Author Topic: Digital financial inclusion: Partnerships are the key  (Read 186 times)

JEWEL KUMAR ROY

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Digital financial inclusion: Partnerships are the key
« on: November 22, 2015, 11:35:25 AM »
In their paper "A Digital Pathway to Financial Inclusion", Dan Radcliffe and Rodger Voohies of Bill & Melinda Gates Foundation outlined how basic mobile connectivity and digital remote payments are the first two necessary steps towards an inclusive digital economy.

MicroSave's work with Equity Bank has clearly shown that an agent-based banking model can indeed be successful and rapidly achieve high volumes of transactions. Indeed, Equity Bank's agent-based banking model looks set to take Kenyan customers to Radcliffe and Voorhies' Stage 3 of a full range of digital financial services. But it is unlikely that Equity Bank could have achieved this rapid up-take without the ground-breaking work of Safaricom's M-PESA in Kenya, which created trust in agent-based systems amongst the population.

Mobile phone companies have a hugely important role to play to create the market - to build people's confidence in digital financial services and local agent-based systems - and thus lay the foundation for digital financial inclusion.

If the Bangladesh Bank (BB) wants to turbo charge financial inclusion, it would allow mobile network operators (MNOs) to act as issuers of e-money with proportionate supervision as discussed by CGAP (Consultative Group to Assist the Poor) in the box below. The reality is that clear and simple rules applied to non-bank mobile money providers can mitigate potential liquidity and solvency risks, as has been pointed out by the GSMA  (Groupe Speciale Mobile Association):Digital financial inclusion: Partnerships are the key


In response, a growing range of central banks across the globe are implementing proportionate supervision, thus encouraging non-banks to serve the mass-market - often in collaboration with banks.

For example, the European Union (EU) Payment Services Directive was implemented across the EU in 2009 specifically "to increase pan-European competition and participation in the payments industry (also from non-banks)". The Central Bank of Kenya's regulation, which gave rise to M-PESA (M for mobile, pesa is Swahili for money) and is used as a model by many, allows MNOs to offer payment and deposit services (backed by a trust account in a scheduled bank). And more recently, Brazil established a new regulatory framework to allow non-bank e-money issuers.

Worldwide, almost all successful digital finance services are MNO-led. This is because MNOs understand technology, distribution, and the marketing and customer service necessary to develop and deliver a volume-based retail business. Furthermore, MNOs see the necessity of protecting their market shares through offering data-based services and thus have the vision, backed by the capacity and will to make the necessary long-term investments. Finally, MNOs have the nationwide outreach to deliver financial inclusion to the furthest corner of the country - in Bangladesh there are some 500,000 agents across the nation.

In response to this reality, central banks are adopting proportional risk-based know-your-customer procedures. As Radcliffe and Voorhies noted in 2014, "Indeed, just 4-5 years after the central banks of Kenya, Tanzania, and Uganda allowed non-banks to launch payments and deposit services, 77 per cent of Kenyan adults and 47 per cent of Ugandan adults have an electronic account, while 46 per cent of Tanzanian households have at least one member of the household with an electronic account."

This has also been the experience in Sri Lanka. Ajith Nivard Cabraal, Governor of the central bank of Sri Lanka, noted, "Achieving financial inclusion through progressive regulation and innovation has been a principal and consistent ethos of the central cank of Sri Lanka."

In 2012, the Central Bank of Sri Lanka (CBSL) finalised an enabling regulatory framework that permitted both bank and non-bank service DFS (Digital Financial Services) providers. This decision was taken to financially include the unbanked/underserved population. As a result of this shift from bank-led to non-bank-led model, a new mobile money service eZ Cash has been launched by Dialog (Dialog Axiata PLC), the largest telecom operator of the country, in June 2012. eZ Cash acquired more than one million customers in their  first year of business; and is currently operating with over two million customers served by more than 20,000 agent outlets across the island. Importantly, eZ Cash has also partnered with multiple banks and telecom operators to provide a wide array of services.

In India, the Reserve Bank of India (RBI) has just issued 11 provisional licences for Payment Banks - including to MNOs such as Airtel, Vodafone, Idea and Telenor. Payment Banks allow MNOs to offer real value-add payment and deposit services to their customers and leverage their existing networks of more than 1.5 million agents to distribute and manage these offerings. This is particularly important/exciting because the MNO business model is based on usage (high volumes of small value transactions), and therefore more aligned to the willingness and ability of the poor masses to pay in small sums; unlike the traditional bankers' business model which is more focused, and dependent on low volumes of high value transactions. MNOs have high levels of brand awareness amongst poor and rural customers that can be leveraged well for cross-selling financial services. MNOs also invest regularly and extensively in marketing and promotions to create channel and consumer awareness.Digital financial inclusion: Partnerships are the key


Since telecommunications is a well regulated service industry, similar to banking, mobile retailers acquiring new subscribers are well-equipped to handle Know Your Client (KYC) norms and service activation processes. They are equally conversant with mobile technology to conduct business.

If the BB still wants to maintain a bank-led approach, in preference to a proportionate supervision-based approach or creating a new class of "narrow" payment banks; then we would suggest the following amendments to the current draft regulations to drive digital financial inclusion:

1. Currently the draft regulations stipulate that no bank or non-bank entity can hold more than fifteen per cent beneficial ownership in equity. This condition would substantially reduce the interest of bank and/or non-bank service providers due to the inability to exert control over the deployment. This also means, bank-led deployments which are already in the market will need to conduct resource-heavy operational and capital restructuring. This could potentially lead to at least some current deployments going dormant, thereby reducing customer interest and trust. We would recommend that at the very least banking entities should individually be able to exert majority control. Also, there could be a scope for the banks to be allowed to operate mobile financial services (MFS) as part of their core business, instead of forming specialised subsidiaries.

2. Currently the draft regulations stipulate that beneficial ownership of MNOs in an MFS platform should not exceed thirty per cent of its total equity. This condition reduces the interest from MNOs who are likely to need control to have a better say over the product and distribution aspects. This is also likely to lead to a situation where the expectation that "MFS platforms will be expected to choose non-bank equity partner entities with promise of bringing in innovative dimensions in business model and technology base" outlined in the draft regulation is diluted. We recommend that the condition be modified to the effect that commercial banks should hold a majority stake (51 per cent) and leave the rest of the capital composition to be determined by the company.

3.    Currently, the draft regulations stipulate that Bangladesh Bank will require multi-bank MFS platforms to operate. We believe these are still early days to mandate interoperability. The new deployments that come into force as a result of the draft regulations are likely to need some time for customer acquisition and building customer loyalty to their products and services before they are comfortable in pushing interoperability. Other countries which have mandated interoperability have seen reduced provider interest as a result. For example, Ghana. We propose that new MFS platforms should be given more time to develop and interoperability should be mandated only after a few years, when the national switch is also in place.

4. Currently, the draft regulations stipulate that transactions in MFS platforms will be conducted only through non-chequing limited purpose accounts termed "Mobile Accounts" in the names of customers, accessible with their mobile phone devices. This can lead to a reduction in scope for product innovation. Other countries which have experimented with basic no-frills accounts such as India and South Africa have not fared well. This would also dilute the value proposition to customers since the scope to develop customised products suited for the needs of specific segments will be limited. We believe that this condition can be removed.

Bangladesh has a long and proud history of being a leader in the provision of financial services to the poor. We believe that adopting proportional regulation to allow MNO-led digital financial services or creating a new type of payment banks could turbo-charge financial inclusion in the country. If neither of these options is acceptable to BB, then we believe that the current draft regulations require the amendments outlined above. These are necessary to ensure that MNOs, who must provide the channels over which mobile financial services operate, are motivated to invest and collaborate with the banks at the core of the system. 

Offline munna99185

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Re: Digital financial inclusion: Partnerships are the key
« Reply #1 on: March 02, 2016, 04:15:52 PM »
Informative post.


Sayed Farrukh Ahmed
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Faculty of Business & Economics
Daffodil International University


Offline Shakil Ahmad

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Re: Digital financial inclusion: Partnerships are the key
« Reply #2 on: March 10, 2016, 12:24:56 AM »
Nice work!!!