Unlocking the potential of Digital Financial Services for the Unbanked

Digital financial services will allow more people to manage their accounts remotely

By Gigi Gatti and Sharada Ramanathan

The term “digital financial services” automatically implies high levels of automation and limited human interaction and physical cash handling.  This is how most of us expect it to be. We would much rather walk up to an ATM machine and withdraw cash, than queue up to see a teller. We would much rather use our credit card to make a purchase, than carry cash around.  

This is not necessarily true in the context of development, where the significance of human interface remains high. Our experience working with microfinance institutions (MFIs) to use mobile money platforms to serve their clients highlights this and several other complexities in implementing digital financial services for this populace.  Until a few years ago, the key challenge was technology. Today, rapid advances in mobile technology have provided us with multiple ways to deliver services economically. Yet, widespread adoption by the unbanked remains a challenge worldwide.
 
A Conceptual Framework for Delivery 
The delivery of digital financial services involves integrating a mix of practical technologies and channels which the unbanked can use to access financial services conveniently, cheaply, efficiently and faster.  A robust delivery framework requires six functioning elements to be in place.

• A healthy regulatory framework for m-banking and electronic money issuer licensing
• High mobile access and literacy
• Applications that support easy over-the-counter transactions
• Agents and channels in rural areas
• Interoperability of digital financial services providers
• Widespread, digitized use for micro-payments

Let’s look at these six elements in the context of the Philippines, where close to 70% of its 99 million people (2013 figures) remain unbanked.  

In 2007, the Banko Sentral ng Pilipinas (Central Bank) established an office dedicated to financial inclusion.  It was the first central bank in the world to do so.  Since then, the Inclusive Financial Advocacy Staff (IFAS) has been at the forefront of implementing policies and advocating the delivery of mobile money solutions by financial and non-financial institutions, while at the same time, establishing guidelines for financial education and consumer protection.  
Prior to this, there had been a slow yet steady transformation of non-bank financial institutions, such as pawnshops and money changers, into remittance centers and airtime resellers. Over-the-counter “bayad (payment) centers” also started to proliferate, offering bills payment services to the market at large.   These institutions are now recognized as “trusted financial intermediaries” by the unbanked.  However, they are still located in predominantly urban and peri-urban areas, so accessing these services require people in rural communities to commute.  Transportation remains expensive and time-consuming in rural Philippines.

And while telecom companies claim that there is more than 100% mobile penetration in the country, the GSMA (2013 data) estimates that there are only 50%, unique subscribers. Though non-conclusive, this may be an indication that mobile ownership and access is not as high as the telcos claim.  The lack of mobile money interoperability between the two major telcos (Smart and Globe) is slowly being addressed by third party aggregators and platform providers.  While this is a necessary solution to the bigger problem of non-interoperability, the multi-layered pricing structure for mobile money services poses a threat to agents’ liquidity, which is key to the success of digital financial services in rural areas.   

Establishing an infrastructure to digitize micropayments at the “barangay” (village) level is largely left out of the equation. Point-of-sale functionality in small stores and ambulant merchants is still not seen as an exciting proposition despite the transaction volume that this sector can potentially generate. 

Though, as in the case of the Philippines, there are a lot of focused players, the orchestration of these players, their limited physical reach, and their risk appetite to serve the unbanked are still the key missing pieces.  

Lessons from the field 
As we work to provide a conceptual framework for evaluating a country’s readiness for digital financial services, our experience in executing mobile money programs with MFIs in India and the Philippines point to complexities which inhibit large scale adoption. 

1. Mobile ownership and literacy do not automatically translate to “usage”—Most services on offer are not designed around the needs, capabilities and behaviors of the unbanked, which is reflected in low uptake and usage rates, in turn affecting the commercial viability of these services. (For more, read these usability studies conducted by Grameen Foundation in India, the Philippines and Uganda.)
2. Interoperability results in high pricing—Interoperability is expensive to implement. Mobile network operators typically hike rates in this scenario, which impacts the adoption of services. Third party providers that are agnostic about telcos need to bite the bullet in terms of layered fees that, in most cases, result in a prohibitive pricing structure for the unbanked. 
3. It is very difficult to make rural agents profitable—There is still a need to “move physical cash” until the “usage of cash” is also digitized.  We need to look beyond cash-in and cash-out transactions alone and take a wider view, by enabling micro-payment streams.    

Looking ahead
Digital financial services initiatives are set to rapidly expand and accelerate financial inclusion over the next few years, but to achieve its potential, ecosystem players must partner to test and deliver innovative interventions that lead to higher adoption rates and repeated usage. We believe that there are three immediate priorities that need their collective focus to have a transformative impact on service delivery.

1. Create profitable rural agent networks—Viable, liquid agent networks need to be nurtured by minimizing cost layers and enabling cash transfer facilities. This will need strong partnerships between multiple entities, both private and public.    
2. Encourage human-centered design and delivery for lasting behavior change—No matter how advanced the technology, we have learned that there is little it can do by itself to create lasting change in the behavior of clients. For true behavioral change to occur, products need to be designed around their needs, behaviors and capabilities; and trusted, local human networks must be leveraged for delivery and adoption.  Human networks are still key to driving usage and trust. (Learn more about Grameen Foundation’s past human-centered design initiatives and findings.) 
3. Develop an enabling infrastructure for micro-payments—Widespread use of digitized micro-payments, which are designed around the cash flows of unbanked clients and delivered through a system that they can trust, can significantly reduce costs and enhance the efficiency, convenience and transparency of their day-to-day transactions. This will eventually pave the way to less physical cash handling.

This blog is adapted from a plenary speech deliverd by Gigi Gatti at the Digital Services for Development Summit in Manila (October 2014)