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Posted on October 19, 2015

Posted by: Enclude’s Channels & Linkages Team

Trends in the field of digital financial services (DFS) range from changes in the stakeholders driving change to reactions to fraud allegations. The members of Enclude’s Channels and Linkages cut through the noise of the breakneck pace of change to share trends we think will be the most significant in the coming years.

 National Strategies for Financial Inclusion

Although financial inclusion has been a long-term goal for many, we are seeing more concrete and articulated national plans to reach previously un(der)served markets. In these new strategies, DFS is a key channel with which Central Banks plan to reach new populations. Moving forward, we expect to see changes in or developments of national payment system strategies that will have an impact on the opening of markets to new financial service providers as well as new rules that will govern the supervision and oversight of payment systems. To highlight this increase, 23 countries have made National Financial Inclusion Strategy commitments under the Maya Declaration, as of 2014. At least 18 more countries are at various stages of the process.

Governments Driving Digital Payments

More recently, governments are prioritizing the digitization of government-to-person and person-to-government (G2P and P2G) payment streams, including pensions, salaries, and other social welfare disbursements. It is part of a wider digitization process where governments are also automating their systems, such as those for internal processes and provision of public services (notably, payments and national identification systems). Shifting payments, such as wages or government transfers, from cash into accounts can increase the number of adults with a bank account according to multiple studies. These disbursements provide an important first entry point into formal financial services for recipients, which can lead to increases in savings and the substitution of formal for informal saving flows. For example, Colombia has undergone a transition to digital with Familias en Accion, which pays bi-monthly amounts to 2.4 million households, or 11% of the population. Within two years, the program went from 76% of its beneficiaries being paid in cash to only 9% in 2011—by which time, 91% had a card-linked bank account.

Increased Risk and Risk Management Responses

As the popularity of DFS, and the value transacted on the channels, increases,  so does the risk threatening stability of the system. In the markets where we work, we have not only seen the increasing focus on risk from industry stakeholders (banks, regulators, MFIs, telcos) but also the risk manifesting itself in various ways, including fraud. A suitable risk management frameworks at all levels is critical to protecting the overall payment system from substantial shocks; protecting individual institutions from losses; and protecting the customers who transact in the payment system.

An example of what happens when risk is not mitigated properly is the fraud at MTN Uganda, in which millions of dollars were stolen from the company due to the lack of appropriate processes and controls. As the risk associated with DFS flows throughout the ecosystem, so must the measures to guard against it. As an example of a country moving to guard against risk, in a response to the Peshawar school attack in 2014, the government of Pakistan drove a Biometric Verification System (BVS) that requires mobile SIM cards to be formally linked to people’s fingerprints. Since each mobile money account is linked to a SIM card, the providers may be able to implement a multiple-factor authentication at agent locations. We expect to see similar initiatives from other governments moving forward.

MSME Access to Finance

A lack of access to finance for MSMEs has been commonly cited as a major barrier to growth in many developing economies. The financial sector often overlooks MSMEs, due in part to their typical lack of formalization and the difficulty of underwriting loans to firms with unreliable financial records and no credit history. Converting retail payments to digital form offers opportunities to create a data trail which can both demonstrate the creditworthiness of small businesses on the basis of their payment histories, but also better track and document their own cash flows when more of those are received via digital channels.  This is especially important in largely cash-based economies where there is often little “paper trail” for revenues and expenses.  Better record keeping and evidence of payment history in turn presents a more attractive proposition to financial service providers (FSPs) and can unlock credit for small businesses by offering FSPs a  basis in data for more confident credit decisions. Companies like Kopo Kopo have built upon existing DFS rails to offer mobile wallet – merchant payments and capture the data produced from digital transactions to provide credit to these MSMEs.

Drive to Increase Uptake

Researchers in the DFS industry are studying ways in which usage of mobile wallets and digital channels can be increased. What is new and interesting is that the problem is being tackled by a variety of disciplines that go much beyond the financial sector. For example, product designers researching how to create a mobile phone interface that is intuitive enough for illiterate users to conduct money transfers using SMS have found that using USSD syntax with “#” or “*” symbols is difficult for these users. Anthropologists study how the social practices of individuals and the cultural norms in their communities interplay with the introduction of mobile money or banking agents. Data scientists build models to predict usage of mobile wallets given an individual’s phone activity or sentiments expressed on social networks. Behavioral economists reflect on how educative or marketing messages can be developed to trigger a change of behaviour among young customers. All of these approaches have the benefit of considering the customer as an individual who is part of a social system, rather than as a mere transaction.

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