Financial Inclusion Track: Transforming the Economics of Payments through Policy Innovation
Fighting Poverty, Profitably: Transforming the economics of payments to build sustainable, inclusive financial systems Jason Lamb September 11, 2013
Financial Services for the Poor Converting the poor s financial transactions into digital form is the catalytic change that will strip enough costs out of the system to enable robust public and commercial efforts to serve the poor 2013 Bill & Melinda Gates Foundation 3
Payment Systems Research 6 Country Deep Dives 100+ In-Person Interviews McKinsey Payments Database External dvisory Board 2013 Bill & Melinda Gates Foundation 4
Payment Systems are Complicated Payments value chain (US frame) Payee device/ gateway Transaction acquirer cquirer processor Network Issuer processor Payment instrument issuer Payer device DD/check CH Credit card Debit card/ TM Prepaid card Money transfer Emerging POS ECR POS / ECR systems systems providers providers TM TM manufacturers manufacturers / / servicers servicers Payments Payments gateways and gateways and software software companies companies Wireless Wireless device device manufacturers manufacturers Collecting Fed, Collecting Clearing Paying bank Paying bank or clearing- bank houses processor bank processor houses Originating depository financial institution Fed, EPN Receiving depository financial institution merican Global Express card associations / Discover / GECC Merchant Merchant Card Issuer acquirer processor associations Visa, MC, processor Issuer EFT networks EFT Prepaid acquirer networks Issuer processor Issuer gent Money transfer operator Money transfer operator (e.g., Western Union, MoneyGram) gent Specialist payments providers Specialist payments providers (e.g., PayPal, DebitMan, Bill Me Later) Federal Central Reserve Bank U.S. National Mint Mint Check Check printers printers Plastics providers Electronic banking/ bill payment services Treasury workstations Payments software providers Source: McKinsey Global Payments practice 2013 Bill & Melinda Gates Foundation 5
User-Oriented View of Payments C T CCOUNTS CICO TRNSCTIONS DJCENCIES 2013 Bill & Melinda Gates Foundation 6
Key Findings Business Models Cost Reduction Innovation Market Behavior 2013 Bill & Melinda Gates Foundation 7
Three Business Models Balance-Driven Mixed-Revenue Usage-Driven 1 2 3 T C T C T C KEY: ccounts Cash-in-cash-out Transactions djacencies 2013 Bill & Melinda Gates Foundation 8
Model 1: Balance driven profitability ($/year) France CCOUNTS CICO TRNSCTIONS DJCENCIES 198 NETS 0 2 8-47 -145 Source: McKinsey Global Payments practice 2013 Bill & Melinda Gates Foundation 9
Model 2: Mixed drivers of profitability ($/year) Denmark CCOUNTS CICO TRNSCTIONS DJCENCIES 183 NETS 0 40 69-44 -110 Source: McKinsey Global Payments practice 2013 Bill & Melinda Gates Foundation 10
Model 3: Usage driven profitability ($/year) CCOUNTS CICO TRNSCTIONS DJCENCIES NETS 0-7 6 4 4 7 Source: McKinsey Global Payments practice 2013 Bill & Melinda Gates Foundation 11
Key Findings Business Models Cost Reduction Innovation Market Behavior 2013 Bill & Melinda Gates Foundation 12
Three Levers Drive Cost Variation cross Countries B C Channel: Digital is cheapest, with smallest variance Scale: High transaction volume necessary to a point Efficiency: Drives costs down throughout the system 2013 Bill & Melinda Gates Foundation 13
Digital channels are cheapest and have smallest cross-country variance Credit transfer transaction cost by channel (USD) Min Max Digital 0.16 0.04 0.30 TM 0.17 0.05 0.20 Call center 0.61 0.30 0.90 Mail 0.75 0.40 1.30 Branch 2.36 1.00 6.50 0 0.5 1.0 1.5 2.0 4.0 6.50 SOURCE: McKinsey Global Payments Map 2012 (2010 data) 2013 Bill & Melinda Gates Foundation 14
B C >0.41 Minimum scale and Operational efficiency are essential to reach low costs Trnx cost per digital credit transfer B Minimum scale needed More efficient system given volume Illustrative scale curve for more efficient systems Illustrative scale curve for less efficient systems 0.3 0.2 C Operational improvement potential 0.1 0.04 0 0 250 500 750 1,000 3,000 3,250 3,500 3,750 4,000 8,550 Electronic credit transfer volume, m SOURCE: McKinsey Global Payments Map 2012 (2010 data); BIS 2013 Bill & Melinda Gates Foundation 15
Key Findings Business Models Cost Reduction Innovation Market Behavior 2013 Bill & Melinda Gates Foundation 16
Innovation: New players, new value Jumio ID scanning software to reduce error LianLian Pay Distribution networks expanding through unconventional means Dwolla Faster & cheaper alternative payment processing M-KOP Pay-as-you-go model for goods, powered by mobile money C T CCOUNTS CICO TRNSCTIONS DJCENCIES 2013 Bill & Melinda Gates Foundation 17
Key Findings Business Models Cost Reduction Innovation Market Behavior 2013 Bill & Melinda Gates Foundation 18
Market Behavior: Cost alone does not determine price to transact Consolidated Market Structure Coordinated Government Stance Laissez-Faire Government Stance Fragmented Market Structure 2013 Bill & Melinda Gates Foundation 19
Implications for the Poor Business Models Cost Reduction Innovation Market Behavior 2013 Bill & Melinda Gates Foundation 20
Implications for the Poor Balance-Driven Mixed-Revenue Usage-Driven 1 2 3 T C T C T C Balance driven revenues are insufficient Low revenues; providers lose money on poor users Incentives aligned around driving system usage benefits both providers and poor users KEY: ccounts Cash-in-cash-out Transactions djacencies 2013 Bill & Melinda Gates Foundation 21
Implications for the Poor Business Models Cost Reduction Innovation Market Behavior 2013 Bill & Melinda Gates Foundation 22
Conclusion Parting Thoughts ctivities rather than institutions Work across industries Higher complexity Need solid baseline system understanding Challenges and opportunities Open Questions Short vs. long-term solutions? Usage driven model at country level? Degree of government coordination of the market? 2013 Bill & Melinda Gates Foundation 23
Thank You Jason Lamb Deputy Director, Global Development Bill & Melinda Gates Foundation Jason.Lamb@gatesfoundation.org
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Price tends to depend on structure and competitiveness of the market, with utility-type systems charging lower fees USD 0.24 Most utility systems Issuer Network cquirer 0.16 0.14 0.01 0.07 0.09 0.02 0.03 0.10 0.04 0.02 0.04 0.09 0.06 0.01 0.02 0.07 0.01 0.04 0.01 0.01 Kenya US¹ India China Nigeria² Netherlands SOURCE: McKinsey U.S. Payments Map Release Q1-2012, McKinsey Global Payments 2013 Bill & Melinda Gates Foundation 26