[From Bill & Melinda Gates Foundation´s Impatient Optimists blog, 12 August 2014]
Digital finance encompasses the notions of: (i) electronifying poor people´s monetary holdings; (ii) creating end-to-end cashless payment ecosystems reaching down to the base of the pyramid;(iii) pushing financial transactions outside of costly bank branches and into normal retail shops; and (iv) inducing a shift from riskier, traditional, informal financial practices into structured financial services (savings, credit, insurance) from formal, regulated institutions.
That´s a tough combo.
If I were grading the performance of the developing world as a whole on these four dimensions, I´d only give a comfortable passing score on (iii). Of course it´s still early days, countries have been on this agenda for anywhere between 0-10 years, and it will no doubt take another decade or two before we see substantial inroads. I do think there is an inevitability about this journey that will ultimately carry us through. But the hype about all the progress on the ground is, in my view, exaggerated.
Still, are the efforts well directed? I am certainly impressed with the number of providers that are having a go at it, though I´d like to see more banks and third parties joining the telcos in this club. But the main worry I have is the very limited extent of innovation and differentiation that I see as I go from country to country, and from provider to provider. It is hard to imagine, in these early days, that anyone has fully figured out the magic formula, and yet we seem to be trying very few formulas.
Over the last year, I have been looking at the pace and constraints on innovation in digital finance, under research I have conducted under a Gates Foundation-funded Fellowship at the Saïd Business School at the University of Oxford. In a sequence of four papers, I have looked at it from different angles:
· Client view. The paper “Digitizing the Kaleidoscope of Informal Financial Practices” contrasts the psychological and cultural richness of informal savings mechanisms with the simpler, more rigid and yet less intuitive format of digital savings products. The paper argues that financial inclusion should not imply a rejection of informal financial practices but a synthesis of the informal and the digital.
· Provider view. The paper “Product Innovations on Mobile Money” (co-authored with former BMGF colleague Mireya Almazán) contains a thorough review of the state of product development and innovation on mobile money platforms. We find that the range of product categories such platforms support is still rather narrow, but the specific ways in which services are defined and packaged do vary significantly across operators and markets.
· Technology view. The paper “Why You Should Care about Bitcoin – Even if you don´t Believe in it” explores what a truly innovation-friendly electronic currency system and payments infrastructure might look like. A software-protected currency operating with a public ledger system –the key technology elements behind bitcoin— has the potential for supporting the development of more open, contestable and interconnected ecosystems for the delivery of payment and financial services, much like the internet did for the delivery of communication and content services.
· Regulatory view. The paper “Shifting Branchless Banking Regulation from Enabling to Fostering Competition” argues that regulations on e-money issuers, retail agents and account opening need to be recast so as to reduce the cost of entry and give much more scope for service and business model innovation. In addition, there is a growing need for policymakers to ensure there is a level playing field across all players, and that mobile operators do not exploit their dominance in the mobile communications market to gain advantage in the new market for mobile financial services.
My main take-out from this work is that there is still much we need to learn and many approaches we need to experiment with before technology-based approaches can become a reliable tool for financial inclusion across the developing world.