David Porteous, founder and director of Bankable Frontier Associates, shares his perspective on the importance of scale and interoperability as catalysts for financial inclusion. His consulting firm is dedicated to eradicating the barriers that prevent the poor from accessing financial services, and they partner with us in our efforts to promote financial inclusion.
Promoting financial inclusion has become an accepted goal for financial policy makers in an increasing number of countries: see here for example the list of 16 countries which have signed the Maya Declaration committing them to advancing this goal. The G20 have the topic of inclusion squarely on the agenda of their forthcoming meetings in Mexico. The higher profile follows growing recognition of the benefits which come to individuals, households and economies from appropriate access to financial services; and also stems from the growing sense that the alternative–financial exclusion –is no longer a politically or socially palatable option, especially in countries with growing, increasingly connected emerging middle classes.
Affirming the inclusion goal publicly is a useful first step; but actually achieving new inclusion targets requires a much longer journey of discovery. This journey involves taking new pathways of experimentation, even though some of the signposts are clearer now following experience and research in many different places in recent years.
One key area of exploration is the pursuit of robust business models for the delivery of formal small value financial services. This can be challenging in various aspects and few have yet succeeded at large scale. What is clear is that in the long run, most business models supporting greater financial inclusion require that the dominance of cash be reduced as the prevailing payment instrument in most common transaction types. Electronic transactions initiated by the customer on their own device such as a mobile phone cost financial institutions a fraction of branch, or even agent, transactions so they have a clear incentive to enable the shift.
Customers, however, do not necessarily have the same incentives. Even when the functionality to make electronic payments is available, customers may not use it much or at all: a recent CGAP study of mobile money accounts found that only 8% of those who registered to use the service remained active users. Ongoing surveys of domestic payments of various types in places like The Philippines and Ghana confirm that convenience, speed, security and cost matter to payers. The value proposition to customers rests in large part on having easy access to the largest possible number of payees—in other words, the network effect. In most places, this will require that electronic payment schemes find robust cheap terms to interconnect earlier rather than later so that customers can transfer funds across provider and scheme. Regulators are taking increasing interest in the issue of interoperability of payment instruments from the vantage point of financial inclusion as well as cash reduction. In some countries, new switching infrastructure and arrangements will be needed to switch and clear micropayments in real time. In many ways, the electronic payment world stands at a threshold akin to that of electrical power distribution more than a century ago. Electricity moved from being generated and used mainly locally to being generated centrally and distributed through a grid. The grid concept revolutionized the business models of electrical utilities, both public and private, and stabilized the flow of reliable power. It has enabled over time ubiquitous access to electricity for an estimated 80% of people on the planet today—a percentage well above the proportion of adults financial included in most countries, which has been estimated at 50% globally.
In addition to increasing the sheer number of payees, the payment proposition must also be convenient: for example, using a mobile number as the payee address is increasingly familiar and known, while entering a bank routing and account number seems onerous by comparison. Safety matters too, but it requires not so much more rules about authentication (which is usually fairly standard and may trade off with ease of payment) than clear rules about recourse and dispute resolution. These rules build the trust of clients and providers that there will fair and swift redress of problems when they arise, especially for payments across financial institutions. Card network rules have effectively offered this clarity for card payments in the past; but these frameworks must be extended and amended or new adjudication mechanisms built for the world beyond cards.
Financial inclusion is now firmly on the agenda of governments as a social priority and financial institutions as a business opportunity. Achieving full financial inclusion will require that countries have a clear pathway to more electronic payments, leading to “cash lite”, a state in which major categories of payment become predominantly electronic even if cash is still exchanged alongside for a long time to come. Equally, “cash lite” rests on advancing financial inclusion: unless most people have and use electronic stores of value from which they can initiate electronic payments, ‘cash heavy’ will remain the status quo. ‘Inclusive cash lite’, or “i-Fi” as a colleague and I have labeled it, is a term which both recognizes the interdependence of these objectives and which also signals the way forward for greater financial inclusion. Much work remains for governments and financial institutions to understand the pathways towards this objective. But it is a worthy one to pursue, building on the new focus on financial inclusion.
I was delighted to share my opinion on all of these issues with Visa as part of its Perspectives on Progress series. Check out the video for my perspective on the importance of scale and interoperability as catalysts for financial inclusion in developing economies.
Posted by: David Porteous, Bankable Frontier Associates on May 31, 2012 at 1:18 pm