Microfranchising

Entrepreneurship is the largest creator of wealth. In the developing world, financial, education, healthcare and other services are provided by private entrepreneurs. In Haiti for example, 90% of the schools are private, 90% of children are delivered by midwives, and 90% of the finances will be done by independent agents.

These entrepreneurs are job creators. According to the U.N. Office of Special Envoy for Haiti, at least 80% of the jobs in Haiti are provided by “informal” businesses, 10% by formal small-t0-medium enterprises (SME’s) and 10% by large enterprise & government.

If entrepreneurship is critical to sustainable economic development and job creation, what can we do to increase business success?

Microcredit

I recently wrote an article about the challenges of doing business in Haiti. Among the top challenges is access to capital for small businesses. Microcredit is the extension of very small loans to those in poverty to spur entrepreneurship. Many organizations, including Kiva.org, Opportunity International and World Vision Micro, market microcredit loans by promoting the concept that a microcredit loan will be used to start or continue a business.  However, that is an exception, not the rule.

According to CGAP, less than half of the microcredit loans are actually used to run a business. In Hyderbad, India, that number is just 30%, which means 70% of microcredit loans are being used to payoff non-business debt. Borrowers simply use a new unsecured loan to payoff an old loan, not to build a business.

The 30% that do start a business have no formal business training, no business systems, and often create businesses that won’t scale. In other words, many businesses fail to make enough or barely make enough money to get out of poverty. Many of these borrowers try anything to get ahead, including playing the Haiti lottery, looking for ways to get enough money to make a significant different in their lives.

Microfranchise

One of the ways to improve the odds of success is to apply the franchise business model to building a small business in the developing world. A good example is Digicel Haiti’s Pap Padap service that allows independent business people to buy minutes wholesale and resell (top up) minutes to Digicel’s 2.5 million customers. With just a $10 phone, an hour of training, a Digicel red jersey, and about $50 worth of top-up cards, someone can start reselling Digicel pre-paid phone minutes.  In just 18 months, over 40,000 people became Pap Padap agents, most earning more than Haiti minimum wage ($4.60/day). Most agent/franchisees get started without a microcredit loan.

What does a Pap Padap franchisee get from the franchisor, Digicel?

• Branding. Digicel has the strongest brand in Haiti. In fact, Digicel is the largest company in Haiti and represents 10% of Haiti’s GDP.
• Customers. With 2.5 million customers, Digicel commands a 65% market share amongst Haiti’s mobile network operators.
• Training. Most Pap Padap agents already know how to top up their phone. A typical top-up transaction is completed in 30 seconds, allowing the agent to make a quick 8% commission. With additional technical training, an agent can earn the Pap Padap “Tech” designation, allowing him to provide technical service to his customers. This includes fixing phones, providing replacement SIM cards, replacement batteries, and other handset hardware services. Being a Pap Padap Tech provides additional opportunity to generate revenue.
• Scalability. There are three groups of Pap Padap agents depending on the amount of wholesale minutes they can buy. Agents that can buy $5,000 (US)/day sell to agents that can buy $500 (US)/day who in turn, sell to agents that can handle $50/day. So, if you are good at building an agent network, there is no limit to your upside. In addition, Digicel’s coverage is nationwide, providing an opportunity to support agents throughout Haiti, not just urban locations.
• Support. The entire technology platform runs at Digicel’s data center with carrier-class, high-uptime servers. If an agent runs into trouble, they can call the Digicel agent support line.
• Financial accounting. All transactions are digital.  All transactions are taxed at the appropriate rate. If an agent uses the system, their accounting is done and commissions are paid immediately. No paper work to fill out. No tax returns.
• Marketing. Digicel’s marketing is everywhere in Haiti. You can’t drive or walk a single block of Port au Prince without seeing the Digicel logo. More importantly, any Digicel customer with a pre-paid phone plan must top-up their phone every 30 days. This top-up requirement drives over 2 million customers to their nearest Pap Padap agent at least once a month. Often, customers see their agent at least weekly as they get a few HTG (Haitian Gourdes) to spare.

All of these franchise systems are available to the Pap Padap agent for a minimal investment.  These systems make the difference between business success and business failure. In fact, if you use the systems as designed and are efficient at servicing your customers, you can make a living. If you can hustle and sell, you will be rewarded for your effort. If you can replicate yourself, you can create a sales network.

As indicated above, there are three levels of Pap Padap agent:

1. Level 1: Resellers who can buy $5,000 (US) worth of airtime at a time. These are typically physical retail locations both in Haiti and in the U.S. where Haitian diaspora are located.
2. Level 2: Group reseller who can buy around $500 (US) worth of airtime and have recruited around 5-10 individual resellers.
3. Level 3: Individual reseller who can purchase and resell around $50 (US) worth of airtime at a time.

Microfranchise + Microcredit

In Haiti, the typical microcredit loan is around $250-500.  The loan is short-term (6 months), unsecured and carries a 25-35% interest rate. Using the above 3-level system as an example, a Level 3 Individual airtime reseller does NOT need a microcredit loan. An individual airtime reseller can probably borrow some money from family to get started for less than $50. An average individual reseller could probably could purchase $100 worth of airtime a day, giving him an income of around $8/day.  Given the average Haiti wage of $4.60/day, this wage keep the reseller slightly above the average, but not enough to feed a family.

With a microcredit loan of $500, a Level 3 reseller could become a Level 2 group reseller by recruiting and training Level 3 resellers, thus creating a nice business for himself. If a group reseller can buy/sell $1,000 of airtime per day @ 8% commission, the Group reseller could make $80/day, which is good enough to take care of a family. A Level 2 Group airtime reseller is an easy business model to understand and should be rewarded with a lower microcredit loan interest rate.

Franchise Systems..the Key

As we’ve seen above, one of the keys to success are the franchise systems. This is true in any business environment, not just developing world. Microcredit without any microfranchise systems, rarely creates a sustainable or scalable business model. Combining microcredit with a microfranchise is a powerful combination for the developing world.

Mobile Financial Services

Microfinance is the collection of financial services including micro credit, micro insurance, micro savings, and mobile money services. Each of these mobile financial services also provides a microfranchise opportunity, especially mobile money. Haiti’s two leading carriers, Digicel and Voila are launching their respective mobile money services–Tcho Tcho Money and T-Cash. The Haiti Mobile Money Initiative, provided the catalyst to jump start these services and their agent networks–another opportunity for franchisee to take advantage of this new franchise opportunity.

While the mobile money franchise requirements are tougher than an airtime reseller, a mobile money agent can make significantly more money and gets most of the franchise systems as the top-up agent. According to CGAP’s M-PESA agent report, an M-PESA mobile money agent can make around 3.2 times more profit than selling airtime alone. A mobile money agent has several requirements that a airtime top-up agent does not need. These include a physical location, a valid business license, and increased liquidity. The mobile money super-agent can help an agent each of these requirements, allowing a top-up agent to upgrade his way up to a mobile money agent.

In future articles, I will explore how microfranchising and microcredit can work together to build a mobile financial services franchise in developing markets.

Univicity, Harvard, and Haiti

Harvard team on top of Digicel's roof

Univicity wishes to thank Harvard Business School MBA candidates for working with Univicity/Transversal on the Digicel mobile money agent training & audit planning.  The team spent 10 days in January 2011 visiting Haiti to volunteer their time & talent on the project as part of their 1st year MBA program.

We wanted to say thank you for all of your help and time over the past few months. We had a wonderful trip and enjoyed getting to know you and learning about the mobile banking sector in Haiti. You and Max’s work in this field is truly exciting. We are all looking forward to watching it unfold over the coming months – we think that with Transversal’s help it will be a success. We also hope that our work over the past week has helped contribute to that success.

From the Harvard team: Justin Lambert, Julie Filion, Justus Meyer, Anya Klots.

Univicity & Transversal again say “thank you” to the Harvard team for all of their work and their final report. We look forward to working with Harvard in the future.

More reading: Harvard MBA teams blog about their Haiti experience.

Doing business in Haiti

I just finished by 9th trip to Haiti since May 2010. People ask me all the time, “are things getting any better in Haiti?”  Well, the roads are still crappy, but some of the rubble is being removed.  There are still a LOT of people living in tents. People are dying of Cholera. And the political climate is unsettled with former Haitian dictators coming to Haiti to try to fill the leadership void.

But, in spite of all that, there are some good things happening in Haiti–at least on the projects I’m working on. Let me explain.

When the earthquake hit Haiti on January 12, 2010, I knew that I was “called” to Haiti.  I had no idea what that calling would entail or what I would be doing.  I must also admit, that prior to January 12th, I had no desire or reason to visit Haiti.

My first visit to Haiti, I was given an assignment by World Vision to figure out how to get birth certificates for 1 million Haitian children. This is a huge problem in Haiti and leads to all kinds of problems, including illiteracy. Click here to read more about the birth certificate project. While working on that project, I met up with Digicel, the largest mobile phone company in Haiti. Digicel persuaded me to get involved in the Haiti Mobile Money Initiative. Less than 2% of Haitians have a bank account. The Haiti Mobile Money Initiative’s goal is to enable any Haitian with a mobile phone to to access basic banking services via their mobile phone.

Doing business in Haiti has its challenges. Traveling is difficult because the roads are poor and there are constant traffic jams. Lately, Haiti has suffered from political instabilities. During December, the election riots shut down the country, causing us to lose several days of productivity. The video below shows some of the riot activity taking place right outside of the apartment building where I stay.

The World Bank ranks Haiti  162 out of 183 in the “Doing Business Ranking.”   Haiti ranks 176 out of 183 in Starting a Business and 164th out of 183 in Protecting Investors. So, why would Univicity want to start or invest in a business in Haiti?

During my first visit to Haiti, I met several very smart Haitian technology entrepreneurs who want to make a difference in their country. Any one of them could get a good job in the U.S. or Canada at any time. Yet, they want to build an IT company in Haiti. I have always loved information technology and in my past, I founded Windows NT Magazine that was read by over a million IT people around the world in print, in person and online. Today, Haiti’s largest export is mangoes. But I asked myself, why can’t Haiti be known for exporting software and other IT services?  What can I do to help these Haitian technology entrepreneurs fulfill that vision?

In short, I have chosen to invest in some smart business people who happen to be Haitian. We are working together to try to make a difference, in spite of earthquakes, hurricanes, political instability, poor infrastructure, and weak governance.

Bottom line: If we can make it here, we can make it anywhere.

So, if you are looking for an adventure and you want to make a real difference in a country that needs just about everything, Haiti is open for business.

Haiti Mobile Money Initiative

In July 2010, Univicity got involved with the Haiti Mobile Money Initiative (HMMI), a USAID/HIFIVE grant initiative funded by the Bill & Melinda Gates Foundation.  The HMMI was designed to motivate Haiti’s carriers to implement a Kenya Safaricom MPESA-style mobile money platform. M-PESA allows Safaricom’s customers to make mobile payments (cash-in, cash-out, P2P transfers, etc.) using their mobile phones.

The Haiti Mobile Money Initiative contest is in two phases:

• First-to-market. Haiti’s first mobile carrier to achieve 10,000 transactions (100 agents, in 100 locations doing 100 cash-in/cash-out transaction each).
• Scale-up phase.  An 18-month contest that rewards mobile payment transactions. The scale-up phase begins after the first-to-market prize has been awarded.

Univicity partnered with a location Haitian IT company, Transversal, to assist Digicel Haiti in competing for the first to market prize. On January 10, 2011, the first-to-market prize was awarded to Digicel. Tranversal was officially recognized by Digicel’s CEO, Maarten Boute, as helping Digicel achieve the first-to-market goal.

HIFIVE awards Digicel with the HMMI first-to-market award from Mark Smith on Vimeo.

The other Haiti mobile carriers, Voila and Haitel, are still in competition for the second-to-market award of $1.5M.

Digicel has now entered the scale-up phase of the contest. The scale-up phase rewards all forms of mobile money transactions. During this scale-up phase, Univicity will help World Vision Haiti implement mobile money in their cash-for-work programs, which provides temporary jobs for people living in the camps.

Univicity & Transversal will continue to play a major role in Haiti’s mobile money initiative in 2011 and will be instrumental in development and implementing several key mobile money services.

Further reading:

• Mobile Money in Haiti: Strategies for a multi-competitor, multi-industry market
• Gates Foundation prize announcement
• News about Haiti Mobile Money Initiative
• Institute for Money, Technology and Financial Inclusion – Haiti Blog
• Designing Mobile Money Services: Lessons from M-PESA
• The Economics of Branchless Banking

Haiti Birth Certificates & Illiteracy