Monday 04, June 2018 by Jessica Combes

Partnership potential of financial services

 

Banker Africa spoke with Michael Wiegand, Director of Financial Services for the Poor at the Bill & Melinda Gates Foundation about how the organisation is trying to grow the adoption of financial services on the continent

Can we start with an overview of what the main challenges that you are looking to solve are?
The basic strategy of the Financial Services for the Poor team is based on the understanding that it is expensive to be poor and that the poor do have needs for financial services, both to smooth income and expenditure. The poor are particularly susceptible to shocks of either a sudden expenditure or a sudden loss of income. Furthermore, financial services enable the poor to invest in capital and better inputs— for instance if they’re a farmer then they might invest in better seeds and fertilizer.

Currently the poor rely on informal methods such as the family, the community and so forth, to weather difficult times. These methods are very inefficient and so by delivering financial services products to them it can help them move out of poverty and help them stay out of poverty. Six years ago, we refocused our strategy on developing digital platforms for the delivery of these financial products, so how can we get electronic payment systems in the hands of the poor so that a variety of financial services products could be delivered to them over those platforms.  There’s an ongoing conversation on the continent about how to promote financial inclusion.

What kind of work have you done at the foundation to support these efforts? We focus our work in three areas. The first is advising governments on the regulation and policies that will enable these kind of pro-poor payment systems to grow and flourish. We did some extensive analysis early on to really understand the cost of driving payments and therefore what you need to do to get that down to a near-zero cost so that’s it’s profitable to serve the poor.

We work primarily with central banks or financial regulators but also broader government institutions that need to come together to create an environment where the private sector can come in and serve the poor effectively. The second area that we work on is on infrastructure. We don’t focus particularly on financing mobile connectivity and cell towers and so forth, but we do see a couple of areas that are important.

First and foremost is interoperability. In many parts of the world you’ve had certain companies develop some success in reaching a lot of the poor, but they are closed loop solutions, you have to be part of their system. In China for instance you have Alipay, but only an Alipay customer can pay another Alipay customer. We want to create interoperability so that different providers can pay customers of other providers to create competition and foster innovation and usage. We invest a lot in promoting these interoperable solutions.

The second area of infrastructure that we’ve gotten involved in is in biometric ID systems. We’ve seen that one of the big costs of bringing in millions of new and poor customers under the system is around KYC (Know Your Customer). A biometric ID system in a country can bring those costs down. The KYC process can typically cost anywhere from $6-$8 and up to $20 in some countries. With a biometric ID system this cost can be brought down to cents and it’s close to instantaneous. We fund some organisations that help advise on how to develop and implement those kind of ID systems.

The third is about driving usage—what can we do to create use cases for the poor so that it is worthwhile for them to adopt and to start using these digital systems. This includes working with governments on how they can digitise their payments, particularly social benefit payments because those are targeted towards the poor generally and can be a compelling use case to get customers to first adopt these payment systems. We also work to encourage the private sector to start developing use cases that will bring the poor into the formal system. So these are our the three areas—regulation, infrastructure and usage. 

How do you encourage disparate fintech providers, banks and telecoms to use an interoperable system?
We’ve done a few things to work on this. Firstly, we’ve worked with the developers of mobile money systems, the mobile technology operators, such as Ericsson, Huawei, Comviva and Telepin. Between the four of them they dominant the mobile market and they’ve agreed on an interoperability standard, a standard API, so that a mobile money system of Huawei can be taken out of the box and communicate with a mobile money system with Ericsson and once you have that standard then banks can also adopt that standard. It lowers the cost dramatically for mobile money providers and bank account providers and lowers the cost for them to connect to a common switch.

We’ve also helped fund the development of an example platform which we call MojoLoop that does that switching at a very low cost in real time. There are unique risks that come into play when you allow non-banks to connect to payment systems. So we’ve developed a system that enables real-time payment transfers but with very regular clearing and settlement to reduce a lot of those risks. We then engage directly with some central banks if they need either advice or even funding to implement these interoperability switches. 

Do you see greater results from supporting issues around interoperability, biometrics and KYC, or government digitisation efforts and regulation?
Government action has proven to be the biggest lever, or levers, to drive adoption [of financial services] among the poor. Countries that have used regulation to open up to a wider range of providers for these basic payment services have seen dramatic increases in the usage of financial services by the poor.

The economics to serve the very poor are very difficult, the revenue for individual poor people is very low from these payment services and so traditional banks and the traditional models find it very hard to succeed and that’s why opening up to a wider range of providers that have lower cost platforms, have adjacent revenues, or existing infrastructure—one of the examples that has proven successful are the mobile network operators (MNOs) themselves.

These MNOs have widespread agent networks and usage of mobile phones by the poor is quite widespread across most of the world. These agents are already accepting cash for airtime and data so converting them to cash in and cash out for mobile money is a small investment in training and technology to enable them to do that. These companies don’t need to make a lot of incremental money on those customers because they are already customers and they are already serving them and if it helps them with retention, that can be enough. Whereas if a business is coming in and your model is based on fees from payments from these customers, it’s a higher bar for those customers to be profitable for you and if with that you have to build whole new infrastructure to reach those customers it’s difficult to make the economics work. 

How can banks remain competitive with fintechs and telcos and in your position as you an advisor to organisations where do you see that relationship moving forward? Are banks going to be able to work with these mobile money operators, these fintechs, is there still going to be a place for them?
Absolutely, and you’re seeing clear examples of that. In the mobile moneybanking relationship you have, and especially when you have effective interoperability between banking systems and mobile money systems, a whole range of products that can be provided to these customers that banks are uniquely positioned to provide.

Whether it be lending products or insurance on a micro scale, these payment systems enable a vast increase in the customers that can be served, as well as then the linkages between the larger corporate or even SME customers and consumers—there are huge opportunities for banks. In the fintech space we really see fintech take off when countries move to greater smart phone adoption and then you have what we call these ‘over-thetop’ solutions, companies that can come in and leverage those rails.

The banks still maintain the deposits and are getting the benefit of the flow of these small accounts, but the innovators are driving usage and creating whole new business models. In the West you have things like Uber and you have comparable transportation companies in the developing world that are successful because of the ability to make these micro payments and those are all customers of banks. There’s huge banking businesses to be done through those businesses.

So there’s absolutely a huge role for banks going forward and you can imagine if you’re going from a country that has 25 per cent of the population connected digitally to where it’s 75 per cent of the population that just dramatically expands the whole pie for financial services.  

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