Monica Brand Engel and Jackson Scher

Four Barriers – and Four Solutions – to Financial Inclusion Through Payment Innovations

Innovative payment solutions are proliferating globally. Enabled by the exponential expansion of mobile phones, social media, “big data”, and internet access, financial players throughout the world are inventing new ways to complete transactions. Disruptive innovations such as prepaid options, NFC-enabled payments, and cryptocurrencies are gaining significant adoption and are changing the payments space. These trends are especially pronounced in emerging markets where many new entrants have chosen to “leapfrog” traditional, resource-intensive systems and dive directly into the seamless and nimble world of digital financial services. Although these exciting innovations in digital payments have the potential to increase convenience for customers and dramatically reduce costs, some challenges remain.

1. Infrastructure. Many emerging markets lack the core infrastructure (national switches and settlement systems, connectivity, even electricity) required for innovative payment systems to operate reliably. One option that addresses this pain-point is Eseye’s innovative machine-to-machine (M2M) technology. By embedding SIM chips into solar-powered lighting units, Eseye has created a remote device management system enabling prepaid and pay-as-you-go (PAYG) financing via M-Pesa in East Africa. Prepaid customers buy exactly as much light as they need, while PAYG customers see their lights go out if they miss a payment. The payment options enabled by Eseye’s technology and its relationship with M-Pesa circumvent infrastructure shortcomings in East Africa by operating through mobile channels. Without this technology, customers would have to pay up front or borrow in order to purchase the system. With it, many more people are gaining access to solar lighting.

2. Interoperability. Many digital financial services have been launched as closed loop systems, which operate on an individual mobile network operator (MNO) service. A closed loop system limits the ability of customers to transact with peers using a different MNO service. Closed loops allow MNOs to sell more airtime while increasing revenues and customer retention in the short term, but open loops that promote interoperability across payment options may be needed to expand the acceptance environment, usage rates, and product functionality. Industry-led initiatives – like those in Tanzania – have aligned business and social goals more effectively than those done by regulatory fiat. The Tanzanian initiative involves cooperation between the four main MNOs (Airtel, Vodacom, Tigo, and Zantel) and three large banks (Bank of Tanzania, CRDB Bank, and the National Microfinance Bank). It is a good example of interested parties circumventing the near-sightedness that threatens truly game-changing payments innovation.

3. Customer. Many payments products suffer from being supply-driven, aimed at solving industry inefficiencies instead of customer pain points. In Zambia, Zoona’s focus on customer interest serves as a source of differentiation from similar offerings by powerful MNOs such as Airtel or MTN. Zoona P2P transfers do not require mobile wallet sign-ups (including a lengthy know-your-customer process) from sender and receiver, rather a simple proof of identification. Additionally, a Zoona transfer only charges the sender, whereas MNO P2P transfers often charge the receiver a cash withdrawal fee. This focus on customer convenience and efficiency is the primary reason Zoona has had success when compared to its larger competitors.

4. Regulation. Although regulation in emerging markets has at times hindered innovation in the name of “prudent financial intermediation,” many policy makers in these markets have also been quick to learn and improve upon such decision making. For example, the Reserve Bank of India (RBI) at first required deep bank involvement with any mobile money scheme. Noting the limiting effect of this regulatory framework on innovation, the RBI created the payment bank framework in 2014 to enable payments innovators to enter the market more easily. Elsewhere in Zambia, interoperable payment platforms are taking advantage of favorable “test, then regulate” regulations. When regulation is well-informed and iterative, it ceases to be a barrier to payments innovation and instead drives progress.

Disruptive businesses are changing the face of financial inclusion and piggybacking on the expanding digital infrastructure throughout emerging markets. With innovative models, engaged regulators, and third-party players continuing to alter the landscape and economics of financial services, the remaining barriers to a digital-enabled financially inclusive world may be overcome.

Editor’s note: This post was originally published on the Center for Financial Inclusion’s blog. It is cross-posted with permission.

Monica Brand Engel and Jackson Scher (@JacksonWScher) are with Accion’s Frontier Investments Group, an early-stage venture equity impact fund that focuses on catalyzing new approaches to financial inclusion.

digital payments, mobile finance