Friday, September 11, 2015

Cash is Still King – but freedom movement towards cashless societies has begun…

All nations provide billion of currency notes/ bills to facilitate instant value exchange among people and businesses. With growth of economy, demand for more currency notes is also growing in addition of need to replenish old currency notes.

Below charts provides a quick view of currency notes in circulation in few regions in 2014.

Currency notes (Cash) provide instant value exchange anytime anywhere to complete transaction and considered highest form of liquidity.  It offers security against double spend as each note is unique by design. Transactions in cash don’t incur any service charge and also provide anonymity for consumers. It doesn't require any intermediaries, active network connection or costly devices to complete a transaction.

Currency notes are considered symbols of nation sovereignty & pride and languages & pictures shown on currency notes provides emotional connection to people of the country.

It does have some drawbacks such as counterfeiting, friction, risk of loss or theft, need of change and only works best in close proximity of transacting people. A remote payment settlement often requires intermediaries with additional service charges to complete transaction.

Government, consumers & businesses all face various challenges in managing cash based transactions. While government spends millions of dollars in issuing, distributing and replenishing banknotes, businesses also spend huge sums for cash management in collections & operations.
Cheques & inter-bank transfers have reduced business transaction volumes in cash while person to person payments and consumers to business payments for smaller amounts largely remain in cash.

Here are some of the key hurdles in large scale adoption of electronic money

  • ·        Large illiterate population in developing nations
  • ·        Consumer behaviour and comfort with cash
  • ·        Lack of payment infrastructure in many regions and long settlement time
  • ·        Significant usage costs to consumers & merchants
  • ·        Diverse languages in different regions of country
  • ·        Few entities with banking licenses

Arrival of Digital Money in plastic forms

Plastic money (debit/ credit cards, cash cards) have been in use for last few decades for proximity (in stores, malls, theaters) & remote transactions payments (online & tele-sales). They have been quite successful in cutting down on cash transactions volumes in mainly urban areas where infrastructure to support plastic cards based transactions is available.
Plastic cards operational costs and transactions frauds & thefts have kept many consumers away from adopting plastic money even in urban areas. Segment based risks assessment and lack of swift settlement of disputes with defaulter also has been a deterrent in accelerating cards issuance rate.

Arrival of Mobile Phones acting as carrier for money transfers

Telecom and internet growth has made a very major impact on financial industry allowing them to provide services in many new innovative ways to existing and new consumers. It facilitated electronic banking access to consumers pushing bank transfers transactions volumes to new levels.
Still billions of people are unbanked or underbanked and not able to use banking & payment services in a cost effective & convenient way.

Since past few years, mobile phones are being used to transform cash payments into mobile money payments thus reducing share of cash transactions and reducing need of issuing new currency.

Millions of people have adopted this payment mode to reduce their reliance on cash alone especially for bills payments to businesses and government. Mobile wallets service has now started addressing person to person payment needs.  Mobile Point of Sale devices supporting card payments and mobile to mobile payments are pushing cash usage further down.

Below graphics shows an indicative view of cash usage across different types of transactions in a developing nation.

Freedom movement from Cash has just begun in developing nations.

Over past few years, millions of people have signed up for bank accounts and majority of population in developing nations is able to afford a mobile phone causing behaviour changes suitable for digital money adoption.

Based on the MasterCard Cashless Journey study for retail payments, following countries have been deemed nearly cashless (having 80-90% transactions volume cashless) now.

Belgium, France, Canada, United Kingdom, Sweden, Denmark, Norway, Australia, Netherlands, USA

Developing nations are also building & expanding their payment infrastructure in addition of introducing various new policies and payment initiatives to promote e-payments. Financial Institutions are also accelerating their efforts to onboard merchants to their payments systems. Due to such efforts in India, cards payment market has reached $50 billion and is growing at 30% rate to get a major share from $750 billion cash market. Almost a million shops from 15 million local stores also are equipped now to accept card payments and growing further.

While retail payments in urban area are moving to electronic & mobile payments, person to person payment yet to see a major shift from cash transfers. Also electronic & Mobile payments yet to make any significant impact in rural areas so it seems cash will continue to rule in rural markets for some more time while tis territory will reduce in urban areas to negligible size in next 3-4 years.

Government & businesses should incentivise e-payments for people to move towards a cashless economy and ensure people & merchants at all points of goods & service supply chain are equipped with e-payments facilities.Acceptance of cash cards should be encouraged for bus & taxi fare and fresh food purchases.

Government should setup national level agencies to improve collaboration among telecom, banks, payment networks, payment gateway, POS & mobile device providers to ensure consumers get the service convenience at fair price to make switch to e-payments.

Declining rate of new currency notes release from central banks despite growth in overall economy will strengthen people belief that we are in fact moving towards a cashless economy. As next milestone, we should see withdrawal of large denominations notes and smaller denominations notes and finally coins. 

May be it should be a ‘Mantra’ now towards a cashless new economy.

Less Cash Please!

Sunday, July 19, 2015

Bill & Melinda Gates Foundation drive to expand financial inclusion net globally

For Kosta Peric, overcoming finance's last mile means looking for ways to do so from the ground up.
As deputy director of the Financial Services for the Poor initiative for the Bill & Melinda Gates Foundation, Peric is the forefront of the organization’s efforts to build what he calls a digital financial system that, if successful, would connect everyone to financial services.
Inclusion isn’t simply a matter of opening the door to products such as microloans or insurance policies geared toward low-income families and individuals, he said in a new interview with CoinDesk. Rather, inclusion means creating channels of financial support during times when people need it the most.
“These include challenging shocks like debts, death in the family or some expense that has to be taken care of,” Peric said. “Having access to an affordable and secure, reliable financial system is very important.”
As part of its efforts, the Gates Foundation is working in a number of African and Asian countries to foster the development of digital money systems, with the overarching goal of building interconnected webs of finance that enable poor households to connect with the wider global financial system.
It’s within this context that Peric and others at the Foundation see the blockchain playing a powerful role.
He told CoinDesk:
“The very powerful thing about bitcoin in general and specially the technologies behind it, is they are essentially leapfrogging all the technology and providing a new system for processing these huge amounts of transactions for very small costs.”
The organization recently published materials for the Level One Project, an umbrella initiative for the Foundation’s various development projects around the world.
The goal, according to Peric, is to spur local private stakeholders, government agencies and everyday people to support the creation of interoperable financial pipelines.

New channels for old problems

As part of its broad research efforts, the Foundation has looked closely at how blockchain technology can be implemented to make such networks fast, simple and secure – characteristics that Peric said would align it with existing money systems like M-Pesa in Kenya and bKash in Bangladesh.
As outlined on the Level One Project website, the blockchain, within the context of the Foundation's work, could theoretically be used to provide a crucial means of settlement between payment systems being established in developing economies.
The site notes the blockchain can be "used as an alternative to current transaction switching and settlement models. In theory, it could also be used to lower the costs of providing these functions".
This fits in with what Peric described as a need for a system that can is capable of supporting large amounts of small transactions, which are typically the norm for value amounts sent by people in developing nations.
"What we try to foster is national systems that are, essentially connecting providers together in an interoperable system that can reach out to the entire population and can serve huge amounts of small value transactions every day," he continued. "That's the primary goal we are trying to achieve."

Bitcoin's utility

Peric has said in the past that he is far more interested in bitcoin the technology versus its use as an alternative currency.
When asked in interview whether his view has evolved on this question, he cited the work of the Foundation in developing digital financial systems and looking for ways to utilize innovative technologies for doing so.
Citing feedback from individuals in some of the countries that Foundation works in, Peric says that bitcoin can't quite meet the needs of those regional because people in those countries are accustomed to using local currency.
He explained:
"You receive your salary in your national currency so you can pay your schools, the bills for your house, in your national currency. So that's what is most required at this moment, and that's where bitcoin the currency cannot really help right now."
However, he went on to clarify that bitcoin "can help in other contexts like international remittances, international money flows".

Investing in the future

Peric has said that the key to jumpstarting financial inclusion isn't simply a matter of throwing money at an idea or providing support for a particular project. Most important, he said, is fostering self-sustaining ideas that can continue to grow as support mechanisms subside.
"We can help bootstrap the system, to get it over, until the scale works, so that at the end of the day, the providers have a valuable and profitable business case to bring this forward and their systems become self-sustainable," he said.
In conversation, Peric touched on the recent awarding of a $100,000 grant to Bitsoko, a Nairobi-based digital currency startup that focuses on payments and wallet provision, as part of the Foundation's Grand Challenges Exploration (GCE) initiative.
Peric framed the grant as one component of the Foundation's broader efforts to support innovation and entrepreneurship in developing companies, reiterating how the organization sees financial inclusion growing out of a diverse ecosystem of initiatives rather than one central effort or another.
This, he suggested, means providing grants to startups and initiatives that can contribute to that broader goal of bringing financial tools and services to developing communities.
"I don’t want to leave any stone unturned," he said.


Monday, July 13, 2015

Putting $18 billion back in the pockets of Asia’s migrants

Money is the next most important liquidity of the world which needs clean & smooth flow to keep the world moving after Water.  Stagnant money can cause major economy hazards like stagnant water can cause major environmental hazards.

With increasing globalization, millions of emigrants work in foreign countries to earn their living while supporting their families & communities back home by sending money periodically. Around 4% of world population live & work in other nations for better employment opportunities and other settlement reasons.
Considering World Bank global average remittance cost of 9%, a whopping $50+ billion are being charged for remittance services in moving money across nations. Next two paragraphs provide a quick overview of Remittance economy.

A remittance is a transfer of money by a foreign worker to an individual in his or her home country. Workers' remittances are a significant part of international capital flows, especially with regard to labour-exporting countries.  

In 2014, $436 billion went to developing countries, setting a new record. Overall global remittances also totalled $583 billion. India with the world’s largest emigrant workforce of 14 million people was in top slot, attracting about $71 billion in remittances. Other large recipients are China ($64 billion), the Philippines ($28 billion), Mexico ($24 billion), Nigeria ($21 billion), Egypt ($18 billion), Pakistan ($17 billion), Bangladesh ($15 billion), Vietnam ($11 billion) and Ukraine ($9 billion). World remittance is expected to grow around 5% rate.

Remittances remain an especially important and stable source of private inflows to developing countries, as they bring in large amounts of foreign currency that help sustain the balance of payments. Still many countries have not done enough to accelerate money remittance infrastructure and individual continue to bear high costs of remittance especially for smaller volume transactions. 

Asia emigrants alone are losing $18+ billion annually on account of remittance charges.

How person to person money transfer is being done currently

While banks handle 70 percent of money receiving volume globally, Money Transfer Organizations have the largest share of sending volume.  One of the major problems with international person to person remittances has been at the receiving end (location coverage, communication connectivity, person identification authentication etc). Almost two billion adults globally don’t have bank accounts, they are mainly dependent on MTO services for receiving money.

Western Union with its 500,000 agent locations & Money Gram with its 334,000 agent locations provides money transfer services across 200 countries at a significant remittance costs.

New players in remittance space

Considering high friction costs and growing remittance transaction volume, many new players have emerged to offer low costs remittance solutions mostly for bank account recipients:

·    WorldRemit
·         Remitly
·         TransferWise
·         Azimo
·         Xoom
·       TransferFAST
·         iRemit
·        eTranzact 
·       ·     HomeSend

Some of them operate on transfer fee plus fix forex spread or only on forex spread however their coverage is quite limited for unbanked persons who mainly use MTO services. Emergence of these players and their steady growth has attracted new interest in providing more efficient solutions for remittance market. Visa, MasterCard & Paypal are also offering consumer to consumer remittance services. 

A significant portion of remitted money is used to offset various utility bills in recipient country.  Cross-border payments processor service such as iSend where a customer can pay an overseas bill from US can help reduce remittance volume thus reducing transfer costs.

Now Digital currency aim to address high remittance costs, speed & coverage

Person to Person Cryptocurrency is also being used to provide faster and cheaper remittance solutions. Bitcoin firms such as BitPesa, PayFast, BitPagos, and BitSpark have built money remittance solutions using different business models in line with local regulations and compliance and offering an alternate remittance channel in few markets.

Some of them allow persons to convert their money in bitcoins at best forex rates possible and get money transferred to their bank account after converting back to local currency from a bitcoin exchange in recipient country. Some of them keep bitcoin under the hood while money agents handle money transfers (using cash-in & cash-out settlement methods) offering lowest transfer charges.

As per BitPeso, remittance transactions are “twice as fast and 75% cheaper” than competitors, because it uses bitcoin to transfer funds. They aspire to bring the transfer price (of sending remittances) as close to zero as possible.

By using such remittance platforms, MTO like Western Union & Money Gram can also reduce their operational costs significantly thus lowering remittance charges.

Many global organizations like Word Bank, FATF, OECD , IFAD, GFRD & AFI are implementing programs to coordinate various initiatives to bring security, efficiency and speed to remittance industry however developing nations must take a lead in driving these efforts as it helps to improve their economy.
As Asia cannot be described as a single market due to significant differences among sub-regions and even between urban and rural markets in the same country, Remittance to Asia often moves at slow pace with high remittance costs.

To put $18b back in the pockets of Asia’s migrants, Government policy making & regulation bodies need to work with global organizations and industry leaders (finance & technology) to remove hurdles in bringing down remittance costs.   

Monday, May 25, 2015

The Money Returns

The Money Returns...
The Money Returns in new form of Cryptocurrency.
For last few years, there is a constant effort to build an alternate currency which can become new money for the whole world.
For any currency to become money, it must function as a medium of exchange, a unit of account and a store of value for a large community.
Above all, People trust is fundamental for a currency to be used as money.  
Looking back at history of Money, we know that First recorded monetary system appeared in Mesopotamia, modern day Iraq around 3000 B.C. when Babylonians began using silver & barley as universal mediums of exchange and unit of value. Debts/ Payment settlements guidelines were laid out known as “Code of Hammurabi”.
Fiat money (Fiat - a Latin word for "let it be done") which derives its value from government regulation or law was first used in around 1000 AD in China. It differs from Commodity or representative money. Fiat money has no intrinsic value of its own.
 Initially Federal Banks of each nation printed paper money & coins for their economies mostly holding some % of gold reserves behind however now a days, most countries have switched to IOU or legal tender model.  Basically legal tender means business or person is required to accept payment of the debt in Federal currency.
International Monetary Fund (IMF) was setup to oversee the international monetary and financial system, foster global monetary cooperation, secure financial stability and monitor the economic and financial policies across its member countries.
Government has been at the center of currency ensuring people trust is maintained in legal tenders while Banks managed money exchange and support economic development of the country. Countries which failed to maintain this trust have faced currency crisis impacting million of people savings and halting economic development of country.
This centralized system comes with its own operational costs and multiple intermediaries who support money exchange/ payments at their own pace in exchange of certain fees.
 To enable peer to peer value exchange globally, decentralized digital currencies have been developed which enforces trust for transactions and offers transparency using it global ledgers digitally. These are not tied to any centralised party or servers.
These currencies systems are capable of avoiding double spending of same money and storing value securely using cryptography technologies. Users base of these currencies are slowly growing for payments, remittances & ecommerce transactions however they are far from being accepted as another global currency like leading fiat currencies.
Top 2 leading Crypto currencies are mentioned here to show how their acceptance is growing…
In 2009, Satoshi Nakamoto launched bitcoin as the world's first crypto currency. Bitcoin is an open source, global payment network that is fully decentralized without any central authorities. The code is open source, which means it can be modified by anyone and freely used for other projects. Mathematics secures the network and empowers individuals to control their own finances. Bitcoin coin limit is 21 million bitcoins and 14 millions coins already in circulation with current exchange rate of $236 per bitcoin.
Litecoin launched in 2011 by Charles Lee is a peer-to-peer Internet currency that enables instant, near-zero cost payments to anyone in the world.  Litecoin network will produce 84 million litecoins, or four times as many currency units as will be issued by the Bitcoin network. Currently 40 millions Litecoins are in circulation with current exchange rate of $ 1.461 per Litecoin.
Merchants accepting these currencies for payments can get confirmation within 10 mins without any add-on charges for payment settlement.
Recently New York Stock Exchange premiered a bitcoin index, giving an important endorsement to the digital currency that could help give it more mainstream credibility.
There are hundreds of bitcoin exchanges already operational which are making buying & selling bitcoins easier for people globally.
 These are early days of digital currency and it is yet to be seen whether it will stand people trust and replace fiat currency in long run.
A new era of currency has begun..

Wednesday, March 25, 2015

A new patron of Customer Empowerment- it’s called Digital Banking

In past 2-3 years, many Retail Banks have accelerated their efforts to move from customer satisfaction & loyalty to customer empowerment.
With the advent of many digital first banks like mBank, Moven, Metro, Simple, Atom & Fidor Bank, consumer banking business landscape is being redefined fast. Customer acquisition costs of these banks are much less than traditional banks and they are more aggressive to realize revenues from customer lifetime value projections.
They follow their customers wherever they are and truly offer anytime anywhere banking. Their services are designed to ensure every customers interactions (even non-transactional) adds to customer stickiness to bank.
Additionally many new players have emerged in forex, online payments, mobile wallets & remittances space like Remitly, WorldRemit, TransferWise, Venmo, Google Wallet, Alipay, Facebook P2P Payments which have started impacting banks existing revenue streams & growth prospects.
Customers have now opportunity to experience these services and expect similar or better experience from their banks. Traditional retail banks earn their major revenues from one of these banking services and many of these will face decline as customers switch their loyalty or shift gravity center of their financial transactions to new players.
Traditional Retail Banks Revenue Streams
  • Checking and savings accounts (Service charges apply)
  • Deposits (Domestic & Foreign Currency)
  • Lending/ Mortgages (Home, Car Loans)
  • Credit Cards (Service charges apply)
  • Lines of credit (Personal Loans, Overdrafts Limits)
  • Forex, Payments and remittance services
I recently got to see Fidor Bank banking demo and was delightedly amazed to see how smartly they have integrated collective wisdom of community and collaborated with their customers to design new products.
Fidor Bank take their services wherever their customers are, be it Facebook, Twitter, Mobile Devices or Online Games. They created a banking operating system which allows them to create new applications in partnership with 3rd parties & partners. Developers Community is creating mobile payments, wallets and eWallets to integrate Fidor banking services into various eCommerce and Online games (be it Steam, Skype, Xbox One, PSP4) covering proximity and remote payment services.
Fidor Bank Account is a fully integrated universal account for multiple products, commodities, currencies including virtual gaming currencies and crypto currencies accessible from multiple channels at customer convenience.
Many traditional but smart banks have also started offering services to suit customer digital life style and giving them self-service power to do what they wish to do and when they wish to do. Kotak Mahindra Bank from India is another such example who are leveraging all channels to empower their customers (See more details here)
"All the data now tell me the highest levels of customer satisfaction are coming from those customers who self-serve", Anthony Thomson. Founder of Atom & Metro Bank, UK.
Treat your customers as co-managers” Matthias Kröner, CEO & Founder, Fidor Bank, Germany.
Focus of digital banking has been to not only expand the reach of Banks but more to empower existing customers to perform transactions at their convenience.
Online Banking, Mobile Banking, Mobile Wallets, e-Wallets, Mobile Payments, Payments via FB, email, SMS & Cash withdrawal using Mobile are just some of the ways of empowering banking customers. Digital Banking solutions must consider that “One size doesn’t fit all” and all solutions should be uniquely designed for target customers to deliver exceptional customer experience.
Banks using Digital Banking to engage & empower their customers will not only reduce customer acquisition costs but are more likely to realize revenues from customers lifetime value and sustain business growth.
Experts predictions of growing decline in Retail Banking revenues in next few years can be dismissed.
It’s possible with Customer Empowerment & Digital Banking!!!.

Wednesday, February 25, 2015

Digital Banking vs. Payment Banks and the winner is?

Significant market frictions have been present in financial markets for new players to offer new or improved services. Most of existing players had high transaction costs or limited reach in their respective key markets.
From past few years, leading Banks in India have been busy in executing their digital strategy to allow banking services access from new digital channels be it web, mobile (WAP, SMS & Apps),  email, Facebook or Twitter. Some have even setup dedicated business units/ subsidiaries to incarnate their new avatar to compete in digital age. 
Growing middle class, urbanization, increasing access to better internet & mobile access, all these have been changing social interactions, consumer expectations & market dynamics be it retail, airlines, telecom or financial sector.
On one side, we have urban population covered by major banks & non-banking financial companies (NBFC), on the other side we have rural population which have been deprived of banking & financial services for many decades. To serve needs of unbanked consumers, many NBFC and telecom companies have now started offering bill payments, pre-paid cash cards, money transfers & mobile wallet services. They are building crucial distribution channels while acquiring customers thru their prime services.
Most Banks digital strategy has been focusing to engage existing customers across various digital channels as well as reaching out to new urban customers. E.g.  Leading private bank of India, ICICI bank, now have 2.8 million registered mobile banking users and 15 million Internet banking users thus shifting major transactions & interactions over digital channels.
So far new players offering payments & transfer services were required to have a tie up with a bank for KYC and other regulatory needs however now Reserve Bank of India (RBI) is offering a new type of banking license referred as “Payment Banks”.
These Payment banks will provide savings, deposits, payments and domestic remittance services to people who do not have a bank account, including millions of migrant workers.  Currently Payments banks are restricted to holding a maximum balance of Rs. 1 lakh (INR 100,000) per individual customer. They can issue ATM/debit cards, but not credit cards or loans. They can also distribute simple financial products such as mutual fund units and insurance products. 
Recently non-banking financial services companies such as IDFC & Bandhan Financial services got Banking license while India Post (having 150,000+ post offices across country) is under RBI consideration.  Now with Payment banks arrival, competition for acquiring new customers may intensify in banking sector.
Few leading banks have started revamping their payments & transfer services reach & customer experience to get ahead of expected competition from Payment banks like ICICI Bank launching their Digital Banking Service – POCKETS & HDFC Digital Wallet.
eCommerce and mobile Commerce is growing in India ($100 bn market by 2019 as estimated by Assocham) along with overall growth in retail & airlines sectors. This will present a significant opportunity for Payments Banks.
Are Payment Banks & Digital Banking going to operate in largely separate market segments or target same set of customers to expand their customer base? Will they complement or compete for similar services?  
What do you think , how this change will reshape banking & financial sector?
One thing is sure, it’s a good sign for financial services reach & customer experience.

Tuesday, February 10, 2015

Extending Financial Services Reach to the World which has been left behind !!!

While progress has been made in increasing financial inclusion in some countries, meaningful scale has not yet been achieved. An estimated 2.5 billion adults worldwide still lack access to formal financial services, 90 per cent of whom live in developing and emerging countries. The need for greater financial inclusion – in terms of access, usage and quality of services – remains significant.

In 2008, Alliance for Financial Inclusion (AFI) established itself as the world’s first peer-to-peer learning and knowledge sharing platform for financial inclusion.

For financial inclusion to meet its full potential, it must be truly inclusive, bringing together the expertise of a broad cross-section of partners beyond AFI. This effort to expand knowledge exchanges among all financial inclusion stakeholders will be an important focus in the coming months.

Making a public commitment is a means to champion financial inclusion

Our commitment compels us to move beyond our introspection and individual action. It effectively enables us to share our experiences to other stakeholders. As none of us know the holy grail that will financially include all people, knowledge sharing is ultimately beneficial for all.

Making a public commitment is a call for actionIt does not stop with making others cognizant of the importance of financially including people. There will be an inevitable changing of mindsets to take on a proactive attitude toward inclusion.

Our commitment to financial inclusion is about the 2.5 billion that are still left unbanked around the globe up to this day. 

Banks followed by non banking financial companies (NBFC) & regulators have significant knowledge around various challenges in extending financial services reach to left-out world. Therefore it is important that they play their part & partner with others to change this situation.