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> Posted by Sonja Kelly, Director, CFI
This post is the first in a series examining the global phenomenon of de-risking and its impact on financial inclusion. Through the Credit Suisse Global Citizens Program, CFI partnered with Rissa Ofilada, who works as a lawyer in compliance in the Philippines, to undertake a study on de-risking. In the series, we’ll discuss the causes of the phenomenon, what it means for customers at the base of the pyramid, how it affects global momentum toward financial inclusion, and what solutions are on the horizon.
The term de-risking may sound arcane and technical, but in fact some observers believe that de-risking is the biggest threat to the progress that has already been made on financial inclusion. We at CFI are worried about it—and you should be too.
De-risking refers to the trend of commercial banks, payments companies, and regulators closing down “suspicious” accounts. These accounts could be suspicious for any number of reasons. The owner may not have had adequate proof of identity—a common problem for lower-income people in countries without well-developed identification systems. Or the owners may not be able to precisely trace the source of the funds they deposit—a frequent issue for those operating in the informal sector. Or the provider had a problem with another lower-income customer who was flagged as suspicious, and as a result decided to close all accounts owned by people with similar patterns or profiles.
> Posted by Elisabeth Rhyne, Managing Director, CFI
As regulators navigate the changes involved in financial inclusion, they must hold fast to first principles. The arrival of new technologies and new players, and in many countries, new mandates for financial inclusion and consumer protection, demand responses in regulation and supervision. Many of these responses are major departures from past practice. However, while the details of regulations and supervision may change significantly, familiar fundamental tenets remain to guide the way.
A task force of distinguished experts convened by the Center for Global Development under the joint leadership of Liliana Rojas-Suarez and Stijn Claessens puts forward three key tenets. First, if it quacks like a duck, treat it like a duck; second, let risk be your guide; and third, strike a balance between anticipation and reaction. (Of course, in regulator-speak these tenets sound different: functional similarity; proportionality; and a balance between ex-ante and ex-post regulation.)
The first principle suggests that regulators should look across providers of all types who are carrying out similar activities, whether banks, telcos, or small financial institutions, and ensure that one provider is not disadvantaged relative to another. This principle is especially important for regulators in determining whether mobile money should be telco or bank-led. It guides regulators towards a response that is agnostic about institutional form and focuses instead on understanding risks inherent in activities.
The Basel Committee on Banking Supervision has requested comment on a draft guidance document that for the first time addresses the responsibilities of regulators and supervisors in the context of financial inclusion. Given the potential impact of this guidance on regulators around the world, we invited Daniel M. Schydlowsky to review and comment. Dr. Schydlowsky is a fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School, and the former head of the Superintendency of Banks and Insurance Companies of Peru.
The draft guidance issued by the Basel Committee is unquestionably an enormous step forward. It identifies, describes, and qualifies how supervisors should behave in relation to financial inclusion. It also describes numerous particular situations that supervisors have to confront and suggests responses. It thereby provides the representative supervisor with what amounts to an encyclopedia of supervisory wisdom.
The guidance is comprehensive, it treats (almost) everything. That is its strength. But, it did not create an effective hierarchy of importance to guide supervisors as they confront their new mandate to generate financial inclusion. In what follows, some central issues are raised, which, in the opinion of this author, need to be incorporated into the guidance or highlighted to denote greater relative importance.
The Dilemma of the Supervisors
- Too much to do with too few resources: The supervisors have limited staff and many things to do, starting with making sure the financial system is safe, the books are kept properly, required information is supplied reliably and on time, and capital and other requirements are complied with. On top of this come new responsibilities related to financial inclusion. When reading the guidance, a whole second staff would appear to be needed to comply properly with what is suggested. It is absolutely imperative that the limited resources of the supervisor be factored into what is requested that they do.
> Posted by Brenda Santoro and Ahmed Dermish with Kim Wilson
In uncertain times do developed economies have the resiliency in their financial inclusion processes to withstand rapid change without risking systemic stability and consumer protection?
Modern, nationally integrated systems, high-capacity supervision, and flexible policymaking are helping Germany turn the refugee crisis into an economic opportunity.
The German Federal Financial Supervisory Authority, commonly known as BAFIN, this fall relaxed requirements for opening a bank account. The new rules allow accounts to be opened with a stamped document from an appropriate German authority, such as BAFIN, along with a picture and personal information. Transitional rules are in effect until the approval of the law, expected this year. A directive in the European Union, which will begin in September 2016, will require similar access to bank accounts across the EU.
Citizens of developed countries may not appreciate the role a bank account plays in providing access to basic financial services. A bank account is more than a place to secure our money – in nearly every country, it provides high social and economic value. When a bank says we are trustworthy, even for a simple bank account, doors open for many services we take for granted such as access to electronic payments, basic utilities, housing contracts, education or small business loans. This works because banks use a vetting process to ensure they know exactly who we are, often referencing a nationally issued document such as a passport or driver’s license. For us, the account becomes another form of identity. For the banks, it ensures the correct people have access to funds. With a passport and a bank account, the world is our oyster, an entrée into other services and for the bank, it is an entrée into cross-selling and more profits as they learn more about us.
> Posted by Gloria Grandolini, Senior Director, Finance and Markets Global Practice, the World Bank Group
FI2020 Week is a global conversation on the key actions needed to advance financial inclusion, grounded in the findings of the recently launched FI2020 Progress Report. From November 2-6, 2015, stakeholders around the world are participating in more than 30 events and sharing their voices over social media, with #FI2020.
Despite significant progress and the increased technical and financial resources devoted to financial inclusion, 2 billion people worldwide still lack access to regulated financial services.
As I read the FI2020 Progress Report and cast my vote on how the world is doing on the five aspects of financial inclusion the FI2020 report covers, I’m reminded of the recent Global Policy Forum of the Alliance for Financial Inclusion (AFI), where I had rich discussions with AFI members regarding how to meet challenges to expanding access to financial services.
The successes and obstacles which AFI members shared echo many of the points identified in the FI2020 Progress report as shaping the future of financial inclusion.
These hurdles can be distilled into five main challenges:
Financial literacy and capability. Countries must develop financial capability programs to ensure people can make sound financial decisions, select financial products which best fit their needs, and know how to use related channels, such as ATMs or mobile banking. Recent World Bank Group Financial Capability Surveys in Morocco and Mozambique, and studies on remittance services among migrants in France and Italy, show that a lack of awareness prevents people from using suitable financial products and services. Behavioral insights are leading to more effective – and lower cost – financial literacy efforts, which can improve uptake of new accounts and increase savings, including through tailored SMS texts.
> Posted by Susy Cheston, Senior Advisor, CFI
Of the 700 million new accounts that the Global Findex reports were opened from 2011 to 2014:
- Banks and other financial institutions accounted for 550 million;
- Mobile network operators accounted for 100-240 million, depending on your source and methodology;
- Microfinance institutions accounted for 50 million.
These numbers are rough and involve some overlap—but they point to the continued importance of commercial banks in financial inclusion. Put another way, of the 3.2 billion accounts reported in the 2014 Findex, 3.1 billion were accounts with a financial institution.
That’s why I was so interested in hearing what the commercial bankers had to say at an Institute of International Finance (IIF) roundtable held in Lima on October 9 alongside the International Monetary Fund (IMF) / World Bank meetings. The strategies they discussed for reaching the BoP were not new to those immersed in the financial inclusion world, but it was heartening to hear their commitment to putting those strategies into operation. Here are a few of the points from the discussion:
Use data to understand customers. Now more than ever, there is a wealth of available data to help us better understand customers at the base of the pyramid. These new customer insights are opening up new practices – from on-boarding, to cross-selling, to risk management. Data analytics can also enable cost reductions on credit and insurance. For example, ecommerce platforms for small manufacturers can facilitate credit offers and then arrange for automatic repayment from the ecommerce activity itself. This innovative use of data allows financing at half the cost.
> Posted by Jeffrey Riecke, Senior Communications Associate, CFI
GSMA’s Mobile Money for the Unbanked (MMU) program recently released the report ‘Mobile Financial Services in Latin America & the Caribbean,’ spotlighting the region’s booming mobile money activity. I talked with the report’s authors, Mireya Almazán and Jennifer Frydrych, to learn more about the project. The first half of our conversation, published last week, is available here. The second half of our conversation follows.
An enabling regulatory environment, as identified in the report, is one where the regulator has taken a functional and proportional approach that allows banks and non-bank providers to compete, as well as establish different types of partnerships for the provision of mobile money services. What does this means in practical terms, and how has or hasn’t Latin America and the Caribbean (LAC) met these conditions?
An open and level playing field that allows banks, mobile operators, and third parties to offer e-money is critical for mobile money to succeed. Anecdotal evidence, commercial lessons, and international regulatory principles all speak in favor of opening the market to providers with different value propositions and business models. Best practices are well established at both the regulatory and commercial level to guarantee the soundness of mobile money schemes, as well as the integrity and stability of the financial system.
As of April 2015, six of 19 (32 percent) mobile money markets in LAC have an enabling environment for mobile money, up from only two in 2012 (Nicaragua and Peru). These six include Bolivia, Brazil, Guyana, Nicaragua, Paraguay and Peru. Uruguay also has enabling regulation for mobile money and in fact issued the nation’s first e-money license to Redpago in April 2015; however, as Redpago has not formally launched, Uruguay is not categorized as a “mobile money market” in this report’s analysis.
In this thoughtful and provocative blog post Ignacio Mas lays down a series of challenges for everyone working on financial inclusion. We think that the questions he’s asking need to be talked about. We’re asking three experts — on customer-centricity, on fintech start-ups, and on regulation — to respond to his provocations, and for the next three Wednesdays we’ll publish one of them.
Have you noticed how narrow the interventions of the chorus of financial inclusion supporters have become? Academic researchers are immersed in proving whether an SMS message sent at the right time can push people to repay their loans more promptly (a.k.a. nudges), or whether someone with more savings is likely to be happier and more empowered in some way (a.k.a. impact evaluations). NGOs fund numerous papers and conferences to promote the idea of seeking early and frequent customer feedback in product design (a.k.a. human-centered design), or of looking into customer data for some clue as to what interests them and how they behave (a.k.a. big data). Donors set up round after round of tenders with subsidized funds to spur fully-grown banks and telcos to try out a new product feature (a.k.a. challenge grants), or to prop up the marketing and distribution wherewithal of selected players (a.k.a. capacity building).