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Tuesday
May292012

Policy and the divisibility of the financial services value chain

In my last post I suggested one explanation for the fact that financial regulators have been reluctant to permit non-banks to offer mobile financial services: incentives that reward excessive risk aversion. Another reason, I think, is a failure to grasp the ways in which the value chain for financial services can and likely will be disaggregated over time.

The Governor of the Reserve Bank of India recently repeated his intention to permit only “bank-led” mobile financial services in India, explaining that, “Our experience shows that the goal of financial inclusion is better served through mainstream banking institutions as only they have the ability to offer the suite of products required to bring in effective/meaningful financial inclusion.”

I am not sure what experience he is referring to; in India, the use of mobile technology to extend access to financial services is still in its infancy. But even absent evidence, the argument is seductive: since banks can offer customers not just payment services, but also interest-bearing deposit accounts and personal loans, perhaps its best to leave outreach to them.

The argument founders, however, for the simple fact that the financial services value chain lends itself to disaggregation: non-bank payment providers cannot themselves offer banking products to their customers, but they can provide a cost-effective way for banks to distribute them. This is not a theory of what might happen; it already is happening. M-PESA customers in Kenya can easily access an interest-bearing savings account, a personal loan facility, and even a microinsurance policy offered by Equity Bank via the M-PESA platform, and 7 other banks in Kenya make it possible for customers to move money between their deposit and M-PESA accounts. As mobile money services gain traction, we will see many more of these arrangements emerge.

We must put to rest the fear that if customers sign up for a payment service, they won’t be able to continue up the “ladder” of financial inclusion—consigned to what one observer breathlessly called “poor quality, high cost, and potentially high risk financial inclusion.” This idea is not just wrong; it has also been profoundly harmful, because it has led a number of policymakers to deliberately frustrate the ambition of non-banks to offer payment services—postponing the day when the unbanked will get onto that ladder at all.

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