Understanding Payment Systems in the Times of Fintech
Mar 3, 2017
Payments are nowadays widely considered to be gateways for financial inclusion. Withdrawing money or repaying a loan are basic financial transactions without which traditional financial products like credit, savings and insurance would not be possible.
In addition to being gateways to financial products, payments, and more specifically digital, national and international micropayments, are attractive services demanded by the population of Latin America and the Caribbean. Services such as Paypal, Xoom or Transferwise are already popular among consumers across the region. Banco Estado de Chile, which created a payment app in September 2016, MovilBancoestado, linked to its popular CuentaRUT, reached 600,000 customers in a matter of only months.
In all of the above cases, it is important to recognize that digital payments are based on an interaction with financial systems, either through the exchange of bank account or credit/debit card data, or via a service access point authorized to take deposits or perform withdrawals. It would be impossible to send funds through or extract money from a digital payment service without these interactions. That is why an important recent trend in the Fintech world concerns the integration with the traditional financial sector, an approach that has come to be called Fintegration. According to a McKinsey study, 43% of Fintech startups are focusing on payments and for these startups, Fintegration will be a major challenge. Finconecta, a new MIF program seeking to connect financial institutions with Fintech companies, will help address this challenge in the Latin America and the Caribbean region.
With financial support from the Government of Spain, the Multilateral Investment Fund (MIF) and the Capital Markets and Financial Institutions Division (CMF) of the IDB have developed a study that assesses the way in which the payment systems of eight countries in Latin America work and have impacted the quality of financial inclusion in the respective national contexts. The results of this analysis suggest that the way in which particularly low-value payment systems have developed in each case had significant causal impacts on respective progresses in financial inclusion. For example, in Peru, where entities with inclusive financial services, such as the Development Entities for the Small and Mid-Size Company (Edpymes, for their Spanish abbreviation), Municipal Funds and Rural Savings Banks, did not participate in the low-value payment system, payments were a much less important gateway to inclusion than in other countries. This experience shows the importance of allowing those actors closest to underserved populations to enter the payment system on a non-discriminatory basis.
Challenges for an inclusive ecosystem of digital payments
Another important conclusion of the study is that, despite advances in mobile payments in countries such as Paraguay and increasing usage of debit and credit cards across the region, one of the main challenges to promote an inclusive ecosystem of digital payments consists in the expansion of efficient and interoperable networks of Point of Sale (POS) terminals in small shops, where most of the micro-payments of vulnerable populations take place. In several countries, including Brazil and Chile, the POS network does not accept all franchises, or does not accept cards issued by non-bank operators. This lack of interconnectedness encourages the continued use of cash in favor of electronic means of payment that could provide for more efficiency and security not only among consumers, but also among businesses themselves. The lack of interoperability of POS networks contributes to the fact that, in Brazil, only about two billion transactions are recorded through POS networks per year, a figure almost surpassed by neighboring Uruguay, a county with a population of less than 2% of that of Brazil, which counts with solid regulation concerning POS interoperability.
Two policy priorities for payment systems
Against this background, we suggest two policy priorities for the region to ensure that payment systems become more competitive and inclusive. On the one hand, in order to arrive at adequate diagnoses of the incentives faced by the different financial market participants, it is necessary to improve the collection of standardized and comprehensive information on infrastructure elements, costs and exchange fees of the region’s payment systems. An example of a comprehensive payment data collection program can be found in Uruguay, where the Central Bank publishes detailed periodic reports which include the number and value of payments by instrument and channel. On the other hand, and based on the previous effort, authorities should strive to ensure that different payment operators, including Fintech operators, have non-discriminatory access to the infrastructures of the countries’ payment systems. Examples of these regulations are those that promote the interoperability of means of payment in such a way that incumbent actors cannot block the entrance of new companies with novel business models that would allow for greater financial inclusion.
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