In payments, the US is an emerging market

There are people trapped in the cash economy all over the developing world, but there are people trapped in the cash economy in the developed world too.

The Bill and Melinda Gates Foundation is most, and deservedly, well-known for their work in tackling big, big problems such as eradicating polio. But what you may not know is that they have a programme called Financial Services for the Poor (FSP) which aims to help people out of poverty by providing digital financial services (DFS). The Foundation decided to create an external advisory group to help to steer, support and promote DFS. This is called the Platform Enablers Group, because the Foundation sees DFS as a platform for products and services that will make a real and sustained difference to the lives of least well-off around the world.

I was flattered to be asked to be part of this advisory group and honoured to be able accept (on behalf of my colleagues at Consult Hyperion who actually do the ground-breaking work in delivering financial services in Kenya, Nigeria and elsewhere). There are two reasons for this:

• The altruistic reason: my colleagues at Consult Hyperion have done some amazing work, from the original feasibility study for M-PESA to the implementation of TAP, and it feels  good to be able share some of the experience and expertise to help the Foundation change lives.
• The selfish reason: the other members of the advisory group are really smart and really interesting and I learn a tremendous amount from listening to them (especially when they argue – there’s no quicker way of learning about a subject than hearing two people who know all about it disagree!).

At a recent meeting of the group, there was a discussion about trying to identify the key conditions for payment innovation that could help with financial inclusion and therefore with social inclusion. The group discussions are according to the Chatham House rule, so I can’t attribute these comments (other than to say that they come from a very clever and very experienced person and I always take her opinions very seriously) but I wanted to share them. I should add that I do have the permission of the Foundation to use this picture to illustrate the discussion:

As you can see in the picture, the three enablers discussed were:

1. A reliable and efficient identity infrastructure. I will blog about this again some time in the future as I have been exploring some ideas about emergent identity infrastructures for emerging markets and I think there may be breakthrough strategies here. In many countries there are no ID cards, no population register and no consistent identifiers, so the cost of bring customers into a system while complying with demanding KYC/ATF/AML requirements is a barrier to progress. What if we made it easer for people to join the system and then defined their identity as the reputation generated within the system that could be later bound to external identifiers?

2. A real-time settlement system. Being able to move money instantly from one account to another works fine when both accounts are in the same system (such as M-PESA). But to scale, we need to be able send money between accounts with different organisations and even different kinds of institutions (e.g., between a bank account and a mobile operator account). There are a few different ways that this can work, as my colleague Dick Clark explained at the Mobile World Congress this year.

   As part of this work, MMU released a new paper titled ‘A2A Interoperability’ last week at Mobile World Congress in Barcelona that we co-authored with Consult Hyperion.

   [From New publication: A2A interoperability – making mobile money schemes interoperable | Mobile for Development]

   If it were possible to move money between payment accounts instantly (as you can do via the Faster Payment System, for example, in the UK) then it would mean that risk associated with a rich, multi-organisation environment would be reduced significantly.

3. A regulatory environment that allows new competitors to challenge the incumbents. The US has no equivalent of the EU’s Payment Institution (PI) licence, but this would be a practical way to allow new entrants access to the infrastructure needed to deliver great new products and services.

I couldn’t help but remark that the US has none of these with the result that, as another of the advisors pointed out, there are something in the region of a hundred million people in the US today who are unserved or underserved by the existing financial services providers.

For consumers, the costs of using cash are regressive and fall heaviest on the “unbanked” – mostly low-income individuals who can least afford it.

[From Cash Is a Wasteful System, but Hard to Replace – Room for Debate – NYTimes.com]

There are people trapped in the cash economy all over the developing world, and therefore denied access to the first rung of the ladder out of poverty, but there are people trapped in the cash economy in the developed world too.