Assessing the Role of Fast Payment Systems in Promoting Financial Inclusion

Critical Questions by William Alan ReinschandJohn Strezewski

Published May 9, 2024

Digital public infrastructure (DPI) intends to revolutionize the distribution of public services, formalize the economy, and integrate technology into the lives of everyday citizens across the developing world. Though still somewhat undefined due to its recent coinage, DPI generally consists of three components: a digital identification, a data exchange platform, and a fast payment system (FPS). The development of FPSs, in particular, has the potential to boost financial inclusion in emerging markets by reducing the importance of formal banking, lowering transaction costs, and simplifying cash transfers.

Questions remain, however, on both the extent to which FPSs have truly improved participation in the formal financial system and which FPS models have done so most effectively. New research from CSIS explores this question in greater depth, using survey data from Brazil, Costa Rica, India, and Thailand to unearth the impact of FPSs on developing market economies.

Q1: What are fast payment systems?

A1: In their most basic form, "fast payments" are transactions in which fund transfers occur almost instantaneously, unlike traditional card payments that undergo a longer settlement process. Fast payments can be processed around the clock, on every day of the year. The immediate nature of the clearing process can boost business's liquidity, give consumers a clearer understanding of their finances, and reduce processing costs for both parties.

Both public and private entities have pursued the development of FPS architecture, starting with Kenya's M-Pesa, which was launched in 2007. The M-Pesa system permitted unbanked users to exchange hard cash for digital currency and transact with that currency using a mobile phone-enabled digital wallet. Aided by firms like MTN Mobile Money and Tigo Pesa, numerous African counterparts followed suit, and by 2021, these first movers were reporting high rates of digital payments usage despite credit cards and formal bank accounts remaining unpopular.

African nations were not the only ones to recognize the immense potential of FPSs to boost financial inclusion, particularly among low-income consumers. China, Mexico, Thailand, Brazil, and Bangladesh are among the now many examples of countries home to popular FPSs. Today, India is the undisputed global FPS leader, recording over 48.6 billion transactions in 2022. Its FPS has evolved substantially into a vast interoperable network that can be used for everything from grocery shopping to wage payments and social welfare transfers. The United States, conversely, remains one of the few countries where consumers still strongly prefer to use credit and debit cards over any FPS. The U.S. Federal Reserve is just now implementing an interbank fast payment service, called FedNow, which launched in July 2023.

Despite broad adoption in various parts of the globe, FPS design has varied substantially between countries with differing development goals, government mandates, and technological constraints. Perhaps the biggest divergence lies between the government-led and private sector-led models, with countries like Brazil and Saudi Arabia adopting FPSs fully owned by their respective central banks and counterparts like Singapore and Sweden giving the private sector space to develop its own systems.

Q2:What financial inclusion benefits have FPSs yielded?

A2: Several studies have already explored the financial inclusion gains reaped from FPSs. A recently published investigation by the Bank for International Settlements (BIS), for instance, draws correlations between certain design features (like central bank ownership, the use of internet aliases in place of bank accounts, and strong governance) of FPSs and their adoption at the national level. Where this research falls short, however, is in its use of broad, country-level data focusing entirely on the total and per capita number of FPS transactions in each jurisdiction, rather than digging into the number of users or income segments of these users. The latter two data points are more indicative of the actual impact of FPS integration on the extent to which low-income users are being incorporated into the financial system.

Using consumer- and firm-level survey data, a new CSIS research study reveals that there is still work to be done in promoting financial inclusion to complement FPS introduction. The survey indicates that wealthier consumers in developing nations believe they benefit more from FPSs than their poorer counterparts. This is even the case in India, the world's FPS leader. There, low-, middle-, and high-income consumers were asked on a 0-100 scale how they perceived the value of India's FPS (0 = not valuable; 100 = extremely valuable). Nearly half of low-income respondents said the FPS was not very valuable to them (answers between 0 and 20), while less than a fifth reported it as having high value (answers between 81 and 100). On the other hand, almost no high-income respondents said the FPS had low value and nearly two-thirds claimed it was extremely valuable to them. These results indicate that wealthier segments of the population have been quick to embrace FPS in their everyday lives, while low-income segments still do not perceive it as anything life-altering.

While FPS uptake among poorer segments is still lower than desired, it is important to note the ways in which FPSs have enabled the achievement of other development goals. Government-to-person transfers for social assistance programs, for instance, have been transformed by FPSs in several markets. The Brazilian government leveraged its FPS, called Pix, to disperse stimulus funds to nearly 70 million beneficiaries during the Covid-19 pandemic, despite 40 percent of recipients being unbanked. Initiating transactions with Pix requires just an email address or mobile phone number. This feature enabled the government to transfer stimulus money to an estimated 30 million unbanked citizens. International remittances are another area where FPSs have boosted efficiency. The central banks of Singapore and India, for example, agreed to interlink their FPSs in February 2023, facilitating instantaneous, convenient, and safe transfers from Indian migrant workers to their families.

Q3: Which FPS model is the most promising?

A3: With regard to the ownership and design structure of FPSs, it is still too early to tell whether the government or private sector-led approach yields better results. Some public sector models, such as Hong Kong's Faster Payment System and Brazil's Pix, have seen widespread adoption in short periods of time. Bangladesh's bKash-a mobile payment platform developed by fintech firms-boasts tens of millions of users and in November 2021 became the country's first-ever "unicorn" startup. One commonality that can be gleaned from successful introductions of FPSs is that all had a strong product-market fit. Consumers and businesses must both have a demand for digitizing payments and the appropriate physical infrastructure (e.g., mobile phones, internet connectivity) to adopt them.

While neither government nor private sector-led models have emerged as a clear winner, one can make a convincing case for DPI arrangements that promote cooperation between the private and public sectors. Where government actors can be most effective is in laying the groundwork for the private sector to build upon. India's government did this by developing its unified payments interface (UPI), a free-to-use, baseline payments network that can be linked with a variety of private sector payments providers to enable both inter- and intra-platform transactions. Using UPI as a building block, anyone can build a payments app on top of the interface, and this app can interact seamlessly with the others connected to the network. Already, several private sector payments systems, such as Google Pay and WhatsApp Pay, have linked their services with UPI, effectively making their systems interoperable. As such, UPI boosted the efficiency of India's financial transaction network while affording consumers the privilege to select their preferred interface.

Where India has strayed from this approach is with RuPay card, India's UPI-compatible, government-backed credit and debit card network. RuPay entered the market in 2014 with the explicit goal of displacing privately owned networks like Visa and Mastercard with a government solution. Since its release, Indian prime minister Narendra Modi has used nationalist rhetoric to strongly promote RuPay over these U.S.-based firms. In a 2018 speech, for instance, Modi asserted that while "everyone cannot go to the border to protect the country, we can use RuPay card to serve the nation." Now, RuPay accounts for the majority of India's debit and credit cards, as private sector networks have difficulty competing with its not-for-profit business model, which has allowed it to reduce costs far below market rates.

Explicitly displacing U.S. firms is a dangerous game for India, and it should consider the long-term implications of promoting public sector endeavors over private enterprise. UPI has only been so successful because it gives private sector actors proper incentives to probe further into an attractive Indian market and compete among themselves for customers. Conversely, the introduction of RuPay cards and use of economic nationalist rhetoric actively undermines innovation by undercutting the companies with the best financial technology in the world. The prospect of innovation slowdown only grows when competition is removed from the market.

Conclusion:

FPSs have significant potential to transform the day-to-day operations of developing market economies. While they have been lauded by some as a silver bullet for addressing financial inclusion, new data shows that FPSs have yet to fully penetrate the low-income segment of the market. Furthermore, the evidence does not clearly favor the private or public sector-led models but does point towards public-private partnerships as a promising archetype for innovation. Finally, introducing a government-run solution to displace the private sector can be risky. Economies typically perform better when their governments create markets, not when they run them outright.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. John Strezewski is an intern with the Scholl Chair in International Business at CSIS.

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