In December 2014 and June 2015, Cenfri attended workshops on Digital Financial Services and Financial Inclusion organised by the International Telecommunication Union (ITU) in collaboration with the Bill and Melinda Gates Foundation. The events were hosted in Washington D.C and at the ITU headquarters in Geneva, Switzerland. The workshops brought together a range of participants from the private sector, international standard-setting bodies, academia and development organisations. The insights gathered from the workshops set the context for the ITU-Digital Financial Services Focus Group (ITU FG-DFS) which provides a platform to develop and promote harmonised approaches, principles and tools to fast-track policies aimed at promoting financial inclusion in developing countries.
The convergence of the communication and financial worlds
The recent growth of digital financial services provides a potentially effective means of expanding the delivery of basic financial services to the poor. The deployment of information and communication technologies in the financial services space can play an enabling role in facilitating this process in order to meet financial inclusion goals. The convergence between the financial and communication worlds have at different times throughout history created new capabilities and fundamentally transformed financial services, creating new efficiencies and functionalities to drive economic activity. An early example of convergence between the financial and communication worlds is the stagecoach system. Originally used for public conveyance, operating along specified routes on specified schedules, its functionality for transferring money created a new system for payments and settlements and the rise of larger and more effective regional financial services, the origin for money-gram and western union.
The current convergence between telecommunications infrastructure and financial services holds the same promise with each sphere offering its respective and established strengths. The telecommunications world offers established international interoperability across a range of platforms, governed by strong protocols and treaties. This enables the ability to interact at the individual level across many dimensions. The world of financial services brings with it a high level of sophistication reflected in advanced risk and prudential management, intermediation and coordination of capital and advanced payment protocols and methodologies.
Convergence can play to the strengths of both spheres and lead to a broader, more effective financial services footprint. However, there are inherent challenges to this process and new resulting services need to be harmonised in order to reconcile the different risk tolerances, long-established operating protocols and regulatory requirements of the respective spheres.
The ITU-T FG-DFS
The ITU has recognised the potential that the convergence between the ICT and financial services worlds holds for driving the financial inclusion programme on a global scale and the establishment of the ITU-T FG-DFS represents a significant initiative within this context. The ITU-T FG-DFS will analyse ICT solutions and projects that promote financial inclusion, secure mobile financial services and emerging technologies in the field that better suited for financial services as well as identify best practices which could facilitate the implementation of such solutions on a global scale. It will also develop a common roadmap for interoperable digital financial services, taking into consideration the current activities undertaken by the various standards developing organisations and forums.
Cenfri’s interest in the ITU-T FG-DFS
Cenfri’s participation in the ITU-T FG-DFS is driven by our interest in the potential role of digital financial services in extending access and usage in low-income markets. This is of particular importance for financial inclusion in Sub-Saharan Africa where limited financial sector infrastructure is concentrated in urban centres and amongst high-end clients and few alternative options exist.
A report by GSMA on the state of the mobile money industry found that by the end of 2013, 84 countries had mobile money services and according to the Economist in at least 8 of these countries (all in Sub-Saharan Africa) more people have mobile money accounts than bank accounts. Further mobile money was identified as a primary payments channel with a comparable number of subscribers to bank account holders in the 4 Sub-Saharan African countries where we have conducted Making Access Possible (MAP) Financial Inclusion diagnostics (Lesotho, Malawi, Mozambique and Swaziland).
While mobile money has received much of the attention, growth in insurance offered by or through the mobile phone (m-insurance) has also been rapid. We found in a study commissioned by the Bill and Melinda Gates Foundation in 2014 that of the 105 m-insurance schemes that have been launched, 60% have been in Africa. This had significant impact. From 2010 to 2012 insurance coverage in Africa grew by 200% and 8 out of the 9 markets outside of South Africa with more than 1 million insured have reached that mark through mobile insurance.
However, digital financial services have not come without its challenges. In 2010, an m-insurance scheme in Zimbabwe was discontinued overnight after reaching between 1.2 and 1.6 million adults in less than 7 months due to a disagreement between the mobile operator and a third party payment administrator, leaving 20% of the adult population without coverage.
Given that the scheme was administrated by the mobile network operator, the insurance company underwriting the scheme had no recourse mechanism to provide for its clients and the insurance supervisor had no jurisdiction over the mobile network operator. The experience in Zimbabwe raised concerns amongst supervisors and regulators on the continent on how to manage the risks inherent in these schemes. A key focus is to increase coordination between telecommunications regulators and financial sector supervisors.
Despite the relative success of many mobile money initiatives, a number of challenges continue to constrain the effective provision of mobile money. Following the early success of many mobile money initiatives, the growth in the MAP countries has slowed or completely stalled. For example, in Mozambique, mobile money subscribers had increased from 485,000 to 820,000 in 2013, but by the end of 2014 had only grown to 887,000, demonstrating that there had been little change over the year, possibly indicating a plateauing of subscriber numbers. Usage levels have also remained low. In both Swaziland and Malawi, despite rapid initial uptake, the proportion of active users has remained below 30% and the rate of growth of subscribers has slowed substantially. Similarly, in Lesotho, rapid initial uptake was partially driven by the fact that the providers offered generous incentives – in the form of an airtime bonus – for signing up. Based on in-country consultations, it is estimated that only between one-third and one-quarter of mobile money subscribers in Lesotho are active.
Cenfri is exploring the drivers of the slowed growth and what can be done. This includes investigating models of interoperability, the incentives driven by business case for mobile network operators, as well the challenges that agents face with regards to cash management and sales. Interoperability is a key focus of the ITU-T FG-DFS and from the countries where Cenfri has investigated mobile money, none have achieved full interoperability. Instead, a number of methods have emerged across countries that enable “quasi-interoperability”. For example in, Mozambique interoperability has been achieved between bank-led mobile money providers and other payment channels such as ATM, POS and online EFT transactions. However, this is currently limited to the electronic mobile wallets issued by a privately owned payment services by a group of commercial bank for their banking clients. Regulators are aware of the importance of interoperability and in some cases have begun to investigate options to address the lack of interoperability in their countries. For example, in Malawi, the newly launched National Switch (Nat-switch) makes provision for MNOs to access the switch directly in future, thereby enabling full interoperability between mobile money providers and with the banks.
Cenfri will feed the insights emerging from this research into the ITU-T FG-DFS to identify best practices which could facilitate the implementation of such solutions on a global scale.