The year ahead is likely to see financial exclusion continuing to impact low-income familiers in developed economies, while Africa and Asia are tipped as providing the next wave of financial technology (fintech) innovators to watch.
The predictions come from Alix Murphy, director of mobile partnerships at online money transfer specialist WorldRemit, who forecasts five specific developments for 2017.
Financial exclusion will continue to harm low-income families in developed economies:
Financial exclusion, which will continue to impact on low-income families in the developed world, has become a systemic problem.
Many don’t appreciate that exclusion from basic financial services is among the biggest challenges facing the developed world today, but one that has been known about for years. Millions of people across Europe and North America lack access to even the most basic financial utility – a savings account – while many more live precariously from paycheque to paycheque, without access to credit or any cushion against even the smallest shock to their income. It’s arguably the greatest potential cause for future social and economic instability.
Among noteworthy trends in the developed world:
- In the UK, 12% of the population is now categorised as “underbanked” – a new term that reflects the precarious access to financial services.
- Nine million US households (7% of the population) are unbanked, while an additional 19% (24.5 million households) are “underbanked”, a Federal Deposit Insurance Corporation (FDIC) report released last October found.
- The UK’sFinancial Inclsuion Commission reports that 13m Britons don’t have enough savings to support them for one month if they experienced a 25% cut in income
The problem is one that the traditional financial services sector, including banks, automated teller machines (ATMs), direct debit and mortgage providers, are either ill-equipped or unable to address for low-income customers with risky or unpredictable incomes. That affects the financial inclusion of low – and increasingly, middle-income people.
The shocks of Brexit and the rise of nationalism across Europe and the US, the constitutional vote in Italy, forthcoming elections in France and the ongoing collapse of the so-called internationalist and liberal order in favor of loose and inward looking nationalistic agendas have forced a deeper examination of social inequalities, and led to a wider recognition that financial inclusion is a fundamental part of achieving political and financial stability.
European leaders need to rethink their strategies and recognise the key role that non-bank services can play in increasing formal financial activity among the unbanked or underbanked. Rather than looking internally for solutions, they should take lessons and examples from the developing world where innovative digital financial services have helped bring millions of low-income households into the formal financial sector.
Mobile money will increasingly be used to stabilise economies:
There are 2bn unbanked people worldwide – mainly in developing countries – but more than 1bn already have mobile phones.
Several countries have understood the fundamental interlinkage between financial and political stability and have promoted national financial inclusion strategies to bring their unbanked into the formal economy. Today, these countries are moving one step further in promoting mobile as the key technology for bringing financial services to underserved citizens.
According to the World Bank Digitising Payments report, digital payments will provide a first entry point into the formal financial system. They are more efficient than cash payments, while their broader adoption also can reduce rates of corruption and violent crime, reduce the cost of government wage and social transfer payments, offer new pathways into the financial system for the disadvantaged, and, importantly, contribute to the ongoing objective of economic empowerment.
For many years, India’s government focused on bank-led financial inclusion, only allowing banks to take deposits and withdrawals, which was only partially successful. However, according to the World Bank Measuring Financial Inclusion report, 43% of bank accounts in India (195m) were dormant at the end of 2014.
This led to a shift in policy: recently the Reserve Bank of India (RBI) agreed to allow non-bank entities to offer mobile financial services, licensing 11 new ‘payment banks’; essentially allowing mobile money to operate in the country).
While these new payment bank services are in their very early stages, the potential impact for India’s unbanked is tangible. Despite a hastily executed demonetisation attempt in late 2016, adoption of mobile payments services is growing steadily, with telco services like Airtel and Vodafone specifically targeting low-income unbanked segments of the population.
Even PayTM, India’s largest mobile payments provider (and partly owned by Alibaba), announced the migration of its mobile wallet business over to its payments bank in order to facilitate cash-to-digital transactions.
In Peru, a joint venture between the government and 30 of the largest financial institutions now provides a unified mobile banking and mobile payments system for all Peruvians, particularly the 78% who don’t have a formal bank account.
In its early stages, Peru’s Bim service aims to vastly improve productivity and boost commerce in a country where the payments infrastructure is limited by challenging geography – more than 39% of districts lack any bank or ATM, and paying an electricity bill often requires travelling large distances to pay in cash.
Peru’s Bim model was based on lessons taken from other countries where mobile financial services are thriving.
The next wave of fintech innovators to watch will come from Africa and Asia:
Long before the advent of fintech, telcos were already doing it thousands of miles away. Mobile money has done more to extend the reach of financial services in the past decade than traditional “bricks and mortar” banking has in the last century.
Mobile money services now operate across more than 90 countries, covering 85% of the world’s poorest territories where most of the population lacks access to a formal financial institution. At the last count, more than 270 of these non-bank financial services – mostly run by domestic telecoms operators – had at least 411m registered accounts, empowering effect on people, businesses and whole economies.
These customers are people who have traditionally dealt in cash but are increasingly switching to mobile money accounts, which enable them to send, store and receive money without a bank account, using just a basic feature phone.
This impressive growth will continue in 2017 and by huge amounts: a recent McKinsey report found that widespread adoption and use of digital finance could increase the gross domestic product (GDP) of all emerging economies by 6%, or US$3.7 trillion, by 2025.
GSM Association data published in February 2016 corroborate the trend:
- Mobile money providers process an average of 33m transactions a day (more than 1bn transactions a month – or more than double the amount PayPal processes monthly).
- Registered accounts grew by 31% in 2015 alone to a total of 411m.
- At least 19 markets currently havemore mobile money accounts than bank accounts; 37 markets have 10 times more registered agents that bank branches.
- Mobile money services offering international money transfers (IMT) saw the volume of cross-border remittances increase 52%.
- In 2015, 51 of 93 countries where mobile money services operate had an enabling regulatory framework.
Cutting edge fintech innovation will sprout in friendly regulatory environments where societies are ready to leapfrog existing antiquated financial regulations that cripple innovation. Mobile money started as basic peer-to-peer (P2P) money transfers, but mobile money providers are expanding to other services traditionally provided by banks:
- In Tanzania and Ghana millions of unbanked mobile money customers now receive a quarterly interest payment on their balances.
- Mobile money users of m-Shwari in Kenya and Airtel in Ghana can apply for small personal loans based on the personal credit history built from the data on their mobile money transactions, which are paid directly into their mobile money accounts.
- Other companies are connecting to mobile money platforms, becoming part of a wider low-value payments ecosystem reaching unbanked customers.
- For a deposit of US$35, M-Kopa Solar lets clients purchase a solar panel then make daily payments of $0.43 through mobile money system M-Pesa until the system is bought outright.
- Among the most popular uses of mobile money in countries from Zambia to Uganda is paying school fees.
- eCommerce – mobile money is used in the Philippines by unbanked customers of SMART Padala.
- In Sri Lanka, the elderly can receive pensions onto their Dialog eZCash mobile money account, potentially saving the government millions in cash disbursement costs.
Mobile money will continue to define the industry standard for cross-border payments:
Mobile money started as a domestic remittance service enabling anyone with a mobile phone to send money to another person instantly and cheaply. Now it’s expanding internationally and driving instant mobile transfers as the baseline standard for cross-border money transfers.
- Using mobile money to send international remittances is more than 50% cheaper, on average, than using global money transfer operators (MTOs).
- At least 53 mobile money services in 16 countries (covering 170m mobile money accounts) enable customers to send money across 45 country corridors.
- The average cost of sending $200 using mobile money was 2.7%, compared to 6.0% using global MTOs.
- Even when mobile money cash-out fees are considered, it’s still 21% cheaper on average to send $200 using mobile money than with traditional remittances channels, and 36% cheaper to send $50.
Consequently, mobile money is particularly competitive for low-value transactions. The average value of international transfers sent using mobile money was $82 in June 2015 (the latest survey date) and international transfers made via mobile money in 2015 totalled US$5.2bn, or 1.2% of the total US$431.6bn sent globally to the developing world in 2015. The figure is expected to have been significantly higher in 2016.
The growth of instant messaging apps will turbocharge mobile to mobile remittances:
This parallels how migrants are communicating through instant messaging services like WhatsApp, Viber and other messaging apps. When sending to mobile money, people are more likely to be sending from an app (rise in mobile-to-mobile transfers) because people communicating about their money transfers on instant messaging apps are effectively keeping their user experience (UX) within the same interface.
Mobile money extends the range and speed of this communication, in a way that is very similar to instant messaging. WorldRemit’s own internal data, shows an increasingly prevalent trend:
- Forty-two per cent of customers use instant messaging to discuss their money transfer.
- The availability of low-cost, instant transfers is enabling people to send smaller amounts, more often (around a third more) – for specific reasons, making them more involved in the recipient’s life.
- When new mobile money services are launched in countries with cash pickup, the latter tends to decline as mobile money grows.
- WorldRemit transactions made from a mobile are growing strongly, catching up to transactions made from web, with most of the growth in transactions and send value coming from mobile. Although web is still larger at the moment, this will change very soon.
- Migrants are sending much smaller value transfers much more frequently and are increasingly turning to mobile over the website. Technology is driving this on both the send and receive side of transactions.
ExxonMobil is legally challenging a $2m fine from the US Treasury for allegedly violating sanctions against Russia in 2014 while US Secretary of State Rex Tillerson was still overseeing the company.
Morgan Stanley is moving staff to Frankfurt in time for the March 2019 Brexit deadline.
The US bank, which already has 350 employees based in the city, will transfer some trading activities currently undertaken in London and create a further 150 to 250 jobs according to reports.
BNP Paribas is the latest in a long line of financial service companies to be penalised for misconduct during the financial crisis on both sides of the Atlantic.