New push for ‘open banking’
CaPRI finds large banks uninterested in vulnerable clients, suggests new direction
Published:Sunday | January 30, 2022 | 12:08 AM
A new study conducted by think tank Caribbean Policy Research Institute, CaPRI, has revealed that the real cause of the slow crawl towards financial inclusion is largely due to banks’ disinterest in tailoring products to meet the needs of society’s most vulnerable.
The study titled Cheque In: Increasing Access to the Formal Financial System, found that such markets are not deemed profitable for financial institutions, particularly the larger players.
“Acquiring customers is costly; maintaining customers is costly,” said CaPRI Executive Director Dr Damien King.
“If this is a low-income customer or a customer who is not going to make great use of financial services then probably the return to be had from that customer is not worth the cost,” he said at the presentation of the report’s findings on Thursday night.
He added that it also may not be worth the risk when the banks weigh their obligation to ensure that every new customer is compliant with AML, or anti-money laundering, and financing of terrorism requirements.
“So segments of the market are not of interest to large commercial banks that have a business based on serving better-off customers and customers that are going to make more use of the service,” King said.
The report is the sixth out of nine studies being financed by the European Union that seek to explore obstacles to financial inclusion and provide recommendations for opening access or achieving an enabling environment for individuals and businesses.
Over the years, the conversation around the challenges Jamaica faces on its course to financial inclusiveness has mainly been centred on the population’s heavy reliance on cash, low confidence in the financial system, limited understanding of basic or personal finance, inadequate financing by the banks, and a lack of suitable and accessible savings products across financial institutions.
Up to 2016, only 14 per cent of Jamaicans had transactional bank accounts bank, with corresponding cards; 52 per cent were underbanked; and 34 per cent had no bank accounts – dismal data that led to the Government of Jamaica launching the National Financial Inclusion Strategy in March 2017.
The national strategy has 53 action items and is structured around four main pillars: financial access and usage; financial resilience; financing for growth; and responsible finance – all aimed at improving access to the country’s financial system by 2020.
Targeted groups included low-income persons as well as informal segments of the market such as those in need of agriculture, housing, retirement, and MSME financing.
Over time, the initiative gained some traction with institutions like JMMB Bank and First Global Bank rolling out services targeted at MSMEs and unbanked individuals living in the rural areas.
But King is of the view that to get at least half of Jamaica’s population into the formal financial system, a more targeted approach is needed. Instead of having the financial institutions working to bring the unbanked Jamaicans into the system, the economist and university lecturer is pitching for a recalibration of the financial system to reach these individuals, regardless of where they are located.
“If we going to have a financial system that is open to new kinds of customers and new kinds of services, it requires a new architecture and new institutions. And that takes us up to what we call ‘open banking’,” he said.
Open banking refers to the sharing of registration and transactional data on individuals and businesses with third-party providers through a secure platform.
Jamaica is already checking some of the boxes on tapping into the unbanked populace. The Bank of Jamaica has established a ‘fintech sandbox’, a kind of incubator for tech innovations under which the central bank works with companies to fast-track financial tools and products that Jamaicans can readily tap into through their mobile devices.
Under the sandbox, for example, microfinance company Lasco Financial Services is developing a tech-driven cashless business model, designed especially, but not exclusively, for MSMEs.
Additionally, the Jamaicans central bank’s pending issue of a digital currency that is already market-tested is designed to give options to unbanked Jamaicans, whose cellphones will hold their digital cash wallet.
Jamaica has also passed legislation for the required digital infrastructure – National Identification Systems or NIDS – and implementation is now under way; as well as the Data Protection Act 2020 that is meant to ensure protection of private information for persons doing transactions or business online.
“So a start has been made,” King remarked. “What is left to be done? Having passed the Data Protection Act, now, the regulations that are going to govern that need to be drafted,” he said. “That’s important because those regulations are going to govern the sharing of transactional data.”
He added that regulations will also be need to be drafted specifically around how open banking should be conducted and could mimic Brazil’s open banking system, which requires that all registered financial institutions share transactional data with third parties.
“If we can complete the establishment, drafting, and implementation of these regulations, then the country will have open platforms and facilitating regulations out of which will come competition and innovation. It is that competitive innovation that is going to bring new players and new services that are going to seep into every financial service niche bringing the unbanked,” said King.