Accelerating Financial Inclusion through Digital Financial Services Mr. Sherab Jamtsho, 14th March 2018

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1 Accelerating Financial Inclusion through Digital Financial Services Mr. Sherab Jamtsho, 14th March 2018 I. BACKGROUND AND CONTEXT The Royal Monetary Authority as the Central Bank has the mandate to promote, supervise and, if necessary, operate national and international payment and settlement system as per the RMA Act. In this context, the Authority is deploying and promoting digital financial services to enhance access to and use of formal financial services for the benefit of citizens, especially in the rural areas, to further the goal of financial inclusion. To this end, the Authority has focused on setting up some of the following key pre-requisites of digital financial services (DFS). Box 1. Three Key Components of a Digital Financial Inclusion Model Digital transaction platform. A digital platform enables a customer to make or receive payments and transfers and to store value electronically through a device that transmits and receives transaction data and connects directly or through the use of a digital communication channel to a bank or non-bank permitted to store electronic value. Retail agents that have a digital device connected to communications infrastructure to transmit and receive transaction details enable customers to convert cash into electronically stored value ("cash-in") and to transform stored value back into cash ("cash-out"). Access Devices used by the customers can either be digital devices (mobile phones, tablets, etc.) that transmit information or through instruments (like payment cards) that connect to a digital device such as a point-of-sale (POS) terminal. Source: The Consultative Group to Assist the Poor (CGAP) II. ASSESSMENT OF CURRENT DIGITAL FINANCIAL SOLUTIONS AND REGULATORY INITIATIVES 1. Mobile Wallets/Money The Authority has approved and issued e-money Rules and Regulations in 2017 with the intent to improve access to and use of digital financial services towards financial inclusion through Mobile Money a dedicated wallet account linked with a phone number. Mobile phones have shown a huge potential to scale up access to financial services and drive the agenda of financial inclusion. With an estimated 86 percent mobile connectivity, and Internet access of more than 45 percent, mobile money services can address the last mile distribution and servicing through digitally-enabled access points point-of-sale devices, mobile phones, and agent networks as low-cost alternatives to branch banking, offering services Peer to Peer money transfers (P2P), converting physical cash in a customer s mobile account (also called cash-in ), converting electronic funds into physical cash (also called cash-out), utility bills, customer registration, etc. Apart from the Banks, the regulations allow Mobile Network Operators (MNOs) to offer mobile-led financial services due to existing business setup and telecommunications infrastructure that can be leveraged to their absolute advantage to provide mobile money as value proposition to the customers. Further, to prevent regulatory arbitrage and confusion with the telecom regulator, the Authority has entered into an understanding and collaboration with the BICMA on the regulatory and supervisory roles relating to mobile financial services and processes. 1

2 Despite the enabling regulatory environment, the response to and adoption of mobile wallet have been slow, but has caught up recently with the Bank of Bhutan launching BoB Chharo. In the light of the ongoing technical integration to removing interoperability frictions, an open Application Programming Interface (API) has been made available to enable fund transfers between the bank account and the wallet account through Bhutan Immediate Payment System (BIPS). Gauging by the ongoing effort, T-Bank and TashiCell present exciting promises to rollout the wallet services. On the other hand, the state-owned telecom, owing to the already extensive network footprint and large number of mobile subscribers, is in better position to take advantage of mobile financial services more quickly and hence expand financial inclusion. Moreover, the telecommunications sector appears to have reached stagnation in terms of new product innovations, which is evidenced by the waging price wars between the two telecoms; therefore, mobile financial services offer new business opportunities. 2. National Payment Gateway / Electronic Commerce As a part of Government-to-Citizen (G2C) effort to improve services delivery, the Authority has implemented national e-payment gateway, the first ever e-commerce platform by enabling payments over the Internet using local debit cards. The infrastructure triggered the development of several online portals with payment facility, but mostly from the government entities and the corporations. The youth in particular have shown encouraging adoption of ecommerce for new business start-ups, such as Bhutan Smart Shop ( offering an online market for fruits and vegetables instead of bricks-and-mortar market, Druk Ride for online ordering and reservation of bus and cab services. Although the payment gateway is in place which can be integrated with variety of shopping cart software and merchant accounts, however, there is a need to have comprehensive and business-friendly e-commerce law and strategy to provide a sound legal basis for e- commerce sector growth. Moreover, logistics form an integral part of ecommerce supply chain to facilitate the delivery of goods and services to last mile, therefore, requiring proper localization of last mile postal and delivery address in the country. As such, e-commerce presents economic opportunities to tap into other market segments to promote Made in Bhutan products. On the positive note, most of the players have started integrating online payments with their web portals and establishing e-commerce businesses that will invariably encourage adoption and acceptance of digital payments in the long run. 3. BIPS - National Mobile Payment Gateway Likewise, the Authority has implemented BIPS platform a Mobile Payment Gateway in 2017 to integrate mobile banking services through a unified and common API standards and protocols. The platform allows interoperability between the banks and MNOs in real-time. BIPS is an important platform for person-to-person (P2P) mobile money transfers and payments, particularly in the rural areas. The platform provides common API interoperability standards, a consumer-friendly feature, between the MNOs and the Banks to make the bank account and the wallet account interoperable. 4. Retail Payments (POS, ATMs, QR code, BIPS) The Authority has established Bhutan Financial Switch to enable interoperability for ATM and POS transactions across banks. The growth of ATMs has been steady, but mostly concentrated in urban and peri-urban areas where it is mostly used for withdrawing cash. However, the use 2

3 of POS has received mild response, which could be attributed to factors, such as quality of services, lack of awareness and trust leading to low adoption, and merchants preferences for cash. The Authority is collaborating with the banks on a costsharing model to increase the supply of POS distributions to stimulate effective uptake of POS use in strategic target groups, such as over the counter payments in government agencies, the FCB, recreational centers, fuel depots, revenue collection centres of Thromdes, etc. On the other hand, payments and transfers through the Internet and mobile banking (QR Code and BIPS) have been growing in popularity among customers. III. CURRENT DIGITIAL FINANCIAL SERVICES INITIATIVES The Authority is currently in the process of implementing the following digital payment solutions, which are expected to be implemented in the current calendar year. 1. Global Interchange for Financial Transaction (GIFT) The objective is to move the government payments to electronic, such as disbursement of salary, social benefits, and releases in real time. The system will have a straight through processing (STP) of payment messages to the DPA, the banks and the Authority. The system will enable the following: BITS - the high value individual fund transfer with deferred net-settlement RTGS - high value fund transfer with real-time gross settlement Bulk Payments- disbursement of salary, welfare, etc. The Global Interchange for Financial Transaction (GIFT) will facilitate the following: Government to Citizens (G2C) Payments Government to Businesses (G2B) Payments Government to Employee (G2E) Payments Government to Government (G2G) Payments This momentum by the government toward electronic payment would help to promote and popularize digital payments in the country, in addition to improving transparency, decreasing costs and reducing leakage on the other hand. 2. Inter-connectivity of BFS and NFS Switches The Authority is currently implementing an iconic project to interconnect the Bhutan Financial Switch, owned and operated by the Authority, with the RuPay network of India, operated by the National Payments Corporation of India. The cross-border interoperability would allow the citizens of both nations to seamlessly perform banking transactions using their local bank issued ATM/Debit Cards through any of the delivery channels such as ATMs, PoS and merchants e-commerce sites. The initiative is expected to improve and facilitate cross-border remittances between the two nations. The interconnectivity of two switches is congruent with objective of promoting digital payments transactions, which is evidenced from the effort put in by the central banks of the both the countries. 3. Integration with PayPal Payment System Although in the very early stages of discussions with PayPay regional office in Mumbai, India, PayPal supports online money transfers and facilitates inward remittances and international e- commerce. Through PayPal, users can electronically send or receive online payments for online 3

4 auctions, marketplace, and donate money or receive donations, etc. Such facility can improve our local economy, especially in rural areas, by promoting hospitality and lodging (homestay) sector, for example, Airbnb, VRBO, HouseTrip, etc. 4. Druk MicroFin Platform Druk MicroFin is an integrated MFI banking platform with digitally enabled devices such as mobile apps and hand-held micro ATMs. The platform is provided by the Authority to reduce the costs and resource burden to MFI and CSI banks, and targeted to have a more financially inclusive economy by reaching segments of the population that have little or no access to the financial services. The platform can be leveraged to their advantage in all parts of the value chain, from the head offices to the branches, the field offices, and the clients. 4

5 IV. The Way Forward to Promote Digital Financial Services # Areas of Constraints Digital Enablement Regulatory & Public Policy Enablement 1 Manual KYC verification process and Integrate banking systems with civil registration ID Develop and provide API standards and absence of proper KYC infrastructure. databases in real time to simplify and facilitate electronic customer identification and onboarding. Paperless verification guidelines by the civil registration. 2 Extend Points of Access-agents operate mostly in urban and semi urban locations. Ensure access to agent network enabled with digital device (e.g. point of sales and mobile phones) for cash-in and cash-out in rural areas. Promote agent network for mobile money services in rural areas under clear legal guidelines. 3 Most MFI does not provide access to savings products. 4 Government payments mostly through cash and cheques. Allow and link savings account to loan account and repayment through DrukMicro app, Agents, etc. Digitization of government payments through GIFT (e.g. salary, payments, tax, fines, etc.). Embed savings with loan product and enabling savings habit. Enable critical volume through G2P and P2G. 5 Removing friction- interoperability of QR code payments. 6 Removing friction- network quality reliability and power outages. Enable interoperability of QR code payments that is currently in the initial growing stage. The biggest beneficiaries would be the customers and merchants need not specifically have account with the same bank. High and reliable coverage of telecommunication network. Enable and mandate standard QR code interoperability using same barcode technology across the banks. Coordinated approach among the government, regulators, and providers through memorandum of understanding and service level agreements, etc. Need to be championed by the regulator on high levels of network availability (99%+). 5

6 7 Low level of digital financial literacy and awareness among customers as well as merchants. 8 Absence of clear-cut consumer protection and redressal specifically ecommerce/online payments. 9 Outdated IT system in government agencies hindering digitisation. 10 Current payment gateway scope limited to domestic online payments for ecommerce, which is at the nascent stage. 11 Digitization of RSEBL commodity trading platform. 12 Low level of mobile money services and reach in remote areas despite BIPS platform. 13 Absence of proper last mile address/ logical delivery 14 RMA enacted the Private Money Lenders Rules and Regulations, Target and educate on digital financial knowledge and skills through FIL programs and activities. Establishment of customer protections guidelines and dispute redressal mechanism specifically for electronic commerce and online payments. IT system up gradation at government agencies (e.g. DRC could not automate online tax payments and collections using RMA Payment Gateway). Enable acceptance of international cards payments via payment gateway to promote and sell Made in Bhutan products to the foreigners. Trading platform to be integrated with e-commerce and other online payment options Encourage mobile money operators and banks to offer mobile money services through network of agents Provide digital devices such as point of sales to the agents. Support localization of last mile postal address within Bhutan for better delivery of online products in e-commerce supply chain. P2P lending platform, non-existent at present in Bhutan, presents an opportunity to drive and boost the informal lending DFS training to be included through coordinated approach with banks, telecoms, and RMA. Coordination and convergence among MoEA, BICMA, RMA, MoIC, etc. ICT support and up gradation Investing in international cards membership may prove costly when BOBL has already invested significant investment in implementing the facility. An agreement could be worked out to leverage the existing setup for the overall benefit of the stakeholders and the economy. ICT support and innovation Encourage mobile money operators and banks to offer mobile money services at cost affordable to the customers and sustainable to the providers. Allow small savings in wallet account. Necessary support and lead by the government and Bhutan Post. More studies required and adopt regulatory sandbox approach. 6

7 however, it has experienced only a few registrations to be authorized or licensed lender. practices through a regulated and protected system. Central Banks also benefit from the establishments of such P2P lending platforms. It offers an opportunity to bring the informal lending and shadow economy into formal regulated environment through banking channels. Furthermore, it also helps central banks to achieve higher financial inclusion through increased access to credit. *** 7

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