Digital financial services (DFS) include a broad range of financial products and services including payments, credit, savings, remittances and insurance via digital channels. DFS also includes mobile financial services (MFS). In addition, the term “digital channels” refers to the internet, mobile phones (both smartphones and digital feature phones), ATMs, POS terminals, NFC-enabled devices, chips, electronically enabled cards, biometric devices, tablets, phablets and any other digital system. Many DFS models are also accessed via a range of access points including agents and/or networks of other third-party intermediaries to improve accessibility and lower the overall service delivery cost.
PDA Enabled Microfinance Loan Officers – used initially over 15 years ago with the introduction of the Palm Pilot Mobile E-Money - one of the widest used platforms especially in Africa that now enables access to a range of services Smart Cards – started in Africa over 15 years ago with the use of Gemalto cards, now shifted to EMV cards often for CCT programs Banking Agents – o of the widest used digital channels used primarily in Latin America over the past 15 years but increasingly being utilized in Africa and Asia Social Media Interfaces with Clients – primarily a digital channel but also now used for credit scoring Investment in MIS and Online/Mobile Applications – digital lending platforms have been used for over 25 years to support financial inclusion but increasing expansion of smart phones continues to drive digital channels to access finance Credit Scoring – while credit scoring has been around for over 3 decades, the new digital platforms and access to digital transactional data is increasingly expanding the approaches to credit scoring Alternative data & big data analytics – driving credit scoring has been the use of new alternative data and the focus on analytics often refered to as “big data” analytics due to the vast amount of information that can now be processed.
Many different terminologies have been used to describe digital financial services so policy makers and regulators have come up with common “basic terminologies” for DFS.. See AFI Basic DFS Terminologies Guideline Note http://www.afi-global.org/sites/default/files/publications/2016-08/Guideline%20Note-19%20DFS-Terminology.pdf These focus on:
General terminologies Business Model terminologies E-money terminologies Agent terminologies AML/CFT terminologies Payment terminologies DFS transactional terminologies
E-Money is defined as: A type of monetary value electronically stored and generally understood to have the following attributes: (i) issued upon receipt of funds in an amount no lesser in value than the value of the E-Money issued and in the same currency, (ii) stored on an electronic device, whether or not it is SIM enabled (e.g. a chip, pre-paid card, mobile phone, tablet, phablet or any other computer system), (iii) accepted as a means of payment by parties other than the issuer and (iv) convertible into cash.
A decade ago brands such as Wealthfront, OnDeck, Zopa, Square PayPal and more recently Yirendai, CreditEase and Ant Financial had not attracted significant attention within the financial services industry.
Changing consumer behavior and attitudes are playing a key role in the industry’s evolution, as a transition in power occurs from corporations to customers. In most cases, technology is facilitating this shift of control. Consumers are embracing new technology (at a rapid rate), seeking advice from alternative sources, and they are increasingly less loyal to their financial institutions and demanding greater levels of personalization, convenience and immediacy.
The rising tide of millennials, or Gen Y, will become increasingly important, with their share of financial assets increasing from around a third today to 70 per cent by 2030. This group is currently undergoing major life events such as starting full-time work, applying for credit cards and car loans, and applying for a mortgage for the first time. As a result, this group is likely to drive future trends and developments in the broader marketplace and their preferences are very different from other demographic groups. As evidence of this, the findings from the Millennial Disruption Index, a three-year US study of industry disruption at the hands of Gen Y, revealed that they believe the banking industry is most at risk of being disrupted, they are counting on tech start-ups to overhaul the way banks work; and would be more excited about a new offering in financial services from Google, Amazon, Apple, PayPal, or Square than from their own bank.
Similarly, we can look at the experiences in China for people to take advantage of crowd funding P2P models like CreditEase or mobile payment platforms such as WeChatPay and financial services via Alipay (Ant Financial - Alibaba)
A few years ago, people performed daily tasks in conventional ways. Today, ‘convention’ has shifted to digital platforms and mobile devices. Over the past decade, we have seen the proliferation and widespread adoption of mobile devices, with over 50% of population in many markets now owning a smartphone. We have also seen an explosion in data, fueled by social media platforms. And this revolution is set to continue over the medium term, facilitated by the adoption of new technology infrastructure and especially the advances in national payment systems. Furthermore, developments such as the Internet of Things (with some experts suggesting there will be 75 billion devices connected globally by 2020) and the maturing of artificial intelligence and robotics in the longer-term will have a significant impact on delivery of banking and financial services products and services, and redefine the customer experience.
In many arenas, the pace of change is accelerating over time, with more players competing and barriers to entry falling. Technology adoption is occurring much more quickly. For example, it took five decades for the landline telephone to reach a penetration of 50 per cent of US households. Unbelievably, it took less than five years for mobile phones to accomplish the same penetration levels.
The world’s stock of digital data will double every two years through 2020, fueled by the phenomenal intersection of and growth in mobile, cloud, big data, electronic payments, and social. By 2020, 60 percent of this digital data will come from developing economies. Analytic and processing capabilities are making great leaps, dispersing data-driven intelligence faster across these new digital ecosystems at plummeting transaction costs. Smart mobile devices are making this information, computing power, and intelligence accessible to SMEs and their financiers around the world.
By extension, firms with competitive advantages in those areas will need to move faster to capture those opportunities that present themselves. To highlight the pace of innovation and the impact disruption can have, looking at the US as an example, corporations that were in the S&P 500 in 1937 remained in the index for 75 years on average. In 2011, the average tenure had shrunk to about 15 years. In around 10 years’ time (2025), it is projected to drop to five years. Therefore, in a world of increasing digital commerce, winners and losers will come and go much more quickly.
A fundamental shift is underway, towards what author and collaborative economy expert Rachel Botsman calls ‘distributed power’, where we are moving away from a business and a society that places trust in top-down, centralized institutions and moving towards a world of distributed, connected communities. This shift is changing who has power, who we trust, our perceptions of brands and how we access products and services in the new “trust economy”
This decline in the levels of trust in major institutions is seeing the rise of trust between strangers. The lack of trust in financial institutions, and the prevalence of social media in millennials’ everyday life, has seen the emergence of a ‘review community’, whereby customers are more inclined to place their trust in the opinion of a stranger. These review communities are helping to shape customers’ opinions of financial institutions and their products and services, more than the information provided by an institution’s own website.
Another key driver is that the barriers to entry for digital disruption are falling quickly. It has never been cheaper or easier to commence a technology start-up, with the advent of open source software and low-cost development tools. Not surprisingly, falling start-up costs are seeing a rapid increase in the number of start-up companies.
The technology is now in place to substantially transform financial services (e.g. cheap IT, widespread mobile penetration, regulation, such as the Financial Claims Scheme requiring Single Customer View and the move to real time payments). There is $A27 billion of current revenue at risk, with the areas of financial services most at risk of digital disruption being lending, payments and merchant acquiring.
In the near term, it is expected that shorter-tenure, high turnover products like credit cards, loans and payments will see the most digital transformation. Looking further ahead, bank accounts and mortgages, which together typically drive more than 50 per cent of many banks’ revenues and usually provide ‘sticky’ annuity streams, will be brought into the fray.
There are also billions of dollars of venture capital and crowdfunding models that are accessible to the new fintech sector.
Digital financial products and services have expanded rapidly over the past ten years. Initially, the field was primarily focused on the rapid advances with electronic money especially its use via Mobile Network Operators (MNOs) that offered mobile-enabled versions commonly referred to as mobile money. Early innovations focused on mobile money transfers and later evolved to focus on other services offered on top of mobile money platforms including remittances, savings, credit and insurance services. These innovations also moved beyond person-to-person (P2P) transactions to business-to-business (B2B) value chains as well. Many of these additional products and services were the result of partnerships between non-bank electronic money issuers (EMIs) and banks such as M-Shwari in Kenya (see Kenya case study). There has also been the rising development of credit and savings products that leverage informal or group capabilities have also expanded rapidly. These include savings products like Tutanda https://www.tutanda.com in Mexico that build on rotating and savings associations (ROSCAs) that have long existed in the informal economy and new P2P lending platforms like CreditEase http://english.creditease.cn in China. In the area of microinsurance, there has also been rapid development with products like APA Insurance, in partnership with Leapfrog, ILRI, and World Vision, have developed a micro-insurance product in Kenya that covers livestock in the event of drought and which uses mobile money for premium and claim payments. The product uses satellite readings to monitor when rain or forage falls below the required level, which would then trigger a claim pay-out. In addition, new investment and money management apps are being offered to even low income clients with the potential to save and invest small amounts of funds like China’s Ant Financial Yu’ebao.
Digital financial products and services have expanded rapidly over the past ten years. Initially, the field was primarily focused on the rapid advances with electronic money especially its use via Mobile Network Operators (MNOs) that offered mobile-enabled versions commonly referred to as mobile money. Early innovations focused on mobile money transfers and later evolved to focus on other services offered on top of mobile money platforms including remittances, savings, credit and insurance services. These innovations also moved beyond person-to-person (P2P) transactions to business-to-business (B2B) value chains as well. Many of these additional products and services were the result of partnerships between non-bank electronic money issuers (EMIs) and banks such as M-Shwari in Kenya (see Kenya case study in XXX). There has also been the rising development of credit and savings products that leverage informal or group capabilities have also expanded rapidly. These include savings products like Tutanda https://www.tutanda.com in Mexico that build on rotating and savings associations (ROSCAs) that have long existed in the informal economy and new P2P lending platforms like CreditEase http://english.creditease.cn in China. In the area of microinsurance, there has also been rapid development with products like APA Insurance, in partnership with Leapfrog, ILRI, and World Vision, have developed a micro-insurance product in Kenya that covers livestock in the event of drought and which uses mobile money for premium and claim payments. The product uses satellite readings to monitor when rain or forage falls below the required level, which would then trigger a claim pay-out. In addition, new investment and money management apps are being offered to even low income clients with the potential to save and invest small amounts of funds like China’s Ant Financial Yu’ebao.
Early developments in DFS and financial inclusion have also come from the use of establishing new digital access points as well as innovations in distribution of financial services. Early developments in agent models have included countries such as Brazil, which dramatically increased outreach via the use of agents. New applications and tools have helped to digitize and speed up the account opening process. Third party providers like https://www.jumio.com are assisting banks with digital ID verification. Biometrics are also being increasingly used to both support customer identification and authentication for account opening as well as to facilitate transactions. India’s Aadhar initiative is by far one of the most extensive developments in the use of biometric systems to authenticate clients. This further helps to support financial inclusion efforts by not only facilitating Know Your Customer (KYC) rules but also making it easier and safer for clients to transact without having to remember their Personal Identification Numbers (PINs). Financial institutions are also increasing using and relying on tools to support field staff and their agents to better remotely open accounts and facilitate a broader range of financial services. These new distribution models include not only usage of third party agent networks using mobile phones, stored value cards and digitally enabled Point-of-Sale (POS) systems and ATMs but also electronic kiosks like those offered in Russia (QIWI) https://corp.qiwi.com/en/company.action, Eastern Europe and parts of Asia. As the use of third-party agents has expanded so has the use of agent network managers or super agents and the discussion around agnostic agent services. Companies like Maxcom http://maxcomafrica.com in Tanzania have aggregated agent and payment services for a range of e-money operators and other companies to expand digital financial access points as well as providing vital over-the-counter agent services and bill payment solutions.
New technological innovations are also allowing financial institutions to offer a range of products and services at much lower costs than in the past. Increasing focus has been placed by regulators and policymakers of ensuring more interoperability and interconnectivity among different types of players. New developments and the opening up of Application Programming Interfaces (APIs) especially by banks is allowing new financial technology providers called Fintech players to build new products and services and additional access points. Companies like F-Road in China have been offering SIM overlay technology that allows banks and other financial players to make use of mobile platforms in a more secure way. Other companies are offering a range of new back-office innovations especially for Business-to-Business value chains or to enable businesses to better integrate mobile e-money solutions and build digital payment solutions more quickly like Kopo-Kopo in Kenya http://kopokopo.com. Credit information sharing by digital financial service providers and the use of digital footprint information is also helping financial players to better offer DFS services.
New banks have built a “banking-as-a-platform” (BaaP) model. This allows for improved cooperation with alternative and third-party fintech models.
Open APIs and support for integrating bank data with online accounting platforms are also strengthening the use of digital data to better enable banks to address SME lending.
DFS markets can be categorized under three broad categories: new, emerging and mature markets. These different market categories are generally analyzed using various indicators that look at the market infrastructure, adoption of technologies especially mobile phone penetration, the DFS regulatory framework, DFS access and usage.
Overview of Digital Financial Services Landscape
OVERVIEW OF DIGITAL FINANCIAL
JOHN V OWENS
DIGITAL FINANCIAL SERVICES (DFS)
Digital financial services (DFS) include a broad range of financial
products and services including payments, credit, savings,
remittances and insurance via digital channels.
WHAT ARE THE MAIN FORMS OF DIGITAL FINANCIAL
SERVICES IN YOUR MARKET?
DIGITAL FINANCIAL SERVICES ENABLING FINANCIAL
PDA Enabled Microfinance Loan Officers
Social Media Interfaces with Clients
Investment in MIS and Online/Mobile Applications
Alternative data & big data analytics
BASIC TERMINOLOGIES FOR DFS
Business Model terminologies
DFS transactional terminologies
GENERAL DFS TERMINOLOGIES
Digital Financial Inclusion
Digital Financial Services (DFS)
Electronic Banking (E-Banking)
Mobile Banking (M-Banking)
Mobile Financial Services (MFS)
Mobile Money (M-Money)
Mobile Network Operator (MNO)
Non-bank Financial Institution
KEY GENERAL TERMINOLOGIES FOR DFS
Electronic banking (e-banking): The provision of banking products and services,
including electronic payments, through electronic channels.
Electronic money (e-money): A type of monetary value electronically stored and
generally understood to have the following attributes: (i) issued upon receipt of funds
in an amount no lesser in value than the value of the E-Money issued and in the same
currency, (ii) stored on an electronic device, whether or not it is SIM enabled (e.g. a
chip, pre-paid card, mobile phone, tablet, phablet or any other computer system), (iii)
accepted as a means of payment by parties other than the issuer and (iv) convertible
into cash. Mobile e-money, often referred to as mobile money, is a subset of e-money is
transferred electronically using mobile networks and SIM-enabled devices, primarily
KEY GENERAL TERMINOLOGIES FOR DFS
Financial technology (Fintech): The use of technology and innovative business
models in the provision of financial services.
Mobile banking (m-banking): The use of a mobile phone to access banking
services and execute financial transactions. This covers both transactional
services, such as transferring funds, and non-transactional services, such as
viewing financial information on a mobile phone.
BUSINESS MODEL TERMINOLOGIES
Payment Services Provider (PSP)
Agent: Any third party acting on behalf of a bank, a financial institution or a
non-bank institution (including an E-Money issuer or other payment services
provider) to deal directly with customers, under contractual agreement. The
term “agent” is commonly used even if a principal agent relationship does not
exist under the regulatory framework in place.
DFS Cash Point
Agent Due Diligence (Know Your Agent)
Balance and Transaction Limits
Biometric Identification System
Customer Due Diligence (CDD)
Know Your Customer (KYC)
Electronic Funds Transfer (EFT)
Electronic Payment (e-payment)
National Retail Payment System
KEY PAYMENT TERMINOLOGIES FOR DFS
Interconnectivity: The technical capability to enable a connection
between two or more schemes or business models, such as a payment
services provider connecting to another payment services provider’s
digital financial services model.
Interoperability: Enabling payment instruments belonging to a
particular scheme or business model to be used or interoperated
between other schemes or business models. Interoperability requires
technical compatibility between systems, and can only take effect
once commercial interconnectivity agreements have been concluded.
THE RISE OF FINTECHS
• “Financial technology (fintech) is
one of the fastest growing sectors in
the industry, with global fintech
investment rising from $US100
million in 2008 to over $US19 billion
• Fintech developments are affecting
all sectors of the financial services
industry, such as banking, capital
markets, payments, insurance,
wealth management and real estate,
as well as industry platforms,
systems and infrastructure. “
WHY THE RISE IN FINTECH?
WHY THE RISE IN FINTECH?
WHY THE RISE IN FINTECH?
pace of change
and access to
WHY THE RISE IN FINTECH?
Declining levels of
trust with banks and
the rise of the new
WHY THE RISE IN FINTECH?
Barriers to entry for
digital disruptors are
WHY THE RISE IN FINTECH?
pools which are
WHY THE RISE IN FINTECH?
KEY ELEMENTS OF DFS
• Digital device: such as a mobile phone, computer, phablet, wearable device,
stored value or debit card plus a POS device that transmits and receives
• Digitally enabled access point: such as kiosks, ATMs, and/or agents where
customers can put cash in (that is convert cash into digitally stored-value or make a
digital payment or transfer) and/or take cash out (withdraw from a digital stored-
value account or receive a digital remittance or other transfer of payment);
• Digital transactional platform: which (i) enables payments, transfers, and value
storage through the use of the digital device and/or (ii) connects to an account
with a bank or non-bank stored electronic value provider.
Source: GPFI (2016) Global Standard-Setting Bodies and Financial Inclusion The Evolving Landscape
The DFS landscape includes the three broad innovation categories that are often
1. Products and Services
2. Distribution Models
3. Back-office Solutions
WHAT ARE SOME EXAMPLES OF DFS
PRODUCTS AND SERVICES IN YOUR
Products and Services
• Leveraging mobile payments infrastructure and machine-to-machine
• Mobile on-demand micro-credit
• Mobile & index-based micro-insurance
• Big data enabling new credit products
• Financial products offered by financial players riding on top of the mobile e-
• Building on informal savings via technology platforms
• Offering new products and services: micro-investments & micro-money market
WHAT ARE SOME OF THE DFS DISTRIBUTION MODELS
IN YOUR MARKET?
• Online platforms
• Apps and tools to digitize and speed up the account opening processes
• Biometrics as additional options for customer authentication
• Optimizing distribution – field-force management tools to track field staff, agents,
• Agent networks
• Emergence of third-party agent aggregators offering provider-agnostic agent
• Use of electronic, payment kiosks or multipurpose ATMs
WHAT ARE SOME OF THE BACK-OFFICE INNOVATIONS
IN YOUR MARKET?
• Financial institutions integrating with e-money
• Technology companies enabling merchant acceptance of digital payments
• Payment aggregators enabling online payments andcommerce
• Leveraging alternative data sources for credit decisions
• Data analytics
• Open API integration between FIs and Fintechs
BANKS VS NON-BANK FINANCIAL INSTITUTIONS
• Captive, large customer base/
positive selection in applicant mix
• Distribution coverage
• Valuable, “free” internal data (but
• Low cost, stable source of funds
• Regulatory certainty (mostly)
Advantage: Non-Bank Fintechs
• Customer service oriented
• Simple and often friction-free applications
• More credit data sources
• Enhanced risk models
• Underwriting costs
• Pricing for risk
• Less regulation in many markets (but the
future is uncertain)
NEW NON-BANK DFS PROVIDERS
Peer-to-Peer SME lenders
Online balnce sheet lenders
Online loan aggregators
Third-party analytic, data, and lending platform providers
Tech and ecommerce giants
Invoice financing, supply chain and trade credit providers
Mobile-based lending models
NEW, EMERGING & MATURE DFS MARKETS
New Emerging Mature
Infrastructure Limited ICT infrastructure Competitive and accessible ICT
Extensive, reliable ICT infrastructure with
access to multiple channels
Mobile Adoption Low levels of mobile phone adoption mostly
Moderate to high levels of mobile phone
penetration and increasing access to
High levels of mobile phone ownership and
usage with higher levels of smartphone
DFS Access Points Limited or low levels of DFS access points
outside of main cities
Extensive coverage in cities and increasing
penetration of DFS access points in rural
Extensive DFS access points in all urban
markets and moderate to high coverage in
DFS regulatory framework Limited or recently issued DFS regulations
permitting agent and/or e-money services
Clear regulations and guidelines that allow
for a diverse set of DFS providers
Well regulated DFS markets with regulations
and supervision of DFS providers along with
adequate consumer protection issues
DFS Availability Fragmented payment system
Limited agent or e-money issuers
Low debit/stored value card/ transactional
Multiple providers initiating and offering DFS
transactional accounts. Widespread agent
networks with sufficient liquidity.
Extensive access to transactional accounts
often available via a wide range of mobile
and card-based systems. Interoperable
electronic payment systems. Fully developed
DFS Adoption <5% of the adult population using DFS
Transactions limited to P2P, bill pay and OTC
5-35% of the adult population using DFS
Transactions include P2P, B2B, C2P, G2P,
P2G, remittances. Client usage increasing
and new products being added.
>35% of the adult population using DFS.
Extensive product base as well as greater
access to DFS-related credit, savings,
insurance and other products and services.
List the various DFS players in your market
Using the table above, would you rate your market as
new, emerging or mature DFS? List the various indicators
and why you think you are at this level.