Modelo Perú: A Unique Approach to Financial Inclusion
by Jeffrey Bower, October 9, 2015
By Jeffrey Bower, Digital Finance Specialist, Better Than Cash Alliance
Peru is well regarded internationally for having a well-developed formal financial sector. However, more than 70% of Peruvians are excluded financially. This is for a variety of reasons, including high transaction costs, financial illiteracy, and lack of accessibility in remote areas. Through Modelo Perú – a unique collaboration between the country’s financial institutions, government, telecommunications companies, large payers and payees – this is about to change. Together these institutions have constructed a shared infrastructure for mobile payments, which forms the basis for competition on customer acquisition through product, all with a unifying goal of financial inclusion. If successful, this will be the world’s first attempt to build a fully interoperable national mobile payments system designed to promote financial inclusion.
An innovative approach to digitizing payments
In the picturesque town of Andahuaylillas, located 45 minutes southeast of Cusco, sleepy willow trees hang lazily across the central plaza, providing much needed shade to the indigenous women who sell snacks and souvenirs from small vending carts. The town church, a baroque masterpiece, has changed little in 400 years. The place feels little affected by the incredible growth Peru has seen in the last 10 years, least of which in digital financial services.
And yet, it was earlier last month that residents of this sleepy rural town were the first in the country to test out an innovative payment service that soon will be launched nationwide. Using their own phones, the vendors from the town square were able to register and open an electronic money account (a simplified kind of bank account) to transfer funds between each other, and with the help of the town’s correspondent bank agent, to put money into and take money out of their mobile accounts. All this was accomplished using simple messaging available on any phone, without requiring a smartphone or even a data plan. When the service is live, a nominal fee will be charged, much lower than what money senders charge today.
Most had never used anything but cash before in their life. Their response was immediate and impressive:
“My new mobile wallet is really going to help me send money to my youngest child who’s studying in Lima and needs money to pay for transport. I’m also going to be able to receive money from my oldest child. I’ve just learnt how to use Bim. It’s very easy,” said Delmesia Jaime from Chinchero.
Called Bim, the mobile money program will provide Peruvians across the country access to digital financial services. The messaging is intentionally clear: “If you have a phone, you have Bim”. The goal, according to H.E. Dr. Luis Miguel Castilla, Ambassador of the Republic of Peru to the United States of America and former Minister of Finance, is to have “Five million Peruvians make use of Modelo Perú, a common payments platform, in the next five years”. Achieving this will not be easy, but a distinct advantage for Peru is coming in the form of a broad partnership established across organizations known as Modelo Perú.
Why a new model?
Peru, a founding member of the Better Than Cash Alliance, is well-regarded as a leader in financial services. With over 40,000 banking agents and 10.6 million debit cards, Peru has a relatively well-developed formal financial sector. However, more than 70% of Peruvians still do not use formal financial services due to a combination of high transaction costs, financial illiteracy, and lack of accessibility in remote areas.
This is about to change.
High levels of mobile phone use nationwide (over 87% of households) means that Peru shows potential for significant financial inclusion through financial services innovation, particularly with mobile money. With over 260 programs in operation around the world, mobile money is now relatively commonplace. However, many programs are struggling to reach scale because they are not attractive enough for people to switch away from what they currently use: cash. Part of the reason is that generally these programs are operated by one entity, usually a single bank or a telecommunications company. Often these solutions are ‘closed-loop’, they work only for the organization’s own customers. When such limits are placed on how and where transactions can happen, there is limited incentive for people to change their behavior especially since cash is seen to be universally accepted.
As a relative latecomer to mobile money, Peru had the ability to observe the challenges facing many of the mobile money programs around the world. Instead of encouraging individual entities to compete on the development of their own payment platforms – as is the case in most countries in the world – the Peruvians have instead pursued a collaborative approach through an initiative led by the Peruvian Banker’s Association (ASBANC), that came to be known as Modelo Perú.
Modelo Perú – a unique private sector partnership to provide access to digital financial services
Modelo Perú is the informal name of the partnership formed by the country’s financial institutions, government, telecommunications companies, and large payers and payees, to cooperate on constructing a shared infrastructure for mobile payments. Impressively, over thirty financial institutions have agreed to collaborate together in this initiative and are working along with the four major telecommunications companies. Together, they founded Pagos Digitales Peruanos (PDP) a company meant to design and manage Bim, the mobile payments platform. PDP was founded as a collaborative entity, with the majority being owned by ASBANC’s financial education institute and the remainder owned by the account issuers using the platform. By pooling existing financial infrastructure across Peru, members of Modelo Perú will then use the Bim platform to issue affordable products for those formerly financially excluded, effectively competing to design products for this new segment with a unifying goal of financial inclusion. What small profits are made from the low fees will be directly invested back into the platform, further ensuring low costs for users.
The ultimate goal is for mobile financial transactions to flow without friction - between banks and other approved entities, across telecommunications networks, while making use of existing financial infrastructure- banks, branches, agents, ATMs, online channels, so that a payment can be accepted by anyone, everywhere, at any time; in person, at distance, and online. This will enable all Peruvians to participate in the formal financial system, no matter if they are urban or rural.
Modelo Perú is the world’s first attempt to enable a fully interoperable national mobile payments system with a specific focus on financial inclusion. Rather than focusing on the strengths of technology, Modelo Perú sees the partnership between the entities as the key to success. It is the strength of this partnership that will enable a solution to be built that has a fair chance of competing with cash. However, technology and partnerships are only part of the challenge. Users of the service will need to understand and adopt the product to achieve financial inclusion.
The Better Than Cash Alliance and its contribution
As a founding member of the Better Than Cash Alliance (BTCA), the Peruvian Government made a public commitment to digitize its payments at a national scale. Peru has already shifted two conditional cash transfer programs to electronic payments (Juntos with 815,000 users and Pension 65 with 457,000 users). Bim, the first product to come from the Modelo Perú partnership, will be a key enabler to expanding on its commitment.
As this is a priority for the Peruvian Government, BTCA has committed time and resources to ensure the success of Bim. BTCA provided a number of experts in building inclusive digital finance ecosystems to support the development and launch of the platform with the key actors in the ecosystem. A key contribution has been supporting the development of engagement strategies based on lessons learned from other programs around the world.
“By collaborating to create a new digital payments ecosystem, approved institutions in Peru have created a unique opportunity to compete in order to increase levels of financial inclusion in the country. The distinctive partnership behind Bim – often called Modelo Perú, bringing together more than 30 financial institutions to work across 4 telco networks – lowers entry costs and substantially increases the value proposition for users, making the decision to shift away from cash a more likely outcome,” says Carolina Trivelli, Managing Director of PDP, the company behind Bim.
In pursuing such a partnership with clear digitization and financial inclusion objectives, BTCA hopes that Modelo Perú will be a success and will catalyze similar initiatives around the world. We urge governments to pay attention to this Peruvian initiative, and understand that enabling broad-based partnerships can be key to building payment systems that shift people away from cash and achieve financial inclusion.
About the Author
Digital Finance Specialist, Better Than Cash Alliance
Jeffrey Bower is a digital payments innovation specialist, particularly for the developing world. He works as a Digital Finance Specialist with the Better Than Cash Alliance, a UN-based partnership of governments, companies and international organizations that accelerates the transition from cash to digital payments to reduce poverty and drive inclusive growth.
With the Alliance, Jeffrey provides expert technical assistance to governments and corporations around the world to build successful payment ecosystems. This includes supporting national ecosystem approaches, working with global corporations to define their digital payments strategies, and providing technical assistance on specific national payment programs. Jeffrey has played a key role in defining strategies and launching many payment systems, including Modelo Perú, the world’s first truly interoperable national digital payments platform.