Tuesday, August 22, 2017

Financial Inclusion: Integrating the Poor into the World Economy – A Look at Migrant Laborers in a Karachi Marketplace and How They Move Money

by IMTFI Fellow and International Board Member Noman Baig, Habib University

Vendor at Jodia Bazaar, Karachi 
My interest in money stems from the incidents of 9/11 in the United States. After the attacks in the US, all major governments and international organizations passed stringent laws against informal money transfer channels labeled as funding terrorism all over the world. In Pakistan, the state curtailed the illegal funds transfer channel known as hawala by arresting prominent currency dealers and passing the Anti-Hawala Act. A hawala channel is a monetary network/practice that relies on centuries-old kinship bonds for transferring value without moving physical cash from one place to another. In place of these informal and embedded monetary channels, the state opened up a market for multinational corporations such as Western Union and the branchless banking sector to integrate hitherto unbanked people into the gambit of modern finance under the national strategy called “financial inclusion.”

Despite the state’s coercive crackdown on moneychangers and moneylenders in the country’s local bazaars, the lower-income labor class continues to depend on such informal money channels to send and receive money. These personalized networks allow them to feel secure that the money will reach its destination safely. I conducted ethnographic research in Karachi’s marketplace, Bolton Market, the largest wholesale bazaar of a variety of commodities such as skin care, spices, fabric, steel, medicine, etc. While the merchant community was under the direct surveillance of the state security agencies, the laborers were freely moving their funds.

An archeology of funds transfer methods in Karachi’s Bolton Market

Bolton Market, Karachi 
During my research in these markets, I have discovered an archeology of funds transfer methods. I call it an archeology because there are layers of channels, often superimposed on each other, cross-cutting in many cases, and undermining each other at various intervals. It can be called a gradation of financial channels. For example, an informal hawala transfer made through a local money changer passes through a kinship channel, but at some point in a long chain the same transaction will intermingle with the formal banking system. If the transaction raises a suspicious activity report, then the Federal Investigation Agency (FIA) will examine it before the funds reach their final destination.

Jodia Bazaar, Karachi
Financial practices in Karachi’s marketplaces are a lattice work, convoluted, and rhizomatic, making the location of the sources of a transaction by the researcher a dizzying task. In just a single transaction the number of actors involved can include a number of players, such as banks, moneychangers, security agencies, merchants, etc. Sometimes transactions may include shrines, mosques, and charity organizations by virtue of the mere fact that the gift economy and commodity exchange are so tightly knit. Thus it becomes extremely difficult to neatly categorize and differentiate one method of financial transfer from another. In fact, it is also incorrect to use labels such as “informal market,” which according to recent estimates is 75-90% larger than the size of the “formal economy.” To be very clear, “informal” does not mean that the market operates haphazardly, randomly, or irrationally, though it is the kind of impression we generally get when we hear the word informal. In fact, the informal market, if it can be neatly categorized as informal, does not operate outside of the formal market. Both domains intermix with each other at multiple locations.

Bhandari’s story – Considering migrant laborers in Karachi

The research I conducted engages with these multiple methods of funds transfer. One of the channels often used by laborers in Bolton Market involves a kin-based network of largely Pakhtun migrant workers in Karachi.  One of the laborers who I became friends with is called Khan Zareen, also known as Bhandari in the market. Bhandari arrived in Karachi as a porter in the early 1980s. He started working in the city’s vegetable market (sabzi mandi) loading and unloading vegetables and fruit on his back. After the resettlement of the vegetable market to the outskirts of city, Bhandari decided to work in Bolton Market, where he started hauling heavy boxes to and from the warehouse.

Vendor at Jodia Bazaar, Karachi
My encounter with Bhandari was sudden and unexpected. One day while loading boxes on the cart to take it to bus station, he came to hear, rather incorrectly, from a shopkeeper that I was a journalist writing a story about the markets. Bhandari came rushing into the office and instructed me to write about his suffering and condition. “Our houses have been destroyed in Bajaur, and we never got any compensation from the government, while the landowners (malik) are constructing new palatial houses,” he said.  These were the first words that Bhandari uttered to me bluntly. Initially I responded to him by saying that I would tell his story, but that he would have to give me more details. As the days passed, we became friends. Every time I would visit Bolton Market, we would go to a chai dhabba (tea shop) for a cup of tea.

One day Bhandari showed me how he transfers money to his home in Bajaur. He took me to another Pakhtun porter, who is known as Laal Zeb. Bhandari handed over cash to Zeb and told him to deliver rice, ghee, wheat, and sugar to his home. Laal Zeb took the cash and called his brother in Bajaur who owns a food ration shop in the village. The next day, Zeb’s brother delivered the goods at Bhandari’s house. There were no fees or charges for any part of the entire transaction. Bhandari was able to buy food items for his family from Karachi, while Zeb collected the cash for his brother’s shop in the village. However, when Bhandari sends cash to the village via a moneylender/shopkeeper, he has to pay Rs. 30 for every Rs. 1000 (which is still half of what branchless banking services such as Easypaisa charge their customers). These are personalized networks operated mainly by village communities who are spread across rural and urban Pakistan. Porters such as Bhandari never go to the bank. Several years ago, with the aid of the state officials, he managed to open a bank account in a local bank branch in Bajaur to receive government compensation for the reconstruction of his house, but after several years the bank account is still waiting to receive funds from the government.

I asked him why doesn’t he use new services such as Easypaisa—Pakistan’s largest branchless banking network—to send money. He replied, “Easypaisa charges Rs. 60, while I pay Rs. 30 on every Rs. 1,000. Also nobody in my home can get to an Easypaisa shop, which is outside of the village.” In conservative tribal areas women are not allowed to go outside alone. Bhandari has no male family members living in the village; his two sons who are 22 and 14 also work in Karachi.

Although Easypaisa has become a phenomenal success among the laboring classes in Karachi, and in Pakistan in general, Pakhtun laborers in Bolton Market continue to use the old ways of sending and receiving money. They use personalized channels such as Laal Zeb not only to transfer value, but also to solidify affective bonds, social relationships, and ethnic ties. These symbolic values play a determining role in maintaining community boundaries. In an Easypaisa store, affective and ethnic relations are rendered unnecessary, while the rationalized market ethos of efficiency, security, and instant transaction takes precedence.

Vendor at Jodia Bazaar, Karachi
Laborers such as Bhandari constitute the majority of Pakistan’s working class who survive on less than $2/day. It is this sector of the population that is seen as existing outside of the “real” economy, the domain of modern, “formal,” rational, and bureaucratic finance propelled by identity cards, paperwork, written records, and a survivalist ethos. The recent financial sector development policies and practices are an effort to bring laborers like Bhandari under the umbrella of the state and the corporate economy through giving them easier access to savings, loans, and credits. One of the ways proposed to implement this is to initiate a network of branchless banking or retail agent banking. The state and corporations justify these efforts as a favor to laborers, a remedy for alleviating their so-called “miserable” conditions through the cure of financial inclusion.

Expanding the Discourse on Financial Inclusion

The agenda of financial inclusion to offer easy access to savings, loans, and credit to the masses, is fraught with inequalities and injustices. This is not to say that the laborers should cease using branchless banking. But to charge heavy fees for the services owned by a foreign corporation proves how terms of trade set during the colonial era continue to extract surplus value from the bones and flesh of the laborers. Most importantly, if international developmental organizations such as the World Bank are seriously interested in improving the financial conditions of the poor by bringing them inside of modern finance, then they should start by identifying the actual root causes of their exclusion. If they want to include these people, then the governments need to start a radical program of wealth redistribution through policies that allow its more even distribution. In other words, the poor masses all over the world are excluded because the wealthy few hold the wealth of 99 percent of the people. The majority will always stay excluded, and any financial inclusion program will fail miserably, unless a just economic system comes into place.

Laborers near Urdu Bazaar, Karachi
The discourse of financial inclusion therefore demands a critical scrutiny in light of the developmental ideology propagated in the postcolonial world. With the beginning of modern colonialism in the mid-eighteenth century, such efforts at integration and inclusion have resulted in an imbalanced power structure and income inequality at a global scale. For instance, in British India, colonial rule forced the integration of the vast land of the Indian subcontinent, and its markets, its weavers and peasants, into the international markets. The outcome was horrendous, and resulted in the siphoning of wealth and resources from the colonies to the metropolis. Thus this is not the first time that a serious effort at integrating the masses into the world economy has been undertaken. The postcolonial world has been experiencing such programs of integration for at least the last two hundred years, often with disastrous consequences.

Stay tuned for a blogpost insights from "Financial Inclusion of the Poor workshop" in Karachi, Pakistan.
Photos credits: Noman Baig 

Wednesday, August 16, 2017

From the wallet to the refrigerator: why in the future machines will pay for everything

Experts point out that a multitude of Internet-connected devices will begin to take care of small daily transactions

by Andrés Krom from LA NACIÓN (The NATION, Argentina) 


About 8,000 years ago, the first farmers began to use part of their crops as exchange goods. For practical reasons, people later leaned more towards precious metals, which were not only easier to divide up, but also to carry. Paper money began to be used during the eleventh century, one of the many inventions attributed to medieval China.

Over the last 50 years, the state of available means of payment—cash, checks, credit cards—remained relatively stable. However, the proliferation of Internet access, the rapid adoption of mobile phones, and the emergence of new technologies have opened a window to a radically different future in many aspects, including economically.

So, if we were to travel a few years ahead in time, what kind of means of payment would we see from the slightly tarnished window of our DeLorean?

Probably none.

Invisible future

Unless you are in the habit of going everywhere with printed photos of your family, traditional leather wallets will become a museum artifact in the coming years.

The reasons? There are several, but we might start with the future dematerialization of the more than 1 billion credit cards currently in circulation. "I think the format of credit cards is likely to change," Bill Maurer, Director of the University of California, Irvine's Institute for Money, Technology and Financial Inclusion (IMTFI), tells LA NACIÓN. "We see a gradual migration towards a more virtual space, which is already beginning to be seen in online shopping," he adds.

Rubén Salazar Genovez, Senior Vice President of Visa Products in Latin America and the Caribbean, agrees that there is a need to move from plastic to an invisible environment in which payment credentials are maintained. "Connected devices are changing everything we know about shopping and payment. The web and mobile payments are just the beginning," he adds.

The expansion of mobile payment platforms and the consequent digitalization of money will also put banknotes and coins in check, but will not be enough to extinguish them. "I do not think cash will disappear," Maurer augurs. "Coin, in particular, is one of the oldest technologies in use that exists. It's incredibly durable."

According to this academic, the use of cash will endure among the lower classes, where access to financial services is limited. Even Anuj Nayar, Director of Global Initiatives at the electronic payment company PayPal, thinks that cash will withstand the digital onslaught. "There are still spaces for outdated technologies," he says. "The problem is the discomfort that comes with its use, its deterioration, what happens when it is lost."

In this context, it is estimated that this partial dematerialization of the means of payment will be tied to a noticeable drop in the role of human beings in some transactions, which will begin to be automated.

Things that talk to things

If Gartner's predictions are met, the Internet of Things (IoT) will be an established reality in the next four years. There will now be around 20.4 billion Internet-connected devices, from coffee machines to streetlights.

In this new world, diverse elements connected to Internet will have the capacity to transact with each other continuously and without the permanent supervision of users—a phenomenon that Maurer calls "ambient payments." "In the world of IoT, we will see some payments that happen in the background, especially at the level of micropayments," he indicates.

Gregorio Trimarco, of the Global Products and Digital Channels division of Mastercard, agrees with this vision. "We see that payments are going to be convergent. We believe that every connected device can be a payment device. The technology already exists for this to happen."

Imagine, for example, having a smart refrigerator with sensors that allows it to detect when a product begins to run out. Through a simple Internet connection, this appliance can put itself in contact with a supermarket every time it is necessary to replace the out-of-stock food.

Connected and autonomous vehicles might also be a determining factor in the expansion of this new economy. A system built into the automobile will allow, among other possibilities, to automate the payment of a series of services, like fueling, parking meters, and even automotive insurance.

There is also room for new payments in the virtual reality sector. Just this May, the payment processor Worldpay presented a proof of concept for a solution that allows consumers to buy items available in a simulated reality context.

Security, the last frontier

With new technologies come new problems. Any of the elements connected to the Internet will be vulnerable to cyberattacks, so ensuring the protection of privacy will become essential, especially when the financial integrity of users is at risk.

That is why multinationals like Visa, MasterCard, and PayPal are already preparing for a world in which passwords and payment voucher signatures will be nothing but distant memories. Among the technologies they are exploring geolocation and biometrics stand out, in their various facets: facial recognition, fingerprint device authentication, etc.

"The more complex the systems become, the greater the challenges," says Maurer. "It only takes one weak link to complicate the whole chain."

Translated by Taylor C. Nelms. Read original post (Wednesday, August 09, 2017) in Spanish here - http://www.lanacion.com.ar/2051464-de-la-billetera-a-la-heladera-por-que-en-el-futuro-las-maquinas-pagaran-por-todo.

Wednesday, August 9, 2017

Barriers to a single European payments market: Cultural-economic feedback loops

PERSPECTIVES By Erin B. Taylor, Canela Consulting, former IMTFI Fellow and co-creator of the IMTFI Consumer Finance Research Methods Toolkit

Look into the average traveller’s pockets today and you will find evidence of multiple means of payment. Debit cards, credit cards, traveller’s checks, several currencies, cryptocurrencies, and payment apps are now so common that it seems impossible to run out of ways to pay. Wherever we buy things—on the street, in shops, restaurants, at ticket machines—we have a way to pay. 

As cash falls out of favour, foreigners must switch between different debit 
and credit cards in order to pay. Photo By Erin B. Taylor.

Or so it would seem. In fact, as many travelers can attest, it is still possible to run out of ways to pay. 

Let me give an example. One fine winter’s day in early January 2016, I stopped at a kiosk at the University of Amsterdam to buy a coffee. It was the beginning of my six-month stint as a visiting academic, and the environment was brand new to me. 

I handed the teller some cash to pay for my coffee and croissant, and she looked at me in surprise: “We only accept PIN,” she said. She meant that the kiosk exclusively accepted payment via a Dutch debit card: no cash, no foreign cards—not even European ones. 

I was astonished. Not accepting foreign cards is bizarre enough, but who doesn’t accept cash? As it turns out, a growing number of retailers in northwestern Europe are turning away from hard currency, citing cost and safety reasons. Some stores don’t accept cash, but they accept virtually all foreign cards (debit and credit). Others accept cash and local debit cards, but not foreign cards. And a minority (like my kiosk) exclusively accept local debit cards. 

The unsuspecting traveller may encounter inconveniences not only when trying to pay in the odd kiosk, restaurant, or shop, but also when simply trying to get from A to B. In the Netherlands, an unusually cash-averse society, some parking meters and train ticket machines only accept Dutch cards, and many a traveller has been caught out trying to return to the airport but unable to pay for the fare. Even the simple act of making a meal can involve a complicated series of transactions (see text box at the end of this post, "A Recipe in pan European Payments"). 

This is not just a Dutch peculiarity: payments are a Europe-wide problem. The European common market is meant to deliver the “four ‘f’s”: freedom of movement in people, goods, services, and capital. Theoretically, this should endow people with far more choice as consumers, workers, and citizens. 

Yet despite decades of financial market integration, many consumer finance products and services cannot be readily used across national borders within Europe. This situation could worsen when Brexit is implemented. A diversity of financial systems and a willingness to experiment means that the consumer can never be quite sure what to expect when crossing national borders. Consumers who live, work, and socialize across Europe’s borders can encounter problems using a wide range of finance products and services (e.g., payments, mortgages, taxes, and pensions). Why is this the case?

Some ticket machines in the Netherlands only accept cash or
Dutch debit cards. Photo By Spoorjan (Own work)  CC BY-SA 3.0 

Barriers to integration

One major problem is that the process of financial integration is far from complete. Generally, this integration process is conceptualized as being primarily technological and regulatory. The Single European Payments Area (SEPA) has been largely rolled out across the continent, and the Target Instant Payment Settlement (TIPS)  service promises to abolish waiting times for transfers between European banks. European regulators are working to create legal solutions, such as developing Europe-wide pension schemes, and the Payment Services Directive 2 (PSD2) is due to be implemented next year, further deregulating payments and opening up the market to new players and products. 

However, there are also barriers to integration at the level of the firm and the consumer market interactions, and our understanding of these is threadbare. Some of these relate to market structures, such as pricing. For example, in some European countries, credit cards are not widely accepted because merchants consider the cost to be prohibitive. Other barriers have socio-cultural leanings, such as consumers’ preference for local services, which dissuades them from shopping around the EU, or a preference for using cash in Germany.

These barriers might appear to be either economic or cultural, but closer inspection often shows them to be both. Let me illustrate by way of an example. In an ECB Report, Kokola argues that the Dutch tend to be more averse to credit card debt than their neighbors, whereas Germans are more risk-averse. This kind of cultural heterogeneity influences how financial products and services are developed, marketed, and consumed. 

Such cultural predilections can have deep historic roots. In the Netherlands, there is a longstanding aversion to credit due to historical attitudes towards indebtedness, but bank cards were adopted early on. Because the Dutch are averse to credit, but used to debit cards, credit transactions are relatively rare compared with other countries. And because the Dutch don’t use credit cards much, the cost of credit card transactions remains expensive. Because they’re expensive, merchants don’t accept credit cards, and this reinforces the Dutch aversion to them. 

And so a cultural-economic feedback loop is created.

This lines up with what we know about the interplay between economy and culture globally. Social researchers have long observed that economy and culture are analytically inseparable, no matter what kind of economy people live in. This is easiest to observe in pre-capitalist societies, such as in the use of shell money in Melanesia. 

But economy and culture are intertwined everywhere. In Dreaming of Money in Ho Chi Minh City (2014), Allison J. Truitt discusses how money culture influences what banknotes people will accept (dirty or broken notes are rejected), how money is used for ritual purposes, and many more phenomena that cross the culture/economy divide. In Liquidated: An Ethnography of Wall Street (2009), Karen Ho describes how the decisions of investment bankers are  shaped by their sociocultural beliefs. Nobody, anywhere, is immune.  

The diversity of cultural-economic feedback loops has significant implications for the integration of consumer finance markets in Europe. It suggests that there are hard limits to what can be achieved through technological and regulatory means alone. As Sander, Kleimeier & Heuchemer note, “cultural distance limits international financial integration over and above what can be expected from economic trade and transaction costs.” Even if full integration is achieved, consumers will continue to face limits to their freedom of choice as they live, work, and socialize across European borders.

To understand why there is still no single market for financial services in Europe, it is not enough to look at technical or regulatory matters. But nor can we simply shift the blame to culture. Rather, a cultural-economic feedback loop comes into existence when an economic practice and a cultural practice reinforce each other’s existence. 

The standard EFTPOS machine is fast
being replaced by other POS devices.
Photo By Erin B. Taylor.

The EU’s problem is global

The globalization of payments and other financial services is also creating an imperative to figure out what happens when money cultures meet. Given that so many consumer finance products and services are now available over the Internet, consumers are no longer limited to what is available in their home town or country. Today, we can research and buy an increasingly wide range of savings, transfer, investment, credit, and money management services from anywhere around the world. 

Let’s stop for a moment to consider the irony here. A resident of one European country cannot use their bank card in a second European country, even though there is a single currency and theoretically an integrated payments system. But that same person can buy travel insurance from the U.S.A., invest money in a fund in India, exchange currency using a mobile app based in the United Kingdom, and trade cryptocurrency based in—well, anywhere really.

The problem we face is twofold. First, the integration of financial markets globally is proceeding at different rates in different places. This means that consumers are facing a rapid expansion of choice on the one hand, and the same old limitations on the other. (In fact, these limitations are becoming more problematic because people are more mobile across borders than they were before, and so they encounter these problems more often.) Regulators and financial services providers are over-providing services in some areas, and under-providing them in others. Corporate and government strategies for integrating financial markets need to find a balance between these extremes. 

Second, we have little idea what consumers do when faced with this strange situation. How do consumers work around obstacles to making financial transactions? Do any of the new products and services available globally fill gaps in local services? Why are some people willing to experiment and become “early adopters” of new digital finance products and services, while others remain “laggards” dependent upon traditional banks? And what will a more mature global market for financial goods and services look like in the future? 

Since consumers can now use financial services from around the world, we cannot assume that it is sufficient to approach any of these questions from a local or European angle. In the future, consumers are likely to care less and less about whether the financial services they use are local or not. This is particularly the case when brands that are already globally popular (such as Google, Apple, or PayPal) develop their own range of payments solutions, such as digital wallets. 


A Dutch ATM, fast becoming a rare commodity. 
Photo by Canadian Pacific CC BY-NC 2.0

Mixing methods to understand changing markets

Our challenge is not to get everyone using exactly the same tools, but to create a global ecosystem in which multiple tools and avenues are accepted. To do this, we need to first understand the market. This means we need to design research that investigates how a variety of factors–cultural, economic, regulatory, technical–shape market practices. This holds even if we are trying to specifically understand consumer behaviour. 

Due to the complexity of markets, relying on one single research method (e.g., a survey or interviews) is unlikely to be sufficient for many research questions. Just as financial markets for consumer services are diversifying, so must our research methods also diversify. Understanding consumer choices requires analysis of both qualitative and quantitative factors that influence behaviour, including price, market structures, personal preferences, social structures, and cultural norms. 

This is not news: product developers, designers, and marketers know well that in order to sell something, the offering must hit the right price point and the right “tone” with the consumer. But the shift to Internet-based and mobile consumer finance services presents a challenge because the transition is incomplete and the market is highly complex. 

While little can be done to predict how regulations will change, it is certainly possible to improve our understanding of changing consumer behaviour and thereby generate more robust market knowledge. As we discuss in the Consumer Finance Research Methods Toolkit (CFRM Toolkit), researchers from both industry and academia are innovating new ways to record and analyze the financial behaviours of individuals and households. 

Ethnography, interview methods, financial diaries, online/offline studies, experiments, and so on, are all being reconfigured and combined with other methods to account for the increasing mobility products and services through accessible digital spaces and technologies. Adapting and combining methods offers substantial potential to generate detailed data on a variety of cultural and economic problems. This is because they either include ways to collect qualitative and quantitative data simultaneously, or because they can be easily incorporated into mixed-methods research. 

Combining interdisciplinary thinking with mixed methods gives us a chance to understand the cultural/economic feedback loops that are shaping the emergence of a new generation of consumer financial practices and markets, not only in Europe, but around the world. Regulators, service providers, and researchers are best placed when they take this range of factors and geographies into account.