Four Drivers of Change for Financial Inclusion in 2017
Open Letter from Greta L. Bull, CGAP CEO
Returning from the holidays, we at CGAP are turning our attention to the future. I used the down time over the break to reflect on the topics I believe are likely to shape the future of financial services for the poor. Building efficient, large-scale digital ecosystems that dramatically reduce the cost of delivering financial and other services has been an important focus of CGAP’s for many years. But what do we think will enable the emergence of such large ecosystems and ensure their broad accessibility?
I would posit that four factors are changing the landscape for financial inclusion before our eyes:
Technology and distribution
Technology is a clear enabler. None of what we have seen emerge in the last 10 years would have been possible without technology. But technology on its own is not the answer: distribution is the other side of the equation, and its importance is often overlooked in the excitement over new technologies. To access digital financial services, access to a mobile connection is important, but it is equally important to be able to convert cash to digital money and, at least for now, back into cash again. So mobile phones have been important in places like Kenya, but the real game changer has been the emergence of large and well-functioning agent networks. Until accounts are more widely available or people are willing to accept the leap into purely digital money, agents will remain a fact of life.
Photo Credit: Eakarin Ekartchariyawong, 2016 CGAP Photo Contest
Policy and regulation
Policy and regulation have always been important, and that role has not diminished. But it has changed. In East Africa, we are seeing a shift from open experimentation to a more coordinated effort to build interconnected services, such as interoperability and cross-border remittances. We are also seeing an increasing focus on competition policy and consumer protection in a number of markets. Governments are increasingly channeling payments to citizens through digital infrastructure and, in some markets, citizens are able to pay governments too. Given the large volumes of money governments drive through the system, this is having an important impact on the viability of digital finance operations.
In India, we are seeing a government that is pushing on all the levers to develop a viable, large-scale digital ecosystem, from building unique biometric identification to pushing government payments through digital channels and integrating various financial services providers into a unified payment system. It is still too early to declare the Indian experiment a success, but we are learning a lot about the public goods that need to be in place for a digital marketplace to function efficiently for the poor, and what the role for the private sector can be.
Around the world, we have much better evidence on what works and what does not in building enabling policy environments, using the levers of government policy and regulation. We are also seeing the impact that global financial policy can have on emerging markets, particularly the effect of de-risking on a number of markets. Even in developed markets, regulators and policy makers are grappling in novel ways with challenges to traditional banking models from disruptive fintechs.
We are increasingly seeing the emergence of collaborative approaches in the commercial sector that help broaden the digital ecosystem. Sometimes, these emerge as purely private initiatives, sometimes they are pursued explicitly as public goods. Two important examples are interoperability and open application programming interfaces (APIs).
Interoperability is important because it broadens a networked system, creating a frictionless experience for users, and enables participants to compensate each other for use of their infrastructure. For example, rather than juggling multiple SIM cards to send funds from one mobile money service in Tanzania to another, consumers can now send money across services at no cost to the consumer beyond regular money transfer fees. And agreements are in place that define the rules and commercials for how that transaction will work. So instead of having four smaller mobile money ecosystems for person-to-person (P2P) transfers, Tanzania now has one large interconnected one. Early evidence shows that removing friction between operators is growing the overall size of the P2P market in Tanzania.
Open APIs increase the size of the ecosystem in different ways. When infrastructure providers like banks or mobile network operators open up their APIs, they take the friction out of integrating to the main service for smaller providers of financial services. By removing that cost from the system, small innovators can develop, test and refine services for consumers at a very low cost, and may hit on a formula that users like and want to use (think of the Apple App store and the proliferation of services available there). The innovator can then provide the service over the rails of the larger mobile money service, to the benefit of both providers. Without open APIs, small companies must negotiate commercial arrangements with the large provider and then navigate the complex process of technical integration. Open APIs make this process far more efficient and competitive. Both interoperability and open APIs are by nature complex, as they require fierce competitors to cooperate in ways that may seem counter-intuitive. But over the long term, they have the potential to expand the value of the ecosystem for both providers and consumers by fostering innovation and a more competitive ecosystem.
Data is emerging as a topic of great importance. Connected services mean that poor people, who previously left no data trail, begin to exist in a digital world. Providers are increasingly capturing data on consumer behavior that has wide applications — from scored consumer credit, to the provision of off-grid solar home systems, to building better products for consumers, to providing primary health care services to the poor. Building profiles of poor people will enable providers to deliver services to them in ways they could never have previously done.
But data also brings new risks. Who owns the data generated by our interactions with e-commerce and social media sites? How secure are mobile money systems? How do we know how our data is being used? How likely is it that the poor will be at risk of over-indebtedness, fraud or theft? These are all important aspects that require attention.
These are all topics on which CGAP is actively focusing its attention in the coming year. At the end of last year, we released a landscaping study on emerging trends in interoperability around the world. We brought together different industry players to discuss open APIs and will continue to build on this experience in the coming year. Data is an emerging area of importance, both for the financial and non-financial services it enables, but also for the risks it poses for low-income consumers. Policy and regulation have been at the heart of our work for many years, and we continue to contribute to global and country-level debates on what works and what does not, most recently in an examination of the key regulatory enablers of digital financial services.
Large, inclusive digital ecosystems provide unprecedented opportunities to generate growth and development, leveraging both financial and non-financial services. CGAP sees it as its core mission to ensure that these innovations evolve in ways that benefit the poor. We look forward to another exciting year!