New Model for Technology-Driven Financial Inclusion

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New Model for Technology-Driven Financial Inclusion

  1. 1. NEW MODEL FOR TECHNOLOGY-DRIVEN FINANCIAL INCLUSION 2010 Global Savings ForumSummaryOur quest is to use the ubiquity of mobile phones to deliver financial services to those who havetraditionally been underserved. We do this in partnership with mobile carrier, banks, mobile phonemanufacturers, and retailers. Interestingly, our partnership with each of these players has given us aunique insight which is:Collaboration is key: an open, trusted, scalable and interoperable model is essential to maximizereach and deliver the broad range of financial service offerings. Additionally, national IDs anddisbursements will ensure key cost elements are reduced and drive larger adoption – acceleratingthe “network effect” for those with the greatest need.An Open Collaborative Model will achieve the benefit of more financial offerings and more choicewhen branchless banking scales: • Interoperable multiple mobile banking/payment providers: It is essential to have multiple service providers which include both banks and non-banks. If they interoperate (allow payments between the respective participants) this will drive greater adoption and usage. Much like carrier based SMS enjoyed when it became interoperable. It is essential that these players recognize the tangible benefits that accrue to the market as a whole, while benefiting each of them individually. • Broad-based agent networks with connections to traditional banking and payment infrastructure: Agent networks need to 1) reach people where they live and work, and 2) connect to the traditional banking and payment infrastructure. Financial solutions are not silos - much like the internet where the value increases with the number of participants and contributors. Agent networks are key to reaching the underserved, and traditional connections are key to participation of the traditionally served community. • Open Access: It is important to offer choice and encourage innovation in financial services. An open “marketplace” or “app-store” for mobile financial services gives users greater competitive choice. All people deserve access to quality and choice in the financial services. Open approaches will encourage innovation. • Merchant acceptance interoperability: Building enough people and places to pay is essential for the growth of mobile financial services. Small and micro business adoption is key to usefulness. Those businesses benefit more if they are able to serve more of their customers – therefore merchant acceptance of multiple mobile bank solutions will increase value to the SME and value for users.Such a model empowers life and work by making financial services more accessible and affordablewhile providing a full range of offerings that are user focused even in the most challenging marketscenarios. Users can start with simpler, immediate needs and graduate to savings, micro loans andmicro-insurance products.Once a network is established (critical mass of agents, merchants, users, financial offerings), theOpen Collaborative Model will encourage highest value, more choice, more innovation and moreutility. 2
  2. 2. NEW MODEL FOR TECHNOLOGY-DRIVEN FINANCIAL INCLUSION 2010 Global Savings ForumThere is great interest from the private sector in investment for mobile financial services. Yet theseinvestments, absent an open collaborative approach will achieve only a fraction of their potential.We recommend the creation of a funded initiative that will champion, conceive and execute acollaborative ecosystem as outlined in this paper in countries that have the need, motivated playersand the regulatory environment to make it a real success.In a world where half the adult population lacks affordable and convenient access to simple banking,we owe it to the underserved to move quickly to this model. What is at stake is inclusive growth andempowerment of the poor. 3
  3. 3. NEW MODEL FOR TECHNOLOGY-DRIVEN FINANCIAL INCLUSION 2010 Global Savings ForumBanking for allThe potential is clear - bring affordable financial services to people who need them. The world hasseen unprecedented change in the growth and adoption of mobile phones. However, barring a fewsuccess stories, the opportunity to bring billions of unbanked people affordable financial serviceneeds to be realized as yet. At the confluence of under-banked and mobile phones lies anopportunity to create payment and low cost banking services. An estimated 750 Million householdswith money have no banking services. These people use cash, a costly alternative where studieshave shown that as much as 20% of the cash is lost or stolen. This impacts families, micro-businesses, surrounding communities, and hampers economic development. Our quest is to use theubiquity of mobile phones to deliver financial services to those who have traditionally beenunderserved. We do this in partnership with mobile carrier, banks, mobile phone manufacturers,and retailers. Interestingly, our partnership with each of these players has given us a unique insightwhich is:Collaboration is key: an open, trusted, scalable and interoperable model is essential to maximizereach and deliver the broad range of financial service offerings.We know from early implementations that mobile-facilitated branchless banking at scale is a “game-changer” for financial inclusion. The key factors to scale are: 1. A large agent network 2. Ease of enrollment (ease of personal authentication) 3. Important use cases for people to save, borrow and spend 4. Simplicity, security, and availability in multiple languagesAdditionally, national IDs and disbursements will ensure key cost elements are reduced and drivelarger adoption – accelerating the “network effect” for those with the greatest need. Only a fewplaces in the world will achieve scale with a simple implementation model. We need an opencollaborative model to achieve scale where it doesn’t come easily, and offer more financial servicesand more choice. 4
  4. 4. NEW MODEL FOR TECHNOLOGY-DRIVEN FINANCIAL INCLUSION 2010 Global Savings Forum1. Multiple ProvidersIt is essential to have multiple service providers which include both banks and non-banks. Ifthey interoperate (allow payments between the respective participants) this will drive greateradoption and usage. This open access is essential for building a “network effect” much likecarrier based SMS enjoyed when it became interoperable. This will enable both largeorganizations as well as grass roots efforts to have a viable offering to users. It is essential thatthese players recognize the tangible benefits that accrue to the market as a whole whilebenefiting each of them individually. Regulatory, legal and technological frameworks need tobe put in place to ensure the smooth operation of this new financial network.In recognizing that this new model replaces cash, it is important to have a real-time paymentnetwork that operates with the same immediacy as cash. It establishes a level of comfort intechnology with users who have long-entrenched methods of managing their money. In somecountries, these real-time frameworks are already in place: Faster Payments in the UK, NationalPayment Corporation of India, China Union Pay, BankServ South Africa. But for those that don’thave them, there is a significant investment in time, legislation and operational infrastructurethat will be required to create a foundation upon which multiple providers can reach users.When such frameworks operate, risk management initiatives also require proportionalinvestments both from a systemic risk / solvency in the ecosystem as well as operational andfraud risk management for the participants. It may sometimes take years for central banks andgovernments to legislate in and around the relevant areas.2. Agent Distribution NetworksAgent distribution networks lie at the foundation for any developing market financial serviceoffering that hopes to include the under and un-banked. The reasons for this lie in the physicalextent of branch networks and their ability to profitably serve people outside the ambit offinancial services. Registration, cash-in and out, user education, handling of prepaid plastic andcross selling other financial services are some of the activities that the agent networks engagein. Our experience clearly shows that the extent of this network and its operational efficiencyare perhaps the single most significant factor in user adoption and re-use. Agent networksneed to 1) reach people where they live and work, and 2) connect to the traditional banking andpayment infrastructure. The ability to efficiently manage distribution networks require enablinginfrastructure such as physical cash-management, document management (for Know YourCustomer fulfillment) a financial support model that supports intra-day credit for retailers toensure they have enough “operating balance” to service users etc. Financial solutions are notsilos - much like the internet where the value increases with the number of participants andcontributors. It is important for these networks to interoperate seamlessly with the bankingsystem to drive greater efficiency in cash management. Agent networks are key to reaching theunderserved, and traditional connections are key to participation of the traditionally servedcommunity. 5
  5. 5. NEW MODEL FOR TECHNOLOGY-DRIVEN FINANCIAL INCLUSION 2010 Global Savings Forum3. Open Access to Financial ServicesAn open “Marketplace” or “App-store” for mobile financial services gives users greatercompetitive choice. Such an open approach will encourage innovation and foster quality. Waysin which financial service providers can respond to users’ needs are:• Pay interest on small deposits, thereby encouraging savings and defraying the damaging effects of high inflation which is prevalent in a number of emerging economies.• Create attractive savings products through term-deposits• Provide direct lending to users through agents and indirect lending through MFI’s and their agents. This ability to create a multi-tiered hierarchy is important in achieving reach and scale in micro-lending as it has long been recognized that local organizations that work closely with community groups have the best success in understanding the user and providing support for their activities, specially where the borrowers have no credit history or even collateral.• Lower the cost of operation to lower the interest rate that users pay. In India, for example, user lending from mainstream banks can vary between 9% for a secured asset to 18% for unsecured loans, while established non-banking financial institutions in the MFI business lend at rates between 24-35% and money lenders between 0.5% and 1% per day! Due to the small ticket size and short tenor of MFI loans, operational costs can actually be high which when coupled with access to more expensive capital, translate to very expensive rates to the end user. Therefore bringing more people into formal banking will have a huge benefit to the end user.• Provide a direct model that brings transparency to government disbursements• Provide micro-insurance products with small regular premium collections as a viable alternative to expensive large ticket products. For example India has farmer insurance for as little $1 per week, however the cost of collecting the $1 is as high as $0.254. Merchant Acceptance Network & InteroperabilityBuilding enough people and places to pay is essential for the growth of mobile financialservices. Small and micro business adoption is key to usefulness. Those businesses benefitmore if they are able to serve more of their customers – therefore merchant acceptance ofmultiple mobile bank solutions will increase value to the SME and value for users. In emergingmarkets banks invest in building merchant acceptance, since the demand for accepting plastichas been relatively limited. With the growth of mobile payments, the ability to simply acceptpayments using something as fundamental as a mobile becomes a game changer. Acquiringtraditionally un-acquired merchants is a capital intensive feet – on – street game that requiresseveral years of effort to build a critical mass of merchants to be universally appealing to users.Mechanisms to discount merchant interchange may be required to provide enough incentivefor the merchants to adopt electronic payments. 6
  6. 6. NEW MODEL FOR TECHNOLOGY-DRIVEN FINANCIAL INCLUSION 2010 Global Savings ForumBuilding Blocks for an Open Collaborative ModelIn most countries of the world where the need is great, the success of mobile payments in Kenya willbe extremely difficult to replicate because of a fragmented mobile market that challenges thecreation of a ubiquitous agent and merchant network. In emerging markets with a large number ofparticipants, the investment for any single entity will be huge and those that do invest will struggleto scale if they try and do everything themselves. Once a network is established (critical mass ofagents, merchants, users, financial offerings), the Open Collaborative Model will encourage highestvalue, more choice, more innovation and more utility. An “App-store” of financial offerings willliberate the user and give them real choice. It is therefore vitally important to ensure that threebasic building blocks for an open collaborative model are developed in concert.The Benefits of a collaborative modelThe clear benefits are that such a model empowers life and work by making financial services moreaccessible and affordable while providing a full range of offerings that are user focused even in themost challenging market scenarios. Users can start with simpler, immediate needs and graduate tosavings, micro loans and micro-insurance products. 7
  7. 7. NEW MODEL FOR TECHNOLOGY-DRIVEN FINANCIAL INCLUSION 2010 Global Savings ForumThe Open PlatformA blue-print for an open platform envisages four broad areas: 1. Banking and Payments 2. Centralized shared operations run as a utility 3. Interconnect points for multiple service providers 4. Customer account management, marketing and complianceThese services can provide a nationwide infrastructure for multiple participants including users,merchants and governments to transact in a safe and scalable way, while building a branded specificvalue proposition that can be unique to each provider. 8
  8. 8. NEW MODEL FOR TECHNOLOGY-DRIVEN FINANCIAL INCLUSION 2010 Global Savings ForumRecommendationHow about this section being more for a call to action. Like we recommend - Private sector solutions need to support true interoperability, shared merchant acceptance, and an open collaborative model. - Low cost platforms enabling pre-paid accounts and no frills bank accounts - Public and private partnerships to increase awareness and aid in onboarding of first time bank users - National ID systems which lower cost and time of enrollment and reduce security risks.In a world where half the adult population lacks affordable and convenient access to simple banking,we owe it to the underserved to move quickly to this model. What is at stake is inclusive growth andempowerment of the poor powered by a self-sustainable framework. 9

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