The Finanser Interviews: Kosta Peric, the Bill & Melinda Gates Foundation

Following our regular weekly interview, the Finanser talks this week with Kosta Peric, Deputy Director, Financial Services for the Poor, the Bill & Melinda Gates Foundation.

What is the Bill and Melinda Gates Foundation doing with mobile money and the objective of raising people out of poverty by 2030?

Our vision is that every life has equal value. The Foundation is then active in many ways to realise that vision in health, family planning, agriculture and other markets.  One of the facts we found, from quite a lot of substantial academic and experimental research, is that dealing with cash is a key inhibiting factor. 

When I say poor people, I'm really looking at extreme poverty that is currently being defined by the World Bank as people who have, on average, less than $2 of income per day. Remember, when you say that, it's an average with many living well below even this level of poverty. As a matter of fact, these people live quite complicated lives from that financial perspective, with many sources of irregular revenues coming from jobs, often times several jobs.  Equally, if you think about agriculture, there is of course the irregularity of crops and harvests, with some years of crop failure and famine.

So dealing with cash in these circumstances actually proves to be an aggravating factor from several perspectives. Of course, there is the risk perspective of simply having cash. Secondly, there is the risk of being exposed to a lot of corruption that goes with the distribution of cash. Third, absorbing financial shocks, which is all about financial instruments being available such as payments, as well as the capacity to save money.  We need to help people to manage money in order to have the capacity to finance projects; to pay school tuitions; for children to pay for utilities; and also unforeseen shocks that inevitably come.  Good shocks, such as marriage, or challenging shocks, such as death in the family, and so on.

We will all benefit from an economy that benefits everyone. That is why we have embarked on this ambitious program that is about financial inclusion and, from our perspective, is really all about digital financial inclusion. This is because the one thing that these people have in abundance, in terms of technology, are mobile phones. Contrary to banks, whose ATMs and branches are nowhere near the people we look at in terms of geographical locations, the mobile phone technology towers and supporting infrastructure of agents is actually quite close to these people.   This is why it is a very natural step to actually use this technology, and that's how the mobile money concept comes into the picture as a key instrument of that.

The last thing to mention is that mobile money is also helpful for other of our Foundation’s strategies.  For example, we have found that a lot of our polio, health, agriculture and maternal health strategies relies on workers in the countries who have to be paid, and mobile money is a very helpful enabler for that.

How many people are we talking about who are living on less than $2 a day?

The latest number, that was just updated recently by the World Bank’s global database called Findex, is two billion people who live on less than $2 per day, and who are currently without bank accounts. This number actually decreased from 2,5 billion in 2011, which has been a great indicator that the overall focus on financial inclusion is having positive results

You mentioned remote areas are not served by banks, but can be served by the mobile networks. How will the mobile network bring these people into financial inclusion?

That's where we start discussing some of the technology aspects of how this can work. The most talked about system is MPESA in Kenya, which is an initiative of a mobile network operator who basically provided a way for people to associate electronic wallets to their mobile phone number. It's an evolution of the airtime concept, because airtime represents value.  When you have airtime, you can call on the mobile wallet from the mobile phone. So the mobile wallet is actually an evolution of that concept, where you can offer stored value associated with the SIM card on the phone or, most often, by the provider as value.

Once you have that, then it becomes relatively easy to start talking about sending money from one phone number to another phone number, which is also what MPESA has done. That transfer can be fast, instantaneous and real-time. It is relatively affordable for the users because the technology involved is very streamlined and efficient.

Another important point is the on-boarding of people to that system; because you need to subscribe people to mobile wallets and then enable them to digitise cash.  In other words, to put cash on their account wallet and to take money out of the system as well, which is a natural evolution of the agents that the mobile network operators (MNOs) have to sell airtime.  So the agent concept evolves, and they become not only resellers of airtime but also handlers who can bring people on board so that they can cash in and cash out.  They add a fee, of course, but now the money is onboarded to a digitized network.

MPESA is a notable example, but there are others.  In fact, one of the fastest growing mobile money implementations is bKash in Bangladesh, who now have over 15 million users, and that is growing fast in terms of transactions and value transferred.

bKash operates on the same concept as MPESA, being able to send and receive money very easily.  The idea is that, in the same way that you send a text message, you can send and receive money. So that's good progress, but we don't see that as the ultimate success. For example, exactly as it was with mobile phones at the very beginning, where it was very difficult to call across network providers, it's the same now when you have a MPESA wallet.  

There are ways around that, and the ideal way to solve this problem is to actually have several providers.  In our vision, a single player will never cover the entire geography and customer segments, so inter-operability is also very important in the mix. This is not only better because you reach more of the population, but also because it provides for more competitive offerings, which is good because the end user price of all of this is very important. The other aspect that's very important is not only the subscription to mobile money services, but also the capacity to use the money to purchase things.

The Foundation has a focus to bring on more providers and to bring more merchants on board. This is because if the only thing that we achieve is simply that we can cash in, send money and cash out on the other side, then we are just a competitor to Western Union. Our ultimate measure of success is not that. The measure of success is the money keeps on being digital and keeps on moving, rather than being cashed out. That means you need to have an interoperable environment. That means you have to connect merchants to the network, so that all the users can do much more with it and keep the money inside the system. 

And when you talk about such a vision then of course this becomes almost like a national good, creating a national infrastructure for payments that is parallel to the traditional banking system that's connected to it. This brings up the issue of regulation because, as the system grows transactions, then it must obey certain characteristics and comply to regulations, anti-money laundering, anti-terrorism, Know Your Client (KYC) and more.

The challenge is how to implement, how to deploy such a system, in a way that remains very streamlined so that it can be super-scalable and also very cost effective. When you look at existing traditional financial systems, none of that is actually the case.  So this digital financial system needs to have some of the same characteristics, but with a much faster, cheaper technological base.

You mentioned MPESA, but it is difficult to repeat because it had two distinct unusual features. One was the agency network, which was already in place, and the other is government endorsement and support. How do you overcome those factors in countries that don't have government support or agency network?

Yes. Indeed, these two things are very important, and indeed were present in some way, shape or form for MPESA. If we look at a country like Nigeria, for example, none of these things actually exist.  There is no specific regulation allowing mobile money and there is a multitude of small players with very little reach individually. This is where, again, if you look at this as a national infrastructure for payments, then this argument of essentially a shared utility or a shared infrastructure makes a lot of sense. 

For example, in order to make the system accepted by the regulators, it needs to have things such as a strong anti money-laundering structure embedded but if you start asking each and every one provider of mobile money services to implement that themselves, then two things will immediately happen. First, the overall cost of the system will dramatically increase and, second, the system will be only as reliable as the weakest of the components or the providers.

What we suggest therefore is that, in countries who start from further away such as Nigeria, there is a very strong argument to provide a shared infrastructure that does certain things all at once from the start, on behalf of the community of providers. These things would include fraud management and KYC, as typical examples of such things.  These things can be quite tricky to implement and manage.  This means that doing it once on behalf of the whole community, and having the regulator look at only one system, makes it a lot easier.

The same argument can be made for agents. In Nigeria, there is a multitude of small providers and they each try to cultivate their own agency networks but, in fact, what's happening underground is they are poaching agents from each other and, as a result the, agent network as a whole is not increasing. So in Nigeria, if you put all of these agent networks together, there’s about 15,000 of them. Most are located in the big cities while, in fact, Nigeria needs around 100,000 agents mostly located outside of the big cities.  That's where this notion of seeing the agent network as a shared good, or shared utility among providers, starts making a lot of sense.

To answer your question, it's really about looking at this as a national good that will crack the problem of the costs and reach, rather than trying to simply regulate it and then let everyone have a crack, because then we will not reach the objective.

You also mentioned KYC again.  What are the challenges in performing KYC in a mobile money environment?

This is an area of huge business and technology innovation that I can see because the poor people that we want to connect often don't have fixed addresses, and it's very rare that they would have all the requirements of the identity schemes that would onboard them to a traditional system. So tiered KYC schemes and identity schemes that rely on digital, such as e-Aadhaar in India, is a whole new, very rich domain of innovation.

Yes, I've read quite a lot about the biometric identity card program in India and, to a large extent, that is the biggest challenge: to actually make sure the people are who they say they are.

That's right. And a way to do that, at huge scales, when we’re talking about billions of people, is with biometrics and with new innovative schemes such as the Aadhaar numbering schemes.  It's all hugely important as well, and it's an integral part of what we do. It's not at all related to payments, but it's really the basic infrastructure to get people on board.

What is the Foundation actually doing to make this happen?

We do several things to make this happen. The first is that we always enter into key partnerships with the central banks in the countries where we work because mobile money is money, and therefore has to be regulated. If the central bank doesn't allow for it, then it does not work.  This was the case in India, where mobile money circumvented the central bank and was restricted to very specific use cases in very specific domains.   We have established a very strong partnership with the central banks n the eight countries we work in (India, Indonesia, Pakistan; Bangladesh, Nigeria, Kenya, Uganda and Tanzania)

The second thing we do is that we establish partnerships with the private sector players, such as banks, mobile network operators and fintech infrastructure or service providers. The Foundation does not implement the digital platforms for mobile money systems.  That's not our job.  Our job is to foster the creation of this system by the private sector players on the ground, either local or regional or global.  What we do then is we de-risk the beginning of this implementation with philanthropy capital. 

If you look at mobile money systems, digital money systems, it's a question of scale. This is not about charity. It's about making a sustainable business of serving the people but, as we know, the transaction sizes are so small that, in order to make profit, you need to have a huge scale out of the system.  You need a huge number of payments to be digital, so that profits can be made through this huge scale of things.  To get to that scale is difficult, because the business maybe not be material for the providers.  They may say: "This is great, but if I need to invest for three years to break even, I just won't do it. I don't have a case for that." This is where we can play a role by providing philanthropy capital.

When I say philanthropy capital, it means that we invest our own philanthropic money with no view on any return of our investment.  Our aim is to simply de-risk this for the private sector so that they will engage in this activity, and that ultimately they will see the value and be self-sustainable.

We also work with infrastructure and the large funders, such as the African Development Bank, so it is not all philanthropic capital as that's infrastructure development capital. It is loans, but they have a huge financing power and so we can also bring these players to the table.

In summary, we will all benefit from an economy that includes everyone.  We call this the Level One Project: creating the national infrastructure for digital payments that will achieve this vision. You can read more about it at http://leveloneproject.org

One of the things to make this happen needs a cheaper form of value exchange.  Is that bitcoin?

No. Our goal is that the payment infrastructure supports the national currency. The majority of the users have to purchase things, to pay schools, to send money and this means that we need to use the national currency. Of course, bitcoin as a currency can be useful in some specific cases, like international remittances.  But the major use cases of mobile money will be with the national currency.

What we then need to do is to make the processing and the transactioning with the national currency very affordable. One way to do that, which we have explored quite in depth, is the use of distributed ledgers and blockchain technologies which, of course, underlie Bitcoin.  

When we mean affordable, it's really the technology-related processing of transfers that has to be super efficient in terms of costs, as well as the streamlining of the business intermediaries and partnerships to make that happen.

Let us take one example about the way we would like to see the system work.  It's that user-to-user payment transactions are instantaneous and settled immediately, even if they are on different providers. That's objective number one. The consequence of that is that if these users are served by different providers then, of course, the providers have to settle between themselves. That settlement currently takes place once a day in the traditional banking system.   This is where we see use cases where the blockchain concept of a distributed ledger can make inter-provider settlements happen much faster than intraday, simply because the way the technology works makes that possible.  In this process, there is a reducing of intermediaries and reducing of time, and this will also have very positive consequences by settling several times a day.  The outcome is that you actually drastically the risk of one of the providers being unable to settle and reduce the capital requirements required of them.

So the in-depth operation of the system can benefit greatly from new technologies, and that's why we also see digital payment platforms as separate from, but connected to, traditional banking systems.

In the newsletter for the Foundation that went out in 2015, there is an ambition to raise all people out of extreme poverty globally by 2030. Originally, I thought that the ambition was to wipe out poverty by 2035. Has the ambition been toned down a little bit, or is it adapting?

No. I think it really depends on what you're looking at. The document you mention is the annual letter of the Bill and Melinda Gates Foundation, our co-chairs, where they expressed their views of this. In parallel with that, there are a number of initiatives at the global level with the United Nations, the World Bank and the so-called Millennium Development Goals (MDGs).  These are all the commitments that countries make to reduce poverty in many sectors, and that could be different timescales for these initiatives.

 

About Kosta Peric

Kosta Peric is Deputy Director, Financial Services for the Poor, at the Bill & Melinda Gates Foundation, where he leads the team that focuses on digital payments. From governance through business models to technology, from ideas through architecture to development, he oversees the strategy and grants to deliver secure, reliable and affordable digital payment solutions.

Previously, he was the co-founder and leader of Innotribe, the SWIFT initiative to enable collaborative innovation in the financial industry. At SWIFT, he was also the chief architect of SWIFTNet, the backbone worldwide secure network currently connecting 8,000 banks and 1,000 corporations, and servicing daily the world economy.

Kosta summarises his experiences as a technologist, and his interests lie at the point of fusion between technology, finance and innovation.  He is also the author of The Castle And The Sandbox, a book on how to innovate in conservative companies using open innovation.

About the Bill & Melinda Gates Foundation

Guided by the belief that every life has equal value, the Bill & Melinda Gates Foundation works to help all people lead healthy, productive lives. In developing countries, it focuses on improving people’s health and giving them the chance to lift themselves out of hunger and extreme poverty. In the United States, it seeks to ensure that all people—especially those with the fewest resources—have access to the opportunities they need to succeed in school and life. Based in Seattle, Washington, the foundation is led by CEO Sue Desmond-Hellmann and Co-chair William H. Gates Sr., under the direction of Bill and Melinda Gates and Warren Buffett.