Technology

In 2007, the M-Pesa initiative launched in Kenya with the slogan “Send Money Home,” ushering in a wave of innovation around the world and providing an expanded vision of what is possible in terms of reach and cost.

Fast-forward to the Mobile World Congress in 2015, when Nokia unveiled a $29 smartphone with a 29-day standby battery life. Targeted at consumers in many emerging markets, the phone signals a shift in smartphones from a customer base that is exclusively high-income to one serving the general population. This shift opens the possibility of app-based service delivery.

A Rail-Building Agenda

Today’s rail builders are hard at work on several challenges. The current agenda for building delivery channel infrastructure includes the following:

Expanding the connectivity infrastructure. This crucial process occurs largely beyond the financial inclusion world, as mobile network operators expand their phone and Internet coverage or upgrade existing services to higher capacity. This part of the agenda is essential for reaching rural and remote areas and very low–income countries. It is also essential for the transition from SMS/USSD–based services to Internet-based services.

Expanding and strengthening agent networks. It is ironic that current technology-enabled models depend on large networks of humans (agents) to perform cash-in/cash-out transactions, and many companies are focused on building and managing agent networks. As these agents who perform banking transactions are still an emerging phenomenon, the rules governing safe and fair agent network operation are a prime subject for regulatory attention.

Connecting consumers. The race is on to sign up customers for basic transaction services. This occurs mainly as banks, mobile network operators, and others compete to expand their coverage, but governments also play an important role, as they have opportunities to create rapid mass sign-ups by converting from cash-based government benefit payments to payments performed electronically. Aadhaar, India’s national biometric ID program, is one of the best-known examples (see “Biometric Identity through Aadhaar”). And increasing merchant acceptance of these services, so consumers can use electronic payments for everyday purchases, is a necessary next step in making it worthwhile for customers to connect.

Enabling the fast track: government-to-person payments. The World Bank is relying in part on the promise of government-to-person (G2P) electronic payments to achieve its goal of connecting all consumers. Governments are the biggest payment generators in the world, with annual global volume predicted in 2010 at about U.S. $40 trillion, and they have strong incentives – improved efficiency, lower cost, reduced corruption – to switch away from cash. The Gates Foundation predicts that using digital rather than cash payments can significantly reduce costs. South Africa, for example, saw its costs of delivering social transfers drop 62 percent when it went digital. But the big promises have yet to yield the truly significant success stories: according to the World Bank, electronic payments would allow governments to give an additional 160 million people access to a bank account.

Getting the regulatory framework right. As governments increasingly move from initial regulatory frameworks into second-generation revisions and improvements, issues continue to command attention, such as supporting interoperability (without discouraging entry) and developing robust consumer-protection regimes that can adapt to changing technologies.

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.

Regional Variety

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.

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.

Unlocking Interoperability

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.

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.

There remains a question of whether and how technology can increase the quality of interaction between providers and clients. Those who pose this question argue that low-touch, automated financial services strip interactions within financial services of the essential human element. Citing the example of KGFS, a financial institution that IFMR operates in rural India, Bindu Ananth, CEO of IFMR, points to the importance of branch staff in helping to steer a person toward the products that they need, much as a doctor would prescribe a medication. The KGFS model combines sophisticated technology on the back end with the face-to-face interaction its designers believe must remain a cornerstone of client relationships. Start-up Juntos offers a counter example. Juntos provides its partner financial institutions with electronic platforms that conduct SMS-based client conversations in a friendly and client-tailored manner to help build loyalty and nudge customers toward prudent financial behavior (see the FI2023 Progress Report on Addressing Customer Needs and the FI2023 Progress Report on Financial Capability).

Client protection is an integral part of ensuring quality of services, and is already prioritized in the most forward-thinking organizations. Segments of the technology-enabled ecosystem have adopted industry standards for client protection, such as the GSMA Code of Conduct and the Client Protection Principles promoted by the Smart Campaign. However, technology brings new risks to clients not yet fully integrated into client protection policies. Unsolved questions include who owns the data generated, how the data are secured, the proper recourse when things go wrong, and whether “know your customer” regulations exclude too many low-income people, confining them to the informal sector (see the FI2023 Progress Report on Client Protection).