Business Principles, Tools, and Techniques in Participating in Various Types...
Growth Week 2011: Ideas for Growth Session 7 - Finance
1. Banking in every community
Ignacio Mas
International Growth Week
London, 21 September 2011
1
2. The success of M-PESA in Kenya
In just 3.5 years… (data as of Sep 2010 based on Safaricom data)
• 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 2.5 years… (data as of Nov 2009 based on panel data from Billy Jack & Tavneet Suri)
• 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
3. 3
A service platform delivering many benefits to all
Banks
Microlenders Government services
Family & social Utility companies
networks
Youth Distributors &
supply chains
Households Control Entrepreneurs
Innovation
Convenience
“The new banking
Simple Accessible Mass market hygiene factors”
4. 4
Making financial services relevant for all
MAKING E-MONEY HELPING PEOPLE
BUILDING BRIDGES TO CASH DIRECTLY USEFUL, DAILY ACHIEVE THEIR GOALS
Gov’t
Electronic money P2P Int’l
0110010100 Individual
G2P
B2C P2Cash
Online Store Cash
Merchant Merchant Merchant
Downstream Business
Cash
B2B
Cash ↔ Electronic value Electronic ↔ Electronic Electronic ↔ Psychology
• Convenience = location • Network effects = larger • Customer insight =
• Trust = brand, consistent is more useful (as well motivations, practices
experience as cheaper) • Service presentation =
• Viability = volume per store • Pain points of cash = intuitive, easy to use
willingness to pay
5. 5
Savings as deferred payments (or installments)
• People save for a purpose:
Mobile phone menu:
time-bound or goal-based
MONEY TRANSFER • Financial services are
TIME Phone # ________ installment plans for planned
Amount ________ purchases or expenditures:
I want a credit (postpaid) or savings
PIN ____________
bicycle! (prepaid)
(Value date _____)
(Purpose_______) • Any savings product can be
constructed as a package of
transactions across space
Rent (real-time payment) and time
due! (deferred payment)
• How to maintain a
conversation with your
Now customers, when the
Here Bicycle Village back SPACE interaction is remote (on a
shop home phone)?
7. 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)
8.
9. 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
10. Risks and regulatory response
Function Risks Conduct Regulation Prudential Regulation
Exchange Fraud No, No
just commercial law
Storage Inaccurate records, Yes, including No
Theft regulation of agents
Transfer Transmission errors, Yes No
Accounting errors
Investment Investment failures, Yes Yes
Systemic risks
11. 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…
12. 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
18. 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?
19. 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
20. 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?”
21. 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
22. 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
23. 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
24. 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
25. 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
26. 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
27. 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
28. 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
