 | Issue: | Latin America 2014 |
| Article no.: | 5 | |
| Topic: | Payment ecosystems and financial inclusion: More challenges for old and new players | |
| Author: | Fabiola Herrera | |
| Title: | Payment Systems Department Director | |
| Organisation: | Central Bank of Dominican Republic | |
| PDF size: | 205KB |
About author
Fabiola Herrera is the Payment Systems Department Director, Central Bank of Dominican Republic.
Ms. Herrera areas of expertise are Payment Systems, Financial Inclusion, Strategic Planning, IT Project Management and Control, Process Analysis and Redesign, Business Continuity Planning. She has been a teacher and international lecturer since 1998, and has published papers on local and international media in her areas of expertise.
She began her career at the Central Bank in 1996. In 1998, she was named IT Assistant Director. In 2003 she left the bank and was appointed National Consultant for the Inter-American Development Bank (IDB). In 2005, she returned to the Central Bank as a Technical Consultant for the Governor and in 2006, was appointed Director of Payment Systems Department. She is also the Director of the National Cheques Clearing House.
Since 2005, she represents the Central Bank in the Payment Systems Technical Committee of the Central American Monetary Board (CMCA), which in 2011 successfully implemented a new interconnected regional payment system. She is also a member of World Bank´s working groups on Payment and Securities Systems.
Article abstract
Achieving financial inclusion can greatly contribute to eliminate extreme poverty. According to the World Bank, half of the adult population in the world is unbanked. That is, they don´t even have a basic savings account. In Latin America, that percentage rises to 61%. Even worse, “close to 200 million micro to medium enterprises in developing economies lack access to affordable financial services and credit.”
Full Article
Globally, 1 in 2 adults—some 2.5 billion people—does not have a formal bank account. World Bank Press Release, Oct. 11th, 2013
A couple of years ago, I wrote a paper for Connect-World where I stated that collaboration is an essential key for the development of a country´s payment system. And by “collaboration” I meant that each player had a role to play: banks, operators, TELCO´s, central banks, supervisors, payment service providers.
Many things have changed in two years, but I still think the same, even more after seeing several payment systems initiatives fail, because, among other reasons, they did not involve all the stakeholders of the project. And foremost, this is especially important when cross-border payments are at stake. But let’s begin from the beginning.
I. Financial inclusion: why is it so important?
Regulators and the financial private sector have been busy for the last decade trying to create the rules, the infrastructure, the channels and the instruments so people who do not have access to a formal financial system, can have it. But, giving reality and statistics, the results are still, well, not as expected.
According to reports provided by the World Bank, half of the adult population in the world is unbanked. That is, they don´t even have a basic savings account. In Latin America, that percentage rises to 61%. Even worse, “close to 200 million micro to medium enterprises in developing economies lack access to affordable financial services and credit”
Achieving financial inclusion can greatly contribute to eliminate extreme poverty, by building financially aware communities that encourage the development of its members and small companies. It can be considered a “basic human right” to have fair access to financial services. It can be described as a “value chain”:
Economic growth of communities and countries
Financial development (people and businesses)
Financial Inclusion (thru banks or non-banks)
Rules, Infrastructures, channels, financial products: Payment systems
Financial education
This financial inclusion will take, in most cases, the shape of retail payments. This is a low value payment between consumers, businesses and public authorities. This type of payment has enormous volume in the economy, and can be made using any payment instrument we know today: cards (debit, credit and pre-paid), direct debits and credits, cheques, mobile payments.
II. Payment ecosystems, what are these?
We all know for sure what an ecosystem is. A payment ecosystem is the same, theoretically, only slightly different in the “nature” of its inhabitants: there we can find very old creatures (banks and other financial institutions, regulators, supervisors, operators, issuers, stand-alone (non-connected) merchants, traditional customers…) and new ones (correspondent banks, non-banks, merchants, payment services providers, operators, telephone companies, technology suppliers, cross-border financial institutions, cross-border non-financial institutions, educated –and young- customers, and a whole new world of potential customers: the unbanked population).
All of these types of “creatures” compete for different objectives: some want the profits of the payment business, others want fairness and competitiveness, and others just want efficiency and transparency.
In order to have a sound and efficient payment ecosystem, three things have to exist:
1. – A model, with well-defined hierarchies and interrelationships between all the “creatures” living there;
2. – Clear rules of operation, and effective oversight procedures that will make the “creatures” think twice about not complying with them; and
3. – Strong leadership, for every system (even the eco) needs a head.
It is very important to clearly define one of the creatures in this zoo, the one we call “non-banks” and their role in the payment ecosystem.
According to the Committee on Payment and Market Infrastructures (CPMI) of the Bank for International Settlement (BIS) non-banks are not easy to define. Instead, they are defined for what they are not, and that is what the CPMI just did in their recent publication on Non-banks in retail payment:
“Therefore, for the purposes of this report, a non-bank is defined as: any entity involved in the provision of retail payment services whose main business is not related to taking deposits from the public and using these deposits to make loans. However, an institution whose primary business is accepting funds from customers to provide payment services, rather than using these deposits to make loans, would be considered a non-bank for the purposes of this report, even if it has a banking license. Similarly, an institution that in the course of its business offers payment services and extends credit, but does not accept customer deposits, would be classified as a non-bank in this report, even if it has a banking license (eg a credit card issuer).”
This is a “giant leap forward” in the world of payments, for the lack of definition on the role of this creature has been causing many delays and confusion among the clients and potential clients of the financial system. Now each local regulator should assess the impact of this definition in its own payment ecosystem and implement the measures needed. And competition will arise between banks and non-banks that will both be front-end or end-to-end providers of payments services and products.
III. Putting together I and II
If someone asks what is the natural road for financial inclusion, with no doubt I would answer: payment systems. But in that complex ecosystem, it is easier said than done. If we want, as the World Bank has proposed, by 2020, to have every adult globally with access to transaction accounts in which they can store money, send and receive payments, as the basic building block to manage their financial lives, we need to work very hard, starting by changing the approach to the problem.
This means, accepting that the unbanked want payment services, not banking services (these might come later). This change in approach makes a huge difference. And also changes a lot of the strategies we have put into place all these years. Which, by the way, have not been especially successful.
It also means that the role of giving the unbanked access to payment services is not the sole responsibility of banks or regulators; in fact, it´s not the role of regulators at all. Providing the unbanked access to payment services is the role of banks and non-banks, as defined above. The role of the regulators is to set the rules, to provide the basic infrastructure, to oversight the ecosystem.
A lot has been written about how payment systems can boost financial inclusion, and I could only emphasize four issues: first, that payment products and services should be motivating enough to make the unbanked want them. This means developing or transforming those products and services in a creative, innovative and friendly manner.
Second, banks and non-banks, as front-end suppliers of services and products, should always have in mind that the cost of using a savings account or a payment service should never be higher than the cost of saving or paying without the account or the service. Otherwise, the unbanked will choose the cheapest way to do both. This is a mid and long term commitment.
In order to achieve financial inclusion, it´s not enough to offer innovative products. It´s not enough to have a state-of-the-art platform. It´s not enough to have safe systems. If people don´t understand how to, and don´t want to use the product or service, all efforts are worthless. So my third issue is: financial education. And this is a shared responsibility of all creatures in the ecosystem. Regulators should lead the strategy for this.
Finally, the fourth issue is: collaboration. All creatures in the ecosystem have to perform their roles in “network mode”. This is, creating synergy rather than isolating themselves to preserve their “space”. Let´s be clear. More and more, the boundaries between disciplines tend to get blurry or disappear. So, as sooner as the creatures in the payment ecosystem accept this, the sooner they will be able to collaborate, and working together, achieve the common goal. Naïve or not, this is reality.
A few years ago, somebody came up with a new word: “coopetition”, as the result of mixing cooperation and competition. Yes, as you already deduced, this term can be perfectly applied to our ecosystem. Collaboration or cooperation, yes, but at the same time, taking out the best in each creature.
The old creatures have the experience; the new creatures have the energy. By collaborating, great things can be achieved. By competing, great innovation will emerge.
V. New challenges for all
“Universal access to financial services is within reach – thanks to new technologies, transformative business models and ambitious reforms. As early as 2020, such instruments as e-money accounts, along with debit cards and low-cost regular bank accounts, can significantly increase financial access for those who are now excluded.” World Bank Group President Jim Yong Kim
Finally, all creatures in the payment ecosystem will have to face three common challenges: interoperability, penetration, collaboration and competitive participation, in order to achieve their corporative goals and above all, the goal of financial development and economic growth, which we all pursue. But to accomplish this and at the same time face the challenges above mentioned, we have to begin with financial education, for it´s the cornerstone of the rest. If we do not begin there, all efforts will be in vain.
