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Rethinking Financial Inclusion, the MasterCard Way

Ed Brandt, EVP, Managing Director, Government Services & Solutions, MasterCard
Ari Sarker, Division President, South Asia, MasterCard

Ann Cairns, President of International Markets, MasterCard (right) presents  Virginia Petersen, CEO of the South African Social Security Agency (SASSA), with an award to acknowledge SASSA’s worldleading social grants payment programme at an event held in Pretoria, South Africa

A well-developed, inclusive financial sector benefits individuals, governments and businesses. It also leads to a shift in payment of salaries, welfare support and bills from cash to electronic, which reduces costs and leakage. Not surprisingly, the need for an inclusive financial sector has increased over the years. New technologies such as mobile phones, smart cards, and ATMs coupled with strong banking institutions have helped expand access and reduce costs for both, providers and clients.
Despite these obvious advantages and progress, close to Three billion people around the world still lack access to financial services, according to the World Bank. Many live on less than US$ 2 a day. Indeed, financial exclusion disproportionately affects the poor in Africa, South Asia, Latin America and the Middle East. While full-fledged financial inclusion may encompass savings and deposit services, payment and remittance, credit and insurance, a beginning has to be made somewhere. Digital payments are increasingly being recognized as a stepping stone toAwel l -de veloped, inclusive financial sector benefits individuals, governments and businesses. It also leads to a shift in payment of salaries, welfare support and bills from cash to electronic, which reduces costs and leakage. Not surprisingly, the need for an inclusive financial sector has increased over the years. New technologies such as mobile phones, smart cards, and ATMs coupled with strong banking institutions have helped expand access and reduce costs for both, providers and clients. Despite these obvious advantages and progress, close to Three billion people around the world still lack access to financial services, according to the World Bank. Many live on less than US$ 2 a day. Indeed, financial exclusion disproportionately affects the poor in Africa, South Asia, Latin America and the Middle East. While full-fledged financial inclusion may encompass savings and deposit services, payment and remittance, credit and insurance, a beginning has to be made somewhere. Digital payments are increasingly being recognized as a stepping stone to the journey of financial inclusion due to their versatility and wider usability.

Key Challenges
Expansion of inclusive financial services is not without risk, as the recent controversy surrounding excessive microfinance lending in India has demonstrated. Regulation can play a role in improving oversight and verifying financial information. Another big challenge to improving financial inclusion is achieving economies of scale. Achieving financial inclusion requires developing an entire ecosystem to support such a change. Women, who are often the focus of such programmes, must have greater legal protection and social equality.

Innovations Help Overcome Barriers
MasterCard has been working with governments around the world in their efforts to drive financial inclusion and the social welfare payments. For example, in South Africa Social Security Agency (SASSA) chose MasterCard Debit card with an embedded chip to store both biometric data and payment application and more than 10 million cards have already been issued and being used for this purpose. Africa’s most populous country Nigeria has also selected MasterCard platform to deliver benefit payments. In the first phase alone, 13 million dual purpose cards would be issued that would also act as government ID with biometric authentication. Also, MasterCard is supporting the UN World Food Programme with electronic vouchers. MasterCard also brings global best practices to assist India realize its vision of financial inclusion. Firstly, there is immense value in public private partnerships with the government wanting to create the right environment and working with the private sector to accomplish their goals. Secondly, a whole ecosystem needs to be developed and nurtured to align motivations. Finally, stakeholders need patience and perseverance, while staying on the course.

Long-standing Barriers to Financial Inclusion

Business Model for Financial Inclusion: It is well acknowledged that serving the unbanked and under-banked using the conventional approach is unviable. The traditional bank branch model costs too much – starting and running them and extending to new geographies – and the branchless model has not been fully developed and is not yet economically sound. Further, banks operating in the traditional sense (making money from float and fees) do not make money off the base of pyramid.

Identification of Customers: There is a greater need to know who the right target people are. Know Your Customer (KYC) and other regulations are in place for the right reasons. But it is not easy unless the government creates a robust ID scheme. So there is a greater need for public private partnership that enables formal financial services.

Education: The traditional approach has focused on budgeting and saving. But people need to be educated in helping them understand that these financial services are in their best interests.

Lack of Electronification:
There is also the need to optimally manage flow of funds ‘Cash-out’ is a dire need and may need suitable escrow mechanism.

The challenge with mobile transactions is the difficulty in building these systems from scratch. Innovations such as those from Colombia are relatively new and needs to be explored further in which at ATMs government benefits can be withdrawn using mobile phones. Engaging in emerging and developing markets is critical but developed markets cannot be ignored. According to the FDIC, in the United States, there are 44 million people lacking access to financial services; KPMG puts that number at 88 million though. The solutions may be different, but the need is still there.

The Indian Context
With the world’s largest population of financially excluded persons, India presents both a daunting challenge and a unique opportunity to foster and accelerate financial inclusion. Even after decades of focus on financial inclusion, only one third of Indians have a bank account with the problem gaining acute dimensions in the rural areas where two out of three Indians live but just about six percent of 6, 50, 000 villages, have bank branches.
Though there has been impressive growth in the e-Payments in India over the decades and especially in the past few years, it is mostly concentrated in the urban centres. India still lags in global rankings. It stands at 119th position among 148 countries in the World Bank’s Global Financial Inclusion Index and 21st across 34 countries in Mastercard’s Mobile Payment Readiness Index. MasterCard is committed to the cause of financial inclusion in India and is jointly developing and supporting a number of initiatives, working closely with banks, central and state governments. These include assistance in developing the strategic concept from a deep shared understanding of the government needs; identification and mobilisation of partners; and, last but not the least, implementation support. All this requires heavy investment and hence, the government agencies should be willing to pay reasonable fees, which by the way, are way below the prevailing costs being paid.

edbrandt

MasterCard has been working with governments around the world in their efforts to drive financial inclusion and the social welfare payments


The Direct Benefit Transfer (DBT) using Aadhaar is a transformational paradigm but the main challenge is to link the Aadhaar number with accounts and to provide accounts to those who do not have one. Open system prepaid instruments can be used to address this challenge. MasterCard is playing an active role in enabling e-Governance in the country and would enable transactions using the Aadhaar authentication.

TWO INNOVATIONS IN PARTICULAR THAT WARRANT ATTENTION

Biometrics: There is a great need to recognise and overcome illiteracy tied to financial inclusion. Without biometrics taking a greater role, it is unclear how we can overcome this barrier. Fingerprint and voice recognition can provide the necessary security for access to accounts and reduction in leakage while overcoming illiteracy. But Chip & Pin technology and biometrics increases security in markets, but requires greater literacy and numeracy levels. Aadhaar is doing exactly that.Mobile: There are many ways that innovations in mobile can drive financial inclusion, and most of the success seen has been in the remittance and P2P space. However, rather than being limited to closed-user groups within the respective mobile networks, MasterCard can help ensure interoperability so that a user of mobile operator X can seamlessly transact with another user on a the mobile operator Y

Prepaid as Enabler
for Financial Inclusion It is encouraging to see that the new RBI Governor has set up a high level committee to focus on financial inclusion holistically. Indeed, India is well positioned to become the flag bearer in innovative solutions to financial inclusion.
For example, in addition to the existing criteria, prepaid instrument should also be considered as a sufficient qualifier for financial inclusion. The Reserve Bank of India allowed cash withdrawal at PoS using open system prepaid instrument in September 2013. Hence, it is only logical that such prepaid instruments be considered by the RBI as a sufficient qualifier for financial inclusion, in addition to other criteria such as the basic savings bank deposit account (BSBDA) and the no-frills account (NFA).
The cost for acquisition and maintaining a prepaid account is significantly lower than that for a bank account (BSBDA or NFA) directly residing in the bank’s Core Banking System (CBS). All the same, the prepaid instrument is extremely versatile and can be widely used across ATM, Point of Sale (PoS) terminals and even for online payment gateways notwithstanding that the acquiring bank may be different from the issuing bank.


MasterCard is playing an active role in enabling e-Governance in the country and would enable transactions using the Aadhaar authentication 


Likewise, the prepaid card account number should be enabled within the Aadhaar Payment Bridge System (APBS) enabling beneficiaries with prepaid accounts to receive payments for the Direct Benefit Transfers (DBT). Such fresh and flexible ideas can indeed accelerate and expand financial inclusion in India – and the world!

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