TECHNOLOGY RESCUES THE UNBANKED
▶ India’s digital plan helps open 330 million accounts since 2014
Big technology companies are increasingly playing a role in reshaping banking and financial services, which can help boost the inclusion of the unbanked across the globe and reduce transaction costs.
“Big Tech’s promise is to make payments and financial services as easy and as cheap as sending a text or a picture,” David Lipton, first deputy managing director of the International Monetary Fund told a gathering at the fund’s headquarters in Washington. “This could potentially change and reshape the financial sector’s landscape for the future.”
Nowhere is the impact clearer than in Africa and Asia. The mass market penetration of smartphones has facilitated the financial inclusion of unbanked segments of the population in developing countries.
The adoption of FinTech services has moved steadily upward to 64 per cent this year from 33 per cent in 2017 and 16 per cent in 2015, according to EY’s Global FinTech Adoption Index. Of the 27 markets surveyed globally, consumer FinTech adoption was 87 per cent in both China and India, 82 per cent in South Africa, 76 per cent in Colombia, 72 per cent in Mexico and 71 per cent in the UK.
The most commonly used service category is money transfer and payments, with 75 per cent of consumers using at least one of these services and 64 per cent of them attracted by the lower fees.
For much of the past decade, India has been putting in place building blocks to digitalise public infrastructure. About 1.2 billion people in Asia’s third-largest economy today have a digital ID – the base for electronic verification of a person’s identity, referred to as e-KYC (know your customer), according to Nandan Nilekani, co-founder and chairman of Infosys Technologies, who took part in the discussion at the IMF. With biometrics, people can open a bank account within minutes and be fully compliant with anti-money laundering and counterterrorism laws.
With the help of new technology, the Indian government went live with a programme in 2014, which has led to the opening of 330 million new bank accounts – a process that would normally take 46 years, said Mr Nilekani.
“E-KYC was essential to financial inclusion because if people don’t have an identity, they can’t open a bank account or get access to financial services,” he said. Developing a payment system was the second component and the platform was designed by the central bank and the banks themselves.
“The uniqueness of this model is that Big Tech participates along with the banks,” said Mr Nilekani. Six entities have signed up to take part, he added.
Last month, the platform processed 955 million transactions worth about $23 billion, according to Mr Nilekani. “This has shown that you can have an architecture and that you get all the benefits you talk about: convenience, instant payments, get them cheap with instant provisioning and you can do it within the system.”
Key to the success of India’s digital platform is its interoperability, allowing transactions in conjunction with financial institutions. “The India model is important because it’s an open access model, it allows any Big Tech to participate, but they have to come through the banks, and it is interoperable … the heart of payments is interoperability. Payment is so fundamental to an economy that you need an interoperable payment system,” said Mr Nilekani.
About 1.7 billion people across the globe do not have access to digital money and sending money across borders costs an average 7 per cent of the transaction, said David Marcus, a former president of PayPal who now heads Calibra, the Facebook-owned digital wallet set up for the new cryptocurrency Libra. Though communication costs have drastically reduced with the coming of the digital age, the same is not true of financial services when it comes to transaction costs.
“Digital money is only for people who have the devices on which they can store digital money, in other words you need to have a smartphone to keep the digital money,” said Mr Nilekani. “If you really want financial inclusion for the world you have to think of those who have no bank accounts, those who have no IDs and how to get them IDs, and so on.”