Ignacio Mas International Growth Week

London, 21 September 2011

1

Banking in every community

The success of M-PESA in Kenya

• 13 million users = 50% of the adult population

• More transactions than Western Union does globally

• 60% of e-payments by volume, 2% by value

• 20,000 cash merchants = 20x the number of bank branches

In just 3.5 years… (data as of Sep 2010 based on Safaricom data)

• 70% of households had at least one M-PESA user, including 50% of unbanked and 60% of rural households

• 3% of people surveyed don’t know about M-PESA

• Closing it would have a large negative impact on 91% of users

In just 2.5 years… (data as of Nov 2009 based on panel data from Billy Jack & Tavneet Suri)

A service platform delivering many benefits to all 3

Convenience

Control Innovation

Utility companies

Government services Microlenders

Youth

Entrepreneurs

Banks

Distributors & supply chains

Households

Family & social networks

Simple Accessible Mass market “The new banking hygiene factors”

Making financial services relevant for all 4

Electronic money 0110010100

Cash

BUILDING BRIDGES TO CASH

Cash ↔ Electronic value • Convenience = location • Trust = brand, consistent

experience • Viability = volume per store

Individual

Online Merchant

Downstream Business

Store Merchant

Cash Merchant

P2P

B2B

B2C P2Cash

Gov’t

G2P

Int’l

MAKING E-MONEY DIRECTLY USEFUL, DAILY

Electronic ↔ Electronic • Network effects = larger

is more useful (as well as cheaper)

• Pain points of cash = willingness to pay

HELPING PEOPLE ACHIEVE THEIR GOALS

Electronic ↔ Psychology • Customer insight =

motivations, practices • Service presentation =

intuitive, easy to use

Savings as deferred payments (or installments) 5

SPACE

TIME

Here

Now

Rent due!

Village back home

Bicycle shop

I want a bicycle!

• People save for a purpose: time-bound or goal-based

• Financial services are installment plans for planned purchases or expenditures: credit (postpaid) or savings (prepaid)

• Any savings product can be constructed as a package of transactions across space (real-time payment) and time (deferred payment)

• How to maintain a conversation with your customers, when the interaction is remote (on a phone)?

MONEY TRANSFER Phone # ________ Amount ________ PIN ____________ (Value date _____) (Purpose_______)

Mobile phone menu:

Mobile Money Regulatory Issues

LSE, September 21, 2011

Mobile money - A wave of experiments

• Till 2006: half a dozen new trials across the world

• 2007: Kenya: M-PESA starts and booms • Today: 119 deployments – 96 planned

ones, most in Africa, Asia

• Hence there is regulatory concern, but little experience (or data)

Thinking about regulation when business models allow to recompose

delivery systems • Unbundling Banking by function/service

– Exchange of forms of money

– Storing money

– Transferring money

– Investing money

Risks and regulatory response Function Risks Conduct Regulation Prudential Regulation

Exchange Fraud No,

just commercial law

No

Storage Inaccurate records,

Theft

Yes, including

regulation of agents

No

Transfer Transmission errors,

Accounting errors

Yes No

Investment Investment failures,

Systemic risks

Yes Yes

Systemic risk: Basic ways of running a system

• As a “Safe deposit box”

• Investing in central bank paper (narrow bank)

• Investing in banks and beyond…

Systemic Risk: Topics for investigation

• Nature of runs and policy/management responses under each basic model of running the system

• Deposit Insurance: Allow deposit insurance or allow provider to determine investment strategy or provider becomes deposit insurer

• Resolving distress – operational separation and transfer to new ownership

• Scenarios for reaching scale/systemic importance

Competition Issues • Telecommunications and interconnection • Cash-in/cash-out system:

– critical mass – free entry – exclusivity

• Two-way access among account providers – Voluntary – Mandated (access charges)

• Unbundling payment platforms – SIM card – USSD – Applets

Anti-money-laundering

• Strategic posture: Encourage people to leave the cash economy

• Graduated KYC requirements – Identity check – Transaction limits: amount, frequency – Suspicious Transaction Reporting

Monetary Policy

• Monitoring schemes • Simulation of size of effects • Transmission mechanism…

Consumer Protection

• Mobile money: operational integrity

• Micro-credit: – Reasons for over-indebtedness – Competition and interest rate levels – Bubbles without the profit motive (e.g. Bosnia)

Financial Innovations and Market Development

Shyamala Gopinath

Financial Innovation, Development and Economic Growth

• What causes what? • Whether financial development really leads to

economic growth? – If so, under what circumstances – Are there any pre-requisites for financial

development to have a positive impact on growth?

Financial Development

• Theoretically, financial development should lead to economic growth – Enables more efficient allocation of capital – Encourages savings and investments – Reduces transaction costs – ‘Completes’ markets – Addresses information asymmetries – Enables better risk management

But, has innovation been beneficial?

• Paul Krugman, Princeton U., 2009 “[It’s] hard to think of any major recent financial

innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.”

• Paul Volcker, Princeton U., 2009 “How many other [recent] innovations can you tell

me that have been as important to the individual as the automatic teller machine, which in fact is more of a mechanical than a financial one?”

Good and Bad Innovations

• Based on the motive ? – To get around regulations – Avoid tax – Manage revenues/assets/liabilities

• Based on the impact ? • Some innovations could have turned bad

simply because they were ahead of times – Shallow understanding of the product

Timing and innovation

• Innovation in an unripe environment could lead to bad results

• While innovation can expedite development of markets to an extent, a basic framework is absolutely necessary for innovation to have positive impact

Basic Framework required

• Reasonable sophistication of participants – Financial literacy

• Sophistication should not be concentrated in a few participants – skewness

• Sound legal framework for dispute resolution – No ambiguity in law

• Robust market infrastructure • Reasonably liquid and deep cash market

Derivatives in less liquid cash markets

• When the cash markets are not reasonably developed, derivatives can be counterproductive

• Derivatives trade as standalone products – No linkage with the underlying – No beneficial impact on cash markets

• Skewness of participants’ sophistication – Leads to mis-selling

• More caution required

How to separate ‘good’ products from others

• Very difficult • Could be based on the motives for usage

– Speculation Vs hedging – But can hedgers survive without speculators?

• Could be based on the sophistication of participants

• Strict controls on leverage and speculation

Financial Innovation- Indian example

• Gradual and calibrated introduction of sophisticated products

• Market making permitted only for select set of regulated participants – Banks and Primary Dealers

• Only hedging was permitted for others – To contain speculation

• Emphasis on suitability and appropriateness

Financial Innovation- Indian Example (2)

• Focussed development of market infrastructure (DvP, CCP etc) – To enhance transparency and – To address counterparty credit risks

• Consultative policy making – Taking into account participants’ awareness and

preparedness

Growth of Non-banking Sector- Concerns

• Contribution to financial development in EMEs

• Hetrogeneous nature • Scope of regulation • Dealing with regulatory arbitrage • Optimal regulation of non-banking finance

companies • Public interest issues

Thank you