New Partnerships for Innovation in Microfinance_6

122 Cerstin Sander Integration of remittances in financial systems has partly been achieved through a combination of stricter regulation and more competition in the money transfer market.19 Thus more of the funds are transacted through the formal financial sys-tem and can be used for refinancing (intermediation). Recent research shows that remittances have an aggregate positive effect, in-creasing levels of deposits and credit to the private sector relative to GDP.20 Thus they contribute to financial sector development.21 The analysis and criteria used, however, do not assess whether or how low-income groups have in fact been better integrated in financial systems. Statistical evidence is lacking, but illustrative observation of markets and actors provides a useful indicative picture: The integration of low-income groups in financial systems through money transfer products is possible though far less obvious and developed than might be assumed. Commercial banks’ interest in attracting this clientele has grown but is still lagging. Cross-selling does not appear to be much pursued where money transfer is offered and could be coupled with or used to attract clients to ancillary financial services. In part it is hampered by insufficient training and incentives for retail staff as well as by the absence of interfaces between money transfer systems and core banking systems, especially links to accounts. The hope that MFPs could be a significant part of better financial integration is not yet realised to any great degree. They are not currently the predestined service providers for money transfers. For MFPs it makes good business sense and has the potential to be a good service where regulations and the market permit and the service network and institutional capacity are conducive. When MFPs offer money transfer services they often still display the lag in integration of this client segment in financial services generally, e.g. as savers, as do com-mercial banks. Opportunities to engender major developments in the market – which contrib-ute to better access to money transfer services and also to greater financial inclu-sion – hinge in many respects on changes in three areas: regulations, systems and products. 19 Stricter regulations have, however, limited the access to financial services for some individuals and small businesses who have not been able to comply with identification or other requirements under the new, tightened rules, or by banks, that rated them as too costly to serve or too high a risk. This has to some extent hampered competition in the money transfer business as some small licensed service providers have found that banks refuse to open an account or that their bank asked them to move their accounts. 20 Aggarwal et al. 2006. 21 In weak financial sector contexts (cash-based, weak service levels and financial infrastructure), however, research suggests that remittances alleviate credit constraints on the poor and substitute for the weak financial sector development. (Giuliano et al. 2006). Remittance Money Transfers, Microfinance and Financial Integration 123 Enabling Regulations Whether business models, technologies or partnerships can be made to work in a certain market is often a matter of the regulatory environment. A market where a full bank licence is a prerequisite for offering money transfer services (MTS) tends to have fewer service providers and points of sale than a market where a money transfer service can be licensed separately. Licensing of MTS is quite new in most markets and, where it exists, has often been introduced in the context of AML and CTF measures. The UK is an example where a separate license and regu-lation was put in place in 2002. Cost and simplicity of licensing is another factor that tends to affect the demand for licenses. The United States is one of the most cumbersome markets to licence an MTS: federal licensing requirements coupled with separate State licensing requirements have to be fulfilled wherever the service is to be offered. The con-comitant costs for fees and bonds are high.22 Where non-banks and non-financial services such as retailers can be part of the point of sale network, the opportunities for outreach are much greater. Grocery stores, petrol stations, or similar businesses which have high client traffic and cash on hand are well placed. Thus, for instance, in the United States, supermarkets or large retail chains are part of the agent network of money transfer companies, especially in locations where migrants shop regularly. In Brazil, the regulator allows retail stores to join an agency network and similarly in Peru. How it is done varies – for instance, Banco do Credito del Peru operates cashless ATMs (auto-mated teller machines) in retail stores. The client uses it like any other ATM ex-cept that the ATM provides a printed record based on which the client receives the money from the store’s till.23 Allowing sub-agents of money transfer services that pay out only in local currency is another factor which facilitates the growth of a service network. Combining mobile phone technology with money transfer services is a very compelling idea.24 As those who have tried know, the technology or software is less of an issue than regulation. Regulators looking after banking and financial services and those in charge of telecommunications need to be convinced in cases such as G-Cash and SMART in the Philippines, or CelPay once active in Congo, Zambia, and South Africa. These are products of mobile phone companies or their subsidiaries using the short messaging system (SMS) to make payments in stores 22 For US State licensing requirements see, for instance, a list at www.westernunion.com/ info/aboutUsStateLicense.asp. 23 For a recent presentation of the agent model, see www.nfx.nl/binaries/conference-website/ presentations/microfinance/bcp-microfinance--nfx-format-.ppt#289,10, Slide 10. 24 For examples see Migrant Remittances 2(1) April 2005; for a recent presentation by G-Xchange detailing their G-Cash business model, see www.nfx.nl/binaries/conference-website/presentations/mobile-banking/gcash-nfx-11-01-06rev.ppt#256,1,Mind the Gap: Bankable Approaches to Increase Access to Finance. 124 Cerstin Sander or for utilities, or to make transfers between individuals, such as for remittances. Often the company initiating such a product finds itself paving the regulatory way by bringing together the different regulators to find a solution which allows the service to operate. Solutions include developing business processes whereby a financial institution holds all the clients’ funds to account for compliance with prudential rules in case the regulators view these as deposits. Alternatively, the funds are not considered as deposits but held in stored-value-accounts analogous to the prepayment accounts customers hold for mobile phone charges. Regulators respond differently – in the Philippines positively or at least constructively and the services operate; in South Africa the regulator eventually required CelTel to sepa-rate its payment product from the mobile phone service leading to the sale of CelPay to a bank. In general, better financial service regulations or even just a better application of existing regulations can facilitate the range of service providers, products, and geographic accessibility of money transfers. In addition, improved interplay of different regulatory regimes can open the way to new business models which can greatly increase outreach to new, previously unserved clients as well as allow for better services to current money transfer users in terms of lower cost, speed or accessibility. Better Systems Payment systems are the backbone of any financial sector. They are key to trans-actional banking such as money transfer. Availability, access and quality of the payment system affect the availability of money transfer services and their cost. Systems have been developed largely without international standards, leading to low compatibility and high costs for transactions across payment systems. Money transfer service providers often use their proprietary systems to trans-act client transfers. This puts transaction cost and time within their control and reduces their need to connect to other existing payment systems to settling their accounts with agents. Such stand-alone systems also typically lack a link to the main account and client information systems of banks or other financial service providers such as MFPs. Client remittance information is thus typically delinked from client account information, limiting the prospects for a more integrated financial service to the client. In interlinked systems remittance information could become part of the clients’ financial track record when considering a loan application.25 25 At least informally, credit officers often take into account remittance receipts as part of their overall loan approval assessment. Based on bank supervision requirements, however, remittances typically can not be counted as regular income and part of the basis for loan approval. Remittance Money Transfers, Microfinance and Financial Integration 125 Attractive Products A migrant’s choice to send money via formal services is largely a question of whether the formal service is sufficiently attractive compared to the informal al-ternative. Market research indicates that familiarity and trust are often as impor-tant or more important than the cost of the service. Some banks serving migrant neighbourhoods have staff of that diaspora working in their branches. Being within ready physical reach of the sender as well as the recipient is another factor, such that branches or points of sale in neighbourhoods with migrants or with remit-tance recipients tend to show high transaction volumes. Each client group can differ, however, so that blueprint assumptions based on market research done elsewhere are not always valid. While proximity to the client is typically an attractive feature, re-cipients in Moldova preferred to use a payout point away from their village or neighbourhood for fear that others would learn about the arrival of cash. Informal services also indicate some of the product features which regulated ser-vices have lacked. Among them is the ability to specify a set of payments to be made from a single money transfer such as a payment to a builder or supplier of construction materials, an insurance or a utility payment, and a remittance to a fam-ily member. In contrast, money transfer products offered in the regulated market are typically limited to a single instruction, i.e. payout to a specific recipient. Also worth considering is how accessible and attractive saving or investment is for migrants and remittance recipients. Access to money transfer, even if through a bank, does not coincide with access to other financial services such as a current or savings account because minimum balances or account fees often deter low-income clients. Even where access to an account is not a barrier, concerted strate-gic efforts to cross-sell savings or other products to migrants or remittance recipi-ents are still the exception rather than the norm. Targeting migrants especially as clients and savers or investors is becoming more common – for instance Indian government bonds specifically targeting the Indian diaspora. In Closing … Market observers concur that more accessible and cheaper money transfer services have come about in markets where competition has increased. This has typically been fuelled by new services entering the market as they realised the potential, partly due to growing remittance flows. It has also been fuelled where regulatory systems have set clear rules for money transfer licences and reasonable compli-ance and cost thresholds. Similarly, regulatory contexts which are open to new business models regarding point of sales networks, and new types of service pro-viders taking advantage of technologies such as mobile phones, have provided opportunities for competition that results in more and better services. Though remittance money transfer services are not a panacea for banking the unbanked, some direct effects can be seen. Moreover, the integration of remit-tances in financial systems is progressing and contributes to financial sector de-velopment by increasing deposits and credit to the private sector. More is possible through attractive products, better systems and conducive regulations. 126 Cerstin Sander Bibliography Adams, Richard H. 2006. ‘Do Remittances Reduce Poverty?’ Id21 insights no. 60, Institute of Development Studies, University of Sussex. 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