclusion and collaboration hide a goal of reconfiguring informal institutional and economic systems around the interests of the formal actors, with the aim of reducing costs and increase profit margins. Interactions presented as complementary may actually involve capture of local resources and knowledge. Inclusive engagement could turn out to be highly selective, by picking only the informal actors or institutions that are useful for the need of the business.

Meagher identifies four channels through which adverse incorporation may occur, with the interaction favouring the formal side and leading to actual disempowerment of the informal side. First, copying product or process innovations from informal actors generates a decrease of profits for the channelsin which such ideas actually emerged. Second, free-riding on local networks reduces the transaction and marketing costs for the corporate actor. Third, by short-circuiting informal accumulation, selective inclusion may lead to delegitimizing informal commercial intermediaries. As Webb, Kistruck, Ireland, and Ketchen (2010) explain, such intermediaries are often substituted with social enterprises or local NGOs that ally with the formal corporations and act as informal brokers to remote BOP markets of poor customers.⁸ Consequently, profit margins of relatively better-off informal actors are eroded, while profits generated along the frugal value chain are concentrated on the side of the corporate partner.⁹ Fourth, shifting risks and costs towards informal actors. Often the programmes implemented by large corporations require that the local informal entrepreneurs bear the equipment costs or exploit their social support networks, adding more stress to the system. In this way, local social capital is eroded rather than empowered, while formal corporations avoid the risks and costs of fully formalizing the actors employed in the whole value chain. Moreover, frugal innovators’ partnership with development aid divert scarce funding from direct support of local enterprise development or creation of formal jobs.

By applying these reflections to the M-PESA case, Meagher (2018) questions the actual complementarity of benefits between formal and informal actors involved. She argues that the role of informal innovation has not been sufficiently recognised, while the benefits have been captured consistently by the lead firms Vodafone and Safariconi. Meagher (2018) and Maurer (2012) note that, on the one hand, the supposed end users of the M-PESA system actually generated product and process innovations, and on the other hand, their low-cost innovative informal business infrastructure of sub-contractors networks was so crucial for the product diffusion that Safaricom promptly copied the schema at a formal level. After having benefited from the services generated by the informal network, in 2010 Safaricom centralised the control by strongly expanding the role of the cheap sub-agents while reducing the number of better-paid dealers. In this way, it increased both control and profit margins, and allowed “the capture and incorporation of the highly successful informal innovations” (Foster & Heeks, 2013, 206). This process is a demonstration of the four strategies listed above: copying local informal innovations, free-riding on informal retailers’ practices, exclusion of “upper ties agents”, and shifting costs onto the sub-agents’ structures (Meagher, 2018).