I spent a couple of days at the end of last year in Silicon Valley, and the experience was eye-opening, as I expected it would be. My discussions with financial technology firms drove home for me the speed with which the large platform players are poised to transform the financial inclusion landscape in emerging markets. We have known for a while that the super platforms were looking at the financial inclusion space, but in 2017, we began to see that rapidly turning into a reality. Ant Financial (the financial services arm of the Alibaba group) entered the Indian market in 2015 through an initial investment in PayTM and is expanding aggressively into other markets in Asia. Google launched its Tez payment functionality in India, integrated with other Google services. And Facebook launched Facebook Messenger Pay in the Philippines, with plans to expand into other markets with low banking sector penetration and high Messenger usage.
2017 saw explosive growth in financial inclusion in large Asian markets like India and China (see recent CGAP report on Alipay and WeChat Pay in China), driven by payments but backed by smartphones and bank accounts. 2018 will surely see continued growth of platform plays in new markets, first in Asia, but eventually in other parts of the world. A recent paper by BFA Global, titled “Inclusive Digital Ecosystems of the Future,” identifies four key factors that enabled the growth of DFS in China: (1) rapid growth of smartphone usage; (2) most adults already had bank accounts; (3) the emergence of aggressive, customer-focused private internet companies (like Ant Financial and TenCent); and (4) the fact that Chinese regulators did not intervene too early (taking a “wait and see” approach, rather than a “test and learn” one).
While many of these factors are already in place in large markets like India and China, the platform players will face different challenges as they expand into other markets. Smartphone penetration is still low in much of Africa, and operators still need to find ways to get cash into and out of the system in the absence of bank accounts or wallets that are regularly paid into digitally. Africa also suffers from scale challenges: The average adult population in a Sub-Saharan African country is around 12 million, so operators hit borders (and therefore regulatory barriers) fairly quickly. What this means is that Asian countries, with higher population densities and higher levels of smartphone penetration, are a more attractive proposition to these large platform players. For now.
The platform players are finding ways around these challenges, through expanding connectivity but also through partnerships that play to each partner’s relative strength. Google and Facebook are both looking at ways to increase internet usage in Africa, Google through experimentations with high-altitude balloons in East Africa and Facebook through its Free Basics service, which is currently operating in 28 African countries (as well as in 33 other markets), in partnership with mobile network operators (MNOs). Financial services are not necessarily the end goal for these large players, which are mainly geared toward deepening user engagement with their core internet and social networking services, thereby harvesting the data and advertising revenues generated by that interaction. Easy-to-use payments functionality can deepen the relationship with users, so platform players are increasingly partnering with local providers to gain access to regulatory licenses and existing accounts (either a bank account or a wallet will do) that are required to feed the money transfer service. With these kinds of partnerships, the four enablers outlined above start falling into place in other markets.
In the United States, for example, I can send a payment via Messenger but am required to enter my credit card or PayPal details into my Facebook account, something I was loath to do when actually confronted with the task, given the extent to which Facebook has already penetrated my digital life. But I live in a market with plenty of alternatives for sending money. In markets without as many alternatives, there may not be as much reluctance to share this sort of detail with Facebook. In the Philippines, Facebook has partnered with G-Cash and PayMaya to offer Messenger payments to its clients, and similarly, Messenger users must enter their account details into Facebook to access the service. Once money is sent from one user to another, the recipient must enter their account details into Messenger to receive the money. This viral strategy, leveraging Facebook’s massive social network, has the potential to exponentially increase the usage of G-Cash and PayMaya’s accounts — not to mention the use of Facebook. A win for both parties. And the regulator is satisfied because licensed entities are the ones providing the actual payments services in the background, while Facebook plays an important multiplier role at the front end.
The case of India is particularly interesting from the perspective of platform players. The Indian government supported the development of important market infrastructure that can be leveraged by private players, which has resulted in a phenomenal uptake in the use of payments services. The Unified Payment Interface, an open payments scheme managed by the National Payments Corporation of India, launched for mobile payments in August of 2016. Since that time, it has grown from processing 92,000 transactions per month to 145 million transactions per month by December of 2017. Google Tez, which launched in September of 2017 — yes, only four months ago — now accounts for 65 percent of that transaction volume. PayTM, a payments service owned in part by Ant Financial, launched in December and accounted for 25 percent of volume in its launch month. These players offer different solutions, but what they have in common is that transaction fees are not the primary drivers of the service — data and integration of consumers into the primary platform are. Both Tez and PayTM provide a free service and cash incentives to drive usage because their primary objective is to capture customers, not necessarily just transactions.
Given developments over the past year on seamless payments interfaces emerging in Asia, it is hardly surprising that Safaricom announced at the end of 2017 the release of an M-Pesa app, which will include QR code-enabled payments and in-phone NFS capabilities, replicating the ease of use we have seen emerge in Asian markets (rather than typing in lengthy strings of characters on a USSD interface). QR code stickers are now being distributed to M-Pesa’s 140,000 agents and 80,000 Lipa na M-Pesa merchants. So we expect to see similar growth of frictionless payments in Africa’s most advanced digital payments market in 2018.
2017 was a momentous year for financial inclusion, with Asia driving rapid change in the digital finance space and Africa now moving forward to match developments in the East. We anticipate that 2018 is going to be an even more exciting year. Ant Financial is likely to invest in and gain traction in more markets, Facebook will expand beyond the Philippines and Google will continue to explore ways it can engage its community with useful financial products. The big platform players could accelerate a process of financial inclusion that began over 40 years ago with microfinance institutions and was more recently injected with new life by the entry of MNOs and other nontraditional players into the market. Adding millions more people through networked digital services could provide a huge boost for financial inclusion, but many thorny questions remain around ensuring that digital financial services actually reach the poor rather than perpetuate a digital divide. And the new players present significant new challenges for policy makers. Maintaining regulatory control and supervisory oversight will become an even more complicated task, and new issues like data protection and privacy, cyber security and competition policy will come increasingly to the forefront, issues that financial inclusion experts are only now starting to address. We at CGAP are looking forward to grappling with these issues in the coming year!