Page 19 - The Digital Financial Services (DFS) Ecosystem

ITU-T Focus Group Digital Financial Services
Ecosystem

1.4 The Evolution of the DFS Ecosystem

The root of the development of the digital financial services ecosystem is, of course, the rapid and wide-spread
adoption of mobile phones. In virtually every country, this has created a base of capability among consumers,
including the most poor consumers and small businesses, to transact and interact electronically. The equally
rapid spread of the phenomenon of “mobile top ups” – the ability to convert cash into airtime minutes – created
a second important capability in the eventual development of what is known as eMoney.
In a well-known story, some developing countries allowed non-bank providers, often MNO’s, to create
transaction accounts allowing their subscribers to store funds in these accounts, and make transfers to other
subscribers. These became “closed-loop” payments systems, and the general model is often referred to as
a “non-bank led model”. The primary weakness of these systems has been a lack of interoperability: the
subscriber to one system could not pay to the subscriber of another system.

In other countries, regulators chose to support banks as the primary provider of digital financial services. In
these countries, either existing or newly formed payments networks, available to banks and, in some cases,
their partners, form the platforms on which these providers can deliver services to their customers. In several
countries, regulators have tried to achieve financial inclusion goals by broadening the set of providers who
are allowed to access these payments networks, either directly or through bank partners. These systems are
generally considered to be “open-loop” systems, and the general model is often referred to as a “bank-led
model”. The primary weakness of the “bank-led” model has been adoption among the poor of the country.

Both models, when looked at from a financial inclusion perspective, share a common problem: that funds
put into these transaction accounts are not left there, but rather withdrawn to cash almost immediately. An
ecosystem dependent on networks of agents, branches or ATM’s to support “cash-out” and “cash-in” has
obvious problems with costs and with the management of this infrastructure.

The idea of a post-cash state of “digital liquidity” has obvious appeal. Consumers and businesses would leave
their funds in electronic form, rather than “cashing out”. What would it take for the ecosystem to evolve to this
state? Four principle drivers are commonly recognized. Each of these is the subject of more detailed reports
from this ITU Focus Group.
• The delivery of “bulk payments” – either G2P (Government to Person) or B2P (Business to Person) into
digital wallets (transaction accounts managed by mobile devices) is seen as a critical enabler for consumer
adoption of wallets. Bulk payments can not only deliver funds immediately into digital wallets, but they
can also improve the odds that the recipient will get their full intended payment.

• The enablement of merchant services – or, more broadly stated, payments acceptors – to receive
payments out of digital wallets is seen as the most important feature in eventually reducing dependency
on “cash-out”. People will be more willing to leave funds in a digital wallet if they are able to use these
funds as they currently use cash.

• The development of interoperability among providers of transaction accounts is seen as the key capability
to enable “ubiquity” – the ability of any one payer (consumer or government or business) to make
payment to any receiver, regardless of who is providing the transaction account for that receiver.
• The delivery of additional financial services, such as savings, lending, and investing, through connection to
the digital wallet is seen as the key to realizing many of the longer term objectives of financial inclusion.
Consumers and small merchants who are able to safely save and invest money, and borrow to support
short or long term needs, are more able to stabilize their financial lives and avoid many of the perils
experienced in an all-cash economy.

Just as different countries have chosen different early models for digital financial services to support (many
developed at a grass roots level), countries will also see different pathways to a full deployment of these
services. However, we expect to see increased regional or global coordination on policy issues connected with
the ecosystem, which may lead to more convergence among countries on supported models and systems.

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