policy brief No. 2016-3 (August) Innovating Financial Inclusion: Postal Savings System Revisited Aladdin D. Rillo, Senior Economist, ADBI Jeffrey Miyamoto, Associate, ADBI Key points • The postal savings Mobilizing domestic financial resources like savings is crucial for Asia’s developing system in Asia has economies. Savings are important because they permit investment, which in turn gone a long way from increases the productive capacity of an economy. They also play a significant role in being a traditional financial intermediation in a sense that savings funds intermediated by the banking vehicle for mobilizing system can be used as credit to finance development activities. Unfortunately, due to savings to becoming a potent new tool for different levels of financial sector development, access to such as financial inclusion. credit, savings, and payment services remain limited in developing Asia. For example, • While postal financial only 36% of adults in East Asia and the Pacific have formal savings accounts and 11% inclusion has much have access to formal credit, as of 2014. to offer, its success depends much on best practices Against this reality, Asia needs to explore other strategies and to improve financial and sustainable access. In this regard, the role of the postal network is crucial. With more than business models of 600,000 branches worldwide, post offices provide alternative infrastructure to rural postal finance. populations to access a wide range of financial services that traditional financial • To maximize the institutions cannot provide. Considering the potential of post offices to expand benefits of postal finance, key challenges financial services in rural areas, the development of a postal savings system may be on regulations, a good strategy for developing Asian countries to increase financial inclusion, reduce technological poverty, and achieve higher economic growth. innovation, implementation capacity, and cooperation need to be Why postal savings? effectively addressed. The postal savings system or the use of the postal network to mobilize savings has its origins in 1861 when policy makers in the United Kingdom recognized the difficulty of including the less wealthy in the nation’s system of formal finance. At the time, only catered to the highly wealthy and had a presence only in the large cities. Allowing the to handle deposits was an affordable way to include more people than ever before in the financial system, giving people a venue for deposits outside the home. The rationale for the introduction of postal finance in 1861 remains at play today in emerging economies, where formal financial institutions tend to serve only the small number of very wealthy.

In Asia, the postal savings system became a vehicle for promoting a more balanced economic development over a century ago, by mobilizing savings and providing financial services to the poor and lower-income people. In Japan, for example, the postal savings system has long served the needs of middle, low-income, © 2016 Asian Development Institute and rural people for financial services, and it has provided financing for public ISSN 2411-6734

Regional Conference on Postal Saving System in Asia: What We Know and What to Expect? 23–24 February 2016 This work is licensed under a Tokyo, Japan Creative Commons Attribution- NonCommercial-ShareAlike 4.0 The event was organized by the Asian Development Bank Institute. International License. capital investment. As early as 1875, areas. This is over four times the number the government’s post office began of rural banking branches of traditional offering savings accounts and money financial institutions. In terms of number orders. The range of financial products of bank accounts, India Post’s 238 million became ever expanded over the century accounts outnumber any other single that followed, including features such institution by far, but there is still plenty of as insurance coverage. Owing to its room for growth compared to the reach expansive reach—the number of post of traditional finance in aggregate (India branches performing financial functions Department of Posts 2016). was nearly double that of all other financial institutions combined in 2015— and its government-backed credibility, Role of postal savings the evolved into one of the in financial inclusion biggest financial institutions in the world, holding a greater amount of deposits Asia seems to be in a natural position than every other in Japan to promote postal savings because (Scher and Yoshino 2004). of the extensive postal network and infrastructure in the region that can serve Through this position of strength, the as access points for delivery of financial postal financial system was important services. Around 48% of post offices in for the modernization of Japan. Savings the world—roughly around 320,000— in the post bank were essential for are located in Asia (Figure 1). On average, projects including housing, infrastructure, every 72 square kilometers is served by and business development. These a post office branch, a coverage ratio far contributions created a virtuous cycle; greater than other parts of the world. all these factors made Japan wealthier, The coverage area is not only a token leading to higher savings deposited in the presence. In fact, Asian economies enjoy postal system, and allowed the financial good access to the full range of postal system to invest in projects of ever greater services such as direct delivery of mail to scale and complexity. the home (Figure 2).

In India, government-backed postal banks One advantage of the postal savings came into being in 1882, among the oldest system compared to the banking of post banks in Asia. Upon independence system is its ability to use existing post in 1947, the Government of India began offices to bring basic financial services integrating the postal finance services to underserved areas and communities into a long-term campaign to modernize. (Figure 3). By providing access to services The responsibility of this effort came such as deposits, payments, and insurance, under the purview of the newly created post offices increase competition for the National Savings Organisation in 1948. underserved segments, thus generating Because of the country’s large number a positive impact on employment and of less wealthy people, the emphasis of supporting rural and regional economic the post bank has been to target the development (Boon 2016). country’s many small savers. Although the banking system has increased its reach Post offices also provide solutions to massively since, more is still needed. Of critical challenges in financial inclusion India’s 1.2 billion people, 40% of the adult such as accessibility and affordability population still does not have banking (Berthaud 2014). Around 32% of adults access. The postal service is going to play a in developing Asia and the Pacific still do powerful role in closing that gap because not have access to bank accounts, while it is better primed than traditional finance more people remain unbanked, 55% to reach the rural regions. Out of 150,000 in South Asia and 41% in Central Asia. post offices, over 130,000 service the rural In economies where postal accounts are

ADBI Policy Brief No. 2016-3 (August) 2 Fig. 1 Number of post offices by region, 2014

Europe and Commonwealth of Independent States, ,

Middle East and North Africa, ,

Asia and the Pacific, Latin America and the Caribbean, , ,

Sub-Saharan Africa, , Industrialized countries,  , 

Source: UPU (2014).

Fig. 2 Type of postal service available by region (% of population)

Europe and Commonwealth of Independent States . .

Middle East and North Africa . . .

Latin America and the Caribbean .  . .

Sub-Saharan Africa . . .

Industrialized countries . .

Asia and the Pacific . .

          

Home delivery Having to collect from post o‰ce No postal services

Source: UPU (2014).

offered, roughly 12% of the population are the second greatest contributor to uses this service either exclusively or as a financial inclusion, with over 1.6 billion complement to traditional formal finance. people worldwide holding some form of postal account. In general, women, the poor, and those who live in rural areas are most likely to Evidence also suggests how postal finance use postal finance. As a result, the mixture can be used to address geographic, of postal services with finance has long gender, and growth gaps brought about been seen as having high potential to by financial exclusion (Ansón 2016). First, bolster financial inclusion for those who because the postal system can be far- tend to be naturally denied access to flung, postal finance can bring financial formal finance. Indeed, postal accounts inclusion to those who live outside major

2 Innovating Financial Inclusion: Postal Savings System Revisited 3 Fig. 3 Direct postal financial inclusion a simple cash-merchant post office that collects savings, to a partnership with financial institutions, to an unlicensed Payments postal , and finally to a postal bank providing a wide range of financial services (Figure 4). In some countries, Savings postal finance takes the form of a joint POST Banked venture between the private and public Unbanked OFFICE sectors. In other countries, postal finance has evolved over time, from post office savings banks to licensed postal banks. According to a database published by Insurance the Universal Postal Union in 2011, postal services in developed markets are mainly provided by a partnership between post Source: Berthaud (2014). offices and other financial institutions. In contrast, the majority of postal finance in developing countries is provided by city centers and urban areas. Additionally, post office savings banks or post banks. because postal finance has typically included more women, it can be a tool in In general, the evolution of various addressing the gender gap. Last, postal business models for postal finance finance can potentially be the first step is influenced by the extent to which in addressing economic inequality, as the government is involved with the it trains the poor to take part in the operations of providing postal financial world of commerce and banking, thereby services. Each model has its own providing more opportunities. advantages and their appropriateness depends on the situation of each Although there is enormous potential, economy. Each model also has its much of it is yet untapped. There is more own advantages in mobilizing savings room for growth, especially among depending on the context. emerging economies. Postal bank accounts are generally more prevalent For example, in a partnership business in wealthier economies and wealthier model, national savings organizations emerging economies. That the presence work with post offices to create financial of extensive postal finance tapers off products designed specifically to work in lower economic rungs signifies the with certain conditions (Scher and untapped potential for the development Yoshino 2004). This is an especially of both the postal and financial systems. popular model in South Asia where there are cultural hurdles preventing people from joining banking organizations. From postal savings By partnering with traditional finance, to post banks: post offices can expand their financial coverage and gain specialized knowledge The changing economics in running financial institutions. of posts Under a postal savings bureau model, Traditionally, postal savings banks fall units within a post department are under the joint purview of central banks, created to handle small savings accounts ministries of finance, and ministries of and a limited range of other financial post. As postal financial institutions products. This type of institution is developed over the years, alternative not meant as a substitute for private models have also emerged, ranging from finance—and cannot act as one due to

ADBI Policy Brief No. 2016-3 (August) 4 Fig. 4 History of providing access to transaction banking

 years of providing access to transaction banking

. billion users?

. billion users

Postbank (partnerships) State-Owned – Postal Managed . billion users Regulated licensed banks Initiatives outside Financial Sector under separate management

Extended Life of Legacies 

Customers/Transactions/Balance Sheet Financial Outreach Innovation Time ‰Š ŒŒ ŒŠ‰ ŒŒ‹ ‹Š ‹ŽŠ

Source: Boon (2016).

its limited breadth. Rather, it is meant to calling foul on the notion of there being a offer simple, convenient, and trustworthy government-owned financial institution savings institutions. By gathering a large that may enjoy securities and benefits not repository of savings, these institutions accessible to private sector institutions. can contribute to state development As a result, running and turning postal through lending and may be a valuable banks into joint ventures, or even wholly source of stability for the country’s private entities, is a way to allay these financial system, as was the case in concerns (Ansón et al. 2013). the Republic of Korea during the Asian financial crisis of 1997. These postal However, finding the right balance is savings bureaus can grow and become potentially troublesome. It is important to more sophisticated institutions that avoid affecting competition by favoring provide full-service financial services. In one private institution over the other. some countries, this means becoming Furthermore, it is important to be aware a public corporation post bank, as has of how the relationship benefits each occurred in the Philippines. partner. Terms that favor the government excessively limit the incentive for the Since the 1990s, more alternative business private sector; such partnerships will have models for postal finance have also only limited impact. Conversely, favoring emerged, characterized by strong private private institutions too much risks sector participation. A number of factors distorting competition and neglecting account for the changing economics of the public service rationale of postal posts, including the falling mail volumes, finance (Berthaud 2012). increasing use of information technology, and regulatory developments such as market opening and liberalization. Of Making effective particular importance is the impact of postal finance systems: competition on postal finance, which affects the way postal systems operate Issues and challenges and the provision of postal financial While post offices have played an services. For example, the idea of a important role as a gateway for delivery postal institution run completely by the of financial services, developing efficient government prompts concerns from postal finance is not easy due to a number rival banks in the private sector arena, of challenges.

4 Innovating Financial Inclusion: Postal Savings System Revisited 5 Regulatory framework environment. In cases where market failures prevent access to financial Regulating a postal financial system services, good regulations should identify presents one of many unique challenges. the constraints and provide appropriate Although postal finance can be an intervention. It is also important that enormously powerful presence in regulations exist to guide the operations an economy, it can also be subject to of postal finance, particularly in dealing inefficiencies and corruption. Therefore, with dramatic improvements in good regulation that is properly designed technology and financial innovation that and implemented is important to make can impact the delivery of postal financial sure that postal finance is both effective services. With this regulatory principle, and accountable. postal finance can coexist harmoniously with existing structures. For example, making financial services available to all at low prices through Implementing postal systems strong government intervention is a worthy policy goal because of the Since postal finance is different from benefits for financial inclusion. On the traditional financial services (e.g., banking), other hand, a government-backed countries must be prepared to fluidly financial institution like a national postal interface postal systems into the existing bank creates a natural monopoly. Because financial network. This is important to business is guaranteed for government ensure that traditional banks and the post postal finance, it is hard to disrupt and bank can handle transactions between innovate. This could have a negative each other and that post banks use the effect on traditional finance as it may existing standards that allow consumers crowd out existing organizations. to transact in the open market. This means creating or joining a wide network of To preempt this problem, policy makers ATMs, implementing debit cards that can must establish an open and transparent be used at stores, and having convenient regulatory framework for postal finance branches that give customers the full and design effective enforcement range of banking services. strategies to implement it. A postal finance system should be governed with The Republic of Korea’s post bank is transparent oversight that pushes it to a good model of implementing cost- innovate. An example from Indonesia of effective and efficient postal finance. how this regulatory structure might exist Because of its quick adoption of financial is ’s relationship technology and its tight integration of with Post Indonesia. Instead of including postal banking and its mobile phone finance under the umbrella of the postal network, customers can access postal service, the bank exists independently finance on the back of the country’s and sells its products through post offices. mobile network. In Indonesia, the By keeping its management distinct, government is experimenting with Bank Tabungan Negara has an incentive so-called “branchless” banking, where to innovate independently. Moreover, it customers access their accounts through has a profit-sharing arrangement with handheld terminals distributed to the post. This encourages Post Indonesia post offices throughout the country. to function as a check, as the two This is an affordable way of enhancing institutions are individually vested in the financial inclusion which relies on the success of the financial product. dissemination of easily understood banking functions that do not require Efficient regulation is needed to ensure wholesale renovations of post offices and that the various business models of do not require the extensive retraining of postal finance operate in a supportive personnel (ITU and UPU 2010).

ADBI Policy Brief No. 2016-3 (August) 6 Financial education and literacy Regional cooperation

Although a postal savings system can As a tool for financial inclusion, the bring the benefits of financial inclusion, provision of postal financial services it must be accompanied by a robust is a public good with benefits that program of financial education to realize extend across countries. In a globalized the full extent of that potential. In world with increasing financial links, Japan, this knowledge base is cultivated one challenge is to harness greater from an early age. In primary school, cooperation and integration to maximize schoolchildren open a postal savings the benefits of postal finance. account and deposit a small amount every month for 6 years. More nuances For example, one important area in which of finance are further elaborated upon postal finance can contribute is in the throughout middle and high school. use of the postal system as a channel for Developing financial literacy in this sending and receiving remittances. A key manner is useful, because it creates the issue is the high fees associated with knowledge base and breeds the habit of sending remittances through the formal saving by getting children involved at an banking channel, as well as the security early age. problems related to sending money across countries. Providing migrants Developing such programs is a with a safe, efficient, and cheap channel collaborative effort between multiple to remit money is essential to promote ministries. The collaboration could be greater financial inclusion among this formalized into an external council that marginalized group. Given the nature of handles these matters on an official and cross-border remittances, postal finance regular basis. These should be created can be an effective tool for promoting with input from an economy’s finance, financial inclusion by strengthening education, and postal authorities. cooperation among various postal That this collaboration is essential is networks across countries. For example, further reinforced by the need for the postal operators can agree to harmonize reconfiguration of the postal workforce. remittance fees or share best practices in All these authorities should work promoting remittances through the post together to ensure that postal employees offices. include those capable of financial service. Otherwise, postal systems should hire the Cooperation is also critical to meet the needed labor to ensure that postal banks challenges of increasing digitization and can handle savers’ deposits effectively technological innovation for financial and professionally. services. There is a need for financial technology to be systematically and It is important to emphasize that periodically undertaken by producing these policy directives for a successful payment instruments, standards, and best postal system need to engender trust practices as solutions for other services from those not acquainted with formal such as credit and insurance. Similarly, finance. Moreover, economies that aspire greater cooperation in promoting ICT to expand postal financial services must solutions and other innovations is needed ensure that the basic service is of high to ensure that postal savings systems quality before evolving the postal bank cope with the challenges of developing in a direction in which it offers a more new products such as e-commerce and diversified and comprehensive portfolio e-banking. For example, postal regulators, of financial products (Ansón et al. 2013). business, and other stakeholders can participate in partnerships promoting technological and institutional innovation for postal finance.

6 Innovating Financial Inclusion: Postal Savings System Revisited 7 Conclusion: With the many challenges facing the Time to innovate traditional banking system—from limited infrastructure to increasing complexity of with postal finance banking operations—it is about time that Postal networks have much to offer for postal finance take a more prominent financial inclusion, as evident in the role. Evidence suggests how access to evolution of the postal savings system even small amounts of postal financial and the various business models for services can have a transformative effect postal finance in many Asian countries. To on the poor, not only to expand their be sure, creating inclusive finance is not incomes but to enhance their resilience easy, as banks, the traditional source of to economic shocks as well (Berthaud financial services, continue to struggle in 2014). Thus, postal finance needs to the current global financial environment. be further developed as a key tool for This calls for the adoption of innovative, financial inclusion. adequate, and low-cost financial service delivery models such as the postal saving system.

References Anson, J. 2016. Postal Savings and Financial Inclusion in Asia: Addressing the Great Geographic, Gender and Growth Gaps. Presentation at the Regional Conference on Postal Saving System in Asia: What We Know and What to Expect? Tokyo, Japan. 23–24 February. Ansón, J., A. Berthaud, L. Klapper, and D. Singer. 2013. Financial Inclusion and the Role of the Post Office. Policy Research Working Paper 6630. Washington, DC: World Bank. Berthaud, A. 2012. Kenya: The Post and the Cash Merchant Model in an Advanced Mobile Money Environment. Berne, Switzerland: Universal Postal Union. Berthaud, A. 2014. Postal Saving System: Overview of Issues, Opportunities, and Challenges. Presentation at the Seminar on Postal Saving System in CLMV: Assessing Its Role to Improve Financial Inclusion. Yangon, Myanmar. 19 December. Boon, H. 2016. Understanding Postal Savings and Their Role in Small Savings. Presentation at the Regional Conference on Postal Saving System in Asia: What We Know and What to Expect? Tokyo, Japan. 23–24 February. Government of India, Department of Posts. 2016. Annual Report 2015–16. New Delhi. http://www.indiapost.gov.in/Report/ FinalPostAnnualReportEnglish2015-16.pdf International Telecommunication Union (ITU) and Universal Postal Union (UPU). 2010. ICTs, New Services and the Transformation of the Post. Geneva and Berne, Switzerland. Scher, M.J. and N. Yoshino. 2004. Small Savings Mobilization and Asian Economic Development: The Role of Postal Financial Services. Watertown, MA: East Gate Books. Universal Postal Union (UPU). 2014. Postal Statistics Yearbook. Berne, Switzerland.

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