Tech-enabled payments are step one toward full financial inclusion. Subsequent steps involve using those platforms to deliver loans, savings, insurance, remittances, and financial capability-building in new ways. The examples here illustrate just a small part of the amazingly rich and active fintech innovation sector. Examples range from initiatives of major global companies to promising new start-ups.
In Pakistan, users of Easypaisa mobile money services access life insurance for free. Telecommunications company Telenor partnered with Adamjee Life Insurance to launch Easypaisa Khushaal in 2012. If subscribers maintain an average monthly balance of 2,000 Pakistani rupees (U.S. $19) in their Easypaisa mobile accounts, they are automatically covered for life and accidental death insurance at no extra charge, including coverage of risks related to riots and terrorism. The higher the balance in a mobile account, the higher the coverage. It is often an uphill battle to convince low-income customers to buy insurance. Easypaisa Khushaal addresses this dilemma by integrating insurance into existing mobile money accounts, eliminating the costly marketing and sign-up processes. The service also incentivizes customers to save.
In India, Tata AIG offers livestock insurance to low-income farmers and uses mobile devices to lower costs and reach scale. When the company switched from a paper-based to a mobile-based enrollment process, it reduced enrollment time from 15 days to 30 minutes. Settlement times for claims have also decreased, as have transaction costs associated with issuing insurance policies. These innovations have allowed Tata AIG to increase volume more affordably and efficiently.
The global remittance market is expected to reach $700 billion by 2016. However, in 2014, the global average cost for transferring remittances was 8 percent – a burden for low-income families who rely on remittance income. But this may soon change. Start-ups such as TransferWise, WorldRemit, and Azimo have mobile apps through which users can send remittances at fees as low as 1 percent. Companies like PayPal are increasing their global consumer base, and charge 3–4 percent on international transfers. Customers who were offered mobile cross-border remittances in West Africa responded by rapidly adopting the service. Orange Money offered transfers between its own customers across Cote d’Ivoire, Mali, and Senegal, while MTN and Airtel created a bilateral agreement to serve the Cote d’Ivoire–Burkina Faso corridor.
With the emergence of these competing business models, established players such as Western Union and MoneyGram have reduced their fees. Cornelis Heesbeen, CEO of Auxfin, a remittance service, predicts that by 2020 there will be no fees for remittances.
P2P Payment Apps
Social media companies, including Facebook, for U.S. users, and WeChat, China’s most popular messaging app, have launched no-cost person-to-person payment services, allowing users to send payments to friends for free. On Chinese New Year it is customary to give friends and family red envelopes full of cash and gifts. Last year, WeChat offered virtual red envelopes via its payment service and recorded more than 1 billion transactions.
While most social media–linked services require a bank account, a growing number allow payments between people without a formal bank account. Emerging P2P services include Pingit/Paym (United Kingdom), SnapCash, LendingClub, and Prosper (United States), LinePay (Japan), KakaoPay (Korea), Alipay (China), and PingPay (India). Internet-based P2P services perform functions similar to SMS-based mobile money transfers, but their interfaces are more user-friendly.
Large up-front costs makes solar home systems too expensive for off-grid, low-income customers, unless they get a loan. To sidestep the need for credit, some companies are using pay-as-you-go leasing technology on top of mobile payments. For example, with M-Kopa in Kenya and Mobisol in Tanzania and Kenya, customers pay daily-use fees via M-Pesa. If payment is not received, the company can turn off the system remotely through the embedded pay-as-you-go device. According to CGAP, as of 2014 there were at least 25 companies selling solar systems with this technology in Africa, Asia, and Latin America.
Digital Savings and Loans Using Big Data
Consumer savings and loan platforms like M-Shwari and M-Pawa are changing the accessibility and ubiquity of very small, non-collateralized loans. Launched by Commercial Bank of Africa and Safaricom in Kenya in November 2012, M-Shwari taps into the personal histories of poor and unbanked customers regarding their telephone use and mobile money activity to make credit-scoring decisions, using M-Pesa for carrying out transactions. By the end of 2014, M-Shwari boasted over 20 million cumulative loans. M-Pawa is the same partnership’s offering in Tanzania. Through M-Pawa, customers receive micro-loans starting at 1,000 Tanzania shillings (U.S. $0.50) on their phones through their M-Pesa accounts. Launched in May 2014, the service had reached 1 million subscribers by December 2014.
Loans for SMEs
Kopo Kopo and NeoGrowth provide cash advances with no collateral to retailers at times when merchants need cash most. Innovations like CapitalFloat and LendingKart in India provide flexible, instant loans to small and medium-sized enterprises (SMEs). While many of these innovations are in their early stages, if successful they may begin to reach the “missing middle” SMEs, with finance at lower cost.
P2P lending services have taken off and expanded rapidly, particularly in China, led by CreditEase, Lufax, China Rapid Finance, and DianRong. At the end of 2014 there were an estimated 1,575 P2P platforms operating in China, up from only 50 in 2011, and 103.6 billion yuan (U.S. $16.7 billion) in outstanding loans issued via online platforms.
An estimated 1.5 billion people globally participate in rotating savings and credit associations (ROSCAs). They provide a simple, informal method for people to save money and receive loans, although traditional ROSCAs can be unreliable and subject to management problems. Kitty10 is a mobile app that offers a possible remedy, allowing ROSCAs to manage their finances, maintain an electronic history of transactions, and easily make decisions (such as those dealing with loan amounts and repayment terms). It gives financial tips and can even build credit histories for members. Magadarsi is an India-based financial services provider known as a chit fund that uses the Internet to support ROSCA operations. Magadarsi allows users to sign up online and pay installments through online banking on its website. This removes the requirement that ROSCAs meet in person, thereby saving members’ time each month. It also allows for ROSCAS to reach a much larger scale in terms of growing their membership.
Increasing Financial Capability
The three innovations we highlight below all incorporate integrative technology into the delivery of services to increase financial capability (see also the FI2020 Progress Report on Financial Capability). We would like to see more of these!
- Juntos promotes savings through partnerships with financial institutions in Colombia and Mexico, with plans for expansion to the Philippines and Tanzania. Juntos allows banks to create a personalized dialogue with customers via SMS to encourage them to save and reach financial goals. Juntos’ messages inform customers about how much they have saved (or spent), remind them of their goals, and comment on events in the customer’s life. Juntos claims that its service results in 33 percent higher active client rates and 50 percent higher average savings balances.
- Tigo’s Su Dinero (“Your Money”) app is provided free to Tigo customers in Colombia. Microfinance Opportunities supplied its financial capability content, tailored to the Colombian context. DAI and Souktel support the program, which operates through Facebook’s Internet.org phone app. Tigo has about 7 million subscribers in Colombia, meaning that these free financial capability resources are now at the fingertips of millions of people.
- RevolutionCredit, an online lender in the United States, offers online courses and videos to increase financial literacy, and when customers take a course or watch a video, it is recorded in their client profile. The idea behind tracking these activities is to identify consumers who are less risky borrowers. RevolutionCredit does not aim to replace credit scores. “It’s really more of a booster,” says founder Zaydoon Munir.
Some of the major factors fueling technology-enabled change are region- and country-dependent. An innovation that is met with wild success in one market may fall flat in another. Mobile money has taken off in Africa, particularly East Africa, in part because the region’s sparse banking infrastructure left major gaps that cell phone service could address. Moreover, the focus on money transfer has built upon existing social relationships. In a place where neighbors and families often help one another with their financial needs, mobile financial services provide a better way to accomplish a socially important task.
Latin America’s story continues to be more about agent banking. The model began in Brazil, where agents have long been allowed to conduct transactions on behalf of financial institutions, and it has now spread throughout the region. In Mexico, for example, Grupo Bimbo has installed over 75,000 point of sale terminals in small mom-and-pop shops, allowing customers to top up airtime, pay bills, and make debit or credit card payments. Bimbo is planning on continuing to empower these shops, 700,000 of which are part of their distribution network. More recently, however, mobile models have shown signs of growth. GSMA reports that Latin America is the fastest-growing region in mobile money uptake, and outperforms other regions in percentage of active accounts. Paraguay, Honduras, and El Salvador, where banking infrastructure is not as robust as in some of the larger countries of the region, feature in the top 15 markets globally for mobile money penetration.
In East and South Asia, where connectivity is high and technology costs are low, innovations in Internet and app-based banking have emerged. Through the flexibility of Internet technology, CreditEase, Lufax, Tunadai, China Rapid Finance, and DianRong offer platforms for P2P lending. Alibaba developed Alipay initially for customers purchasing goods through Alibaba, but the payment platform has since expanded to include 65 financial institutions, more than 460,000 Chinese businesses, and 300 worldwide merchants. In Taiwan and China, where traditional ROSCAs have been in place for centuries, online platforms heighten convenience and safety for informal group banking in an increasingly cashless economy.
But Has Access Led to Use?
But technology-enabled business models are not all rainbows and roses, and Government to Person (G2P) payments are a great example. While governments and international organizations alike agree that an electronic G2P system is more efficient, there is a question of whether it increases use of financial services. If the only change is that a recipient of social welfare payments shifts her collection point from a truck in her village square to an ATM in the same village square, do electronic G2P payments really make a difference? While G2P payments have high potential for expanding inclusion, unless individuals use their newfound access in everyday life, they only fulfill a portion of their potential.
Source: Author projections using both a three-year moving average and a line of best fit, based on GSMA (2015).
A recent University of Chicago study found that the conditions for the success of mobile money are very context-specific, and those countries with services that limp along for years are not likely to ever see explosive growth without significant ecosystem changes. Furthermore, half of the people globally who use mobile money already have an account at a financial institution. Customers whose only access is mobile-based make up about 1 percent of the global population.
For some technology-enabled business models, there is also the question of profitability. Take psychometric testing, which develops credit scores by matching interview-derived psychological profiles with big data on borrower behavior. While the technology may be cool, there is scant evidence that testing identifies good prospective borrowers and increases credit availability for clients. Mobile money itself remains unprofitable in most instances – those deployments that have reached breakeven are anomalies. While much research asserts that mobile money can be profitable, it remains to be seen whether profitability will be the standard or the exception.
Three years ago our working group on technology-enabled business models reached an overwhelming consensus that there is an enormous opportunity for more interoperability in the industry. We have more supporting data that this remains the case, along with more examples of where interoperability is working. For mobile network operators, industry-led interoperability has been shown to have a significant impact on the number and volume of transactions. When Tigo and Airtel created bilateral interoperability in Tanzania, they saw an immediate tenfold increase in the volume of off-net transactions.
Source: GSMA (2015).
Interoperability, however, looks much different depending on regulatory approach (and indeed what exactly is meant by “interoperability”). Tanzania has relied on a web of bilateral relationships to move interoperability forward, and this system has advantages in that providers must see the business case for interoperability instead of following a mandate. Indonesia is pursuing a similar provider-level strategy. In Pakistan, interoperable ATMs have been a priority for the government, and a national bank switch was created to facilitate bank-level interoperability. In Nigeria, policymakers are partnering with the Gates Foundation to create a national central switch that all financial services institutions can use. This approach relies on providers participating once the platform is built. The banking association in Peru is building an interoperable platform that includes banks, telecoms, and other providers.
Multi-stakeholder coordination and buy-in (not hard mandates) are essential for the success of interoperability, as a viable system must be derived from a proper balance of interests and incentives.