Ignacio is also a Senior Fellow at the Council on Emerging Market Enterprises at The Fletcher School of Law and Diplomacy at Tufts University.

Executive Director, Digital Frontiers Institute

Ignacio Mas

As virtuous as we try to be with money, we should embrace our indulgent side. 

Blog Post

This post is not about imagining a financial inclusion nirvana, that would be far too easy. Instead, it is about the role of imagination in digitizing money, specifically, how people imagine and assign roles to the money in their hands (or digital devices) as a way of negotiating between their current and future selves.

Let´s not fool ourselves: these days we are having great success in digitizing remote payments but not money itself. I say this because most transactions start and end in cash, most digital accounts are empty, and most people only think of digital money services to undertake a limited set of remote transactions, but not their everyday transactions.

While digitizing payments is a matter of moving money around more conveniently and reliably, digitizing money is about preserving a sense of control over one´s money and especially money gaps (money you know you'll need but you don´t yet have). In this case, the core challenge is giving people the tools to manage the trade-off between discipline (preserving saved money, not borrowing when circumstances don´t warrant) and flexibility (being able to access liquidity as needs arise). Digitization that lowers payment frictions and broadens payment acceptance may actually make it harder to make money feel more manageable between payments.

Money management is often seen through the lens of the interaction between a virtuous, future-oriented you (a judgmental voice that strives for discipline), and a venial, present-oriented you (who argues for, and too often succumbs to, flexibility). Digital money solutions are usually conceived to talk to and empower virtuous you: carefully evaluate your options, explicitly state your goals, accept illiquidity. That´s why most money management apps feel so schoolmarmish. They are not for people like venial you, which is what you are most of the time. It´s tiresome to be treated like the angel that you know you are not.

My sense is that money management services need to be much more about venial you. That's the guy who needs most help, and that´s the guy who is making most money decisions anyway. Because the decision to be virtuous and set  money aside is made once, but the decision not to raid that money is made continuously thereafter.
<blockquote>The decision to be virtuous and set  money aside is made once, but the decision not to raid that money is made continuously thereafter.</blockquote>
It is important to understand that virtuous you is not necessarily better than venial you. Venial you is more attuned to the importance of the little rewards that you give yourself to sustain you day-in, day-out; to the value of creating little, spontaneous, memorable family moments; to the resilience of social networks built on showing gratitude and loyalty to friends and neighbors; to the importance of signaling success to those around you. You need both of you, and that´s why evolution put both there.

Understand that when you are poor and face a bleak and uncertain economic outlook, virtuous you locking up liquidity can be seen by venial you as an open act of sabotage. The implication is that money management systems that sell illiquidity will always fail to engage venial you. These money management systems have picked a side. So rather than getting venial you to cede ground to virtuous you, their effect is for venial you to tune out. Send all the SMS reminders you like, venial you is just not listening.

The objective of money management tools has to be to structure a continuous conversation between virtuous you and venial you. And you do that with stories. Help virtuous you and venial you develop and agree to a story for each potential liquidity source (whether entailing dis-saving, borrowing, or reciprocity). That helps, because at any point in time the decision of whether to exercise flexibility or maintain discipline comes down to which of these actions is most consistent with the agreed story.
<blockquote>The objective of money management tools has to be to structure a continuous conversation between virtuous you and venial you. And you do that with stories.</blockquote>
What type of story each type of money gets depends on many factors. First: where did it come from? Money that you worked hard for is not the same as money that you got as a windfall; money that you borrow from your employer is not the same as money you borrow from the moneylender. Second: what is it for? Is it for survival, for the future of my children, for guilty pleasures? And third: where is it stored? It may be deposited in some kind of receptacle, invested in a reciprocal relationship, or supporting an ostentatious display of wealth and success. A good story requires that all these aspects be joined up. That's when the financial service that holds or unlocks the liquidity is consistent with its origin and destination. That´s why you put inheritance moneys in jewelry and not in a jar.

The main heuristic model that people use when deciding whether to call on some liquidity source is then whether the purpose sought for it is consistent with the story developed around it. Yes, I will draw down on the school fees fund to pay for a hospital visit for my child; no I will not use it to have some fun on Friday with my friends. That's why informal money services are so powerful: the liquidity instrument (whether a set of jars, a lock box, a cow, a money guard, the savings group I can borrow from) act out the story of the money they hold within.

Money management is then a morality play between virtuous you and venial you, where the supporting actors are all the different liquidity pools you might access. The morality is not about right and wrong, but rather about consistency with the stories we´d told ourselves prior.

Financial management tools should therefore invite us to spontaneously develop these money stories, to play them out, to interrogate them every time venial you is acting up. You see how this links into imagination. We put order in a chaotic world through our imagination. A vivid imagination is our last remnant of control in a world that we have increasingly come to realize is out of our control.

Digital accounts are story killers. They are empty of emotion, they do not invite our imagination. That´s why the only fallback towards discipline is budgeting. Which, by the way, is a framework of "storifying" money, but a particularly boring one.

Financial Inclusion and Imagination

Ignacio Mas ponders how benefits of digital money can be made as apparent as those of digital photography.

Remember back when taking photos was a little indulgence, before the camera was with you all the time, and before it became essentially free to take photos?

Our behaviors and ethics around photography have changed because of the smart phone. We used to look left and right for passersby before taking a photograph, but now few bother with that nicety; you´ll just take another one if someone walks in front. That´s a simple response to shifted incentives.

Another thing you'd expect to happen with the new ease of taking photos is that interest in them would tend to fade. We´d find it too easy, we'd have too many of them. But that didn't happen, in fact quite the opposite: the cheaper and more plentiful, the more photos people seemed to take. People now take selfies in suburban trains.

Scarcity principles do not seem to apply here. Why is that?

Personal photography has always been about manufacturing memories. When you take photographs on a trip, that´s what you are choosing to remember your holiday by. In the same way that the blockchain represents the construction of an indelible transaction history, with photos you are fixing an image-chain of memories.

But where does the image-chain reside?

Not in a hard drive or a memory stick. Memories are experiences you relive in the telling, not in the storing. Stretching the analogy a bit, your image-chain lives in your social network of friends, just as the blockchain lives in a peer network of computer nodes. Others must validate the history you are creating – with money and with memories.

And that is why the business of personal digital photography has exploded, despite the abolition of scarcity. At the same time as digital has allowed us to take pictures more easily, it has also allowed us to spread our social networks more broadly. And that’s what motivates us to take selfies.

The phenomenal success of digital photography is because it is connected with our other digital experiences, and in particular social networking.

Now let´s draw the analogy with digital money (of the traditional, non-crypto kind).

We want to lead people into a form of money that we tell them is better than cash. But it is often hard to make that case on a head-to-head <a href="https://www.centerforfinancialinclusion.org/making-payments-better">feature comparison</a>. From the perspective of someone who has always managed his business in cash, how do you trade off digital money´s benefits in terms of security, traceability, immediacy and distance invariance, against cash´s benefits in terms of familiarity, ease of use, cost, reliability, probability of acceptance, privacy, and electricity independence?

The answer is by linking digital money to broader benefits.

Think again about the runaway success of digital photography. Few got into selfies because digital cameras produce better pictures. In fact, the new digital cameras people took to so readily were often worse than the analog cameras they displaced. It was the ease of sharing photos through social networks that drove the interest in taking selfies anytime, anywhere, in a ready digital format.

It´s the same story with the Kindle e-book reader. I too prefer the printed book to the same book on a Kindle. But I prefer having instant access to any book on my Kindle, to having that one printed book. Oh, and by the way, there’s a reading light and an adjustable magnifying glass thrown in as well.

It will be the same thing with money. Few will get into digital money because they find it to be a better way to pay for half a kilo of rice at the corner shop. But they would get into digital money if you convinced them that it is a better way to, for instance, control their finances.

And by getting into digital money, I really mean into and not out. Wanting to keep money in digital form once you receive it, as opposed to the widespread current practice of cashing out upon receiving digital money, immediately and in full. In the same way that digital photos may once have been printed out, but no longer: they mostly remain in their pure digital state. So I´m talking about digitizing money, not just the odd remote payment.

Digital photography is powerful because it captures the stories you tell yourself and others about your past – your past holiday, for instance. It´s a tool to control your past. Saint Augustine referred to this as the present of the past: your <a href="https://www.psychologicalscience.org/observer/memory-vs-experience-happiness-is-relative">present idea of what the past</a> was.

Digital money ought to capture the stories you tell yourself and others about your future. In so doing, it would give you a sense of influence over your future. The immediate future of how you will get by the next round of bills, the further out future of how you will get out of your current economic strictures, and maybe also the longer-term future of how your children will have a better life that you did. It is the present of the future, in Saint Augustine´s terms: your present idea of what the future holds, and how much influence you will have in determining that.

You might find this esoteric and far afield from financial inclusion. It is not. Just put two thoughts together. First, people frequently manage their money by separating it out and ascribing a different story to each type of money depending on its source, destination, time horizon, moral import, savings vehicle, etc. Is that not what budgeting is all about? Second, digital technologies have a proven track record in creating not only virtual realities, but hyper-realities. Do people not feel that the hyperactive, hyper-happy, hyper-virtuous image they project on Facebook and Pinterest is more real than their real, limited self?

The question is of course how we build such a digital money system. Much research and experimentation will need to go in this direction.

Just to leave you with a kernel of a suggestion of how this might be at all possible, and to link back to the topic of digital photography where we began: how about if, within your mobile wallet application, you could set some money aside by taking a picture of your kids, or your house, or some friends, or whatever motivated your thought of creating a new type of money? Your money app is then a collection of pictures, which tug at emotions, which invite stories, which trigger actions, which pull money, which reinforce emotions… When you look at the app you should see reflected what is in your head, not what others think you should be doing with your money.

Reflections on Digital Photos and Digital Money (With a Little Blockchain Thrown In)

In this thoughtful and provocative blog post Ignacio Mas lays down a series of challenges for everyone working on financial inclusion. We think that the questions he's asking need to be talked about. We're asking three experts — on customer-centricity, on fintech start-ups, and on regulation — to respond to his provocations, and for the next three Wednesdays we'll publish one of them.

Have you noticed how narrow the interventions of the chorus of financial inclusion supporters have become? Academic researchers are immersed in proving whether an SMS message sent at the right time can push people to repay their loans more promptly (a.k.a. nudges), or whether someone with more savings is likely to be happier and more empowered in some way (a.k.a. impact evaluations). NGOs fund numerous papers and conferences to promote the idea of seeking early and frequent customer feedback in product design (a.k.a. human-centered design), or of looking into customer data for some clue as to what interests them and how they behave (a.k.a. big data). Donors set up round after round of tenders with subsidized funds to spur fully-grown banks and telcos to try out a new product feature (a.k.a. challenge grants), or to prop up the marketing and distribution wherewithal of selected players (a.k.a. capacity building).

All this buzz surely is positive and the things that come out of these activities may well be part of the answer to the financial inclusion challenge. But this begs the larger question: why aren´t these rather obvious and incremental things done by interested market participants themselves? Why don´t they already experiment with customer communication modes and new product features? Why don´t they eagerly seek out impact data that can drive effective marketing and PR, or more routinely seek customer feedback to improve their products and operations? Why don´t they systematically leverage customer insight as a core asset, and why do they underinvest in novel customer promotion techniques?

In other words, why is there such an inherent innovation deficit within the very commercial ventures that we think are going to drive financial inclusion forward? Do market players really need this very granular level of handholding to get what academics, NGOs, and donors so clearly believe in?

To put it more bluntly: do we really need to continue subsidizing sustaining innovation like this? Or is the problem, rather, that there isn´t enough of a competitive push to drive them to want to innovate as a key source of market advantage? Would more competition for and within the market drive the kinds of innovations that are being promoted from the sidelines?

I think the latter. Consider the current innovation frenzy in digital financial services in the US. <a href="https://www.google.com/wallet/">Google</a>, <a href="http://www.amazon.com/Amazon-com-Amazon-Wallet-Beta/dp/B00LIBDH8M">Amazon</a>, and <a href="https://www.apple.com/iphone-6/apple-pay/">Apple</a> all want to join early mover <a href="https://www.paypal.com/ke/webapps/mpp/home">PayPal</a> in getting inside or becoming people´s electronic wallets. <a href="http://www.theguardian.com/technology/2014/oct/06/facebook-mobile-payments-messenger-app">Facebook</a> and smaller start-ups like <a href="https://www.dwolla.com/">Dwolla</a> and <a href="https://venmo.com/">Venmo</a> all want to revolutionize how money is sent online. Players like <a href="https://www.smartypig.com/">Smartypig</a>, <a href="https://www.simple.com/">Simple</a>, and <a href="https://www.moven.com/">Moven</a> want to reinvent how you deal with the money sitting in your bank account. Established players like <a href="http://www.mastercard.com/contactless/">MasterCard</a> and new ones like <a href="https://squareup.com/">Square</a> want to change how you pay for goods at the store. Not to mention, of course, the slew of <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1769124">bitcoin</a> start-ups.

Now ask yourself: why are none of these players vying for the blue space that is the billions of people who are excluded? Aren´t these companies the ones who are best placed, with their high-volume, low-cost digital platforms and viral marketing savvy, to radically transform the economics of financial service delivery? Why isn´t the chorus of financial inclusion supporters simply putting their desire for innovation at the feet of these corporate digital natives?

And let me tell you, they are right not to do so. That´s because there are three things none of these digital players want to deal with – and never will. They do not want to get a banking license that embroils them in onerous regulation. They do not want to conduct primary identity checks on their customers (Know Your Customer, or KYC), which require physical customer contact. And they do not want to touch their customers´ cash. That´s why all digital financial players, exciting as they may seem when you look at their wares online, sit parasitically on top of banks. You will not have access to their services if you do not already have a bank account: to deal with regulatory aspects, to conduct primary KYC, and to do cash in/out through them.

It follows that these digital players will not lead the charge on financial inclusion in developing countries. At most they will wait tactically in the sidelines and pick up customers as they trickle into the formal financial system. But most won´t even do that: these businesses´ DNA is all about scale and network effects, so if they can´t go for size then they may not go there at all.

Unless. Unless we give them an alternative path to delegate, or even avoid, these three things that they don´t want to do. A way into developing markets that does not make them entirely dependent on banks to first open up the space for them. Here´s how. First, give these players the opportunity to get a more lenient e-money license which does not constrain them in what services they can offer customers, but bars them from loaning out or otherwise speculating with (i.e. intermediating) customers´ funds. Second, allow them to offer an entry-level account that requires no identity checks; cap usage of that appropriately, so that more onerous KYC procedures kick in only when customers are ready to give the account more serious use. And third, delink cash in/out networks from specific account issuers, so that a breed of independent cash in/out network managers emerge with the vocation to serve all issuers, all stores, and all customers. All they should be required to have is a customer account, but not an agency contract, with each issuer. (If you are thinking that this is the standard branchless banking regulatory prescription, think again, or, better yet, <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1692164">read this</a>.)

You will have noticed that these points are all about regulation. Regulation holds the key to creating a competitive environment that is more welcoming of innovative digital players. In the end, the chorus of financial inclusion supporters are getting involved in the supply of innovation simply because they want to avoid the morass that is regulatory reform. But if they truly want to make an impact on financial inclusion, they should go back to focusing on basic market enablement rather than merely filling innovation gaps.

Ignacio Mas is an independent consultant. You can learn more about his work <a href="http://www.ignaciomas.com/" target="_blank" rel="noopener">here</a>.

Have you read?

<a href="http://cfi-blog.org/2014/08/06/reality-check-three-ways-we-hype-up-financial-inclusion-break-throughs/" target="_blank" rel="noopener">Reality Check: Three Ways We Hype Up Financial Inclusion</a>

<a href="http://cfi-blog.org/2014/07/10/what-kinds-of-regulation-promote-the-development-of-microfinance-markets/" target="_blank" rel="noopener">What Kinds of Regulation Promote the Development of Microfinance Markets?</a>

<a href="http://cfi-blog.org/2014/09/08/emerging-themes-in-responsible-digital-finance/" target="_blank" rel="noopener">Emerging Themes in Responsible Digital Finance</a>

Ignacio Mas

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