Interviewed By Emmanuel Daniel
Konstantin Peric, deputy director, Financial Services for the Poor at the Bill & Melinda Gates Foundation, advances the foundation’s goal to increase digital usage for financial inclusion and create a payments platform for 1.7 billion people who remain unserved globally.
The Bill & Melinda Gates Foundation aims to provide assistance to unbanked people to lead productive lives especially in developing countries. Based in Seattle, Washington, the foundation is led by Mark Suzman, CEO, under the direction of Bill and Melinda Gates and Warren Buffett.
The total direct grantee support in 2019 was $5.1 billion which includes grant payments and direct charitable contracts but not programme-related investments. The foundation spent around $130 million worth of funds last year for financial services for the poor.
Peric has a strong background in financial services innovation and expertise in digital technology, and previously worked as the chief architect at SWIFTNet and co-founder of Innotribe. He currently drives the foundation’s strategy and grants to deliver digital payment solutions for the poor especially in Nigeria, Indonesia, Pakistan, India, and Bangladesh. Peric is leading the Level One project initiative to foster deployment of payment platforms to serve the poor using the open source Mojaloop software.
The following key points were discussed during the interview:
The following is the full transcript of the session:
Emmanuel Daniel (ED): I want to speak with you on a wide range of issues around how the foundation sees the progress in the financial services industry and some of the initiatives that you're working on. And I want to draw a dotted line into all that is happening that is being called innovation in financial services today. You're the best person to speak to on this because you've seen both sides of the equation. You've seen the financial institutions and now you're running a foundation working from the grassroots up helping societies build your financial infrastructure. So tell us what the Bill and Melinda Gates Foundation is doing in financial services today?
Driving financial inclusion through mobile technologies and digital business models
Konstantin Peric (KP): So there are today 1.7 billion people on the planet who are still unbanked. It's an ugly word to describe a person generally poor, generally rural-based, who only has cash as a way to negotiate for day-to-day financial transactions.
If you take Africa as a continent, 400 million African adults are in the situation today - poor rural persons. So the goal of financial services for the poor is to connect these people to the economy by helping financial service providers provide the adequate financial services including payments to these people. So that they can improve their lives, security, manage their money better and escape from poverty. That is essentially the goal to connect them so that they can use digital financial services to improve their lives.
We know from many types of research that giving them this access improves considerably their capacity to absorb shocks dealing with cash. Either positive things like marriages, or shocks like death or accidents. We also know that having an electronic digital way that gives them access to financial services enables them to save money better and also to essentially manage their lives better.
It is unfortunate to say but it's very expensive to be poor and to be in this situation because basically you have to expend energy or pay. If you want to pay the tuition of a child, sometimes you may have to work five kilometres to actually hand out the cash.
ED: So there are three aspects of financial services. One is payments or access to financial infrastructure. Second would be credit. And third would be wealth creation. That's how financial services is configured in the commercial sense. What is the size of the Bill and Melinda Gates Foundation today? And how much of that is dedicated funding for what you do in financial services?
KP: The Gates Foundation annual impact budget is in excess of $3.5 billion. Financial services for the Poor is relatively small strategy, about $130 million. It is a strategy that has its own objectives but it's also transversal because we support other strategies. Other strategies need essentially payments for them to work.
ED: How does the Gates Foundation work? Is there a virtuous connectivity between the different programmes or the different areas that you work in?
KP: Yes. There is common objectives and the best example that was perhaps even amplified by the COVID-19 pandemic is the need for governments to be able to pay to support various people and either people who work in the agricultural sector or who are poor. Digitising the government payments is a very transversal strategy that touches many of the things that we do at the Gates Foundation.
ED: So if I were to ask you to prioritise the top three or five projects that you're working on what would they be?
Building financial infrastructures to drive digital identity and narrow gender gap
KP: In the financial services for the poor, first we are focused on infrastructure to make financial inclusion happen. Secondly, we are focused on gender aspects. One of the facts also is that there is a huge gender gap in access to financial services or mobile phone technology and that is a barrier we need to overcome.
On the infrastructure side, what we believe is that the best way to enable the scaling of the effort to cover 1.7 billion people ultimately is to deploy national or even regional digital payment platforms that interconnect all of the players on the ground in real-time retail payment system. It’s where money can flow from one person to the other instantaneously in real-time at a super cheap processing cost.
The other important infrastructure that is very much connected to payments is digital identity. So in the process of onboarding the 1.7 billion people, how do you manage the identity piece of descended associated know your customer (KYC) aspects of this?
So our basic effort is to help the national stakeholders like governments, central banks, private sector banks and providers to collaborate to deploy this infrastructure that enables a countrywide or even region- wide platform to serve the poor.
To give you a few examples of such endeavours we are assisting the central bank of Pakistan to deploy what they call MPG which is a Mobile Payment Gateway. It is a countrywide, real-time payment platform that interconnects all of the financial service providers in the country’s banks but also the digital financial service providers like mobile money or others in one single platform. One person who has a mobile wallet on a mobile phone can participate in the economy by receiving money from other wallets, paying money from her wallet to a bank account, and all of the combinations thereof including paying to merchants.
Another example we have on a regional level in Africa is in Western Africa. There is an economic and monetary union of eight countries called WAEMU (West African Economic and Monetary Unit). They share a single currency and they have a single central bank. We are helping the central bank there in association with the African Development Bank to deploy such a platform on a regional level.
ED: The two projects that you've just described sounds like programmes that should be funded by the World Bank, for example, rather than by an impact agency. So when do you draw the line between what needs to be done commercially and what needs to be done as an impact agenda?
KP: We work a lot on the ground with the World Bank teams. Our strength at the Bill and Melinda Gates Foundation is to foster innovation and real-time payment platform.
When we got to know each other some seven, eight years ago, there was no real-time payment platforms anywhere. Today this is becoming common. And I would dare to say that Africa and Asia are actually leading the way in deploying real-time payment platforms. So we are at the forefront of these projects where we help create the architecture and lead these projects to deployment. After that the operation of this project gets into the more traditional financing model that we can do. We all know well.
ED: Do you fund existing programmes or do you initiate your own programmes? And do you put your own people on the ground and stuff?
KP: So we do three things. We provide philanthropic capital which is a grant. We don't expect that this money is returned. We fund it for impact. We provide technical assistance because deploying such platforms actually requires skill. And then we provide assets and one of the assets is an open source software that's called ‘Mojaloop’ that we have commissioned the development of. That is actually an open source free software that people can use to create these platforms without having to reinvent the wheel of technology. The software is essentially reference implementation for an interoperable payment platform. This is something that my team has developed with some fintech companies and now has been spun off into its own foundation - the Mojaloop Foundation. We are partnering with other philanthropic organisations like Omidyar and Rockefeller. We have Google partnering with us and PhonePe from India partnering with us. To sum up, we provide a number of assistance, philanthropic capital, technical assistance, and assets to the stakeholders on the ground. So they carry out the projects. We help them with these various ways that I mentioned.
ED: So in the area of payments there are a number of payment initiatives in any country such as in the UK, Southeast Asia, China, and in Africa. It used to be that payments was even for rich people. Even for the people with access to finance payments, it used to be an expensive idea. But over time, technology has made payments. The cost of building a payments platform just collapsed. So, in fact, if you look at the annual reports of Visa and MasterCard, they don't make money from processing anymore, because there are three core revenues. The most important is marketing. In fact, they outsource a lot of their processing down to the regional levels. They also outsourced it to Wirecard which then outsourced it to other subprime processing companies because the payments became a volume game. It's a game played by the commercial institutions. We’re not making money on it anymore. So the idea of making payments cheap or accessible to poor people or people without access to infrastructure has become a lot easier. So when the Bill and Melinda Gates Foundation goes into a country like Indonesia, it looks at payments. What do you see and how do you engage? And what are your priorities as a result?
Interoperability at low-cost is top consideration in payments platform
KP: We are driven by the needs of serving the poor. So the question we need to ask is - how does a payment platform need to look like to be usable and accepted by the poorest on the planet? If you want to serve the poor, there are a number of characteristics that are required.
One, the payment needs to be instantaneous between parties even if they are not on the same network. The interoperability is a huge need because if people can only transact on the same network, even very cheap, they can only do so much and the needs of the poor are much broader than this.
So having an interoperable instantaneous payment platform that is super cheap is an innovation. That didn't exist a few years ago. And that's where we are at in order to serve the poor.
Mojaloop is a good example of how you do that. And secondly, if you think about a merchant transaction which not only needs to be instantaneous but irrevocable because with the merchant you pay with your phone. You walk away with the goods. There is no way now to undo this transaction and so on. On the payment platform side, we consider the payment platforms that need to be run like a utility, essentially, not for profit or I call it not for loss. So essentially, all the profit that is made needs to be reinvested in the platform so that the platform can absorb the volume but also be super secure and reliable. So we consider that a payment platform also needs to be accessible for competitive offerings. To be efficient, these platforms need to be processed at humungous number of transactions of very small value.
Like in East Africa, one of the innovations that happened was the sale of solar batteries where people can actually lease the solar battery and pay every day in a small amount. A good example of where this gets would certainly be the unified payment interface (UPI) in India where they just run over two billion transactions per month with an exponential growth rate.
ED: There is a number of players playing in exactly the field that you've just described. There are fintech startups, the traditional banks and in some cases, central bank currencies and so on. Some of them are conflicting but some of them are competing. I do believe that a number of players when they say that they want to make payments more accessible to the poor, actually all they're doing is trying to extend their customer base to be a profitable business. But on the other hand, the cost of payments has been collapsing. And in fact, this initiative where you have the open source platform that you just described collapses the cost even more. There's competitive dynamics taking place in the area of payments at the moment. And you seem to be working with central banks but not necessarily at the commercial layer. What happens when you come across a country like Indonesia or China which already has commercial platforms that provide this ubiquity?
KP: At the country level you need to make sure that there is a level playing field for everyone and that there is a platform that is run as a utility. If you have platforms run for profit, then basically you create again silos that don't talk to each other. I think the governments and central banks have this view that interoperability is very important from the consumer perspective. It's great to have innovation on payment rails. But it is also important that you ensure that from a consumer perspective there is uniform environment where you are not taxed.
ED: Yes. Does the Gates Foundation take a stake in fintechs and startups?
KP: We have one example. We invested in bKash in Bangladesh early on but this is not our general model. Our more general model is grants to either central banks or associations. For example, we work with SADC, the Southern African Development Community. We work with the banking association there. We have done financially and technically to enhance the existing Cyrus system in South Africa to extend to digital financial service providers, mobile money providers and multiple currencies.
ED: What is your position on emerging technologies like blockchain and so on?
Mojaloop can be used to build national digital payments platforms
KP: We have a very specific focus on looking at new technologies both on the identity and payment side and blockchain obviously is one of these. We tend to take what's best and put it to use. So for example Mojaloop is based on a component called inter-ledger protocol that borrows a lot of blockchain concepts and can connect a traditional payment system with a blockchain-based system but it's not a blockchain in itself.
We look at technologies like cryptocurrencies more in the context of central bank currencies, the digital currencies for settlement. We have not engaged in cryptocurrencies as being directly useful for the poorest for many reasons. First, because many of the people don't have smartphones so they are just not equipped with the power to deal with crypto. We follow the concept that every payment platform in the country must be fully regulated and hence the local currency is used because basically that is what the stakeholders want.
ED: If you take distressed countries like Mozambique, and Venezuela, the poor get right into crypto because it's a matter of survival for them. In distress situations, the desperately poor cannot wait and they need to make decisions.
Your programmes appear to be moving more towards the established infrastructure and not taking a view of circumstances where the desperately poor define their own currency or define their own response to what they need to do.
KP: I agree that we work with incumbents but at the same time we want to ensure that the people using this are protected, the system is secure, and that the system is not used for fraud, or money laundering. And that's why it's important that what we do is in conjunction with regulations but we also work with regulators to take into account the innovations and implement them in the countries as the innovations are coming. And that's a huge part of our work, too.
ED: What is the position of the Gates Foundation on central bank digital currency (CBDC)?
KP: Right now and based on our research CBDC base settlement is something that is quite interesting because one of the frictions in interoperable system is inter-provider settlements. If I send you an instantaneous payment, you receive it. But if we, you and I, are on a different provider, then our two providers have to settle between them. That process today can prove to be a friction depending on the set-up of the particular country or central bank. The research showed that CBDC could be something that can remove that friction.
ED: Would you provide funding for developing countries to set up their own central bank digital currency?
KP: We actually haven't received yet any demand for such a system and if it comes we would look at it in the context of gradual adoption perhaps looking at settlement. But the extreme scenario of CBDC being available all the way down to the users is an interesting case. A lot more research needs to be done on whether how useful it is. What are the on ramps, off ramps to cash, because cash is still needed?
ED: Actually a lot has already happened. I think one of the earliest central bank digital currency was Uruguay. And then Sweden, and then of course, China. So, there are enough case studies now and technology is a lot simpler than we imagined it today. Wouldn't that be the simplest fastest mode of deploying payments infrastructure? It takes care of all the interoperability issues that you've been talking about and then it also fits your model of working with the policymakers.
KP: So again, you have to look at this as obvious as it could appear to us. You have to ask yourself the questions of how useful and how impactful is this to the poorest which is a quite different thing. Are they equipped to deal with cryptocurrency at all? Do they have a smartphone? The smartphones are getting cheaper and so on but by all means, not every of these 1.7 billion people will have a smartphone anytime soon. So that's kind of a basic problem.
By the way your smartphone requires charging every day whereas a bar phone charges once every week or two weeks and you can still transact with it. The other thing is the on and off ramps. So it's great to receive some CBDC version of a rupee on your phone. But if you can't do anything with it, and you can't cash it out, what good is it for you? We all see the possible usefulness of this but before you actually take the drastic step of helping deploy such a technology on a super large scale at two billion transactions per month. That's quite a different endeavour.
ED: Let me test you on two more points. The profit pools in traditional payments infrastructure, one is the interchange and the other is foreign exchange (FX). The cross border issue is that you have FX as a big thing. It's almost no innovation in payment. We'll get into payments if it wasn't for the FX and even when they collapse the FX from the traditional banks, what the banks charge, is still very profitable. It’s still the defining reason for being in cross border payments. Are you saying that anyone who is in payments for the poor cannot be profitable? It's a utility and therefore, there is no income. And, therefore, you either have to totally dismantle both FX and interchange because you need a system that actually, completely, dismantles both. Is that how you think about cross-border payments?
KP: I'm not saying that at all. There are two different layers of services - the payment rails which is typically collaborative and not for loss, and then there are the competitive offerings of accounts, wallets, and services.
For example, like the first mobile money implementation in Africa, in Kenya, M-Pesa, more than 10 years ago, they have proven two things. One, that it's useful for the poor. Secondly, that money can be made by providing such services to the poor.
Today there are more than 250 mobile money operations across Africa. This is a great innovation. The only issue so far is that each one of these mobile money operations is a silo. It's not interoperable. So the next wave of innovation is this payment platform that interconnects them all. So we are not saying that they should provide services for free. But we ensure at least that the platform that interconnects them all is super-efficient and you're provided as utility. The interchange fee between providers is super low, if not zero, but they are still charging their customers in the way they see fit for the product target and so on. It’s the same for cross border transactions. When you have two such platforms in two neighbouring countries, then you can imagine that you can interconnect them through value added forex providers. So we are not taking away by this any business but we are making sure that the infrastructure that connects them is super-efficient. We do hope that they make their customers benefit from the savings they do because of the lower interchange rate.
ED: Do you have initiatives in community currencies? I would imagine that if you have cross functionalities with other parts of the foundation, community currencies appear to be not only being a payment platform or payment token. It actually monetises activity and makes communities sustainable. Do you have a view on that? Are you encouraging it? Are you funding any of these community currencies?
Fostering innovation that is safe and regulated to ensure consumer protection
KP: We are not funding any that I know. This is an innovation that we are favourable to. We see them as a great education tool for financial literacy. A great example is in Asia where there are very small credit unions of which there are many in Indonesia and in the Philippines. They are a great enabler of financial services for the poor but they suffer greatly because they are isolated. They are not connected to the greater payment system of the country. We work with the World Council for Credit Union and the Asian Council of Credit Unions so that the credit unions organise themselves in platforms as well so that they can be connected to a larger, national or regional platform. We see that as a great enabler from grassroots financial literacy and inclusion and that can grow into these bigger platforms that we do.
ED: Give me a sense of what the foundation is doing in the area of credit.
KP: We consider that accounts and wallet provision is a commercial endeavour that we encourage many providers to play on the playing field. The same ease for what I would call the new Ubers, the applications, of course, credit is the basic one.
In Kenya, there are several credit systems that run and that are connected to the mobile money system of the country. We are again encouraging partners to foster innovation on creating fintech or other ideas for these applications. One example I mentioned earlier is M-Kopa Solar which is a company that provides these solar batteries. And that essentially invented a new way because when you look at the poor households, it's not that they don't have money, they do. But they can only spend so much at a particular time. As a Kenyan household, you can’t buy a solar battery because it's like a huge expense. But you can pay $1 a day to actually slowly but surely get ownership. And that would not be possible without a payment platform that is capable of processing humongous amounts of transactions of $1 or less a day. And so the platform is making this possible. These new Ubers as I call them of financial services we hope to see many of them in the transportation space, in agriculture space and in energy space. This is a huge innovation space which we are interested to see flourish and we work with other partners to incentivise this innovation.
ED: Why doesn't the foundation take a stake in specific projects or specific startups?
KP: Our theory of change is that helping deploy these digital platforms is the best way to scale it and the best way to give floor to these innovators. That's what we choose to invest on them. Many other philanthropists are active in many of these spaces. Many venture capitalists are in bed. There is a lot of money for innovation. And we think that this is not a space where we will make an impact. We really think that our impact is this huge scale of getting 1.7 billion people connected.
ED: What is the KPI of the financial services sector portion of the Bill and Melinda Gates Foundation?
KP: How many people get connected? How many people use the system? How many women have reached the system and not only men? We’re closing the gender gap.
ED: Kosta, it has been really wonderful speaking to you. Thank you.