Bringing inclusive instant payment systems (IPS) to unbanked people is a complex problem. But that doesn’t mean it can’t be solved, especially when Mojaloop open source software is used to lay the groundwork.
To explore how to solve IIPS challenges, the Mojaloop Foundation brought together five international experts to share their thoughts on a recent panel, “Instant Interoperable Payment Systems – Bridging or Widening the Digital Divide?” which took place during Financial Inclusion Week in October 2022. Shortly afterward, Mojaloop hosted a talk called “What Is an Inclusive Instant Payment System and How Do We Measure Them?” that examined how to validate solutions.
What follows are the highlights from the discussions. For the key takeaways from the panel discussion, you can read this blog.
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The Top Four Challenges to Implementing Inclusive IIPS
One: Enabling True Inclusivity of Financial Services
True inclusivity means providing access to financial services to all people regardless of location, socioeconomic status, or whether or not they have a bank account.
To reach this goal, financial systems must include very small-scale organizations that are accessible in rural areas and cater to last-mile citizens. For many people, especially women in underserved locations, these organizations are the only way to access financial services.
Inclusivity also requires taking a 360-degree view of people and how they transact in their daily lives. In developing countries, this means looking at low-value (less than one dollar) transactions at higher volume.
The Solutions: Add Inclusive Interoperability Metrics
A big part of the solution lies in making it feasible for digital financial service providers (DFSPs) to reach and transact with people, even in remote areas, for low fees. Mojaloop provides its open source software for free, dramatically reducing development costs for hub operators.
When it comes to measuring the impact on financial ecosystems, we need to look at the things that will allow us to focus on what we want to change in society. Measuring these systems is very difficult, however, and in many cases not possible yet because of a lack of access to disaggregated mid-tier data (by region, financial institution, and transaction size). Inclusive interoperability metrics should include:
- The number of transactions that total less than $1.
- How much the system reduces the market share of cash for a variety of transaction types — not just one. For example, in Tanzania, mobile money is outpacing cash for remittances (person-to-person payments), but not for retail transactions.
- The number and type of FSPs integrated into the switch — and a systematic assessment of who is included and excluded.
- The number of on-net and off-net transactions, with geocoded information about the type of sending and receiving FSP.
Ideally, benchmarks should be taken before and after the release of the new system for the best possible understanding.
Two: Building Systems and Making Them Commercially Viable
Digital financial systems need to build the tools and procedures to manage the risks of working with micro-institutions from the start. If this doesn’t happen, the last mile of citizens will continue to be left out of the digital economy.
Designing an instant payment system around the banks means that providers are going to find it very hard to retroactively adapt to the smaller institutions five or 10 years down the line. Their processes are different, the ways they interact with the banks are different and the risk management procedures are different. It would likely be prohibitively expensive.
There are enormous technical challenges with making digital payment systems work at all, let alone work securely. Many developing countries lack access to a blueprint that they can follow to design them.
It’s also expensive to do, and small institutions often don’t have skilled technicians to build the systems themselves. Finding a funding partner is also a challenge and third-party vendor solutions, for those that can afford them, are available but can lock you into a proprietary system.
Hub operators, central banks and DFSPs have to be able to sustain their operations. To do that, there needs to make sure that there’s an economic incentive for everybody in the ecosystem, starting with that service provider to the mobile wallet providers, merchants and banks who are participating. DFSPs are used for higher-value exchanges for which a small transaction fee makes sense. This may not make for a financially sustainable business model when serving the rural unbanked, who engage in high volumes of very small-value transactions.
The Solution: Using a Digital Public Good
Mojaloop provides free, open source software optimized for developing economies, toolkits for developers and business managers, and a training guide. Most importantly, the Mojaloop Foundation also offers a community of experienced digital payment consultants and technology companies. As a Digital Public Good, the software can be used whole, adapted or as a blueprint and leverages best practices for cybersecurity. You can start learning about how Mojaloop works here.
The fact that Mojaloop software provides hub operators with what’s needed to design an inclusive IIPS — and for free — dramatically reduces the upfront costs of developing and implementing a system.
Three: Connecting All the Institutions, Large and Small
Many large, mainstream banks in developing countries are already using digital payment systems, but to achieve financial inclusivity, a nation also needs to connect microfinance institutions (MFIs), mobile wallets and savings and credit co-operatives (SACCOs). Connecting all service providers within one loop is often the only way that rural people can obtain financial services as well as loans to start businesses or other financial programs that will improve their lives.
Solution: Ensure Security and Risk Management Best Practices Are Part of the Design
Security and risk management must be built into the design from the start to avoid problems down the road. This means understanding and mitigating these risks and having a hub operator who could manage them. All stakeholders will have to work together to manage these risks.
Specifically, when using Mojaloop as a base for the overall IIPS design, hub operators and central banks can design into their system the automatic, tiered risk levels that manage the number of funds that a user can transfer out of the system in a specific timeframe. The system also allows local auditors to screen user IDs for fraudulent activity as well as review transactions automatically flagged by the system.
Four: Complex Regulatory Frameworks
Because technologies are changing rapidly, it’s difficult for many countries to maintain policies that are up to date with emerging trends and international standards. You can learn more about some of the emerging issues here.
In some areas, there can be multiple regulatory frameworks to deal with (including different regulators for banks and non-bank financial institutions). Regulators are often steered by central banks, whose leaders come from a traditional banking background and who tend to protect the interests of banks. We should bear in mind, however, that central banks have the mandate to preserve the safety and stability of the economy, which they feel is in the hands of the banks.
Compounding this issue is the fact that central bankers are not natural risk-takers.
Solutions: Leadership and an Adaptable Framework
Mojaloop Foundation’s Central Bank Digital Currency (CBDC) Centre of Excellence (COE) in Singapore provides critical learning, leadership, and governance models to help governments and FSPs understand what regulations and use cases must be in place to create a truly inclusive system.
Mojaloop software enables local governance: it’s highly flexible and allows local participants to set and update the rules easily as legislation and market conditions change. Further, Mojaloop allows complete freedom as to what data is stored in the cloud and what is stored locally to empower data sovereignty.
Mojaloop Helps Make Financial Inclusion Possible
For hub operators, central banks, and other financial institutions and system integrators, Mojaloop enables the collaboration needed to bring inclusive financial services to the entire population — including the underserved.
IIPS adopting Mojaloop technology are in charge of their own destiny. Using Mojaloop in an IIPS design opens up opportunities for the financially underserved and grows the customer base for the financial institutions and businesses that serve them.
Plus, scheme developers, technology partners, and vendors benefit from a collaborative technology community effort to deliver standards, extensions, cybersecurity-by-design principles, and best practice scheme thinking for global innovation trends that can lead to digital payments volume growth stories.
By making IIPS easier and more affordable to build for financial service organizations, Mojaloop is a digital public good that aims to serve the financial needs of the world’s 1.4 billion unbanked people.
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About the Experts
Steve Haley, Director of Market Development and Partnerships, Mojaloop Foundation
Steve has been leading diverse mission-driven teams since 2008, most of which focused on fintech solutions for economically disempowered countries. His contributions have included helping to start a social entrepreneurship and media workspace in Beirut and leading a team of over 120 relief and development professionals delivering $20 million of assistance per year in Iraq. Steve holds a master’s degree in theoretical mathematics from the University of Padova in Italy.
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Watch Steve’s TED Talk: 5 Things I Learned from Math >
Phil Roessler, Co-Director, Digital Inclusion and Governance Lab (DIGLab), William & Mary
Phil Roessler is an educator, researcher and author. He is the Margaret Hamilton Associate Professor of Government at William & Mary, where he also serves as the Associate Chair of the Government Department, Co-Director of the Digital Inclusion and Governance Lab, and the Director of the Africa Research Center at W&M’s Global Research Institute (GRI). He received his BA from Indiana University and his PhD from the University of Maryland. He has held fellowships at Stanford University and Oxford University.
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Michael Mbuthia, Regional Director for East & Southern Africa, AfricaNenda (A Bill & Melinda Gates Foundation Funded Program)
Michael has been leading Kenyan and Rwandan finance organizations in a variety of C-level roles since 2008. He has shepherded innovative fintech project rollouts and architected new enterprise IS systems from the ground up. But throughout his career he has been interested in bringing financial products to the financially underserved. Michael is a PhD candidate in Information Systems and Information Technology at the University of Cape Town and holds an MBA in Strategic Management and Finance.
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Nyi Nyein Aye, CEO and Co-Founder, ThitsaWorks
As chief of information systems for the United Nations headquarters in New York for 20 years, Nyi oversaw the development and maintenance of global IT and finance operations. He received a Master of Public Administration (MPA) from Columbia University, and an MSc in Information Systems and a BBA in Finance and Investment from the City University of New York.
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Russell Toth, Development Economist, University of Sydney
Russell has been a lecturer and researcher at the University of Sydney since 2011. He is a development microeconomist focusing on enabling the private sector to include access to finance, entrepreneurship, markets, and the role of new technologies. He regularly works on projects that involve collaborating directly with private sector enterprises, NGOs, governments or other partners.
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Paul Makin, Product Manager, Mojaloop Foundation
Paul is one of the world’s leading experts in mobile financial services, digital identity and financial inclusion. He has over 30 years of both strategic and on-the-ground experience and was one of the creators of M-PESA, the most successful mobile money service in Africa. He has also worked with financial regulators, banks, funding agencies and others on projects across multiple emerging markets.
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