In Peru, 8 out of 10 adults don’t have access to the formal financial system. Photo: Flickr/Shawn Harquail
What’s the silver bullet for financial inclusion? Is it a shiny new technology? Or a bold step forward by regulators?
According to Peruvian economist Carolina Trivelli, you can’t have one without the other. Most of all, you can’t put it all together without the collective participation of all the stakeholders within the community.
These are lessons learned as the former Minister of Development and Social Inclusion in Peru has led an ambitious new financial inclusion initiative that has garnered international attention.
The goal? Connect 5 million unbanked adults to the financial system over the next 5 years. In a country where 8 out of 10 adults aren’t plugged into the formal economy, that’s a big deal.
Ripple Labs: It feels like there’s universal excitement around your program.
Carolina Trivelli: Internationally, we’ve gotten positive attention because we are doing something very different. Nationally, we are creating a lot of expectations and there’s excitement because we are launching our first wallet in July.
It’s amazing because in the beginning we thought we would be working with 5 or 6 financial institutions for the program, and now we’re working with 34. We’ve exceeded a lot of expectations.
What have been the biggest challenges so far?
One of the more complex issues that we’ve been working on today, of course, is organizing the 34 financial institutions who will support the digital wallets and will ultimately become shareholders in the company that eventually forms around the program.
But in the beginning, the biggest challenge was figuring out the details. I began working on the project last year around March or April but the seeds of program were planted even earlier than that.
A couple years ago, the bankers association had this ongoing committee that was looking for ways to address financial inclusion and develop a common project around the initiative.
The initial idea was that electronic payments would be central to the development of the project and that we could solve it by simply investing in a technological solution.
As it turned out, technology was just a small part. They needed to create a more ambitious plan that took into account numerous other issues. What they needed, really, was a new legal framework for electronic money. With cooperation from the government, the Peruvian Congress, in January 2013, approved a new law (No. 29985).
In my opinion, it’s a very well written law for promoting the use of electronic money, and it serves as the foundation for this project by regulating all the characteristics of e-money for financial inclusion. All these innovative projects that we are seeing today are some sort of response from the financial sector to the existence of this new law.
So in terms of the quality of the law, we’ve done fairly well—it’s very good regulation. It simplified details for transparency, fraud, and anti-money laundering, which is crucial. The law defined all the necessary characteristics for a digital wallet. This allowed us to create the wallet very easily since the product exists within this regulation. Our job, then is to fill in all the other gaps.
In Peru, 8 out of 10 adults don’t have access to the formal financial system. It’s a very informal country, a very unbanked country, a very cash-based country. We’ve made progress expanding access, but there’s a long way to go.
The benefit of our solution is that we are utilizing channels that already reach most Peruvians. That channel, of course, is mobile phones.
So we had the regulation, and we had the technology. The missing final piece was the participation of the existing financial sector.
Many Peruvians are self-employed. Time spent making payments—traveling and waiting in line—is business lost. Photo: Flickr/Shawn Harquail
You’ve done a phenomenal job recruiting banks. What’s their incentive? Are they profiting from this initiative?
There won’t be profits for the first three years. Either way, I’m not sure that’s the primary incentive. I think there are several factors at play.
One is that some of the big banks have tried to work out this issue on their own but failed because it was too expensive, too complex, too difficult. They failed and never launched.
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Second, we are targeting the majority of the population and they are not yet customers, which, for any business, should be a positive. You’re not sacrificing anything, there’s nothing to lose.
Third, they understand that if they don’t do it, someone else will.
And finally, we’ve written a nice narrative—this being the largest project from a financial sector for financial inclusion anywhere. It’s highly positive for banks to be part of that story—to be building something for financial inclusion, to be innovative. There’s a reputational effect that’s helped a lot. If you’re not part of the picture, you’re missing out.
All of these issues were extremely beneficial, especially because we need a minimum amount of scale to succeed.
What exactly is launching in July?
We will be launching with only about five services. You’ll be able to open an account, cash in, cash out, send money to another phone, and you can buy airtime.
Then for the following 18 months, we will be adding ten additional services. You’ll be able to cash out of the ATM, send money to a savings account, pay a merchant, and so on.
After those 18 months, you’ll have a full set of services in the wallet.
If by then, a large number of the 34 financial institutions are offering the service, we will reach an operating equilibrium so that we will be able to repay our investors in 5-6 years.
We are also setting some financial inclusion goals. After those goals are met, the bankers association will select its share of the business, at which point it will become a legitimate business. But that will be in ten years.
From the customer perspective, they will be able to do all of their banking remotely from their phone. All they need is their phone and an ID number. Peru has a national identity system that covers more than 98 percent of the country.
The formal financial system only geographically covers about half the country—where less than 20 percent of the population lives. Photo: Flickr
And maybe this is an obvious question, but how will these services benefit Peruvians?
We just finished a study with 32 focus groups and the results have been very impressive.
Most people value the ability to do bank transactions without having to leave work. If you have to make a payment, you have to go to the utility office and wait in line and pay a fee.
Many people here are self-employed. To make a payment, they typically have to leave their job. This is especially the case in big cities like Lima, which has about 10 million people. Moving from one place to another takes a lot of time, a lot of money.
The second benefit is security. We have a lot of theft and fraud. So this is very relevant particularly for low income people.
Our initiative is to serve anyone who can use it. It’s for the unbanked, people relying on the informal economy, who might not live around a bank branch.
Even if they do have access, banks here are very fancy and can be very intimidating if you’re not well dressed, if you don’t speak Spanish, and if you aren’t sure what to do.
To open an account, you have to know what account. For example, we do have accounts you can open with no cost, but no banker will offer you that one unless you request it.
So many people end up opening the wrong type of account and end up paying $10 a month. This creates a negative image for the formal banking system where people are worried about losing money. They’ll put money into their account one day and the next month, their account is less. This generates a sense of fear toward banks. What ends up happening is that people don’t trust the banking system. They think they are going to steal their money at some point.
You mentioned financial inclusion goals earlier.
Let me put it this way. In 2003, the regulated financial system had about 3000 points of contact—meaning an ATM, a bank branch, or a correspondent agent.
Now we have over 60,000—but it’s still not enough because it represents just half of the country in terms of geography. Moreover, in that half of the country is where less than 20 percent of people live. So there are still plenty of places you can be without any point of contact with the formal financial system.
So if you consider that 8 out of 10 people aren’t plugged into the banking system, we have 10 million adults we could potentially target with this new program.
We’re hoping to reach 5 million people in the first 5 years.