Financial Services Improving BoP Ag

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Providing farmers with the resources necessary to weather the storm

Farming in India is all too often a high-risk low-reward proposition. As farmers deal with unpredictable weather, disease that impacts crops and animals, and inconsistent market conditions, very few farmers have access to insurance, loans or banking that allow them to save for emergencies.  Financial services can provide farmers with an affordable and safe way to invest in tools and machinery, purchase seed and fertilizers, and secure necessary support services for improved agricultural productivity. While agriculture in India can be unpredictable and downright risky, new technology is creating new approaches for access to financial services via Micro Banking and Micro Loans. Small infusions of cash can be the absolute difference between efficiency and inefficiency, great and poor yields, and access to strategic opportunities.

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Micro Banking Challenges & Opportunities in Ag

In a country with 550 million mobile phone users, only 4% of the population currently use mobile banking services and less than 2% have access to credit cards.  With an additional 220 million mobile phone users anticipated by 2020, there is significant opportunity for banking entities to target the assistance of rural farmers by providing small cash infusions and the ability to access mobile payment services and money transfer options.

Micro Banking Challenges in Ag

India’s rules and regulations have made mobile banking inordinately difficult for companies and excessively confusing for customers.  For traditional mobile banking, the Central Bank requires mobile providers to partner with a national or regional bank.  For other types of mobile financial services such as mobile wallets, providers must go through time-consuming application processes.

For companies, India’s legal framework limits the types of services mobile banks are able to offer and also limits mobile financial service providers ability to scale in size, which impacts the services and ease of use for their customers.  In addition, the Central Bank requires mobile banks to partner with a national or regional bank or an application for variations of a ‘wallet license’ limits the types of transfers and vouchers the company may employ.  There is also a cumbersome two-factor authentication process with mobile banking that makes it difficult to navigate transactions through multiple banks and carriers.

Traditional banking and money transfers are currently time-consuming, travel intensive, and expensive. These challenges make it hard for rural farmers to access, receive or save small amounts of money.

Micro Banking Opportunities Within Ag

Those targeting the soon-to-be 800 million mobile phone users by providing a streamlined and more rurally-focused user-friendly service can make mobile banking services easier, faster, and less expensive for farmers. Startup companies like m-pesa India (which opened in April of 2013) understand this opportunity and are seeking to emulate the success of m-pesa in Kenya where it has reached two-thirds of the population. Meanwhile, established players including Oxigen and Airtel Money are already gaining momentum.

Mobile payment systems provide rural farmers, with 1) more secure ways to purchase input products and services—suppliers also enjoy more reliable and traceable avenues for receiving payments, 2) fast and secure ways to transfer wages and subsidies, allowing the recipient to receive their money without middlemen making deductions, and 3) a way to receive remittance from India’s 100 million internal migrant workers who have migrated from rural farms to urban settings for better paying jobs.

Micro Insurance Challenges Within Ag

While 25 million farmers account for over 60% of global weather-based micro-insurance loans, many potential carriers and policyholders are not utilizing micro-insurance because it can be challenging to sell, administer, and support.  Mobile technology and IT services are making it easier to support and bundle micro-insurance programs aimed at farmers.

Micro Insurance Challenges

Micro-insurance can be hard to sell and support. One Dartmouth article focused on the willingness to pay for crop insurance captured this well: “It’s hard to communicate and educate farmers as to the amount of risk and potential benefit of [insurance] products offered.  Even when this is done, there is a high threshold for willingness to pay.” Insurance policies are offered based upon multiple variables, including education, Stormfamily-size, and business opportunities. The willingness to acquire insurance is influenced by factors such as household wealth, risk attitudes, and product literacy, and the amount a household is willing to pay is driven by a careful assessment of other risk-reducing avenues available to a household. Oftentimes, however, lack of information about the benefits of insurance products drives farmers’ skepticism when considering whether to purchase policies to cover their crop yields.

The micro-insurance industry suffers from a number of other challenges, including the high cost of selling, difficulty in finding effective distribution channels, companies finding rural social obligations unviable, and the like. Moreover, selling insurance policies and validating claims can require a significant amount of time and money. Finally, while government intervention has helped initiate some aspects of micro-insurance, insurers have not readily embraced micro-insurance yet.

Micro Insurance Opportunities Within Ag

Insurance is based on volume and scale. Technology is making it easier to distribute and support insurance to large numbers of farmers, which is leading to lower provision costs.  As the costs decline and support increases, more farmers are gaining access and taking advantage of micro-insurance programs.

Technology Enabled Livestock Micro-Insurance

While micro insurance has historically been difficult to sell, the provision of mobile support services within agriculture will continue to help make services and benefits easier to understand and more affordable for farmers on the lower end of the economic pyramid.

A closer look at RFID's
A closer look at RFID’s

For example, IFFCO TOKIO, a major insurance provider in India, has instituted a collaborative mobile support partnership with Indian Farmers Fertilizer Cooperative Ltd (IFFCO), who represents more than 40,000 farmers’ ITGI and is experienced in designing and marketing livestock micro-insurance distributed through farmer cooperatives and cooperative banks.

Within livestock, companies such as IFFCO, UIIC and New India Insurance are using technology like RFID for cattle insurance, with premiums typically around 4-5% of the animals’ value and payouts normally around RS 10,000. While these services demonstrate how technology is impacting micro-insurance, there are also big opportunities for companies that can find ways of bundling micro-insurance services with IT services.

Bundling Micro-Insurance with New IT Services

Integration within the value chain, thanks to IT and cloud based services, is creating new partnership opportunities within the agribusiness value chain.  While micro-insurance is already bundled with high quality seeds in large-scale agribusiness, the growing availability of IT and mobile enabled services (explored in Farm IT: Mobile in the Mud) are creating new bundling opportunities for loan services.  An excellent example of this is within weather-based index insurance, where technology makes it possible to assess disbursements and provide compensation based on macro weather trends.

Pioneer Bundling IT Services and Micro-Insurance

A pioneer in this space is the weather forecast provider Skymet and their collaboration with the Weather Based Crop Insurance Scheme (WBCIS).  This weather based insurance product is “designed to provide weather based insurance protection against losses in crop yield resulting from adverse weather incidences.”  Skynet already has 1,800 automatic weather stations spread across 15 states and is working to have “an all India presence in data collection” in the coming year.  As a result, Skynet is able to stream live data to insurance companies, which helps settle claims quickly.  In addition, Skynet provides data mining support and remote sensing capabilities to help more crop insurance companies—like WBCIS—develop new products under the Modified National Insurance Scheme (MNAIS).

Conclusion

Innovative uses of IT, technology and the integration of the supply chain are making it easier and more affordable to provide and support financial services aimed towards farmers. Technology is also making it easier for members of the value chain to provide goods and services because of their ability to bundle services. As risks decline and IT services increase, there are growing opportunities to offer financial services to farmers. While this is true, the industry trends towards more control, coupled with flexibility and transparency, make it increasingly important to take a vested and holistic interest in farmers within their supply chain in the form of relationship with the value chain.

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