financial inclusion - bluechain · 2019-04-11 · 1. unbanked or underbanked a majority of...

FINANCIAL INCLUSION:A breakthrough technology

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WHITEPAPER

ContentsIntroduction 1

What is financial inclusion? 2

Cost of banking in emerging and developing markets 3

Primed for digital mobile innovation 3

Existing mobile payment options 4

Key issues 5

Digital payments innovation 7

Bluechain—a breakthrough technology 7

Conclusion 8

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IntroductionYou might not be familiar with the term, but “financial inclusion” is an important issue in emerging and developing economies. And that’s because many governments have identified it as one of the key enablers for sustainable economic growth. When too much business activity is conducted informally, outside traditional financial systems, governments lack the controls they need to effectively manage their economies and stimulate growth. In some cases, operating outside the boundaries can be intentional (i.e. the black market), but for many, being “unbanked” is not a choice.

Although the need for financial inclusion is well understood, the solution has proved elusive. Access to education, communications services, and financial and banking services can pose special challenges in the Third World. And the barriers to inclusivity in developing countries are often formidable, such as distance from a financial service provider, lack of necessary documentation papers, lack of trust in financial service providers, low financial literacy rates, the high cost of making low-value transactions, and religion, to name just a few.

But, with the rapid spread of mobile technologies in developing countries, financial inclusion has never been more possible than it is today. Although some technologies have begun to make inroads into financial inclusion, digital payment innovation is still required to assist both merchants and consumers living in poor and remote communities to enter the financial system. This whitepaper describes the challenge that is financial inclusion, the costs and issues associated with it, and showcases why the emerging and developing countries are now primed for digital payment innovation.

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What is financial inclusion?According to the World Bank , financial inclusion is the delivery of useful financial services at affordable costs to sections of disadvantaged and low-income segments of society who would otherwise be excluded from participating in the financial system. Access to a transaction account is a minimum requirement, but to be fully inclusive, the financial services that individuals and businesses need access to include money transfers, digital payments, credit cards and loans, and insurance. An inclusive financial system is critical in reducing extreme poverty, boosting shared prosperity, and promoting sustainable economic growth and development.

Financial inclusion is a key pillar of development policy in most countries around the world. In addition to its research and non-profit focus, the Bill and Melinda Gates Foundation has created the Level One Project, aimed at helping to build inclusive, interconnected digital economies around the world to bring the poor into the global financial system.

Although progress is being made toward financial inclusion, the World Bank highlights some significant remaining challenges1:

• An estimated 2 billion adults worldwide don’t have a basic transaction account.

• Globally, 59% of adults without an account cite a lack of enough money as a key reason, which indicates that this basic service is not affordable for low-income users.

• More than 200 million formal and informal micro, small and medium-sized enterprises (MSMEs) in emerging economies lack adequate financing to thrive and grow.

• MSMEs cite a lack of collateral, no credit history, and business informality as the main reasons for not having an account.

• Some groups are more financially excluded than others: women, rural poor, remote or hard-to-reach populations, and informal MSMEs are most affected.

• Other barriers to account-opening include distance from a financial service provider, lack of necessary documentation papers, lack of trust in financial service providers, and religion.

Financial inclusion is largely an issue in developing economies. A review of development finance by ScienceDirect2 states, “Whereas developed economies have enhanced access to and provision of quality and sustainable formal financial services like credit, savings, payment systems, insurance and pension among others, in most of the developing economies, the bulk of the adult population still lack access to basic financial services.”

1 The World Bank, “Financial inclusion”, <http://www.worldbank.org/en/topic/financialinclusion>2 ScienceDirect, “A review of development finance”, <http://www.sciencedirect.com/science/article/pii/S1879933716301695>.

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Cost of banking in emerging and developing marketsWith less than 20% of the adult population in sub-Saharan Africa having access to basic financial services and only 34% having an account at a formal financial institution, only a small percentage of (mostly) upper-income households enjoy the convenience of card-based, online, and mobile banking and payments. Most consumers pay with cash and do not have access to a bank account. This is, in part, due to the high cost of operating a bank account in these developing and emerging countries. For example, the fee structure of South African banks is up to four times higher than in India3.

Consumers and banks are caught in a vicious circle: consumers use cash to avoid high bank fees and banks charge high fees because of low market penetration. The high rates of cash payments in sub-Saharan Africa result in increased costs for businesses, banks and governments resulting from the increased need (when compared with digital payments) for manual processing, recordkeeping, counting, storage, security, and transportation4.

Primed for digital mobile innovation“The greatest opportunity to make progress on financial inclusion in developing and emerging countries is provided by new technology channels, in particular mobile technology.” The Foreign Policy Centre5.

In regions where financial inclusion is restricted, such as in sub-Saharan Africa, mobile financial services promises a lower-cost, more scalable alternative to traditional banking.

Substantial efforts have already been made at reforming financial systems in emerging markets across the world. There are many examples that demonstrate the potential of digital technologies and mobile network infrastructure. According to the Level One Project6, there are two dominant trends helping to accelerate access by the poor to effective, efficient, and affordable financial services:

• Mobile technology has spread at a remarkable pace in the developing world. Over 90 percent of the world’s poor are now covered by a mobile signal, giving a unique opportunity to reach vast segments of the population who may not live near a physical banking location.

• Digital payment technologies reduce the cost of financial transactions by eliminating the need for a physical location to do banking, which is one of the biggest challenges in many areas of the developing world.

Mobile is the future. Mobile eliminates the need for a physical location for banking and reduces the cost of financial transactions, in some cases, according to The Bill and Melinda Gates Foundation7 by more than 90%.

3 Boston Consulting, “Improving Financial Inclusion in South Africa”, <https://www.bcg.com/publications/2017/globalization-improving-financial-inclusion-south-africa.aspx>.4 McKinsey&Company, “Sub-Saharan Africa: A major potential revenue opportunity for digital payments”, <http://www.mckinsey.com/industries/financial-services/our-insights/sub-saharan-africa-a-major-potential-revenue-opportunity-for-digital-payments>.5 The Foreign Policy Centre, “The financial revolution in Africa: mobile payment services in a new global age”, <http://fpc.org.uk/fsblob/1518.pdf>.6 Level One Project, “Level One Principles and Perspectives”, <https://leveloneproject.org/wp-content/uploads/2016/03/L1P_Level-One-Principles-and-Perspective.pdf>.7 Bill and Melinda Gates Foundation, “Fighting Poverty, Profitably”, <https://docs.gatesfoundation.org/Documents/Fighting%20Poverty%20Profitably%20Full%20Report.pdf>.

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“Broadening access to financial services will mobilize greater household savings, marshal capital for investment, expand the class of entrepreneurs, and enable more people to invest in themselves and their families”

African Development Bank Group, 2013

Existing mobile payment optionsAlthough digital banking adoption is still a challenge in emerging economies, there are a few success stories. M-Pesa is the poster child for online payments in developing countries. M-Pesa is a mobile phone-based money transfer, financing and microfinancing service, launched in 2007 by Vodafone for Safaricom and Vodacom—the largest mobile network operators in Kenya and Tanzania. It has since expanded to Afghanistan, South Africa, India, Romania and Albania. M-Pesa allows users to deposit, withdraw, and transfer money and pay for goods and services with a mobile device.

Michael Joseph, Director of Mobile Money, Vodafone Group, explains that the basis for M-Pesa’s success is that it fitted into the African way of life, where “the breadwinner typically travels to urban areas for work while their family stays behind. In order to send money to their relatives, people would travel for days to get home or give the money to a bus driver. These people didn’t have access to financial services, and in rural areas there was little, if any, traditional banking infrastructure. If people did use banks, the cost took a big chunk out of their wages.”

A recent study by the Massachusetts Institute of Technology, published in Science8, confirmed that M-Pesa has had a dramatic impact on the overall economy of Kenya, lifting many households out of poverty. M-Pesa is serving nearly 30 million customers through 287,400 agents across 10 countries. In 2016, the service processed 6 billion transactions, peaking at 529 a second in December. M-Pesa is a revolution that has empowered tens of millions of people in some of the poorest communities in the world.

But it doesn’t work everywhere. In May 2016, Vodacom announced it would scrap its M-Pesa mobile money transfer system in South Africa, Africa’s second-biggest economy. Safaricom CEO, Bob Collymore, warned9 that the future of M-Pesa lies in transforming the service’s “clumsy” technology into something more efficient, innovative, and collaborative.

Although a big success story, M-Pesa does have a number of limitations. It’s closed loop: consumers can only load money into a spending account that is linked to M-Pesa. It’s also run by the telecoms, it isn’t regulated by a financial institution, and it isn’t transparent. It’s also expensive, especially when considered in the context of financial inclusion. For high value transactions, the charges are minimal. But when trading smaller amounts, the costs are disproportionately high, disadvantaging the poor.

The Kenya Bankers Association, representing 46 banks, is introducing its own mobile payment platform that will allow transfers between accounts at different banks, which they hope will erode M-Pesa’s market share. Visa also introduced a mobile phone application in 2016 to enable cashless transactions in Kenya.

8 Prof Tavneet Suri, Massachusetts Institute of Technology, “Study: Mobile-money services lift Kenyans out of poverty”, <http://news.mit.edu/2016/mobile-money-kenyans-out-poverty-1208>.9 <https://www.ceo.com/tag/m-pesa/>.

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1. Unbanked or underbankedA majority of consumers in emerging and developing markets are either unbanked (adults who do not have their own bank accounts) or underbanked (people or businesses that have poor access to mainstream financial services normally offered by retail banks). The underbanked can be characterized by a strong reliance on non-traditional forms of finance and microfinance often associated with disadvantaged and the poor, such as cheque cashers, loan sharks and pawnbrokers.

A mobile-based payment scheme provides unbanked or underbanked consumers with access to financial services without the need for a bank account or access to banking facilities.

2. Cash-lite economyConsumers still want to use cash. More than 90 percent of retail transactions in parts of Kenya remain cash based, and Gallup’s survey of 11 countries in sub-Saharan Africa found that more than 80 percent of adults there have made bill payments or remittances with cash10. In South Africa, 70% of adults have transaction accounts, but more than one-quarter of account holders withdraw their wages as soon as they are deposited. These consumers are not actively using their accounts to achieve financial goals, and they are not taking advantage of other financial services. Indeed, many consumers view accounts as constraints, not enablers11, acquired as a condition of employment or receipt of welfare and other public or social payments.

Moving to a mobile-based payment platform encourages a “cash-lite” economy. To achieve this, the cashless alternatives must offer clear advantages over cash payments, in every payment situation. Digitizing existing cash-heavy payment streams offers a significant growth opportunity for mobile money and domestic payment schemes.

Key issuesThere are four key issues that influence financial inclusion in emerging and developing markets throughout Africa, South-East Asia and South America. These issues are global:

10 McKinsey&Company, “Sub-Saharan Africa: A major potential revenue opportunity for digital payments”, <http://www.mckinsey.com/industries/financial-services/our-insights/sub-saharan-africa-a-major-potential-revenue-opportunity-for-digital-payments>.11 BCG, “How to create and sustain financial inclusion”, <https://www.bcg.com/publications/2017/globalization-how-create-sustain-financial-inclusion.aspx>

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3. Financial literacy According to an article on financial literacy in developing countries in the Journal of African Studies and Development, low levels of financial literacy has hampered personal financial decision-making abilities12. The repercussions of poor personal financial decisions not only affect the prosperity of individuals, but can also impact on operation of the financial system and overall economic stability of a nation.

Improving the level of financial literacy enhances outcomes of poverty re-education and welfare improvement programs, including employment and income creation, entrepreneurship and small business development, and food security. And that’s because financially literate individuals will better manage their personal and commercial finance. It also includes people’s abilities to apply for loans, which in turn gives them more capital to pay suppliers, create more inventory and expand. Promoting financial literacy leads to improvements in money management and financial planning, saving and debt management, financial security, and sustainability.

Yet education is needed. According to The Foreign Policy Centre13, “Financial inclusion policies implemented in African countries, notably…technology-driven product and distribution channel like mobile banking could leverage financial inclusion effort through a targeted client financial literacy education”.

4. Merchant acquisition and convenienceThe adoption of alternative payment channels depends on whether merchants can afford to acquire and use the latest technologies. If the merchant hardware is expensive, adoption rates are low. If merchant fee structures are opaque or excessively high, adoption rates are low. For example, e-wallets are only useful if the merchant supports contactless card payments. But contactless NFC terminals and credit card fee structures are expensive, which severely restricts the number of merchants that can afford to accept contactless payments, especially in developing countries.

To achieve a high rate of adoption, the payment channel must be convenient. To be convenient, the method of payment must be efficient and reliable, the number and spread of merchants that can accept the electronic payment must be large, and the number of customers with the appropriate device and who are willing to use it instead of cash must also be large. If any of these is not true, the payment channel will have minimal impact on the payments landscape.

12 MK Refera, NK Dhaliwal & J Kaur, “Financial literacy for developing countries in Africa: A review of concept, significance and research opportunities”, Journal of African Studies and Development, <http://www.academicjournals.org/journal/JASD/article-full-text-pdf/7B4FCFE56826>.13 The Foreign Policy Centre, “The financial revolution in Africa: Mobile payment services in a new global age”, <http://fpc.org.uk/fsblob/1518.pdf>.

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Digital payments innovationTo further financial inclusion globally, digital payment innovation is needed. The Bill and Melinda Gates Foundation indicates that, for a payment system to serve the poor successfully, it needs to meet the following criteria:

• Robust functionality. Users need reliable access to the system and trusted providers. A broad assortment of users must accept the system, and it must offer them a suite of payment services.

• Low cost and low price. Providers need sufficiently low costs and a higher probability of attractive returns. Lower costs allow them to offer lower priced services. Higher returns will attract them to begin serving the poor, and to grow the system.

• Effective coordination. Market structures need effective coordination to ensure that providers achieve better outcomes, and the system evolves successfully over time. Effective coordination will include both cooperation and competition among providers.

While some progress has been made through new technologies, there has never been a break-through payments solution that has the potential to displace cash and profoundly change the financial situation of the unbanked and financially excluded—that is, until now.

Bluechain—a breakthrough technologyBluechain is a next-gen payment platform that offers central payment networks, financial institutions and the broader payment ecosystem a secure platform for all forms of digital transactions.

Bluechain leverages a new security paradigm across any open network that turns a mobile device into a vehicle for RtP payments, including in-store POS, e-commerce and m-commerce, billing and invoicing, and peer-to-peer push and pull payments. It is the only payment platform that is capable of delivering on all three of the Bill and Melinda Gates Foundation criteria for financial inclusion.

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Robust functionality Bluechain has been designed to work with existing payment schemes, bank accounts and mobile wallets. Bluechain provides an overlay service which works with existing switches, employs virtual cards to represent bank accounts and bank based deposits, and supports payment requests on any payment channel. Bluechain payments focus on giving both the customer and the merchant a simple user experience while raising the bar on transaction security. Bluechain enables the previously unbanked customer, merchant or trader to access financial services that were previously either too expensive or too exclusive, via an easy to use mobile app that can be downloaded to their mobile device.

Low cost and low priceBluechain transactions are secured by a new patented paradigm that offers the same high level of security to online and over-the-phone payments as it does to in-store and peer-to-peer payments. By eliminating the major causes of card fraud, Bluechain eliminates many of the costs associated with fraud and fraud management. Costs are further reduced by allowing merchants and consumers to use their existing mobile phones and tablets, without the need for expensive point-of-sale (POS) terminals or a bank-issued credit or debit card.

Effective coordinationBluechain provides banks and national switches with interoperability capabilities that support and enhance the use of existing technologies, including traditional card schemes, bank accounts, e-wallets, and mobile money transfer services. Bluechain can also be deployed as an independent domestic payment scheme, allowing central banks and governments to take control over the sovereignty of their payments data while still being connected to an international payments backbone.

ConclusionBluechain is a breakthrough technology that has the potential to displace cash and profoundly change the financial situation of the unbanked and financially excluded. Bluechain enables the previously unbanked customer, merchant or trader to access financial services that were previously too expensive or exclusive. Access is provided via an easy-to-use mobile app that can be downloaded to an existing mobile device removing the need for expensive terminals. Transaction costs are kept low by keeping the processing and data local, avoiding the costly international schemes. Bluechain is the only scheme capable of supporting a financially inclusive economy.

For more information about Bluechain mobile payment technology visit

www.bluechain.com