Promoting Financial Inclusion through Digital Financial Services – Jordan Ready to Take Off

Paul Newall discussed with Khurram Sikander, who has been leading key digital inclusion initiatives in the country.

Enclude has been involved in multiple projects in Jordan recently, including a project working with the Central Bank of Jordan (CBJ) to promote financial inclusion through mobile financial services (MFS). What is the state of financial inclusion in the country and what is the vision for MFS?

There is a very low rate of financial inclusion in Jordan with only 24.6% of the adult population banked, leaving an entire 75% of the population un(der)banked. On top of that the Jordanian population is also expanding rapidly due to the influx of refugees who have limited access to financial services – further increasing the underserved population.

Recognizing the importance of financial inclusion to broader inclusive economic growth, the CBJ saw an opportunity to leverage MFS to reach these unbanked segments. Specifically, the CBJ took a proactive and forward-looking step by establishing regulations that enable both banks and non-banks to offer MFS, and by spearheading the development and roll-out of JoMoPay, the country’s mobile payment platform.

In establishing and operating the platform itself, the CBJ was able to set rules of the game and ensure a level playing field in Jordan. For example, JoMoPay is fully interoperable among providers – both banks and payment service providers (PSPs). This means that a bank, mobile network operator, or a wallet issuer (or a consortium of these providers) can offer MFS by applying for a PSP license with the CBJ. JoMoPay is also integrated with other national payment systems, including JoNet, the interoperable ATM and point of sale (POS) switch, and eFawateercom, the centralized bill presentment and payment platform. These integrations promote usage of various channels and instruments (mobile, ATM, agent, and card) to access mobile wallet accounts.

Ultimately, the CBJ’s vision for JoMoPay is to build a mobile money ecosystem that brings unbanked segments into the formal financial system, thereby benefiting the Jordanian economy and society as a whole.

How has the market responded to the initiatives promoted by the CBJ?

Since the launch of JoMoPay in 2014, four PSPs have received licenses and two PSPs have received provisional licenses. The four licensed PSPs include Al Hulool, which is a consortium of the telco Umniah, Emerging Markets Payments Group, and four commercial banks; Zain Cash, which is affiliated with the telco Zain; Aya Jo; and Dinarak. The market has been relatively slow to fully launch their services and expand market awareness of their products and services – this is the case for several reasons, including a focus on the technical and operational aspects of their services over the development of marketing and distribution strategies. It seems the market is waiting for one of the PSPs to make the first move.

That said, there is substantial market potential, particularly as the PSPs now focus on expanding their agent networks and targeting key sectors / segments. The foundation for MFS in Jordan is strong and the industry is well-positioned to scale.

Recognizing the CBJ’s vision for financial inclusion and MFS, how did our work fit into their broader strategy?

Two key pillars of the CBJ’s Vision and Strategic Framework 2013-2016 were to enhance oversight of the payment system department and to modernize the retail payment system while promoting financial inclusion. Additionally, the CBJ has been in the process of developing and rolling out a financial inclusion strategy and formalizing commitments to the Maya Declaration – both of which view digital financial services as a core enabler to achieve their targets.

Our work with the CBJ contributed directly to supporting achievement of these strategies and commitments. Specifically, with support of the European Investment Bank (EIB), our mandate was to enhance the oversight capacity of the CBJ’s payment system department (PSD), particularly as it relates to MFS. When the project was first designed, the CBJ had only recently gained authority to oversee the payment system. The PSD – led by Executive Manager Ms. Maha Bahou – was therefore eager for support to build the capacity of the team in areas including the legal and regulatory framework, risk management, and data collection for digital retail payments.

What were some of the key project outcomes and how did we approach them?

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The Enclude team facilitates a risk management workshop with key industry stakeholders

A key characteristic of our approach was engagement with stakeholders across the payments ecosystem throughout the project. Although the CBJ was our main client, a strong understanding of market realities and the opportunities an
d challenges facing stakeholders was critical to delivering recommendations that were fully tailored to the Jordanian market.

At the end of the program, we produced a number of deliverables that we were happy to see were not just sitting on a shelf, but rather, were being used by the CBJ. For instance, on the legal and regulatory framework, our recommendat ions were incorporated into the CBJ’s bylaw and into the memorandum of understanding between the Telecommunications Regulatory Commission and the CBJ.

We also delivered a risk management framework and implementation plan for JoMoPay, with inputs from industry stakeholders, which is designed as a live tool for the CBJ to enhance readiness to mitigate and respond to risks as they rise. We developed a data collection methodology for the CBJ, including templates for the CBJ to collect data from the industry on indicators related to the access, usage, and quality of digital financial services. We also facilitated study visits between the CBJ and De Nederlandsche Bank (DNB), the central bank of the Netherlands; Finansinspektionen, Sweden’s financial supervisory authority; Riksbank, the central bank of Sweden.

What are some of our key takeaways from the project, and how will they inform our work and the broader industry moving forward?

A key takeaway from the project is an understanding of the role that regulators have in pushing the industry along and ensuring that the journey towards cash-lite is one of engagement and consultation with the industry. The CBJ has taken action to create a DFS ecosystem that is fully interoperable from day one – allowing providers equal and fair access to platforms and the customer, regardless of size.

In our work, we have often seen regulators struggle with the financial ‘integrity vs. inclusion’ debate. Particularly in a market like Jordan, which is in a region characterized by social, political, and economic instability, ensuring financial integrity is an utmost concern. However, the CBJ has been able to strike a good balance, understanding the importance of financial inclusion for inclusive growth and pushing the market where it needs to go when it was too slow to take up the reigns. Jo
rdan has all the right ingredients for DFS to take off. There is also another exciting project we are implementing that focuses on the digitization and inclusion of refugees and host communities in Jordan but that will have to wait for another blog.

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Financial Regulations for Improving Financial Inclusion

 Written by Rebecca Marx, Victoria Rau, and Paul Newall

Banking Beyond Branches has published many blogs highlighting how digital financial services (DFS) can expand financial inclusion, including through refugee populations, budget smartphones, and remittances. We also called attention to government policies toward financial inclusion as a key trend in 2016 and our prediction has been complemented by the Center for Global Development’s latest release: Financial Regulations for Improving Financial Inclusion.

A key focus for the report is examining the complexities in the ex-ante vs. ex-post debate on regulations – akin to tightrope walking for regulators. As we see in markets such as Nigeria and India, ex-ante policies may often inhibit the industry with too many regulations from the get-go. Ex-post regulation, on the other hand, may be too late to respond to issues. The key to this debate, some argue, is to allow the market to get out ahead, but keep it “within shouting distance”, as phrased by Marisa Lago, US Department of Treasury. In particular, the question of interoperability is of central concern – should the market evolve to interoperability naturally (presuming it does), or should it be mandated? Regulators want to ensure that the market will advance through competitive market mechanisms, but “maintain the capacity to be interoperable”.

Balancing proactive ex-ante regulation with reactive ex-post regulation and maintaining a level competitive landscape feature strongly in the report. The recommendations are intentionally agnostic to the technologies and players involved in providing financial services. They state that banks introducing additional mobile channels should still be scrutinized as banks, while digital services providers entering the market should be scrutinized more or less depending on the types of services they intend to provide, i.e. adopting a ‘service’ risk-based approach to regulation.

If it is anticipated that greater financial inclusion will be achieved by “disruptive” technologies in payments and financial services, as we would argue on this blog, then trying to regulate the payments industry as it advances is going to be a key question moving forward. A technology or innovation that truly disrupts does not announce its arrival with enough lead-time for regulators to anticipate the potential consequences or develop the appropriate regulatory framework. Innovative ways of paying for goods and services and storing or transferring money can just show up and are often out of “shouting distance” quite quickly. They disrupt the status quo and challenge existing rules, but who knows if they will gain enough traction to stay.

To analyze the role of ex-ante vs. ex-post regulations, and how central banks respond to disruptive technology, we need not look further than Kenya (whose former Central Bank Governor was a key contributor to this report). While lauded as the predominant mobile money case study, Kenya has had its own regulatory questions to answer. In 2014, the Communication Authority of Kenya (CAK) required Safaricom to allow its mobile money agent to host services from other operators but market competitor Airtel pushed regulators to go even further.  Airtel, asserting that mobile cash transfers from M-Pesa to Airtel Money are twice as expensive as transactions between Safaricom customers, wants to see regulators monitoring interoperability costs in order to reduce barriers to entering the market for other operators.

In July 2015, the government introduced new regulations that, if passed, would lead to the break-up of Safaricom in an effort to protect against monopolies. Fred Matiang’I, the cabinet secretary at the Ministry of Information said, “Telecommunications firms need to be regulated to ensure some players are not strangled”. If the regulation is passed it could force Safaricom to separate M-Pesa from its mobile phone services and infrastructure business, to the glee of Airtel.  In September 2015, Airtel chief executive Mr. Youssefi said, “Airtel is likely to exit Kenya if the market structure is not addressed in terms of dominance”.

While the discussion of M-Pesa’s dominance of the Kenyan market has certainly been elevated, reaction from Kenya’s authorities has been slow. The CAK said it would need at least one-and-a-half years to conduct a study to determine the thresholds of abuse and dominance in the telecommunications industry, and only after that study can anti-competitive practices in the market be addressed. Time will tell if regulatory action will be taken while providers are still “within shouting distance”.

From the above example, we are able to see some of the pros and cons of ex-post regulation. While Safaricom was able to develop themselves into the leading mobile payments players, rivals have felt that the playing field was not level – something ex-ante regulations might have mandated. The report attempts to provide regulators, such as Kenya’s, a framework to address these challenges and chart their path.

How might we best assist refugees? The mobile phone

Written by Paul Newall

The world is facing one of the greatest humanitarian crises since World War II. The United Nation’s Syria Regional Refugee Response estimates there are 4.39 million registered Syrian refugees globally – with the total number being much higher[1] – and that is not even including the refugees from other countries, such as Iraq, Afghanistan, Libya, and Eritrea. While there have been many instances of mass migration in human history, there is one key difference to today’s crisis, and it’s a trend that may provide an avenue to reaching, connecting, and serving those in-need: the mobile phone.

A recent article stated “we can call the huge numbers of refugees arriving in Europe in 2015 the first digitally-driven mass-migration.”[2] To highlight this point, Wael, a Syrian migrant, told Agence France Presse “our phones and power banks are more important for our journey than anything, even more important than food.”[3] According to one study, 86% of Syrian youth in refugee camps have access to a smartphone, and agencies have made it relatively easy to get SIM cards once inside.[4] In Jordan’s Za’atri Syrian Refugee Camp, for example, researchers found that 89% of respondents owned a mobile handset and 85% owned at least one SIM card.[5]

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An aerial view of Za’atri refugee camp in Jordan (Photo credit)

At a time when ignorance and fear about the refugees is at an all-time high (Hello, Mr. Trump and Mr. Cruz), the mobile phone can prove the tool to reach these populations and provide a useful lens through which we can better understand them. Through mobile phones, governments/donors can connect to those in-need, allocate cash-transfers, provide health and re-settlement information, and break down any language barrier. We can understand their social circles, their needs, their concerns, and their journey to where they are now.

The above use cases are possible if we find solutions to current questions or concerns (including Anti-Money Laundering /Combating the Financing to Terrorism, fraud, etc.). Using industry best practices, as well as leveraging recent technological innovations, we can move towards the financial inclusion of refugees while maintaining the integrity of the financial ecosystem.

There have been reports of border crossing agents removing mobile phones from refugees upon arrival to their country – it’s hard to imagine a more shortsighted action. We are in a moment when the immediate needs and concerns are so pressing – donors and governments must prioritize utilizing the one common connector between us all: the mobile phone. Responses can be better targeted using the data from the refugees’ mobile phone. Such a targeted, data-driven approach was not available in mass migrations of the past; we must make sure we make the most of this opportunity.

Following this article, we will explore elements such as security, efficiency, technology and inclusion with a series of articles that highlight solutions that could yield big results in assisting refugees.

[1] http://data.unhcr.org/syrianrefugees/regional.php

[2] http://www.zeit.de/gesellschaft/zeitgeschehen/2015-09/smartphones-mobil-phones-refugees-help

[3] http://qz.com/500062/the-most-crucial-item-that-migrants-and-refugees-carry-is-a-smartphone/

[4] http://news.psu.edu/story/350156/2015/03/26/research/ist-researchers-explore-technology-use-syrian-refugee-camp

[5] Maitland, Carleen and Ying, Zu, A Social Informatics Analysis of Refugee Mobile Phone Use: A Case Study of Za’atari Syrian Refugee Camp

The Implications of the Freedom 251 Smartphone

Written by Mark Nichols

The prototype of the Freedom 251, the ultra-budget smartphone that became available for pre-order in India in February, looks like a toy iPhone. Though it shares many characteristics of the popular device, Apple’s signature softly rounded corners, curved sides, and silver-ringed home button are rendered in white plastic. When switched on, even the app icon design recall the iPhone’s, displayed next to such pre-loaded apps as Facebook, WhatsApp and others linked to government initiatives for women, farmers, and fisherman. Above the screen, a smear of white correction fluid hides the logo of Adcom, a handset manufacturer that denies affiliation with the Freedom 251. An Indian flag, already starting to chip off of the white plastic casing, covers more Adcom branding on the device’s back.

Despite its questionable, derivative appearance, the device has received attention from media and potential customers alike: according to Ringing Bells, the company behind the Freedom 251, its website received 600,000 hits per second and 30,000 confirmed orders on the day of the launch before it crashed under the demand, and thousands showed up at the company’s office to buy the device in person (the Freedom 251 is only available for online pre-order). The cost: Rs. 251, or $3.67, the lowest price for an unsubsidized smartphone sold anywhere by a large margin.

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Applications provide smartphone users with many payment options

The Freedom 251 is the newest entrant in the budget smartphone arms race, which has recently seemed more like an all-out sprint with important consequences for mobile money services and players. As we discussed in our predictions for 2016 trends, smartphone penetration is growing quickly in key regions for mobile money, including sub-Saharan Africa. Of the world’s 7.4 billion mobile phone subscriptions, 46% are smartphones, and Ericsson predicts this figure will be 70% by 2021. Though smartphone penetration is lower in poorer countries than in rich ones, it is also growing much faster in regions like sub-Saharan Africa, helped in part by the availability of more affordable devices. MTN, Tecno, and Google already offer smartphones at or below $50.

In December, we talked about the implications of this shift on the blog:

An immediate consequence of the spread is improved user interfaces and integration with smartphone capabilities for existing mobile money services, but this shift cuts deeper. Third parties can develop apps built on the mobile money service, such as pesaDroid and m-ledger, money management applications built on M-PESA. With the service delinked from SIM cards, competitors using mobile and web-based interfaces, such as Facebook’s remittance/e-money services, can enter the market, and existing services can expand to a customer base beyond that of a specific [telcom operator].

The Freedom 251, for its part, may yet fail to fulfill its potential to provide smartphones for even the poorest of the poor. “It feels like a Rs. 3,000 smartphone,” writes one reporter, and he is not far off: the materials of the phone are estimated to cost Rs. 2,500. Ringing Bells says it plans to reduce the price through economies of scale, partnerships, and innovative marketing strategies, and aims to hold 30% of the Indian smartphone market by the end of this year. Some observers fear the Freedom 251 and its highly publicized launch may be a marketing ploy or even a scam. If the device and its price are real, they likely owe their existence to subsidies of some kind (the announcement seems to come in connection with the Make in India scheme, launched in 2014, which encourages domestic manufacturing, though Ringing Bells has denied government involvement or subsidies). Such subsidies would be effective in getting handsets into the hands of the poor, but fall short of the market-based ultra-budget smartphone we might hope for.

Yet even if it has a dirty secret, the Freedom 251 still represents the future of possibilities its name suggests. Two months ago, a $25 smartphone seemed too good to be true; in the year of the $4 smartphone, it seems too good not to be. There is also a chance the low price of the Freedom 251—why Rs. 251 when a viable handset three times that price would still be a step forward?—will end the race towards the ultra-budget smartphone, as customers and manufacturers alike grow weary of the fixation on price above quality. Last year, Mozilla backed down from its 2014 promise to develop a $25 model, choosing instead to focus on improving user experience. Datawind delivered on its Rs. 999 ($14.53) smartphone last year, but with a dip in quality severe enough to dampen much of the excitement over the price.

Retreat from the cost-fixated fervor could be welcome if an emphasis on innovative financing models took its place. Even in rich countries, a phone’s sticker price is often meaningless. I am unlikely to invest the listed price of $749 for a 64GB iPhone 6s, but I happily pay AT&T $35 a month. Pay-as-you-go financing for solar home systems, for example, already increase energy access in areas with poor rural infrastructure by allowing repayment to mirror customers’ cash flow. For some of the world’s poorest, even $3.67 is too expensive to buy outright.

And cost is not the only barrier to smartphone adoption. Feature phones will still retain a significant minority of the market share, even in rich countries: 40% of Orange’s customers in Western Europe and 40% of those in Eastern Europe use feature phones. Many purchase these simple phones with long battery lives for their children or as a second phone for prolonged stays away from charging stations. In poor countries where power supplies are scarce and those residing in rural areas may only be able to charge phones during trips to a city or by using a shared power source, smartphones’ shorter battery lives makes them impractical.

Whether Ringing Bells meets the high bar it has set for itself is in some ways secondary. Even if it fails to meet its June 30 deadline to deliver on its pre-orders, its effect on the market for low-cost smartphones may endure.

The challenges ahead for mobile financial services in Myanmar

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Written by Sachin Bansal

Myanmar has been receiving lot of attention recently. As a result of its increased openness with the global community, there have been many articles written on the country, its people, and many are looking at Myanmar to take great strides in the coming years. As a result of the increased dialogue with international players, there has been significant foreign investment in various sectors of the economy. The country is now moving towards a market-oriented economy, a change that is helping the government-driven economy to be more efficient and competitive. As an example of the increased competitiveness, entry of new players in the telecommunications space has brought down the cost of SIM cards from as high as $2,000o to $1.25 today, making it more accessible to the population. This fall in price has resulted in increased mobile penetration in Myanmar, 54.6% as of March 2015. The Ericsson Mobility Report of November 2015 states that 87 million new mobile subscribers were added globally in the Q3 2015, of which Myanmar contributed 5 million – ranked fourth globally of the fastest growing markets.

The Central Bank of Myanmar is eager to leverage this now omnipresent tool to expand financial services to the un(der)banked citizens of Myanmar. In July 2015, it issued draft Mobile Financial Services (MFS) regulations and the final regulation is expected soon. In spite of all the efforts being made by the government, central Bank, financial institutions and telecom companies, the journey to launch MFS will not be easy in Myanmar. There are several challenges facing uptake and usage:

Lack of trust in the banking system: 

There is a very high level of mistrust with the banking system in Myanmar and most people still do not have bank accounts. The lack of trust is so ingrained that several big institutions pay their staff in cash, as the employees are not willing to accept a bank transfer. This lack of trust in banks can mainly be attributed to the 2003 Myanmar banking crisis but there have also been several recent rumours of banks failing, leading to people withdrawing all their money from the banking system. The MFS players will have to work very hard to overcome this challenge to change people’s perception.

Low level of perceived risk for carrying cash:

People in Myanmar do not perceive carrying large amount of cash on their person as a huge risk, unlike in other countries. This lack of risk is evident in the country as you can see money changers sitting on the roadside of Yangon streets, with minimal security arrangements, counting large US Dollar bills out in the open. As the perceived risk of carrying cash is low, people may be unwilling to pay fees/charges to store their money in MFS wallets for just safety reasons.

Low pricing of existing formal channels of money transfer:

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Money Transfer Charges of Myanmar Post

Most successful MFS offerings have person-to-person money transfer (P2P) as their core product offering as it is cheaper than transferring money through a bank. In Myanmar, however, the money transfer service offered by many formal institutions has a very low transfer fee. The Myanmar Post Office, for instance, has an extensive presence throughout the country and offer money transfer service in 335 of their branches. The fee is lower compared to other countries at 0.05% to 0.5% of the amount remitted plus fees. Indian Post Office by comparison charges 5% on low-ticket money order service. Establishing a business case to compete with such low pricing is going to be a challenge for MFS players in the near future. However, there is limited geographical coverage of such formal services available to the citizens and customers may be willing to pay for convenient services if the price was appropriate.

Prevalence of Hundi system (informal remittance channel)

There are several informal channels , such as the Hundi system, that also offer money transfer services to citizens of Myanmar.  The Hundi system has been used and trusted for several decades. As per The Economist, people migrating outside the country perceive the traditional hundi system to be cheaper, quicker and safer than anything the banks can offer. The new MFS offering will have to beat the advantages offered by such informal systems.

To launch successful MFS operations in Myanmar, the providers will have to work on an innovative business model and develop customer-centric products that learn a lot from the informal offerings. Pricing will also play an important role as customers may be willing to pay for accessibility and convenience.