Digital financial services (DFS) are among the quickest and most effective ways of turning millions of unbanked citizens into formal financial customers. For the first time in history, digital and mobile technology make full financial inclusion not only possible but profitable.
At the heart of the Level One Project Guide is a national system, enabled by shared, open, standards-based components. The system is designed to accommodate variability in local rules, structures, and the existing regulatory framework. The system either provides or contracts for core shared operating components including the interoperability service for transfers (IST) and the fraud and risk management service (FRMS). Structured as a cost-recovery or not-for-profit model, the by-laws and operating rules for IST and FRMS commit to providing low-cost payments capabilities that can support the needs of the poor.
They developed one model for a country-level digital financial services system designed to bring the poor into the formal economy. They created a working digital financial services prototype to demonstrate how the system works.
Today, more than two billion adults do not have a bank account or access to other formal financial services—services that can help people protect their earnings, weather personal financial crises, send and receive payments, and better manage their farms and small businesses. And because of this, many families lack the tools they need to escape the cycle of poverty.
Today, two dominant trends have emerged, which may help to accelerate access to effective, efficient and affordable financial services for the poor:
1. mobile technology has spread at a remarkable pace in the developing world. According to a study done by the World Bank, 90 percent of the world’s poor are now covered by a mobile signal, giving us a unique opportunity to reach vast segments of the population who may not live near a physical banking location.
2. Digital payment technologies can reduce the cost of financial transactions by more than 90 percent. One reason why is that digital payments can eliminate the need for a physical location to do banking—something that can be extremely challenging in many areas of the developing world.
They have observed these trends, learned from their experiences in more than 30 countries, seen what emerging new technologies can do, and ultimately, incorporated those lessons and potential into the Level One Project Guide—a vision of how an inclusive digital financial services system can work for the benefit of poor people. The underlying design principles of the Guide include:
• A push payment model with immediate funds transfer and same day settlement
• Open-loop interoperability between providers
• Adherence to well-defined and adopted international standards
• Adequate system-wide shared fraud and security protection
• Efficient and proportional identity and know-your-customer (KYC) requirements
• Meeting or exceeding the convenience, cost and utility of cash.
By utilizing an open, digital approach to transactions, and partnering with organizations across the public and private sectors, the Level One Project Guide aims to provide access to a robust, low-cost shared digital financial services infrastructure sparking innovation from new and existing participants, reducing risk, and generating substantial value for providers, individuals and economies in developing markets. Additional resources have been created to help governments, NGOs and financial service providers successfully implement these changes. For example, The Level One Project Guide addresses:
• Business requirements for mobile wallet providers, Interoperability Service for Transfer (IST) providers and agent management system providers
• Developer resources like Application Program Interfaces (APIs) based on our working prototype of a system designed around the Guide’s principles
• Key regulatory issues and corresponding choices that a country regulator may face while implementing a digital financial services system
• System operating rules relevant to an open-loop, participant-governed system
The Level One Project Guide provides a detailed and strategic look at how they envision a shared financial services system could work to achieve broad financial inclusion. Of course, in real life countries or marketplaces may look different from each other. Despite these variations, they note that activities to date tend to cluster into one of two profiles. Countries may find that their choices differ based on their relative alignment with these profiles.
Profile #1 – Non-bank, closed-loop mobile money providers moving towards interoperability; at times including interoperability between non-bank providers and bank networks.
Profile #2 – Bank, open-loop networks moving towards enabling participation by non-banks and immediate funds transfer (IFT).
Note that while we frequently use the term “country” when referring to a payment system or system participants, we recognize that digital payment systems may also be structured as multi-country, or cross-border systems. The issues and options described in this section still apply to a multi-country scenario.
Open loop: The system should be an open loop, with the objective of encouraging all qualified participants to join. Open-loop systems avoid duplication of efforts by individual participants, which keeps costs down and optimizes services delivered to end users. Ultimately, an open-loop system achieves interoperability through the direct participation of all providers.
Immediate funds transfer: The system should make funds available to the payee in near-real time, providing immediate notification of payment from the payer to the payee. This feature is both demonstrably possible (as many countries have implemented this in various payment systems) and logically necessary to replace cash, which is another form of immediate payment.
Push payments: The system should effect push rather than pull payments. Push payments, such as an ACH-type employer direct payroll deposit, work when the payer instructs their account holder to move money to the payee’s account holder. This contrasts with pull payments, used in card and direct debit systems, which work when the payee’s bank requests money (“pulls”) money from the payer’s account holder. Existing push payments systems have demonstrated lower fraud rates and lower system costs than pull systems. Note that a push system can incorporate a request message from the payee (for example, a message from a merchant requesting payment), but the transaction doesn’t happen until the payer instructs the provider to send the funds.
Same-day settlement: The system should settle funds among participants at least once a day, to ensure the system and its participants have as close to zero exposure from a failing participant as is possible. This controls liquidity risk, and therefore reduces costs. Note that the timing of end-party settlement (when the accounts of the paying party and the receiving party are actually debited and credited) does not have to match the inter-provider settlement timing. This means, for example, that a transaction can be instantaneous between the two users, but their participant institutions are settling with each other later that day.
Open, international standards: The system should adhere to internationally accepted payments standards (such as ISO 20022) rather than implementing system-specific, proprietary standards. This allows for easier and more cost-effective handling of transactions, such as remittances, across different systems.
Methods of accessing components of the system by participants or other parties should also be enabled through open application program interfaces (APIs). This enables innovation among direct and indirect participants; for example, providers and vendors can more easily embed payment capability in their sector-specific services.
Irrevocability: The system should not specially manage transaction reversal by the originating party nor specify situations in which the liability for a transaction is passed from one participant to another. This eliminates the complexity and services infrastructure required by the system to reverse transactions, thereby eliminating significant system cost. Note that this is only at the system level—direct or indirect participants could still offer value-added services that allow for reversals or other credits. Additionally, this does not mean that there should be no consumer protections: for example, the consumer should be able to make an inquiry into the status of a transaction, or lodge a complaint with their provider about an unauthorized transaction.
Shared fraud service: The system should address how participants may contribute transaction data (either on fraudulent or on all transactions) to a commonly owned fraud management service. Managing some of this functionality at the hub or network level, rather than at individual participant level, is likely to reduce costs of the overall service and improve fraud detection capabilities.
Tiered KYC: The system should enable tiered “know your customer” (KYC) that allows for participation by end users in correlation to level of use. For example, people lacking documentation may open basic accounts, and the risk related to these accounts may be managed by imposing strict maximum account balance and transfer limits. This will help drive volume through participation by the poor, while maintaining proper levels of fraud control.