By Channa de Silva
If a country is to achieve the vision of financial inclusivity, such is the case in Sri Lanka, establishment and adoption of electronic modes of payment is of paramount importance. Financial inclusivity is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of the society, as opposed to financial exclusivity where those services are not available nor affordable to them, or in other words available only to a privileged segment of the society. Globally, an estimated 2 billion of the adult population do not have access to the types of formal financial services delivered by regulated banks and other financial institutions. Until this long-term objective is achieved, general public will continue to use cash as their primary financial instrument towards making payments. It is established by most estimates that usage of cash for financial transactions costs society as much as 1.5% of GDP on the average in terms of printing, distributing and managing currency. Hence, it is of paramount importance that a country must strive to move people away from the use of cash not only to make payments efficient, but also to save valuable GDP.
First of all to achieve this objective, it requires a stable financial sector, a conducive regulatory framework, the enactment of required legislation and most importantly the availability of technology to the masses.
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Assuming that all these are in place, in order for the electronic payments to be widely used by the General Public there are three other key drivers that are going to determine either the success or the failure of the entire electronic payment landscape. They are, in my opinion, usability of technology, establishment of trust and cost of transactions in the same listed order of importance. Let us now consider some of these critical success factors in detail. In addition, since offering of the technology consists of multiple stake holders, such as banks, Telecom companies and Application Developers, all stakeholders must come together in partnership to drive this objective.
Availability of Technology
A key driver of moving people towards this objective is already happening in the telecom industry with the increased adoption of Smart Phones. The Smart phone has become everything that you need as an individual and caters to almost everything that you want to get done. Whether to send a message or email, edit a document, take a picture, wake you up in the morning, make a phone call, pay a bill or buy groceries, a Smart Phone is all you need. It remains with a person all the time, immaterial of whether you are in the washroom or having a meal. While a person may be able to live without a wallet, in the current context, most of the younger generation would not be able to manage affairs without his/her Smart Phone. People are becoming completely dependent on their Smart Phones even for their daily chores.
As the device prices are coming down drastically in Sri Lanka, with the introduction of cheap “Chinese” and “Indian” manufactured Smart phones into the market, the adoption has literally “gone through the roof”. Thus, the Smart Phone penetration has grown rapidly, which has already exceeded 4 million according to the latest estimates and at the rate the things are moving this number is bound to easily grow beyond 10 million in a relatively short period of time. What this means is that half the population will be carrying a smart device soon. With the smart devices becoming widely available, the payments need to be enabled via Smart Phone Apps whether it is a transport app, grocery app or an online banking app.
Usability of Technology
This in my opinion is the number one success factor to drive adoption of electronic modes of payments. Just because there are enough electronic payment instruments out there, if the general public does not adopt them, it does not serve any purpose of having that instrument being out there. The instrument that is likely to be adopted most, in the foreseeable future, would be payment applications on Smart phones. With the increase of Smart phone penetration, an increased number of people will have access to as well as use Smart phone applications to carry out their daily activities. Making and receiving payments would be one such important routine task and there will be a natural tendency of people to move into Smart phone based payment applications, provided, there are adequate amount of easy-to-use applications available.
Hence, a primary driver of increasing usability is to make the payment mechanism extremely simple to use, which ideally should be 1-click pay and go. If the applications are very complex and cumbersome, people will just use cash and move away. When the application developer community comes up with innovative payment applications to be deployed on Smart Phones, which are easy to use and enabled in local languages, we would definitely see a rapid increase in adoption of same. On the other side, a merchant’s task of accepting payments from customers should also be seamless rather than having to fiddle with technology, which would inconvenience their day-to-day work. If this happens, they would rather demand cash while discouraging electronic payments. Hence, the biggest challenge would be to achieve the right level of ease-of-use for both merchants and consumers.
Establishment of Trust
In terms of importance towards the adoption of electronic payments, the number two factor for me is establishment of Trust among the General Public to move away from using cash. Once the use of Smart phones based electronic payment applications gains wide scale adoptability, these payment instruments need to gain the trust of the people. Simply, if there are a few fraudulent transactions that gains wide publicity, people will abandon electronic payments and move back to cash. Hence, if and when the electronic mode of payments gains an increased amount of adoptability, the banks and the IT industry must ensure that applications and the supporting technology back-end is adequately secure. A majority of the people trust their own bank or even the entire banking ecosystem, which is currently in a stable footing, so the trust in banking transactions has already been established. However, the ‘trust’ on electronic mode of payments is yet to be established among the general public. This, in my opinion, is an absolute must for the increase in adoption, otherwise, people will continue to use cash for transactions because it is the most easiest and trustworthy instrument available.
Cost of Transactions
The cost factor, in terms of the transaction fees, is also important for the wide scale use of electronic payments, however, in the importance ranking would fall into the third position. This is because the transaction cost is relative to the perceived value of the actual payment to be carried out. If the transaction costs are not reasonable in the minds of the consumers, they will not move out of using cash blaming that the costs are “too high”. The transaction costs for electronic modes of payments currently varies in the range of Rs. 30-50, which the general public considers high. However, the irony is that the same person, who complains of high transaction costs, goes to the lottery seller and spends Rs. 100 almost every day and buys 5 tickets without not only complaining, but also never winning the lottery as well. This is a paradox, which could create an opening to the financial industry, in my opinion, to change the mindset of the general public.
So, we need to really understand the psychology of how people think and behave when they make a financial transaction to address the cost angle. Even if you make the cost of a transaction reduced to a single digit range, people will still complain. Hence, the important question is “How do we make this transaction cost irrelevant in the perception of the general public?” We need to make this spend seamless just like in the case of buying a lottery ticket, as we have never heard anybody complaining that lottery ticket prices are “too high”. If the banks can capitalize on the reverse psychology, by offering consumers some sort of a reward, then the cost factor becomes relative to their perceived value and people will, hopefully, stop complaining. This is the reason why I believe the cost factor is important, but yet as only the third most important aspect.
Evolution and success of electronic payments
When you consider financial inclusion as an ultimate objective, the evolution of moving people away from using cash to make payments has gone through different cycles such as cheques, drafts, pay orders and same day payments etc. The actual revolution will happen when people accept and make payments via electronic modes rather than depend on cash. During the last decade, this evolution has been relatively slow due to non-availability of adequate electronic payment instruments. However, with the introduction of real time electronic payment capability as well as the growth of the Smart Phone market, the evolution is actually tilting towards the adoption of mobile payments.
However, when you consider an individual, what we are really attempting to achieve is to change the behavior of a person. Immaterial of whether the person is the CEO of a company, the milk man, a farmer or even a policeman, he/she still is an individual. The anticipated change of behavior is for them to move away from the use of cash and adopt electronic mode of payments. This anticipated change is actually a transformation in the mindset. If you can change the mindset of a person, then the same person will take this change back to his organization and creates a similar impact. This would eventually propagate into a change of behavior in the organization, country, the region and even the world to some extent.
The success of this evolution will also depend on the joint efforts of multiple stake holders namely banks, Telcos and Application Development companies. Each have their own domain expertise and they must work together in tandem without trying to duplicate each other’s domain knowledge. If all these industry players can come to a common partnership of working with each other, rather than doing things in isolation, all would contribute to increasing the size of the pie. If the Telcos focus on providing connectivity and devices, banks focus on financial industry expertise and the backend systems and the IT Companies create innovative and secure applications, all could share the benefits of this potential growth. The ultimate beneficiaries of all these innovations would be the general public and the country at large.
Regional Cooperation for Payments
When we look at the requirements of increasing the use of electronic payments enabling them across the regions is also becoming increasingly important. In this region, an increased number of our people are living and working in other countries especially the Middle East. They are constantly making payments whether it be sending money to family or making some other payment across geographies. Hence, there are a significant volume of payments being sent across multiple geographies. In this context, regional cooperation in terms of exchanging payments is becoming increasingly important. However, we don’t have to reinvent the wheel as most of the countries in the region have their own local payment infrastructure. But, what needs to happen is the integration of the systems regionally and ensuring the security of the transactions across geographies flow seamlessly.
If you really look at cross border transactions, what is really being exchanged are the messages containing financial information. It is not that physical money is being sent via the wire. Hence, in order to safeguard the security of the financial transactions what needs to be secured are the message flows. The integration will be seamless by standardizing the message flows and the security framework among the multiple systems in the region. While acknowledging that there won’t be any system which is 100% secure, especially when you consider what has been happening in financial networks in the region in the recent past. However, if these systems are not adequately secure what it will take is one or two fraudulent transactions to go through for people to lose confidence in using electronic financial systems. Unless these flaws are fixed and systems made secure, slowly, but surely the customer confidence will erode. What happens in one country of the region will definitely affect the people in other countries since the same fraud can occur in another country the next instance. Hence, what is of paramount importance is regional corporation in terms of sharing information, especially security related information, so that we learn from those incidents and take sufficient preventive mechanisms for them not to be repeated in the region.
(– Channa de Silva is the General Manager/ Chief Executive Officer of LankaClear –)