growth week 2011: ideas for growth session 7 - finance
TRANSCRIPT
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Ignacio Mas International Growth Week
London, 21 September 2011
1
Banking in every community
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The success of M-PESA in Kenya
• 13 million users = 50% of the adult population
• More transactions than Western Union does globally
• 60% of e-payments by volume, 2% by value
• 20,000 cash merchants = 20x the number of bank branches
In just 3.5 years… (data as of Sep 2010 based on Safaricom data)
• 70% of households had at least one M-PESA user, including 50% of unbanked and 60% of rural households
• 3% of people surveyed don’t know about M-PESA
• Closing it would have a large negative impact on 91% of users
In just 2.5 years… (data as of Nov 2009 based on panel data from Billy Jack & Tavneet Suri)
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A service platform delivering many benefits to all 3
Convenience
Control Innovation
Utility companies
Government services Microlenders
Youth
Entrepreneurs
Banks
Distributors & supply chains
Households
Family & social networks
Simple Accessible Mass market “The new banking hygiene factors”
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Making financial services relevant for all 4
Electronic money 0110010100
Cash
BUILDING BRIDGES TO CASH
Cash ↔ Electronic value • Convenience = location • Trust = brand, consistent
experience • Viability = volume per store
Individual
Online Merchant
Downstream Business
Store Merchant
Cash Merchant
P2P
B2B
B2C P2Cash
Gov’t
G2P
Int’l
MAKING E-MONEY DIRECTLY USEFUL, DAILY
Electronic ↔ Electronic • Network effects = larger
is more useful (as well as cheaper)
• Pain points of cash = willingness to pay
HELPING PEOPLE ACHIEVE THEIR GOALS
Electronic ↔ Psychology • Customer insight =
motivations, practices • Service presentation =
intuitive, easy to use
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Savings as deferred payments (or installments) 5
SPACE
TIME
Here
Now
Rent due!
Village back home
Bicycle shop
I want a bicycle!
• People save for a purpose: time-bound or goal-based
• Financial services are installment plans for planned purchases or expenditures: credit (postpaid) or savings (prepaid)
• Any savings product can be constructed as a package of transactions across space (real-time payment) and time (deferred payment)
• How to maintain a conversation with your customers, when the interaction is remote (on a phone)?
MONEY TRANSFER Phone # ________ Amount ________ PIN ____________ (Value date _____) (Purpose_______)
Mobile phone menu:
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Mobile Money Regulatory Issues
LSE, September 21, 2011
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Mobile money - A wave of experiments
• Till 2006: half a dozen new trials across the world
• 2007: Kenya: M-PESA starts and booms • Today: 119 deployments – 96 planned
ones, most in Africa, Asia
• Hence there is regulatory concern, but little experience (or data)
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Thinking about regulation when business models allow to recompose
delivery systems • Unbundling Banking by function/service
– Exchange of forms of money
– Storing money
– Transferring money
– Investing money
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Risks and regulatory response Function Risks Conduct Regulation Prudential Regulation
Exchange Fraud No,
just commercial law
No
Storage Inaccurate records,
Theft
Yes, including
regulation of agents
No
Transfer Transmission errors,
Accounting errors
Yes No
Investment Investment failures,
Systemic risks
Yes Yes
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Systemic risk: Basic ways of running a system
• As a “Safe deposit box”
• Investing in central bank paper (narrow bank)
• Investing in banks and beyond…
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Systemic Risk: Topics for investigation
• Nature of runs and policy/management responses under each basic model of running the system
• Deposit Insurance: Allow deposit insurance or allow provider to determine investment strategy or provider becomes deposit insurer
• Resolving distress – operational separation and transfer to new ownership
• Scenarios for reaching scale/systemic importance
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Competition Issues • Telecommunications and interconnection • Cash-in/cash-out system:
– critical mass – free entry – exclusivity
• Two-way access among account providers – Voluntary – Mandated (access charges)
• Unbundling payment platforms – SIM card – USSD – Applets
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Anti-money-laundering
• Strategic posture: Encourage people to leave the cash economy
• Graduated KYC requirements – Identity check – Transaction limits: amount, frequency – Suspicious Transaction Reporting
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Monetary Policy
• Monitoring schemes • Simulation of size of effects • Transmission mechanism…
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Consumer Protection
• Mobile money: operational integrity
• Micro-credit: – Reasons for over-indebtedness – Competition and interest rate levels – Bubbles without the profit motive (e.g. Bosnia)
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Financial Innovations and Market Development
Shyamala Gopinath
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Financial Innovation, Development and Economic Growth
• What causes what? • Whether financial development really leads to
economic growth? – If so, under what circumstances – Are there any pre-requisites for financial
development to have a positive impact on growth?
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Financial Development
• Theoretically, financial development should lead to economic growth – Enables more efficient allocation of capital – Encourages savings and investments – Reduces transaction costs – ‘Completes’ markets – Addresses information asymmetries – Enables better risk management
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But, has innovation been beneficial?
• Paul Krugman, Princeton U., 2009 “[It’s] hard to think of any major recent financial
innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.”
• Paul Volcker, Princeton U., 2009 “How many other [recent] innovations can you tell
me that have been as important to the individual as the automatic teller machine, which in fact is more of a mechanical than a financial one?”
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Good and Bad Innovations
• Based on the motive ? – To get around regulations – Avoid tax – Manage revenues/assets/liabilities
• Based on the impact ? • Some innovations could have turned bad
simply because they were ahead of times – Shallow understanding of the product
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Timing and innovation
• Innovation in an unripe environment could lead to bad results
• While innovation can expedite development of markets to an extent, a basic framework is absolutely necessary for innovation to have positive impact
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Basic Framework required
• Reasonable sophistication of participants – Financial literacy
• Sophistication should not be concentrated in a few participants – skewness
• Sound legal framework for dispute resolution – No ambiguity in law
• Robust market infrastructure • Reasonably liquid and deep cash market
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Derivatives in less liquid cash markets
• When the cash markets are not reasonably developed, derivatives can be counterproductive
• Derivatives trade as standalone products – No linkage with the underlying – No beneficial impact on cash markets
• Skewness of participants’ sophistication – Leads to mis-selling
• More caution required
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How to separate ‘good’ products from others
• Very difficult • Could be based on the motives for usage
– Speculation Vs hedging – But can hedgers survive without speculators?
• Could be based on the sophistication of participants
• Strict controls on leverage and speculation
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Financial Innovation- Indian example
• Gradual and calibrated introduction of sophisticated products
• Market making permitted only for select set of regulated participants – Banks and Primary Dealers
• Only hedging was permitted for others – To contain speculation
• Emphasis on suitability and appropriateness
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Financial Innovation- Indian Example (2)
• Focussed development of market infrastructure (DvP, CCP etc) – To enhance transparency and – To address counterparty credit risks
• Consultative policy making – Taking into account participants’ awareness and
preparedness
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Growth of Non-banking Sector- Concerns
• Contribution to financial development in EMEs
• Hetrogeneous nature • Scope of regulation • Dealing with regulatory arbitrage • Optimal regulation of non-banking finance
companies • Public interest issues
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Thank you