Dig­i­tiz­ing pay­ments can re­duce trans­ac­tion cost by 90 per­cent

Financial Nigeria Magazine - - Contents -

The devel­op­ment of a DFS ecosys­tem de­pends on the un­der­ly­ing reg­u­la­tory frame­work and its abil­ity to foster in­no­va­tion and pro­mote com­pe­ti­tion.

In this in­ter­view, Sacha Polverini, Chair­man, ITU's Fo­cus Group on Dig­i­tal Fi­nan­cial Ser­vices, ad­dresses is­sues in the evo­lu­tion of DFS. Mr. Polverini, who is a se­nior Pro­gramme Of­fi­cer with the Bill and Melinda Gates Foun­da­tion, speaks in his ca­pac­ity as Chair­man of ITU's Fo­cus Group on Dig­i­tal Fi­nan­cial Ser­vices, and “we” refers to the Fo­cus Group. He was in­ter­viewed by Jide Ak­in­tunde, Man­ag­ing Editor, Fi­nan­cial Nige­ria mag­a­zine and Fi­nan­cial­nige­ria.com. Jide Ak­in­tunde: The world econ­omy is go­ing through a multi-faceted tran­si­tion and cre­ative dis­rup­tion, but not with­out some con­cerns and, in some cases, push­back by tra­di­tional op­er­a­tors. What is the case for the dis­rup­tion by dig­i­tal fi­nan­cial ser­vices?

Sacha Polverini: Dig­i­tal Fi­nan­cial Ser­vices have been rev­o­lu­tion­iz­ing the fi­nan­cial ser­vices sec­tor. The most vis­i­ble changes are seen in the pay­ments in­dus­try with ma­jor in­no­va­tive so­lu­tions in peo­ple's abil­ity to seam­lessly send and re­ceive money through dif­fer­ent chan­nels. Why is this im­por­tant? Dig­i­tiz­ing pay­ments – tran­si­tion­ing from cash to dig­i­tal money – has sev­eral ma­jor ben­e­fits, such as in­creased ef­fi­cien­cies, trace­abil­ity, speed and most im­por­tantly lower costs per trans­ac­tion, which can be re­duced by up to 90% com­pared to pay­ing with cash. This is a key point in our cam­paign to pro­mote fi­nan­cial in­clu­sion. One of the main rea­sons why low in­come house­holds can­not ac­cess for­mal fi­nan­cial

ser­vices is that they are too ex­pen­sive com­pared to the rev­enues they gen­er­ate.

With mo­bile pay­ments, the mar­ket has wit­nessed the emer­gence of new, non-bank play­ers such as mo­bile network op­er­a­tors who are ag­gres­sively con­test­ing the mar­ket. As this par­a­digm is chang­ing, it is cre­at­ing op­por­tu­ni­ties and chal­lenges for pol­icy mak­ers and reg­u­la­tors who find it chal­leng­ing to keep abreast with mar­ket de­vel­op­ments and fully ap­pre­ci­ate the risks the fi­nan­cial sys­tem and con­sumers are ex­posed to when deal­ing with DFS. As the cat­e­go­riza­tion of prod­ucts and ser­vices is in­creas­ingly blurred, it can be chal­leng­ing for both tele­com and fi­nan­cial ser­vices reg­u­la­tory bod­ies in many emerg­ing mar­kets to de­velop ap­pro­pri­ate guide­lines.

Dig­i­tal Fi­nan­cial Ser­vices also have the ad­van­tage of bring­ing gov­ern­ments closer to the pub­lic, in par­tic­u­lar in re­la­tion to the pro­vi­sion of so­cial sub­si­dies to low in­come house­holds. In many coun­tries, mil­lions of dol­lars of di­rect ben­e­fit trans­fers are still dis­bursed in cash. How­ever, when this pay­ment stream is dig­i­tized it would im­ply sev­eral ma­jor ef­fi­cien­cies: ci­ti­zens re­ceive the money di­rectly in their mo­bile wal­let, re­gard­less of where they are and with­out the risk of cor­rup­tion or the money be­ing stolen.

JA: The Nige­rian Se­cu­ri­ties and Ex­change Com­mis­sion re­cently said it was col­lab­o­rat­ing with peers in some ad­vanced mar­kets on the in­tro­duc­tion of the reg­u­la­tory frame­work for crowd­fund­ing to take off in Nige­ria. This is a case in point about how reg­u­la­tory lag is a hin­drance to dig­i­tal fi­nance, given the de­mand for crowd­fund­ing in Nige­ria. How is the Fo­cus Group work­ing to ad­dress this chal­lenge which spans sev­eral fi­nan­cial ju­ris­dic­tions in the de­vel­op­ing world?

SP: Dig­i­tal Fi­nan­cial Ser­vices is a fast evolv­ing in­dus­try with a host of new play­ers such as tele­coms providers, re­tail­ers and al­ter­na­tive pay­ment ser­vice providers that un­til now have not been part of the core fi­nan­cial ser­vices mix. Many of the cur­rent rules and def­i­ni­tions were de­vel­oped for the FS in­dus­try, but the new play­ers re­quire dif­fer­ent reg­u­la­tory ap­proaches. To build the right frame­work and guide­lines, reg­u­la­tors need to first de­velop a proper un­der­stand­ing of the var­i­ous risks in­volved, for both the fi­nan­cial sys­tem and end-users. Find­ing the right bal­ance, and cal­i­brat­ing the ap­pro­pri­ate reg­u­la­tion, are crit­i­cal; over-reg­u­la­tion could sti­fle in­no­va­tion and kill any in­dus­try be­fore it has had the chance to de­velop and ma­ture; un­der- reg­u­la­tion can lead to abuses and ex­ces­sive risk-tak­ing.

To prop­erly iden­tify and as­sess risks, data and ex­pe­ri­ence are es­sen­tial. Dif­fer­ent coun­tries can learn from each other and ex­change knowl­edge that can be adapted to the lo­cal needs. The right data then needs to be com­bined with ini­tia­tives aimed at build­ing lo­cal ca­pac­ity so that pol­i­cy­mak­ers can lever­age past ex­pe­ri­ence and en­sure the se­cu­rity of the fi­nan­cial sys­tem.

JA: A skep­tic of rev­o­lu­tion­ary dig­i­tal fi­nance might say that some of the ex­ist­ing so­lu­tions are risky, un­der­uti­lized, and that e-pay­ment con­cen­trates fi­nan­cial ac­cess on the al­ready served, while the im­pact of DFS on the real econ­omy is at best in­di­rect. How would you like to dis­pel the skep­ti­cism and also ad­dress is­sues around con­sumer pro­tec­tion in dig­i­tal fi­nance?

SP: Fi­nan­cial in­clu­sion is not an end in it­self. No­body's goal in life is to have a bank ac­count or to be able to pay bills through the phone. But, be­cause hav­ing ac­cess to fi­nan­cial ser­vices helps the poor man­age their money and plan for the fu­ture, fi­nan­cial in­clu­sion helps poor peo­ple achieve their goals, in­clud­ing lift­ing them­selves out of – and keep­ing them­selves out of – poverty.

We un­der­took a study on risks in the DFS sec­tor and dig­i­tal pay­ments. We con­cluded that Dig­i­tal Fi­nan­cial Ser­vices aren't riskier than tra­di­tional pay­ments. We noted that the way risks emerge is dif­fer­ent. With DFS, we are talk­ing about dif­fer­ent op­er­a­tors, prod­ucts and ser­vices, dis­tri­bu­tion chan­nels and par­tic­u­larly vul­ner­a­ble cus­tomers. The in­volve­ment of these new play­ers is spark­ing ques­tions in terms of their abil­ity to man­age tra­di­tional risks such as op­er­a­tional and liq­uid­ity risk. But in re­al­ity, the same risks are be­ing faced. The only ma­jor dif­fer­ence is the op­er­a­tional risk, such as a sys­tem break­down, or a black out, that is be­com­ing more im­por­tant as they could be a ma­jor dis­rup­tor of the sys­tem.

In terms of use of DFS, a dif­fer­ence needs to be made be­tween rural ar­eas and cities. As there is less traf­fic in rural ar­eas, poorer in­fra­struc­ture com­pared to city cen­tres, it is less prof­itable for op­er­a­tors to pro­vide DFS in these ar­eas. There­fore, peo­ple have fewer choices in re­mote parts of the coun­try.

Con­sumer pro­tec­tion is a crit­i­cal part of fi­nan­cial in­clu­sion; the larger the mar­ket be­comes the greater the need for ar­tic­u­lated rules. We think that there should be a pro­gres­sive ap­proach to­wards con­sumer pro­tec­tion. The Fo­cus Group has looked at four com­mon themes that pol­i­cy­mak­ers or reg­u­la­tors may want to con­sider when de­vel­op­ing laws, reg­u­la­tions or guide­lines around the is­sue. This in­cludes pro­vi­sion of in­for­ma­tion and trans­parency, fraud pre­ven­tion, dis­pute res­o­lu­tion and data pri­vacy and pro­tec­tion. But of course the move away from cash will only work if the so­lu­tions and pro­cesses be­ing put in place to re­place it are re­li­able, trustable and easy for the con­sumers. This is an es­sen­tial part of the Fo­cus Group's work.

With mo­bile pay­ments, the mar­ket has wit­nessed the emer­gence of new, non-bank play­ers such as mo­bile network op­er­a­tors who are ag­gres­sively con­test­ing the mar­ket.

JA: It is over half a decade that M-Pesa has been the point of ref­er­ence for suc­cess in dig­i­tal fi­nance. This limited nar­ra­tive will, in par­tic­u­lar, likely af­fect the abil­ity of stand­alone DFS providers to raise fund­ing to grow or­gan­i­cally. How is the FG look­ing at help­ing to as­sist DFS providers to grow, given their pu­ta­tive devel­op­ment im­pacts?

SP: ITU's ini­tia­tive is help­ing to grow the in­dus­try by al­low­ing the DFS frame­work to cre­ate an open and com­pet­i­tive en­vi­ron­ment. This will spark in­no­va­tion and en­sure there is enough choice for cus­tomers. This is ben­e­fi­cial for both con­sumers and op­er­a­tors. But co­op­er­a­tion be­tween reg­u­la­tors is needed to pro­mote healthy com­pe­ti­tion and en­sure in­vest­ments are made into the in­dus­try. There­fore, the Fo­cus Group is look­ing to clar­ify a reg­u­la­tory frame­work in which the right poli­cies are set.

This is crit­i­cal if dig­i­tal fi­nan­cial in­clu­sion is to live up to its po­ten­tial. It's not just in­cre­men­tal change, or squeez­ing poor peo­ple into the mar­gins of a fi­nan­cialser­vices par­a­digm that al­ready ex­ists; it's some­times ma­jor, dis­rup­tive in­no­va­tion driven by play­ers in­side – and es­pe­cially out­side – the bank­ing in­dus­try.

JA: Com­pe­ti­tion is both a hin­drance and an en­abler of in­no­va­tive so­lu­tions in dig­i­tal fi­nance. What is the think­ing within the Fo­cus Group on this is­sue which hin­ders co­op­er­a­tion amongst reg­u­la­tors in fi­nance and tele­com as well as be­tween con­ven­tional and dig­i­tal fi­nance firms?

SP: The devel­op­ment of a DFS ecosys­tem strongly de­pends on the un­der­ly­ing

reg­u­la­tory frame­work and its abil­ity to foster in­no­va­tion and pro­mote com­pe­ti­tion among providers. Lack of co­or­di­na­tion be­tween reg­u­la­tors will cre­ate space and op­por­tu­ni­ties for anti-com­peti­tor be­hav­iour and ar­bi­trage to emerge.

As part of ITU's Fo­cus Group on DFS, one of its four Work­ing Groups is fo­cus­ing on Tech­nol­ogy, In­no­va­tion & Com­pe­ti­tion. This Work­ing Group mainly looks at how emerg­ing tech­nolo­gies could have an im­pact on the ecosys­tem, the costs and charg­ing schemes for DFS, the se­cu­rity frame­work for DFS and the main tech­ni­cal bar­ri­ers to com­pe­ti­tion and mar­ket ac­cess. The Fo­cus Group has looked at how busi­ness-crit­i­cal tech­nol­ogy can be­come a bar­rier to the mar­ket due to the limited num­bers of providers and their abil­ity to abuse their po­si­tion.

JA: In sum, what are the de­liv­er­ables of the Fo­cus Group on Dig­i­tal Fi­nan­cial Ser­vices, and what are the time­lines?

SP: The Fo­cus Group is de­vel­op­ing a set of op­er­a­tional rec­om­men­da­tions, tools and so­lu­tions that will fast-track pol­icy re­form to sup­port nu­mer­ous de­vel­op­ing coun­tries in im­ple­ment­ing the fi­nan­cial in­clu­sion strat­egy and pro­mot­ing DFS at scale. It is the first time an or­gan­i­sa­tion has sought to iden­tify a clear frame­work that reg­u­la­tors around the world can use to help pro­mote Dig­i­tal Fi­nan­cial Ser­vices glob­ally. The group is ex­pected to com­plete its work and pub­lish its re­main­ing guide­lines and tool­kit by end of 2016.

Re­ports al­ready pub­lished by the DFS Fo­cus Group:

1. The Dig­i­tal Fi­nan­cial Ser­vices Ecosys­tem: Maps the over­all ecosys­tem of DFS, iden­ti­fy­ing all key stake­hold­ers, and looks at the crit­i­cal el­e­ments nec­es­sary to make the ecosys­tem de­velop so that it en­cour­ages and en­ables fi­nan­cial in­clu­sion poli­cies.

2. En­abling Mer­chant Pay­ments Ac­cep­tance in the Dig­i­tal Fi­nan­cial Ecosys­tems: De­scribes the mer­chant ser­vices value chain, de­vel­ops a seg­men­ta­tion scheme for dif­fer­ent types of pay­ments ac­cep­tors, and iden­ti­fies the pay­ments-re­lated at­tributes of each seg­ment. It also de­vel­ops sug­ges­tions on ways to ac­cel­er­ate the adop­tion of elec­tronic pay­ments ac­cep­tance.

3. Re­view of Na­tional Iden­tity Pro­grammes – A re­port from the Evans School of Pub­lic Pol­icy and Gov­er­nance: Looks at 48 na­tional iden­tify pro­grammes in 43 de­vel­op­ing coun­tries. With iden­ti­fi­ca­tion sys­tems be­com­ing more com­mon across Latin Amer­ica, South and South­east Asia, and Sub-Sa­ha­ran Africa, the re­port con­cludes that not only is pen­e­tra­tion much higher than ex­pected, but so are the num­ber of bio­met­ric na­tional ID pro­grammes. It eval­u­ates how these pro­grammes are be­ing used to drive pro­vi­sion of DFS ser­vices.

4. Qual­ity of Ser­vice (QoS) and Qual­ity of Ex­pe­ri­ence (QoE) as­pects of Dig­i­tal Fi­nan­cial Ser­vices: This Re­port iden­ti­fies and pro­poses Key Per­for­mance In­di­ca­tors (KPIs) to be con­sid­ered for dig­i­tal fi­nan­cial ser­vices.

5. Reg­u­la­tion in the Dig­i­tal Fi­nan­cial Ser­vices Ecosys­tem: This re­port iden­ti­fies cat­e­gories of reg­u­la­tion and ad­dresses a num­ber of is­sues re­lat­ing to man­ag­ing the reg­u­la­tory en­vi­ron­ment. It in­cludes an anal­y­sis of how reg­u­la­tors cur­rently work to­gether, and pro­vides a model mem­o­ran­dum of un­der­stand­ing that na­tional reg­u­la­tors can adopt to for­malise their col­lab­o­ra­tion and in­ter­ac­tion in view of co-reg­u­lat­ing the DFS mar­ket­place.

6.Com­monly iden­ti­fied Con­sumer Pro­tec­tion themes for Dig­i­tal Fi­nan­cial Ser­vices: Iden­ti­fies four com­mon themes that pol­i­cy­mak­ers or reg­u­la­tors may want to con­sider when de­vel­op­ing laws, reg­u­la­tions or guide­lines around con­sumer pro­tec­tion. This in­cludes pro­vi­sion of in­for­ma­tion and trans­parency, fraud pre­ven­tion, dis­pute res­o­lu­tion and data pri­vacy and pro­tec­tion.

The re­main­ing Fo­cus Group de­liv­er­ables will be pub­lished in­cre­men­tally from now through to the end of the year, fo­cused around the two re­main­ing meet­ings sched­uled in East Africa in Septem­ber, and the fi­nal meet­ing in Geneva in De­cem­ber 2016. The fi­nal rec­om­men­da­tions are sched­uled to be pub­lished in Jan­uary 2017.

Sacha Polverini, Chair­man, ITU’s Fo­cus Group on Dig­i­tal Fi­nan­cial Ser­vices

Sacha Polverini

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