Dave Grace

Blog Post

&gt; Posted by Dave Grace, Managing Partner, Dave Grace &amp; Associates

[caption id="attachment_13406" align="aligncenter" width="600"]<a href="http://www.flickr.com/photos/cfi_accion/10573579246/sizes/l/in/photostream/"><img class=" wp-image-13406 " style="border: 0;margin-top: 10px;margin-bottom: 10px" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/12/10573579246_70c52bd42f_b.jpg" alt="" width="600" height="399" /></a> Dave Grace (at far left) during a roundtable session at the Global Forum.[/caption]
This week I received my self-addressed postcard from the <a href="http://www.centerforfinancialinclusion.org/fi2020/global-forum" target="_blank" rel="noopener">Financial Inclusion 2020 Global Forum</a> reminding me of my personal commitment to help ensure the safety of consumers’ savings and rights as they join the financial system. My first reaction was how slow the post is, but on deeper reflection I recognized that the postcard arrived just at a time when I needed a reminder of my commitment.
In addition to the new connections made at the Global Forum, two comments stood out for me; one was rooted in the past and the other in the future.
Remembering the Past

When Michel Khalaf from MetLife described the company’s roots as an insurer for the working class and the legions of agents who went door-to-door collecting weekly premiums of $.05 or $.10 and dispensing financial advice, I instantly understood something important about my grandfather. Until then, I had just thought of him as a MetLife agent in the steel belt towns of the northeastern U.S. in the 1920s and 1930s. He left school at age nine to help the family make ends meet when his own father prematurely passed away. He first worked shoulder-to-shoulder in the coal mines with many other immigrants. His math skills and ability to work across ethnic groups enabled him to leave the mines and become a top agent for MetLife. He knew firsthand how dangerous the mining work was and how a temporary or permanent injury could be a huge setback for these vulnerable families. Once the Great Depression hit and people could not access their deposits in banks, many of his clients turned to my grandfather for financial help. He had some liquidity and became a de facto deposit insurer, paying people what he could and in the process becoming a larger creditor of the illiquid banks.

Anticipating the Future

While Michel Khalaf’s comments helped me piece together my own family history, what stood out more was the collective prediction by attendees in London that the most important story in the next five years will be the presence of a “bank run” on mobile money.

If we think this is likely, don’t we have some obligation to try and prevent it? After the Great Depression, a system of deposit insurance was created in the U.S. to re-instill confidence in the financial system and ensure small depositors would receive their funds if their bank failed.

While most mobile money deployments are mitigating liquidity risk among the mobile network operators (MNOs) by requiring a 1:1 cash liquidity reserve, gaping holes exist for consumers regarding the solvency risk of the banks holding the efloat accounts for mobile money.

Currently 112 countries have deposit insurance and another 40 countries have systems under development. However we’ve yet to see any country in an emerging market cover mobile money with deposit insurance (the FDIC does cover certain open system stored value systems in the U.S.). Of the dozens of mobile money deployments worldwide only six countries (Kenya, Tanzania, Rwanda, Uganda, South Africa, and the Philippines according to GSMA and Intermedia) have achieved penetration rates of 10 percent or more of their adult populations, raising the question of whether Kenya’s success is an outlier due to unique market characteristics and unlikely to be repeated.

At the same time an astonishingly few deposit-taking microfinance institutions (48 percent), financial cooperatives (28 percent), or postal banks (14 percent), which together serve an estimated 600 million people in emerging markets, have access to deposit insurance, according to <a href="http://www.afi-global.org/opinion/2013/11/25/grace-should-nbfis-be-part-financial-inclusion-agenda">survey</a> results released by the Alliance for Financial Inclusion last week.

I believe the lack of financial infrastructure supporting consumer confidence in deposit-taking non-banks and mobile money has resulted in the slower uptake of these bank alternatives. Expanding the scope of deposit insurance to cover savings in deposit-taking non-banks that serve the poor and rural areas and in mobile money accounts will be critical to preventing bank runs in a financially inclusive world. While this will have implications for oversight of such non-banks, without expanding the concept of deposit insurance we’ll be left to the unreliable and ad hoc solutions like those my grandfather provided some 80 years ago.

<img class="alignleft size-full wp-image-13404" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/12/b30c328a2452786954f46443db97e069_u9r51.jpg" alt="" width="100" height="89" />Dave Grace is the Managing Partner of Dave Grace &amp; Associates, an international boutique consulting firm which focuses on financial cooperatives, supervision, deposit insurance and financial sector strengthening. Its clients include the World Bank, International Monetary Fund, the Alliance for Financial Inclusion, United Nations, the Center for Financial Inclusion, Filene Research Institution, financial cooperative associations, and central banks. Prior to launching his firm Mr. Grace was Senior Vice President for the World Council of Credit Unions, Inc. (WOCCU) for 14 years.

Image credit: <a href="http://www.flickr.com/photos/cfi_accion/10573579246/sizes/l/in/photostream/" target="_blank" rel="noopener">The Center for Financial Inclusion</a>

Have you read?

<a href="http://cfi-blog.org/2013/09/16/savers-at-risk-a-failure-of-consumer-protection/" target="_blank" rel="noopener">Savers at Risk - A Failure of Consumer Protection</a>

<a href="http://cfi-blog.org/2013/02/13/giving-clients-a-fair-deal-actionable-recommendations-for-effective-client-protection/" target="_blank" rel="noopener">Giving Clients a Fair Deal: Actionable Recommendations for Effective Client Protection</a>

<a href="http://cfi-blog.org/2012/11/28/our-woman-in-milan-observations-on-the-intersection-of-mobile-money-and-regulation/" target="_blank" rel="noopener">Our Woman in Milan: Observations on the Intersection of Mobile Money and Regulation</a>

Preventing the Anticipated 21st Century Bank Run on Mobile Money

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&gt; Posted by Dave Grace, Managing Partner, Dave Grace &amp; Associates

Several months ago I attended a seven hour annual general meeting (AGM) of a client-owned microfinance institution where I heard a long stream of angry and sad members recount stories of the potential loss of their life savings. The primary purpose of the AGM was for the regulator of this intervened institution to hear from the thousands of clients whether they wanted to collectively pay US$14.6 million to recapitalize their institution or to liquidate it and lose their money. This was not an insignificant question for the country as the defunct institution held deposits equal to 12 percent of the country’s GDP. The AGM went so late that most of elderly couples, who are the largest depositors, had long since left before the critical vote was taken to recapitalize the entity.

Although there was ample disclosure and discussion of the 30+ pages of financial statements distributed in advance and prepared by a top-notch big five accounting firm, few, if any, of the clients understood them. What every member did understand was that the regulator and its advisors (including myself) were offering two bad choices. Their raw emotions were a testament to that.

As we look at improving the consumer protection environment for institutions that serve the base of the pyramid (BoP) and try to define what “quality” financial services means, we need to give deeper thought to how savers are affected. At this intervened institution clients were required to save US$20 each month. If they did not save this amount their accounts became “delinquent.” Clients who had rejected or just couldn’t afford the mandatory savings were some of the hardest hit. They agreed to convert part of their savings to capital in the institution with the hope of better days and the ability to sell or withdraw their shares in the future.

While consumer protection issues are important for borrowers, they can loom even larger for savers. Yes, I’ve witnessed microfinance borrowers in an African country getting a raw deal when they are sold an interest rate of 18 percent but actually charged flat rates plus fees and prepayment penalties so that the lender appears competitive with commercial banks’ 19 percent declining balance rate. Not that anyone should have to, but if I had to choose between having unclear (or deceptive) loan rates on the one hand and on the other losing access to my savings for up to 24 months in an intervened institution and being forced to convert US$375 plus 10 percent of my savings to long-term capital for the institution, the shock to savings would be a lot worse.

Survey results released last week at the Alliance for Financial Inclusion’s Global Policy Forum showed that only 50 percent of deposit-taking MFIs and 26 percent of financial cooperatives are prudentially supervised (the intervened institution referenced above was not prudentially supervised). AFI’s survey also showed that deposit-taking MFIs and financial cooperatives are much less likely than commercial banks to have deposit insurance or access to central bank borrowing to get them through a liquidity crisis (neither of which was available to protect clients in the intervened institution). It isn’t just that we need better prudential supervision, but rather market conduct supervision and prudential supervision need to complement each other and be buttressed by a sound financial infrastructure.

Small BoP oriented institutions are often the only source of access to financial services for millions of people. We need to put in place the financial infrastructure components to provide consumer protections for their savers as well as borrowers.

<img class="alignleft wp-image-12414" style="border:0" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/09/b30c328a2452786954f46443db97e069_u9r51.jpg" width="100" />Dave Grace is the Managing Partner of Dave Grace &amp; Associates, an international boutique consulting firm which focuses on financial cooperatives, supervision, deposit insurance and financial sector strengthening. Its clients include the World Bank, International Monetary Fund, the Alliance for Financial Inclusion, United Nations, the Center for Financial Inclusion, Filene Research Institution, financial cooperative associations, and central banks. Prior to launching his firm Mr. Grace was Senior Vice President for the World Council of Credit Unions, Inc. (WOCCU) for 14 years.

Have you read?

<a href="http://cfi-blog.org/2013/04/08/ensuring-consumer-protection-in-the-eastern-caribbean/" target="_blank" rel="noopener noreferrer">Ensuring Consumer Protection in the Eastern Caribbean</a>

<a href="http://cfi-blog.org/2013/02/13/giving-clients-a-fair-deal-actionable-recommendations-for-effective-client-protection/" target="_blank" rel="noopener noreferrer">Giving Clients a Fair Deal: Actionable Recommendations for Effective Client Protection</a>

<a href="http://cfi-blog.org/2012/10/31/35-central-banks-commit-to-financial-inclusion/" target="_blank" rel="noopener noreferrer">35 Central Banks Commit to Financial Inclusion</a>

Savers at Risk – A Failure of Consumer Protection

&gt; Posted by Dave Grace, Managing Partner, Dave Grace &amp; Associates

<a href="http://cfi-blog.org/category/financial-inclusion-2020/" target="_blank" rel="attachment noopener wp-att-8901"><img class="alignright wp-image-8901" style="border: 0" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/12/blogseries.jpg" alt="" width="300" /></a>The <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/financial-inclusion-2020" target="_blank" rel="noopener">Financial Inclusion 2020</a> campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process and highlights findings from “Mapping the Invisible Market.”

"Pushing financial access is great, but what are clients being pushed into?" This has been the common refrain I've heard from regulators in Basel, the Alliance for Financial Inclusion, and central bankers in the Caribbean, where I'm sitting now when I talk about the prospects for full financial inclusion within the decade. Given what the financial communities in Europe, India, and the U.S. have been through, we should not be surprised by this common-sense reaction. Consumer protection must be a key component of the Financial Inclusion 2020 platform. Together with a team of policy, technology, regulatory, and financial institution executives, and a former lobbyist for financial cooperatives (um, me), we've developed a framework of actionable recommendations that seek to balance access with protection.

We, in the <a href="http://www.centerforfinancialinclusion.org/fi2020/roadmap-to-inclusion/client-protection" target="_blank" rel="noopener">FI2020 Client Protection Working Group</a>, can foresee that even in a state of full financial inclusion, incentives persist for providers to look out for their own interests at the expense of clients, due to certain information, power, and structural imbalances in financial services. The challenge of client protection therefore is to reduce these imbalances and provide countervailing incentives or requirements for positive behavior.

It’s a challenging task yet there is evidence from some client-focused providers that it can be done and that attention to client protection may even enhance profitability (see examples from <a href="http://www.easycredit.de/International.htm" target="_blank" rel="noopener">Germany</a> and <a href="http://www.bankmecuannualreport2012.com.au/#&amp;panel1-1" target="_blank" rel="noopener">Australia</a>).

Full financial inclusion with client protection requires clients and financial services providers to interact in a supportive environment led by effective regulators, in such a way that produces a safe and healthy result for clients in the long term. To support the development of this ecosystem, we have developed over a dozen <a href="http://www.centerforfinancialinclusion.org/fi2020/roadmap-to-inclusion/client-protection" target="_blank" rel="noopener">recommendations</a> for financial services providers, regulators, client empowerment, and their operating environment. Below is a sampling of some of the key recommendations.

Key Recommendations for Client Protection
<ol>
 	<li>Clients: Develop means for clients to raise their own voices</li>
 	<li>Policymakers and regulators: Client protection standards implemented in each country</li>
 	<li>Providers: Embrace client protection as a core part of the banking profession</li>
 	<li>Researchers and global community: Articulate the benefits of client protection for clients, providers, and economic stability. </li>
</ol>
Develop means for clients to raise their own voices 

<a href="http://blogs.worldbank.org/psd/what-banking-regulators-might-be-usefully-discussing-at-capetown" target="_blank" rel="attachment noopener wp-att-9865"><img class="alignright wp-image-9865" style="border: 0" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/02/indiamf.jpeg" alt="" width="300" /></a>Travelers have Trip Advisor and AAA, home remodelers have Angie’s List, and diners have Yelp and Michelin to aid them in their decisions on where to spend their money. These serve as a valuable two-way street giving companies unfiltered feedback on what works and what doesn’t. Whether because financial services are sticky or consumers feel less empowered, no ubiquitous system exists to give consumers retail financial services a powerful voice short of a regulatory framework or an outspoken advocate. Client protection abuses might be prevented or minimized if decision-makers at financial institutions regularly hear the voices of clients. This could be accomplished through client ownership (as with credit unions), use of regular client opinion research, or a Trip Advisor type system for banking. To illustrate the point, a local bakery in New York City has received nearly 2,000 reviews, but all of the retail banks combined in New York City have received less than 200 reviews on Yelp and the same general proportions hold true in my home town and many cities.

Client protection standards implemented in each country

Perhaps the single most important action in supporting improved client protection is the implementation of effective regulation and supervision of client protection by banking authorities in every country. To this end, at a global level, the world community should issue and adopt as a clear goal the implementation of national standards for financial client protection in every country by the year 2020. Among other things, these goals should be based on and fully address the globally accepted principles of client protection, cover all providers of financial services, and be adapted to the needs of prospective clients. We would like to see each country make a strong client protection commitment through the Alliance for Financial Inclusion’s <a href="http://www.afi-global.org/gpf/maya-declaration" target="_blank" rel="noopener">Maya Declaration</a> process.

Embrace client protection as a core part of the banking profession

To build a culture of client protection in the banking industry, we recommend the creation of a professional identity for financial service providers centered on responsible, ethical standards. A corollary to this effort is a “Financial Consumer Bill of Rights” for clients, also adopted and promoted by providers. The Smart Campaign is doing exactly this kind of work within the microfinance community, but it needs to spread to all providers of financial services to lower-income clients.

Articulate the benefits of client protection for clients, providers, and economic stability

Building a business and social case for client protection requires metrics for monitoring client protection effectiveness at a market level, micro-level research on client outcomes, and documentation of the costs and, potentially, revenue growth by providers that implement client protection standards.

These recommendations will take the concerted effort of many actors but will ultimately benefit both clients and providers as the next <a href="http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:20433592~menuPK:34480~pagePK:64257043~piPK:437376~theSitePK:4607,00.html" target="_blank" rel="noopener">2.5 billion customers</a> enter the financial sector. FI2020 is not just about access, it’s about the quality of financial services as well!

For more information on Financial Inclusion 2020, <a href="http://bit.ly/FI2020signup" target="_blank" rel="noopener">sign up for campaign updates</a>.

Image credit: <a href="http://blogs.worldbank.org/psd/what-banking-regulators-might-be-usefully-discussing-at-capetown" target="_blank" rel="noopener">The World Bank Group</a><a href="https://openknowledge.worldbank.org/bitstream/handle/10986/11858/9780821396346.pdf?sequence=5" target="_blank" rel="noopener">
</a>

Have you read?

<a href="http://cfi-blog.org/2013/01/25/client-protection-and-microfinance-crossing-a-threshold/" target="_blank" rel="noopener">Client Protection and Microfinance: Crossing a Threshold</a>

<a href="http://cfi-blog.org/2012/12/05/the-three-legged-stool-of-client-protection/" target="_blank" rel="noopener">The Three-Legged Stool of Client Protection</a>

<a href="http://cfi-blog.org/2012/10/31/35-central-banks-commit-to-financial-inclusion/" target="_blank" rel="noopener">35 Central Banks Commit to Financial Inclusion</a>

Giving Clients a Fair Deal: Actionable Recommendations for Effective Client Protection

&gt; Posted by Dave Grace, Advisor, CFI

<a href="http://www.afi-global.org/news/2012/9/27/global-policy-forum-2012-forum-real-change"><img class="alignright wp-image-8373" style="border: 0" title="AFI 9" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/10/afi-9.gif" alt="" width="268" /></a>HOPE! Maybe it’s my punch drunk self toward the end of a way too long U.S. election cycle, but it’s the word that comes to mind following the meeting of 80 regulatory agencies in Cape Town. The Cape Town affair was the Alliance for Financial Inclusion’s (AFI) annual <a href="http://www.afi-global.org/gpf-2012-cape-town">Global Policy Forum</a>.

What was so hopeful? That 35 central banks from developing and emerging markets made or reported on past commitments to increase financial inclusion! In my two decades of work in development finance, this is the first time that policymakers, who have the power to change financial systems, are creating a global movement to help the poor in a material way. While some of the commitments from central banks are malleable, most are concrete. For example, Malaysia is seeking 95 percent access by 2012, Ghana is seeking 70 percent inclusion by 2017 and is changing its payments, financial literacy and mobile financial services framework to get there.

The environment in Cape Town was frothy on networking but the hype stopped there. I’ve been to too many past forums where a single solution/provider was seen as the silver bullet for financial inclusion. The answer was agricultural finance in the 1980s, credit in 1990s and mobile in the naughties. In Cape Town people recognized that it will take multiple actions and multiple offerings to get there, including expanding agent banking networks, mobile financial services, savings initiatives, government-to-person electronic transfers and financial service providers acting responsibly. There was considerable discussion around when and how to regulate mobile financial services, including a hot debate around interoperability among mobile providers. Should interoperability be entirely left to the market, encouraged by regulators, or required? Opinions coalesced around strong encouragement from regulators, but only once the market has a moderate level of adoption.

What is AFI?

This movement among supervisors toward financial inclusion would not be occurring at the pace it is if it weren’t for the formidable activities of AFI and its backers. AFI was started in 2008 with funding from the Gates Foundation to facilitate peer-to-peer learning among central banks and regulatory agencies in developing and emerging countries. With its high-level support, committee structures and small but talented team, AFI has become the forum for exchange and learning among developing country banking sector supervisors.

Having started and run a similar network to AFI, for credit union supervisors from 30+ jurisdictions, I know firsthand that peer-to-peer learning is often the most effective method for unbiased supervisory training. It is also a constant effort for supervisors’ knowledge to keep pace with developments in industry. Cross-country forums are an effective way to do this. The members of AFI have not only moved their own institutions forward, but, as a first, the G20 has looked to central banks in developing countries for how to define and track financial inclusion. This is happening by measuring access, usage and quality of financial services through a similar set of metrics in many countries.

Intersection with Financial Inclusion 2020

The Center for Financial Inclusion in partnership with AFI, is building upon AFI’s great work with central banks to ensure providers of financial services and technology companies also have a peer learning platform designed to promote financial inclusion within the decade. This is happening through the Center’s <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/financial-inclusion-2020">Financial Inclusion 2020</a> initiative which seeks to achieve full financial inclusion globally by 2020.

With 2/3 of the 73 countries present in Cape Town having a full or partial strategy for financial inclusion, it is clear that this is an area moving FORWARD!!!

For more information, <a href="http://bit.ly/FI2020signup">sign up for updates</a> from the Financial Inclusion 2020 campaign.

Image Credit: <a href="http://www.afi-global.org/news/2012/9/27/global-policy-forum-2012-forum-real-change">AFI</a>

Have You Read?
<a href="http://cfi-blog.org/2012/10/17/mobile-money-services-are-ripe-for-growth-in-uganda/">Mobile Money Services are Ripe for Growth in Uganda</a>
<a href="http://cfi-blog.org/2012/10/10/serious-about-scale-at-the-clinton-global-initiative/">Serious about Scale at the Clinton Global Initiative</a>
<a href="http://cfi-blog.org/2012/10/03/citi-and-ipa-invite-financial-capability-innovation/">Citi and IPA Invite Financial Capacity Innovation</a>

Dave Grace

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