new model for technology-driven financial inclusion

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FOR TECHNOLOGY-DRIVEN FINANCIAL INCLUSION

2010 Global Savings Forum

NEW MODEL

Summary

Our quest is to use the ubiquity of mobile phones to deliver financial services to those who have traditionally been underserved. 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 insight which is:

Collaboration is key: an open, trusted, scalable and interoperable model is essential to maximize reach and deliver the broad range of financial service offerings. Additionally, national IDs and disbursements will ensure key cost elements are reduced and drive larger adoption – accelerating the “network effect” for those with the greatest need.

An Open Collaborative Model will achieve the benefit of more financial offerings and more choice when 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 affordable while providing a full range of offerings that are user focused even in the most challenging market scenarios. Users can start with simpler, immediate needs and graduate to savings, micro loans and micro-insurance products.

Once a network is established (critical mass of agents, merchants, users, financial offerings), the Open Collaborative Model will encourage highest value, more choice, more innovation and more utility.

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NEW MODEL

There is great interest from the private sector in investment for mobile financial services. Yet these investments, 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 a collaborative ecosystem as outlined in this paper in countries that have the need, motivated players and 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 and empowerment of the poor.

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NEW MODEL

Banking for all

The potential is clear - bring affordable financial services to people who need them. The world has seen unprecedented change in the growth and adoption of mobile phones. However, barring a few success stories, the opportunity to bring billions of unbanked people affordable financial service needs to be realized as yet. At the confluence of under-banked and mobile phones lies an opportunity to create payment and low cost banking services. An estimated 750 Million households with money have no banking services. These people use cash, a costly alternative where studies have 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 the ubiquity of mobile phones to deliver financial services to those who have traditionally been underserved. 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 insight which is:

Collaboration is key: an open, trusted, scalable and interoperable model is essential to maximize reach 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 languages

Additionally, national IDs and disbursements will ensure key cost elements are reduced and drive larger adoption – accelerating the “network effect” for those with the greatest need. Only a few places in the world will achieve scale with a simple implementation model. We need an open collaborative model to achieve scale where it doesn’t come easily, and offer more financial services and more choice.

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NEW MODEL

1. Multiple 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. This open access is essential for building a “network effect” much like carrier based SMS enjoyed when it became interoperable. This will enable both large organizations as well as grass roots efforts to have a viable offering to users. It is essential that these players recognize the tangible benefits that accrue to the market as a whole while benefiting each of them individually. Regulatory, legal and technological frameworks need to be 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 payment network that operates with the same immediacy as cash. It establishes a level of comfort in technology with users who have long-entrenched methods of managing their money. In some countries, these real-time frameworks are already in place: Faster Payments in the UK, National Payment Corporation of India, China Union Pay, BankServ South Africa. But for those that don’t have them, there is a significant investment in time, legislation and operational infrastructure that will be required to create a foundation upon which multiple providers can reach users. When such frameworks operate, risk management initiatives also require proportional investments both from a systemic risk / solvency in the ecosystem as well as operational and fraud risk management for the participants. It may sometimes take years for central banks and governments to legislate in and around the relevant areas.

2. Agent Distribution Networks Agent distribution networks lie at the foundation for any developing market financial service offering that hopes to include the under and un-banked. The reasons for this lie in the physical extent of branch networks and their ability to profitably serve people outside the ambit of financial services. Registration, cash-in and out, user education, handling of prepaid plastic and cross selling other financial services are some of the activities that the agent networks engage in. Our experience clearly shows that the extent of this network and its operational efficiency are perhaps the single most significant factor in user adoption and re-use. Agent networks need to 1) reach people where they live and work, and 2) connect to the traditional banking and payment infrastructure. The ability to efficiently manage distribution networks require enabling infrastructure such as physical cash-management, document management (for Know Your Customer fulfillment) a financial support model that supports intra-day credit for retailers to ensure they have enough “operating balance” to service users etc. Financial solutions are not silos - much like the internet where the value increases with the number of participants and contributors. It is important for these networks to interoperate seamlessly with the banking system to drive greater efficiency in cash management. Agent networks are key to reaching the underserved, and traditional connections are key to participation of the traditionally served community.

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NEW MODEL

3. Open Access to Financial Services An open “Marketplace” or “App-store” for mobile financial services gives users greater competitive choice. Such an open approach will encourage innovation and foster quality. Ways in 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 $0.25

4. Merchant Acceptance Network & 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. In emerging markets banks invest in building merchant acceptance, since the demand for accepting plastic has been relatively limited. With the growth of mobile payments, the ability to simply accept payments using something as fundamental as a mobile becomes a game changer. Acquiring traditionally un-acquired merchants is a capital intensive feet – on – street game that requires several 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 incentive for the merchants to adopt electronic payments.

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NEW MODEL

Building Blocks for an Open Collaborative Model

In most countries of the world where the need is great, the success of mobile payments in Kenya will be extremely difficult to replicate because of a fragmented mobile market that challenges the creation of a ubiquitous agent and merchant network. In emerging markets with a large number of participants, the investment for any single entity will be huge and those that do invest will struggle to scale if they try and do everything themselves. Once a network is established (critical mass of agents, merchants, users, financial offerings), the Open Collaborative Model will encourage highest value, more choice, more innovation and more utility. An “App-store” of financial offerings will liberate the user and give them real choice. It is therefore vitally important to ensure that three basic building blocks for an open collaborative model are developed in concert.

The Benefits of a collaborative model

The clear benefits are that such a model empowers life and work by making financial services more accessible and affordable while providing a full range of offerings that are user focused even in the most challenging market scenarios. Users can start with simpler, immediate needs and graduate to savings, micro loans and micro-insurance products.

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NEW MODEL

The Open Platform

A 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 compliance

These 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 specific value proposition that can be unique to each provider.

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NEW MODEL

Recommendation

How 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 and empowerment of the poor powered by a self-sustainable framework.

new model for technology-driven financial inclusion

Technology