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TECNOCOM Report on trends in payment systems 2016

By Verónica López Sabater, Director of the Afi Foundation

In the public imagination, financial inclusion is still almost exclusively associated with access to finance through instruments such as microlending. Microcredits were the first tool with which some NGOs in Asia and Latin America started experimenting in the eighties of the last century with ways to alleviate the poverty of broad population groups. At the end of the nineties and beginning of the 21st century, the advantages of access to financing were added to for the purpose of ensuring safe and convenient means of formal saving. Today, there are financial inclusion strategies in many countries (Colombia, with its “Pay easy - pay digital” financial inclusion law; the Uruguayan Government’s financial inclusion programme (Programa de Inclusión financiera del gobierno de Uruguay), Peru’s national financial inclusion strategy (Estrategia Nacional de Inclusión Financiera), and Mexico’s National Financial Inclusion Policy (Política Nacional de Inclusión Financiera), to name but a few. These are aligned with the guidelines and recommendations made by institutions such as the World Bank and the Basel Committee on Payments, which identify access and use of online payments as the first step on the difficult path towards financial, and through it, economic and social, inclusion.

As well as making the payment transaction itself efficient –agile, secure, traceable, confirmed, etc– substitution of cash gives further benefits to both parties, the payer and recipient, as well as to society as a whole, insofar as cash is a facilitator of the black economy and of economic and labour informality.

Wide sectors of the population do not have online payment systems and are forced to conduct all their transactions using paper: notes and coins, cheques and IOUs. There are many reasons why this is so: because income from economic activity is paid in cash and not through payment into an account; or because they do not have the necessary systems -payment cards in particular and often no payment account either– to operate online. Frequently also, in the case of card-based payment systems, it is not easy to use them to make payments because they are not widely accepted, either because there are not enough terminals, because there are insufficient incentives for their use to be widespread, or because there is still a preference for cash, for tax or cultural reasons.

Often we mistakenly associate the use of online payment systems with a higher cost for the party making and/or receiving the payment, omitting to consider the numerous invisible costs of only using cash: risk of damage, loss or theft, time and cost of going to get cash (from a bank branch, ATM, etc.), having the foresight to “carry on you” the necessary amounts, etc. In the case of individuals, the belief still exists that the recipient of the payment (the merchant, for example) would prefer to receive cash rather than in alternative, online formats (card payment, for example).

Chile; a case study

As an example, let us look at Chile, where we find an interesting situation.

All Chilean citizens [1] have the right to open a current account (RUT account- Registro Único Tributario, Single Tax Register) with their current national identity card, free of charge in the public state bank BancoEstado (not the case with the other banking institutions, which are not obliged to offer this financial product/service to everyone); on opening the account, a debit card is supplied free of cost[2]. This type of payment card works in ATMs, in the Caja Vecina correspondent banking network and in the POS Redcompra network. It does not have operability, however, in international online commerce, including the smartphone app market (such as Spotify), nor for making transactions in the so-called collaborative economy, inasmuch as these are generally international payment transactions involving global digital platforms, such as  Uber[3] or Airbnb.

By law debit cards are linked to a deposit account that requires the use of a 4-digit PIN to verify the account and its titleholder. Although ATMs and POS in Chile accept the input of these four digits, this is not the case with international merchants’ virtual POS for online or mobile commerce.

There may be a solution to the current situation in which Chileans who do not have a bank credit card are excluded from being able to make transactions in some types of online commerce. This would lie in the ratification of the “Law allowing payment systems to be issued with a provision of funds by non-banking institutions”. This would provide these groups with a prepaid instrument badged with one of the international card brands (Visa or MasterCard, essentially).

Electronic payment systems and the battle against cash

In November we learned about the withdrawal and illegalisation of cash (high denomination notes) by the Indian authorities. Events have shown that the country is not ready for a radical elimination of cash. Only a small percentage of the population has alternatives to cash; most people live in an informal ecosystem with intensive cash use. The situation was chaotic.

In the EU, which is building the Single Digital Market and the Single Payment Market, European Parliament and Council Directive 2014/92/EU, 23rd July 2014, on how to compare fees relating to payment accounts, the transfer of payment accounts and access to basic payment accounts, which in 2014 urged member states to ensure the supply of basic payment accounts, has yet to be passed into the national legislation of most member states, at the date of writing this article. Only Germany, Austria, Bulgaria, Denmark, Slovenia, Slovakia, Hungary, Ireland, Lithuania and United Kingdom did so before the deadline of 18th September 2016.

Ensuring that everyone has a universal electronic payment system (a payment card, preferably linked to a payment account – that handles transfers, direct debits and debit cards, and perhaps, although not necessarily, a pre-payment card) that works in physical and digital establishments and that therefore allows people to pay on both an active and a passive basis (automatic debits or direct debits), is now a public policy challenge. Ensuring that this method is accepted in everyday situations (in the physical and the digital environment) is another.

Conclusion

Identifying which links in the electronic payments chain may be “broken” or missing, that prevent specific types of transactions from taking place (eg. e-commerce transactions) and the consequent failure to access these markets, or being forced to resort to cash, all of them circumstances which affect broad sectors of the population because of how these products have been designed, is the responsibility of the legislator and regulator. It is their job to ensure the best regulatory framework, one that aims for full financial inclusion whilst combatting intensive cash use. In a scenario of digital transformation, we cannot leave behind large swathes of the population - the most vulnerable – in a situation of exclusion from appropriate provision of electronic payment systems.

Analistas Financieros Internacionales, Afi, analyses electronic payment system trends in Spain and Latin America. The recently published 2016 edition of the TECNOCOM Report on trends in payment systems, written by Afi for TECNOCOM, pays particular attention to the pairing of electronic payment systems and financial inclusion.

Verónica López Sabater is a Director of the Afi Foundation and a consultant in Afi’s Innovation & International development area, as well as the Technical Secretary of remEX. She has a degree in Economics from the University of Valencia, a Master’s degree in Economic Policy from Boston University and a Master in Economic Development from QMW University of London.

 

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[1] Over 12 if female and over 14 if male. For minors, the application must be made by the legal guardian. The maximum balance allowed is CLP 3 million (approx. USD 4,400). Other limits are: Redcompra purchases, ATM or CajaVecina withdrawals (CLP 200,000, approx. USD 295, a day), maximum monthly deposits (CLP 2 million – approx.. USD 3,000).

[2] According to the RUT account fee chart published on the BancoEstado website on 20th November 2016. All services are free of charge apart from bank transfers to other banks (CLP 300) and transfers (between CLP 330 and 600), balance queries at ATM (CLP 100) or Caja Vecina (free on other channels, including online): http://www.bancoestado.cl/imagenes/_personas/productos/cuentas/cuenta-rut.asp

[3] UBER drivers in Santiago de Chile began charging in cash in mid-2016 to make it easier for clients without a credit card or who do not want to use it (which,  as we know, would involve financing) to use their services.