Attachment_J.9_-_Digitizing_Payments_for_USAID_Beneficiaries_in_Uganda_(1).pdf

GSMA M4D Partner Assessment and Program Appraisal

Digitizing Payments for USAID Beneficiaries in Uganda

Pilot Report

March 21, 2014

Engagement Manager: David Sessions

Lead Analyst: Leah Gatt

Technical Advisor: Sieka Gatabaki

1 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

Table of Contents

1. EXECUTIVE SUMMARY

2. INTRODUCTION

2.1 Report Focus

2.2 Objectives and Outcomes

2.3 Engagement Model

2.4 Project Schedule

2.5 Key Insights

3. IN-COUNTRY RESEARCH AND LANDSCAPE ANALYSIS

3.1 Kenya and Tanzania Country Assessment Key Learnings

3.2 Uganda Country Assessment

4. IMPLEMENTATION KICKOFF

4.1 Project Dependencies

4.2 Key Vectors of Digital Payments Transition

4.3 Partnerships

5. DIGITIZING PAYMENTS IN UGANDA: PROJECT OVERVIEW

5.1 Overall Progress

5.2 Key Achievements

5.3 Key Challenges

6. DIGITIZING PAYMENTS: THE FOUR PILLARS

6.1 Digital Adoption

6.2 Beneficiary Data Collection

6.3 Payment Processing and Reconciliation

6.4 Issue Resolution

7. MOBILE MONEY STAKEHOLDERS: MNOS AND AGGREGATORS

7.1 Roles and Responsibilities

7.2 The Payments Ecosystem

7.3 MNOs

7.4 Aggregators

7.5 Key Insights

7.6 Comparing the MNO and Aggregator Model

8. FINAL ANALYSIS

8.1 Cost-Benefit Analysis of the Aggregator Model

8.2 Next Steps

9. RECOMMENDATIONS

10. CONCLUSION

2 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

List of Acronyms

API .......................................................................................................... Application Programming Interface

B2P ....................................................................................................................................... Business-to-Person

BRD .......................................................................................................... Business Requirements Document

EFT ........................................................................................................................... Electronic Fund Transfer

IP ..................................................................................................................................... Implementing Partner

KYC ................................................................................................................................ Know your Customer

MFS ........................................................................................................................... Mobile Financial Services

MNO ...................................................................................................................... Mobile Network Operator

NU-HITES .................................................. Northern Uganda – Health Integration to Enhance Services

POS ................................................................................................................................................. Point of Sale

RTGS .................................................................................................................. Real Time Gross Settlements

RTI .......................................................................................................................... Research Triangle Institute

SDS ................................................................................... Strengthening Decentralization for Sustainability

STAR-EC ................................ Strengthening TB and HIV & AIDS Responses in East-Central Uganda

UAT ........................................................................................................................... User Acceptance Testing

UGX ...................................................................................................................................... Ugandan Shillings

UHMG ................................................................................................ Uganda Health and Marketing Group

USAID ...................................................................... United States Agency for International Development

3 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

1. Executive Summary

The objective of this report is to demonstrate the feasibility of digital payments for USAID implementing partner programs in Uganda by presenting the results of a proof-of-concept Digitizing Payments Project conducted in Uganda from June 2013 to February 2014.

In 2012, USAID Uganda spent $218.5 million on in-country development activities. Of that amount, an estimated 10% of implementing partner budgets ($3.6 million per month) is spent on beneficiary cash payments, totalling $43 million per year. The total volume of cash payments rises with the inclusion of staff travel advances and vendor payments. Transferring such a large volume of funds on a cash basis presents consistent operational and security challenges for implementing partners, namely:

Security – Staff carrying large amount of cash in the field are targets for theft. The real human risk of cash was made very clear in mid-October when one of the USAID implementing partners was the target of an armed robbery outside a bank in Jinja. The driver was shot in both arms and USD $8,000 was stolen.

Transparency and accountability – Cash cannot be tracked, making it difficult to document its disappearance. USAID implementing partners all complained about the unease associated with carrying cash into the field to make payments, as it is so difficult to confirm that money is actually reaching those it is supposed to.

Transportation and staff costs – Hiring cars, buying fuel and sending finance staff into the field to monitor the distribution of funds is time-consuming and costly.

With these challenges in mind, the Bill and Melinda Gates Foundation engaged Vital Wave, Inc. to undertake a Digitizing Payments Project, which sought to assist USAID’s implementing partners in their transition from cash to digital payments. Moving away from a cash-based to a digital payment system can yield a number of positive results for organizations and their beneficiaries. Digitizing payments helps to lower the risk of theft and fraud, increases accountability and auditability of funds through accurate record keeping and real-time reconciliation of funds, reduces costs associated with transporting cash, and centralizes financial operations for the organization. Digital payments also help beneficiaries who no longer have to wait long hours to collect their payments. Finally, research suggests that households are able to increase their access to financial services through mobile money, thus allowing them to better manage financial shocks. This is especially pertinent in Uganda, where only 43% of the population, and only 34% of the poor, live within 5 kilometers of a financial access point.1

The project included research and implementation stages. Vital Wave conducted extensive research in Kenya, Tanzania, and Uganda to map the stakeholder landscape and analyze how mobile money systems have been successfully utilized by organizations to make payments to their beneficiaries. In Uganda, a cross section of local stakeholders were identified and interviewed in order to understand the challenges and opportunities of using mobile money to make bulk payments. During the implementation stage, Vital Wave provided support to six USAID implementing partners looking to

1 GSMA, State of the Industry 2013: Mobile Financial Services for the Unbanked, 24 February 2014

4 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave transition from cash to digital payments, and to mobile money stakeholders aiming to improve their payments service in Uganda.

Research in Uganda showed that working directly with Mobile Network Operators (MNOs) to make bulk payments restricted implementing partners from performing many needed functions due to limitations of the MNO platforms. As a result of these inherent limitations, Vital Wave promoted an alternative approach – working with an intermediary known as an aggregator to simplify operations and lower costs.

The project found the prospects of digitizing payments in Uganda to be positive. Over the course of five months, digital payment processes were established and 122 bulk payments were made to beneficiaries on MTN and Airtel networks utilizing aggregators, with a success rate of 95%.

1,392(thirteen hundred ninety two) beneficiaries were successfully paid a total of USD $198,875.

Currently, implementing partners are working directly with aggregators to gradually increase the number of payments made to staff and beneficiaries, and some are looking at how to use digital payments with partner organizations and other donors. Other USAID implementing partners have also expressed interest in the model. The project illustrated the benefits of moving away from cash to digital payments, and highlighted opportunities for mobile money players to tighten operational, technical, and financial aspects of their businesses, and develop other value added services in the payment space.

During the implementation stage, technical, operational, and financial limitations of mobile money stakeholders in Uganda were brought to light. The major challenges were operational, due largely to the manual nature of processes and the lack of escalation and communication procedures. The project also identified technical challenges, including a lack of interoperability and the rigidity of MNO technical platforms. Finally, challenges associated with the mobile finance services (MFS) ecosystem included the lack of merchant participation in mobile money services countrywide, which places a heavy burden on agent networks and liquidity.

To address these challenges, a number of recommendations have been made. These include:

Develop partnerships with aggregators - Aggregators provide superior functionality, better security controls, and the ability to make cross-network payments directly to beneficiaries’ e-wallets, increasing transparency throughout the entire payments value chain.

Seek better pricing structures - Fixed bulk payment price structures and high withdrawal costs are pain points. Addressing them will advance digital payment systems.

Improve planning and account management - A decision to transition to digital payments requires careful change management for all stakeholders, and good planning is crucial.

Improve Aggregator Model agility - Streamlining account funding processes and raising account limits are a high priority if the Aggregator Model is to be more efficient.

Streamline and automate MNO processes - Improve MNO operations and service levels for a more efficient customer experience.

5 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

Build aggregator capacity - The capacity of aggregators to provide timely support to implementing partners is constrained due to limited human and financial resources, necessitating an increase in personnel for various operational roles.

Engage with banks and regulators - Policies at the central bank, MNOs, and local banks can stifle growth due to imposed limits and risk management. Engaging these institutions will help to improve processes and allow the mobile money ecosystem to flourish.

Enhance interoperability - Intra-banking solutions are lacking and cause delays.

Developing better solutions for faster banking will require the mobilizing of financial ecosystem stakeholders.

Open platforms – Stakeholders should be encouraged to create open platforms that will allow multiple players to integrate easily with their service, thus promoting innovation and the spread of mobile money services.

Support the business case for merchant acquisition – An increase in merchant acceptance through point of sale (POS) devices that accept mobile money in supermarkets and petrol stations represents a major opportunity to expand the digital payments ecosystem.

These recommended actions would significantly advance digital payment systems for organizations making bulk payments by making digital payments more reliable and efficient. While key mobile money stakeholders are still developing and learning how to improve the bulk payment process for their clients, the ecosystem is changing fast. As players mature and technologies expand, innovation and growth all along the value chain will continue to improve the reliability and efficiency of mobile money. ■

6 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

2. Introduction

Vital Wave worked with six USAID implementing partners to assist them in making the transition to digital payments for their beneficiaries. Participation in the project provided implementing partners with support and guidance for moving away from cash payments in the field to bulk payments via mobile money. The project duration was nine months. It engaged key stakeholders, including USAID implementing partners and their beneficiaries, USAID Uganda Mission, Uganda Mobile Network Operators (MNOs) and Ugandan payment aggregators. Despite challenges posed by the Ugandan mobile money ecosystem, the project illustrated the great potential for digital payments in Uganda and attracted much enthusiasm from the stakeholders involved. This project has the potential to change the way implementing partners make bulk payments to their beneficiaries in Uganda and beyond.

2.1 Report Focus

This report provides a comprehensive overview of the nine-month project and presents key findings and recommendations.

2.2 Objectives and Outcomes

The objective of this project was to create and validate a roadmap to assist USAID’s implementing partners in their transition from processing cash payments to digital payments for program beneficiaries. This process is intended to increase program efficiency and introduce beneficiaries to the digital financial system. The project was designed to identify key challenges and lessons that can be incorporated into future operating procedures. Another objective was to develop a scalable and transferable model for the transition to digital payments that can be applied by other implementing partners in Uganda and in other East African countries.

Why digitize payments?

Lower risk of theft and/or fraud, unlike cash which can be lost or stolen

More security for the beneficiaries and staff who do not have to travel with cash

Accurate record keeping and real-time reconciliation, even with large volumes of payments to multiple recipients

Reduced paper work

Centralized financial operations and a streamlined electronic banking platform

Reduced travel for accounts staff, who don’t need to travel to the field to distribute payments

Greater convenience and timely payments to beneficiaries, who don’t have to wait for staff to arrive and distribute cash

Reduction in transportation costs, driver and vehicle rental, couriers and fuel

Increased accountability and transparency

More accurate financial records for donors

7 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

2.3 Engagement Model

The engagement model involved both a research component and an implementation component.

The findings from both components are captured in this report.

Results:

1. Recommendations report and

Digitizing Payments Process Kit

2. Workshops for other USAID missions, other implementing partners and Better than Cash

Alliance (BTCA)

3. All-team debrief for BMGF

1. Select implementation partners

2. Aggregator RFP

3. Financial model

4. MNO pricing discussions

5. Implement proof of concept

6. Measure results and iterate

1. In-country kickoff

2. Implementing partner selection criteria

3. Application process

4. Business requirements document (BRD)

5. Aggregator selection process

6. Development of implementation program

7. Field training

8. Iterative approach to implementation

Research Implementation and Recommendations

Gates Library

NetHope &

USAID

Publications

White Papers

Public Domain

Primary

Research

Proof of Concept

USAID

Secondary

Research

Aggregators

MNOs

Implementing

Partners

Case Studies in:

Tanzania and

Kenya

Results:

• Country assessment reports

• Cost/benefit analysis

• Technical and operational requirements

• Gap analysis

• Stakeholder reports

Planning Implementation and Review

8 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

2.4 Project Schedule

The research and implementation components of the project ran over a nine-month period starting in June 2013 and ending in February 2014. The research stage ran from June to September, 2013. It consisted of secondary research of materials provided by USAID and its partners, documents in the public domain, and papers sponsored and written by the Bill and Melinda Gates Foundation.

Informed by the secondary research, primary research was conducted in Kenya, Tanzania, and Uganda, and concluded with the development of an implementation plan and systems design. The implementation stage ran from October 2013 to February 2014 and was divided into four stages: 1) In-country Kickoff, 2) Development and Testing, 3) Roll-out (further divided into three phases), and 4) Final Review. This implementation stage was followed by a Pilot Report in March 2014.

2.5 Key Insights

The nine-month project saw implementing partners (IPs), aggregators, and MNOs work towards formalizing a transition to digital payments. As IPs endeavored to create and activate a digital payments system in their organizations, several key insights have been identified. These include:

The risk associated with handling cash is real. IPs have reported experiences with theft, fraud, and armed robbery. IPs will keep utilizing digital payments after this project to reduce risk.

Aggregators make good partners for IPs looking to digitize payments because they offer superior functionality, increased security controls, better reporting, a beneficiary database, and the ability to manage cross-network payments from a centralized platform. However, their capacity to serve multiple clients is constrained by limited human and financial resources.

Banks are recently starting to show an interest in becoming aggregators by developing a platform on their existing systems that will allow them to play a role in the mobile money ecosystem.

Operations issues appear to be as problematic as technology capacity constraints. Operational processes are predominantly manual and rely heavily on intervention by specific individuals who may or may not always be available. There is a need to improve aggregator and MNO agility through the streamlining and tightening of key operational and technical processes, particularly with regard to account funding and escalation procedures.

20142013

M ar

Fe b

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Aug Se pt

O ct

N ov

Dec Ja n th th th th n d th th rd th th th th th n d th th th th st th th th th th n d th th rd th th th th th n d th th rd n d th th rd th

Secondary Research

Kenya and Tanzania In-Country Assesment

Uganda In-Country Assesment

System Design

Kickoff meeting

Selection

Contractual arrangements

Training

User Acceptance Testing

Feature development

Payments

Review

Stages Report and Read Out

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KICKOFFRESEARCH AND PROJECT DESIGN PHASE 1 PHASE 2 PHASE 3 FINAL REVIEW

9 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

MNO pricing structures are unfavorable and a consolidated effort to improve bulk payment pricing has been lacking, resulting in high fees. As volumes increase over time, an opportunity exists to renegotiate contractual relations and pricing with MNOs to shift away from fixed pricing structures in favor of a sliding scale price structure for bulk payments.

While mobile money players still have much work ahead to develop a more reliable and streamlined bulk payment service, the Ugandan ecosystem is developing fast. As technologies and mobile payment systems expand and stakeholders mature, clients and end users can expect to see innovation aimed at reducing costs and inconveniences. Expected developments include technology-driven data collection and verification tools, tighter integration between aggregators and MNOs, and more streamlined operational and escalation processes.

Mobile money is already being used by individuals to pay for services like transport on a small scale. This suggests significant potential for the continued uptake of mobile money by service providers. Aggregators are in talks with MNOs and are looking into merchant acquisition strategies. The installation of POS devices that support mobile payments is also being considered by supermarkets and petrol stations. This would in turn lighten the burden on agents and reduce costs for implementing partners who cover withdrawal fees.

Intra-banking solutions are lacking and cause delays. There is a need to mobilize financial ecosystem stakeholders including MNOs, banks, and regulators to improve interoperability.

Aggregators can offer enhancements and additional services to suit the needs of IPs. These include Bulk SMS solutions and an on-site beneficiary registration system for training participants. The latter would greatly improve the efficiency of beneficiary data collection, reduce risks, and ease the burden on program and finance staff. ■

10 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

3. In-country Research and Landscape Analysis

Extensive research was conducted in Kenya, Tanzania, and Uganda to understand the stakeholder landscape and how mobile money systems have been and can be used by organizations to make payments to their beneficiaries.

3.1 Kenya and Tanzania Country Assessment Key Learnings

In July 2013, Vital Wave conducted country-level investigations of bulk payment systems in Kenya and Tanzania. As a mature mobile payments market, Kenya offered important insights into creating workable mobile payments solutions for organizations and beneficiaries in Uganda. With a relatively young, less-established mobile money market, Tanzania exposed the challenges and opportunities likely to be faced when digitizing payments in Uganda. The country assessments, accompanied by cases studies of Pathfinder and Concern Worldwide, highlighted a number of key insights that helped guide and inform the Uganda project. These were:

Digital payments have many benefits – Organizations that have undergone the transition to digital payments report reductions of cash ‘leakage’ and corruption, increased operating efficiencies, more transparency and accountability, the ability to track funds in real time, a reduction of operating costs, improved security, and better utilization of staff.

Internal buy-in is essential and can be challenging – Clarity of information among staff and beneficiaries can help to reduce resistance.

Incorrect data provided by beneficiaries is a major challenge – Developing a system that simplifies the data collection process will significantly improve operational efficiencies.

Solid partnerships with bulk payment partners are crucial – Due diligence on bulk payment partners is integral to launching digital payments, and good relations between implementing partners and bulk payment partners need to be developed and nurtured.

Risk is the most important concern for organizations – Non-financial benefits can sometimes outweigh financial benefits, suggesting that cost is not a major pain point for organizations that implement digital payments.

Fear of fraud is real – Reliable regulation is needed to avoid fraud and to instill confidence in mobile money systems. Robust systems that help organizations to counter fraud are needed.

Beneficiaries may require support when using mobile money – Adequate and ongoing training for first-time users of mobile money would be beneficial and help to increase buy-in.

3.2 Uganda Country Assessment

In Uganda, in close collaboration with USAID, Vital Wave interviewed all local stakeholders to understand the challenges and opportunities of using mobile money in their projects.

11 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

3.2.1 Key Learnings

A country assessment in Uganda uncovered a number of key learnings that helped guide and inform the Uganda project. These were:

3.2.2 Use of Cash among USAID Implementing Partners

Prior to the Digitizing Payments Project, USAID implementing partners used cash for operating costs in the field, per diems, and transportation for workshop participants. Risk could be very high and theft and fraud were been widely reported. Implementing partners participating in the project handle between USD $80,000 to USD $1.5 million annually. An estimated 10% of their annual budget is spent on beneficiary cash payments. The total volume of cash payments rises with the inclusion of staff travel advances and vendor payments.

3.2.3 Political Considerations and Regulation

Based on the Kenya model, regulators in Uganda have allowed innovations in mobile money to develop before establishing regulatory frameworks. This pro-liberalization stance and has encouraged competition and innovation in the telecom and mobile money sector.

Anti-fraud regulation remains weak, but in 2013 the Bank of Uganda released Guidelines for Mobile

Money, which is a positive step forward. A tax on cash transfers has been suggested, and the

Ugandan Revenue Authority has even started to register mobile money agents in order to tax their businesses. Taxation may inhibit growth and hit low-income users disproportionately.

A number of implementing partners have experiences fraud and risks to staff security while handling cash in the field.

Risk of cash

Mobile money infrastructure has considerable weaknesses and MNO capacity to provide support is modest, but high levels of competition and innovation have encouraged new players like aggregators to enter the ecosystem.

Money mobile ecosystem

Aggregators are working to develop more robust payment systems and can serve as intermediaries for organizations looking to implement mobile payment systems.

Partnerships with aggregators are a potentially viable solution to payment digitization as MNO capabilities evolve.

Aggregators

MNO contractual relations are unfavorable and a consolidated effort to improve bulk payment pricing has been lacking, resulting in high tariffs.

An opportunity exists to renegotiate contractual relations and pricing with MNOs to shift away from fixed pricing structures in favor of a sliding scale price structure for bulk payments.

Pricing

Stakeholders throughout the mobile money ecosystem lack capacity to manage the technical, operational, and financial aspects of digitizing beneficiary payments.

A multifaceted training, support, and change management process for all stakeholders is a necessary part of any successful transition to digital payments.

Capacity

12 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

3.2.4 Mobile Landscape

In Uganda, the number of agents and SIM penetration is similar to Tanzania, suggesting a less mature but rapidly growing mobile money ecosystem. There is a high potential for growth in mobile transfer and payment services due to demand for sending and receiving money and high SIM penetration and network coverage. Mobile money use is increasing with the total value of mobile money transactions being equivalent to 20% of Uganda’s

GDP.2

3.2.5 Mobile Network Operators (MNOs)

Uganda is a highly competitive market with four MNOs offering mobile money services (MTN, Airtel/Warid, Orange, and UTL).

Beneficiary data collected over the project period revealed that the majority of mobile money users are registered on MTN, with 95% of implementing partner payments in and around Kampala, being made on MTN networks. Outside Kampala, in more rural areas, the number of Airtel/Warid-registered beneficiaries rises slightly, but MTN remains dominant. While UTL and Orange do not currently have bulk payment systems, initial beneficiary data collection and aggregator experience point to a limited number of Orange Money and UTL M-Sente users. Those with a UTL or Orange SIM are often also registered on Airtel/Warid or MTN.

Table 1. Ugandan MNO Comparative

MNO

Market Share

Bulk Payment Transaction Cost

Banking Partner Strengths Challenges

MTN 44.8% 390 UGX

(USD $0.15)

per beneficiary paid

Stanbic Leading mobile operator

Wide coverage Biggest agent network

Allegations of fraud creating unease amongst NGOs

High fees Undeveloped B2P platform Frequent network outages Poor customer service Unwilling to negotiate flexible fee structure for B2P clients Marginal interoperability

Airtel/ Warid

39% 300 UGX

(USD $0.12)

per beneficiary paid

Equity Best B2P platform Lower cost tariffs Across network payments

Agent network and liquidity management

Less network coverage than MTN Marginal interoperability

Orange 2.4% N/A DFCU Data Low Cost

Marginal mobile money player

UTL 13.8% N/A Post Bank and Price Microfinance

Data Low Cost

Marginal mobile money player

2 GSMA, GSMA Global Mobile Money Adoption Survey Identifies 30 Million Active Mobile Money Customers Globally in 2012.

www.gsma.com/newsroom/gsma-global-mobile-money-adoption-survey-identifies-30-million-active-mobile-money-customers-globally-in-2012/

Key Mobile Statistics, Uganda

13 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

Currently, the majority of organizations are attempting to distribute bulk payments by working directly with MNOs (see Figure 1).

As of March 2014, MTN and Airtel/Warid are the only two MNOs offering bulk payment Business-to-Person (B2P) services. However, MNO bulk payment systems have a reputation for modest levels of customer service, limited functionality, and lack of innovation.

Implementing partners are not able to perform many needed functions due to the limitations of the MNO platforms.

3.2.6 Aggregators

Lack of innovation and customization by

MNOs has allowed new players like aggregators to enter the mobile money ecosystem and provide B2P services to clients.

Aggregators provide an alternative for organizations using B2P services by acting as intermediaries between clients and MNOs.

Through the aggregator payment model (see

Figure 2), aggregators allow organizations to send multiple payments across networks and offer a variety of other services that MNOs do not. In this way aggregators are working to fill the gap left by MNOs by building a more robust B2P system and creating a bulk payment channel for clients free of MNO engagement.

Users can report payment problems directly to aggregators, who then work with MNOs to audit the transaction and resolve the issue.

Accountability for delivery of funds to beneficiaries remains solely with the MNOs.

Fee structures are generally fixed and include the MNO rate.

Despite the benefits, aggregator capacity is still low and their ability to provide reporting on payment processes and 24/7 customer services remains limited.

Figure 1. Direct to MNO Payment Model

MNO: MTN

MNO: Orange

MNO: UTL

MNO: MTN

MNO: Orange

MNO: UTL

Donor

MNO: Airtel/Warid

MNO: MTN

MNO: Orange

MNO: UTL

MNO: Airtel/Warid MNO: Airtel/Warid

Implementing

Partner Implementing

Partner Implementing

Partner

Beneficiaries

Donor

MNO: Airtel/Warid MNO: MTN

MNO: Orange MNO: UTL

Aggregator

Implementing

Partner Implementing

Partner Implementing

Partner

Beneficiaries

Figure 2. Aggregator Payment Model

14 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

3.2.7 Headwinds and tailwinds for digitizing payments in Uganda

In Uganda, there are number of supportive forces that facilitate digitizing payments, as well as headwinds that work to slow down adoption.

3.2.8 Key insights

The Uganda country assessment led to a number of key insights related to the policy environment, infrastructure, and stakeholders’ strengths, weaknesses and opportunities. These include:

MNO capacity to provide support is modest, but high levels of competition and innovation have encouraged new players like aggregators to enter the ecosystem.

Partnerships with aggregators are a viable solution to organizations seeking payment digitization.

A multifaceted training, support, and change management process for stakeholders, including implementing partner’s staff and beneficiaries, is necessary for a successful transition to digital payments.

Stakeholders throughout the mobile money ecosystem lack capacity to manage the technical, operational, and financial aspects of digitizing beneficiary payments. ■

Benefits of using aggregators:

Increased security and reduced risk of internal fraud through multiple authorization levels Cross-network payments reduce the problem of making payments to beneficiaries on different networks Cross-network transactions mean that aggregators can distribute payments to beneficiaries more quickly than if clients were to develop separate payment integrations with each MNO Clients of aggregators are trained on how to use the system in their own offices. MNOs require client staff to travel, sometimes for long distances, to attend training in Kampala Real-time reporting improves accountability and allows for immediate reconciliation Payments can be gradually rolled out through a scheduling system Additional functionality to increase beneficiary database and customizable reporting

15 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

4. Implementation kickoff

4.1 Project Dependencies

4.2 Key Vectors of Digital Payments Transition

Supporting organizations in digitizing payments requires strategy components that address the financial, operational, and technical realities of the Ugandan mobile money market. The financial and operational aspects of digitizing payments are as significant as the technical aspects.

Comprehensive strategies are needed for all three vectors.

Figure 3. Key Vectors for Digital Payment Transition

MNO Capacity

Ability of MNOs to accept bulk payment requests

Ability of MNOs to distribute bulk payments to subscribers

Ability and willingness of MNOs to expose APIs to payment aggregators

Effective escalation mechanisms

Aggregator Capacity

Ability to make timely payments for clients

Ability to work effectively with

MNOs to solve problems

Capacity to handle multiple requests from numerous clients

Pricing

Pricing and tariff schedules that are cost competitive with cash payments

Model is cost effective for aggregators

Mobile Money Infrastructure

Mobile network availability and reliability

Agent liquidity and ubiquity

Service provider

(merchants, utilities and schools) adoption of mobile payments

Regulatory Enviornment

A regulatory environment that allows growth of mobile money systems and mobile phone tools while managing risk

Financial

•Controls

•Fraud

•Planning

Technical

•Tools

•Reporting

•Systems Integration

•Open APIs

Operational

•Training

•Process Integration

16 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

4.3 Partnerships

4.3.1 Implementing Partners

Following an application process and consultation with the USAID Mission in Uganda, Vital Wave selected six USAID implementing partners to participate in the project. The selected organizations were provided with support and guidance to transition from cash payments for beneficiaries to bulk payments via mobile money. Implementing partners’ primary reason for transitioning to a digital system is the potential risk to staff and the possibility of theft or fraud when travelling in the field with cash. The second main concern is the convenience of centralized payments.

4.3.1.1 Selection Process

The selection process was developed in close consultation with the USAID Uganda Mission. It followed five steps: Pre-screening, Notification, Formal Application, Pre-Selection, and Selection.

Selection Criteria

Weighted selection criteria were developed, informed by research conducted in Kenya, Tanzania, and Uganda, and by consultations with USAID. Exposure to risk was the most important criterion for involvement in the project, followed by the frequency and volume of payments made to beneficiaries. The criteria were applied to candidate applications. Applicants could score between 1-5 on each criterion, leaving the candidates with a maximum of 500 and a minimum of 100 points.

Implementing Partner Selection Criteria Weight

Implementing Partner demonstrates elevated levels of risk or previous difficulties with cash disbursement 20

Implementing Partner makes bulk payments to beneficiaries currently 15

Implementing Partner has relatively high average transaction amounts and high frequency of bulk payments 15

Implementing Partner has shown an interest in implementing digital payments for making beneficiary payments and for the purpose of addressing risk associated with cash payments

Implementing Partner has a productive relationship with USAID Uganda 10

Implementing Partner maintains adequate service delivery controls pertaining to disbursements 10

Implementing Partner has more than 2 years left in their project/activity 10

Preferred: Implementing Partner has a country office or partner in another country (or a member of staff) that has already undergone the transition to mobile payments

Preferred: Implementing Partner beneficiaries are in close proximity to functioning agent 5

Total 100

Selection

• Vital Wave and

USAID selected 5 implementing partners

• Selected partners were notified

Pre-Selection

• Vital Wave vetted all applications and conducted interviews with 12 shortlisted candidates

Formal

Application

• Formal application send by Vital Wave to 15 candidates launched with a call for applications

• Interested partners submitted applications

Notification

• USAID informed all

15 shortlisted candidates of upcoming call for applications, encouraged their participation and gauged interest

Pre-Screening

• USAID and Vital

Wave reviewed a list of 99 implementing partners and shortlisted 15 candidates

17 Digitizing Payments for USAID Beneficiaries in Uganda Report - Pilot Report © Vital Wave

Partner 1: NU-HITES - PLAN International Sector: Health

Plan International’s NU-HITES activity works in 15 districts in Northern Uganda on developing community-owned health services and systems. NU-HITES conducts trainings for district- and community-level partners to build the capacity of health care workers and health systems.

Trainings can draw anywhere between 40-150 participants.

The high frequency and high number of participants who attend trainings has made it extremely challenging for NU- HITES to use cash. Approximately USD $1.15 million is made in cash payments to beneficiaries annually.

Partner 2: Uganda Health and Marketing Group (UHMG), Ltd Sector: Health

Uganda Health Marketing Group (UHMG) is a local NGO with a presence in 90 districts. It runs about 20 trainings every month for a number of USAID-funded activities.

During trainings cash disbursements are frequently made to cover per diems and transport costs for 30-100 trainees as well as to vendors that provide services during the training.

Bulk payments made using cash average 15 million UX (USD $6,000) per activity. UHMG is highly exposed to risk due to the amount and frequency of cash payments it makes each month. UHMG hopes to use a digital payments platform for not only staff and beneficiaries, but also vendors and eventually other donors.

Partner 3: Strengthening Decentralization for Sustainability (SDS) - Cardno Emerging Markets Sector: Governance and capacity building

SDS works in 35 districts in Eastern, Western, and Central Uganda. It provides capacity-building support to local governments, particularly in the areas of health, education, and services for orphans and vulnerable children. SDS conducts numerous trainings and workshops for district-level participants every month, paying travel expenses and per diems averaging 100,000 UGX (USD $39.79) per person daily. It also makes larger payments to staff for costs associated with organization of trainings and travel advances. SDS currently makes an estimated 100-200 transactions per month using cash. It makes about USD $720,000 in payments annually.

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Partner 4: Commodity Production and Marketing - Chemonics International, Ltd Sector: Agriculture

Chemonics’ Commodity Production and Marketing activity works in 35 districts to improve the productivity of maize, bean and coffee farmers and to link farmers to traders. The program conducts trainings which can run for several days or weeks. Cash payments are made to participants for per diems and transport costs. The new program aims to be a completely cashless operation.

Partner 5: School Health and Reading Program (SHRP) - Research Triangle Institute (RTI) Sector: Education and health

RTI’s SHRP activity works to improve early-grade reading and transition to English for primary students, and to improve health and HIV/AIDS education. SHRP conducts training for teachers at grassroots and sub-county levels. It has been using cash payments, averaging 20,000 – 100,000 UGX (USD $7.95-$39.76) per participant, to cover per diems and transport costs for participants. Trainings are conducted countrywide, each drawing 50-500 beneficiaries.

Bi-annual trainings drawing 3,000 teachers are organized requiring significant volumes of payments to be made and creating high risk for cash.

Partner 6: STAR-EC - John Snow, Inc.

Sector: Health

STAR-EC aims to increase access to, coverage of, and utilization of quality and comprehensive HIV&AIDS and TB prevention, care and treatment services within east-central district health facilities. STAR-EC was the target of an armed robbery outside a bank in mid-October; a staff member was shot and USD $8,000 was stolen. Following this incident, STAR-EC has worked hard to reduce the amount of cash used. It makes over USD $80,000 payments to beneficiaries annually.

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4.3.2 Mobile Money Stakeholders

Mobile money stakeholders are actively supporting the project. MNOs established dedicated teams to provide support and aggregators have worked on improving their service offering.

Mobile Network Operators (MNOs)

Due to the Ugandan market dynamics, Vital Wave approached the two largest MNOs, which control over 80% of the market, to partner in the project. Each MNO has pre-existing contractual arrangements with the selected aggregators, who handle the settlement process of cash to e-value transfers.

Vital Wave negotiated support from the MNOs in terms of expedited beneficiary registration and agent liquidity support.

UTL and Orange were not approached, as they are still marginal mobile money players lacking a bulk payments platform.

Aggregators

Due to the limitations of working independently with MNOs in Uganda through an MNO Model, this project made use of an Aggregator Model to make bulk payments. Implementing partners worked with an aggregator to schedule and facilitate bulk payments to their beneficiaries.

Selection Process

The aggregator selection process followed five steps: Pre-screening, Notification, Request for Information, and Pre-Selection and Selection.

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Selection Criteria

The aggregator selection criteria were informed by the Business Requirements Document (BRD), which synthesized implementing partner requirements and the results of research carried out by Vital Wave. Five aggregators were approached and asked to apply to the Request for Information (RFI). The aggregators were Yo! Payments, Pegasus, PESAPAL, Cellulant and Intel-World.

Aggregators were evaluated according to the weighted criteria listed below.

Aggregator Selection Criteria Weight

Aggregator has an existing connection with the two largest MNOs 15

Aggregator has an existing bulk payments solution 15

Aggregator is currently servicing clients on the bulk payments solution 15

Aggregator meets all the BRD requirements 15

Aggregator shows capacity to handle the transaction volume 5

Aggregator is a Limited Liability Company (LLC) 5

Aggregator has been in operations for over two years 5

Aggregator has adequate business continuity management 5

Aggregator has adequate staff 5

Aggregator is financially stable 5

Aggregator has a flexible pricing arrangement 5

Aggregator has a good relationship with a top-tier bank 5

Aggregator has other services that may be beneficial to the project (SMS, USSD, WAP) 5

Total 105

Selected Aggregators

Yo! Payments, Pegasus and Cellulant were all selected as aggregators for this project. Yo! Payments and Pegasus immediately started working on system enhancements in response to the BRD at no cost to the project. UHMG, Chemonics (Commodity Production and Marketing) and SHRP (RTI) partnered with YO! Payments. SDS, NU-HITES and STAR-EC partnered with Pegasus.

Cellulant lagged behind the others in developing enhancements, delaying in the delivery of a draft contract and failing to fully integrate with MTN and Airtel. As a result, Cellulant was not paired with any implementing partners and ceased to be considered as a project aggregator. ■

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5. Digitizing Payments in Uganda: Project Overview

5.1 Overall Progress

Implementing partners have signed contracts with their aggregators, undergone training at their office locations, communicated the new payment policy to program staff and made payments to MTN- and Airtel-registered users through both Pegasus and Yo! Payments platforms.

Table 2. Summary of Digital Payments

Digital Payments Summary

# of beneficiaries paid

# of total bulk payments made

Success rate of payments

Amount transacted

% MTN % Airtel

1,392 122 95% USD $198,875 95% 5%

5.2 Key Achievements

Implementing partners signed contracts, received trainings, had their user accounts set up and amended internal operational and financial processes to accommodate a digital system.

122 successful bulk payments to beneficiaries were made on both MTN and Airtel networks utilizing aggregators, with a success rate of 95%. 1,392 beneficiaries were successfully paid.

Implementing partners are gradually increasing the number of payments made to staff and beneficiaries using aggregator platforms, and some are looking at how to use digital payments with partner organizations and other donors.

Aggregator system enhancements were identified, developed and tested with implementing partners and found to meet their needs and requirements.

Limitations for both MNOs and aggregators have been identified throughout the project and progress has been made in the streamlining of technical and functional processes for both stakeholders.

Successful negotiation with aggregators for a free 3-month trial period and customized software development at no extra cost.

Opened discussions with MNOs regarding the creation of a bulk discount system.

Registration for unregistered mobile money implementing partner beneficiaries is underway in preparation for a larger internal roll out by participating implementing partners.

5.3 Key Challenges

A number of challenges have been faced throughout the project (see Table 3, below). These challenges underscore the strengths and weaknesses of project stakeholders and the Ugandan mobile money infrastructure in general.

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Table 3. Challenges to Digitizing Payments in Uganda and Mitigating Strategies

Challenges to Digitizing Payments Mitigation

Challenge 1: Digital adoption – Contracts will take long to be signed and staff may have a number of questions about the transition that will need to be addressed before moving forward.

Mitigation: Implementing partners should communicate with home office, key decision makers and accounting staff of decision to transition to digital payments early. A minimum of four weeks should be set aside to allow contracts to be signed and finalized and staff to be informed and have their questions answered. In case of significant delay, arrange with aggregators for training to take place before final signing.

Challenge 2: Internal resistance – Implementing partner staff may resist a digital payment system due to a perceived risk in changing operational and financial processes. Implementing partners may also resist the Aggregator Model due to unfamiliarity with the concept.

Mitigation: Identify sources of resistance, hold meetings with finance and project staff to further clarify the benefits of a digital payment system and to explain the digitization process. Hold meetings with aggregators and implementing partners to help them understand the Aggregator Model better.

Challenge 3: Aggregator capacity – Aggregators’ capacity to deal with multiple clients is sometimes compromised due to limited human resources, lack of experience in dealing with implementing partner operating models and their reliance on MNO technical and operational processes for their functioning. This is especially the case with emergency requests.

Mitigation: Improve communication and planning between aggregators and implementing partners. Work with MNOs and aggregators to streamline processes and build capacity so as to allow aggregators to function relatively independently of MNOs.

Challenge 4: MNO processes – Some MNO processes are highly manual and turnaround times are unpredictable. Processes like aggregator account funding often cause delays, escalation processes, particularly over the weekend, are weak and aggregator account limits are low. A proposed shift away from the current mobile money platform being used by MTN, Fundamo, to Ericsson in May could cause further challenges.

Mitigation: Maintain good and open communication with MNO and aggregator and work with aggregators and MNOs to improve and streamline operational processes and internal controls.

Aggregator client relationship managers are essential links between their clients and MNOs and should inform implementing partners of any foreseen delays in advance.

Challenge 5: Beneficiary data collection and verification - Incorrect data provided by beneficiaries or incorrectly entered…