Infrastructure, Access Points & the Development of Digital Financial Ecosystems
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This presentation provides an analysis of the importance of digital infrastructure and ecosystems as well as review the “tipping” points for more rapid uptake and usage of digital financial services.
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Infrastructure, Access Points & the Development of Digital Financial Ecosystems
- 1. INFRASTRUCTURE, ACCESS POINTS & DFS ECOSYSTEMS JOHN V OWENS
- 2. The Role of Infrastructure The key foundational infrastructure needed to support financial innovations include: • Electricity supply • ICT infrastructure • Payment infrastructure • Identification infrastructure
- 3. WHY IS ELECTICRITY INFRASTRUCTURE SO VITAL FOR DFS?
- 4. WHY IS ICT INFRASTRUCTURE SO IMPORTANT?
- 5. THE CASE STUDY OF MYANMAR – HANDOUT FOR DISCUSSION
- 6. THE INCREASINGLY IMPORTANT ROLE OF PAYMENT SYSTEM INFRASTRUCTURE
- 7. WHY IS IDENTIFICATION INFRASTRUCTURE SO ESSENTIAL?
- 8. The Role of Access Points
- 9. THE ROLE OF DFS ECOSYSTEMS • Stakeholders in the DFS Ecosystem • Relationships of Stakeholders • Role and Contributions of Stakeholders in the DFS Ecosystem
- 10. WHO ARE THE DFS STAKEHOLDERS IN YOUR MARKET?
- 11. WHAT ARE THE ROLE AND CONTRIBUTIONS OF STAKEHOLDERS IN THE DFS ECOSYSTEM?
- 12. ACCESS AND USAGE INDICATORS Indicators for Measuring Access to DFS Access 1. Number of DFS cash points per 10,000 adults Supply Number of MFS cash points Total adult population X 10,000 2. Percentage of relevant administrative units with DFS cash points Supply Number of relevant administrative units with MFS cash points Total number of administrative units 3. Percentage of active DFS cash points Supply Number of Active DFS Cash Points Total Number of DFS Cash Points
- 13. INDICATORS FOR MEASURING USAGE OF DFS 6. Percentage of adults withat least one DFS account Proxy: 1. Number of DFS accounts per 10,000 adults 2. Number of DFS accounts per 10,000 adults by deployment Demand Number of adults with at least one DFS account Total adult population Proxy: Number of DFS accounts x 10,000 Total adult population Number of DFS accounts by deployment x 10,000 Total adult population Percentage of active DFS accounts Supply Number of active DFS accounts Total number of DFS accounts Percentage of active DFS accounts by deployment Supply Number of active DFS accounts by deployment Total number of DFS accounts Value in USD of DFS transactions monthly Supply (x1 ; x2 ; x 3; … x n) where x is the value in USD of DFS transactions per month Average number of DFS transactions per active DFS cash point monthly Supply 1 (x + x + x + … x ) n 1 2 3 n where x is the number of DFS transactions per month per active DFS cash point
- 14. CLASS EXERCISE Which of the following statements are true (check all that apply)? The key foundational infrastructure needed to support financial innovations include: • Electricity supply • ICT infrastructure • Identification infrastructure • Payment infrastructure • Transportation infrastructure • Urban infrastructure
Editor's Notes
- Digital payment mechanisms, by their very nature, depend on a reliable electricity supply, something that is often a challenge in many areas, both urban and rural, in developing countries. Sufficient access to electricity is especially relevant to ATM deployments as well as convenient and low cost solutions to charge mobile phones and MNO cell sites. In some markets, developments in solar power options are providing solutions to address electricity supply issues for ATMs, rural financial service providers and/or their agents and mobile phone charging options However, there are innovative off-line xolutions that rely on solar and/or mobile infratructure.. What are examples from your markets?
- Mobile phone networks often do not appropriately cover sparsely populated, rural areas where they are most needed to enable mobile e-money solutions and other mobile financial services, with appropriate voice, text messaging and/or USSD services. A similar, but more severe, problem exists with regards to mobile and fixed-line internet (data) access. In order to support digital financial transactions, mobile and sufficient ICT infrastructure is necessary. Unreliable or non-existent network coverage is a key barrier to both access and usage of digital financial services. For policymakers looking to increase access to ICT infrastructure, increased competition and conditional licensing requirements can be used improve a country’s ICT infrastructure. Fair access to USSD channels has been particularly challenging in several markets especially where MNOs offer mobile e-money services that compete with banks. Banks have often complained about fair and reasonably priced access to USSD channels. Competition and telecommunication regulators often in coordination with financial regulators have tried to address this in several markets to varying degrees of success. (Read CGAP (2015) brief: Promoting Competition in Mobile Payments: The Role of USSD for options that regulators and policymakers have tried in several markets http://www.cgap.org/sites/default/files/Brief-The-Role-of-USSD-Feb-2015.pdf). There are also several initiatives around the world seeking to increase access to the internet such as Facebook’s internet.org https://info.internet.org/en/ initiative, GSMA’S Digital Inclusion program and the Google and multi-donor supported Alliance for Affordable Internet (A4AI).
- In Myanmar, the number of active SIM cards has increased 18-fold within three years. According to Ericsson, only about one million people in Myanmar had access to mobile phones in 2012. SIM cards, which sold for thousands of dollars when they were first introduced, cost around USD 200 in 2013. Since then the market has made remarkable progress due in large part to increased supply and competition. Ooredoo launched its service in August 2014, followed by Telenor a month later. The two providers now operate in addition to the local provider MPT, which has partnered with Japan’s KDDI Corp. Despite some delays due to intense negotiations of telecommunication tower contracts, the existing tower deployment has already considerably increased the range of Myanmar’s network. Tower sharing is considered to be a cost-efficient option for MNOs that might also speed up the rollout process. While currently not broadly utilized in Myanmar, it is expected to become increasingly important when MNOs start rolling out telecommunication towers in more rural areas. The increased supply of SIM cards by more than one MNO has helped bring the price of a SIM card down to about USD 2. As of May 2015, at least 18.1 million SIM cards were reported in active use in Myanmar. Licensing requirements can also have a marked positive impact. Under the terms of their 15-year license, foreign operators in Myanmar are required to provide voice services across three-quarters of the country and data services across half of the country within five years of starting operations (Ferrie, 2015; Hammond, 2015). Source: GPFI Stocktaking Report (2015): Innovative Digital Payment Mechanisms Supporting Financial Inclusion
- Digital payment mechanisms can be more efficiently offered, if basic payment infrastructures are in place and can be leveraged for that purpose. Among these payment infrastructures are automated clearing houses, payment switches, large value and retail payment settlement systems as well as certain data sharing and information systems such as credit reporting bureaus and collateral registry systems. In addition, financial institution-level infrastructure such as core-banking systems that could take advantage of cloud technologies can improve access to digital financial services. Outsourcing services can help payment service providers (PSPs) who face challenges participating directly in key payment infrastructure. In addition, joint payment switches used by banks and non-banks have been established in several countries (see the example of Modelo Peru on page XXX). Interoperability between the infrastructures of different PSPs and FIs can also provide solutions in markets where there is no single joint platform. Increasingly regulators are seeing the potential of interoperable payment systems to both support market competition and achieve greater and more efficient economies of scale by utilizing existing infrastructure (see the session on interoperability on page XXX). Distributed ledger technology, commonly referred to as the blockchain, also offers potential applications that can support everything from greater access to trade and supply chain finance, asset registry systems, and other types of document tracking.
- Access to financial services is severely hampered in many countries by a lack of adequate identification infrastructures. Adequate access by financial service providers to identification infrastructure plays an important role in supporting financial inclusion. Digital and biometric identification technologies can help financial service providers make better decisions. Some promising developments in several key markets include integrating payment infrastructures with ID infrastructure to support efficiency gains and support the creation of digital payment histories for credit scoring. The Aadhaar ID system in India along with the digital ID issued by Pakistan’s National Database and Registration Authority are good examples of this. Both systems have their pros and cons, which are relevant for policy makers to consider. What is in place in your market? Do your country offer tiered KYC for different valued accounts and transactions?
- One of the key pre-conditions for increasing usage to DFS is to ensure broadly available DFS access points. According to the Findex 2014 surveys, distance to financial service providers was the second most important demand-side issue cited by adults to explain why they do not have an account in a financial institution (first demand side issues were the high costs and challenges associated with opening and holding an account). Countries with advanced banking and payment systems have well-developed and extensive DFS access points. The number of ATMs per 10,000 adults is usually between 5-15 (World Bank Global Payments System Survey 2012). However increasingly the DFS points of contact are mobile phone based access, online banking, kiosks, and third-party agents using mobile POS systems. Agent Models Agent models can be separated into bank agent models and non-bank agent models with the later primarily focused on e-money cash-in/cash-out services. The agent banking model is one in which banks provide financial services through nonbank agents, such as grocery stores, retail outlets, post offices, pharmacies, or lottery outlets. This model allows banks to expand services into areas where they do not have sufficient incentive or capacity to establish a formal branch, which is particularly true in rural and poor areas where as a result a high percentage of people are unbanked. Agent banking has been recognized as a viable strategy in many countries for extending formal financial services into poor and rural areas. In recent years, agent banking has been adopted and implemented with varying degrees of success by a number of developing countries, particularly in Latin America. Brazil is often recognized as a global pioneer in this area since it was an early adopter of the model and over the years has developed a mature network of agent banks covering more than 99% of the country’s municipalities. Most other countries in Latin America have followed suit, along with banks in Africa, Asia and the Pacific. Non-bank agent models have been extensively offered by non-bank EMIs, especially those offering mobile e-money services in Africa and parts of Asia and recently Latin America. The design and implementation of agent models as well as the regulations, supervision and oversight of agent operations vary widely across countries and regions. These differences are evident in the variety of services offered by agents, the types of businesses acting as agents, the types of financial institutions that work through agents and the business structures employed to manage them and whether agents are limited to e-money cash-in/cash-out services or a more extensive level of basic banking services. These differences ultimately contribute to the disparities in the extent to which agent models are able to bridge the financial inclusion gap. Access Devices Access device innovations are also making payments and financial transactions more convenient. The most commonly used access device, the payment card, however, is changing rapidly: from plastic cards with embossed names and numbers, to magnetic stipe cards with data, to smart cards with integrated circuit chips, to cards with contactless connectivity and/or multipurpose (ID, generation of authorization credentials, to virtual cards today that now are on mobile devices. Mobile phones and mobile devices, however, are playing a big role than traditional payment cards as an access device. Low cost smart phones are driving even more ways to support digital financial services as well as support mobile POS that offers an alternative to traditional POS devices. Payment kiosks and other self-service devices can help to bridge technology between brick-and-mortar branches and entirely digital payment devices. Regulators need to understand the different devices being used by DFS providers and the various security risks faced by offering these platforms. The International Organization of Standardization (ISO) has issued several guidelines on standards especially for mobile financial services.
- DFS ecosystem consists of users (consumers, businesses, government agencies and non-profit groups) who have needs for digital and interoperable financial products and services; providers (banks, payment service providers (PSPs), electronic money issuers (EMIs), other licensed financial institutions, and Fintechs) who supply those products and services through digital means; the financial, technical, and other infrastructures that make them possible; and the governmental policies, laws and regulations which enable them to be delivered in an accessible, affordable, and safe manner. As noted earlier, the DFS ecosystem depends on the level of infrastructure readiness as well as the regulatory and policy enabling environment. No single financial product, service or player can alone provide adequate financial services rather a broad-based interconnected DFS ecosystem is needed. As noted by CGAP, a DFS ecosystem “involving multiple businesses may work better for poor people in terms of both increasing the range of options for services and making these options available to poor people in an affordable way. Such an ecosystem represents a shift from vertically integrated business models that limit efficiency and scale. However, these ecosystems do not always develop easily, or quickly, on their own. In fact, competitive forces may stifle the emergence of some cooperative relationships, such as with payment service providers who have invested so heavily in distribution infrastructure that new entrants find it difficult to compete.” While there is the need to support an open and competitive DFS ecosystem, the role of the government can be key support broader-based financial inclusion. Apart from the policy and regulatory enabling environment, government can be a promoter of critical front-end and back-end infrastructure as well as a driver of DFS usage. In several jurisdictions, government-owned entities, such as post office networks can support needed front-end infrastructure. In terms of back-end infrastructure, governments play key roles in the development and ownership of payment and settlement systems. Government is also key in supporting the development of acceptable national identification systems. The government’s most important role as an important stakeholder in DFS ecosystem is in government-to-person (G2P) and person-to-government (P2G) payments. According to the BIS’s Committee on Payments and Markets Infrastructures and the World Bank Group Report (), policymakers and regulators are also recognizing the key role of a sound and efficient retail payment systems and services which plays a crucial role in DFS. At the same time, payment systems overseers and other authorities are also interested in the efficiency gains that enhanced financial inclusion can bring to the retail payment system and to the national payment system (NPS) as a whole. Retail payment services are used daily for numerous types of transaction among and between individuals, businesses and public administrations. Hence, improving the safety and efficiency of, and access to, electronic retail payment services can bring important benefits to commerce and overall business activity, to the distribution and collection of payments made by/to government agencies, and to payments between individuals, among other stakeholders. Making improvements to the provision of traditional payment instruments and products is critical to support financial inclusion. Central banks have a variety of roles, responsibilities and interests in fostering the safety and efficiency of the NPS, including retail payment systems, services and payment instruments. More recently, accessibility and coverage, the effective protection of customers and the existence of a competitive environment are also being considered as important objectives by many central banks. To fulfill these goals, central banks can use one or more of the following roles in retail payments: (i) an operational role; (ii) a catalyst role; and (iii) an overseer and/or regulator role. In an operational role, the central bank typically provides settlement services for one or more retail payment systems in a country. In some countries, central banks also play a more direct operational role by operating a retail payment system. In their role as catalysts in retail payments, central banks maintain close relationships with commercial banks and other PSPs in order to discuss priorities with regard to improvements to payment systems and/or the development of new services, and to facilitate the materialization of all such projects. In some countries, central banks have established and usually chair a so-called national payments council (NPC) that serves as a forum for multi-stakeholder consultations. The regulator also plays a key role in providing oversight of the NPS. While not all financial service regulators have explicit legal powers to oversee retail payment systems, payment services and related arrangements. Those that do have such powers exercise this function through monitoring and assessing existing and proposed systems, services and payment instruments, and, if necessary, inducing change, including through the issuance of formal regulations. Many of the financial service regulators that do not have explicit legal powers still monitor developments in retail payments through tools such as frequent dialogue with market participants and/or through an active research agenda in this field. In addition it is also important that proper coordination and cooperation between financial regulators, telecommunication regulators and often competition authorities is fundamental.
- Private sector DFS providers including banks, non-bank financial institutions (NBFIs) such as EMIs as well as PSPs, fintechs and other DFS third party service providers are critical to the success of DFS ecosystems. The business models required to succeed in DFS are quite different from the more traditional brick-and-mortar financial service providers. It is crucial for policymakers and regulators to ensure a level and enabling playing field. Regulators and policymakers need to understand the various business models and incentives that drive the DFS private sector providers in order to develop smart policies and regulations that spur, rather than stifle, innovation while ensuring safety and soundness of the financial system in a given market. For example, greater understanding of the relative risks of low-value, high-volume DFS transactions can enable regulators to design improved simplified and tiered KYC and customer due diligence (CDD) requirements that lower barriers of entry for both customers and providers. It is equally important to create an environment that foster cooperation and partnerships between DFS private sector providers, especially to deliver a deeper range of financial products and service, not just credit, savings and payments but also remittances and insurance. Although there might be tensions especially between banks and NBFIs, cooperation and service level agreements between the various players will be necessary to both leverage infrastructure and different core competencies but also to provide a broader range of financial services. As these new DFS services evolve, regulation must keep pace with these developments and especially the various partnerships. Regulatory sandboxes, previously known as test-and-learn approaches, can create “safe spaces” in which DFS providers can test new products and services, business models and delivery mechanism in a live environment without the need for incurring all the regular regulatory requirements that would normally need to be complied with. See section 3.2.2. As noted previously, governments can also drive financial inclusion and DFS ecosystems by disbursing salaries and social payments as well as accepting payments electronically. Interoperability is considered important to support a DFS ecosystem, however, the consensus is that interoperability should also be market determined. To identify the best moment for interoperability, regulators should maintain a regular dialogue with all the private sector players to help clarify their concerns. Typically these concerns center on recovering investment costs incurred by early DFS providers, increasing volumes, maintaining a competitive edge, retaining customers, and increasing value-added services. Nevertheless, regulators recognize they may need to step-in and take a more active role if the absence of interoperability proves to be an impediment to progress. The solution will depend on the level of market development and the readiness of market players to compete effectively while remaining profitable. Options might include price sharing, where the initial investor gets a greater portion of fees or profits, or the use of a ‘sunset’ provision, where exclusivity is time-bound. Competition can also be increased by establishing a framework for competing providers to interact.