The ability to make a payment or transfer funds is often taken for granted, yet many of the world’s population are excluded from doing so. This is not isolated to developing economies but is also a hot topic within many developed ones as well. For example, in the UK, the previously proposed (but scrapped) withdrawal of cheques as a payment method (which is a popular payment method, e.g. amongst older generations) could have excluded many from the payments system.
Banks, MNOs (Mobile Network Operators) and FinTechs are amongst the players that are creating solutions to address unbanked users’ payment needs[i] and various solutions are being introduced (including prepaid cards, digital and mobile wallets, to name just a few).
But, are these the panacea to the financial inclusion challenge? No – we do not believe there is a single solution and these solutions only address one part of the challenge.
Providing solutions that allow people to make payments to procure goods and services and/or the ability to receive and send money provides the unbanked and underbanked an important stepping-stone towards broader financial product adoption[ii] and ultimately wider inclusion.
This has opened up some questions: What are unbanked or underbanked user needs? What are the barriers for payment adoption, and how are providers’ solutions taking shape in order to accelerate financial inclusion?
The need to access a payment or remittance system can be led by either the payer or payee, and can relate to both high and low value payments as well as regular and infrequent/one-off payments. Examples include; paying a salary (B2P) or bill (P2B), receiving a benefit payment (G2P), paying a tax (P2G) or paying another individual (P2P).
Imagine a farmer who is told they can only receive a subsidy (G2P payment) if they have a bank or e-money account. Here the payer, the government, is creating a need for the individual to adopt a service. Generally this scenario, where a payer does not use cash, is the leading driver of payment service adoption[iii]. However, if the farmer was buying fertiliser for their farm (P2B payment) a retailer may state a requirement or preference for electronic payment. Here the payee is promoting financial inclusion. Indeed, as agriculture employs 1.34 billion[iv] people globally of whom 97% are in developing countries and 70% are smallholders, farming is an apt example.
Barriers for payment adoption
There are multiple barriers that inhibit wider payment adoption and some of the most common barriers are:
- Merchant acceptance (which is an enduring barrier to wider adoption in the traditional payments card space)
- Education, awareness, and user financial literacy
- Trust in and security of new technology
- Fixed and variable fees associated with using the solution, e.g. access fees, transaction fees
- Ownership or access to technology that new solutions run on (plus users’ ability to use the technology)
- Lack of verifiable identity documentation to access solutions
- Inertia of users to adopt new payment solutions alongside other cultural factors
How are providers’ solutions taking shape in order to solve financial inclusion?
Despite the barriers, there is great opportunity to foster a more financially inclusive environment and various solutions are being developed to help address some of the payments challenges. A range of different players are helping to drive the movement towards greater financial inclusion (including national governments, policymakers, banks and FinTechs) and FinTech led payment solutions are taking shape.
A current development (and perhaps one of the more prominent examples of G2P payer facilitated inclusion) is the Indian government’s Aadhaar scheme and resulting Direct Benefit Transfer (DBT) programme[v]. The Aadhaar scheme provides a biometric identifier for over 1 billion citizens, of which 300 million live below the poverty line and nearly half are unbanked. Aadhaar encourages the adoption of bank accounts using government subsidy payments as an incentive and the DBT programme is now rolling out the replacement of cash with bank transfers for subsidies covering $60 billion of yearly payments[vi]. Subsidies are not just for agriculture and fertilisers but for cooking gas, pensions, scholarships and cover 59 other schemes. The programme’s initial results have improved financial inclusion, 217 million new bank accounts have been opened and 126,000 banking correspondents (agents) have been appointed to provide additional deposit and withdrawal facilities.
The opportunity is also ripe for more innovative FinTech solutions to be developed, focused on identifying specific user needs and carving out solutions that address these needs. The success of India’s DBT programme was achieved by encouraging traditional service adoption (banks and cards), but there was still room for FinTech adoption too. For example, payPLUS, is a new Indian FinTech product that harnesses cloud technology and links the Aadhaar identity reference with a mobile number to create a merchant point of sale solution[vii]. This effectively allows rural merchants to accept Cards, Digital Wallets, UPI & mVisa across channels such as in-store, app and e-commerce[viii]. These solutions are all made possible due to the ‘India Stack’, a push towards open technology and banking in India which draws some parallels with European PSD2 efforts[ix].
Mobile Network Operators (MNOs) are turning their hand to developing solutions that enable a more financially inclusive future. A solution that is often noted as a stand-out example is m-Pesa. With m-Pesa, 80% of Kenya’s population now make and receive payments on feature phones (not smartphones)[x] and this is a service that has crossed the chasm towards wider adoption. The space is also being greeted with more MNOs looking to create solutions that help towards a financially inclusive future. Other MNO developments include TchoTcho in Haiti by Digicel, Orange Money in Senegal, Mali and Niger by Orange and Iko Pesa competing with M-Pesa in Kenya[xi]. These MNOs often bundle wallet services with the payments too – one example is . bKash in Bangledesh and Nettcash in Zimbabwe[xii] the wallet is as much as selling point as the ability to transact.
Whilst governments, financial service institutions and MNOs all have a part to play in the global financial inclusion agenda, providers of FinTech solutions can build business models based on specific user needs and capitalise on the existing technological infrastructure and platforms in place. There is a plethora of examples out there, including Dopay and its cloud-based payroll system (a B2P payer facilitated solution) that enables those without bank accounts to be paid electronically, and the recently launched Kudi in Nigeria that facilitates mobile (P2B and P2P) payments through messaging capabilities where internet access is limited. The list of FinTech led payment solutions goes on and will constantly shape and be shaped based on user needs.
Where to next?
The needs of the unbanked and underbanked are diverse and distinct by region and profession. In order to promote a more financially inclusive future for the 2 billion currently not participating in the world’s financial ecosystem, innovation and investment needs to occur throughout the payments arena.
What is clear is how those providers, who best match their solution to both the needs of these consumers as well as recognising the dynamics of payee and payer pressure, will succeed in encouraging future financial inclusion.
The difference between infrastructure creation and applications providing efficiencies is vast and complex. However, in the context of an increasingly open financial market, improving technological literacy and adoption, as well as greater efficiencies of new solutions compared with what has come before, the future looks bright for a more financially inclusive world, where payments take the lead.
Our next blog post in the Financial Inclusion series will focus on the challenges the financially excluded face when needing to borrow, as well as both the incumbent and disruptive solutions that are available in different markets.
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[ii] The Business Of Financial Inclusion, IIF, 2016
[x] Fintech and Financial Inclusion, World Bank Group, 2016