The future can still be bright for Digital Payment Platforms
All views expressed in this blog post are for an assignment at the Harvard Kennedy School and should only be interpreted in this context.
It’s January 2019, I’m at a food truck with my cousin on the roadside in Telangana. If you’ve ever visited India you can probably imagine the kind of street we were in; a messy juxtaposition of development and dust, bustling with noise and people. As we finish eating I reach for some cash, my cousin rushes to stop me (initially I thought we were about to start the habitual Indian payment process which consists of arguing for several minutes about who was going to pay) he takes out his mobile and beams down at me “we can pay on this now” . I couldn’t actually believe it- even after I watched him do it — that was so cool. The sheer achievement of the India Stack is not difficult to comprehend when you’re on the side of a road and the impossibility of success for such an initiative is glaring.
However, not all Digital Payment Platform initiatives have been successful in fact 80–90% of ventures result in failure. Does this mean countries shouldn’t attempt to implement them? I think the answer is ‘no’ but it’s critical that lessons are learned from mishaps. The power of the premise behind platforms remains irrefutable; Digital Payment Platforms have had a profound impact on financial inclusion and human development by bringing in millions of unbanked people into the formal finance sector.
Countries have implemented Digital Payment Platforms in a myriad of ways; some have chosen to be Mobile Operator Network (MON) led as in the case of Kenya’s M-Pesa (although it’s now partnering with a bank to offer consumers more products) others such as UPI have been led by the banking sector. This blog post explores whether a certain Digital Payment Platform is preferable in a particular context and whether lessons can be learned from mishaps. It takes on the perspective of two different stakeholders in an imaginary Country N. I’m going to assume Country N has has similar demographic characteristics to Nigeria, there are 2–3 small players in the Digital Payments market and there is no clarity on future developments.
For a Mobile Operator led Solution
Dear World Bank,
I’m writing as the Head of Policy Group for M-Pesa in Country N. We were very pleased to hear that you’re considering putting together a policy paper advocating for a Digital Payments Solution for N. Over the course of the past few years my team have been closely studying our initiatives in South Africa, Romania and Albania, we are acutely aware that these failed to materialise in the way we envisioned but we believe we have come to understand why and have developed a comprehensive implementation plan for N that builds on lessons learned from other initiatives. We are confident that we can be successful.
I’ve provided a high-level overview of our research below.
- There are several demographic reasons for why Country N should consider a Digital Payments Solution. Firstly, nearly half of the population sits below the national poverty line- Digital Payments have a direct and significant impact on poverty reduction. Secondly, whilst there is much lower mobile penetration in N than in Kenya and India we do not believe this is a hinderance- N has been listed in the MINTs (the new BRIC economies) and is experiencing rapid economic growth mobile penetration is set to vastly increase, furthermore many countries with similar penetration levels e.g. Tanzania have successfully implemented Digital Payment initiatives.
- We believe that we should lead the initiative as opposed to the Central Bank because an initiative similar to India requires a significant upfront investment. India had already made crucial inroads into developing the India Stack and the Aadhaar system, our Government has not attempted this and it will take a significant amount of time if it were to. We already have the infrastructure; a mobile led solution is the quickest and easiest way to promote financial inclusion.
- We are committed to replicating an agent system similar to that of Kenya as we know that it is critical for success. Given the rapid urbanisation occurring in N we envision that in many ways implementation of this will be much easier. We have already made significant investment into devising a strategy for ensuring registration is easy and have located hotspots that we want to target.
- We are also committed to interoperability as the market matures. We understand that this has been a key source of consumer friction in other markets so we will work with regulators to make this an industry principle.
- We have already been in regular communication with Regulators and are willing and ready to work with them in an agile way to develop the most appropriate standards applying one major learning from other countries . We are pleased to report that Central Bank team have responded positively to our suggestions.
If the objective is to significantly reduce poverty we believe a mobile operator led solution is the best method for N. Fundamentally we will adopt a consumer first approach and keep our initial service as simple and focused as possible. We have built a potential roadmap for when we introduce additional services and have started scoping out appropriate banks. We do not envision being in competition with banks as we are offering a different service initially. When we start to offer financial services we hope to work in partnership with them.
We hope that you take our research into consideration and we look forward to working with you.
Head of Policy
M-Pesa Country N Policy Group
For Digital Payments (provided some requirements are met)
Dear World Bank,
I’m writing on the behalf of Citizens First a consumer rights group specialising in emerging markets. We understand that you’re considering putting forward a policy paper regarding a Digital Payments Solution for N. We have been researching a number of countries that have developed such initiatives over the past decade, regrettably many of these initiatives have been launched with little regard to consumer rights, putting citizens at severe risk. Ad hoc (if at all) regulation has been used to address this retrospectively. Our concerns are not limited to whether the initiative is led by a particular entity. We are writing to ask that you consider the importance of consumer rights in your policy paper and advocate that these should be at the heart of any Digital Payment Solution prior to launching.
A high-level overview of our concerns are listed below.
- User privacy needs to be taken seriously- this applies to both MON’s and Central Bank led solutions. In Kenya there are many examples of data mis-use arising from MON generated data e.g. the Tala app¹. There is an overwhelming amount of data generated from the use of these services and the majority consumers in emerging markets are not aware of the extent to which their data is harvested. Meaningful privacy regulation in fintech is required, for example adopting data minimisation as a principle and limiting the uses of profiling. Privacy is equally important if it’s a central bank led solution especially when you consider the amount of information that is being centralised.
- Competition is crucial- this is the only way to ensure that consumers have access to high quality, innovative and value for money products, especially in the context of a MON led solution.
- Interoperability is important for true financial inclusion— if it’s going to be a MON led initiative, we need to ensure that they’re committed to interoperability with other providers in the future; the Tanzanian approach could be helpful to consider in this instance. The adoption of this principle alongside competition ensures that consumers have the best possible experience.
- Users must be kept in mind- many are from poor, illiterate backgrounds yet numerous products are launched which seemingly forget this. We recommend that all products should be simple, transparent and easy to comprehend for users. The costs of transactions should not be hidden nor the terms and conditions indecipherable as was the case in Kenya². Moreover companies need to put in place steps to prevent over indebtedness and reckless borrowing CGAP have done extensive research on how these considerations can be included and enhance the consumer experience.
Many of the concerns listed above have not been given due consideration and when they arise much later they are much more difficult to address. It is therefore critical that Governments and Regulators take pre-emptive steps to safeguard consumer rights. We ask that you stress the importance of consumers rights no matter what solution you advocate for; we cannot afford to leave them to the wayside.
We are more than happy to share our detailed research and recommendations with you and your team. We look forward to receiving your policy paper.
Yours sincerely,
Citizens First Policy Group
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¹ Tala an app that provides lending- uses data from the SMS messages regarding M-Pesa payments amongst other things to inform its decision making e.g. it found that consumers who are more likely to phone their mothers are more likely to pay back loans.
