You Say M-Shwari, I Say Payday Loan

Over at CGAP, Julie Zollman has a terrific post on M-Shwari, the Kenyan borrowing and saving platform built on M-Pesa, examining the underlying customer needs that have led to M-Shwari’s success. Here’s a key passage:

The appeal [of M-Shwari] was the possibility of being able to borrow on demand, in real time, to stretch families’ ability to make ends meet in the short term.  M-Shwari offered liquidity bigger than credit from local shops; faster, more private, and more reliable than friends and family, and cheaper than moneylenders. Here was a product that … solved a very real financial need while also getting delivery right: being accessible, having simple rules…

I think this is exactly right. Short-term liquidity seems to be a common need for lower-income households around the world, based on financial diaries research in KenyaBangladesh, India, South Africa and the United States. But now take a moment to re-read the passage while substituting the word “payday” for “M-Shwari”:

The appeal [of Payday] was the possibility of being able to borrow on demand, in real time, to stretch families’ ability to make ends meet in the short term. Payday offered liquidity bigger than credit from local shops; faster, more private, and more reliable than friends and family, and cheaper than moneylenders. Here was a product that … solved a very real financial need while also getting delivery right: being accessible, having simple rules…

The passage is exactly right for payday lending as well—and explains why there are more payday store fronts in the US than there are McDonald’s or Starbucks.

The point is not that M-Shwari is just a form of payday lending. It’s that there are real client needs that can be met with good or bad products—and it is often difficult for customers to tell just how bad the bad products are until they use them. As Julie notes, “[M-Shwari] still has much more scope to refine and improve its fit for customers, communications, and consumer protection.” The intersection of customer need for short-term liquidity and quality products that can deliver it is arguably the most promising point for financial services innovation globally. But it’s also arguably the most important point for regulatory innovation as well. In the US, regulators are cracking down on many of the most onerous practices of the payday industry. While hopefully that will drive out at least some of the bad actors in the space, it won’t drive out the need. Similarly as M-Shwari and its many future imitators seek to meet this customer need, regulators need to keep a close eye on how to protect customers while acknowledging that providing short-term liquidity to poor households is an inherently expensive and risky proposition.