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Accelerating Financial Inclusion in South-East Asia with Digital Finance Asian Development Bank Table of Contents

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Accelerating Financial Inclusion in South-East Asia with Digital Finance Asian Development Bank Table of Contents ACCELERATING FINANCIAL INCLUSION IN SOUTH-EAST ASIA WITH DIGITAL FINANCE ASIAN DEVELOPMENT BANK TABLE OF CONTENTS PREFACE 3 EXECUTIVE SUMMARY 4 1 INTRODUCTION 7 2 CURRENT SITUATION AND OPPORTUNITY 9 3 FRAMEWORK TO IDENTIFY BARRIERS TO FINANCIAL INCLUSION 11 4 IMPACT OF DIGITAL FINANCE 18 5 QUANTIFYING THE IMPACT OF DIGITAL IN FINANCIAL INCLUSION 41 6 SEGMENT-SPECIFIC INSIGHTS 43 7 COUNTRY-SPECIFIC INSIGHTS 50 8 CONCLUDING REMARKS 65 9 APPENDIX 67 2 PREFACE Supporting financial sector development has been a strategic priority for ADB over the past several decades because of the critical role the financial sector plays in facilitating economic growth. ADB’s long-term strategic framework, “Strategy 2020,” emphasizes financial inclusion as an essential part of financial sector development: Without access to formal financial services, the unserved and underserved segments of society will be excluded from growth and its benefits.1 Digital finance presents a potentially transformational opportunity to advance financial inclusion. ADB engaged Oliver Wyman and MicroSave to conduct the following study on the role digital finance can play in accelerating financial inclusion, focusing on four Southeast Asian markets – Indonesia, the Philippines, Cambodia, and Myanmar. This study – informed by more than 80 stakeholder interviews across the four markets, extensive secondary research, and economic analysis – is an endeavour to better understand and quantify the nature of this impact. Oliver Wyman is a global leader in management consulting with a specialization in financial services. As a recognized thought leader in financial inclusion and digital finance, Oliver Wyman has a strong body of client work covering a broad range of financial institutions, regulators, and multilateral agencies. MicroSave is a globally recognized research and consulting firm committed to promoting financial access amongst low- and middle-income populations. With over two decades of on- the-ground experience across Africa, Asia and the Pacific, MicroSave has worked with public and private sector organizations to guide business strategies, re-engineer processes, and develop customer-centric products. 1 ADB. 2008. “Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank,” 2008 – 2020. Manila; and ADB. 2014. “Midterm Review of Strategy 2020: Meeting the Challenges of a Transforming Asia and Pacific,” Manila 3 EXECUTIVE SUMMARY Financial inclusion refers to the delivery of formal financial products and services to all segments of a population irrespective of their economic situation. Between 2011 and 2014, bank account ownership worldwide increased from 51% to 62%,2 showing significant progress in extending access to formal financial services (FS), despite substantial imbalances across geographic boundaries and between genders. Promoting the use of formal financial services continues to be a challenge, and the depth of engagement varies with different financial products: Only 18% of adults use a bank account to receive wages or pay utility bills, and only 11% borrow from formal sources. Our research focuses on financial exclusion in three segments: base of pyramid (BoP); women; and micro, small, and medium enterprises (MSMEs). From our research, we estimate that addressing this opportunity could increase Gross Domestic Product (GDP) by between 9% and 14%, even in relatively large economies such as Indonesia and the Philippines. The potential boost to GDP is as high as 32% in Cambodia. Making the most of this opportunity could also help influence the future shape of the financial services industry, particularly in smaller markets such as Cambodia and Myanmar, where only a small percentage of the current needs for financial services are met by formal providers. In Cambodia, for example, formal institutions meet only 16% of the demand for savings facilities from people in the financial inclusion target segment. Taking this opportunity will require action from regulators, public policymaking institutions, and supply-side participants to address structural issues impeding financial services growth in these segments. On the supply side, resource and investment mobilization continue to be held up by the unattractive economics of serving the three segments. For target customers, the solutions offered by the formal financial services sector often do not appear attractive enough as alternatives to existing informal solutions – partly because of their low level of financial literacy and overall awareness. For public policymaking institutions, the base- of-pyramid population is challenging because there are often conflicts between social, economic, and political priorities. Our research finds that digital financial solutions could play a significant part in closing gaps in financial inclusion. They could address about 40% of the volume of unmet demand for payments services and 20% of the unmet credit needs in the BoP and MSME segments. Digital finance alone cannot entirely close the gaps in financial inclusion. But we estimate that the cumulative effect of digitally driven acceleration in financial inclusion could boost GDP by 2% to 3% in markets like Indonesia and the Philippines, and 6% in Cambodia. For the population earning less than $2 a day, that would translate to a 10% increase in income in Indonesia and the Philippines, and an increase of around 30% in Cambodia. 2 Global Findex Database; Percentage of adult population with bank accounts 4 Digital solutions will have the most significant positive impact on financial inclusion in five key areas: • They can enable fast, low-cost, and convenient customer identification and verification processes – especially when powered by unique national identification numbers, a real- time verification infrastructure, and supporting regulatory frameworks such as tiered know-your-customer (KYC) schemes. • They can meaningfully alter the economics of the supply side by addressing last-mile distribution and servicing issues through low-cost, widespread, digitally-enabled points of physical access such as mobile phones and point-of-sale (POS) devices. • They are prevalent throughout the payments value chain and ecosystem. Digital government-to-person (G2P)3 payments and remittance flows can create the initial momentum for electronic payments, thereby supporting the development of viable supply-side business cases. These can be sustained and further developed through person-to-all (P2All)4 payments systems combined with interoperable networks and open application programming interface (API) platforms. • They can significantly enhance access to credit by using alternative sources of data, such as payment transactions and telecoms data, as well as analytics. These improve customer profiling, credit risk assessment and fraud detection. • Savings can be mobilized digitally through alternative, lower-cost origination and distribution channels and more-convenient product designs, such as mobile wallets connected to savings accounts and intuitive goal-based savings products. An easy KYC and onboarding process can also contribute. Exhibit 1: Gap between demand and formal supply, and impact of digital applications % of Need met by formal FS providers Need vs. Formal Supply Gap Gap addressable by digital finance (calculated as % of total need in (In US$ Billion) (% of total gap) the segment) ID 35% ID 144 ID 37% PH 75% PH 16 PH 44% PAYMENTS/ CB 40% CB 5 CB 35% TRANSFERS MM 11% MM 20 MM 30% ID 74% ID 37 ID 35% PH 60% PH 20 PH 38% SAVINGS CB 16% CB 22 CB 12% ID 64% ID 57 ID 20% PH 48% PH 21 PH 21% CB 72% CB 3 CB 19% CREDITS MM 48% MM 2 MM 28% ID 1% ID 0.7 Not estimated due to nascent PH 4% PH 0.7 stage of Micro-insurance market development INSURANCE CB 2% CB 0.0 Source: Oliver Wyman analysis Note: We were not able to reliably estimate formal savings and insurance supply in Myanmar that targets financial inclusion sub-segments 3 Government-to-person (G2P) payments includes employee payments (such as wages and pensions), as well as social transfers 4 Person-to-all (P2All) payments consists of all payments made by individuals. It includes remittances and transfers, payments made by individuals to businesses, and payments made to the government (such as taxes) 5 Since much digital enablement will be driven by the supply side, regulatory and public policy actions will play a significant role in creating a favourable environment. We see a particular need for action in three areas. (See Section 4 for a more comprehensive list of specific regulatory actions) • Supply-side entry barriers: Create a level playing field by allowing collaboration and competition between traditional financial services players and new types of supply-side participant such as mobile network operators (MNOs). • Suitable solution design and delivery: Develop a “safe space” for businesses to test new ideas in a live environment with a regulatory sandbox approach; provide clear guidance on the development and role of agent networks, and allow different supply- side operators to use these alternative channels; and promote frictionless payment channels and network infrastructure, for example by advocating and mandating interoperability between mobile money platforms. • Shared vision: Produce a unified roadmap for financial inclusion in order to focus the efforts of various stakeholders; and put in place a governance mechanism to facilitate coordination and ensure accountability for action in all relevant government departments. While digital innovation can provide
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