The Financial Services Cambrian Explosion: How growth markets are innovating for the next 2 billion customers - Apis Partners
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The Financial Services Cambrian Explosion: How growth markets are innovating for the next 2 billion customers
Factsheet
While there has been progress toward financial
inclusion, significant challenges remain1:
- An estimated 2 billion adults worldwide do - MSMEs cite a lack of collateral and credit
not have a basic bank account history as main reasons for not having an
account
- Globally, 59% of adults without an account
cite a lack of enough money as a key - Some groups are more financially excluded
reason, implying that financial services are than others: women, rural poor, and other
not yet affordable or designed to fit low remote or hard-to-reach populations, as well
income users as informal micro and small firms are most
- Other barriers to account-opening include affected
distance from a financial service provider,
lack of necessary documentation, lack of - For example, the gender gap is estimated
trust in financial service providers, and at 9% points: 59% of men reported having
religion an account in 2014 versus only 50% of
women
- More than 200 million formal and informal
micro, small and medium-sized enterprises
(MSMEs) in emerging economies lack
adequate financing to thrive and grow
Financial inclusion is becoming a priority globally for
policymakers, regulators and development agencies:
The Bill & Melinda Gates Foundation The G20 reiterated its commitment
aims to play a catalytic role in financial to financial inclusion by renewing the
inclusion by broadening the reach Financial Inclusion Action Plan for 2015
of robust, open, and low-cost digital onwards and endorsing the G20 High-
payment systems, particularly in poor Level Principles for Digital Financial
and rural areas—and expanding the range Inclusion
of services available on these platforms
Since 2010, more than 55 countries
Financial inclusion has been identified have made commitments to financial
as an enabler for 7 of the 17 Sustainable inclusion, and more than 30 have either
Development Goals launched or are developing a national
strategy
The World Bank Group considers financial
inclusion a key enabler to reduce
extreme poverty and boost shared
prosperity, and has put forward an
ambitious global goal to reach Universal
Financial Access (UFA) by 2020
For all footnotes within this document, please refer to Section 6: Footnotes.
Preface
On 29 December 2003, former United Nations Secretary- varying degrees of success. It is yet to be seen how these
General Kofi Annan said: “The stark reality is that most poor countries fare against their long term commitment to financial
people in the world still lack access to sustainable financial inclusion, in this paper we aim to analyse the optimal degree
services, whether it is savings, credit or insurance. The great and type of regulation.
challenge before us is to address the constraints that exclude
people from full participation in the financial sector. Together, Given the broad scope of this topic, we have used a sample
we can and must build inclusive financial sectors that help of five representative countries, namely India, Indonesia,
people improve their lives.” While Alliance for Financial South Africa, Kenya, and Nigeria – each of which has
Inclusion (AFI)2 highlighted that: “Financial inclusion is no financial inclusion as a stated developmental goal whilst
longer a fringe subject. It is now recognized as an important having approached the problem differently with varying
part of the mainstream thinking on economic development degrees of regulatory intervention. For consistency and
based on country leadership”. comparative purposes, we have examined each country’s
approach to what we have defined as the five key regulatory
Given the economic and social benefits of financial inclusion, it enablers towards financial inclusion: namely, the regulator’s
is not surprising that influential global policy circles, foundations, approach to:
regulators and governments are pushing for greater financial
inclusion and promotion of alternative systems in emerging i. KYC and AML/CFT requirements vis-a-vis transactional
markets. BCG estimates that a 1% increase in financial accounts;
inclusion increases real GDP per capita growth by 3.6%
ii. financial infrastructure development;
through factors such as increased savings and access to credit,
prompting better health, education, business creation and iii. the development of the payment system (with a focus on
expansion. Needless to say, the impact is both sustainable the retail payments system);
and self-reinforcing. Global policy actions, including the Maya iv. the use of technology as a financial services’ enabler; and
Declaration3 signed in September 2011, comprising a set of v. consumer protection and financial literacy.
measureable commitments to increase financial inclusion, and
the World Bank’s commitment to extend access to financial We believe that the approach taken by regulators in emerging
services to 1 billion adults through the Universal Financial markets vis-a-vis financial inclusion is important primarily due
Access 2020 initiative4, are steps towards universal financial to the economic and social benefits of financial inclusion
inclusion. and the virtuous cycle of profitability and sustainability that is
created by the provision of these services. In addition, however,
These global directives, whose fulfillment can be made we expect that the absence of traditional legacy financial
possible by leaps in technological advancement, need infrastructure in emerging markets, coupled with the presence
to be supplemented, however, by support from local of an enabling regulator, presents an environment ripe for
regulatory authorities and governments, who are – innovative business models and alternative distribution
through different methods and in varying degrees – mechanisms in financial services. There are several
promoting financial inclusion through incremental policy examples, including mobile banking, remittances, agency
adjustments. Examples include adjustments such as easing banking, micro-finance and micro-insurance. Emerging markets
the way for new distribution models (for example, agent are well positioned to capitalise on the unbanked opportunity by
banking in South Asia and mobile money in Sub Sahara Africa) as delivering financial services in a tailored way and in the process
well as promoting programs that encourage financial education delivering innovative, efficient, proven business models that can
and consumer protection or increasingly ‘forcing’ financial eventually be replicated in the developed world. As you will no
inclusion through, for example, the digitization of the dispersion doubt recall, this was precisely the conclusion we reached in
of welfare payments. India, South Africa, Egypt, Brazil and Apis’ first paper, entitled “Reverse Innovation in Financial
Pakistan, to name a few, have started to disburse subsidies Services - a 10 Year Outlook”
through electronic means, often card-based and sometimes
authenticated through biometrics. India has a simplified branch All this innovation, and related “friendly” regulation, is taking
authorisation process whereby the Domestic Scheduled place within the backdrop of the global financial system
Commercial Banks (SCBs) are allowed freely to open branches currently being at an important inflection point, with financial
in Tier 3 to Tier 6 centres with populations of less than 50,000. institutions having to adapt to an environment of tighter
In 2010 in India, small, local “for-profit” companies, such as credit and lower economic growth, increased government
corner shops and grocers, were also allowed to be engaged as intervention, stringent compliance requirements and,
Business Correspondents (BCs) – intermediaries for providing most recently, several direct and stated threats to the
financial and banking services, as facilitators for banks. These previous pace of globalization.
seem gargantuan achievements when compared to the
restrictive, often byzantine rules in Europe and the rest This white paper does not intend to make any recommendations
of the developed world. As you’ll no doubt recall, this was for the future architecture of financial systems or for the optimal
precisely the conclusion we reached in Apis’ first paper, regulatory approach to financial inclusion. However, we do hope
entitled “Reverse Innovation in Financial Services - a 10 that our comparative analysis will serve as a helpful data point in
Year Outlook”. the debate on how to promote financial inclusion and, perhaps,
on how to prepare the financial sector for the next two billion
Although most regulators in emerging markets are actively customers. For our sector, we believe that this has the potential
seeking to tackle the problem of financial inclusion the approach to be a true Cambrian Explosion.
taken by each individual country differs and has resulted in
Matteo Stefanel Udayan Goyal
4 The Financial Inclusion Stack
Contents
1. Regulation and Financial Inclusion _____________________________ 6
Framework and methodology .................................................................................................................. 7
Consistent and long-term regulatory attitudes towards financial inclusion ........................................... 10
2. Key Regulatory Enablers – The Framework ______________________ 12
3. Country Case Studies _______________________________________ 20
India ............................................................................................................................................................ 22
Indonesia ................................................................................................................................................... 31
South Africa ............................................................................................................................................... 40
Kenya .......................................................................................................................................................... 49
Nigeria ........................................................................................................................................................ 55
4. Conclusion _________________________________________________ 62
5. Glossary ___________________________________________________ 64
6. Footnotes __________________________________________________ 66
The Financial Inclusion Stack 5
1. Regulation and Financial Inclusion
What is financial inclusion?
Financial inclusion is the delivery of financial services at that all people have access to a transaction account5.
affordable prices to sections of disadvantaged and low-income A secure account forms the first building block of a cashless
segments of society - effectively two billion people. Financial payment ecosystem which removes the cost of transacting
inclusion means that individuals and businesses have access in cash from the system, thereby reducing friction. As every
to useful and affordable financial products and services individual has recurring expenses (particularly bill payments),
that meet their needs – transactions, payments, savings, enabling such payments electronically, using either a mobile
credit and insurance – delivered in an efficient, responsible -enabled or online payment method is a key driver of efficiency
and sustainable way. whilst helping to build an individual’s payment transaction
history that forms the basis of traditional credit scoring,
To help inform financial inclusion strategies, it is key to keep which is in turn the foundation and key enabler to the provision
in mind that financial inclusion is a progression with of credit.
payments as the optimal entry point. Financial needs must
be addressed as a hierarchy whereby owning a payment Credit enables one to reach beyond daily needs and make
transaction account and having the ability to make electronic investments that will pay off in the future. For example, a loan for
payments serve as the most foundational needs. new equipment or stock allows an MSME to be more productive
and hence expand margins and yield a higher income. Finally,
At the bottom of the pyramid, common across all segments generating income beyond expenditure enables individuals to
of population, are bill payments and other infrastructure think about investments and insurance, which comprise the
and for this reason access to a secure transaction account fifth and sixth layers of the financial inclusion pyramid.
is a first step towards financial inclusion: it enables people to
store money, and send and receive payments. A transaction Underlying all of this, financial literacy is imperative
account serves as a gateway to other financial services and its and constitutes the foundation of the financial inclusion
importance is highlighted by the World Bank Group’s Universal pyramid as illustrated below.
Financial Access 2020 initiative, the aim of which is to ensure
The Financial Inclusion Pyramid: Hierarchy of financial needs
Emergency requirements
Insurance
Investments/
Savings
Aspirational needs
Borrowing
Other electronic payments
Monthly expenses
Electronic bill payments
Secure account for holding payment
transaction funds
Financial literacy
6 The Financial Inclusion Stack
1. Regulation and Financial Inclusion
1.1 - Framework and methodology
Emerging literature on the topic of financial inclusion is gathering momentum on a global scale: one of the
most important discussions happening in the field is centered on how exactly we should measure
the regulator’s impact on financial inclusion, both conceptually and technically.
In order to better assess the effectiveness of government and regulatory initiatives, we have provided a comparative analysis across
five countries in Africa and Asia: namely India, Indonesia, South Africa, Kenya and Nigeria.
The sample countries examined in this paper have been chosen on the following basis:
1. Apis geographies
They are a representative sample across Apis’ target geographies in Africa and Asia, and the team has deep knowledge of and
experience within their financial sectors.
2. Sizable population size and similar demographic make-up
The median age across the five countries we have sampled is younger than the global average, with a median of 24.6 years6. This
is a key differentiator as younger populations tend to be technologically literate, are stronger contributors to a country’s workforce,
and spend rather than invest.
Global Median Age7
No data
14 – 20
20 – 25
25 – 30
30 – 35
35 – 40
40+
The Financial Inclusion Stack 7
1.1 - Framework and methodology
3. Each country has financial inclusion as a stated developmental goal whilst having
approached the problem differently using varying degrees of regulatory intervention
Country Financial inclusion charter The regulator’s objective
The term ‘financial inclusion’ was used for the first time Pradhan Mantri’s Jan-Dhan Yojana: The Prime Minister’s
India in April 2005 in the Annual Policy Statement presented People’s Wealth Program — it envisions bank accounts
by Y.Venugopal Reddy,the then Governor of the Reserve for all Indians
Bank of India
Financial inclusion is defined as the ability to access the Target of 75% banked population by 2019 from 36% in
Indonesia following products: savings, credit, insurance, payment 2014.
system and other financial services
Broad set of goals including: access to housing finance;
South Africa’s Financial Services Charter specifically SME finance; agricultural finance; formally banked
South Africa identified financial inclusion as a mandate of private sector population; access to branches within a 15km radius and
banks access to branches and ATMs within a 10km radius. Goals
are set on a 5-yearly basis
Financial inclusion was given a new impetus by the rapid Financial inclusion is viewed as a key plank of the
Kenya rise of mobile money, with the regulator taking a flexible government’s long-term Vision 2030 economic growth
approach towards innovation by commercial players in the project, while at the same time being supportive of the
sector efficacy of monetary policy
The CBN is a signatory of the Maya Declaration and The CBN is committed to reducing the number of adults
formalized its commitment to financial inclusion with the excluded from the financial system to 20% by 2020 and
Nigeria launch of a dedicated National Financial Inclusion Strategy aims to achieve these targets to through a broad range of
in 2012 coordinated interventions outlined in its National Financial
Inclusion Strategy
4. Although each country is at a different level of developmental maturity, most have exhibited
strong GDP growth over the past 5 years
Historical GDP Growth8
10.3%
12%
8.4%
10%
7.6%
7.8%
7.2%
7.3%
6.6%
6.6%
6.1%
6.0%
6.3%
5.7%
6.2%
6.2%
5.6%
6.0%
5.3%
8%
5.6%
5.6%
5.4%
5.2%
5.6%
4.9%
4.6%
5.0%
4.8%
4.3%
2.7%
6%
3.3%
3.0%
2.3%
2.3%
2.2%
4%
1.6%
1.3%
2%
0%
India Indonesia South Africa Kenya Nigeria
2010 2011 2012 2013 2014 2015 Average
8 The Financial Inclusion Stack
1. Regulation and Financial Inclusion
1.1 - Framework and methodology
5. All five countries have experienced a significant improvement (albeit at differing degrees) in
financial inclusion as measured by the World Bank Findex9
Financial Inclusion Development10
2011 2014
75%
80% 70%
53% 54%
60% 44%
35% 42%
36%
40% 30%
20%
20%
0%
India Indonesia South Africa Kenya Nigeria
6. Whilst at the same time, having low levels of financial infrastructure at their disposal
Financial infrastructure density and financial inclusion metrics11
Country
% of adults who have ATMs per 100,000 % of adults who used % who personally paid
debit cards adults E-Payments to make for health insurance
payments
22.1% 11 2.0% 6.8%
India
25.9% 37 3.1% 0.9%
Indonesia
54.9% 60 13.1% 7.4%
South Africa
34.7% 10 5.4% 5.4%
Kenya
35.6% 11 2.4% 0.4%
Nigeria
The Financial Inclusion Stack 9
1.2. Consistent and long-term regulatory attitudes towards financial inclusion
For much of the past century, broadly speaking, governments have tackled the financial inclusion problem
in one of two ways:
• The first, has been to nationalise banks or otherwise • The second approach has been to do nothing more
coerce financial institutions into serving the poor. than the occasional gentle nudge. Economic growth
India, which nationalised its 14 biggest banks in 1969 has probably been the largest facilitator of financial
(and a few more in 1980), was a leading proponent of inclusion. The World Bank has found that GDP per capita
this approach. Though it has since liberalised its banking accounts for more than 70% of the variation in global
system, it still forces banks to provide services in remote formal account penetration, and has observed banked
villages and to lend to certain underserved segments populations of over 90% in countries with GDP per capita
(through Priority Sector Lending12). Even so, in 2014 53% of US$ 15,000 or higher. This suggests that formal account
of Indian adults had an account up from 35% in 201113. penetration will increase sharply as emerging markets
Similarly, most European governments have either forced grow and become more prosperous. Additionally, the
banks to offer free “basic” accounts to the poor or have demographic transition in these markets gives rise to clear
done so themselves through state-owned institutions, consumption, saving and investment demand growth as
such as post offices. the workforce ages.
National income per capita is strongly correlated to the share of adults with a formal account (explains c.76% of
variation among countries)14
1000
100%
R² = 0.7564
80%
Account at an FI 60%
(% age 15+)
(2014) 40%
20%
-
- 10 20 30 40 50 60 70
GDP per capita (current US$ k) (2014)
Now more than ever, economic growth coupled with the inclusion have put in place an enabling regulatory and policy
combination of mobile telephony, big data, and cloud environment, coupled with an encouraging stance towards
computing is likely to have a greater impact than previous competition allowing banks and non-banks to innovate and
decades of either top-down planning or the trickle-down of expand access to financial services. Creating this innovative
economic growth. By way of illustration, at the end of 2015, and competitive space has to be accompanied, however, by
there were 271 mobile-money services in 93 countries, with appropriate consumer protection measures (such as lending
more than 410 million registered accounts15. In fact, countries rate caps) and regulations to ensure responsible provision of
that have achieved the most progress toward financial financial services.
10 The Financial Inclusion Stack1. Regulation and Financial Inclusion
1.2. Consistent and long-term regulatory attitudes towards financial inclusion
The Global Microscope 201616 analyses the overall regulatory and institutional environment for financial
inclusion in more than 50 countries. Based on the ranking table below, the broader lessons that have
emerged over time remain important:
1. The first is that long-term commitment matters. In the strength in the scores of all four leaders in all indicators17
four leading countries, financial inclusion has been on the is particularly striking. Each country has weaknesses, but
policy agenda for many years. The central banks of Peru for no indicator do any of the four countries score below
and the Philippines were among the 17 original participants 50 out of 100.
in the Maya Declaration in 2011.
3. As they put regulations and systems in place to support
2. The second lesson from the leading countries is the value the supply of financial services, the four leading countries
of consistency across all fields of financial inclusion. The have also taken steps to protect consumers.
Microscope scores and rankings
Overall Scores and Rankings18
Score Score
Rank / 55 / 100 Rank / 55 / 100
Average 49 +1 = 27 3 Kyrgyz Republic 48 +1
=1 1 Columbia 89 +1 = 27 4 Panama 48 +2
=1 Peru 89 +3 = 30 Cambodia 47 -8
16
=3 1 India 78 -1 = 30 Honduras 47 +5
6
5 Phillipines 78 +7 = 30 Senegal 47 +3
5
=6 Pakistan 63 -3 = 33 Jamaica 46 +1
=6 Chilie 62 -1 = 33 5 Nigeria 46 -2
=8 Tanzania 62 0 = 33 10 Turkey 46 -4
=8 3 Kenya 61 0 = 33 10 Uganda 46 -4
10 8 Rwanda 61 +5 = 37 Mongolia 45 -3
9
11 2 Mexico 60 +7 = 37 1 Trinidad and Tobago 45 +3
12 Uruguay 59 +3 39 3 China 44 +2
= 13 2 Ghana 58 0 = 40 Bangladesh 42 +3
= 13 5 Bolivia 56 -4 = 40 Nepal 42 +3
= 15 13 El Salvador 56 +7 = 42 2 Guatemala 40 +1
= 15 4 Indonesia 55 -1 = 42 Vietnam 40 +6
3
= 15 1 Morocco 55 0 = 44 4 Argentina 39 0
= 15 2 Nicaragua 55 +2 = 44 Tajikstan 39 +1
= 15 4 Paraguay 55 +3 46 Jordan 38 +6
2
19 1 Dominican Republic 52 +1 47 Sri Lanka 36 +3
= 20 Bosnia and Herzegovina 51 0 48 Ethiopia 34 +2
= 20 3 Brazil 51 -2 49 Cameroon 33 -1
4
= 20 3 Mozambique 51 +1 50 Venezuela 32 +1
= 20 11 South Africa 51 +5 51 Egypt 31 +2
= 20 6 Thailand 51 +2 52 Madagascar 30 +3
1
25 5 Ecuador 50 -1 53 Lebanon 29 0
2
26 7 Russia 49 +4 54 Dem. Rep. of Congo 26 0
= 27 9 Costa Rica 48 +6 55 Haiti 22 -2
The Financial Inclusion Stack 112. Key Regulatory Enablers – The Framework
Keeping the aforementioned in mind, we have chosen to measure regulatory intervention and attitudes towards financial inclusion
across 6 distinct areas or enablers. This allows us to (i) approach the comparative analysis in a streamlined fashion; and (ii) ensure
that we measure regulatory intervention through a holistic lens ensuring that a well-balanced, market-led but “fair” financial services
ecosystem is being promoted.
Overview of the Key Enablers Based on our analysis we have chosen to measure each country’s regulatory
attitude towards financial inclusion across the following six enablers:
Key Enabler Example Rationale
• AML/CFT requirements - The introduction of inappropriate AML/CFT requirements, which do not take
/ Reduced KYC into account the potential negative impact of such requirements, gives rise
requirements to financially excluded groups. AML/CFT obligations can increase the cost of
doing business, which is transferred to customers, potentially discouraging
• Existence of a national some from using the formal financial system
KYC and AML/CFT
ID system / Biometric ID - The existence of a national ID system (oftentimes biometrically enabled)
requirements capability allows for easy, low cost and fast on-boarding of new customers and thus
enhances financial inclusion
- Opening a bank account, receiving a loan, withdrawing money or making a
payment still requires going to a bank branch, ATM, or a point-of-sale terminal.
These access points, however, are limited in developing countries
- The key is finding alternative delivery channels that work in specific
• ATM / POS contexts and which may differ depending on the target audience
• Treatment of agents - It also relates to changing financial habits. In that respect, one successful
Financial infrastructure approach is to focus on changing how government payments such as wages,
pension, and social and medical benefits are delivered in both developed and
developing countries
- As the opening of a transactional / payments account is often the first
step towards financial inclusion the existence of a national payments
• Development of the system is integral to financial inclusion (i.e. real time gross settlement,
national payment system national automated clearing house, national switch, lower cost domestic
Payment system scheme, national check truncation, and a continuously operational system for
remittances, interoperability between systems)
- The global penetration of mobile phones, has facilitated expanding access to
• Alternative credit scoring financial services through the implementation of digital financial technology
engines (i.e. wallets), in hard-to-reach populations and small businesses at relatively
• Availability of mobile low cost and risk
Use of technology financial services - The use of big data analytics has allowed the development of alternative
credit scoring technology leapfrogging the current paradigm
• Lending rate caps
• Prevention of over
- Implementing measures such as rate caps forces the system to be more
indebtedness
efficient (i.e. prevents lenders from pricing in defaults rather than improving
• Turnaround time for collections)
complaints - Without adequate consumer protection, debt loads on consumers can spiral
Consumer protection out of control or indeed often results in mass scale abuse of the system itself
and financial literacy • Privacy of data
- Consumer protection goes hand in hand with financial literacy
• The existence of country
level initiatives to promote
financial literacy
• Universal bank account - Further facilitators include the regulator enforcing universal bank account
opening opening, enabling specialty finance providers’ access to deposits/ funding and
• Priority sector lending issuing banking licenses
General financial - Priority sector lending is another tool often used to force the banking sector
inclusion facilitators to develop distribution geared towards the bottom of the pyramid
12 The Financial Inclusion Stack2. Key Regulatory Enablers - The Framework
2. Key Regulatory Enablers - The Framework
2.1. KYC and AML/CFT Requirements
In the majority of countries, financial service providers are typically regulated and supervised by the central bank and must comply
with national Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations. These AML/CFT compliance
requirements, at a country level, determine the “Know your Customer/Customer Due Diligence (KYC/CDD)” procedures, hiring
compliance staff, monitoring software, agent training, and ongoing agent supervision. This adds additional cost to the overall
business, which is most often transferred to the end customers and even more often makes account opening such a cumbersome
process that financial service providers are no longer incentivized to target the bottom of the pyramid.
The regulator is therefore instrumental in providing guidance on assisting financial service providers to balance the AML/
CFT requirements with financial inclusion goals. Regulators have a number of tools at their disposal here:
1. The existence of a national identification system that insurance policies and pension insurance certificate, bringing
allows the financial service provider to bypass the cumbersome together these different services on a single card.
verification process that often includes cross-referencing such
ID against an acceptable third- party database. Some countries 2. The existence of tiered KYC requirements. This allows, for
are developing acceptable non-governmental and even non- example, the identity verification of the customer only to occur
documentary methods of verifying identification, such as a after reaching certain tiers rather than doing so in “real time.”
signed declaration from the community leader together with In this case, account “tier” levels directly link the level of KYC
a photograph taken on a camera phone, biometrics or voice to the extent and range of financial services offered to the
prints (such market-based solutions have been developed in customer. For example, a level 1 tier could mean that customers
Fiji, the Philippines and Malawi). Countries are also developing are provided with limited and basic services after undergoing
electronic multi-purpose forms of identification to facilitate a “simplified” KYC verification. A level 2 tier could mean that
identification (and financial inclusion) such as the Financial additional customer verification would allow the customer to
Identification Program in Indonesia and the launch of the access an expanded range of financial services with higher
“Universal Electronic Card” in Russia, in 2013 which allows transaction ceilings. The system would basically match the
users to remote order, pay and receive government services, level of KYC to the level of risk and tier them accordingly.
and replaces a number of documents, including medical
Measure Overview
Access to very limited banking functionalities, with access to broader services (e.g. higher
No frill account limits, transfers including cross-border) being allowed only if the customer provides proof of
identity and address
Scanning the verification material and maintaining the information electronically
KYC norms simplified Keeping electronic copies of the results of any electronic verification checks
Merely recording reference details (in the particular context of mobile banking, where mobile
money agents are often the simple, modest corner shops)
National ID A national ID system (oftentimes biometrically enabled) allows for easy, low cost and fast on-
boarding of new customers and thus enhances financial inclusion
The Financial Inclusion Stack 132. Key Regulatory Enablers - The Framework
2.2. Financial Infrastructure
Physical proximity of financial access points to where people customer, an important consideration when addressing
live and transact is the starting point for encouraging usage low-income segments and gaining their trust, although as
of financial services. Financial access points can be defined data becomes cheaper and bandwidth increases, this will
as locations where people can cash in and cash out, get resolved
thereby increasing the confidence of the interoperability
of digital and analogue cash. Currently, these include: bank
branches, ATMs, POS, microfinance institution branches and Indirect channels
agents. Emerging markets as a whole, including our sample
of countries, exhibit shockingly low legacy infrastructure
as illustrated by the penetration of bank branches and ATMs, Are those that the financial institution does not fully control.
particularly compared to mobile subscriptions. Usually this means that the bank needs to engage in some
sort of partnership with a third party. Examples include issuing
Historically, traditional financial institutions were reluctant a prepaid card, working with a mobile operator to facilitate
to invest heavily in infrastructure as their business models mobile banking, joining a national switch and deploying ATMs,
were structurally unprofitable in emerging markets. Outside or leveraging a pharmacy chain as part of an agent banking
large urban centres, their fixed and marginal costs were too program. An important focus of indirect channels is thus to
high for the provision of cost effective services particularly in work with and through third parties to reach customers and,
rural areas. The advent of new technologies and innovations consequently, outsourcing a significant part of the customer
are increasingly supporting financial inclusion, making it experience to those parties.
economically viable for banks to reach poorer people. The
agent or correspondent banking model has come to the fore Within this indirect channel, regulation is often ambiguous or
in many emerging countries, supported by technology. Mobile restrictive. With the introduction of a new delivery channel,
money or ‘branchless’ banking schemes have seen rapid various governments have oftentimes placed unclear or
growth in countries where branch banking has been hampered conservative guidelines, which in turn stifle innovation: for
by transportation and infrastructure problems. Fueled by example, only in 2009 did the Reserve Bank of India (RBI)
the success of M-Pesa in Kenya, many other countries have permit regulated microfinance institutions (MFIs) to be banking
followed suit. correspondents of big banks, while in Mexico, regulators
approved banking agent guidelines only in 2008.
With this in mind, the regulators’ stance towards the
usage of alternative distribution models which entails the Given that innovation around alternative distribution
extending of financial institution’s branch, ATM and POS channels is ongoing and fluid, it is primarily the approach
networks, is critical to financial services development. rather than the regulation per se adopted by the regulator
The core principle of alternative distribution is that of the right that allows alternative distribution models efficiently and
infrastructure for the right market environment, allowing banks continuously to develop. Key to this approach is working
to have agents operate on the same basis as non-bank mobile closely with the relevant stakeholders to design and test these
money providers. regulations: not only banks and microfinance institutions but
also mobile network operators (MNOs), payment providers
Financial services distribution channels can be fragmented and retailers. Two success stories are worth noting: the first
into direct and indirect channels, as outlined below: in the Philippines, where the Central Bank collaborated closely
with the country’s two MNOs, Globe and SMART, to develop
a framework for mobile banking that incorporated consumer
Direct channels protection into the MNO’s business model. The second example
is in Pakistan where the Reserve Bank has taken a pro-active
approach and established transparent guidelines for banking
Are those that the bank owns or has main control over. Within agents and mobile banking ahead of any implementation. The
this category there are two types of direct channels: bank also created a cross- industry, multi-sector “Stakeholders
Group” to address product, operational, and technical issues
for mobile banking.
• Location-based direct channels are those that have a
physical presence (though not necessarily fixed) such as
If regulators in other countries can follow a similarly
branches, kiosks, roaming vans, and business units
collaborative, pro-active, and risk-based approach to draft
• Remote channels such as mobile and internet banking, supportive guidelines, it would remove one of the major
call centers, and IVR (Interactive Voice Response). Remote obstacles for the development of transformational
channels lack a direct face-to-face interface with the distribution channels.
14 The Financial Inclusion Stack2. Key Regulatory Enablers - The Framework
2. Key Regulatory Enablers - The Framework
2.3. Payment System
Increasingly, authorities are recognizing the relevance of sound risk of loss or theft. As such, making improvements to the
and efficient retail payment systems and services for provision of traditional payment instruments and products
financial inclusion. Retail payment services are used daily for is also critical for financial inclusion. For example the study
numerous types of transactions among individuals, businesses on “The virtuous Circle: Electronic Payment and Economic
and public administrations. Hence, improving the safety Growth” found that electronic payments would have cost
and efficiency of, and access to, electronic retail payment savings of 1% of GDP19.
services can bring important benefits to commerce, to
the distribution and collection of payments made by/ Key payments infrastructure components include an interbank
to government agencies, and to payments between system for retail electronic funds transfers (ie an automated
individuals, among others. clearing house (ACH)), a payment card processing platform or
platforms (ie a payments switch) and a large-value interbank
As discussed earlier, transaction accounts are at the heart of settlement system (ie a real-time gross settlement system
financial inclusion. End users without access to transaction (RTGS)); a robust communications infrastructure; and an
accounts are basically restricted to cash as their only means of effective and efficient identification infrastructure. Absence
initiating retail payments. While cash might serve the purpose of any of these components hinders the national payment
for some day-to-day, low-value payment needs, especially in- system in exploiting the potential benefits of modern payment
person payments, it comes with considerable disadvantages instruments, and therefore adversely affects financial inclusion.
for remote and/or higher-value payments, potentially higher
charges for cash-on-delivery payment methods, or increased The interactions between these components are shown below:
Interplay of Relevant Infrastructure – Stylised Model20
Data sharing platforms
Identification
(i.e. credit reporting
infrastructures
system)
ICT infrastructure
Core banking systems
Automated clearing Interbank payment card
house processing platform
Large value interbank gross settlement system
Flow of information and funds
Flow of information
The Financial Inclusion Stack 152. Key Regulatory Enablers - The Framework
2.3. Payment System
Key enablers within the payment system:
• Large-value interbank settlement systems have been a of different issuing banks.
focus of central banks for more than three decades and, as
• Conversely the absence of a national switch (such as in
a result, they are nearly universally implemented today21
the DRC) limits access to finance and slows the adoption
although even in this age, there are some countries
of electronic financial services. When interbank electronic
(e.g. DRC) that lack such systems and rely on cross
transactions are processed internationally, costs are
border settlement systems. These systems are critical
higher, which results in the inefficient development of the
to financial inclusion more as an enabler of the safe and
electronic infrastructure. Examples include interbank ATM
efficient settlement of many other interbank payments
transactions that become costlier, leading to significant
infrastructure. There are a number of countries in which
duplication of infrastructure (as each bank needs to build
the RTGS system is also used for retail payments through
said infrastructure rather than integrating directly into one
a common switch.
switch). Withdrawals at other banks’ ATMs are processed
• Interbank systems for retail payments – often referred through international card networks (VISA or MasterCard)
to as automated clearing houses or ACHs – and interbank which are significantly more expensive. In addition, the
payment card processing platforms (card switches) play a lack of a national switch leads to the proliferation of ATMs
more direct role in financial inclusion as they are integral from different banks in overlapping locations, which is
to daily payment processing (including clearing and often cumbersome, inefficient, and costly (which are ultimately
netting) of a large number but low value of payments. ACHs passed on to the customer). Finally, the lack of a national
have generally focused on two distinct retail payment switch also poses significant challenges to countries in
products: direct credit transfers and direct debit transfers time of conflict as they can be cut off from international
(collectively defined as EFT-based instruments). systems through external sanctions (e.g. Iran).
• The existence of a national ACH increases the network • There are other infrastructures that, while not being part
size of access points (eg ATMs, POS or branches) for of the clearing and settlement process, are also of major
individual customers, since it acts as a hub for processing relevance for financial inclusion, as they provide critical
interbank transactions and consequently creates positive information to financial service providers, such as ID
network externalities. Any branch of a bank for example infrastructure, credit reporting and other data-sharing
can be used to initiate a funds transfer to a customer platforms.
of another ACH member. This supports countrywide
• Lastly, regional integration initiatives, are imperative
reachability, even if a bank does not have access points
to financial inclusion where there are large migrant
deployed in specific areas.
populations across regions. Not only do they provide
• An interbank payment card processing platform is a access across borders but they provide financial service
mechanism that connects various payment card issuers, providers a larger customer base. Examples include the
typically banks. It allows the exchange of payment card Southern African Development Community (14 countries
transactions of a bank’s cardholders with another bank’s in Southern Africa), the Economic Community of Central
merchant, ATM or another card acceptance device (POS) – African States (six countries in Central Africa) and the West
provided that both banks are participating in the platform. African Economic and Monetary Union (eight countries in
Payment card processing platforms also play an important West Africa)22, to name a few.
role in increasing the effective size of the access channel
network by interconnecting the ATMs and POS terminals
16 The Financial Inclusion Stack2. Key Regulatory Enablers - The Framework
2. Key Regulatory Enablers - The Framework
2.4. Use of Technology: Balancing innovation with prudent risk control
Digital financial technology and particularly the global penetration of mobile phones, has facilitated expanding access to financial
services to hard-to-reach populations and small businesses at a low cost and risk, namely:
• Digital IDs make it easier than ever before to open an • Greater availability of customer data allows providers to
account design digital financial products that better fit the needs of
unbanked individuals
• Digitization of cash-payments is introducing more people
to transaction accounts • The availability of high-speed computing, advances in
cryptography, and innovations in machine learning and
• The further penetration of mobile telephony and internet
data analytics are some of the other elements of financial
use leading to mobile-based financial services allowing
technology
convenient access to financial services even in remote
areas • Driving the adoption of this technology is changing
consumer behavior
As the use of technology has accelerated the spread of financial inclusion in emerging markets, regulators’ stance towards
technological improvements in each country has at times proven to be a key financial inclusion multiplier. Regulators must
adapt to the fast-changing landscape and to a new class of entrants, while ensuring a level playing field, protecting consumers and
privacy, and guarding against money laundering and the financing of terrorism.
• Ensuring interoperability: Many digital financial services • With the influx of new providers and the development
have been launched as closed loop systems, which of new business models, the conventional mappings
operate on an individual ‘infrastructure type’ such as the between financial products and services and different
mobile network operator’s (MNO) service for example. types of institutions are becoming increasingly blurred.
Continuing on this example, a closed loop system limits The way for regulators to deal with this environment is to
the ability of customers to transact with peers using a regulate by function rather than by type of institution.
different MNO service. Closed loops allow MNOs to sell Such an approach seems appropriate not only to the
more airtime while increasing revenues and customer broader task of regulating financial services effectively but
retention in the short term, but open loops that promote also to promoting the goal of financial inclusion
interoperability across payment options may be needed
• Regulation according to risk of the financial service
to expand the acceptance environment, usage rates, and
provider is already a fundamental principle of the
product functionality. Industry led initiatives – like those
modern approach to financial regulation. The various
in Tanzania – have aligned business and social goals
capital and liquidity requirements, capital surcharges,
more effectively than those done by regulatory fiat. The
and other regulations recommended for banks by the
Tanzanian initiative involves cooperation between the
Basel Committee on Banking Supervision are based on
four main MNOs (Airtel, Vodacom, Tigo, and Zantel) and
this principle. The committee’s recommendations aim to
three large banks (Bank of Tanzania, CRDB Bank, and
enhance the stability of commercial banks and the financial
the National Microfinance Bank). It is a good example of
system, but the objective of improved financial inclusion
interested parties circumventing the near-sightedness that
requires a similar risk-based approach. Current national
threatens truly game-changing payments innovation.
legislation on financial regulation in many countries,
• Regulatory attitude towards innovation: When however, omits (and sometimes even contradicts) any
regulation is well-informed and iterative, it ceases to notion of risk-based regulation as a means toward greater
be a barrier to payments innovation and instead drives financial inclusion. For example, micro-insurance has yet
progress. For example, in India, having noted the limiting to gain traction in many countries in Africa due to the
effect of the regulatory framework on innovation, the RBI onerous capital requirements imposed on an underwriter
created the payment bank framework in 2014 to enable regardless of its size. Conversely, in Kenya, even at the
payments providers to enter the market more easily. time of M-Pesa’s inception, the banking sector had claimed
Although this legislation has turned out to be ineffective in regulatory discrimination because M-Pesa was not subject
its current form, it is an iterative process. While in Zambia, to the same regulatory burden imposed on bank-provided
interoperable payment platforms are taking advantage of payment services and, unlike banks, was permitted to use
favourable “test, then regulate” – led regulations. agents for cash-in, cash-out transactions.
The Financial Inclusion Stack 172. Key Regulatory Enablers - The Framework
2.5. Consumer Protection and Financial Literacy: Leveling the playing field
Consumer protection seeks to level the playing field between suppliers and consumers of financial services. Retail customers
have less information about their financial transactions than do the financial institutions providing these services, which can result
in excessively high interest rates paid, lack of understanding about financial options, and insufficient avenues for redress. This
information imbalance is greatest when customers are less experienced and products are more sophisticated. To this end:
• Appropriate regulation should correct the balance need for financial institutions to innovate and grow.
and encourage market expansion by apportioning
• Financial education is needed to balance information
information disclosure at the right time. Relevant
between consumers and providers of financial services.
information has to be disclosed during the different
New entrants to the market, with less experience using
stages of the engagement. The disclosure of information
financial services, are especially in need of education
in manageable and easily understandable portions is
about their rights and responsibilities. Consumer
necessary to avoid overloading the consumer, who can
education may be delivered by government agencies,
then better understand his or her rights and obligations.
consumer associations, or the industry, but most often
• Similar products offered by different financial service they are provided through public campaigns (i.e. through
providers should be subject to the same regulations internet, print, radio and television media; advertising;
to minimize the opportunity for regulatory arbitrage. publications and training). A case study to this effect is
Consistency can best be assured through a single market the Philippines where inwards remittances are estimated
conduct regulator for all financial products. to be c. 10% of GDP. Recognizing that these nine million
workers are important consumers of remittance services,
• When consumer rights are protected, financial innovation
the Bangko Sentral ng Pilipinas conducts its Financial
can lead to more suitable products for customers at lower
Literacy Campaign through road shows in Singapore,
prices. The right to be heard, the right to information
Hong Kong and other countries, educating hundreds of
/ transparency, the right to choice, the right to redress
Filipino working abroad about financial planning, saving
and the right to privacy are among the most common.
and investing.
The regulatory burden is to balance these rights with the
The Bangko Sentral ng Pilipinas’ conducts its Financial Launch of the Digital Financial Literacy Campaign in
Literacy Campaign India
18 The Financial Inclusion Stack2. Key Regulatory Enablers - The Framework
2. Key Regulatory Enablers - The Framework
2.6. General Financial Inclusion Facilitators / Enablers
In addition to the aforementioned five enablers, we have considered a sixth enabler whereby the regulator
takes a more hands on and direct approach towards financial inclusion by forcing market participants to
serve the bottom of the pyramid. Here India serves as a good example as it has enforced certain measures
that traditionally have not been within the purview of the regulator, such as:
• Prime minister Modi launched bank accounts for all: micro and small enterprises, education, housing, export
Forcing the banks to open bank accounts to all adults. credit, etc. New sectors like renewable energy and social
Under Pradhan Mantri Jan Dhan Yojna (PMJDY), 250.5 infrastructure have been added too and the new norms
million accounts have been opened and 192.2 million require banks to ensure that 8% of their loans go to small
RuPay debit cards have been issued as of October 12, and marginal farmers.
2016. These new accounts have resulted in deposits worth
• Demonitisation: On 8 November 2016, the Government
almost Rs 44,480 crore (US$ 6.67 billion)23.
of India announced the demonetisation or the Currency
• The Government aims to extend insurance, pension and Replacement Program (CRP) of all INR 500 (US$ 7.40) and
credit facilities to those excluded from these benefits INR 1,000 (US$ 15) banknotes. The government claimed
under PMJDY. that the action would curtail the shadow economy, crack
down on the use of illicit and counterfeit cash to fund illegal
• Priority Sector Lending (PSL): The list of sectors has
activity and terrorism and help digitize India’s economy.
been revised in April 2015 and includes agriculture,
The Financial Inclusion Stack 193. Country Case Studies
India Indonesia
Financial Identification Program: Opening
• Tiered KYC requirements bank accounts using a unique identifier:
1. KYC and • National biometrically enabled ID FIN is a lifetime number connected to the
AML/CFT existing e-ID card
requirements
ATMs / 100,000 adults 11.4 36.5
• “Forced” ATM rollout across urban The Laku Pandai programme is another
2. Financial Initiatives and rural cities initiative that focuses on increasing
infrastructure • Initiative to streamline the MDR financial access through branchless
banking, by using agents.
ACH; NPCI; IMPS for mobile payments;
Aadhaar universal identification; RuPay; Establishment of a National Payment
Aadhaar Payments Bridge System; Gateway to increase interoperability
Initiatives Aadhaar-enabled Payment System; between payment infrastructure
3. Payment
system National Mission for Financial Inclusion;
Payment bank licenses; UPI
• Funding support Promoting banks to collaborate with
• Financial inclusion and enablement financial technology companies (still in
Initiatives • Tax and surcharge relief nascent stages)
4. Use of
• Infrastructure support
technology
• IP facilitation
Explicitly combines financial education Government led financial literacy
5. Consumer Mandate and financial inclusion at all points of its initiatives
protection
National Strategy for Financial Education
and financial
literacy
• Pradhan Mantri Jan Dhan Yojna • The Laku Pandai programme
(PMJDY) • Direct-deposit programme for welfare
6.General Other initiatives • Interest rate caps service
financial
• Priority Sector Lending • Use of mobile number as an e-money
inclusion
facilitators • The currency replacement program account number
20 The Financial Inclusion Stack3. Country Case Studies
3. Country Case Studies
South Africa Kenya Nigeria
FICA was introduced in 2001 governing • CBN launched a risked based KYC
all AML and KYC requirements. It requires National ID is sufficient for opening an system in January 2013
individuals to provide: formal proof of account • Under the BVN program each bank
residence, valid identification documents customer’s biometric information is
and proof of income (in some cases) stored at registration
59.9 9.9 11.4
• ATM roll-out has largely been developed
by privated sector banks
• SASSA has been the largest of several Support for agency banking networks to Cashless policy - fees for withdrawing
financial inclusion initiatives augment branch and ATM networks (non- and depositing large sums of cash used to
• All issues cards include MasterCard exclusivity) encourage PoS use
Debit functionality
• MNO interconnectivity;
National Switch run by BankServ (collectively • MVNO licensing to allow banks to launch
owned by all the banks) Implemented Faster mobile money networks; • NIBSS Instant Payments;
Payment’s real time settlement capabilities • EMV card for government payments • NIBSS Electronic Funds Transfer;
in 2007 (G2C); • Nigerian Automated Clearing House
• Interbank instant P2P transfer network
Several initiatives have been undertaken
to increase mobile money penetration,
however none have been successful to date. Digital Literacy Project aimed at increasing Established Micro Cash (mCash) platform to
Technology driven initiatives largely pushed technology usage across all sectors in the promote electronic payments
to date by the private sector country
Consumer Protection Act (2008) and CBN released the Consumer Protection
National Credit Amendment Act (2014) have Focused on availing affordable credit to Framework in 2016 to enhance confidence in
played a strong role in protecting customers borrowers through data usage and rate the financial services industry and promote
controls financial stability, growth and innovation
Mzansi initiative launched to provide low
cost transaction banking (medium take up) Broader government initiative to digitize Super Agents licensed to accelerate roll out
payments through the Huduma (‘service’) of agent banking
Card
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