The Financial Services Cambrian Explosion: How growth markets are innovating for the next 2 billion customers Factsheet

While there has been progress toward financial inclusion, significant challenges remain1:

- An estimated 2 billion adults worldwide do - MSMEs cite a lack of collateral and credit not have a basic bank account history as main reasons for not having an account

- Globally, 59% of adults without an account cite a lack of enough money as a key - Some groups are more financially excluded reason, implying that financial services are than others: women, rural poor, and other not yet affordable or designed to fit low remote or hard-to-reach populations, as well income users as informal micro and small firms are most - Other barriers to account-opening include affected distance from a financial service provider, lack of necessary documentation, lack of - For example, the gender gap is estimated trust in financial service providers, and at 9% points: 59% of men reported having religion an account in 2014 versus only 50% of women

- More than 200 million formal and informal micro, small and medium-sized enterprises (MSMEs) in emerging economies lack adequate financing to thrive and grow

Financial inclusion is becoming a priority globally for policymakers, regulators and development agencies:

The Bill & Melinda Gates Foundation The G20 reiterated its commitment aims to play a catalytic role in financial to financial inclusion by renewing the inclusion by broadening the reach Financial Inclusion Action Plan for 2015 of robust, open, and low-cost digital onwards and endorsing the G20 High- payment systems, particularly in poor Level Principles for Digital Financial and rural areas—and expanding the range Inclusion of services available on these platforms

Since 2010, more than 55 countries Financial inclusion has been identified have made commitments to financial as an enabler for 7 of the 17 Sustainable inclusion, and more than 30 have either Development Goals launched or are developing a national strategy

The World Bank Group considers financial inclusion a key enabler to reduce extreme poverty and boost shared prosperity, and has put forward an ambitious global goal to reach Universal Financial Access (UFA) by 2020

For all footnotes within this document, please refer to Section 6: Footnotes. Preface

On 29 December 2003, former United Nations Secretary- varying degrees of success. It is yet to be seen how these General Kofi Annan said: “The stark reality is that most poor countries fare against their long term commitment to financial people in the world still lack access to sustainable financial inclusion, in this paper we aim to analyse the optimal degree services, whether it is savings, credit or insurance. The great and type of regulation. challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, Given the broad scope of this topic, we have used a sample we can and must build inclusive financial sectors that help of five representative countries, namely India, Indonesia, people improve their lives.” While Alliance for Financial South Africa, Kenya, and Nigeria – each of which has Inclusion (AFI)2 highlighted that: “Financial inclusion is no financial inclusion as a stated developmental goal whilst longer a fringe subject. It is now recognized as an important having approached the problem differently with varying part of the mainstream thinking on economic development degrees of regulatory intervention. For consistency and based on country leadership”. comparative purposes, we have examined each country’s approach to what we have defined as the five key regulatory Given the economic and social benefits of financial inclusion, it enablers towards financial inclusion: namely, the regulator’s is not surprising that influential global policy circles, foundations, approach to: regulators and governments are pushing for greater financial inclusion and promotion of alternative systems in emerging i. KYC and AML/CFT requirements vis-a-vis transactional markets. BCG estimates that a 1% increase in financial accounts; inclusion increases real GDP per capita growth by 3.6% ii. financial infrastructure development; through factors such as increased savings and access to credit, prompting better health, education, business creation and iii. the development of the payment system (with a focus on expansion. Needless to say, the impact is both sustainable the retail payments system); and self-reinforcing. Global policy actions, including the Maya iv. the use of technology as a financial services’ enabler; and 3 Declaration signed in September 2011, comprising a set of v. consumer protection and financial literacy. measureable commitments to increase financial inclusion, and the World Bank’s commitment to extend access to financial We believe that the approach taken by regulators in emerging services to 1 billion adults through the Universal Financial markets vis-a-vis financial inclusion is important primarily due Access 2020 initiative4, are steps towards universal financial to the economic and social benefits of financial inclusion inclusion. and the virtuous cycle of profitability and sustainability that is created by the provision of these services. In addition, however, These global directives, whose fulfillment can be made we expect that the absence of traditional legacy financial possible by leaps in technological advancement, need infrastructure in emerging markets, coupled with the presence to be supplemented, however, by support from local of an enabling regulator, presents an environment ripe for regulatory authorities and governments, who are – innovative business models and alternative distribution through different methods and in varying degrees – mechanisms in financial services. There are several promoting financial inclusion throughincremental policy examples, including mobile banking, remittances, agency adjustments. Examples include adjustments such as easing banking, micro-finance and micro-insurance. Emerging markets the way for new distribution models (for example, agent are well positioned to capitalise on the unbanked opportunity by banking in South Asia and mobile money in Sub Sahara Africa) as delivering financial services in a tailored way and in the process well as promoting programs that encourage financial education delivering innovative, efficient,proven business models that can and consumer protection or increasingly ‘forcing’ financial eventually be replicated in the developed world. As you will no inclusion through, for example, the digitization of the dispersion doubt recall, this was precisely the conclusion we reached in of welfare payments. India, South Africa, Egypt, Brazil and Apis’ first paper, entitled “Reverse Innovation in Financial Pakistan, to name a few, have started to disburse subsidies Services - a 10 Year Outlook” through electronic means, often card-based and sometimes authenticated through biometrics. India has a simplified branch All this innovation, and related “friendly” regulation, is taking authorisation process whereby the Domestic Scheduled place within the backdrop of the global financial system Commercial Banks (SCBs) are allowed freely to open branches currently being at an important inflection point, with financial in Tier 3 to Tier 6 centres with populations of less than 50,000. institutions having to adapt to an environment of tighter In 2010 in India, small, local “for-profit” companies, such as credit and lower economic growth, increased government corner shops and grocers, were also allowed to be engaged as intervention, stringent compliance requirements and, Business Correspondents (BCs) – intermediaries for providing most recently, several direct and stated threats to the financial and banking services, as facilitators for banks. These previous pace of globalization. seem gargantuan achievements when compared to the restrictive, often byzantine rules in Europe and the rest This white paper does not intend to make any recommendations of the developed world. As you’ll no doubt recall, this was for the future architecture of financial systems or for the optimal precisely the conclusion we reached in Apis’ first paper, regulatory approach to financial inclusion. However, we do hope entitled “Reverse Innovation in Financial Services - a 10 that our comparative analysis will serve as a helpful data point in Year Outlook”. the debate on how to promote financial inclusion and, perhaps, on how to prepare the financial sector for the next two billion Although most regulators in emerging markets are actively customers. For our sector, we believe that this has the potential seeking to tackle the problem of financial inclusion the approach to be a true Cambrian Explosion. taken by each individual country differs and has resulted in Matteo Stefanel Udayan Goyal 4 The Financial Inclusion Stack Contents

1. Regulation and Financial Inclusion ______6

Framework and methodology ...... 7

Consistent and long-term regulatory attitudes towards financial inclusion ...... 10

2. Key Regulatory Enablers – The Framework ______12

3. Country Case Studies ______20

India ...... 22

Indonesia ...... 31

South Africa ...... 40

Kenya ...... 49

Nigeria ...... 55

4. Conclusion ______62

5. Glossary ______64

6. Footnotes ______66

The Financial Inclusion Stack 5 1. Regulation and Financial Inclusion

What is financial inclusion?

Financial inclusion is the delivery of financial services at that all people have access to a transaction account5. affordable prices to sections of disadvantaged and low-income A secure account forms the first building block of a cashless segments of society - effectively two billion people. Financial payment ecosystem which removes the cost of transacting inclusion means that individuals and businesses have access in cash from the system, thereby reducing friction. As every to useful and affordable financial products and services individual has recurring expenses (particularly bill payments), that meet their needs – transactions, payments, savings, enabling such payments electronically, using either a mobile credit and insurance – delivered in an efficient, responsible -enabled or online payment method is a key driver of efficiency and sustainable way. whilst helping to build an individual’s payment transaction history that forms the basis of traditional credit scoring, To help inform financial inclusion strategies, it is key to keep which is in turn the foundation and key enabler to the provision in mind that financial inclusion is a progression with of credit. payments as the optimal entry point. Financial needs must be addressed as a hierarchy whereby owning a payment Credit enables one to reach beyond daily needs and make transaction account and having the ability to make electronic investments that will pay off in the future. For example, a loan for payments serve as the most foundational needs. new equipment or stock allows an MSME to be more productive and hence expand margins and yield a higher income. Finally, At the bottom of the pyramid, common across all segments generating income beyond expenditure enables individuals to of population, are bill payments and other infrastructure think about investments and insurance, which comprise the and for this reason access to a secure transaction account fifth and sixth layers of the financial inclusion pyramid. is a first step towards financial inclusion: it enables people to store money, and send and receive payments. A transaction Underlying all of this, financial literacy is imperative account serves as a gateway to other financial services and its and constitutes the foundation of the financial inclusion importance is highlighted by the World Bank Group’s Universal pyramid as illustrated below. Financial Access 2020 initiative, the aim of which is to ensure

The Financial Inclusion Pyramid: Hierarchy of financial needs

Emergency requirements

Insurance

Investments/ Savings

Aspirational needs

Borrowing

Other electronic payments

Monthly expenses Electronic bill payments

Secure account for holding payment transaction funds

Financial literacy

6 The Financial Inclusion Stack 1. Regulation and Financial Inclusion

1.1 - Framework and methodology

Emerging literature on the topic of financial inclusion is gathering momentum on a global scale: one of the most important discussions happening in the field is centered on how exactly we should measure the regulator’s impact on financial inclusion, both conceptually and technically.

In order to better assess the effectiveness of government and regulatory initiatives, we have provided a comparative analysis across five countries in Africa and Asia: namely India, Indonesia, South Africa, Kenya and Nigeria.

The sample countries examined in this paper have been chosen on the following basis:

1. Apis geographies

They are a representative sample across Apis’ target geographies in Africa and Asia, and the team has deep knowledge of and experience within their financial sectors.

2. Sizable population size and similar demographic make-up

The median age across the five countries we have sampled is younger than the global average, with a median of 24.6 years6. This is a key differentiator as younger populations tend to be technologically literate, are stronger contributors to a country’s workforce, and spend rather than invest.

Global Median Age7

No data

14 – 20

20 – 25

25 – 30

30 – 35

35 – 40

40+

The Financial Inclusion Stack 7 1.1 - Framework and methodology

3. Each country has financial inclusion as a stated developmental goal whilst having approached the problem differently using varying degrees of regulatory intervention

Country Financial inclusion charter The regulator’s objective

The term ‘financial inclusion’ was used for the first time Pradhan Mantri’s Jan-Dhan Yojana: The Prime Minister’s India in April 2005 in the Annual Policy Statement presented People’s Wealth Program — it envisions bank accounts by Y.Venugopal Reddy,the then Governor of the Reserve for all Indians Bank of India

Financial inclusion is defined as the ability to access the Target of 75% banked population by 2019 from 36% in Indonesia following products: savings, credit, insurance, payment 2014. system and other financial services

Broad set of goals including: access to housing finance; South Africa’s Financial Services Charter specifically SME finance; agricultural finance; formally banked South Africa identified financial inclusion as a mandate of private sector population; access to branches within a 15km radius and banks access to branches and ATMs within a 10km radius. Goals are set on a 5-yearly basis

Financial inclusion was given a new impetus by the rapid Financial inclusion is viewed as a key plank of the Kenya rise of mobile money, with the regulator taking a flexible government’s long-term Vision 2030 economic growth approach towards innovation by commercial players in the project, while at the same time being supportive of the sector efficacy of monetary policy

The CBN is a signatory of the Maya Declaration and The CBN is committed to reducing the number of adults formalized its commitment to financial inclusion with the excluded from the financial system to 20% by 2020 and Nigeria launch of a dedicated National Financial Inclusion Strategy aims to achieve these targets to through a broad range of in 2012 coordinated interventions outlined in its National Financial Inclusion Strategy

4. Although each country is at a different level of developmental maturity, most have exhibited strong GDP growth over the past 5 years

Historical GDP Growth8

12% 10.3% 10% 8.4% 7.8% 7.6% 8% 7.2% 7.3% 6.6% 6.6% 6.1% 6.0% 6.3% 5.7% 6.2% 6.2% 5.6% 6.0% 5.3% 5.6% 5.6% 5.4% 5.2% 5.6% 4.9% 4.6% 5.0% 4.8%

6% 4.3% 2.7% 3.3%

4% 3.0% 2.3% 2.3% 2.2% 1.6% 1.3% 2%

0%

India Indonesia South Africa Kenya Nigeria

2010 2011 2012 2013 2014 2015 Average

8 The Financial Inclusion Stack 1. Regulation and Financial Inclusion

1.1 - Framework and methodology

5. All five countries have experienced a significant improvement (albeit at differing degrees) in financial inclusion as measured by the World Bank Findex9

Financial Inclusion Development10

2011 2014 75% 80% 70% 53% 54% 60% 44% 42% 35% 36% 30% 40% 20% 20%

0% India Indonesia South Africa Kenya Nigeria

6. Whilst at the same time, having low levels of financial infrastructure at their disposal

Financial infrastructure density and financial inclusion metrics11

Country % of adults who have ATMs per 100,000 % of adults who used % who personally paid debit cards adults E-Payments to make for health insurance payments

22.1% 11 2.0% 6.8% India

25.9% 37 3.1% 0.9%

Indonesia

54.9% 60 13.1% 7.4% South Africa

34.7% 10 5.4% 5.4%

Kenya

35.6% 11 2.4% 0.4% Nigeria

The Financial Inclusion Stack 9 1.2. Consistent and long-term regulatory attitudes towards financial inclusion

For much of the past century, broadly speaking, governments have tackled the financial inclusion problem in one of two ways:

• The first, has been to nationalise banks or otherwise • The second approach has been to do nothing more coerce financial institutions into serving the poor. than the occasional gentle nudge. Economic growth India, which nationalised its 14 biggest banks in 1969 has probably been the largest facilitator of financial (and a few more in 1980), was a leading proponent of inclusion. The World Bank has found that GDP per capita this approach. Though it has since liberalised its banking accounts for more than 70% of the variation in global system, it still forces banks to provide services in remote formal account penetration, and has observed banked villages and to lend to certain underserved segments populations of over 90% in countries with GDP per capita (through Priority Sector Lending12). Even so, in 2014 53% of US$ 15,000 or higher. This suggests that formal account of Indian adults had an account up from 35% in 201113. penetration will increase sharply as emerging markets Similarly, most European governments have either forced grow and become more prosperous. Additionally, the banks to offer free “basic” accounts to the poor or have demographic transition in these markets gives rise to clear done so themselves through state-owned institutions, consumption, saving and investment demand growth as such as post offices. the workforce ages.

National income per capita is strongly correlated to the share of adults with a formal account (explains c.76% of variation among countries)14

Country Name GDP per capita - 2014 Account at an FI - 2014 1000 Afghanistan 0.6 10% 100% Albania 4.6 38% R² = 0.7564 Algeria 5.5 50% 80% Angola 5.2 29% Argentina 12.3 50% 60% Armenia 3.9 17% Account at an FI Australia 62.0 99% (% age 15+) (2014) Austria 51.3 97% 40% Azerbaijan 7.9 29% Bahrain 24.5 82% 20% Bangladesh 1.1 29% Belarus 8.0 72% - Belgium 47.3 98% - 10 20 30 40 50 60 70 Belize 4.9 48% GDP per capita (current US$ k) (2014) Benin 0.9 16% Bhutan 2.6 34% Bolivia 3.1 41% Now more than ever, economic growth coupled with the inclusion have put in place an enabling regulatory and policy Bosnia and Herzegovina 4.9 53% combination of mobile telephony, big data, and cloud environment, coupled with an encouraging stance towards Botswana 7.2 49% computing is likely to have a greater impact than previous competition allowing banks and non-banks to innovate and Brazil 11.7 68% decades of either top-down planning or the trickle-down of expand access to financial services. Creating this innovative Bulgaria 7.9 63% economic growth. By way of illustration, at the end of 2015, and competitive space has to be accompanied, however, by Burkina Faso 0.7 13% there were 271 mobile-money services in 93 countries, with appropriate consumer protection measures (such as lending Burundi 0.3 7% more than 410 million registered accounts15. In fact, countries rate caps) and regulations to ensure responsible provision of Cambodia 1.1 13% that have achieved the most progress toward financial financial services. Cameroon 1.4 11%

10 The Financial Inclusion Stack 1. Regulation and Financial Inclusion

1.2. Consistent and long-term regulatory attitudes towards financial inclusion

The Global Microscope 201616 analyses the overall regulatory and institutional environment for financial inclusion in more than 50 countries. Based on the ranking table below, the broader lessons that have emerged over time remain important:

1. The first is that long-term commitment matters. In the strength in the scores of all four leaders in all indicators17 four leading countries, financial inclusion has been on the is particularly striking. Each country has weaknesses, but policy agenda for many years. The central banks of Peru for no indicator do any of the four countries score below and the Philippines were among the 17 original participants 50 out of 100. in the Maya Declaration in 2011. 3. As they put regulations and systems in place to support 2. The second lesson from the leading countries is the value the supply of financial services, the four leading countries of consistency across all fields of financial inclusion. The have also taken steps to protect consumers.

Microscope scores and rankings

Overall Scores and Rankings18

Score Score Ran 1 Ran 1

verage 1 = 27 3 Kyrgyz Republic 48 1

= 1 1 Columbia 89 + 1 = 27 4 Panama 48 + 2 = 1 Peru 89 + 3 = 30 16 Cambodia 47 - 8 = 3 India 78 - 1 1 = 30 6 Honduras 47 + 5 5 Phillipines 78 + 7 = 30 5 Senegal 47 + 3

= 6 Pakistan 63 - 3 = 33 Jamaica 46 + 1

= 6 Chilie 62 - 1 = 33 5 Nigeria 46 - 2

= 8 Tanzania 62 0 = 33 10 Turkey 46 - 4

= 8 3 Kenya 61 0 = 33 10 Uganda 46 - 4

10 Rwanda 61 + 5 8 = 37 9 Mongolia 45 - 3

11 2 Mexico 60 + 7 = 37 1 Trinidad and Tobago 45 + 3

12 Uruguay 59 + 3 39 3 China 44 + 2

= 13 2 Ghana 58 0 = 40 Bangladesh 42 + 3

= 13 5 Bolivia 56 - 4 = 40 Nepal 42 + 3

= 15 13 El Salvador 56 + 7 = 42 2 Guatemala 40 + 1

= 15 4 Indonesia 55 - 1 = 42 3 Vietnam 40 + 6

= 15 1 Morocco 55 0 = 44 4 Argentina 39 0

= 15 2 Nicaragua 55 + 2 = 44 Tajikstan 39 + 1

= 15 Paraguay 55 + 3 4 46 2 Jordan 38 + 6

19 1 Dominican Republic 52 + 1 47 Sri Lanka 36 + 3

= 20 Bosnia and Herzegovina 51 0 48 Ethiopia 34 + 2

= 20 Brazil 51 - 2 3 49 4 Cameroon 33 - 1

= 20 3 Mozambique 51 + 1 50 Venezuela 32 + 1

= 20 11 South Africa 51 + 5 51 Egypt 31 + 2

= 20 Thailand 51 + 2 6 52 1 Madagascar 30 + 3 25 Ecuador 50 - 1 5 53 2 Lebanon 29 0

26 7 Russia 49 + 4 54 Dem. Rep. of Congo 26 0

= 27 9 Costa Rica 48 + 6 55 Haiti 22 - 2

The Financial Inclusion Stack 11 2. Key Regulatory Enablers – The Framework

Keeping the aforementioned in mind, we have chosen to measure regulatory intervention and attitudes towards financial inclusion across 6 distinct areas or enablers. This allows us to (i) approach the comparative analysis in a streamlined fashion; and (ii) ensure that we measure regulatory intervention through a holistic lens ensuring that a well-balanced, market-led but “fair” financial services ecosystem is being promoted.

Overview of the Key Enablers Based on our analysis we have chosen to measure each country’s regulatory attitude towards financial inclusion across the following six enablers:

Key Enabler Example Rationale

• AML/CFT requirements - The introduction of inappropriate AML/CFT requirements, which do not take / Reduced KYC into account the potential negative impact of such requirements, gives rise requirements to financially excluded groups. AML/CFT obligations can increase the cost of doing business, which is transferred to customers, potentially discouraging some from using the formal financial system KYC and AML/CFT • Existence of a national ID system / Biometric ID - The existence of a national ID system (oftentimes biometrically enabled) requirements capability allows for easy, low cost and fast on-boarding of new customers and thus enhances financial inclusion

- Opening a bank account, receiving a loan, withdrawing money or making a payment still requires going to a bank branch, ATM, or a point-of-sale terminal. These access points, however, are limited in developing countries - The key is finding alternative delivery channels that work in specific • ATM / POS contexts and which may differ depending on the target audience • Treatment of agents - It also relates to changing financial habits. In that respect, one successful Financial infrastructure approach is to focus on changing how government payments such as wages, pension, and social and medical benefits are delivered in both developed and developing countries

- As the opening of a transactional / payments account is often the first step towards financial inclusion the existence of a national payments • Development of the system is integral to financial inclusion (i.e. real time gross settlement, national payment system national automated clearing house, national switch, lower cost domestic Payment system scheme, national check truncation, and a continuously operational system for remittances, interoperability between systems)

- The global penetration of mobile phones, has facilitated expanding access to • Alternative credit scoring financial services through the implementation of digital financial technology engines (i.e. wallets), in hard-to-reach populations and small businesses at relatively • Availability of mobile low cost and risk Use of technology financial services - The use of big data analytics has allowed the development of alternative credit scoring technology leapfrogging the current paradigm

• Lending rate caps • Prevention of over - Implementing measures such as rate caps forces the system to be more indebtedness efficient (i.e. prevents lenders from pricing in defaults rather than improving • Turnaround time for collections) complaints - Without adequate consumer protection, debt loads on consumers can spiral Consumer protection out of control or indeed often results in mass scale abuse of the system itself • Privacy of data and financial literacy - Consumer protection goes hand in hand with financial literacy • The existence of country level initiatives to promote financial literacy

• Universal bank account - Further facilitators include the regulator enforcing universal bank account opening opening, enabling specialty finance providers’ access to deposits/ funding and • Priority sector lending issuing banking licenses General financial - Priority sector lending is another tool often used to force the banking sector inclusion facilitators to develop distribution geared towards the bottom of the pyramid

12 The Financial Inclusion Stack 2. Key Regulatory Enablers - The Framework

2. Key Regulatory Enablers - The Framework

2.1. KYC and AML/CFT Requirements

In the majority of countries, financial service providers are typically regulated and supervised by the central bank and must comply with national Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations. These AML/CFT compliance requirements, at a country level, determine the “Know your Customer/Customer Due Diligence (KYC/CDD)” procedures, hiring compliance staff, monitoring software, agent training, and ongoing agent supervision. This adds additional cost to the overall business, which is most often transferred to the end customers and even more often makes account opening such a cumbersome process that financial service providers are no longer incentivized to target the bottom of the pyramid.

The regulator is therefore instrumental in providing guidance on assisting financial service providers to balance the AML/ CFT requirements with financial inclusion goals. Regulators have a number of tools at their disposal here:

1. The existence of a national identification system that insurance policies and pension insurance certificate, bringing allows the financial service provider to bypass the cumbersome together these different services on a single card. verification process that often includes cross-referencing such ID against an acceptable third- party database. Some countries 2. The existence of tiered KYC requirements. This allows, for are developing acceptable non-governmental and even non- example, the identity verification of the customer only to occur documentary methods of verifying identification, such as a after reaching certain tiers rather than doing so in “real time.” signed declaration from the community leader together with In this case, account “tier” levels directly link the level of KYC a photograph taken on a camera phone, biometrics or voice to the extent and range of financial services offered to the prints (such market-based solutions have been developed in customer. For example, a level 1 tier could mean that customers Fiji, the Philippines and Malawi). Countries are also developing are provided with limited and basic services after undergoing electronic multi-purpose forms of identification to facilitate a “simplified” KYC verification. A level 2 tier could mean that identification (and financial inclusion) such as the Financial additional customer verification would allowthe customer to Identification Program in Indonesia and the launch of the access an expanded range of financial services with higher “Universal Electronic Card” in Russia, in 2013 which allows transaction ceilings. The system would basically match the users to remote order, pay and receive government services, level of KYC to the level of risk and tier them accordingly. and replaces a number of documents, including medical

Measure Overview

Access to very limited banking functionalities, with access to broader services (e.g. higher No frill account limits, transfers including cross-border) being allowed only if the customer provides proof of identity and address

Scanning the verification material and maintaining the information electronically

KYC norms simplified Keeping electronic copies of the results of any electronic verification checks

Merely recording reference details (in the particular context of mobile banking, where mobile money agents are often the simple, modest corner shops)

National ID A national ID system (oftentimes biometrically enabled) allows for easy, low cost and fast on- boarding of new customers and thus enhances financial inclusion

The Financial Inclusion Stack 13 2. Key Regulatory Enablers - The Framework

2.2. Financial Infrastructure

Physical proximity of financial access points to where people customer, an important consideration when addressing live and transact is the starting point for encouraging usage low-income segments and gaining their trust, although as of financial services. Financial access points can be defined data becomes cheaper and bandwidth increases, this will as locations where people can cash in and cash out, get resolved thereby increasing the confidence of the interoperability of digital and analogue cash. Currently, these include: bank branches, ATMs, POS, microfinance institution branches and Indirect channels agents. Emerging markets as a whole, including our sample of countries, exhibit shockingly low legacy infrastructure as illustrated by the penetration of bank branches and ATMs, Are those that the financial institution does not fully control. particularly compared to mobile subscriptions. Usually this means that the bank needs to engage in some sort of partnership with a third party. Examples include issuing Historically, traditional financial institutions were reluctant a prepaid card, working with a mobile operator to facilitate to invest heavily in infrastructure as their business models mobile banking, joining a national switch and deploying ATMs, were structurally unprofitable in emerging markets.Outside or leveraging a pharmacy chain as part of an agent banking large urban centres, their fixed and marginal costs were too program. An important focus of indirect channels is thus to high for the provision of cost effective services particularly in work with and through third parties to reach customers and, rural areas. The advent of new technologies and innovations consequently, outsourcing a significant part of the customer are increasingly supporting financial inclusion, making it experience to those parties. economically viable for banks to reach poorer people. The agent or correspondent banking model has come to the fore Within this indirect channel, regulation is often ambiguous or in many emerging countries, supported by technology. Mobile restrictive. With the introduction of a new delivery channel, money or ‘branchless’ banking schemes have seen rapid various governments have oftentimes placed unclear or growth in countries where branch banking has been hampered conservative guidelines, which in turn stifle innovation: for by transportation and infrastructure problems. Fueled by example, only in 2009 did the Reserve Bank of India (RBI) the success of M-Pesa in Kenya, many other countries have permit regulated microfinance institutions (MFIs) to be banking followed suit. correspondents of big banks, while in Mexico, regulators approved banking agent guidelines only in 2008. With this in mind, the regulators’ stance towards the usage of alternative distribution models which entails the Given that innovation around alternative distribution extending of financial institution’s branch, ATM and POS channels is ongoing and fluid, it is primarily the approach networks, is critical to financial services development. rather than the regulation per se adopted by the regulator The core principle of alternative distribution is that of the right that allows alternative distribution models efficiently and infrastructure for the right market environment, allowing banks continuously to develop. Key to this approach is working to have agents operate on the same basis as non-bank mobile closely with the relevant stakeholders to design and test these money providers. regulations: not only banks and microfinance institutions but also mobile network operators (MNOs), payment providers Financial services distribution channels can be fragmented and retailers. Two success stories are worth noting: the first into direct and indirect channels, as outlined below: in the Philippines, where the Central Bank collaborated closely with the country’s two MNOs, Globe and SMART, to develop a framework for mobile banking that incorporated consumer Direct channels protection into the MNO’s business model. The second example is in Pakistan where the Reserve Bank has taken a pro-active approach and established transparent guidelines for banking Are those that the bank owns or has main control over. Within agents and mobile banking ahead of any implementation. The this category there are two types of direct channels: bank also created a cross- industry, multi-sector “Stakeholders Group” to address product, operational, and technical issues for mobile banking. • Location-based direct channels are those that have a physical presence (though not necessarily fixed) such as If regulators in other countries can follow a similarly branches, kiosks, roaming vans, and business units collaborative, pro-active, and risk-based approach to draft • Remote channels such as mobile and internet banking, supportive guidelines, it would remove one of the major call centers, and IVR (Interactive Voice Response). Remote obstacles for the development of transformational channels lack a direct face-to-face interface with the distribution channels.

14 The Financial Inclusion Stack 2. Key Regulatory Enablers - The Framework

2. Key Regulatory Enablers - The Framework

2.3. Payment System

Increasingly, authorities are recognizing the relevance of sound risk of loss or theft. As such, making improvements to the and efficient retail payment systems and services for provision of traditional payment instruments and products financial inclusion. Retail payment services are used daily for is also critical for financial inclusion. For example the study numerous types of transactions among individuals, businesses on “The virtuous Circle: Electronic Payment and Economic and public administrations. Hence, improving the safety Growth” found that electronic payments would have cost and efficiency of, and access to, electronic retail payment savings of 1% of GDP19. services can bring important benefits to commerce, to the distribution and collection of payments made by/ Key payments infrastructure components include an interbank to government agencies, and to payments between system for retail electronic funds transfers (ie an automated individuals, among others. clearing house (ACH)), a payment card processing platform or platforms (ie a payments switch) and a large-value interbank As discussed earlier, transaction accounts are at the heart of settlement system (ie a real-time gross settlement system financial inclusion. End users without access to transaction (RTGS)); a robust communications infrastructure; and an accounts are basically restricted to cash as their only means of effective and efficient identification infrastructure. Absence initiating retail payments. While cash might serve the purpose of any of these components hinders the national payment for some day-to-day, low-value payment needs, especially in- system in exploiting the potential benefits of modern payment person payments, it comes with considerable disadvantages instruments, and therefore adversely affects financial inclusion. for remote and/or higher-value payments, potentially higher charges for cash-on-delivery payment methods, or increased The interactions between these components are shown below:

Interplay of Relevant Infrastructure – Stylised Model20

Data sharing platforms Identi cation (i.e. credit reporting infrastructures system)

Core banking systems

ICT infrastructure Automated clearing Interbank payment card house processing platform

Large value interbank gross settlement system

Flow of information and funds

Flow of information

The Financial Inclusion Stack 15 2. Key Regulatory Enablers - The Framework

2.3. Payment System

Key enablers within the payment system:

• Large-value interbank settlement systems have been a of different issuing banks. focus of central banks for more than three decades and, as • Conversely the absence of a national switch (such as in a result, they are nearly universally implemented today21 the DRC) limits access to finance and slows the adoption although even in this age, there are some countries of electronic financial services. When interbank electronic (e.g. DRC) that lack such systems and rely on cross transactions are processed internationally, costs are border settlement systems. These systems are critical higher, which results in the inefficient development of the to financial inclusion more as an enabler of the safe and electronic infrastructure. Examples include interbank ATM efficient settlement of many other interbank payments transactions that become costlier, leading to significant infrastructure. There are a number of countries in which duplication of infrastructure (as each bank needs to build the RTGS system is also used for retail payments through said infrastructure rather than integrating directly into one a common switch. switch). Withdrawals at other banks’ ATMs are processed • Interbank systems for retail payments – often referred through international card networks (VISA or MasterCard) to as automated clearing houses or ACHs – and interbank which are significantly more expensive. In addition, the payment card processing platforms (card switches) play a lack of a national switch leads to the proliferation of ATMs more direct role in financial inclusion as they are integral from different banks in overlapping locations, which is to daily payment processing (including clearing and often cumbersome, inefficient, and costly (which are ultimately netting) of a large number but low value of payments. ACHs passed on to the customer). Finally, the lack of a national have generally focused on two distinct retail payment switch also poses significant challenges to countries in products: direct credit transfers and direct debit transfers time of conflict as they can be cut off from international (collectively defined as EFT-based instruments). systems through external sanctions (e.g. Iran). • The existence of a national ACH increases the network • There are other infrastructures that, while not being part size of access points (eg ATMs, POS or branches) for of the clearing and settlement process, are also of major individual customers, since it acts as a hub for processing relevance for financial inclusion, as they provide critical interbank transactions and consequently creates positive information to financial service providers, such as ID network externalities. Any branch of a bank for example infrastructure, credit reporting and other data-sharing can be used to initiate a funds transfer to a customer platforms. of another ACH member. This supports countrywide • Lastly, regional integration initiatives, are imperative reachability, even if a bank does not have access points to financial inclusion where there are large migrant deployed in specific areas. populations across regions. Not only do they provide • An interbank payment card processing platform is a access across borders but they provide financialservice mechanism that connects various payment card issuers, providers a larger customer base. Examples include the typically banks. It allows the exchange of payment card Southern African Development Community (14 countries transactions of a bank’s cardholders with another bank’s in Southern Africa), the Economic Community of Central merchant, ATM or another card acceptance device (POS) – African States (six countries in Central Africa) and the West provided that both banks are participating in the platform. African Economic and Monetary Union (eight countries in Payment card processing platforms also play an important West Africa)22, to name a few. role in increasing the effective size of the access channel network by interconnecting the ATMs and POS terminals

16 The Financial Inclusion Stack 2. Key Regulatory Enablers - The Framework

2. Key Regulatory Enablers - The Framework

2.4. Use of Technology: Balancing innovation with prudent risk control

Digital financial technology and particularly the global penetration of mobile phones, has facilitated expanding access to financial services to hard-to-reach populations and small businesses at a low cost and risk, namely:

• Digital IDs make it easier than ever before to open an • Greater availability of customer data allows providers to account design digital financial products that better fit the needs of unbanked individuals • Digitization of cash-payments is introducing more people to transaction accounts • The availability of high-speed computing, advances in cryptography, and innovations in machine learning and • The further penetration of mobile telephony and internet data analytics are some of the other elements of financial use leading to mobile-based financial services allowing technology convenient access to financial services even in remote areas • Driving the adoption of this technology is changing consumer behavior

As the use of technology has accelerated the spread of financial inclusion in emerging markets, regulators’ stance towards technological improvements in each country has at times proven to be a key financial inclusion multiplier. Regulators must adapt to the fast-changing landscape and to a new class of entrants, while ensuring a level playing field, protecting consumers and privacy, and guarding against money laundering and the financing of terrorism.

• Ensuring interoperability: Many digital financial services • With the influx of new providers and the development have been launched as closed loop systems, which of new business models, the conventional mappings operate on an individual ‘infrastructure type’ such as the between financial products and services and different mobile network operator’s (MNO) service for example. types of institutions are becoming increasingly blurred. Continuing on this example, a closed loop system limits The way for regulators to deal with this environment is to the ability of customers to transact with peers using a regulate by function rather than by type of institution. different MNO service. Closed loops allow MNOs to sell Such an approach seems appropriate not only to the more airtime while increasing revenues and customer broader task of regulating financial services effectively but retention in the short term, but open loops that promote also to promoting the goal of financial inclusion interoperability across payment options may be needed • Regulation according to risk of the financial service to expand the acceptance environment, usage rates, and provider is already a fundamental principle of the product functionality. Industry led initiatives – like those modern approach to financial regulation. The various in Tanzania – have aligned business and social goals capital and liquidity requirements, capital surcharges, more effectively than those done by regulatory fiat.The and other regulations recommended for banks by the Tanzanian initiative involves cooperation between the Basel Committee on Banking Supervision are based on four main MNOs (Airtel, Vodacom, Tigo, and Zantel) and this principle. The committee’s recommendations aim to three large banks (Bank of Tanzania, CRDB Bank, and enhance the stability of commercial banks and the financial the National Microfinance Bank). It is a good example of system, but the objective of improved financial inclusion interested parties circumventing the near-sightedness that requires a similar risk-based approach. Current national threatens truly game-changing payments innovation. legislation on financial regulation in many countries, • Regulatory attitude towards innovation: When however, omits (and sometimes even contradicts) any regulation is well-informed and iterative, it ceases to notion of risk-based regulation as a means toward greater be a barrier to payments innovation and instead drives financial inclusion. For example, micro-insurance has yet progress. For example, in India, having noted the limiting to gain traction in many countries in Africa due to the effect of the regulatory framework on innovation, the RBI onerous capital requirements imposed on an underwriter created the payment bank framework in 2014 to enable regardless of its size. Conversely, in Kenya, even at the payments providers to enter the market more easily. time of M-Pesa’s inception, the banking sector had claimed Although this legislation has turned out to be ineffective in regulatory discrimination because M-Pesa was not subject its current form, it is an iterative process. While in Zambia, to the same regulatory burden imposed on bank-provided interoperable payment platforms are taking advantage of payment services and, unlike banks, was permitted to use favourable “test, then regulate” – led regulations. agents for cash-in, cash-out transactions.

The Financial Inclusion Stack 17 2. Key Regulatory Enablers - The Framework

2.5. Consumer Protection and Financial Literacy: Leveling the playing field

Consumer protection seeks to level the playing field between suppliers and consumers of financial services. Retail customers have less information about their financial transactions than do the financial institutions providing these services, which can result in excessively high interest rates paid, lack of understanding about financial options, and insufficient avenues for redress.This information imbalance is greatest when customers are less experienced and products are more sophisticated. To this end:

• Appropriate regulation should correct the balance need for financial institutions to innovate and grow. and encourage market expansion by apportioning • Financial education is needed to balance information information disclosure at the right time. Relevant between consumers and providers of financial services. information has to be disclosed during the different New entrants to the market, with less experience using stages of the engagement. The disclosure of information financial services, are especially in need of education in manageable and easily understandable portions is about their rights and responsibilities. Consumer necessary to avoid overloading the consumer, who can education may be delivered by government agencies, then better understand his or her rights and obligations. consumer associations, or the industry, but most often • Similar products offered by different financial service they are provided through public campaigns (i.e. through providers should be subject to the same regulations internet, print, radio and television media; advertising; to minimize the opportunity for regulatory arbitrage. publications and training). A case study to this effect is Consistency can best be assured through a single market the Philippines where inwards remittances are estimated conduct regulator for all financial products. to be c. 10% of GDP. Recognizing that these nine million workers are important consumers of remittance services, • When consumer rights are protected, financial innovation the Bangko Sentral ng Pilipinas conducts its Financial can lead to more suitable products for customers at lower Literacy Campaign through road shows in Singapore, prices. The right to be heard, the right to information Hong Kong and other countries, educating hundreds of / transparency, the right to choice, the right to redress Filipino working abroad about financial planning, saving and the right to privacy are among the most common. and investing. The regulatory burden is to balance these rights with the

The Bangko Sentral ng Pilipinas’ conducts its Financial Launch of the Digital Financial Literacy Campaign in Literacy Campaign India

18 The Financial Inclusion Stack 2. Key Regulatory Enablers - The Framework

2. Key Regulatory Enablers - The Framework

2.6. General Financial Inclusion Facilitators / Enablers

In addition to the aforementioned five enablers, we have considered a sixth enabler whereby the regulator takes a more hands on and direct approach towards financial inclusion by forcing market participants to serve the bottom of the pyramid. Here India serves as a good example as it has enforced certain measures that traditionally have not been within the purview of the regulator, such as:

• Prime minister Modi launched bank accounts for all: micro and small enterprises, education, housing, export Forcing the banks to open bank accounts to all adults. credit, etc. New sectors like renewable energy and social Under Pradhan Mantri Jan Dhan Yojna (PMJDY), 250.5 infrastructure have been added too and the new norms million accounts have been opened and 192.2 million require banks to ensure that 8% of their loans go to small RuPay debit cards have been issued as of October 12, and marginal farmers. 2016. These new accounts have resulted in deposits worth • Demonitisation: On 8 November 2016, the Government almost Rs 44,480 crore (US$ 6.67 billion)23. of India announced the demonetisation or the Currency • The Government aims to extend insurance, pension and Replacement Program (CRP) of all INR 500 (US$ 7.40) and credit facilities to those excluded from these benefits INR 1,000 (US$ 15) banknotes. The government claimed under PMJDY. that the action would curtail the shadow economy, crack down on the use of illicit and counterfeit cash to fund illegal • Priority Sector Lending (PSL): The list of sectors has activity and terrorism and help digitize India’s economy. been revised in April 2015 and includes agriculture,

The Financial Inclusion Stack 19 3. Country Case Studies

India Indonesia

Financial Identification Program: Opening • Tiered KYC requirements bank accounts using a unique identifier: 1. KYC and • National biometrically enabled ID FIN is a lifetime number connected to the AML/CFT existing e-ID card requirements

ATMs / 100,000 adults 11.4 36.5

• “Forced” ATM rollout across urban The Laku Pandai programme is another 2. Financial Initiatives and rural cities initiative that focuses on increasing infrastructure • Initiative to streamline the MDR financial access through branchless banking, by using agents.

ACH; NPCI; IMPS for mobile payments; Aadhaar universal identification; RuPay; Establishment of a National Payment Aadhaar Payments Bridge System; Gateway to increase interoperability Initiatives 3. Payment Aadhaar-enabled Payment System; between payment infrastructure system National Mission for Financial Inclusion; Payment bank licenses; UPI

• Funding support Promoting banks to collaborate with • Financial inclusion and enablement financial technology companies (still in Initiatives • Tax and surcharge relief nascent stages) 4. Use of technology • Infrastructure support • IP facilitation

Explicitly combines financial education Government led financial literacy 5. Consumer Mandate and financial inclusion at all points of its initiatives protection National Strategy for Financial Education and financial literacy

• Pradhan Mantri Jan Dhan Yojna • The Laku Pandai programme (PMJDY) • Direct-deposit programme for welfare 6.General Other initiatives • Interest rate caps service financial inclusion • Priority Sector Lending • Use of mobile number as an e-money facilitators • The currency replacement program account number

20 The Financial Inclusion Stack 3. Country Case Studies

3. Country Case Studies

South Africa Kenya Nigeria

FICA was introduced in 2001 governing • CBN launched a risked based KYC all AML and KYC requirements. It requires National ID is sufficient for opening an system in January 2013 individuals to provide: formal proof of account • Under the BVN program each bank residence, valid identification documents customer’s biometric information is and proof of income (in some cases) stored at registration

59.9 9.9 11.4

• ATM roll-out has largely been developed by privated sector banks • SASSA has been the largest of several Support for agency banking networks to Cashless policy - fees for withdrawing financial inclusion initiatives augment branch and ATM networks (non- and depositing large sums of cash used to • All issues cards include MasterCard exclusivity) encourage PoS use Debit functionality

• MNO interconnectivity; National Switch run by BankServ (collectively • MVNO licensing to allow banks to launch owned by all the banks) Implemented Faster mobile money networks; • NIBSS Instant Payments; Payment’s real time settlement capabilities • EMV card for government payments • NIBSS Electronic Funds Transfer; in 2007 (G2C); • Nigerian Automated Clearing House • Interbank instant P2P transfer network

Several initiatives have been undertaken to increase mobile money penetration, however none have been successful to date. Digital Literacy Project aimed at increasing Established Micro Cash (mCash) platform to Technology driven initiatives largely pushed technology usage across all sectors in the promote electronic payments to date by the private sector country

Consumer Protection Act (2008) and CBN released the Consumer Protection National Credit Amendment Act (2014) have Focused on availing affordable credit to Framework in 2016 to enhance confidence in played a strong role in protecting customers borrowers through data usage and rate the financial services industry and promote controls financial stability, growth and innovation

Mzansi initiative launched to provide low cost transaction banking (medium take up) Broader government initiative to digitize Super Agents licensed to accelerate roll out payments through the Huduma (‘service’) of agent banking Card

The Financial Inclusion Stack 21 3.1 India

Overview: India’s approach to financial inclusion

Historically, Indian regulatory intervention has often not gone hand in hand with market forces as evidenced by the bank nationalization in India (in 1969 and 1980) which marked a paradigm shift intended to re-focus provision of financial services from class banking to mass banking, while the Reserve Bank of India (RBI) also took initiatives such as laying down priority sector lending requirements, lead bank scheme, establishment of regional rural banks (RRBs-1975-76), service area approach (1989), self-help group-bank linkage programme (1989-90), and setting up of local area banks etc., all aimed at making available benefits of banking services to the masses.

And although the RBI’s financial inclusion efforts can be traced back to the 1960s, when the focus was re-channeling credit to the neglected sectors of the economy, since 2006, the RBI has adopted a planned and structured approach to address the issues of financial inclusion by focusing both on the demand as well as the supply side. This in part has been possible due to the availability of technology and its gradual adoption within financial services. In 2008 the Rangarajan Committee stated that “the essence of financial inclusion is in trying to ensure that a range of appropriate financial services is available to every individual and enabling them to understand and access those services”. In 2014 the RBI Governor Raghuram Rajan declared that financial inclusion was about “(i) the broadening of financial services to those who do not have access to financial services, (ii) the deepening of financial services for people who have minimal financial services and (iii) greater financial literacy and consumer protection”. Following the evolution of the financial inclusion concept and understanding, the Indian strategy has similarly evolved. From 2010 to 2013 the Government of India had initiated the Swabimaan program24 and in 2013 a new scheme, called Pradhan Mantri Jan-Dhan Yojana has been launched by the new administration in place.

Although a departure from the stringent pre-2000s’ financial inclusion initiatives, overall, the Indian regulator has chosen to set strict rules ex ante, before services and their providers evolve – trying to ‘fit innovation in the ‘regulator-defined mold’. However, on the flip side significant institutional infrastructure reform has allowed financial service providers to better serve the poor, while managing to strike a balance between fostering innovative approaches and ensuring safety, soundness, and consumer protection.

Financial inclusion by numbers

To illustrate, financial inclusion has expanded in India over the of the adults belonging to the “richest 60%”. Usage of bank past years, as indicated by the data collected for the World accounts is also an issue that deserves more attention: 43% Bank’s Global Findex database. Between both implementations of account holders did not make any deposits or withdrawals of this survey in 2011 and 2014, 53% of adults are reported to in their bank accounts in the past year, while 67% of account have a bank account, which is a sharp increase from 35% in holders reported not making a single deposit in any typical 2011. The banking penetration has drastically increased in rural month. areas between 2011 and 2014 with 50% in 2014 against 33% in 2011. However, there is still a long way to go in the attempt The World Bank’s survey findings from 2011 and 2014, which to target financial inclusion efforts towards the poorest section found an increase in financial inclusion, are summarized of the Indian population. Among the poorest 40% of the below25: population, 56% of the adults are unbanked, compared to 41%

22 The Financial Inclusion Stack 3. Country Case Studies

3.1. India

World Bank’s survey findings from 2011 and 2014, which found an increase in financial inclusion:

% of adults* who 2011 2014

Have an account 35.2% 53.1%

Have an account at a financial institution 35.2% 52.8%

Saved at a financial institution in the past year 11.6% 14.4%

Saved in the past year 22.4% 38.3%

Took a loan from a financial institution in the past year 7.7% 6.4%

Loans in the past year n/a 46.3%

Has a debit card 8.4% 22.1%

Used a debit card to make payments n/a 10.7%

Other metrics 2011 2014

Bank branches per 100,000 adults 8.9 11.2

ATMs per 100,000 adults 10.5 11.4

Regulatory policy towards the key pillars of financial inclusion:

1. KYC and AML/CFT requirements

With regard to facilitating KYC and balancing AML/CFT requirements, the Indian regulator has taken a number of steps to minimize friction around opening transaction accounts and transacting through them:

• KYC relaxation for small transactions: As per current in comparison, requires a customer to undergo the 2FA RBI guidelines, there is no requirement for customers to process only while loading funds from the funding source. undergo a KYC process for transactions up to INR 10,000 Such wallets have limits on the value of transactions and (c. US$ 150) per month on prepaid instruments. This tend to reduce exposure to fraud, as they do not divulge guideline makes it convenient for customers to download any details of the customer’s savings account directly. the wallet of choice and use the same for transactions • Aadhaar making KYC easier: The advent of Aadhaar26 as without the need for documentation, photograph etc. that a national identity instrument has made the KYC process are usually required to avail traditional banking services. extremely easy. Aadhaar was developed to provide a • Exemption from Two-Factor Authentication: The RBI unique identifier to each Indian and as an e- KYC tool. The has currently mandated the inclusion of a two-factor government’s purpose in setting it up in 2009 was to help authentication (2FA) for transactions made on Indian debit the state correctly direct welfare payments. By early 2017 and credit cards, irrespective of transaction value. While all Indian adults should have provided their fingerprints, iris this requirement is necessary for consumer security, scans, name, birth date, address and gender in return for it also tends to be cumbersome, resulting in a payment a single, crucial, 12-digit number. This has brought millions process with a lot of friction, significant number of failed within the ambit of financial inclusion and has made transactions and transactional drop-offs. A mobile wallet, biometric authentication a reality.

The Financial Inclusion Stack 23 3.1. India

2. Financial infrastructure

With regards to financial infrastructure density, India ranks amongst the lowest globally, even when compared to its emerging market peers. Therefore, the regulator has taken a proactive stance with regard to the deployment of ATMs and POS terminals, while at the same time taking a conservative approach in allowing alternative distribution channels to flourish.

POS and ATM infrastructure27

POS Terminals Per Million Card Users ATMs Per 100,000 Adults

2012 2013 2014 2015

200 14,702 14,235 15000 150

12000 100 9000 4,689 4,626 6000 4,101

3,229 50

3000 1,870

0 0 UK

Turkey Brazil Mexico Russia South China India India Brazil China Kenya Turkey Russia Africa Nigeria Indonesia Singapore South Africa

• POS terminals: The RBI has outlined a broad strategy to • ATMs: The Ministry of Finance, together with the public enhance the growth in acceptance infrastructure through sector banks (PSBs) launched a common procurement POS terminals and usage of cards, which includes further process to deploy 63,000 ATMs across 16 geographical rationalisation of merchant fees for debit card transactions. areas in seven clusters during the 2012–2014 period. By Key measures from the RBI’s proposed strategy are: doing so, the regulator wanted to ensure that large scale ATM deployment is outsourced to industry experts and »» Banks issuing cards should install POS terminals that a lower cost is achieved. proportionate to the number of cards issued EPS, one of Apis Partners’ portfolio companies won some »» The government has set up the Acceptance of the tenders in this process and has since successfully Development Fund (ADF): Different stakeholders in deployed c. 5,000 ATMs as part of this initiative. the card payment chain contribute to a program that encourages wider deployment of card acceptance • Similarly in June 2012, in order to extend the reach of infrastructure. Card issuers are expected to divert a banking services to towns beyond Tier 1 and 2, RBI percentage of their transaction revenue into the ADF issued guidelines for non-bank entities to install white which is then invested in structured initiatives to expand label ATMs (WLAs). The entities which applied for license acceptance infrastructure need to specify the scheme A, B, C (each mentioning the number of WLAs to be installed as well as breakup of WLA »» The RBI has also proposed a number of options for the deployments across Tier 1-6 cities). rationalization of the Merchant Discount Rate (MDR) although further details are not available at this stage • Business Correspondents (BCs): Initially created by banks and then supported by the RBI as the banks’ »» In 2016, the RBI announced that any new card ‘agents’ that are technologically empowered to provide acceptance infrastructure deployed (POS machines and the last mile delivery of financial products and services. ATMs) by banks will have to be enabled for processing The RBI issued the first guidelines for BCs in January payment transactions using Aadhaar- based biometric 2006 and since then the list of eligible entities acting authentication from June 2017 onwards as BCs has been extended. In addition, in 2012, the RBI • While India’s POS base has been growing, its POS permitted BCs to be interoperable: allowing BCs of one infrastructure is lagging behind its emerging market peers. bank to service customers of other banks as well. Today As such there is still significant room for growth, especially the sector presents an abundance of models and types of in tier 2 and Tier 3 cities with smaller merchants. BC structures.

24 The Financial Inclusion Stack 3. Country Case Studies

3.1. India

• Payment bank licenses and small finance bank credit cards or undertake lending activities. Payment licenses: In 2016, the RBI allowed two special classes banks are permitted to set up outlets such as branches and of banks: “payments banks” and “small finance banks” ATMs, and to appoint business correspondents. Small that allows MNOs, payments service providers and pre- finance banks can undertake basic banking activities, paid card issuers to apply for payments bank status, while such as acceptance of deposits and lending to unserved existing Non-Bank Financial Companies (NBFCs) or MFIs and underserved sections, including small business units, can apply for Small Finance Bank license. Payment banks small and marginal farmers, MSMEs, and unorganized are permitted to accept demand deposits and savings sector entities. In effect, both of these initiatives are bank deposits from individuals, small businesses, and expanding financial inclusion by utilizing the vast networks other entities. They are restricted to holding a maximum of non-bank financialservice providers for the provision of balance of INR 100,000 per customer, and cannot issue additional financial services products.

3. Payment System

The RBI has continued to focus on both paper based and Most recently, the RBI has launched the Unified Payments electronic payment systems. Realizing the rapid scale of Interface (UPI), powered by NPCI is an integrated open innovations, in December 2008 the RBI decided to encourage the architecture set-up that could fundamentally change formation of a separate organization - a non-profit organization the way customers manage payments. The UPI set-up called the NPCI (National Payments Corporation of India) proposes to stitch all services from IMPS, ACH to RuPay as the umbrella organization for retail payment systems in into one common platform. This would allow for seamless India. NPCI’s goal: to create a large scale infrastructure that can interoperability and the potential unlocking of multiple operate on high volume, resulting in the delivery of payment solutions. The inherent open architecture will provide access services at a fraction of the cost. This entity has spear-headed to all payment service providers (PSPs), be it banks, financial numerous innovations in retail payments such as the first technology companies, payment banks etc. It is also expected real time, retail inter-operable inter-bank mobile payments with to provide users with the flexibility of accessing bank accounts 24 x 7 real-time transfer of funds (IMPS - Immediate Payment through any PSP that is connected to UPI. Moreover, customers Systems), payments based on Aadhaar (Unique national ID will be able to choose a virtual address in any format (mobile based on biometrics), a domestic card network – RuPay, number, Aadhar ID, email IDs etc.) and as such is expected to enabling ISO compatible National Automated Clearing House improve user experience and enable PSPs to provide easy and (NACH) systems and launching BBPS – an interoperable, simple payment solutions. In addition it will enable multiple use accessible and cost effective bill payment system. cases on the UPI platform- including peer to peer payments, person to merchant payments and business to business payments.

Below we have outlined a number of these:

Developments in India’s Payment System

Date Payments / Entity policy 2014

Sep - 08 National Automated Clearing House

National Payments Corporation of India Dec - 08

Nov - 10 Immediate Payments Service for Mobile Payments

Feb - 12 Online verification of Aadhaar universal identification cards

The Financial Inclusion Stack 25 3.1. India

Mar - 12 RuPay electronic payment card scheme

Jul - 12 Aadhar Payments Bridge System

Oct - 13 Aadhar-enabled Payment System

Aug - 14 National Mission for Financial Inclusion

Aug - 15 Provisional payment bank licenses

Aug - 16 Bharat Bill Payment System

Unified Payments Interface Aug - 16

4. Use of technology

Although late to the party, the Indian financial services sector penetration of the digitally enabled financial platforms: has embarked upon its digital journey and is fast catching • Funding support: The Start-Up India initiative launched by up with its global peers. The traditionally cash-driven Indian the Government of India in January 2016 includes a US$ economy has responded well to the fintech opportunity, 1.5 billion fund for start-ups29 the banking sector while primarily triggered by a surge in e-commerce, and smartphone Aadhaar has been extended for pension, provident fund penetration. The total transaction value for the Indian fintech and the Jan Dhan Yojana sector is estimated to be approximately US$ 33 billion in 2016 and is forecasted to reach US$ 73 billion28 in 2020 growing at a • Financial inclusion and enablement: Jan Dhan Yojana five-year CAGR of 22%. The government is naturally themain added over 200 million30 unbanked individuals into catalyst for the success or failure of these fintech companies in • Tax and surcharge relief: Including tax rebates and patent a heavily regulated financial industry. The Government of India rebates along with regulators such as SEBI and RBI are aggressively supporting the ambition of the Indian economy to become • Infrastructure support: The Digital India and Smart a cashless digital economy and emerge as a strong fintech Cities initiatives have been launched to promote digital ecosystem via both funding and promotional initiatives. The infrastructure development in the country as well as attract following multi-pronged approach has been taken to enable foreign investments. The government recently launched a

26 The Financial Inclusion Stack 3. Country Case Studies

3.1. India

dedicated portal to provide ease in registration to start-ups the globe, such as in the UK, where the Financial Conduct • IP facilitation: Government support for expenses towards Authority (FCA) launched an initiative in name of “Project patents filing, trademark and other design work Innovate” for helping startups work with British financial regulators to launch innovative products in the market. On 14 Overall, the regulator has played an integral role to support July 2016, RBI announced that it had set an Inter Regulatory the growth of fintech. Nonetheless and going forward, more Working Group to study the full range of regulatory issues radical and well-timed policy initiatives are required. Indian relating to fintech and digital banking in India. This group will regulators may be at a stretch balancing the complex regulatory study the aspects of fintech and create a roadmap for its best framework building activity and monitoring the fast-moving usage and growth and will involve entities from the payment, Indian fintech market. To address this, they have adopted some MNO, software and startup ecosystem. of the regulatory practices in line with those established across

5. Consumer protection and financial literacy

India explicitly combines financial education with financial to be complemented with financial literacy. Close to 76% of inclusion at all points of its National Strategy for financial Indian adults do not adequately understand key financial education, stating that its mission is “to undertake massive concepts, faring worse than the rest of the BRICS and the Financial Education campaign to help people manage money average across South Asia31. To help improve financial literacy, more effectively to achieve financial well-being by accessing some banks have set up literacy centers that work with appropriate financial products and services through regulated microfinance organizations such as the Citi Center for Financial entities with fair and transparent machinery for consumer Literacy in Ahmedabad, while the RBI has also launched a protection and grievance redressal”. financial literacy project among the target groups of school children, senior citizens, and military personnel. It has also Nonetheless, more stringent customer protection laws been suggested that financial literacy be included in the school alone are unlikely to achieve financial inclusion. These need curriculum.

6. General financial inclusion facilitators

As evidenced below, the Indian regulator has taken a proactive approach to financial inclusion at times superseding market forces to ensure that the bottom of the pyramid is financially served.

• The prime minister launches bank accounts for all: vis-à-vis customers’ credit profile. Rates can be brought Forcing the banks to open bank accounts to all adults. down on a sustainable, commercially viable basis through Under Pradhan Mantri Jan Dhan Yojna (PMJDY), 266.8 greater competition in the system. million accounts have been opened and 210 million RuPay • Priority Sector Lending: An important instrument of debit cards have been issued as of January 2017. These financial inclusion in India has been the priority sector new accounts have mustered deposits worth almost lending targets that mandate that all domestic commercial Rs 69,027 crore (US$ 10.1 billion). Although the pace of banks, public or private, lend 40% of their adjusted net account activity has been slow with 24.6% of accounts bank credit or credit equivalent amount of their off-balance opened showing a zero balance, as these accounts are sheet exposure (whichever is higher) to priority sectors. used to receive government benefits, an ever increasing Further, public sector banks have clearly defined rules majority of accounts are now also used to make deposits in the subcategories of agriculture, MSMEs, education, and avail of credit32. housing, and export credit. For example, 45% of all • Government of India aims to extend insurance, pension priority sector lending must be made to agriculture. The and credit facilities to those excluded from these benefits economic objectives that underlie priority sector lending, under PMJDY. although laudable, must, however, be reinforced by robust implementation, including careful monitoring • Interest rate caps: India has long had caps on lending of distribution33. It is widely believed that the quality of rates either in the form of absolute caps or margin above execution has been weak; in many cases, the financial the base rate. These uniform caps, however, oftentimes institutions have had to be recapitalized or amalgamated. lead to the exclusion of riskier customers i.e. the bottom of the pyramid from formal lending as risk is mispriced

The Financial Inclusion Stack 27 3.1. India

• Demonitisation / Currency Replacement Program claimed that the action would curtail the shadow economy, (CRP): On 8 November 2016, the Government of India crack down on the use of illicit and counterfeit cash to announced the demonetisation of all INR500 (US$ 7.40) fund illegal activity and terrorism and help digitize India’s and INR1,000 (US$ 15) banknotes. The government economy.

Conclusion

India’s financial inclusion agenda has seen a welcome shift away from an emphasis on credit to a more holistic approach and now a leader in the sector thanks to deliberate efforts to upgrade the backbone of the financial services system. Over the past 10 years, India has taken steps to modernise its financial system, by leveraging technology and has formed a sustainable path to financial inclusion. India’s financial inclusion policy, Pradhan Mantri Jan-Dhan Yojana (PMJDY or Prime Minister’s People’s Wealth Scheme), has the political will and institutional support of the Government of India and the RBI, which is demonstrated with achieving laudable and quantifiable goals such as the opening of c. 260m bank accounts.

UIDAI, e-KYC, AEPS, UPI, eSign and DigiLocker form the v. eSign: an API to facilitate Aadhaar card holders to India Stack: digitally sign documents, which hopes to remove a lot of paperwork from the authentication process, as well as i. UIDAI: a unique identification number is linked to provide a legally valid signing mechanism biometric readings of the individual based on Aadhaar vi. DigiLocker is a Government of India repository for (the world’s largest national identity project); documents ii. e-KYC: allows instant verification of customers along with date of birth and residence address All the above will enable users to sign up for the service, link to the Aadhaar card, upload their documents, eSign them, and iii. Aadhaar Enabled Payments System (AEPS): payment share the documents on request. service empowering a bank customer to use Aadhaar as his/ her identity to access his/ her respective Aadhaar There are 4 layers in the stack and each layer is designed to enabled bank account operate independently. The APIs can be used for any kind of iv. Unified Payment Interface: allows for both a pay request hardware (from desktops to mobile phones) and access to and a collect request using a virtual ID to process these each API requires a sign up for that particular service. transactions

The India financial inclusion stack

Presenceless Layer Cashless Layer Where a universal biometrically enabled, Where a single interface digital ID allows people to to all the country’s bank participate in any service accounts and wallets to from anywhere in the democratise payments country layer Paperless Layer Consent Layer Where digital records movewith an individual’s Which allows data to identity, eliminating the need move freely and securely to for massive amount of democritise the market for paper collection and data storage

28 The Financial Inclusion Stack 3. Country Case Studies

3.1. India

More importantly, India is building a complex public digital infrastructure, called the “India Stack”. Built upon the Aadhaar initiative, it is a series of connected systems that allow people to store and share their data such as bank statements, medical records, utility bill records, birth certificates, university diplomas or tax filings. When the India Stack is connected to UPI(Unified Payment Interface) - the new payments system that was launched in August 2016, the future potential is likely to be huge. For now, Aadhaar is used chiefly to confirm identity and for KYC purposes.As any information can be linked to each Aadhaar ID, there are endless possibilities, most obviously within financial services.

For example, customers can allow lenders access to anything linked to the Aadhaar number, thus proving their ‘credit rating’ and in an instant shifting people into the formal economy. The India Stack experiment is likely to become a trailblazer in creating digital economies around the world.

The Financial Inclusion Stack 29 3.1. India

India Dashboard34

INDIA

KYC Infrastructure Payments Technology Protection Other

GDP Adult Population Unique Mobile Financial Account Financial Account (billion USD) (millions) Subscribership Ownership Among Ownership Among Adults Women $2,049 860 48% 53% 43%

Formal Commitment • Committed to the Alliance for Financial Inclusion in 2012 Milestone

Selected Financial • Launched the Pradhan Mantri Jan Dhan Yojana program in 2014 Inclusion Highlights • Joined the Better Than Cash Alliance in September 2015 • Issued provisional payments bank licenses to diverse entities, including nonbank institutions such as India Post, in August 2015

Next Steps • Amplify financial capability initiatives to reduce account dormancy rates and incentivize adoption of digital payments at merchant locations to enhance the digital financial services ecosystem • Move forward with implementation of recommendations contained in the December 2015 “Report of the Committee on Medium-term Path on Financial Inclusion,” as appropriate

= The regulator has taken a passive stance

= The regulator has taken a pro-active stance and significant progress has been make

= The regulator has over-regulated, hindering development

30 The Financial Inclusion Stack 3.2 Indonesia

Overview: Indonesia’s Approach to Financial Inclusion

Indonesia lags behind its emerging market peers with 64% unbanked population among adults older than 15 years old(30). As the world’s fourth most populous nation with 250 million people, Indonesia represents 6% of the world’s unbanked population, while it only represents c. 3.6% of the global population. The Indonesian Government has recognized that an inclusive financial system is a fundamental pre-requisite for economic and social development and has launched a number of initiatives over the past 5 years, which are showing early signs of momentum.

Indonesia’s underperformance in financial inclusion is traced back to its history and geography. As a consequence of the Asian financial crisis, policymakers focused more on regulating the banking system and strengthening supervisory and regulatory oversight instead of pushing aggressively for financial inclusion. In addition Indonesia’s complicated geography with around 900 inhabited islands has also been a key barrier.

The Indonesian government has adopted financial inclusion as its new national development policy objective setting a target of 75% banked population by 2019 from the current 36%. Along with its positive distributive impact, financial inclusion should increase the availability of credit, thus boosting economic growth. Currently the financial sector is highly dominated by banks with low levels of intermediation, a growing capital markets with low penetration of pension funds, insurance and other non-bank financial institutions. Bank Indonesia, the central bank, is the main government body pushing financial inclusion in the country.

Like India, Indonesia has focused on government-led programs driven primarily by bank participation, accompanied by a recent launching of mobile number based accounts. Key technological innovations are paving the way for the spread of these programs. These programs are, however, still largely in either the nascent or the pilot stages and will require a sustained push to become more broadly successful.

Financial inclusion by numbers

We have considered the evolution of financial inclusion in third saved at a formal financial institution. Similarly, 57% of the Indonesia based on the latest World Bank Findex data that population borrowed money in 2014 but only a third did so from was conducted in 2014. It is important to note that the most a formal financial institution. impactful government initiatives were started in 2014, and as a consequence the results of these initiatives will not be While there is no reliable recent data on financial inclusion in observed in the data. Early data from government sources has, Indonesia, we note a few anecdotal developments since the however, seen some uptick. World Bank study. There were 32 million new cards issued between December 2014 and December 2016. This represents The banked population in Indonesia increased from 20% in 2011 a 26% increase in the card base. While the number of card to 36% in 2014. While the increase is significant, it still lags far based transactions has increased by a similar percentage, on behind its East Asia and Pacific peers, which had an average a per card basis, usage has remained flat, which may be due account penetration of 69%. Financial exclusion is even further to a lag between issuance of card and usage. Additionally, the accentuated when looking at usage of these accounts, with latest results of the National Survey on Financial Literacy and only 6.6% of the adult population using an account to receive Inclusion (SNLIK) revealed that the financial literacy increased wages and only 8.5% using a debit card to make payments in to 29.7% last year from 21.8% in 2013. 2014. The World Bank’s survey findings from 2011 and 2014, which Looking at savings and credit, financial institutions are not the found an increase in financial inclusion, are summarized on the primary channels. The World Bank estimated that 69% of the next page36: Indonesian population saved money in 2014, however only one-

The Financial Inclusion Stack 31 3.2. Indonesia

World Bank’s survey findings from 2011 and 2014, which found an increase in financial inclusion:

% of adults* who 2011 2014

Have an account 19.6% 36.1%

Have an account at a financial institution 19.6% 35.9%

Saved at a financial institution in the past year 15.3% 26.6%

Saved in the past year 40.5% n/a

Took a loan from a financial instituion in the past year 8.5% n/a

Loans in the past year 49.1% 56.6%

Has a debit card 10.5% 25.9%

Used a debit card to make payments n/a 25.9%

Other metrics 2011 2014

Bank branches per 100,000 adults 8.7 9.6

ATMs per 100,000 adults 16.8 36.5

Regulatory policy towards the key pillars of financial inclusion:

1. KYC and AML/CFT requirements

Financial Identification Program services to every corner of the country by standardizing Indonesia lacks a unified real-time ID database linked to Know Your Customer (KYC) protocols and eliminating issues financial services for electronic KYC and authentication of of asymmetric information. In India, the use of the Aadhaar transactions. However, Bank Indonesia launched the Financial card has had a transformative impact. The Indonesia FIN Identification Program, which issues Financial Identity Numbers program, however, is yet to be linked fully to the existing (FINs) to unbanked persons. This is a unique, lifetime number ID infrastructure. While enrollment in the national e-ID system that connects to the existing e-ID card and makes it easier to is more than 140 million, only a fraction has so far obtained a identify prospective new customers. Similar to the Aadhaar FIN number. card in India, the FIN cards will expedite the spread of banking

2. Financial infrastructure

A key challenge for the financially excluded is their inability through agents. Under the program, participating banks are to access formal financial services through traditional required to recruit agents to provide basic savings and loan infrastructure, such as bank branches. The Government has products. The use of bank agents allows for low-cost expansion addressed this issue through the launch of the Laku Pandai of point of service where individuals can open accounts or program (branchless banking program). transact. The bank accounts that are opened under this program are aimed at providing micro-access towards savings and Announced in November 2014, the Laku Pandai program aims loans for rural communities across the country that are mostly to bring access to basic, no-minimum balance bank accounts unbanked. The Laku Pandai program has been very successful to the poorest sectors in Indonesia. The program focuses not with 160,000 Laku Pandai agents recruited in less than 18 on the spread of banking through physical branches but rather months compared to about 20,000 bank branches nationwide

32 The Financial Inclusion Stack 3. Country Case Studies

3.2. Indonesia

over decades of traditional banking and has resulted in 2 million new customers as of September 2016. It faces a few regulatory hurdles which limit its functionality: • Agent incentives: Regulations only allow for customers Other than geographical proximity, the Laku Pandai program to be charged for withdrawals and transfers out. i.e. many offers many welcome positive changes: transactions are free. Restrictions on charges may render the agent business model unviable for both smaller service • Simpler KYC: A customer with any photo identity card providers and the agents themselves issued by the government or a reference letter from a local • Agent geographical restrictions: Regulations restrict community leader can open a basic savings account agents from operating in provincial, regency or municipality • One-stop shop: The regulations permit providers to offer capitals. Although providing services to remote areas is a micro-savings, micro-loans, micro-credit, micro- insurance key goal, a large proportion of urban dwellers do not have and transfers, thus providing a “one-stop shop” access to banking services, and should also be a target for financial inclusion focused regulation • Availability of more providers: Smaller banks and financial institutions (microfinance, rural banks and venture • Agent exclusivity: The regulations mandate that agents finance institutions) with limited capital and geographical may only partner with one service provider. Agents should presence are able to offer financial services through low- be given the option to partner with multiple service cost technology enabled channels providers as non-exclusive agents would allow customers to choose from the best product/services. Indonesia • Limited thresholds for agent recruitment: Service seems to be following a similar trajectory as India, as providers are allowed to appoint any individuals and agents in India only became interoperable in 2012. business entities (with legal status) as agents

ATM Infrastructure

The ATM is the main interaction point customers have with their banks. As per the World Bank 2015 study, 71% of Indonesian account holders use ATM as the main mode of withdrawal. ATM density is significantly higher than branch density with 53 ATMs per 100,000 adults vs. 18 commercial bank branches per 100,000 adults (World Bank).

Number of ATMs (000’s) Number of Cash Withdrawals (in m)

CAGR 10% CAGR 11%

120 103.4 3,258 99.3 3500 2,907 100 90.7 3000 2,649 75.9 2,354 80 2500 2000 60 1500 40 1000 20 500 0 0

2013 2014 2015 2016 2013 2014 2015 2016

ATM deployment and number of cash withdrawals continues Credit Information Bureau to grow in Indonesia, but at a slower pace than card growth, Another major barrier for expansion of financial inclusion is which grew at 13.7% CAGR between 2013-2016. Number of the absence of the credit infrastructure required to underwrite transactions per card per year has remained stable at c. 21 small and micro loans. Credit bureau data is still underutilized transactions per year with an average cash withdrawal amount and insufficient for making robust credit decisions, and banks of US$ 55. ATM withdrawals as a proportion of card based exchange information relating to their clients on an informal transactions has, however, steadily declined over the last 5 basis. Credit assessment is still judgment-driven with years with eMoney (prepaid cards) and debit purchases gaining limited use of alternative data. The government has outlined traction. in its financial inclusion roadmap the establishment of a credit rating agency for MSMEs and a credit information bureau, however these are still in early stages.

The Financial Inclusion Stack 33 3.2. Indonesia

3. Payment System

Cash is used currently in the vast majority of transactions. The central bank is focusing on the shift from cash to digital transactions as a key objective.

Point of Sale (POS) Infrastructure

The central payments infrastructure is not currently fully Kartuku an Indonesian third party processor and payment interoperable and interconnected, rather it is fragmented service, has developed a propriety system to unify the payment across four switching networks. Additionally, banks in infrastructure at the POS by connecting issuing and acquiring Indonesia often do not issue customers with a debit card with banks, e-Money providers and merchants onto a single EDC a 16-digit number that can be used on the global card networks (Electronic Data Capture) multi-acquiring network, becoming (i.e. Visa / Mastercard). As such, banks and other payments the de-facto payment ‘aggregator’. Recent years have seen a players have all sought to roll-out their own payments slowdown in the growth of investment in POS terminals. With infrastructure, and so it is very common to see four or five growth in interoperability, it is expected that there will be a different POS devices at a merchants’ counter. In response, consolidation of payments infrastructure assets.

Number of POS Terminals (000’s) Number of Card Transactions at POS (in m)

CAGR 17% CAGR 15%

1050 722 1200 800 1005 623 1000 843 700 543 656 600 479 800 500 600 400 400 300 200 200 100 0 0

2013 2014 2015 2016 2013 2014 2015 2016

Negara (BTN) - under the Association of State-Owned There are four main competing domestic switching networks/ Banks (Himbara) debit card schemes focused on switching services provided through their member banks’ ATMs or POS devices: In December 2016, the central bank issued regulations and • PT Artajasa Pembayaran Elektronis (ATM Bersama) signed an MoU with four banks as acquirers, representing 75% - controlled by Indosat, one of the biggest MNOs in of all domestic debit transactions, namely BRI, Bank Mandiri, Indonesia, and the Bank Indonesia pension fund BNI and BCA, as well as three national switches (Artajasa • PT Rintis Sejahtera (ATM Prima) – controlled by the Bank Pembayan Elektronis, Alto Network and Rintis Sejahtera) aimed of Central Asia (BCA) towards the creation of National Payment Gateway (NPG). The unified National Payment Gateway is expected to accelerate • PT Daya Network Lestari (ATM ALTO) - controlled by Seven the adoption and development of electronic payments by Bank, Japan simplifying and accelerating the acceptance process as • PT Sigma Cipta Caraka (ATM Link) - controlled by four state- has been observed in China and the United Kingdom, with owned lenders - Bank Mandiri, Bank Rakyat Indonesia the creation of a single dominant interbank switching network (BRI), Bank Negara Indonesia (BNI) and Bank Tabungan (China Union Pay and LINK, respectively).

34 The Financial Inclusion Stack 3. Country Case Studies

3.2. Indonesia

Roadmap to the establishment of the NPG37

From anuar 1, individuals earning less than IDR 3 million banned from applying for credit card, slowing credit card growth a 1: ATM Principal, transfer interconnectivity mandated by BI 2014

1: Himbara banks announce intention to form their own switching network, which they hope will become the NPG

2016

ecember 1: BI agrees a memorandum of understanding ovember 1: BI issued (“MOU”) with bank Mandiri, BCA, new electronic payments BRI, and BNI, and also ATM regulation, which for the first Bersama, ATM Prima and ATM Alto time captured eWallets and on the NPG. The NPG will be payment gateways. Please overseen by a ‘domestic principal’. refer to the Appendix for The aim of the NPG is to enable more details interoperability and inter-connectivity among all electronic payment systems, to increase the level of electronic payments in Indonesia. It arch 1: Full inter-operability between 2017 is also a requirement for ASEAN ATMs and debit cards will be required, and Economic Community (AEC) banks must be inter-connected to a minimum of two switching companies une 1: Interconnection of electronic money

ul 1: Institutional establishment of NPG. It is unclear whether this will be a new switching network or one of the existing switching networks une 1: BI to widen the NPG scope to cover electronic bills and 2018 invoices, internet-based services, mobile-banking and eCommerce

2019

une 1: The future domestic principal will also oversee credit card payments,whosetransaction settle ments are currently managed by foreign principals New debit cards with chip and pin technology need to be rolled out From 1 July 2017 – 31 December 2021, such that by 1 January 2022 all debit cards (with nominal exclusions) use chips.

The Financial Inclusion Stack 35 3.2. Indonesia

Mobile Money Infrastructure

Indonesia is the fourth largest mobile market in the world: May 2013, Indonesia’s three MNOs achieved interoperability between 2007 and 2012 the three largest MNOs (Telkomsel, between their mobile wallets, giving Indonesia the distinction Indosa and XL Axiata) representing 80%+ of the mobile of being among the first countries to achieve mobile subscriber base each launched their own mobile money money platform interoperability, enabling customers in a platforms. Mobile operators’ money transfer services have, mobile money scheme in one network to transact seamlessly however, seen low levels of activity — with active users of with customers in another. services standing at less than 10% of registered users. In

# of E-Money Instruments (in m) # E-Money Transactions (in m)

CAGR 12%

CAGR 70% 800 683.1 60 51.2 700 50 600 535.6 36.2 35.7 34.3 40 500

30 400 300 203.4 20 200 137.9 10 100 0 0

2013 2014 2015 2016 2013 2014 2015 2016

Since then, given the size of the market and the need for an with a few specialist providers such as alternative transport alternative financial inclusion channel, there have been a total companies (Go-Jek and Grab). Only licensed operators can be of 21 licensed electronic money operators as of August 2016. used for the purchase of physical goods. Most licensed eWallets are owned by MNOs and banks,

Mobile Money Ecosystem

Bank Institution

Telco Provider

3rd Party

36 The Financial Inclusion Stack 3. Country Case Studies

3.2. Indonesia

Room for improvement remains mostly with regards to various and electronic money (e-money) and ensuring an even constraining elements of the regulations, particularly in terms playing field for financial service providers. of harmonizing regulations regarding branchless banking

4. Use of technology

Before 2015, there was a handful of fintech players. In 2016, the fintech players in Indonesia are operating in the payment the number of registered fintech startups grew 78% per sector, covering the entire spectrum from mobile payments to Indonesia’s Fintech Association (IFA) data. By November payment gateways. 2016, the IFA listed around 135-140 fintech players. 43% of

Fintech players growth Fintech Player Profile by Sector

Other 8.0

Crowdfunding 78 8.0 80 70 60 Personnel 50 Finance Payment 40 8.0 43.0 30 20 7 6 9 10 0 Lending 1 7. 0 2013 2014 2015 2016

Aggregator 13.0

The fintech landscape is still in nascent stages. While increased, it remains relatively low for the size of the overall investments from local and foreign capital providers have economy.

5. Consumer protection and financial literacy

The level of financial literacy in Indonesia, especially among Authority: the Otoritas Jasa Keuangan (OJK) along with select lower socio-economic groups, is still low. Financial inclusion banks have launched financial literacy initiatives aimed at cannot be successful without the simultaneous spread of even those individuals who have little to no formal education. financial literacy. To bridge the gap, the Financial Services

The Financial Inclusion Stack 37 3.2. Indonesia

6. General financial inclusion facilitators

the population. The initial success of a national financial inclusion strategy hinges not only upon access to bank accounts, but also • Limiting cash withdrawals: A key facet for incentivizing incentivizing the use of those accounts. The Indonesian account holders to use their accounts to perform government has also initiated a number of programs to enable transactions rather than simply withdrawing cash on a account usage: regular basis. With this objective in view, the government has limited cash withdrawals from accounts under the • G2P payments: In total, G2P payments accounts for 84% Laku Pandai program, both in number and amount. of all government transfers in Indonesia. They are often This restriction will force people to use their accounts and cash-based. Indonesia intends to leverage digital platforms ensure that banks will not have significant quantities of for social transfers through its Laku Pandai program, which zero balance accounts, which are costly to maintain on a is expected to reach rural areas and cover at least 75% of large scale.

7. Conclusion

Financial inclusion efforts have largely been driven by the government in coordination with private and public sector banks. While Indonesia has successfully implemented various pilot programs to test inclusive measures in recent years, the initiatives have remained small scale and are still in nascent form.

Spurring financial inclusion has now become a key goal of President Jokowi. His administration views the spread of financials services to the poor and underserved parts of Indonesian society to be important for sustained, strong and inclusive economic expansion. Indonesia’s National Strategy for Financial Inclusion began in 2012, but limited progress prompted President Jokowi’s government recently to step up efforts.

The government has pushed financial inclusion throughtwo main initiatives comprising a bank led model and MNO led model. The central bank is indifferent towards which method is used for opening accounts as long as the country sees a fundamental shift in account penetration. As demonstrated by India, the initial success of a national financial inclusion strategy hinges not only upon access to bank accounts, but also incentivizing the use of those accounts. Direct deposits of social program payments along with the bundling of insurance and pension products would serve to fuel usage of these new accounts.

The recent momentum of financial inclusion initiatives has spurred the growth and opportunities in the fintech sector. Indonesia is still in its early stages and a proliferation of financial technology in coordination with government initiatives is expected to transform the financial services sector.

38 The Financial Inclusion Stack 3. Country Case Studies

3.2. Indonesia

Indonesia Dashboard38

INDONESIA

KYC Infrastructure Payments Technology Protection Other

GDP Adult Population Unique Mobile Financial Account Financial Account (billion USD) (millions) Subscribership Ownership Among Ownership Among Adults Women $889 173 67% 36% 37%

Formal Commitment • Committed to the Maya Declaration in 2012 Milestone

Selected Financial • Developed a national financial inclusion strategy in 2012 Inclusion Highlights • Implemented mobile money platform interoperability in 2013 • Tied for first place on the mobile capacity dimension of the 2016 FDIP scorecard

Next Steps • Harmonize electronic money and branchless banking guidelines to enhance regulatory clarity and advance a level playing field for financial service providers • Identify dedicated financial inclusion sta to assist with implementation of the national financial inclusion strategy and facilitate coordination across key stakeholders

= The regulator has taken a passive stance

= The regulator has taken a pro-active stance and significant progress has been make

= The regulator has over-regulated, hindering development

The Financial Inclusion Stack 39 3.3. South Africa

Overview: South Africa’s approach to financial inclusion

South Africa has made the pursuit of financial inclusion a key tenet of the formal financial services industry. The country has benefited from a relatively advanced payments infrastructure and the presence of a few but dominant financial service players. The South African financial services sector is regulated via two primary institutions: The South African Reserve Bank (SARB), which is mandated to achieve and maintain price stability in the interest of balanced and sustainable economic growth in South Africa (the SARB is the formal regulator of all banking licenses in the Country); and the Financial Services Board (FSB), which is mandated to oversee non-bank financial institutions, which includes retirement funds, short-term and long-term insurance, companies, funeral insurance, schemes, collective investment schemes (unit trusts and stock market) and financial advisors and brokers. Finally, the government assists in guiding the agenda of these institutions through the passage of key acts traditionally via the Treasury or the Department of Trade and Industry. Some examples of these acts include: a market conduct policy focused on treating customers fairly and the Financial Sector Charter which aims to ensure equality amongst participants in the Financial Services landscape.

Inclusion is a priority of the South African government as it seeks to redress inequalities carried over from the Apartheid era. As such, for many years, the National Treasury has implicitly pursued financial inclusion as a policy goal. Post 2011, the South African Government went on to institutionalize the focus on financial inclusion, with the National Treasury including “financial inclusion” as one of its four official policy priorities and defined its mandate as “contributing to the development of a financial sector that provides access to the poor and thereby contributes to economic growth, job creation and poverty alleviation”.

Outside of the government bodies, several associations representing the private sector play an important role in enacting government policy through their members. These include: the Association for Savings and Investment South Africa (ASISA), Banking Association of South Africa; International Bankers Association; South African Insurance Association and the Johannesburg Stock Exchange (JSE). Due to the presence of a strong financial services industry, a collaborative interaction between government and the private- sector is a key requirement in order for government to drive its policy requirements.

Financial inclusion by numbers

South Africa has relied on the traditional banking sector to bank account initiative and the expansion of debit cards on the drive financial inclusion. In 2015, 77% of South African adults back of the South African Social Security Agency (SASSA). were financiallyserved by either the formal or informal financial services sector. The proportion of banked adults has grown A summary of the state of South Africa’s Financial service significantly from 46% in 2004 to 77% as of 2015, according to penetration is provided by World Bank’s survey findings survey conducted by FinMark Trust. Increasing banking levels from 2011 and 2014, which found a similar increase in can be attributed to two main initiatives: the Mzansi (basic) financial inclusion.39

40 The Financial Inclusion Stack 3. Country Case Studies

3.3. South Africa

A summary of the state of South Africa’s Financial service penetration is provided World Bank’s survey findings from 2011 and 2014, which found a similar increase in financial inclusion.

% of adults* who 2011 2014

Have an account 53.6% 70.3%

Have an account at a financial institution 53.6% 68.8%

Saved at a financial institution in the past year 22.1% 32.7%

Saved in the past year 31.5% n/a

Took a loan from a financial instituion in the past year 8.9% n/a

Loans in the past year 4 4.1% 85.6%

Has a debit card 45.3% 54.9%

Used a debit card to make payments n/a 40.8%

Other metrics 2011 2014

Bank branches per 100,000 adults 10.5 4

ATMs per 100,000 adults 59.1 59.9

Regulatory policy towards the key pillars of financial inclusion:

1. KYC and AML/CFT requirements

South Africa criminalized drug-related money laundering in In order to comply with FICA, a new customer at a formal 1992 and laundering from any type of activity an offence financial institution requires: a proof of identity and a utility in 1996. The money laundering control law, known as the bill that shows the property the individual resides at as proof Financial Intelligence Centre Act or FICA, was passed in of residency. Whilst FICA ensures South Africa meets global 2001 and the regulations supporting implementation of the standards in terms of KYC, it also has the effect of limiting law came into force on 30th of June 2003. From that date, participation in the formal financial services infrastructure, registered financial institutions were required, amongst other specifically to migrant workers who may lack the requisite things, to identify and verify the identity of all new clients. The paperwork and who in the absence of being able to provide current AML / CFT framework was completed when South FICA documents are thus reliant on poorly governed non- Africa criminalized terrorist financing as part of the Protection financial intermediaries. of Constitutional Democracy against Terrorist and Related Activities (POCDATARA) Act of 2004. Collectively this act Stringent KYC requirements have created the un-intendent and FICA ensures that South Africa complies with the core consequence of hindering financial inclusion. A more risk- FATF (Financial Action Task Force) 40+9 recommendations on based approach should be designed to target high-impact terrorist financing and money laundering. To date South Africa cases involving large amounts of money and greater numbers is the only country in Africa that is a representative of FATF. of people.

The Financial Inclusion Stack 41 3.3. South Africa

2. Financial infrastructure

South Africa has a well-developed formal financial services sector. The primary means of access is via bank branches, POS The largest 5 banks in the country (FNB, ABSA, Standard Bank, & MPOS infrastructure at merchants, online payments and Nedbank and Capitec) accounted for the significant majority mobile banking (largely over smart-phones). As noted under of system-wide assets (c. 88% as of FY2015), and similarly section 4, mobile money, has been launched in the market on account for the majority of financial services infrastructure in several occasions yet lack of up-take has led the two largest the country. As of 2015, the top 5 banks has a branch network mobile network operators to withdraw their mobile money in excess of 5,000 branches across the country. offerings in 2016.

# of ATMs (in 000s) # of POS (in 000s) # of Cards (Debit + Credit) in m

4.2%

96 98 100 339 345 87 350 308 77 28 29 2 74 277 276 80 30 27 300 25 62 23 24 58 25 250 60 20 200 40 15 150

10 100 20 5 50

0 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015

Due to the large and robust formal financial services infrastructure, the government has focused on driving financial inclusion through these players. To date two significant programs have underpinned the push for financial inclusion. Firstly the Mzansi program which pushes the market into the development of low-cost transactional banking platforms and secondly the SASSA program which is responsible for the majority of grants distributed in the country (see below for a more detailed overview on each).

The Mzansi Account driven by the emergence of Capitec – a low cost bank account provider) has effectively resulted in banks providing accounts that are more competitive than the initial Mzansi The Mzansi Account is a ‘no-frills’ low income transactional account. As such the initiative has been viewed by many as banking account that was developed in line with the a success through first driving the movement of large banks commitments of South Africa’s Financial Sector Charter. The into the formally unbanked segment of the market, and then Financial Sector Charter requires banks to make banking more subsequently promoting sufficient competition so as to allow accessible to the nation and, specifically, to increase banking the improvement of services. reach to all communities. The Mzansi Account is the result of the five major South African banks, namely Standard Bank, SASSA Program: ABSA, Nedbank, First National Bank and PostBank, working collectively to provide a standard for new bank accounts, which is affordable, readily available and suits the specific needs SASSA is the government grant program that is focused on of the previously unbanked communities. The collaboration the provision of social security payments for certain segments between the banks has allowed Mzansi account holders of the South African population, such as grants for senior to make use of any of the participating banks’ ATMs at no citizens, for disability and child support etc. SASSA has played additional cost – effectively creating a network of over ten a key role in expanding access to the formal financial services thousand ATMs across the country and extending the banking sector in South Africa: of the 77% of all adults who have a basic platform to the greater community. The effect has been further bank account, SASSA card holders account for 19% of the total, augmented by POS functionality available at retailers. as such SASSA accounts contribute to the expansion of c. 1/4th of all bank accounts, with the majority of the participants As of 2016, however, almost all banks have stopped providing being traditionally excluded segments of the population (i.e. the Mzansi account due to “high cost of origination in-branch, women and the elderly). Since SASSA cards are sponsored by servicing being expensive and customer utilisation being very Grinrod Bank and switched by Net1, account holders are able low”. Instead increased competition between banks through to withdraw funds from ATMs across the country and use their the introduction of a low cost banking account (particularly cards across the well- developed national POS infrastructure.

42 The Financial Inclusion Stack 3. Country Case Studies

3.3. South Africa

3. Payment System

The National Payment System (NPS) is one of the pillars of sponsoring intermediaries (such as Payment Service Providers). financial stability. The Reserve Bank oversees the safety and The central role of Bankserv has ensured the stability of the soundness of the national payment system and implements South African NPS, but has potentially come at the cost of risk-reduction measures in the payment system to reduce innovation. For example, in comparison to Kenya, a product systemic risk. The Reserve Bank provides an inter-bank such as M-Pesa (which exists outside of the national payments settlement service via the real-time electronic settlement infrastructure), would be unlikely to been allowed in South system. Africa, and this partially explains the difficulty that MNOs face when launching mobile money schemes in South Bankserv Africa is the national automated clearing house (ACH) Africa. which runs the Faster Payments platform, akin to IMPS in India and IPS/ Vocalink in the UK. Bankserv acts as the central player As of today, the majority of South Africans access the NPS in the South African payments infrastructure and is collectively largely to conduct ATM withdrawals (see below) on a weekly owned and controlled by the four largest banks in the country or monthly basis, and it remains quite common for low (ABSA, FNB, Standard Bank and Nedbank) each holding a earning individuals to access the formal financial system only 23.125% share, with the remainder shared between a further once a month whereby they withdraw their entire salary. As seven financial institutions. All transactions that are cleared such, whilst statistics indicate a high percentage (77%) of and settled within the borders of South Africa are routed via individuals being formally banked, in practice many of these BankServ and exclusively by SARB licensed banks. As such the individuals are poorly financially served. A 2015 Finscope local banks play a pivotal role in facilitating the expansion survey (see below) highlighted that as many as 78% of those of the payments infrastructure, whether directly or through with formal bank accounts were not adequately served.

Depth and Quality of Financial Inclusion40

Adequately served

Moderately served

Thinly served

0 10 20 30 40 50

Frequency and Type of Usage41

Deposit cash at ATM Do electronic bank transfers Paying bills through bank account Get cash at store till using ATM card Get cash from ATM

0% 20% 40% 60% 80% 100%

Daily Once a week Once a month Once a year Never

The Financial Inclusion Stack 43 3.3. South Africa

4. Use of technology

Geographically, Sub-Saharan Africa has been a leader of growth mobile phone operator able to leverage the payments and in mobile digital financial inclusion, driven by mobile money distribution expertise of its two largest shareholders to services. South Africa launched mobile money services in drive financial inclusion via the mobile phone. Nonetheless, 2004, Kenya followed in 2007 and Uganda in 2009. To date, the high penetration of smartphones (51% as of 2015 according however, South Africa has been heavily reliant on driving to a FinScope survey) has led to the continued adoption of financial inclusion through traditional banking channels. mobile banking for existing customers, with 31% of banked Vodacom has attempted to launch M-Pesa mobile money customers making use of their mobile phone to access banking solution on two separate occasions, whilst MTN has aimed to services. drive its Mobile Money service. As of 2016, both mobile phone operators (Vodacom in May 2016 and MTN in September 2016) Although traditional MNO-led mobile financial services has have suspended their mobile money initiatives due to lack of not proliferated in South Africa, a strong mobile capacity, “commercial viability”. has allowed the proliferation of a number of fintech deployments offering P2P domestic transfers, bill payment, Looking forward, the acquisition of a 45% stake in Cell C (the and international remittances. The aforementioned, coupled 3rd largest operator) by Blue Label (the largest distributor of with government initiatives to digitise government transfers, airtime) and the subsequent purchase of a 15% stake in Blue along with the country’s quite extensive banking infrastructure, Label by Net 1 (the latter being a significant player in the South has supported financial inclusion. African payments space) may lead to the development of a

South Africa’s Fintec Ecosystem

B2B Solutions

Security & ID Education

Lending

Payments

Data Analytics

Insurance

Remittance

Blockchain

Personal Finance

44 The Financial Inclusion Stack 3. Country Case Studies

3.3. South Africa

5. Consumer protection and financial literacy

As part of reviewing the ongoing indebtedness of the average (not shown). Finally, in addition to rate caps and initiation fees, South African consumer, in May 2016 the Financial Stability proposals have been put forward to cap the fees chargeable Board revised interest rate caps and fees charged on on credit life policies, traditionally an area in which financial loans. The table below (RR refers to Repo Rate) outlines the services players have generated significant margins. Current maximum prescribed loan rates across various products. In proposals are to cap credit life insurance costs of ZAR 4.50 per parallel, maximum initiation fees have been outlined by the FSB ZAR 1,000 loan.

Credit Type Maximum Prescibed Rate42

Mortgage agreements RR + 12% p.a.

Credit facilities RR + 14% p.a.

Unsecured credit transactions RR + 21% p.a.

Developmental credit agreements RR + 27% p.a.

Short term transactions 5% per month on the first loan and 3% per month on subsequent loans within a calendar year

Other credit agreements RR + 17% p.a.

Incidental credit agreements 2% per month

• TCF Outcome 1 – Customers must feel confident that Outside of the more rigid protection of consumers via rate they are dealing with an institution where TCF is at the caps and limitations on initiation fees, the FSB has initiated core of their culture. a Treating Customers Fairly (TCF) regulatory framework. This framework governs the way a Financial Service Provider (FSP) • TCF Outcome 2 – Products and services in the retail conducts daily dealings with its clients ensuring that all clients market which are sold and marketed are designed are treated fairly, during all stages of the product life-cycle and according to the needs of the customers identified and advice process. targeted accordingly. • TCF Outcome 4 – Advice is suitable and according to the The TCF framework is built on principles that help drive a customer’s circumstances. FSPs business conduct towards a set of six outcomes, aptly termed TCF outcomes. An FSP therefore needs to move • TCF Outcome 3 – Customers are provided with clear towards business practices that achieve these outcomes and information and kept appropriately informed before, during eventually becomes an inherent part of all areas within the and after point of sale. business. At the same time, all FSPs need to demonstrate to • TCF Outcome 5 – Service is of an acceptable standard and the regulators that they adhere to the TCF principles and treat products perform as customers have been led to expect. their customers fairly. Documenting the implementation of new business processes or the change to existing practices • TCF Outcome 6 – Customers do not face unreasonable therefore becomes a fundamental part of a businesses’ TCF post-sale barriers when they want to change a product, journey. switch providers, submit a claim or make a complaint.

The Financial Inclusion Stack 45 3.3. South Africa

6. General financial inclusion facilitators

Key to financial inclusion in South Africa is, on the one hand, African citizen should be able to access one free credit report bringing more people into the banking fold and secondly, and per annum. According to World Bank data, 63.7% of all potentially more importantly, ensuring that retail indebtedness adults in South Africa were scored by one of the several levels normalize. As indicated below, South Africa exhibits credit bureaus operating in the country indicating a relatively high levels of consumer high-risk borrowing, a key area that high take-up of credit amongst the formally banked population. the regulator should focus on. According to data from Compuscan (one of the leading credit bureaus in the country) the average South African borrower is About 51% of adults are borrowing from various sources to 42 years old, has a predicted income of ZAR 13 147 and a credit supplement their income. This is driven by credit from other score of 618 (high risk). Highlighting the situation at hand, 41% formal (non-bank) credit providers (46%), while only 14% are of the 22.5 million credit-active consumers in the country are borrowing from banking institutions. On the ‘quality’ aspect, considered very high risk borrowers and an additional 15% of the narrative for developmental credit is becoming the norm credit-active consumers are considered high risk borrowers. As as 5% have used credit for developmental reasons. Within such, one of the particular obstacles that face the South credit, there has been an uptick in accessing credit through African financial services sector is the relatively high level short-term revolvers or unsecured loans. By law, each South of indebtedness.

Unsecured Credit is Driving Credit Growth43

25

20

15

10

5

0

Secured loans Unsecured Mortgages Facilities Developmental loans loans

2013 2014 2015

On the savings side, generally these have stagnated year-on- societies, indicating that the motive for saving is to finance year. In 2016, 33% of adults were saving with 15% saving funeral related expenses. In 2016, 18% of adults indicated through banks, 14% at other formal (non-bank) institutions, 8% that they are saving for a long-term period, 12% are saving with informal institutions and 11% at home. Interestingly, there for the medium term while only 8% for the short-term - the has been an emerging trend where adults interchangeably longer the term, the higher the likelihood that savings will not save for funeral expenses either through stokvels or burial be withdrawn (until maturity).

46 The Financial Inclusion Stack 3. Country Case Studies

3.3. South Africa

Conclusion

Overall, South Africa has benefited from a relatively advanced payments infrastructure and the presence of a few, but dominant, financial service players. Relative to other emerging markets South Africa has a high level of penetration of formal financial services (e.g. card penetration covering over 3/4th of the adult population), however the reliance on this established financial service infrastructure (e.g. bank branches, point of sale and ATMs) results in the majority of population being “under-served” in their financial needs. Innovation seen in the rest of Africa (such as mobile money and agency banking) have not taken root in South Africa due to the bank-led regulatory nature of the system, and in the short-to-medium it is unlikely that these alternative channels will gain any further traction. As such a key development in South Africa over the last 3-5 years is the increasing penetration of smartphones (although this is partially handicapped by relatively high data costs versus average incomes). This trend has, and is continuing to, improve access to financial services for the middle to lower income individuals – developments such as banks covering the costs for data access to their apps as a means of reducing branch footfall will continue to drive this secular trend.

A key focus area for both the government and the private sector will be to increase the number of acquiring and cash-out points in semi-rural and rural areas, as this will significantly increase the utility of bank accounts to lower and medium income individuals. Recent innovation such as mPOS are attempting to broaden the merchant acquiring landscape to informal and semi- formal merchants, however the continued reliance on banks as the gatekeepers to National Payments System has kept costs above levels that will drive significant adoption. A potential tiered solution, whereby access is differentiated by merchant volume or risk could potentially drive much faster roll- out of acquiring infrastructure, which given the large penetration of bank accounts, will significantly improve the utility of financial services for many individuals. Due to the presence of a strong financial services industry and ecosystem, a collaborative interaction between government and the private-sector is a key requirement in order for government to drive its financial inclusion policy requirements, with a particular focus on improving the acquiring landscape so as to facilitate the movement of transactions out of the grey market, and reduce the cost of cash to rural and semi-rural individuals.

The Financial Inclusion Stack 47 3.3. South Africa

South Africa Dashboard44

SOUTH AFRICA

KYC Infrastructure Payments Technology Protection Other

GDP Adult Population Unique Mobile Financial Account Financial Account (billion USD) (millions) Subscribership Ownership Among Ownership Among Adults Women $350 36 67% 70% 70%

Formal Commitment • Committed to the Maya Declaration in 2011 Milestone

Selected Financial • Joined the Better Than Cash Alliance as a founding member Inclusion Highlights • Received the highest score on the adoption dimension of the 2016 FDIP scorecard, primarily due to its considerable rates of mobile money adoption among low-income adults and women • Achieved a 50 percent increase in financial inclusion within the previous decade, according to a 2016 FinAccess household survey

Next Steps • Continue to strengthen digital infrastructure to reduce network challenges at agent locations • Promote financial education and capability initiatives among underserved populations, including women, to expand and deepen financial inclusion

= The regulator has taken a passive stance

= The regulator has taken a pro-active stance and significant progress has been make

= The regulator has over-regulated, hindering development

48 The Financial Inclusion Stack 3.4. Kenya

Overview: Kenya’s approach to financial inclusion

Kenya has recently seen a sharp increase in financial inclusion due to the success of mobile money services such as M-Pesa. The government, acting through the Central Bank of Kenya (CBK), is a strong supporter of financial inclusion initiatives and has facilitated the entry and growth of mobile financial services. The CBK’s financial inclusion approach is driven through the prism of increasing the financial sector’s stability, supporting economic growth, and increasing the efficacy of monetary policy.

While the CBK did not initially have a formal financial inclusion mandate, its focus on the financial sector’s stability and monetary policy drove its policy of increasing the proportion of people covered by the formal financial sector; the more people financially included, the greater the impact, in the CBK’s view, of monetary policy decisions. This influenced their decision in 2006 to grant a ‘no objection’ letter to Safaricom, a leading mobile network operator in Kenya, to pilot a digital money transfer service targeted at facilitating payments to microfinance institutions (MFIs). Neither the CBK nor Safaricom foresaw the growth of the service or intended for it to drive general financial access. As such, the subsequent increase in financial inclusion can be attributed to market forces as opposed to a concerted regulatory strategy.

The popularity of mobile financial services coupled with a push from the World Bank to increase financial access, has seen the CBK formalize its approach to financial inclusion through legislation covering mobile financial services, KYC requirements, allowing MFIs to collect deposits, allowing banks to use third party agents, and creating credit reference bureaus.

Financial inclusion by numbers

Financial inclusion increased substantially over the past 10 mobile wallets. As the chart below shows, the proportion of years, primarily as a result of mobile financial services, which financially excluded people dropped from over 40% in 2006, started in 2007 with Safaricom’s M-Pesa service. Banks have prior to the launch of mobile financial services, to less than lately increased their coverage by partnering with mobile 20% today. money companies to offer flexible bank accounts linked to

Financial inclusion progression45, 46

2006 15.0% 4.0% 7.7% 32.1% 41.3%

2009 21.0% 15.4% 4.1% 26.8% 32.7%

2013 32.4% 33.7% 0.8% 7.8% 25.3%

2016 42.3% 32.6% 0.4%7.2% 17.4%

0 50 100 150 200

Formal prudential Formal non-prudential Formal registered Informal Excluded

The chart above is supported by World Bank’s survey findings from 2011 and 2014, which found a similar increase in financial inclusion47.

The Financial Inclusion Stack 49 3.4. Kenya

World Bank’s survey findings from 2011 and 2014, which found an increase in financial inclusion:

% of adults* who 2011 2014

Have an account 42.3% 74.7%

Have an account at a financial institution 42.3% 55.2%

Saved at a financial institution in the past year 23.3% 30.2%

Saved in the past year 40.0% 76.1%

Took a loan from a financial instituion in the past year 9.7% 14.9%

Loans in the past year 67.0% 79.2%

Has a debit card 29.9% 34.7%

Used a debit card to make payments 5.0% 11.2%

Other metrics 2011 2014

Bank branches per 100,000 adults 5 5.5

ATMs per 100,000 adults 9.2 9.9

Despite the tremendous progress made in bringing people into32.7% over the preceding year. In fact, the 2016 FinAccess Survey the formal financial sector, usage of financial services is still low found that more than 50% of mobile money account holders as evidenced by the 46% gap between people who saved at use their accounts monthly or less than once per month, with financial institutions and those who saved in various other ways the number rising to 82% for formal bank accounts.

% Usage of Accounts48

MFS 12.4% 35.4% 38.4% 13.8%

Mobile Bank Account 5.7% 31.0% 47.3% 16.0%

Bank account 1.8% 16.2% 59.5% 22.5%

0 20 40 60 80 100

Daily Weekly Monthly Less than once per month

Commercial players and regulators have recently started initiatives to increase usage, with the former expanding the range of payment services available and the latter issuing regulations intended to improve credit access and returns for depositors.

50 The Financial Inclusion Stack 3. Country Case Studies

3.4. Kenya

Regulatory policy towards the key pillars of financial inclusion:

1. KYC and AML/CFT requirements

Banks were historically required to keep detailed KYC allowed M-Pesa to fulfill KYC using only a government- documentation on their account holders, which served as a issued national ID card. These looser requirements were barrier to financial inclusion as a majority of people, who are extended to mobile bank accounts operated by regulated primarily employed in informal sectors, could not provide the commercial banks in later years. The CBK, however, imposed required documentation. In order to facilitate the entry of restrictions on transfer amounts and outstanding balances on mobile wallets, the CBK loosened KYC requirements and such accounts for AML purposes.

2. Financial infrastructure

In recognition of the costly nature of bank branches, the CBK in the most prime locations (e.g. Safaricom’s M-Pesa had over allowed banks to contract 3rd party businesses to act as 100,000 agents as of March 2016). As such, other financial agents of the banks in 2010. As of March 2016, 17 Kenyan service providers could leverage the existing infrastructure. banks had signed up over 40,000 agents, who collectively transacted over US$ 9.3 bn in 170.5 million transactions In contrast to agency banking, Kenya’s ATM and POS estate between April 2015 and March 2016. These agents facilitate has been slow to develop and stood at 2,658 ATMs and a broad range of transactions (account openings, deposits, 28,463 POS devices as of 30 September 2016. This represents withdrawals, transfers) at a lower cost to banks and earn a a lackluster 4% and 12% CAGR growth for ATMs and POS commission in return. The Competition Authority of Kenya devices respectively in the 5 years from September 2011. (CAK) also facilitated the expansion of agency banking by ATMs and POS devices have not been at the center of the outlawing agent exclusivity contracts32.7% , which were being used government’s financial inclusion push, and as such have not by mobile money providers who have extensive agent networks benefited from any special initiatives.

Agency Banking49 ATMs and POS Devices50

8.4x increase between October 2009 and September 2016 200,000 ATMs (left) 3000 30000 POS Machines (right)

150,000 2500 25000

100,000

2000 20000

50,000

1500 15000 Apr-11 Apr-10 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Oct-11 Oct-10 Oct-12 Oct-13 Oct-14 Oct-15 Oct-09 Apr-11 Apr-10 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Oct-11 Oct-10 Oct-12 Oct-13 Oct-14 Oct-15 Oct-09

3. Payment System

The Central Bank’s overall objective, as provided under Section Settlement (RTGS) system and has established a regional 4 A (i)d of the Central Bank of Kenya Act, is to formulate and payment system within the East African Community implement such policies as to best promote the establishment, (EAC) and Common Market for East and South Africa regulation and supervision of efficient, effective payment, (COMESA) regions: the East African Payment System (EAPS) clearing and settlement systems. With regard to large value and the Regional Payment and Settlement System (REPSS) payment systems, Kenya has the Kenya Electronic Payment respectively. and Settlement System (KEPSS) which is a Real Time Gross

The Financial Inclusion Stack 51 3.4. Kenya

With regard to retail or low value payment systems, this is established a regulatory framework for mobile financial comprised of: (i) the Nairobi Automated Clearing House and (ii) services but did not alter the operating environment. mobile money transfer services. The most significant change in the Kenyan payment system has been the introduction of Innovation in this arena has primarily been driven by mobile money as the dominant channel for domestic commercial players, though the government has recently money transfers. From its initial ‘no objection’ letter that embarked on an initiative to digitize government payments through a prepaid card issued by banks in partnership with allowed M-Pesa to commence its services in 2007, the CBK MasterCard. developed new payments regulations in 2011 that formally

Mobile Money Transaction Development51

Monthly number of transactions (mn, left) Value of monthly transactions (KES bn, right)

150 300

250

200 100 150 6.6x increase in the monthly number of transactions, and 5.8x increase in the value of the monthly transactions 100

50 50

0 0 Jul-11 Jul-10 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Apr-11 Apr-10 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Jan-11 Jan-10 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Oct-11 Oct-10 Oct-12 Oct-13 Oct-14 Oct-15 Oct-09

4. Use of technology

Globally, regulators in financial services have taken a variety of on an experimental basis; a clear and effective marketing approaches to regulating the provision of mobile money transfer, campaign (“Send money home”); an efficient system to move payment services and generally the use of technology within cash around behind the scenes; and, most intriguingly, the post- financial services. In some cases, these have been ad hoc in election violence in the country in early 2008. To elaborate, the absence of enabling legislation, using ‘no objection M-Pesa was used to transfer money to people trapped in letters’ as pioneered by Kenya. For example, prior to the launch Nairobi’s slums at the time, and some Kenyans regarded of mobile banking services by the various companies, the CBK M-Pesa as a safer place to store their money than the banks, requires each company to provide a detailed risk assessment, which were entangled in ethnic disputes. Having established outlining all potential risks and satisfactory mitigating a base of initial users, M-Pesa then benefitted from network measures they have put in place. Such an attitude has led to a effects: the more people who used it, the more it made sense proliferation of fintech companies and a nimble and market for others to sign up for it. M-Pesa has since been extended driven approach to the rise of alternative financial services to offer loans and savings products, and can also be used to business models. disburse salaries or pay bills, which saves users further time and money. One study found that in rural Kenyan households To illustrate, with dozens of mobile money systems launched that adopted M-Pesa, incomes increased by 5-30%. In globally, M-Pesa has been the most successful. There were addition, the availability of a reliable mobile-payments platform several factors that helped: including the high cost of sending has spawned a host of start-ups in Nairobi, whose business money by other means; Safaricom’s dominant market share; models build on M-Pesa’s foundations. the regulator’s initial decision to allow the scheme to proceed

52 The Financial Inclusion Stack 3. Country Case Studies

3.4. Kenya

5. Consumer protection and financial literacy

Prior to the introduction of lending rate caps in 2016, the main banks get pre-approval for any new charges they implement, thrust of regulators’ consumer protection initiatives targeted and fully disclose such fees to borrowers, and disclose an ‘hidden fees’ charged by financial institutions in various Annual Percentage Rate (APR) including all fees to borrowers. transactions. These fees, primarily loan issuance fees, form a The Kenyan Parliament has also taken an interest in the issue, significant portions of banks’ non-interest revenue, and have and is in the process of drafting legislation to amend the 2016 typically been used to generate upfront income on loans and interest rates cap law to refer to the APR. other services offered by banks. The CBK requires that all

6. General financial inclusion facilitators

This has been done by several market players, with a few By contrast with South Africa, in Kenya, the recent increase in partnering with mobile money firms (e.g. M-Shwari52 and financial inclusion has not been matched by a similar increase KCB M-Pesa53) while others independently built credit in access to credit, as most potential borrowers do not have the scores through analysis of M- Pesa transaction history, financial history information required by financial institutions. text messages, and social media accounts54. As of 2014, more than 79% of people borrowed during the previous year, but only 15% of those borrowed from financial • Standardized lending benchmark rate: Following institutions. The regulator and commercial players have recently the implementation of credit scoring legislation, a key focused on this increasing access to credit as described below: stumbling block for borrowers seeking to compare loan terms was the use of different benchmarks to set interest rates. To solve this issue, the CBK introduced a uniform • Credit scoring: The government formally created a base lending rate, the Kenya Banks Reference Rate regulatory framework for credit reference bureaus in (KBRR), based on the average between the monetary 2013 and simultaneously mandated lenders to share policy rate and the 91-day Treasury Bill rate. loan performance information with credit bureaus. This significantly improved information sharing across the • Lending rate caps: The Kenyan Parliament took up the industry, though there have been challenges in getting issue of high interest rates and passed legislation in 2016 lenders to utilize fully information in determining credit that fixed bank lending rates at a maximum of 4% above terms; lenders have so far primarily utilized credit bureaus the ‘base rate’. The CBK, however, opposed this law as a filter to exclude ‘blacklisted’ borrowers but not to due to its potential to slow lending growth to individuals provide better terms to performing borrowers. and SMEs but implemented it nonetheless in mid-2016 following its passing by Parliament. The law also placed a • Alternative credit scoring: The ubiquity of mobile floor on the interest offered to depositors to equal 70% of money in the informal sector created a trove of data on the base rate. Banks have lately found a workaround for potential borrowers that could be leveraged by lenders the interest rate cap law by charging various non-interest to score potential borrowers through big data analytics. fees to borrowers.

Conclusion

According to the CBK, financial reforms in Kenya in the last five years or so have led to significant financial developments. These include: enhanced risk management and supervisory standards and practices; decline of the financial sector entry barriers and cost of maintaining accounts resulting in increased number of deposit and loan accounts; the introduction of innovative financial service instruments and delivery channels; and a notable increase in penetration of financial services.

Although Kenya takes the lead among Sub-Sahara African countries in relation to mobile money accounts, it still has room to continue to bring the underbanked in the formal financial services ecosystem. Kenya’s financial inclusion success is the product of combined efforts by the regulator and commercial players, primarily in the field of mobile financial services. The CBK’s flexible approach to granting M-Pesa a ‘no objection’ letter, which allowed its operations to commence is often cited as a risky but crucial regulatory decision that spurred the development of mobile money in the country. The success of mobile money has in turn created a vibrant ecosystem of financial services targeted at previously underserved segments of the population, generating new revenue streams for financial sector players, including banks that were initially threatened by the rise of mobile money. Innovation continues to strengthen in the sector as mobile wallet providers and start-ups seek ways to increase usage of digital channels and leverage the data created by electronic transactions. We continue to watch the Kenyan market for trends that are likely to be replicated in other markets as they achieve scale in mobile financial services.

The Financial Inclusion Stack 53 3.4. Kenya

Kenya dashboard55

KENYA

KYC Infrastructure Payments Technology Protection Other

GDP Adult Population Unique Mobile Financial Account Financial Account (billion USD) (millions) Subscribership Ownership Among Ownership Among Adults Women $61 25 57% 75% 71%

Formal Commitment • Committed to the Maya Declaration in 2011 Milestone

Selected Financial • Joined the Better Than Cash Alliance as a founding member Inclusion Highlights • Received the highest score on the adoption dimension of the 2016 FDIP scorecard, primarily due to its considerable rates of mobile money adoption among low-income adults and women • Achieved a 50 percent increase in financial inclusion within the previous decade, according to a 2016 FinAccess household survey

Next Steps • Continue to strengthen digital infrastructure to reduce network challenges at agent locations • Promote financial education and capability initiatives among underserved populations, including women, to expand and deepen financial inclusion

= The regulator has taken a passive stance

= The regulator has taken a pro-active stance and significant progress has been make

= The regulator has over-regulated, hindering development

54 The Financial Inclusion Stack 3.5. Nigeria

Overview: Nigeria’s approach to financial inclusion

Despite being one of Africa’s largest economies, Nigeria has been challenged historically by low levels of financial inclusion. A sizeable unbanked population persisted due to limited access to financial services, a deficit in financial services infrastructure and a distrust of institutions such as banks and insurers. A large cash based and informal economy also reduced reliance on the formal financial sector. The unbanked chose instead to rely on friends and family to meet their borrowing, saving and insurance needs.

In the 1990s, the Central Bank of Nigeria (CBN) embarked on banking sector reforms to consolidate the sector. It increased the minimum capital base of any bank to NGN 25 billion. This drastically reduced the number of banks from 89 to 25 in 2005. Although the banks have shown their capacity to offer financing of big-ticket items to large creditworthy investors and to invest in government securities, SMEs which have the highest potential for driving inclusive growth are largely underserved.

The CBN has sought to address these challenges, focusing its attention on the low income and financially excluded segments. A watershed moment in this approach was the launch of the Financial Services System 2020 (FS2020) strategy. Key tenets of the FS2020 included the enhancement of the payment process, development of the credit system and encouragement of a savings culture. Frameworks and guidelines issued by the CBN since the launch of FS2020 in 2007 have been the catalyst for recent strides in financial inclusion. The CBN is a signatory of the Maya Declaration and formalized its commitment to financial inclusion with the launch of a dedicated National Financial Inclusion Strategy in 2012. Directives and guidelines released under these initiatives, primarily aimed at improving financial services access and developing financial infrastructure, have shaped the current financial inclusion landscape in Nigeria.

Financial inclusion by numbers

Nigeria prides itself as the most populated and biggest The financial sector also boasts 25 commercial banks, over economy in the African continent with over 176 million people, 400 micro-finance banks and more than 23 mobile money yet 55% (of the adult population) are underbanked. Nigeria’s operators, who over the years have been trying to tap into this considerable population size means that these percentages market potential. represent a significant number of adults that are formally and/ or financially excluded.

World Bank’s survey findings from 2011 and 2014, which found an increase in financial inclusion, are summarized below56:

% of adults* who 2011 2014

Have an account 29.7% 44.4%

Have an account at a financial institution 29.7% 44.2%

Saved at a financial institution in the past year 23.6% 27.1%

Saved in the past year 64.4% n/a

Took a loan from a financial instituion in the past year 2.1% 5.3%

Loans in the past year 48.3% 44.8%

Has a debit card 18.6% 35.6%

Used a debit card to make payments n/a 14.1%

The Financial Inclusion Stack 55 3.5. Nigeria

Other metrics 2011 2014

Bank branches per 100,000 adults 6.4 5.8

ATMs per 100,000 adults 11.8 11.4

• Implementation of a comprehensive Consumer Protection The CBN is committed to reducing the number of adults Framework to safeguard the interest of clients and sustain excluded from the financial system to 20% by 2020 and aims confidence in the financial sector to achieve these targets through a broad range of coordinated interventions outlined in its National Financial Inclusion • Continued pursuance of Mobile Payment System and Strategy57. The strategy, which was launched in October 2012, other Cashless Policies to reduce the cost and increase prioritizes the following: the ease of financial services and transactions • Implementation of Credit Enhancement Schemes/ • Transformation of existing Know Your Customer (KYC) Programs to empower micro, small, and medium regulations into a simplified risk based tiered framework enterprises (MSMEs): that allows individuals who do not currently meet formal identification requirements to enter the banking system »» Micro, Small and Medium Enterprises Development • Development and implementation of a Regulatory Fund (MSMEDF), 60% of which will support loans from Framework for Agent Banking to enable financial microfinance banks and institutions to women and institutions to bring banking services to the unbanked in women-owned enterprises all parts of the country »» The Nigerian Incentive-Based Risk Sharing System for • Development and implementation of a National Agricultural Lending (NIRSAL) Financial Literacy Framework to increase awareness and »» Entrepreneurship Development Centres (EDCs) or understanding of financial products and services, with the Restructuring and Refinancing Facilities for SMEs ultimate goal of increasing sustainable usage »» SME Credit Guarantee Scheme

Regulatory policy towards the key pillars of financial inclusion:

1. KYC and AML/CFT requirements

Pursuant to its Financial Inclusion Strategy, the CBN launched separates bank accounts into: (i) Low Value Accounts (Tier I); (ii) a risked based KYC system in January 201358. The KYC system Medium Value Accounts (Tier II); and (iii) High Value Accounts was designed to improve access to financial services for (Tier III). The risk based approach to KYC has been leveraged individuals that have struggled to access the financial system by the country’s banks to broaden their customer base. The due to a lack of acceptable means of identification. The policy primary features of each ccount are outlined below:

The primary features of each account are outlined on the next page

56 The Financial Inclusion Stack 3. Country Case Studies

3.5 Nigeria

Account Account Limits59 Account Opening Monitoring Restrictions Type

• No amount needed for • Single deposit – • Electronically account opening NGN 50,000 or in person • Close monitoring by • Deposits can be made by Tier I Savings • Cumulative at branches or financial institutions account holder or third balance –NGN agents by the • Less inspection by bank parties, withdrawals by 300,000 account holder or examiners accountholders only 3rd parties • International transfers are not allowed

• Single deposit – • In person at • Account holder • No amount needed for NGN 100,000 branch by third information cross checked account opening Tier II Savings • Cumulative parties or the and saved during the • International transfers are balance – NGN account holder opening process not allowed 500,000

• Single deposit – • Banks need to obtain, No limit • In person by the confirm and maintain Savings & Tier III • Cumulative account holder at all copies of mandatory • n/a Current balance – No branch documents for account limit opening • Full KYC requirements

The KYC requirements under the AML/CFT regulations, though Number (BVN). BVN gives a unique identity that can be revised to allow for some flexibility, are not necessarily an verified across the Nigerian Banking Industry (i.e. not particular enabler of access. A key constraint has been the lack of an to one bank) and each customer’s bank account is protected integrated national ID system and the proliferation of parallel from unauthorized access. Under the BVN program each bank ID systems that remains a barrier to financial inclusion. To this customer’s biometric information is stored at registration. end, the CBN in collaboration with all banks on 14 February The BVN policy seeks to minimise identity theft and fraud. 14 2014 launched a centralized biometric identification By October 2015, over 20.8m customers had enrolled and 40 system for the banking industry tagged Bank Verification million bank accounts had been opened60.

2. Financial infrastructure

Financial Services Infrastructure61

150000 20000 17,398 16,406 15,935 114,423 120,191 116,868 112,847 120000 15000 12,755 10,727 82,549 90000

10000 60000

5000 30000

0 0 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016

No. of PoS Terminals Connected No. of ATM Terminals Deployed

The Financial Inclusion Stack 57 3.5. Nigeria

support POS adoption going forward. Overall, with regard to financial infrastructure development, one of the major reasons for the limited propagation of • Outside of traditional banking channels, Nigeria has also the Cashless Policy is the problem posed by suboptimal aimed to develop its agent network. In February 2013, CBN telecommunications infrastructure. Poor mobile coverage issued guidelines for agent banking to provide minimum and network quality has caused the failure of several electronic standards and requirements to promote a cost effective transactions on POS terminals, ATMs, and mobile and internet and accessible channel to deliver financial inclusion. banking platforms, which constitute the major electronic Following the release of the regulation, the development channels in the country. To illustrate: of the agent network faced a number of challenges, including low awareness, poor liquidity management and poor network connectivity. In order to invigorate the • The number of ATMs deployed in Nigeria increased at a agent network and accelerate the roll out of agent banking CAGR of 12.9% from 10,727 in 2012 to 17,398 in 2016. services, the CBN released a set of guidelines specific A policy banning banks from deploying offsite ATMs and to Super Agents under which Super Agents can sub- licensing Independent ATM Deployers (IAD) was issued by contract other agents in a network while retaining the CBN in 2009. As IADs faced challenges ensuring that overall responsibility for the agency relationship. ATMs were sufficiently stocked with cash, the CBN lifted In August 2016, Innovectives Limited and Interswitch the ban on banks deploying off site ATMs, resulting in the Financial Inclusion Limited (IFIS) were granted approval- growth of ATMs deployed. in-principle licenses to operate as super agents. IFIS now • The number of POS devices in use has broadly remained has plans to grow its active agent network to over 150,000 flat between 2012 and 2016. POS adoption has been agents by 202062, while together with Innovectives these hampered by perceived costs amongst merchants and two companies are leveraging their expertise in electronic network outages. Further, the relative cost of transacting in financial infrastructure to support an agent network cash for merchants was reduced by the reversal of a policy expansion. This effort is supported by the regulator as to charge fees on excess deposits of NGN 500,000+. The NIBSS will provide the switching infrastructure to enable reintroduction of these fees by the CBN in 2017 should inter-scheme cash-in cash-out at all agent locations.

3. Payment System

Payments System Vision 2020, launched by the CBN in CBN announced its Cashless Policy in 2011, and formally March 2007, included several initiatives to bolster payments launched a pilot of the initiative in Lagos State in April 2012, infrastructure and boost financial inclusion in Nigeria. The rolling out the policy nationwide in 2014. Several measures objective of the Nigerian Payments System Vision 2020 is: “To discouraging the use of cash were introduced under the policy. create an electronic payments infrastructure that is nationally These include: utilized – by all sectors of the economy and all regions of the country – and internationally recognized – as being world • Cash handling charges: All individuals and corporate class.”63 entities are required by banks to pay for cash deposits and withdrawals in excess of state thresholds of N500,000 Key developments facilitating financial inclusion following the and N3 million respectively. The fee ranges from 2% to 2007 review include: 5% of the amount exceeding the threshold • Changes in how cash can be handled by the banks: • NIBSS Instant Payments (NIP) – NIP was launched in Effective 31 December 2011, only CBN licensed cash-in- 2011 and enables real-time inter-bank account-to- account transit companies are allowed to collect cash from clients electronic fund transfers. All major banks in Nigeria support in Lagos State, Abuja, Port Harcourt, Kano and Asaba this scheme • Implementation of POS Guidelines: The CBN’s (POS) • Mobile Money – Following the developments and release guidelines, published in 2011, define minimum standards of Mobile Payments Rules and Regulation by the CBN, and requirements for the operation of POS card acceptance 26 mobile payments schemes were licensed by the CBN. services Nigeria adopted the ‘bank-led’ approach whereby a bank, either alone or a consortium of banks, seeks to deliver • Promoting awareness through market education and banking services, leveraging the mobile payments system sensitization: This was done directly by the CBN and banks, through high profile messaging in all forms of media • ATM and POS deployment – Under the direction from the CBN, banks and other financial service providers were Beyond reducing the amount of cash within the economy, the encouraged to increase deployment of ATM and POS policy also sought to reduce the cost of banking services and in devices turn drive financial inclusion. The cashless policies have spurred an increase in both the value and volume of transactions across electronic payment channels. 58 The Financial Inclusion Stack 3. Country Case Studies

3.5 Nigeria

Transaction Values Transaction Volumes

600

45,000 500 40,000

35,000 400 30,000

25,000 300

20,000 200 15,000

10,000 100 5,000 0 0

ATM POS INTERNET NIP NEFT ATM POS INTERNET NIP NEFT

2012 2013 2014 2015 2016 2012 2013 2014 2015 2016

4. Use of technology

Regulators must strike a difficult balance between protecting In this vein, the CBN has adopted a bank-led approach to consumers and encouraging them to adopt formal financial mobile money, keeping the service tightly regulated in order services. As Nigeria’s key financial inclusion policies were to protect consumers against fraud and limit money laundering. released during a particularly challenging period for the financial The take up of mobile money services has, however, been services sector, characterised by the closure of large numbers slow. According to a 2014 EFInA survey, there are as little of microfinance banks by the CBN, consumer pay-out by the as 0.8 million mobile money subscribers64. Advanced mobile Nigeria Deposit Insurance Corporation (NDIC), and the banking banking and internet platforms have been particularly popular, crisis of 2009/2010 that diminished consumer confidence and as evidenced by the rapid rise in the value of payments under trust, these policies have a relatively strong focus on the NIBSS Instant Payment (which has been experiencing a 77% financial health of institutions, consumer protection, and CAGR from 2012 – 2016). While payments using bank mobile anti-money laundering protocols, in addition to encouraging and internet applications have enjoyed success they are, due to new account openings across a range of channels and offerings. regulation, limited to the banked segment.

In addition to encouraging the development of financial MCash infrastructure in Nigeria, the CBN has made more direct interventions to promote the use of technology to encourage financial inclusion. The CBN and NIBSS, in collaboration with banks and the leading telecommunications companies, have launched microCash (mCASH). mCASH is considered to be Nigeria’s UPI equivalent and is designed to facilitate low- value retail payments; grow e-payments by providing accessible electronic channels to a wider range of users and further enhance financial inclusion in Nigeria by extending e-payment benefits to payers and merchants at the bottom of the pyramid, where usage of cash has been predominant65. Merchants receive instant credits for all transactions under mCash and are not subject to the delayed settlement experienced when transacting through a POS terminal. mCash payments are made directly from users bank accounts using USSD technology.

One of the key achievements of the CBN and NIBSS relating to mCash has been the agreement of all the MNOs in Nigeria to provide access to the USSD channel for mCash transactions for free, thus solving one of the key access issues faced in other markets such as Kenya.

The Financial Inclusion Stack 59 3.5. Nigeria

5. Consumer protection and financial literacy

The CBN has sought to consolidate on the strides made in management framework; (iv) empower consumers to make financial inclusion by shifting its focus towards consumer informed decisions; (v) promote professionalism and ethics; protection and increasing confidence in financial services for and (vi) outline the rights and responsibilities of consumers66. vulnerable consumers. In November 2016, the CBN released The launch of consumer protection laws is considered vital in the Consumer Protection Framework to enhance confidence order to enable long term customers to take confidence in the in the financial services industry and promote financial financial system. For instance, there was a noted decrease in stability, growth and innovation. Other specific objectives of fraudulent bank transactions in 2015, which dropped to NGN the Framework are to: (i) protect consumers’ assets; (ii) ensure 2.3 billion (US$ 7.1 million) from NGN 6.2 billion (US$ 19.3 timely complaints handling and dispute resolution; (iii) ensure million) in 2014. financial services operators put in place effective consumer risk

Conclusion

The CBN has been the primary driving force for financial inclusion in Nigeria. The guidelines and policies introduced under the FS2020 initiatives have been positive for financial inclusion with key indicators trending upwards. The percentage of adults with an account increased from 29.7% in 2011 to 44.4% in 2014, while the percentage of adults borrowing and saving have also trended upwards. There, is, however, still significant headroom to increase financial services penetration as evidenced by the lack of financial services usage: only 5.3% of adults took a loan in 2014.

Measures such as the introduction of risk-based KYC have lowered access, while the cashless initiatives have sought to reduce the risk in the formal financial sector. Challenges with the rollout and operation of financial infrastructure, such as ATMs and POS, have meant that the capacity required to support increased financial inclusion has been lacking. Connected POS machines in Nigeria have broadly been flat at c. 110,000 machines between 2012 and 2016. Mobile and internet channels are driving increased economic activity and participation in the formal financial sector and roll out of mobile banking applications that allow users to make transfers and pay bills, have been welcomed by bank customers. Nonetheless, financial infrastructure in the form of agents and business correspondents to support this financial inclusion push has lagged.

The key obstacles to financial inclusionhave been: (i) within the realm of policy, a number of actors are involved in regulating the financial services, while The National Financial Inclusion Strategy identifies 48 regulations and policies with “some impact on Financial Inclusion”; (ii) a lack of trust in alternative banking channels, which is not helped by the continued reliance of the government on cash transactions; and (iii) a regulatory focus on protecting consumers and ensuring the stability of the financial services sector, rather than a balance between consumer protection and encouraging them to adopt formal financial services by supporting competitive, dynamic, and innovative private sector players in offering a diversity of financial products and services.

The CBN has made significant progress to date but will need to continue to drive improvements in access and awareness of financial services with the same vigor if it is to meet its ambitious plans under the National Financial Inclusion Strategy of only 20% of adults excluded from the formal financial system.

60 The Financial Inclusion Stack 3. Country Case Studies

3.5 Nigeria

Nigeria Dashboard67

NIGERIA

KYC Infrastructure Payments Technology Protection Other

GDP Adult Population Unique Mobile Financial Account Financial Account (billion USD) (millions) Subscribership Ownership Among Ownership Among Adults Women $569 97 47% 44% 34%

Formal Commitment • Committed to the Maya Declaration in 2011 Milestone

Selected Financial • Launched a national financial inclusion strategy in 2012 Inclusion Highlights • Published guidelines on agent banking in February 2013 • Released new guidelines on mobile money services in April 2015

Next Steps • Expand distribution of financial access points through super- agent networks and other nonbank entities • Execute study to identify constraints and drivers of agent banking for consumers and financial institutions

= The regulator has taken a passive stance

= The regulator has taken a pro-active stance and significant progress has been make

= The regulator has over-regulated, hindering development

The Financial Inclusion Stack 61 4. Conclusion

In conclusion, each of the five countries examined in this paper have adopted differing regulatory stances, whether slightly or significantly so, to address financial inclusion and prepare themselves for the next several hundred million, or billion, customers

Country profiles summary

India: Since 2006, the RBI has adopted a planned and structured approach to address the issues of financial inclusion by focusing both on the demand as well as the supply side. This in part has been possible due to the availability of technology and its gradual adoption within financial services. Most notable has been the building of a complex public digital infrastructure, called the “India Stack”. Built on the national ID system, Aadhaar, the India Stack when connected to UPI (the payments system) has endless financial services possibilities, from e-KYC, to payments, to credit scoring and lending, effectively becoming a digital locker with an individual’s pertinent financial data.

Indonesia: Since 2014, Indonesia has taken a more proactive approach in addressing financial inclusion. While initiatives are still in the early stages of penetration, the country has made recent strides, such as being one of the few countries globally to have achieved an interoperable MNO-led wallet and in the process of creating a national switch. Historically the key obstacles to financial inclusion, and the reasons why Indonesia has only recently refocused to address this, have been a history of financialservices aimed at battling the Asian financial crisis and a geography unsuited for the development of financial services infrastructure.

South Africa: Overall, South Africa has benefited from a relatively advanced payments infrastructure and the presence of a few, but dominant, financial service players. Due to the presence of a strong financial services industry and ecosystem, a collaborative interaction between government and the private- sector is a key requirement in order for government to drive its financial inclusionpolicy requirements. Relative to other emerging markets South Africa has a high level of penetration of formal financial services, however the reliance on this established financial service infrastructure results in the majority of population being under-served in their financial needs. A key focus area for both the government and the private sector will be to increase the number of acquiring and cash-out points in semi-rural and rural areas, as this will significantly increase the utility of bank accounts to lower and medium income individuals.

Kenya: A country that for many is considered to have been pushed, thanks to technology, into financial inclusion rather than being considered to have taken a structured approach to address it. Nonetheless, the popularity of mobile financial services, coupled with a push from the World Bank to increase financial access, has seen the regulator formalize its financial inclusion approach through legislation covering mobile financial services, relaxing KYC requirements, allowing MFIs to collect deposits, allowing banks to use third party agents, and creating credit reference bureaus. The Kenyan government’s support for branchless banking activities through modifications introduced into the Finance Act, has allowed third- party entities, based in places as varied as supermarkets, gas stations and post offices, to act as agents for the banks. Most recently the regulator has announced some key initiatives such as mcash, which are expected to significantly increase the levels of financial services’ participation.

Nigeria: The CBN – the driving force of financial inclusion in Nigeria – has made considerable strides in creating a conducive environment for financial inclusion, while ensuring consumers are well protected. Now the CBN is focusing on a more tailored approach, based on the learnings of the past 5 years, and is planning to incorporate the country’s fundamental institutional peculiarities into any future policies.

62 The Financial Inclusion Stack 4. Conclusion

As evidenced, all the regulators in the countries examined within the sample, have approached financial inclusion differently and have had different obstacles to overcome. In the case of India, and less so of Indonesia and Nigeria, the regulators have taken a more interventionist approach and have either mandated financial inclusion for the country’s financial service providers or at times taken on the task directly themselves. In the case of Kenya, and to a lesser degree South Africa, financial inclusion was the by-product of market forces and structural idiosyncrasies: in the case of Kenya, M-Pesa created a market where none existed and in South Africa, a concentrated list of dominant banks defined the mature financial services ecosystem. In both cases: M-Pesa and a dominant set of leading banks in Kenya and South Africa, respectively, have in large part overshadowed the respective regulator’s financial inclusion efforts in each country.

Nonetheless, the regulators in all of the sample countries have set financial inclusion as a key developmental goal, which features prominently on the regulator’s agenda. The key learnings from this paper for the orderly development of the financial services ecosystem and in turn the proliferation of financial inclusion, is for the regulator to ensure an enabling environment, tailored to each country’s specific needs and base or starting level of financial inclusion. Broadly: i. First and foremost, financial regulations should not be overly costly or cumbersome but rather should be proportional to the underlying risks associated with specific products or transactions (i.e. tiered KYC, a risk based regulatory approach, etc); ii. Secondly, as with everything, timing is key: Overregulating too early can stifle innovation, while doing so too late leaves consumers unprotected; and iii. At the same time, the key responsibility of the regulator should be to support, or even build itself, an enabling and comprehensive financial services infrastructure i.e. the rails on which financial inclusion can thrive, such as the wholesale and retail payments system, a national comprehensive identification / e- passport system, while at all times imposing financial education and consumer protection principles.

Such an environment, coupled with the advent and explosion of mobile telephony, big data, and cloud computing, is likely to have a greater impact of both top-down planning and the trickle-down of economic growth, leading to immeasurable benefits on the road to achieving financial inclusion, and as such, unlocking economic opportunity for the poor.

The components of financial inclusion summary

Govt / NGOs

Retailers

Remittances Private Sector / Employees CASH IN CASH OUT Schools

Banks Cards Secure Ability to Access to Utilities Financial Electronic save, borrow, Global Identity Account insure Economy Telcos

The Financial Inclusion Stack 63 5. Glossary

Te rm Definition

ACH Automated Clearing House

AML Anti-Money Laundering

ARP Annual Percentage Rate

ASISA Association for Savings and Investment South Africa

ATM Automated Teller Machine

BBPS Bharat Bill Payment Systems

BC Business Correspondents

BVN Bank Verification Number

CAK Competition Authority of Kenya

CBK Central Bank of Kenya

CBN Central Bank of Nigeria

CDD Customer Due Dilligence

CFT Combating the Financing of Terrorism

COMESA Common Market for East and South Africa

CRP Currency Replacement Program

EAC East African Community

EAPS East African Payment System

REPSS regional Payment and Settlement System

FATF Financial Action Task Force

FCA Financial Conduct Authority

FS2020 Financial Services System 2020

FSB Financial Services Board (South Africa)

FSP Financial Service Provider

G2P Government To Person

GDP Gross Domestic Capital (Real)

ID Identification

IMPS Immediate Payment Systems

IP Intellectual Property

64 The Financial Inclusion Stack 5. Glossary

Te rm Definition

JSE Johannesburg Stock Exchange

KBRR Kenya Banks Reference Rate

KYC Know Your Customer

MDR Merchant Discount Rate

MFI Microfinance Solutions

MSMEDF Micro, Small and Medium Enterprises Dev. Fund

NACH National Automated Clearing House

NBFC Non-Bank Financial Company

NIP NIBSS Instant Payments

NIRSAL Nigerian Incentive-Based Risk Sharing System for Agricultural Lending NPCI National Payments Corporation of India

NPG National Payment Gateway

NPS National Payment System

OJK Otoritas Jasa Keuangan

P2P Person to Person

PMJDY Pradhan Mantri Jan Dhan Yojna

POS Point of Sale

PSB Public Sector Banks

RBA Risk-based Approach

RBI Reserve Bank of India

RTGS RealTime Gross Settlement

SARB South African Reserve Bank

SASSA South Africa Social Security Cards

SNLIK National Survey on Financial Literacy and Inclusion

TCF Treating Customers Fairly

UPI Unified Payments Interface

USSD Unstructured Supplementary Service Data

The Financial Inclusion Stack 65 6. Footnotes

1. Basic bank accounts provide a debit card and allows one to set up direct debits 2. http://www.afi-global.org/ 3. http://www.afi-global.org/maya-declaration 4. http://www.worldbank.org/en/topic/financialinclusion/brief/achieving-universal-financial-access-by-2020 5. A transaction account, checking account, current account or demand deposit account is a deposit account held at a bank or other financial institution. It is available to the account owner “on demand” and is available for frequent and immediate access by the account owner or to others as the account owner may direct. 6. UN World Population Prospects, 2015 7. UN World Population Prospects 8. World Bank 9. The Global Financial Inclusion Database provides 800 country-level indicators of financial inclusion summarized for all adults and disaggregated by key demographic characteristics-gender, age, education, income, and rural residence. Covering more than 140 economies, the indicators of financial inclusion measure how people save, borrow, make payments and manage risk 10. World Bank Findex: “Banked” denotes adults that have an account at a bank or financial institutions (2011), as well as a mobile account (latest available 2014) 11. World Bank, Most recently available ATM data as at 2014 and e-payments and insurance data as at 2011 12. Please refer to Section: India for a full definition of Priority Sector Lending 13. World Bank, Financial Inclusion Data / Global Findex; Account denotes adults that have an account at a bank or financial institutions (2011), as well as a mobile account (2014) 14. Demirguc-Kunt and Klapper (2012) 15. GSMA, 2015 State of the industry report, Mobile Money 16. The Microscope, a project of the EIU with technical support and oversight from the Center for Financial Inclusion at Accion, the Multilateral Investment Fund at the Inter-American Development Bank, and the MetLife Foundation, is intended to benchmark national progress on financial inclusion and catalyze reform. The Global Microscope 2016 assesses the regulatory ecosystem for financial inclusion by evaluating 12 indicators across a range of developing economies in East and South Asia, Eastern Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, and Sub-Saharan Africa 1 7. The 12 indicators assessed are: government support for financial inclusion, Regulatory and supervisory capacity for financial inclusion, Prudential regulation, Regulation and supervision of credit portfolios, Regulation and supervision of deposit-taking activities, Regulation of insurance targeting low-income populations, Regulation and supervision of branches and agents, Requirements for non-regulated lenders, Electronic payments, Credit-reporting systems, Market-conduct rules, Grievance redress and operation of dispute-resolution mechanisms 18. The Economist Intelligence Unit, Global Microscope Report 2016 19. Recent Developments on Financial Inclusion in India, IBGC Working Paper 14-08, K.Ramesha, D. Bapat and D. Roy October 2014, The Fletcher School 20. PAFI Taskforce 21. The World Bank’s Global Payment System Survey 2012 shows that RTGS systems are operating in 127 countries. 22. CGAP 23. https://pmjdy.gov.in/account 24. Swabhimaan is a campaign of the Government of India which aims to bring banking services to large rural areas. It was launched by Smt. Sonia Gandhi, the Chairperson of the United Progressive Alliance party in the presence of Shri Pranab Mukherjee, the Union Finance Minister and Shri Namo Narain Meena, the Union Minister of State for Finance on February 10, 2011 25. World Bank Global Findex; * ‘Adults’ defined as population above 15 years of age 26. Aadhaar is a 12 digit unique-identity number issued to an Indian resident based on their biometric and demographic data. The data is collected by “Unique Identification Authority of India (UIDAI)”, a central government agency of India, and stored into a central database 27. Apis analysis based on Bank for International Settlement and Reserve Bank of India; ATM figures as per the World Development Indicators 28. Statista website, https://www.statista.com/outlook/295/119/fintech/india, accessed on 25 May 2016, 17 May 2016. 29. Solve India’s problems’: Modi launches Rs 100 billion fund, generous tax breaks for Indian start-ups, First Post, 17 January 2016, http://www.firstpost.com/business/ pm-modis-grandinitiative-for-indian-start-ups-a-rs-10000-cr-fund-3-year-tax-rebate-2587272.html accessed on 25 May 2016 30. Pradhan Mantri Jan Dhan Yojana – Jan Dhan Yojana Account, Master Plans India, 04 February 2016, http://www.masterplansindia.com/welfare-schemes/pradhan- mantri-jan-dhan-yojana accessed on 25 May 2016. 31. Global survey conducted by Standard & Poor’s Financial Services LLC, 2015 32. Pradhan Mantri Jan - Dhan Yojana (Accounts Opened as on 11.01.2017) http://pmjdy.gov.in/account 33. Ramakumar and Chavan 2014 34. The 2016 Brookings Financial and Digital inclusion project report

66 The Financial Inclusion Stack 6. Footnotes

35. Older than 15 with no access checking account as per World Bank Global Findex 2014 36. World Bank Global Findex; * ‘Adults’ defined as population above 15 years of age 37. Bank Indonesia, Kompas Ekonomi 38. The 2016 Brookings Financial and Digital inclusion project report 39. World Bank Global Findex; * ‘Adults’ defined as population above 15 years of age 40. 2015 Finscope survey 41. Finscope Survey 42. RR: Repo rate 43. Compuscan (one of the leading credit bureaus in South Africa) 44. The 2016 Brookings Financial and Digital inclusion project report 45. 2016 FinAccess Household Survey, FSD Kenya 46. Note: (i) ‘Formal prudential’ includes regulated institutions such as commercial banks, microfinance banks, and deposit-taking savings & credit societies (“SACCO”); (ii) ‘Formal non-prudential’ primarily comprises of mobile financial services; (iii) ‘Formal registered’ includes registered institutions such as credit-only MFIs, non-deposit taking SACCOs, hire-purchase companies, and development finance institutions (e.g. Higher Education Loans Board); (iv) ‘Informal’ includes non-regulated entities such as shopkeepers / supply chain credit, informal lending clubs, employers, and informal moneylenders. 47. World Bank Global Findex; * ‘Adults’ defined as population above 15 years of age 48. 2016 FinAccess Household Survey, FSD Kenya; * ‘Mobile Bank Account’ refers to bank accounts issued in partnership with mobile money firms (e.g. M-Shwari, KCB M-Pesa) 49. The Central Bank of Kenya, as of 30 Sep, 2016 50. The Central Bank of Kenya, as of 30 Sep, 2016 51. The Central Bank of Kenya, as of 30 Sep, 2016 52. M-Shwari is a partnership between CBA, a leading bank in Kenya, and M-Pesa which had disbursed US$ 400 mn in loans to borrowers as of December 2015 by leveraging borrowers’ M-Pesa transaction history. The service has recently extended to also offer savings products. 53. KCB M-Pesa is a similar service to M-Shwari, with the key differences being lending rates and lending limits 54. Independent scoring firms are typically restricted to smartphone users, which limits the range of people they can cover (2016 FinAccess survey found that only 16.2% of mobile money users accessed the service using smartphones), but allows them to avoid revenue-sharing requirements of mobile money providers. The dynamics of this sector have been presented in Apis’ previous white paper titled “Breaking the Bank: The rise of alternative credit providers in growth markets”. 55. The 2016 Brookings Financial and Digital inclusion project report 56. World Bank Global Findex; * ‘Adults’ defined as population above 15 years of age 57. CBN National Financial Inclusion Strategy 58. CBN Introduction to three tiered KYC requirements (January 2013) 59. Limits were revised upwards in July 2016 (EFInA) 60. http://www.premiumtimesng.com/news/top-news/192328-bvn-over-20-8-million-customers-enrol-40-million-bank-accounts.html 61. CBN disclosure 62. Interswitch Obtains CBN Approval in Principle, Kick starts Aggressive Agency Banking Network - Vanguard News (March 2016) 63. Nigeria Payments System Vision 2020, Release 2 (September 2013) 64. EFINA Did You Know Series Demand Side Overview of Mobile Money in Nigeria (2014) 65. EFINA Quarterly Review (October 2016 – December 2016) 66. CBN Consumer Protection Framework (2016) 67. The 2016 Brookings Financial and Digital inclusion project report

The Financial Inclusion Stack 67 68 The Financial Inclusion Stack The Financial Inclusion Stack 69 Apis Partners

Matteo Stefanel - Managing Partner & Co-Founder, Apis Partners

Matteo has a successful track record in private equity and investment banking spanning over two decades and focusing specifically on Growth Markets and Financial Services. He is a Co-Founder and Managing Partner of Apis Partners LLP.

Formerly a senior partner at The Abraaj Group, a leading EM private equity group, where he held various roles including co-Head of Abraaj’s PE Investment Team in Dubai (US$7bn), Head of both the Special Situations and the Real Estate Group, as well as being a member of the Executive and the Investment Committees. He was responsible for a number of Abraaj’s investee companies (10+), including Network International (payments), Saham Finance (insurance), and Jordan Ahli Bank (banking).

Matteo has been a board director of over 20 companies and completed over 100 transactions in Europe (including CEE), South Asia, the Middle East and Africa, throughout his career at Abraaj, at MIG (US$7.4bn AUM) where he was briefly CIO, and at Deutsche Bank as MD and co-Head of Emerging Markets in the Financial Institutions Group.

Since 2012, Matteo has been a member of the World Economic Forum’s Global Agenda Council on Financing and Capital (2012-14 and 2014-16).

Matteo graduated from Queens College, the University of Oxford, with an MA (Hons) in Philosophy, Politics and Economics.

Udayan Goyal - Managing Partner & Co-Founder, Apis Partners

Udayan is a keen proponent of technology driven reformation in banking and financial services and has exceptional domain expertise in the industry. He is a Co-Founder and Managing Partner of Apis Partners LLP.

Prior to Apis, Udayan was a Co-Founder of Anthemis Group, a leading venture capital investor in digitally native fintech companies and advisory firm to large private equity companies investing in the financial technology sector. Here Udayan made a number of seed investments in companies including (Bank)Simple, Azimo, Betterment, Moven and Fidor, whilst also leading a number of innovation projects and private equity- backed transactions.

Udayan was formerly the Managing Director and Global Head of Financial Technology Advisory at Deutsche Bank AG in the Global Financial Institutions Group based in London. Prior to Deutsche Bank, Udayan had specific responsibility for developing the pan-European specialty finance practice of Credit Suisse with a focus on financial technology.

Udayan is a much sought after commentator on digital finance and curates the very popular “Future of Money” annual session at Innotribe, SIBOS, where he serves as a member of the Enablers Board.

Udayan graduated from Trinity College, the University of Cambridge, with an MA (Hons) in Natural Sciences (Tripos).

70 The Financial Inclusion Stack IMPORTANT INFORMATION

Apis Partners LLP is a Limited Liability Partnership registered in England and Wales, under Companies House Registration Number OC392430, with its registered office at 6th Floor, 44 Great Marlborough Street, London W1F 7JL.

Apis Partners LLP is authorised and regulated by the UK Financial Conduct Authority as a Small Authorised UK AIFM under authorisation number 628289.

This document contains background information about the business and investment philosophy of Apis Partners LLP and has been created to provide general information only. This document is not an invitation to invest into any investment opportunity and should not be construed as such.

This document is preliminary in nature and is not a prospectus or a placement memorandum. It does not constitute or form part of any offer or invitation to subscribe for, underwrite, or purchase interests in any investment and should not be treated as constituting an inducement in connection with any offer or invitation, nor shall it or any part of it form the basis of or be relied upon in any way in connection with any investment. The information contained in this document is selective and is for illustrative purposes only and is subject to material updating, completion, revision, verification or other amendment. This document does not comprise advice on the suitability of any investment for any particular investor or prospective investor.

Any projections or analysis provided to investors and potential investors in evaluating the matters described herein may be based on subjective assessments and assumptions. Accordingly, any projections or analysis should not be viewed as factual and should not be relied upon as an accurate prediction of future results. Furthermore, to the fullest extent permitted by law, neither Apis Partners LLP nor any of its agents, service providers or professional advisors assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on any of the information contained in this document or for any decision based on it.

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The Financial Inclusion Stack 71 About Apis Partners

Apis Partners is a private equity fund manager that supports financial services companies in Africa and Asia with catalytic growth capital. Apis is managed by an accomplished team with extensive expertise in traditional and technology enabled financial services globally.

Apis Partners counts on industry-specialised human capital and resources: in addition to the core team based in London, Apis’ operating network includes dedicated on-the-ground regional presence in India, South Africa, East Africa and West Africa, with a second office established in Lagos, Nigeria.

Apis Partners is highly conscious of the developmental impact that the provision of growth capital for financial services in growth markets can achieve, and it has incorporated the deepening of financial inclusion as a core tenet of its investment mandate.

For more information please visit www.apis.pe For more information please visit www.apis.pe