The commercial viability for banks to serve smallholder farmers is highly debated, even though they generate 75% of the Agriculture sector’s $4 trillion annual turnover. From collaborating with ZANACO PLC to build a digital platform for smallholders, we identified an approach to capturing value from banking smallholders, as well as to bridging the gender divide in financial access.
Smallholder farmers in Zambia, and Sub-Saharan Africa in general, remain trapped in a cycle of poverty and produce significantly below their potential. The challenges they face are multidimensional, cutting across the entire agriculture value chain and require a systems approach in order to address them. In addition, to be sustainable, all problems need to be unlocked simultaneously, while creating value for each actor. While this is not an easy goal to attain, digital platforms can accelerate the process, allowing for both farmers and service providers to capture value through innovative business models.
With this in mind, Mercy Corps’ AgriFin program worked with the Zambia National Commercial Bank (ZANACO), as a digital innovation partner to develop AgriPay®. AgriPay is a farmer-centric plug-and-play mobile-based platform that allows farmers to transact, save, send and receive money while accessing agronomic information and financial literacy. For the agribusinesses and off-takers on the platform, AgriPay facilitates bulk payments in order to reduce high Cash-in-Transit (CIT) costs they incur to pay farmers for their produce.
THE BUSINESS CASE FOR BANKS
The commercial viability for banks to serve smallholder farmers is highly debated. There are many reasons why banks have shied away from lending to this segment: the seasonal nature of rain-fed agriculture, high cost of onboarding, low financial literacy, high costs of accessing and disbursing small-sized loans, and lack of data/credit history, to name a few. When you run the numbers, there really isn’t a commercial case and the risk is high. Yet, over $4 trillion flows through the agricultural sector annually, 75% of which is generated by smallholders. So how can banks capture this value?
We considered taking a bundled approach for AgriPay. Whereas bundling products and services is a well-documented strategy that has already been proven to be valuable in serving customers at the Bottom of the Pyramid, financial projections for AgriPay allowed us to understand how best to operationalize the approach for a bank.
Figure 1 below is an indicative breakdown of the expected revenue stream for AgriPay (assuming the platform offers a zero-fee transaction account, micro-credit, insurance bundled with credit, and free information service). We can see that the bulk of AgriPay’s revenue is in transaction fees from bulk payments, which is a fee incurred by Agribusinesses/buyers on the platform, hence a more guaranteed and sustainable income stream for the bank. While the revenue generated from interest earnings on loans is minimal and might not significantly affect the success of AgriPay, access to loans and a safe place for storage of funds were considered the strongest value proposition for farmers. The strategy for AgriPay was thus clear: onboard Offtakers/Agribusinesses and their farmer networks/outgrower schemes onto the platform. Partnerships with agribusiness and buyers were not a nice-to-have addition, but rather absolutely essential to the scale, financial viability, and sustainability of the platform.
Figure 1: An illustration of projections for expected revenue streams for AgriPay®
The last question we needed to address was the challenge of dormant accounts given income generated from agriculture tends to be seasonal and we anticipated account dormancy of up to 9 months. Two design choices for AgriPay will be essential to address this issue: financial literacy messaging and an interest-earning savings account. Studies done by Arifu in Tanzania showed that SMS-based financial training increased savings and credit repayment by 54% and 5.5 days, respectively. In addition, ZANACO will soon be launching its first-ever Mobile Loan and Savings product embedded into AgriPay and is considering negotiated interest rates on the savings account, in hopes to incentivize farmers to actively use the account. While these services offerings are still in development and will be deployed later this year, we believe they will drive active use of the account by farmers, beyond receiving payments from buyers.
BRIDGING THE GENDER DIVIDE THROUGH PARTNERSHIPS
Despite the significant role that women play in the household, they are often underserved by financial institutions. In Zambia, 43% of women smallholders are financially excluded, yet they make up over 70% of the agricultural labor force. Although financial institutions see the value in reaching female clients, many do not have the capacity to target them as a standalone customer segment or resort to designing “pink products” that are not central to the organization’s commercialization strategy. At the same time, the gender digital divide can prevent women from benefiting from the gains realized through digital platforms.
For AgriPay, the solution for this challenge was to take a gender-inclusive approach to marketing. Although AgriPay is a mass market, gender-neutral product, ZANACO partnered with organizations that already took a women-centric approach to their recruiting such as Cotton Association of Zambia (~70% women in their membership), VITALITE (~40%), International Development Enterprises iDE (~65%), and the World Food Programme (~45%). In addition, ZANACO recruited women-led savings groups as bank agents to reduce gender-specific barriers to accessing financial services.
An important learning through the pilot phase was that while some women did not have phones because they could not afford them, for a majority, phones were seen as a luxury item that added little value. They were willing to purchase phones if there was a use case – AgriPay provided multiple use cases, including, a safe place to store their money, save for emergencies and household needs, as well as a platform to learn better farming practices. As the product penetrates the market, we expect to see a positive correlation with phone ownership among women.
Digital platforms can enable both smallholders and the businesses that serve them to capture value in the agriculture sector. However, multiple levers need to be unlocked simultaneously, as opposed to sequentially, in order to realize this value. In addition, business modeling is not just an academic exercise to determine a break-even point; one can identify the right strategy for operationalizing the model by assessing income and cost structures. Lastly, a buyer-led approach is critical to ensuring the commercial viability of agriculture platforms.
Christabell Makokha, Innovation Strategy & Program Consultant
Jessica Chisompola, Head Alliances, Zambia National Commercial Bank (ZANACO)
Betty Muriithi, Digital Banking Manager, Mercy Corps AgriFin Program
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