Building Financial Systems for the Poor

Consumer Protection at the Bottom of the Pyramid (BOP):Striking the right balance between access, protection and

innovation

Kate McKee, Senior Policy AdvisorGlobal Seminar on Consumer Protection and Financial Literacy

Washington, DC September 3, 2008

Building Financial Systems for the Poor

Consumer Protection at the Bottom of the Pyramid (BOP):Striking the right balance between access, protection and

innovation

Kate McKee, Senior Policy AdvisorGlobal Seminar on Consumer Protection and Financial Literacy

Washington, DC September 3, 2008

Four key messagesFour key messages

1. Low-income and first-time financial consumers face specific risks –>consumer protection policy and regulation should consider needs of different client segments

2. Different financial products also raise distinct risks –> product-specific regulation may be appropriate

3. With the huge growth projected in branchless banking, specific channel risks need attention

4. A “light-touch” approach to regulation can permit evolution of standards as risks evolve -- enabling regulators to encourage innovation, access and protection

The market at the bottom of the pyramid – What’s different?

The market at the bottom of the pyramid – What’s different?

The demand side – clients tend to have lower . . . Income and assets Levels of literacy, education and “financial

capability” Experience with formal providers and products

The supply side – BOP providers Typically, the poor rely more on non-bank

providers, use a more limited product range (each with

distinct protection concerns) – payments, credit, deposit, insurance – and are

likely to depend more on branchless banking models for future access

Consider the CP issues for a low-income consumer . . .Consider the CP issues for a low-income consumer . . .

Looking for a safe place to saveTrying to get cash for a remittance transferred from a relative working overseasOpening her first basic banking accountShopping around for a business loanGoing into a community retailer to send money to his mother in the villageDeciding whether to permit her MFI to report payment info to the credit bureauReceiving his social payment (pension, child allowance, etc.) via a card linked to an account

Let’s look at branchless banking . . .Let’s look at branchless banking . . .

The logic of branchless banking: a low-cost transactional channelThe logic of branchless banking: a low-cost transactional channel

1. Use existing retailers – shops,

lottery, POs

1. Use existing retailers – shops,

lottery, POs

3. Use existing technology in use

3. Use existing technology in use

2. Deliver trustthrough

technology

2. Deliver trustthrough

technology

Real-time account-to-account transfers

Customer

Agent

Any store can potentially be an agentAny store can potentially be an agent

The power of using existing infrastructureThe power of using existing infrastructure

~25m

~3bn

~1m600k500k250k

WesternUnion

Bankbranches Post Offcs ATMs POS Mobile

Phones

Philippines 1,000 branches 7,000 ATMs 25,000 POS

terminals in stores 1.1 million prepaid

airtime resellers

Panama Largest bank has

65 branches 850 shared ATMs

(many in branches!)

12,000 prepaid airtime resellers

Worldwide points of presence

Experience to date with branchless

banking

Experience to date with branchless

banking

Promising strategy to extend access to those currently unserved, by driving down costs

Typical models use mobile phones, cards, and/or POS devices

Alliances between Mobile Network Operators and financial institutions common

Partnerships with non-bank agents (e.g., neighborhood shops, airtime dealers, even lottery outlets) also often in the mix – to reduce costs and reach lower-end and more remote clients

Consumer protection issues in branchless banking

Consumer protection issues in branchless banking

What concerns arise? Distance between bank HQ or branch and point at

which financial services are delivered Use of non-bank agents – introduces additional

issues of service quality, error resolution, fraud and abuse

Use of technology (mobile phone, cards, POS devices, biometric) including potentially much larger data “footprint” and wider data access

Note, however, that branchless models also can offer

some consumer protection advantages over conventional delivery (real-time info, traceability for errors/disputes) – trust through technology

Key consumer protection issues in branchless banking

Key consumer protection issues in branchless banking

Transparent pricing -- # of players in chain, service bundling, agent corruption

Service quality, incl. agent training, consistent availability of cash-in/cash-out services

Complaints and error resolution – Who is responsible? What is the process? ADR vs. courts?

Data quality, privacy and security

Note: some financial services raise more consumer protection issues than others, e.g., deposits, credit

What can go wrong? Who is responsible?What can go wrong? Who is responsible?

Customer shares his mobile phone and PIN… and it is used malevolently

Fraudster manages to electronically intercept the client’s PIN Client is robbed inside agent’s store The agent’s store is robbed and the cash is stolen Client makes a deposit, and value credited to his account is

less than what he paid in and also less than what is shown on the receipt

Using P2P transfer capability on mobile phone, the client sends money to the wrong phone number (= bank account number)

Client makes a deposit, but the account is empty when the customer goes to withdraw

Fraudulent agent is set up

Which regulatory tools to use?Which regulatory tools to use?

1. Prudential and market conduct regulation, e.g., Agent licensing/training/monitoring –

outsourcing rules Disclosure requirements – plain language --

agent/bank relationship, pricing, product terms Prohibited products (e.g. credit) and/or

practices (e.g., steering, cross-selling, unauthorized data sharing)

Required practices, e.g., standard contracts or provisions

Which non-regulatory tools to use?Which non-regulatory tools to use?

3. Recourse/redress mechanisms

4. Market-based mechanisms (e.g., quality seal, satisfaction index, publish data)

5. Self-regulation, e.g., voluntary codes of conduct

6. Consumer awareness, education and financial literacy

Note that regulators may need to define the rules of the game for these tools

Closing thoughts on consumer protection in BOP markets

Closing thoughts on consumer protection in BOP markets

Keep regulation “light-touch” and focused on most important products, providers and delivery channels

Consider regulatory capacity constraints and ability to enforce

Need to leave space for market innovation and experimentation

Balance protection and access policy goals

Building Financial Systems for the Poor

Thank you!