The Financial Services Cambrian Explosion: How Growth Markets Are Innovating for the Next 2 Billion Customers Factsheet
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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 through incremental 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 ...........................................................................................................................................................