Building Financial Systems for the Poor C onsumer Protection at the Bottom of the Pyramid (BOP): Striking the right balance between access, protection and innovation Kate McKee, Senior Policy Advisor Global Seminar on Consumer Protection and Financial Literacy Washington, DC September 3, 2008

Four key messages  Low-income and first-time financial consumers face specific risks –>consumer protection policy and regulation should consider needs of different client segments  Different financial products also raise distinct risks –> product-specific regulation may be appropriate  With the huge growth projected in branchless banking, specific channel risks need attention  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 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...  Looking for a safe place to save  Trying to get cash for a remittance transferred from a relative working overseas  Opening her first basic banking account  Shopping around for a business loan  Going into a community retailer to send money to his mother in the village  Deciding whether to permit her MFI to report payment info to the credit bureau  Receiving his social payment (pension, child allowance, etc.) via a card linked to an account

Let’s look at branchless banking...

The logic of branchless banking: a low-cost transactional channel 1. Use existing retailers – shops, lottery, POs 3. Use existing technology in use 2. Deliver trust through technology Real-time account- to-account transfers Customer Agent

Any store can potentially be an agent

The power of using existing infrastructure ~25m ~3bn ~1m 600k 500k 250k Western Union Bank branches Post OffcsATMsPOS 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  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 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  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?  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?  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? 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  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!