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The Digital World and a Human Economy: Mobile Money and Socio-Economic Development in Africa

12.06.2018Sean Maliehe & John Sharp, Research Fellows, University of Pretoria

GSMA’s State of the Industry on Mobile Money report (2016) argues that

Mobile money has enabled financial inclusion, giving people access to transparent digital transactions and the tools to better manage their financial lives. It has also been a gateway to other financial services, such as insurance, savings, and credit. The impact of mobile money has been felt well beyond transactions and accounts: people’s lives have been enriched by greater personal security, a sense of empowerment, and more.

There is a lot to like about the report’s optimism, given that mobile money has greater potential to serve the needs of poor people in Africa and elsewhere than other forms of money that have emerged recently.

Beyond ‘data-mining’ 

Also heartening is the report’s attention to the importance of careful understanding of these needs in order to provide the poor, wherever they are, with appropriate financial services. As much literature on mobile money’s promise does, the report stresses the value of ‘mining’ the data that becomes available to fin-tech companies in consequence of people’s use of the internet.  As smartphones become cheaper and their penetration across Africa increases, data-mining will allow service providers to build profiles of individual users’ needs and preferences in order to tailor the services – including loans and insurance – offered them.

Such data-mining is clearly important, particularly as service providers move beyond mobile money’s basic, and earliest, function as facilitator of P2P money transfers.  But it is worth noting that GSMA’s report acknowledges that most mobile-money usage in Africa (by volume and value) still comprises money transfers.  Mining ‘in-system’ data is unlikely to be sufficient here, and it will also be necessary to gain information about the needs, wants and aspirations of poor people by other means.

A straightforward example is provided by Woldmariam’s first-hand, on-the-ground research in Ethiopia.  He discovered that many rural recipients of P2P mobile transfers struggle because they are illiterate.  When remittances came in cash, they could distinguish bank notes by their distinctive colours. But they find numbers on a small screen indecipherable, leading Woldmariam to ask if fin-tech innovators cannot come up with an appropriate digital solution.

His research is in line with our Human Economy approach, which starts by asking what poor people do to insert themselves into an economy which is stacked against them.  Our research shows that people in Lesotho (as in many other places) save money by forming rotating associations of various sizes. ROSCAs are meaningful to them because they are based on a longstanding local cultural logic which engenders trust.  But – as everywhere – trust is sometimes undermined by unscrupulous association members aiming to benefit at their fellows’ expense.  To counter this, people try to devise ways to inform all members quickly whenever there is movement of money out of the bank accounts in which they now commonly store their collective funds.  So the most important contribution open to the mobile money industry may not be to offer a facility for digital saving on the simple assumption that it will fill a vacuum.  Could innovators not build on what is already in place, by assisting people to make existing savings associations more secure? 

The mobile-money literature makes great play of the roll-out of exciting new innovations.  But since P2P transfers still dominate in Africa, it makes sense to pay considerable attention to those aspects of this infrastructure which could be improved.  Our research in Lesotho shows that people battle with the lack of liquidity in agent networks – they cannot ‘pay in’ or ‘pay out’ readily because the small agents in rural areas do not have sufficient float on hand to meet their requirements.  The literature talks about a shift across Africa from small, independent agents to agency banks as the principal actors in agency networks.  But whether involving the banks more closely is a good idea is an open question.  From our vantage, we are deeply aware that the big banks played no small part in killing mobile money, and its potential to serve the poor, in South Africa.

The ‘business case’ for mobile money?

Like most of the literature, the GSMA report is built on the ‘business case’ for mobile money.  There is a certain, undeniable logic to this case: if private business couldn’t profit from mobile money it would be unlikely to enter the field.  But it is worth remembering that as recently as fifty years ago, the need to make a ‘business case’ for everything, including the fight against global poverty and inequality, was by no means as pronounced.  The dominant understanding then was that the purpose of the economy, seen as so many national economies, was to improve the lives of the citizens of nation-states, and that private business, the state and the people should co-operate, and make compromises, to that end.

This vision was realised most fully in Western Europe and North America after World War II, but it found echoes behind the Iron Curtain, and also became the goal to be striven for in the newly-independent states of Asia and Africa.  But it has fallen by the wayside since the 1970s, replaced by the notion that success in attaining socio-economic goals in a global economy depends on private business retaining its position as a ‘winner’.  Hence the need for elaborate promises that initiatives such as the development of mobile money will lead to ‘win-win’ outcomes from which business will benefit as much as the poor.

But whether the poor will benefit as much as business is a moot point.  The present era produces abundant evidence that big business, in particular, does not play by the rules.  The ‘free market’ is corporate ideology, and in practice the corporations collude in all manner of ways to rig the market against the interests of competitors, states, and the people.  This is not necessarily true of all businesses: small fin-tech start-ups are bound to be more attuned to their prospective customers than large corporations which are beholden to shareholders with limited liability and no local knowledge.  South Africa had a golden opportunity to use mobile money to distribute social grants to millions of new recipients after 2012.  Instead the state contracted distribution to a large financial company which opened a bank account for every recipient, and gave its subsidiaries access to the information in each account in order to target recipients for particular services.  Small wonder that, in this case, the much-vaunted instant loan facilities simply added to the debt burden on the poor.

Conclusion

Our ‘human economy’ approach starts with an emphasis on what the billions of poor people in Africa and elsewhere do off their own bat to insert themselves into an unequal global economy.  Since they know their own circumstances better than even well-intentioned outsiders ever will, building on what they do for themselves is probably the best way to address the challenge of poverty and inequality.

On the other hand, poor people cannot solve these challenges alone.  They need the input of big bureaucracy and big money, but allies from these camps are not easy to find.  Hence the need for critical, but not dogmatic, scrutiny of the discourses by which states and corporations seek to explain their actions to address these problems.  In this regard a ‘human economy’ approach looks carefully at the ‘business case for mobile money’ and its assurances about ‘win-win’ outcomes.

Our argument is that states, and state-aligned institutions such as Central Banks, could play a positive role in the development of mobile money by taking notice of the points raised in this article.

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About the Authors

Dr. Sean Maliehe is an economic historian and ethnographer of commerce and 'mobile money'. He joined the Human Economy Research Program as a postdoctoral research fellow in January 2016 having arrived in 2012 as a PhD student. Sean's postdoctoral research is based on the emergence of 'mobile money' in southern Africa. He explores the development of 'mobile money' in Lesotho and South Africa, and uses the township of Diepsloot (north of Johannesburg) as his ethnographic site.

Prof. John Sharp is currently South Africa Director of the Human Economy Research Programme, Senior Research Fellow in the Centre for the Advancement of Scholarship, and Emeritus Professor of Social Anthropology at the University of Pretoria.

DFS Customer Development Opportunities in Nigeria

25.05.2018Jacqueline Jumah, Senior Analyst, MicroSave & Irene Wagaki, DFS Consultant

This blog was originally published on the MicroSave website.

Customer development is a fundamental requirement for any business. In digital financial services (DFS), we can view customer development as a journey that comprises customer discovery, customer captivation and appropriating value. Customer discovery involves finding out about potential customers and understanding whether existing solutions are able to meet their needs. Customer captivation entails continuously sustaining the interest of the customer by ensuring a positive user experience. Appropriating value focuses on adding valued products, services and delivery channels that can deepen early market successes to generate revenue and thus profits.

So far, in customer discovery, many financial institutions replicate solutions to drive user adoption. A few financial institutions conduct initial market research to understand the pain points among DFS users. In customer captivation, the emphasis is on heavy marketing communication – creating awareness on the existence of different solutions. There appears to be a greater focus on the success of a transaction rather than on the user experience that drives adoption and long-term use. Providers often focus on the number of customers rather than the value per customer, which requires innovation. The adjoining diagram illustrates this:


Source: Adapted from the Open APIs in Digital Financial Services 2017 report by CGAP

Providers lose out on profitability by failing to optimise the customer value proposition that drives adoption, and in their inability to support this through the creation of appropriate mission-oriented structures. Examples of these structures include setting out autonomous DFS departments, appropriate budget allocation, operating with adequate teams, among others.

Customer Development in Nigeria

In Nigeria, Deposit Money Banks focus on raising deposits from the public to fund the corporate sector but typically do not offer a full range of products and services to the mass market. Agent banking can promote greater access to convenient and accessible transactional services throughout the country. The agent channel can be used by providers to significantly increase customer captivation and revenue per customer. At present, the primary focus of the financial institutions that have adopted agent banking is on the customer discovery phase – primarily through offering the channel for Cash-In and Cash-Out. There are few value-added services that customers use. To drive revenue per customer, Deposit Money Banks must combat the perception that they are only used for the storage of funds. This would encourage their customers to use the products and services that ride on the agent channel.

Providers must ensure that services can meet the actual needs of customers, provide an optimal user experience, and use agents as a Below-the-Line marketing channel to demonstrate the range of services available. This is essential if the aggressive Above-the-Line (in most cases) and Through-the-Line (SMS blasts) marketing communications that Deposit Money Banks typically use are to be effective.

Beyond deposits, many mass market customers’ needs are served by Microfinance Banks that provide a better user experience. But agent banking combined with customer-centric product development and appropriate partnerships with fintech companies could extend the range of personalised retail services that Deposit Money Banks offer. This would allow them to compete with the Microfinance Banks.

How Might Institutions Harness Opportunities in Customer Development in Nigeria?

One of the research focus pillars in the recently published Agent Network Accelerator Research: Nigeria Country Report 2017 by the Helix Institute of Digital Finance has been customer development. The report outlines the need for providers to use research to generate compelling value propositions beyond cash deposits and cash withdrawals. We have identified use-cases within the payments space, including social transfers from donors or government, person-to-business, for instance, payment of school fees and person-to-person funds transfer. Designing use-cases around pain points would drive customer adoption and thereby revenue per customer.

The survey finds that providers have been doing little to promote uptake and usage. Rather, innovative agents have themselves developed mechanisms to promote uptake and usage. Typically, these mechanisms are built around digitising locally accepted cash-management practices:

a) Providing Microloans to Customers

Agents offer passbooks to customers for record-keeping and use these records to provide loans to them. A good number of agents report that the act of filling up the passbooks themselves provides opportunities to interact with the customers, making them feel “special”. Agents value the customers’ body language and demeanour as additional information that is critical in the intuition-based assessment of customers for microloans – of course, in addition to the transactional patterns. The transaction sessions with customers also involve asking personal questions to unearth their financial needs. An agent reported that he would provide a higher value loan to a customer who was confident enough to share more about their personal business progress than one who provided guarded responses.

The takeaway for providers: This example shows how agents use their customer relationship and information available on the channel to reduce the risk of micro-lending. The options available to providers include lending to the agents for on-lending or adopting agents into micro-lending processes given that pure digital lending carries significant risks of non-recovery.

b) Digitising Esusu and Ajoo1 Using Roving Employees

Some agents employ roving staff to provide Esusu services and facilitate Ajoo services through the agent banking channel. From the Helix field interactions, agents report that considerable financial information is shared in the Ajoo meetings, and this could be helpful in product evolution to make solutions more meaningful to the daily lives of customers.

The takeaway for providers: Develop field-based applications to digitise the Esusu or Ajoo processes thereby improving the agent business-case and enhancing agent loyalty, and through their actions increase the transaction volumes and deposits mobilised. Digital tools such as tablets and smartphones that offer other intuitive interfaces could be used during these sessions to improve the interactions and ensure prompt data collection.

c) Facilitating Remote Transactions

Due to a lack of service reliability and limited access to liquidity experienced by agents, they have developed networks to aid in facilitating transactions remotely. This means that whenever a customer visits an agent who is unable to conduct transactions for any reason, another agent in the network conducts the transaction on that agent’s behalf. For example, a customer wants to deposit NGN 5,000 walks to an agent in his locality – agent A. Unfortunately, due to network issues, the service is unavailable and agent A is unable to conduct the transaction. Agent A then reaches out to agent B – who is in a different locality through a call. Agent A provides the customer's transaction details and agent B immediately conducts the transaction on his behalf. This is also practiced whenever there are liquidity management issues, and in both cases the agents reconcile through their network. These agent practises follow the principles of Hawala2.

The takeaway for providers: Providers could design products that facilitate remote transactions and the reconciliation between agents in such a way as to provide transparency on the underlying transaction to conform to Anti Money Laundering/Combating the Financing of Terrorism (AML/CFT) requirements, and to ensure consumer protection. These mechanisms could enhance services delivery especially in rural areas where access to agent rebalancing points is a challenge.

Where is the Prize?

Providers must create value for agents and customers if they are to benefit from increased transactions and deposits. Providers would be able to increase usage through digitising local use-cases and by enhancing the user experience. This is the key takeaway from M-PESA's ‘Send money home' campaign – it mirrors existing local financial practices. In this way, providers can maximise value per customers and ultimately be able to appropriate value which is pivotal for DFS business sustainability.

[1] Esusu is an informal and rotating saving association that involves collection of funds by a designated individual, while Ajoo is an informal and rotating savings and credit association (ROSCA) where money from members is raised in meetings and given to an identified member.
 
[2] Hawala is a popular and informal value transfer system based not on the movement of cash, or on telegraph or computer network wire transfers between banks, but instead on the performance and honour of a huge network of money brokers known as "hawaladars".

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About the Authors

Jacqueline Jumah is a Senior Analyst within the Digital Financial Services (DFS) department at MicroSave Consulting Africa and a faculty member at The Helix Institute of Digital Finance based in Kenya. Jacqueline has over 10 years of experience in digital financial services, telecommunications and the banking sectors. She has been involved in various projects consulting across Kenya, Uganda, Ghana, Nigeria, India, among others. She has broad knowledge and experience in DFS Product and Strategy Development, DFS Policy Advisory, Agent Network Deployment and Scale-up, Market Research, Risk Management and Marketing.

Irene Wagaki is a Consultant in strategic operations for digital financial services. She has seven years of experience in supporting innovative financial solutions that have a real positive impact on the lives of the poor through viable payments and distribution channels, and government and social innovations in emerging markets. Irene also has proven track record in digital transformation, agent network distribution models, and mobile money product innovations across Africa and Asia.

Three Fintech Trends for Financial Inclusion in Sub Saharan Africa

30.04.2018Geraldine O'Keeffe, Chief Innovations Officer, Software Group

This blog was originally published on the CFI website.

Key fintech trends include publishing open APIs, which helps to expand customer bases and improve services offerings

The following post is part of a blog series spotlighting perspectives and experiences from the Africa Board Fellowship.

Access to financial services in Africa is on the increase, up 19.4 percent from 2011 to 2017, according to the 2017 Global Findex report*. This change can largely be credited to digital financial services. New entrants to the financial sector such as telcos, fintechs, and in the near future bigtechs like Facebook and Google are all offering technology-centered financial services that are changing the landscape and posing a competitive threat to traditional financial services providers (FSPs). At the same time, new technologies can allow traditional FSPs to expand their outreach and radically improve operational efficiency.

Considering both challenges and opportunities, now, more than ever, financial institutions of all stripes have to accept that technology and innovation are integral to their business strategy. These changes require a shift in culture throughout the institution and among the leadership. Board members, for example, have to embrace this change, understanding the current industry trends, experiencing these financial innovations firsthand, and taking concrete actions.

Through our work with board members of financial service providers in the Africa Board Fellowship program, we have identified three key fintech trends especially relevant for institutions in Africa focused on financial inclusion.

Data, Data and More Data.  In this digital age, we generate and consume more data than ever before, and for many successful fintechs, such as Tala, Branch, and Jumo, data is key to their success. Alternative data, such as how a person uses social media, including their social network, how they use their mobile, and, in some cases, psychometric data are used for loan underwriting and targeting potential customers for instant digital loans. For more traditional financial institutions, business intelligence and data mining is critical to understanding customer behavior and coming up with the right product and services. Those players that collect and use data wisely are setting the new standard for financial services.

Digitization of Workflows and Systems. With the recent increases in affordability and capabilities of mobile devices, financial service providers are looking to automate and digitize with the use of digital field applications (DFAs) and digital workflow systems. Such technologies can eliminate time consuming manual processes while they help improve customer service. Examples include customer onboarding and loan origination via DFA solutions that eliminate paper forms and shift to digital data encoding. VisionFund, for instance, equips its agricultural loan officers with a tablet application that has an integrated credit-decision algorithm specific for agricultural loans. Such solutions offer the ability to easily capture GPS, documents, photos, and signatures. These can be instrumental as part of a branchless banking or branch-light strategy and have been proven to radically increase efficiencies of key processes.

Open Systems, Integrations and Interoperability. The era of going it alone with monolithic systems is gone. Today we need systems that can be seamlessly integrated with other systems to build flexible and scalable financial ecosystems. Evidence of this shift is seen with the trend of publishing open APIs (Application Programming Interfaces) such as those of Mastercard, Visa, M-Pesa, and Android Pay. These open APIs allow institutions such as financial providers, e-commerce platforms, and remittance companies to integrate into these systems, often in real time. By allowing more integrations into their systems, they increase their customer base and, at the same time, provide better services to their existing customers.

Another component of open systems is interoperability. Some countries such as Tanzania and Nigeria have enforced interoperability amongst mobile wallets which allows customers to exchange mobile money from different providers. For example, a person should be able to send Tigo Money to a person with an Airtel Money wallet. Partnerships and openness are key drivers of change.

Taken together, these three fintech trends provide core elements needed for financial providers to reach more customers, with better products, while strengthening the broader financial ecosystem.

These are just a few of the trends in financial technology that are revolutionizing the inclusive finance landscape in Africa.

For more on this topic, check out insights shared during discussions of the Africa Board Fellowship.

* Data has been updated with the latest Global Findex Report (2017)

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About the Author

Geraldine O'Keeffe is currently Co-Founder and Chief Innovations Officer at Software Group, a global technology company that is specialized in delivery channels and integration solutions for institutions that provide financial services. Geraldine is passionate about financial inclusion and is inspired to help institutions leverage technology to achieve efficiency, scale and increase outreach. In the last 14 years, Geraldine has completed over 50 consultancy assignments and 40 successful software implementation projects for a range of different financial institutions and players within the financial inclusion space. She has a proven ability to discover customer needs and design sustainable, holistic solutions that carefully consider the interactions between people, process and technology. 

Better Regulations Can Spur Agent Banking in WAEMU

11.04.2018Corinne Riquet, Financial Sector Specialist, CGAP

This blog was originally published on the CGAP website.

The West African Economic and Monetary Union (WAEMU) has taken significant steps toward financial inclusion in recent years. Mobile money has driven much of this progress under the aegis of regulations that make it possible for mobile network operators to offer e-money services and expand their agent networks and the reach of their services. However, WAEMU’s regulations make it difficult for banks and microfinance institutions to expand their own agent networks and contribute fully to financial inclusion. While the number of mobile money accounts and agents in the region roughly doubled between 2014 and 2017 (to 36.4 million and 183,000, respectively), banks and microfinance institutions have lagged behind.

Even in the age of mobile money, these traditional financial institutions have an important role to play in expanding low-income customers’ access to financial services. For example, as Will Cook points out in his recent CGAP blog post, bank accounts in Kenya once again outnumber mobile money accounts – by 30 percent. Alongside partnerships with mobile money providers, a rise in agent banking has contributed to this increase. In 2016, 17 commercial banks developed agent banking and contracted over 40,000 agents. The Central Bank reported that agent banking saw 55.8 million transactions in the first quarter of that year, compared to 10.3 million in the same period the year before. Kenya’s regulators enabled this kind of growth by adopting a risk-based approach when defining the country’s agency banking regulatory framework in 2010 and integrating provisions for consumer protection.

What will it take for WAEMU regulators to similarly unlock the potential of banks and microfinance institutions to drive financial inclusion for the region’s 50 million people living in poverty?

[In November 2017] CGAP published a regulatory diagnostic of digital financial services in Côte d’Ivoire, which has the same agent regulations as the other WAEMU member countries (Benin, Burkina Faso, Guinea-Bissau, Mali, Niger, Senegal and Togo). We found that WAEMU recognizes three types of agents and that the regulations surrounding them contribute to disparities among different types of institutions (banks, nonbank e-money issuers, microfinance institutions, etc.):

  • E-money agents. E-money agents may conduct marketing activities and supply services related to e-money, including account enrollment, cash-in and cash-out and payments. Current regulations provide for a two-tier system of primary agents and subagents (or “distributors” and “subdistributors,” as they are called in the regulation), who act under the responsibility of the e-money issuer. Retailers and other registered businesses, microfinance institutions, the post office and other nonbank financial institutions are permitted to serve as primary agents. These agents may outsource to other registered businesses who act as subagents. These rules have allowed mobile network operators to deploy large agent networks in the eight WAEMU countries.

  • Rapid money transfer agents. Another regulation enables banks, nonbank financial institutions and microfinance institutions to provide over-the-counter transactions, or “rapid fund transfers,” through retail agents called “subagents.” Permitted transactions are limited to real-time transfers that are performed over the counter at an authorized provider or agent and do not involve any bank or e-money account of either the sender or recipient. These providers act under the responsibility of a financial institution and are not allowed to collect funds for deposits for any purpose other than over-the-counter transfers (unless they are microfinance institutions). The best-known of these over-the-counter providers is WARI, which has large networks of subagents in most of the WAEMU countries.

  • Banking agents. Beyond e-money and over-the-counter transfers, the scope for using agents is unclear. The rules that do exist are highly restrictive for banks, and there is no explicit framework for microfinance institutions. Banks are authorized by the banking law and a 2010 instruction from BCEAO (the common central bank for the WAEMU region) to use agents called Intermédiaires en Opérations de Banque (IOBs). An IOB acts under a mandate assigned by a bank, which may include opening accounts and taking deposits. Each IOB is required to obtain approval from the Ministry of Finance, on the advice of BCEAO. It is also subject to fit-and-proper standards – a financial guarantee whose level depends on the nature of the mandate and regular reporting requirements. The IOB model did not arise for the sake of financial inclusion but rather, as a business niche for intermediaries operating within the traditional banking sector comparable to an insurance agency. As a result, since the introduction of these rules in 2010, BCEAO has approved and registered only six IOBs, and two are authorized to just collect deposits.

While regulations on e-money agents have greatly expanded the reach of mobile money, those surrounding agent banking appear too restrictive for the banks and are nonexistent for the microfinance sector. This creates a competitive disadvantage for traditional financial services providers to make use of digital channels in expanding their reach and relevance. Uniform, or at least harmonized, rules across the board for e-money, over-the-counter transactions and banking agents would be a big step in the right direction. Any new framework should provide a comprehensive and proportionate set of risk-based rules on due diligence, supervision, internal control and subagents. And special consideration should be given to replacing or revising IOB rules to support a more flexible agent banking approach.

More harmonized rules around agent networks would ensure a level playing field for all financial services providers to seize the opportunities presented by digitization to reduce cost, increase scale and expand financial inclusion.

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About the Author

Corinne Riquet is an independent microfinance consultant and has worked in several African countries since 2001. She has advised a range of clients, especially MFIs and funders on organizational audit practices, business plan development, appraisals, designing financial service projects in rural areas, and evaluating and defining national microfinance strategies. Since 2002, she has been a resource person for CGAP's MFI Capacity Building Program in Francophone Africa (CAPAF). At CGAP, she has participated in several train-the-trainer seminars in the capacity of Supervisor. Corinne, a French national,  has been living in Côte d'Ivoire for the past 24 years. She is bilingual (French and English) and holds a Master's degree in Developmental Economics from CERDI, University of Clermont Ferrand, France.

Distributed Ledger Technology: a South African financial services perspective

22.11.2017Langelihle Mnyandu, Associate in Banking & Fin. Services Regulatory, Bowmans

This post was originally published on the Bowmans website.

The advent of Distributed Ledger Technology (DLT) has caught the attention of the global financial services industry, with many labelling it a technological revolution that is set to disrupt the financial services infrastructure. DLT is a type of digital ledger or database that is used for the recording, safe keeping and decentralised sharing of data relating to the ownership and possession of a wide range of assets. It uses consensus-based cryptographic methods to record and distribute information among participants of that ledger without the need for a middleman to facilitate this. Blockchain is an example of a very popular and well-known form of DLT.

There is no doubting that DLT, and generally financial technology (fintech), has huge potential to challenge and impact conventional ways of rendering financial services and possibly even extending services to new consumers. However, very limited actual ‘use cases’ have been introduced to demonstrate how DLT can help expedite financial inclusion. At present, most use cases pertain to how DLT can improve the efficiency of existing methods in order to make them more cost-effective and secure. These use cases have been, for example, on how blockchain can help reduce costs and improve payment settlement times in the deposit and peer-to-peer payment environments, and how it can help enhance data protection and data sharing between consumers, regulated institutions and regulators. Yet use cases are still lacking on how blockchain can be more effective than existing methods in expediting economic participation and use of financial services by unbanked people.

Obvious challenges

Perhaps one of the biggest challenges in achieving financial inclusion through DLT is that current DLT (blockchain) based products and services are aimed at improving existing methods of rendering financial services. In other words, the current use cases do not seem to introduce any new services that would be useful in the daily transactions that unbanked people ordinarily undertake.

It may be argued, however, that DLT is not meant to expedite financial inclusion directly by developing new products or services but rather indirectly through the introduction of cheaper and more efficient methods of rendering existing financial services and products, which in turn makes it easier for service providers to extend these services to new markets.

Another challenge is consumer education and awareness. Regulators will always want to be comfortable that the most vulnerable members of society know about and understand new products and services well enough to use them for basic transactions without their protection as consumers being compromised. The difficulty is determining who is better placed to lead this initiative - the service providers or regulators - while also ensuring that consumers do not bear the costs.

Despite these challenges, there is general industry consensus that with appropriate regulatory supervision, DLT-based products and services hold huge potential to improve financial inclusion - whether directly by developing new use cases or indirectly by making conventional methods cheaper and more efficient and thus more accessible to underbanked people.

Regulatory buy-in and the way forward

Financial services industry participants have also taken comfort from the fact that South African regulators are actively engaged in the conversation and creative process around fintech. This eases some concerns about a potential disjoint between fintech innovation and regulation.

In most cases there may not even be a need to drastically reform legislation to cater for new product innovations such as DLT. South African financial services legislation is largely sufficient to regulate DLT-based services and products, albeit in a fragmented manner. Consider the insurance landscape, for example. The insurance Acts already have broad deeming provisions that allow the regulator to deem a person’s conduct as insurance business conducted in South Africa and therefore requiring licensing by the insurance registrars.

The same can also be said for legislation regulating the credit lending environment. As with the insurance Acts, the National Credit Act 34 of 2005 (NCA) applies to credit transactions having an effect within South Africa. Because the NCA is activities-based and not entity-based, it means that provided a credit transaction has an effect within South Africa, it may be regulated by the NCA regardless of the medium used to provide that credit. However, this does not mean that the need for some level of regulatory reform is completely negated in other areas.

Regulatory reform will likely be required if, for example, we are to realise the potential of DLT to satisfy other types of regulatory requirements. For example, DLT-based products, such as cryptocurrencies (like bitcoin, ethereum and corda based currencies), may potentially be used by regulated institutions to satisfy their prudential capital requirements. In particular, certain cryptocurrencies have qualities of a ‘tier 1’ type asset for purposes of meeting minimum and solvency capital requirements under the Solvency Assessment and Management (SAM) framework. Cryptocurrencies such as bitcoin have been lauded as being immune to inflation and highly liquid, thus making them readily available to absorb losses as required for tier 1 assets under SAM.

However, cryptocurrencies are currently not recognised as securities in South Africa, let alone as securities that can be used for purposes of meeting the capital requirements of regulated institutions. Also, the current insurance framework (including the Insurance Bill) does not provide a clear position on whether such instruments can be regarded as eligible assets for purposes of meeting capital requirements. This is just one of the areas that may benefit from regulatory reform or clarification.

Although regulation may not be moving as fast as innovation, it is positive to see that the Financial Services Board, in particular, is adopting a more hands-on approach in keeping up with fintech innovations and has indicated that it will establish a regulatory sandbox to test new product developments. This will also allow it to leverage off the strides made by the UK’s Financial Conduct Authority in regulating fintech-based products, as our financial services regulatory framework is largely similar to that of the UK.

There are clearly a number of moving parts with regards to DLT and fintech innovations. Whether it is from the perspective of expediting financial inclusion, developing regulatory sandboxes to test new DLT use cases or grappling with whether or not these innovations will necessitate significant regulatory reforms, it is reassuring to see DLT, and generally fintech, receiving buy-in from South African regulators.

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About the Author

Langelihle Mnyandu is an associate in Bowmans' Johannesburg office, more precisely in Banking and Financial Services Regulatory practice area. He holds an LLB degree from the University of Kwa-Zulu Natal. He has expertise in banking regulation, financial services, financial technology regulation, securities, insurance, financial markets regulation, investment funds structuring and investment management.

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The Digital World and a Human Economy: Mobile Money and...Sean Maliehe & John Sharp, Research Fellows, University of Pretoria
DFS Customer Development Opportunities in NigeriaJacqueline Jumah, Senior Analyst, MicroSave & Irene Wagaki, DFS Consultant
Financial Education: The Key to the Development of African...Emmanuel Zamblé, Expert-Consultant in Capital Markets

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