CGAP CEO Greta Bull's Speech at CGAP Annual Meeting, May 17, 2017
WHAT NEXT FOR FINANCIAL INCLUSION?
Greta Bull, CGAP CEO
Annual Address to the CGAP Council of Governors
Yangon, Myanmar, May 17, 2017
Good morning. And mingalabar, a very warm welcome to Myanmar. We know that many of you have had to travel a long way to spend this week with us, and we thank you for making the effort. We are confident that, by the end of this week, you will feel that the long trip was well worth it.
Myanmar is a particularly appropriate place for this year’s CG. It represents opportunities for financial inclusion but also some of the challenges. I spoke with you last year about how much progress we have made in expanding access to financial services for the poor and how there is a growing evidence base that this can measurably improve lives. This year, I’d like to focus greater attention on the challenges ahead and how they have shaped our thinking about CGAP VI. Many of you have already contributed to that process through planning workshops, the mid-term evaluation, interviews and on-line surveys. This week we will share with you our synthesis of those inputs and solicit your feedback on the broad directions we propose to take CGAP in the next five years.
One of our major undertakings last year was to hold four scenarios workshops, which looked at the forces shaping the world we live in today. We invited influential thinkers from both developed and emerging markets — including many of you — for sessions in Washington, London, Accra and Bangalore. A consistent message across all four workshops was that we are living through a time of enormous change. And technology is a fundamental driver of that change. Other influential factors were globalization, migration, climate change, conflict and the changing nature of work. These forces are clearly interconnected and are experienced differently in each market. But in all cases, participants felt that we are on the threshold of a very new kind of world — one that is driven by technological innovation. And this is not only changing the way we interact with our finances, but fundamentally changing the ways we interact with each other.
Let’s look at how this is playing out in the world of financial inclusion.
The good news is that we’re making progress and, more importantly, it’s having an impact.
- The GSMA in its recent State of the Industry survey looked back at a decade of mobile money. In Sub-Saharan Africa, registered mobile money accounts surpassed the number of bank accounts in December of 2015. In other words, what took banks over 100 years to do in Africa has been achieved by mobile operators in 10.
- And this is expanding. In seven countries in the region, more than 40 percent of the adult population is now using mobile money at least once every 90 days. This is up from two a year ago.
- Interestingly, mobile is also pushing the banks to get into the game. In 2009 in Kenya mobile accounts surpassed bank accounts, which numbered around 8 million. But by 2014, bank accounts once again overtook mobile. As you can see from the graph, this growth was initially driven by M-PESA’s competition for customers with Equity Bank. But in 2011, CBA created its successful M-Shwari partnership with M-PESA, which virtually overnight made it the largest holder of retail accounts in the country. More recently, KCB has created a similar partnership with M-PESA and has seen a sharp uptick in accounts. By 2015, the total number of bank accounts in Kenya was 40 million, five times the number in 2009.
- At the same time, researchers are finding positive development outcomes of being located near an agent. Billy Jack and Tavneet Suri, in a paper published in Science in late 2016, found that proximity to M-PESA agents had the effect of raising per capita consumption in female-headed households by 18.5 percent, and contributed to a 22 percent reduction in extreme poverty. Extending this logic, they estimate that as many as 194,000 households have been lifted out of poverty in Kenya simply by having access to mobile money agents.
- Other studies in Uganda and Kenya have shown similar impacts, largely because poor people can receive remittances quickly, cheaply and from a wider social network when hit with an income shock. Emerging evidence from Bangladesh appears to echo these findings in a completely different market context.
So there is a growing body of evidence that having access to financial services does have a positive impact on poor people’s lives, both in terms of improved opportunity and greater resilience to shocks.
But challenges remain: first and foremost, cash distribution. M-Pesa, like other mobile money services, is built on both high and low tech, mobile connectivity and old-fashioned distribution. Technology enables distance interaction with providers, but the service also relies on the ability to turn physical cash into digital cash and again back into physical cash. Cash distribution via agents is the expensive and difficult part of the operation: an analysis done by the GSMA of the top 10 mobile money providers revealed that 54 percent of total revenue was paid out as agent commissions. Even in these mature operations, cash distribution remains the single biggest cost for operators. But if people can’t transact directly from bank accounts, there remains a need to manage cash. That said, agent networks do have the benefit of sharing the value of mobile money more widely: the 925,000 agents of these providers received an average of $703 annually in additional income.
Secondly, demand remains patchy. Usage rates, while steadily improving, are still lower than we would like to see, raising questions about product suitability and the depth of many mobile money services, especially outside of East Africa and China.
Thirdly, the remaining unserved population is becoming more expensive and difficult to reach at the margin. Although we are bringing more people each year into the formal financial system, technology does not overcome the fundamental economic difficulty of reaching people who are excluded for geographic, legal or cultural reasons. And the acceleration of digital in our lives creates the risk of a growing digital divide, with some people becoming more integrated and others being left further behind.
However, new approaches are emerging. India is trying to tackle some of these challenges by creating public infrastructure that enables efficient service delivery for both the public and the private sectors. This infrastructure is known as the India Stack. Let’s take a look at how it works.
India is not relying on low-cost market infrastructure alone. An important element of India’s approach is the creation of basic, no-frills Jan Dhan accounts. These enable the government to pay subsidies directly to recipients. Combined with new market infrastructure, Jan Dhan accounts could, at least in theory, dramatically reduce the need for expensive cash-in cash-out infrastructure. The long-term vision in India is for people to make any payment digitally, using a phone or a biometric device, eventually replacing most cash payments. Given that distribution represents at least 54 percent of the total cost of a mature mobile money system, this is potentially a big efficiency gain. This shift is already happening among the elites of Mumbai and Bangalore, but it will take time to build among low-income people, who are more comfortable using cash.
While a steady stream of social payments and the recent demonetization in India provide a strong supply-side push towards digital, a larger distribution network and many more use cases need to be built to create deeper demand — and that is largely a role envisioned for the private sector. A few private payments banks have now launched to provide distribution services, as have other newly licensed providers, like small finance banks. But restrictive licensing conditions, which place limitations on earnings, have meant that only a fraction of payments banks have actually launched, two years after receiving regulatory approval, and several have dropped out.
India is a market worth watching, both to understand technology-driven efficiencies created as public goods, but also the related hazards. A centralized biometric ID system is an attractive target for hackers, so cyber-security has to be a top priority. And given the value payments banks plan to generate from monetizing consumer data, data privacy and protection will also be crucial. And we don’t yet know whether agent distribution models will work commercially in India. But we have much to learn from this public-private approach to building markets.
Kenya and India represent two very different approaches to building an efficient digital ecosystem. In Kenya and other parts of East Africa, the private sector is clearly in the driver’s seat. India is pursuing a public-private model, with the government playing a crucial role. These two divergent approaches raise interesting questions about the ways the digital economy might evolve and what this may mean for consumers, especially the poor. In CGAP VI, we plan to expand our understanding of the drivers required to build markets and how to deepen them once they reach scale. We know that new business models are rapidly emerging, disrupting traditional value chains but also creating new opportunities for innovative providers. But we don’t know enough about how these new value chains will be constructed. And as these changes sweep through the marketplace, we know that marginalized populations are at risk of being left even further behind.
For CGAP to deliver on its promise of improving the lives of the poor, we propose exploring three broad areas — infrastructure, new business models and excluded segments. These will be examined in six interconnected work streams, which we will be describing in more detail over the next two days. My task for now is to give you the headlines.
Firstly, how do we build large-scale, commercially viable ecosystems and make sure they work for low-income people? It is very clear that digital ecosystems need to be large to build scale efficiencies that lower costs so that services can be provided sustainably to the poor. And once we have scale, we need to build in more use cases so that we have greater depth of services. This is important not only from a consumer perspective, but also to sustain a business case for operators.
We have long assumed that competition is the ideal scenario. But companies like M-PESA, bKash in Bangladesh, Ecocash in Zimbabwe and AliBaba in China are live demonstrations that large ecosystems dominated by one company can build both the scale and the depth required to sustain a strong mobile money operation.
So scale is important. But is it good for consumers? CGAP has previously demonstrated that a competitive market like Tanzania provides lower prices for consumers than a non-competitive one like Kenya. However, that equation has changed in recent years, with prices for key services like money transfers and short-term loans now cheaper in Kenya than in Tanzania. There are several external factors behind this — like a tax on financial transactions in Tanzania — but it doesn’t explain the whole story. A competitive market introduces new challenges. If prices are low for consumers, then volumes need to be very high for operators to recoup the costs of running the system, and if the volumes aren’t there, then providers may need to raise prices or exit. A couple of large operators in East Africa are looking to do just that, which is a cause for some concern.
There are two ways providers are solving this problem, particularly in competitive markets. The first is interoperability, which helps to build scale in the mobile money ecosystem. Here Tanzania has played a leading role globally. Out of a fragmented marketplace, four mobile operators came together to create one large integrated system for money transfers — and the early evidence suggests that the ability for consumers to seamlessly transfer money, regardless of service provider, is contributing to growth in the overall size of the market. MasterCard and Visa are developed world analogues for interoperable payment systems. It is likely that lessons learned in the card space will be relevant for driving greater efficiency into the mobile money value chain, particularly around agent and merchant acquiring.
The other approach providers are exploring is to open their APIs, which creates greater depth of services in the market. Open APIs allow small companies to inexpensively develop innovative products that ride on the infrastructure of large providers. Open APIs encourage developers to create services that run over an operator’s system, providing more use cases for consumers and adding new revenue streams for operators from existing infrastructure. For this, think of the App Store or Google Play.
Building open ecosystems among fierce competitors — whether it’s through open APIs or interoperability — is not easy. It requires them to find ways to cooperate. But in competitive markets, it helps drive scale and efficiency, while also deepening the products available.
And what about markets like Kenya, with dominant players? They are also experimenting with interoperability and open APIs, but another factor is important here. Competition policy needs to play a more prominent role in ensuring that those players do not abuse their strong position. A big player needs to create rails, and perhaps even provide the trains, but with infrastructure this important, other providers should be able to deliver services over the rails on transparent and equal terms. As an example, access to the communications channel is increasingly seen as a public utility that should be available to all licensed providers on equal terms. Agent infrastructure for now remains tightly controlled by providers, but there has been pressure to make this non-exclusive in many markets and there may even come a time when agent networks become interoperable or are delivered by neutral third parties.
In CGAP VI, we propose to deepen our understanding of the different approaches to reaching scale: What parts of the value chain might be run as public utilities? What parts may represent natural monopolies and should be regulated for open access? What should remain competitive to foster innovation and reduce costs? And how can we use both regulatory and collaborative industry approaches to create solutions?
Second: As new business models emerge and old value chains are rearranged, how can we make them work for the poor? If we believe that the digital ecosystem will become more open, then it’s vital to understand emerging new business models, and their impact on traditional providers. How will banks play in this new space? What will be the role of MNOs? What will be the role of government? How about fintechs? And big, cross-border giants like Facebook and Google? And how do we think about supporting traditional providers, like microfinance institutions, to adapt to technology?
It will take some hard thinking to understand these forces and how they can be harnessed to meet the needs of poor people. In doing so, we will continue to explore how emerging business models can support other development objectives in health, education, agriculture and access to infrastructure like energy, water and sanitation. There may be clever fintech solutions, but there may also be more efficient ways of integrating government services like health and education into the financial system, or using traditional microfinance approaches to deliver last-mile water connectivity or efficient drip irrigation. We propose in CGAP VI to explore both the challenges facing traditional financial service providers and the opportunities arising from emerging business models.
Data represents one of these new opportunities. Data is an increasingly powerful tool driving alternative business models, and digitally scored credit is just the beginning of this revolution. The data generated by mobile phone use puts low-income people on the map for the first time, and the ability to monetize this data is behind many new business models. Data-driven giants like Facebook, Amazon and Google are turning their attention to emerging markets and, as smart phones become more accessible, growing volumes of data from a variety of sources will be captured and algorithms used to help providers sell services to both businesses and consumers.
There is no doubt that data will be an important driver of all kinds of services for low-income people, and this is a good thing. But it also raises important questions: Who is permitted to collect, use and store personal data and for what purpose? Who owns the data? Where does it sit, especially with cross-border players like Facebook? Are consumers aware of how their data is being used? Are data adequately protected by providers’ systems, from hacking or misuse by state or private players? Nearly every country is charging into the digital age without having adequate legal frameworks in place for protecting consumers’ data. CGAP is proposing a new work stream that examines the growing uses of data, while also looking carefully at risks and how they can be mitigated.
Which brings me to the important topic of regulation and supervision. Digital finance is changing the face of finance so quickly that — in both developed and emerging markets — regulators and supervisors struggle to keep up. What was once simply a challenge of understanding the risks of letting a telco operate a payment system is now turning into a much more complicated undertaking. In Kenya alone, we have already seen the emergence of crowd-funding, data-driven lending, cross-border payments, crypto-currencies, e-commerce and the sale of government bonds via mobile phone. And we expect the level of innovation to accelerate. Regulators and supervisors need data, training and tools to understand and manage novel risks. They also need the skills to extract from licensed operators the information they need to effectively do their jobs. More structured approaches to “test and learn” — like regulatory sandboxes — are providing novel ways for regulators to engage with business and understand new models, but they should not be seen as a replacement for an on-going dialogue between industry and regulators. CGAP and others are helping regulators and supervisors to think about ways to enable innovation, while also protecting system stability and the rights of consumers.
As markets evolve, there is a risk of a growing digital and capability divide. Even as more people are included in the financial system, there are others who remain excluded and disempowered. A persistent gender gap remains, as women are excluded by legal and social norms from participating in the financial system. Rural populations are left behind because it is incredibly difficult for providers to crack the high cost to serve in these areas. Migrants and displaced populations often lack access to basic services, whether in their own countries or as refugees. And some groups naturally self-exclude, for reasons ranging from lack of empowerment to illiteracy to lack of trust in the financial system. As smart phones become more ubiquitous and the world becomes more connected, there is a risk of a growing digital divide. We need to understand marginalized populations and their needs much better in order to serve them effectively. Our smallholders and gender work is teaching us that these are not monolithic segments and solutions are not always obvious. For CGAP VI we propose to generate insights into key segments like smallholders, women, displaced populations and youth. This will be operationalized in our own work with providers and governments, but will also be shared with our members and partners so they can build it into their own work.
The last theme we propose under CGAP VI is human capacity building, but with a new twist. We want to leverage technology and our many partners to do this in new and more scalable ways. Markets that are new to digital finance shouldn’t have to reinvent the wheel. Myanmar is a good case in point. Wave Money received the first e-money issuer license here in October of 2016 and as of today has 6,500 agents covering over 70 percent of townships. MPT and Ooredoo are both awaiting approval of licenses and preparing to launch. As these services grow, finding qualified staff to run them will rapidly become a constraint. The regulator will need to learn how to oversee new providers, in addition to learning how to supervise an incipient banking sector. And the same challenges we see emerging today in Kenya and India will eventually show up in Myanmar, probably sooner than we think. Myanmar shouldn’t have to figure this out on its own. But Myanmar also has much to contribute. It is primarily a smartphone market, which means we have an opportunity to learn about how smartphones will change the equation for mobile money in other markets. We have learned a lot about what works and what doesn’t in the last 10 years, but how can we efficiently get those lessons into the hands of people who are actually doing the work?
To be clear, CGAP is not proposing to deliver retail training around the world. It is simply too big a task, and the track record for retail capacity building is mixed. But we can operate through others to get knowledge and practical tools into the hands of those who need it. This might be through a digital platform that allows us to crowd-source and curate content from different providers of e-learning services, as the Gateway Academy is designed to do. It might be collaborating with specialized organizations like AFI, the Toronto Center and the Fletcher School to develop specialized content for regulators and supervisors. It could involve creating Communities of Practice that help providers share practical learning on ways to reach marginalized populations, like women, youth or migrants. As a center of global learning that has partnership in its DNA, we are uniquely well positioned to help other organizations deliver high quality materials to their constituents in ways that meet their specific needs.
These six themes are interconnected and build off each other to confront the pressing issues we face today. They are grounded in a clear theory of change that will act as the “north star” orientating our work under CGAP VI. We don’t envision these six themes to be fixed and rigid. We want to build a flexible process that allows us to cycle topics in and out of our work plan in a way that enables us to respond to emerging priorities while remaining rooted in the theory of change for CGAP VI. We will be walking you through our thinking about this in the following sessions.
As we look to the future of financial inclusion, it is clear that there is no one magic formula for success. There are no silver bullets. Building financial services for the mass market and especially for the poor requires hard work, creativity and boots on the ground. Technology is an important enabler, but it requires viable business models and, more importantly, consumers using the products. Just as microfinance and later M-PESA didn’t magically transform the landscape for the poor overnight, fintech and blockchain aren’t going to do it either. But I have to say that in my 20-plus years working in development finance, I have not seen anything that has so much potential to make a difference in so many areas affecting the poor — not only in access to finance, but also in education, health, agriculture, access to infrastructure and general well-being. As we learned in our scenarios exercises, technology is the real game changer, and it will improve our ability to reach the Sustainable Development Goals. But it is going to take patience, realistic expectations and a lot of hard work to get there. We are in reality shifting from a world of financial inclusion to one of digital inclusion, and that is an important shift for all of us.
So, how does CGAP fit into this rapidly evolving space? We’ve taken time in the last year to do some thinking about this. What did we learn?
We learned we were doing a pretty good job on things that mattered. But we also had a few important messages on ways we could improve: We became a bit atomized, we could be more nimble in responding to emerging challenges, we need to up our game on mapping and documenting our influence, we need to figure out how to manage more effectively the global-regional interface and our partner relationships, we are not always so good at communicating our thinking externally, and we need to continue to engage with our membership more actively.
But we also have a lot of assets. As we looked at ourselves in the context of the many organizations now operating in the financial inclusion space, we realized that we have a few key attributes that position us well in the marketplace of ideas:
- Firstly, we have a strong brand. We are still perceived as the go-to place for financial inclusion globally.
- Secondly, we are open source. We are the sum total of the work of all our members and partners, who are able to help amplify our influence, while we in turn can help amplify theirs.
- Neutral: This doesn’t mean we don’t have a position. It means we don’t have a horse in the race, so we are not affected by commercial self-interest.
- We have a strong position by virtue of being part of the World Bank, but a position we have to manage and nurture carefully, both to protect our independence and to ensure the complementarity of our work.
- We can operate both globally and locally, with the lessons from each informing our work, as well as that of our partners.
- We can operate seamlessly across the public and private sectors and in the cooperative space that sits in between.
- Our independence enables us to be relatively flexible, but that is both a strength and a challenge. We have to be manage it carefully and with discipline.
- Finally, we are good at spotting innovation and thinking about how it can be applied in the markets we care about. We are also able to take a skeptical view of the latest bandwagon thinking.
The stakeholder survey told us a lot about how we work most effectively. CGAP’s best contributions are guidelines and best practice, knowledge sharing and research. People want information on the practical application of knowledge and synthesis of global learning. How can we effectively transfer the lessons learned from India, China or Myanmar to Africa, Latin America and the Middle East, and vice versa? This is CGAP’s key comparative advantage.
We believe that CGAP plays a unique role in the financial inclusion community. We have a diverse set of relationships and characteristics that enable us to influence, test, push boundaries, document and share knowledge. Our challenge, as always, is to explore the frontier of financial inclusion while ensuring that the lessons from the frontier are adapted, applied and scaled across a wider range of markets, often through you, our members and key partners. CGAP is all of us, a collective of like-minded entities trying to drive development impact through the use of financial sector tools. Our primary objectives remain poverty alleviation and ensuring that the donor community deploys its resources in a way that helps the financial sector to contribute to improving the lives of the poor. In doing so, we see it as our role to make sure that the whole of this community adds up to more than the sum of its parts.
In closing, we look forward to sharing more about our future directions with you over the next two days. We have designed this week to be highly interactive, so please be ready to jump in with comments and questions. We want to hear from you, so be forewarned that you may be called on! This week is all about sharing, debating, listening and collectively designing our strategy for CGAP VI. And we are going to start that process now. So I thank you for your attention and welcome your questions and comments.