Financial Inclusion And Integration Through Mobile Payments And . - AfDB

AcknowledgementsThis publication was prepared by the Regional Integration andTrade Division of the African Development Bank Group (AfDB).The findings of this report, however, do not necessarily reflectthe opinions of the AfDB senior management and boardof directors.The report was drafted by Dr. Jian ZHANG, PrincipalMacroeconomist, AfDB with inputs from a team at YES BANKLimited, spearheaded by Mr. Anand Bajaj, Group ExecutiveVice President & Chief Innovation Officer. Dr. MichaelMah’moud, Consultant, also contributed useful inputs andcomments and made editorial suggestions . Ms. MoonoMupotola, Manager, Regional Integration and Trade Division,AfDB, provided overall supervision. The report is basedon presentations made by invited speakers and sessionpanelists as well as the open discussions by the participants.The African Development Bank and YES BANK commendthe work of the team of drafters and wish also to thankpresenters, panelists and participants for the fruitful outcomeof the workshop.The organizers also appreciate valuable comments receivedfrom the following participants, who reviewed the report:Mr. Manoj Sharma, Director Asia and a DevelopmentFinance Specialist, MicroSave; Mr. Ibrahim Abdullahi Zeidy,Coordinator, COMESA Monetary Institute (CMI); Mr. StephenMwaura Nduati, Head - National Payments Systems, CentralBank of Kenya; Mr. H Agbai, ABOSI, Secretary General,West African Bankers’ Association (WABA); Mr. BoukaryZongo, Director of Operations and Electronic BankingStandards of GIM, WAEMU; and Prof. Kinandu Muragu,Executive Director, Kenya School of Monetary Studies.Appreciation is also due to the following African DevelopmentBank staff, who also reviewed the report: Dr. Lachaal Lassaad,Chief Training Economist at the African Development Institute;Mr. Gabriel V. Mougani, Chief Financial Specialist at RegionalTrade Division; Mr. Enock Yonazi, Principal InfrastructureSpecialist at the ICT Division; Mr. Themba Bhebhe,Principal Operations Officer at Operations Committee; andMr. El Kettani, Oumama, Investment Officer at FinancialInstitution DivisionAFRICAN DEVELOPMENT BANK GROUP ix

Acronyms and AbbreviationsAfDB African Development BankKYCKnow Your CustomerAMLAnti-Money LaunderingKYRKnow Your ResidentACHAutomated Clearing HouseM-BankingMobile BankingANMsAgent Network ManagersMCBFMicrofinance Capacity Building FundATMAutomatic Teller MachineMDManaging DirectorBCBusiness CorrespondentMDFMigration and Development FundB2BBusiness to BusinessMFIsMicrofinance InstitutionsB2PBusiness to PersonMFSMobile Financial ServiceCBSCore Banking SolutionMNOMobile Network OperatorCDMACode Division Multiple AccessM-MoneyMobile MoneyCEOChief Executive OfficerM-paymentMobile PaymentCFTCombating the Financing of TerrorismMTSSMoney Transfer Service SchemeCGAPConsultative Group to Assist the PoorNBFCNon-Bank Financial CompanyCOOChief Operating OfficerNCAER National Council of AppliedEconomic ResearchCOMESA Common Market for Eastern andSouthern AfricaNFCNear-Field Contactless CommunicationsCRMCustomer Relationship ManagementNGOsNon-Governmental OrganizationsCSPCustomer Service PointsNEFTNational Electronic Fund TransferEACEast African CommunityNPCINational Payments Corporation of IndiaE-BankingElectronic BankingPESTPolitical, Economic, Social and TechnicalECOWASEconomic Community of West African StatesPDAPersonal Digital AssistantECSElectronic Clearing ServicePINPersonal Identification NumberEUEuropean UnionPNBPunjab National BankE&YErnst & YoungPOSPoint of SaleFEMAForeign Exchange Management ActPSSAPayment and Settlement System ActFIFinancial InclusionP2PPerson to PersonFI4FIFrugal Innovation for Financial InclusionPPPPublic Private PartnershipG2PGovernment to PersonRBIReserve Bank of IndiaIATAInternational Air Transport AssociationRECsRegional Economic CommunitiesGulf Cooperation CouncilREPSSRegional Payment and Settlement SystemIDRBT Institute for Development and Research inBanking TechnologyRSPRegional Strategy PaperRTGSReal Time Gross SettlementIFCInternational Finance CorporationSADCSouthern African Development CommunityIMPSIndia Mobile Payment SystemSBIState Bank of IndiaSHGSelf- Help GroupsSIMSubscriber Identity ModuleSMSShort Message ServiceSTRSuspected Transaction ReportGCCINFAST Interoperable Infrastructure for AccountingSmall TransactionsISBInclusive and Social BankingIVRInteractive Voice ResponseAFRICAN DEVELOPMENT BANK GROUP xi

FINANCIAL INCLUSION AND INTEGRATION THROUGH MOBILE PAYMENTS AND TRANSFERSSWOTStrength, Weakness, Opportunity and ThreatTRAITelecom Regulatory Authority of IndiaUBIUnion Bank of IndiaUEMOA Union Economique et MonetaireOuest AfricaineUIDUnique IdentificationUIDAIUnique Identification Authority of IndiaUSSDUnstructured Supplementary Service DataWABAWest African Bankers’ AssociationWAPWireless Application ProtocolWAEMU West African Economic and Monetary Union(or UEMOA in French)WAMIWest Africa Monetary InstituteWAMZWest Africa Monetary Zone xiiNEPAD, REGIONAL INTEGRATION AND TRADE DEPARTMENT

AbstractMobile payment is financially inclusive and offers potentialfor financial integration. This publication concerns how thepotential can be leveraged through appropriate regulationsto enhance not only financial inclusion but also cross-borderfinancial integration. Based on Indian and African models,it examines progress and challenges at the national levels,while also providing insights into what would be required totake the growth of mobile banking and payments beyondnational borders and to enhance the platform for regionalfinancial integration.In order to enhance growth and contribution of mobilepayments to financial inclusion and integration, Indian andAfrican governments have adopted either bank-led modelsor non-bank-led ones in line with national economic andfinancial sector development. The results are mixed: someare successful; and some, not.Adoption of particular models is not a sufficient conditionfor the success of mobile payment programs. The existenceof adequate critical success factors in the ecosystem isalso important. Critical success factors include risk-basedregulation for a cheaper and profitable but secured solution tofinancial exclusion, policy-led interoperability for an increasingscale of economies, development-oriented support foroutreach through agents, and win-win partnership for all thestakeholders. Wherever there are adequate critical successfactors, mobile payment programs are successful, as thecase of MPESA in a few East African countries. Regional realtime gross settlement (RTGS) systems with a mobile switchwould have helped further and enabled landlocked smalleconomies in the tripartite arrangement to benefit furtherfrom low-cost mobile money services across borders.The same is true in West Africa. In WAEMU’s landlockedeconomies, mobile payment programs would have turnedout successful too with adequate critical successful factorsin the ecosystems (adequate retail agent network forexample) Most WAEMU banks are recommended to adoptCRM-based core-banking solutions, reengineer businessprocesses, build ICT-enabled retail banking expertise; andextend their distribution network of nonexclusive agents.In addition, telecom companies have been selectively privatized; and investments in ICT and other regional infrastructurefurther increased.To push banking penetration towards full financial inclusionIndian policy makers and regulators have adopted powerfulmeasures, such as permitting ‘for profit’ companies to serveas banking correspondents and launching an interbankmobile payment system (IMPS). But despite initial successesmuch still remains to be done. A stronger ecosystem wouldhave helped further in this direction.To facilitate financial integration through mobile paymentsin and beyond African borders, development partners arerecommended to support establishment of sound regulations, help identify key constraints with more upstreamstudies, work out and prioritize solutions, engage in policydialogues, institutional and skills capacity building in additionto mobilizing resources for regional mobile payment systemsto connect landlocked countries. Drawing on Indian experiences, regional RTGS, with a similar IMPS and introductionof “Aadhaar”-type Scheme (electronic unique identity numberproject) introduced, should contribute significantly to financialinclusion and integration in African RECs, so long as paymentregulations are harmonized among members. However, norecommendation for financial inclusion through cross-bordermobile transfers will be given until a sound domestic ecosystem is rooted on the ground.AFRICAN DEVELOPMENT BANK GROUP xiii

1.Introduction“ Drawing from Kenya on financial inclusion (M-PESA and M-KESHO products), governments could facilitate therolling out of technology driven mobile banking services, which have worked exceptionally well in that country, andcould be replicated regional-wide. In that regard, governments would also gain by facilitating movements of people,easing border controls, and encouraging cross-border investments, and investments in regional infrastructure”.Mr. Mthuli Ncube, Chief Economist, AfDB1.1The prospect of cross-border mobile payments holdmuch promise in promoting financial integration, adding to itsbenefits for financial inclusion at the national level. However,there are also challenges that must be addressed. Basedon the developments in India and Africa, this report exploresthe key evolving themes in the cross-border mobile payments arena, and seeks to highlight promising practices andexamine critical challenges. The objective is to draw lessonsfrom across the various countries and regions to inform policyand regulatory reforms, especially in Africa. In particular, thereport discusses what the experiences in India and Africahave been regarding the benefits and challenges of mobilepayments for financial inclusion and cross-border paymentsor regional financial integration, and addresses a range ofquestions. What models have been adopted across thecountries to promote the mobile payments systems? Whatare the underlying issues that account for the successesof these models in the various countries and ecosystems?When should national authorities and/or industry operatorsconsolidate activities or introduce innovations to meet challenges and enhance progress? In particular, the discussionsseek to explore the role of regulations and how best they canbe directed at enhancing regional mobile payments.Map 1:Global map of the financially includedAdults with an account (%) 0 to 2525 to 5050 to 7575 to 100No dataHigh income OECDand non-OECD84%Latin Americaand Caribbean45%Europe andCentral Asia42%Sub-SaharanAfrica12%East Asia & Pacific39%Middle East& North Africa35%South Asia24%% show the simple regional averageof the percent of banked population,not weighted by the populationSource: Peer Stein, Bikki Randhawa, Nina Bilandzic, 20112 The quote can be found in -ncube-9023/.3 Peer Stein, Bikki Randhawa, Nina Bilandzic, 2011, Toward Universal Access: Addressing the Global Challenges of Financial InclusionAFRICAN DEVELOPMENT BANK GROUP 12

FINANCIAL INCLUSION AND INTEGRATION THROUGH MOBILE PAYMENTS AND TRANSFERSTable 1-1:24 Poorest countries, 20101.2Unit: GNI per capita, Atlas method (current US )RankCountryUS 1Burundi1702Congo, Dem. Rep.1803Liberia2004Malawi3305Eritrea3406Sierra an41011Madagascar43012Mozambique44013Gambia, The450The key considerations or issues are that:n The gap in access and use of financial services remainsa challenge in Sub-Saharan Africa (SSA), the mostfinancially excluded region in the world as per Map 13.This is also true of India, though to a lesser extent thanthose faced by SSA.n There is however, no one-size-fit-all model of mobilepayments due to different ecosystems across countries.SSA contains 22 of the 24 poorest countries in theworld, as per Table 1-1. More than half of the Indianand SSA populations live below the internationalpoverty line of US 2 a day,4 with little disposablepersonal income after consumption. Since consumption depends on commerce and payment, the poormay have a stronger demand for transaction-basedservices, payment services in particular.14Zimbabwe460n To promote financial inclusion and integration, In Kenya15Central African Republic47016Nepal49017Togo49018Uganda500and many other low-income African countries policymakers have adopted nonbank-led models in linewith their level of national economic and financialsector development. In contrast, India and somemiddle-income African countries (South Africa, forexample) have adopted bank-led models. The resultson the ground are mixed: some mobile payment initiatives have been successful, but others have not. Themixed performances do not result from the adoptionof either models, but from the sufficiency of successfactors in their ecosystems.19Rwanda52020Tanzania54021Burkina Faso55022Guinea-Bissau59023Mali60024Chad620Source: World Bank5n An ecosystem with adequate critical success factorsincludes at minimum: (1) regulation and supervisionthat balance IT-enabled innovation, enhanced competition through participation of business agents andfacilitators, and protection of customers for a cheaperbut secured solution to financial exclusion; (2) win-winpartnerships among all stakeholders; (3) a technically inter-operable platform for all kinds of mobilepayment products and their cross-border services;and (4) a knowledge sharing platform for educatingthe unbanked population about finance. When there45 2http://search.worldbank.org/data?qterm 2 dollar a day poverty line for africa&language EN&format NEPAD, REGIONAL INTEGRATION AND TRADE DEPARTMENT

1. INTRODUCTIONare sufficient critical success factors in an ecosystem,mobile payment programs tend to be successful infacilitating financial inclusion and integration in bothmiddle-income and low-income countries.n The question of whether to continue innovating orconsolidating existing innovations may seem easy toanswer, but becomes more difficult in the context ofunsuccessful mobile payment initiatives. While theseclearly need to be consolidated to become more effective, financial inclusion and integration is an on-goingprocess that requires both consolidation and innovation. As a result, consolidation of unsuccessful initiatives cannot rule out further innovation so long as thereare strong unmet demands and an adequate regulation of providers.n The ecosystem for cross-border payments is morecomplex in that there must be adequate: (1) demandfrom diasporas in both developed and developingcountries for transferring part of their savings to relatives in their home countries; (2) partnerships amonghost and home country banks, MNOs, technologyfirms, agents, and retailers in enabling the last miledelivery of cross-border mobile payment services ataffordable tariffs; and (3) coordination between hostand home countries’ policy makers in regulating crossborder flows of mobile commerce and mobile money.On that score, the domestic ecosystem with adequatecritical successful factors can be regarded as the prerequisite for launching a cross-border mobile paymentor transfer program.n Branch-to-mobilen Whether consolidating unsuccessful mobile paymentinitiatives or innovating future ones, banks, MNOs,mobile commerce service providers, technology firmsand retailers need to co-ordinate their strategies forwin-win partnerships. Balanced interests are likelyto enable efficient and effective ‘last-mile’ delivery.Customers also need to be educated and assistedfor greater convenience or accessibility, especially inremote rural areas. It is recommended that both banksand their regulators use technology as (1) an enablerof mobile financial services that enhance accessibilityfor the unbanked population and extend convenience for the banked; and (2) as a safeguard of mobilefinancial systems’ stability and protection of customers’interests.n Experience in Africa shows that (1) mobile money isfinancially inclusive, especially in low-income Africancountries (Kenya and Uganda, for example) wherethe ecosystem has sufficient critical success factors;(2) mobile money is not a perfect answer in an imperfect world of technology and telecoms since mobilepayment initiatives will not, in themselves lead to fullfinancial inclusion; and (3) potential solutions lie inestablishing an ecosystem with the necessary critical success factors to enable a win-win collaborationbetween all stakeholders that brings about an effectiveextension of financial services to the unbanked andbanked population.payment from high to lowincome country is less challenging than the other wayaround. Accordingly, African regulators are advised tosequence cross-border mobile payment programs.They may begin with approving inward remittancesfrom selected bank or non-bank branches in advancedcountries (such as the US and European Union andGulf Cooperation Council members), where mostof the African diaspora lives and works, to approvedSubscriber Identity Module (SIM) cards of mobile phoneusers in their countries. As their regulatory capacitiesgrow in this area, they may also collaborate with eachother to harmonize regulation of mobile-to-mobilepayments between low-income African countries.1.3The report is presented in seven sections. Followingthis introduction, part two explores the debate over bankand nonbank-led policy models for mobile financial services(MFS), followed by a discussion of the important role oftechnical platforms in the ecosystem in part three. Part fourfocuses on the debate over innovation versus consolidation, while part five addresses the impact of mobile paymentprograms on financial exclusion. Part six discusses theregulation of cross-border mobile payment programs whichis followed by the concluding section.AFRICAN DEVELOPMENT BANK GROUP 3

2.Policy models for mobile payments programs2.1 Context for debate on policy models2.1.1Over the past five years, there has been a debate onthe appropriate policy models for technology-enabled mobilefinancial services, and their impacts on financial exclusion inIndia and Africa. Technology has brought about previouslyunimagined changes in people’s lifestyles. An electronicdevice is generally regarded as one of the most appropriatedelivery channels for financial services. Indeed, mobile usersout-number bank account holders in India and many Africancountries. As a result, both Indian and African governmentshave regarded mobile technology as one of the most promising tools for expanding access to finance and achievingfinancial inclusion due to the ubiquity of mobile phones andgood mobile network coverage, even in rural areas.US dollars, the Indian economy is 1.5 times bigger than all ofthe SSA economies combined–including South Africa, whichis the biggest SSA economy by far. Moreover, there is also ahuge output per capita gap of over five times between lowand medium-income SSA countries, as shown in Table 2-1.As over 50 % of the Indian and African populations livebelow the international poverty line of US 2 per day (CGAP7

Figure 2-3: Total African mobile connections and penetration rate (million, % penetration) Figure 4-1: Mobile penetration in top 25 African countries (2010 q4, % penetration) Figure 5-1: Distribution of Indian households (based on annual household incomes) Figure 5-2: All the main stakeholders for mobile payment services