Fi­nan­cial in­clu­sion and be­yond

Financial Mirror (Cyprus) - - FRONT PAGE -

Be­cause tra­di­tional fi­nan­cial ser­vices are not de­signed for small de­pos­i­tors and bor­row­ers, sev­eral non-tra­di­tional mod­els have been able to scale up rapidly in this un­tapped market. But, with­out a strate­gic pol­icy roadmap to guide fur­ther fi­nan­cial­tech­nol­ogy (fin­tech) de­vel­op­ment, these new “con­nec­tor” mod­els will re­main lim­ited in terms of the ser­vices they can pro­vide.

In Kenya, the suc­cess of M-Pesa, a mo­bile pay­ments app, has been noth­ing short of trans­for­ma­tional. It took PayPal two NAS­DAQ listings and al­most two decades op­er­at­ing in the world’s largest econ­omy to reach 188 mil­lion ac­tive cus­tomers and $282 bil­lion in an­nual pay­ments. Although M-Pesa has been op­er­at­ing for less than a decade in a much lower-in­come market, it had nearly 17 mil­lion ac­tive users con­duct­ing more than $50 bil­lion in cash­less trans­ac­tions last year.

Sim­i­larly, bKash now dom­i­nates the pay­ments sys­tem in Bangladesh to such a de­gree that “bKash­ing” has be­come com­mon Ben­gali par­lance, just as “Xerox­ing,” “Hoover­ing,” and “Googling” are in English.

Other mod­els, such as Mi­croen­sure and Bima, have also gained ground, of­fer­ing mi­cro-in­sur­ance so­lu­tions in emerg­ing coun­tries. Jan Dhan Yo­jana, a high-pri­or­ity In­dian fed­eral-govern­ment pro­gramme that pro­vides ac­cess to the bank­ing sec­tor for the poor, has en­abled 250 mil­lion new bank ac­counts to be opened in less than two years.

New fin­tech prod­ucts will have to clear sev­eral hur­dles to move be­yond just im­prov­ing ac­cess to fi­nan­cial ser­vices. Ser­vices fos­ter­ing fi­nan­cial-in­clu­sion must de­liver a high vol­ume of low-value out­put, which means they often have to rely on part­ner­ships to meet cer­tain con­sumer de­mands. Prob­lems arise when these part­ners have their own con­straints or dif­fer­ent pri­or­i­ties.

For ex­am­ple, Mi­croen­sure and Bima have made in­sur­ance so­lu­tions avail­able to mil­lions of peo­ple; but their ser­vices ul­ti­mately de­pend on in­de­pen­dent in­sur­ers to al­lo­cate cap­i­tal and un­der­write in­sur­ance poli­cies. Like­wise, while there are green shoots of in­sur­ance-in­dus­try growth in re­gions like Sub-Sa­ha­ran Africa, global in­sur­ers must con­stantly adapt to reg­u­la­tory changes in their pri­mary or home mar­kets, and it is un­clear if they have the ca­pac­ity to ex­pand mean­ing­fully into low-in­come coun­tries. Or con­sider M-Pesa it­self. Four years ago, it formed a part­ner­ship with the Com­mer­cial Bank of Africa to add a lend­ing tool, M-Sh­wari, to its suite of prod­ucts. It has since opened more loan ac­counts than any Kenyan bank. But such ac­counts still num­ber less than a quar­ter of ac­tive M-Pesa users, and M-Sh­wari still sup­ports only small 30-day loans. M-Sh­wari is not a core part of ei­ther part­ner’s business.

Nor is it the only prod­uct of its kind on the market. The most re­cent com­peti­tor to chal­lenge M-Pesa is mVisa, a part­ner­ship be­tween Visa Inc. and two other Kenyan banks. With $400 mil­lion in 2016 rev­enues at stake, Sa­fari­com – M-Pesa’s par­ent com­pany – will likely fo­cus on de­fend­ing its core of­fer­ing be­fore it tries to in­tro­duce new prod­ucts. In Sa­fari­com’s cur­rent list of new prod­uct pri­or­i­ties to ex­pand fi­nan­cial in­clu­sion, sav­ing-and-loan prod­ucts are ranked al­most last.

Un­fet­tered in­no­va­tion and en­trepreneur­ship are nec­es­sary for con­nect­ing the poor to the for­mal fi­nan­cial sys­tem; but, from a pol­icy and de­vel­op­ment per­spec­tive, we need to shift our ef­forts to­ward im­prov­ing the larger ecosys­tem to re­alise new fin­tech prod­ucts’ full po­ten­tial.

For ex­am­ple, M-Pesa’s cash­less trans­ac­tions are un­der­pinned by cash con­trib­uted by its cus­tomers, which is held in trust at any given time. In­ter­est in­come from these funds is cur­rently dis­bursed through the M-Pesa Foun­da­tion. With a care­fully con­structed sys­tem, this money could be put to even greater pro­duc­tive use. In­dia’s Jan Dhan Yo­jana pro­gramme has mo­bilised an es­ti­mated $6 bil­lion from newly ac­quired cus­tomers, which could be used to pro­vide ad­di­tional tai­lored prod­ucts.

Emerg­ing fin­tech ser­vices can take a les­son from the Chi­nese e-com­merce com­pany Alibaba, which was quick in lever­ag­ing its pay­ments plat­form, Ali­pay. Af­ter Alibaba launched its money market fund, Yu’e Bao, in June 2013, it be­gan rein­vest­ing its Ali­pay cus­tomers’ un­pro­duc­tive mi­cro-de­posits.

By the end of 2015, the Yu’e Bao fund man­ager was over­see­ing $165 bil­lion in as­sets and had con­verted Ali­pay’s mil­lions of small, fi­nan­cially un­so­phis­ti­cated savers into in­vestors col­lect­ing re­spectable re­turns. To de­velop its plat­form, Alibaba re­lied on big data to man­age the fund’s unique liq­uid­ity dy­nam­ics; and it ben­e­fited from China’s un­set­tled reg­u­la­tory frame­work, though this could change in the fu­ture. The Chi­nese con­text may be unique; and, in­deed, there are grow­ing con­cerns about risks in­her­ent in the Yu’e Bao model. But reg­u­la­tors and fin­tech firms should take note of ex­am­ples like Ali­pay to de­velop ra­tio­nal strate­gic pos­si­bil­i­ties for this emerg­ing sec­tor. Most im­por­tant, they should re­mem­ber that ac­cess to fi­nance is not an end in it­self, but a means to im­prove one’s lot.

A re­cent in­ves­ti­ga­tion re­vealed what can hap­pen when ac­cess to fi­nan­cial ser­vices is pro­vided in a vac­uum. The pa­per found sev­eral in­stances where of­fi­cials at In­dian pub­lic-sec­tor banks were de­posit­ing one ru­pee into cus­tomer ac­counts with­out cus­tomers’ knowl­edge. These of­fi­cials were ap­par­ently un­der pres­sure to re­duce the num­ber of ze­r­obal­ance ac­counts, all of which, it turns out, were re­lated to the Jan Dhan Yo­jana pro­gramme. Sim­i­lar chi­canery, we now know, was a rou­tine prac­tice at the US bank Wells Fargo. The dif­fer­ence is that cus­tomers at the bot­tom of the pyra­mid have few bank­ing al­ter­na­tives. Fi­nan­cial-ser­vices ac­cess is a much needed start, but it must lead some­where.

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