Wednesday, June 10, 2009

The sequence of financial inclusion

This must be attributed to Lawrence Yanovitch who spoke about it at the work-session that I attended at the WEF. I thought that it is a great framework for financial inclusion that I had to document it. (I have elaborated a bit on it myself). When we think of mechanisms to bring the underbanked into the banking system common wisdom usually dictated the implementation of micro lending. Mobile payments is now also something to be considered, but do we do this in conjunction with micro lending or not. And what about platforms for saving? How do they fit into this puzzle. So Lawrence suggested a sequence for financial inclusion:
  1. The first component that must be provided is an effective payment system that can now be deployed by means of mobile technology. This payment system must be secure, easy to use and enable payments over a distance (money remittance). The system should support the needs of the subscriber to such a degree that a large percentage of the cash be taken up into the system.
  2. This is then a logical transition to savings. With cash having been turned into electronic value, it will be easier to start offering savings products based on regular payments. These products should typically be targeted savings products with a monthly installment. Credit risk does not exist as it is a savings product, but the discipline of the subscriber to meet his/her monthly installments will be important.
  3. The behaviour of a subscriber (and the history) with regards to payments and savings will provide mechanisms to start scoring credit, making the introduction of lending products easier.
So the sequence is: teach them to pay electronically, then to save and then offer them loans.


Anonymous said...

The steps seem to make absolute logical sense but more importantly at face value they seem to have things in the right order from a moral perspective. One thing that sends my head into over-drive is how to get people to actually trust the technology. I work in mobile payments and strategy for one of the "Big 4" banks and attended a number of focus group interviews. My mind was blown away by a comment that seemed to come up, over and over again. "If doing these payments is so easy on my phone, how will I have the dicipline to control my spending?". After having heard this, I made it my mission to walk into different branches and asked consultants about their banks cellphone banking. When I ask if they had used it themselves 4 out of 5 told me they they could not trust themselves not to overspend on things like airtime and thus did not use their cellphone and preferred to go to the ATM which was more of an "effort". While the absolute convnience and realative easy of use have always been apparent me new found insight leaves me dumb struck.

Kaiser said...

Bill gates and mobile money.