Mapping the DFS Ecosystem with a Fintech Stack

Briefing Paper for the Catalyst Fund

DRAFT 1: 5 January 2018

The purpose of this paper is to present a framework that permits a logical separation of the
many elements involved in delivering rich digital financial services (DFS). This can be useful
to identify patent capability gaps in the present financial inclusion solution landscape
(whether of a regulatory, technological, or commercial nature), and to map the increasing
diversity of fintech players that are emerging to address those gaps.

The economic purpose of finance is managing risks and taking advantage of opportunities,
both in the social and commercial domains. Money flowing cheaply and seamlessly down
mobile and data networks is as essential to modern life as is water flowing down pipes,
electricity flowing across wires, trucks driving down roads, or information flowing between
computers. All finance can indeed be construed to be a transfer of value across space and
time, which is why an efficient payments infrastructure is a foundation for higher-level
financial services. National financial policy ought therefore to treat digital money platforms
as a national utility infrastructure, just like water and electricity, albeit not a nationalized
one. This is the notion of the digital money grid.

India is the country that most exemplifies this approach. The single-minded objective of the
authorities is to create a low-cost, fully interconnected network that works for all. They see
the role of the State not in owning and operating the utility, but in creating the public goods
that are necessary for the utility to flourish for the common good. They have based their
approach on two key concepts: (i) promotion of interoperability at all levels of the value
chain, and (ii) direct provision of certain technical standards and shared service elements
by public entities. This offers opportunities for the various financial service players
involved to scale up through specialization, consistent with what we have observed in most
sectors that have been exposed to the full force of the internet.

A layered model of digital financial services

As with all modern ICT systems, it is best to conceive of the digital money grid as a
collection of distinct but closely interlinked layers of functionality. To frame this discussion,
we define eleven layers that the grid needs to deliver on in order to create compelling
propositions for mass-market, and especially lower-income, users. These are grouped into
five categories as shown below (by convention, core enablers are put at the bottom and
higher-level services at the top).

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• Digitizing me: These two layers are, respectively, about digitizing users´ identity and
other user information (such as their financial history) that can help them access
financial services on better terms.

• Digitizing my money: The first two layers are about digitizing the two core functions
of money: as a store of value and as a means of payment. The third layer is about
creating backward compatibility of digital money with the legacy cash system,
through effective digital money-cash conversion mechanisms.

• Driving user choice: These two layers are about adding flexibility to the basic digital
money operation: by introducing more user friendly money addressing schemes, as
well as a framework of application programming interfaces (APIs) that allow a
logical and commercial separation between the lower infrastructure layers and the
upper service creation layers.

• Driving user relevance: These two layers are where financial services beyond the
sheer storage of digital value and real-time payments occur. These are the service
creation layers that target a variety of human and business needs, taking account of

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 the diverse psychological, social, and organization environments in which digital
money needs to fit in.

• Driving engagement: These two layers do not offer any direct financial capability to
the end user, but are designed to drive greater intimacy between the customer and
the provider. This includes mechanisms to increase users´ participation in defining
how to use the services, as well as to address and resolve their queries and issues.

1. Digital identity layer

Digital money is, at its core, assigning a monetary value to a digital identity. Digitizing the
notion of $100 into zeros and ones is easy; giving customers the means to unfailingly prove
their identity digitally is the real job of digital banks. Without a proper digital identity,
money cannot be said to be properly digitized. One can unbundle the notion of digital
identity into the following three elements:

• Assigning a unique number to each resident of the country. This requires linking the
unique number to a unique identifying factor associated with each registered
person (whether biometrics, PIN or private key, or a personal device), and
maintaining a database that ensures that these unique factors are associated with
one unique number only (i.e. no duplicates).

• Being able to prove my identity. There needs to be an accessible infrastructure

supported by specific technical standards that allows people to assert their identity,
by (i) capturing the user´s unique factor associated with their unique number (e.g.
biometric readers), and (ii) an online mechanism for querying the unique number
database to check that the factor supplied matches the one on record for that
number.

• Attaching irrevocable proof of identity on digital documents. This is the equivalent of

signing documents, which in technical terms is called digital signature. A related
service is digital watermarking, which in addition proves that the text of the
document has not been tampered with. Such services are essential for paperless
contracting of services, such as for new loan agreements or insurance policies. To be
useful, the validity of digitally signed documents needs to recognized by law so that
they can be enforced in court.

2. User data aggregation layer

This layer is a logical extension of the previous one in that it also relates to user-specific
information, but broadens it beyond what is usually used as identifying characteristics. This
layer is about any additional pieces of user-specific information that can help financial
institutions profile their customers in order to assess either product fit (e.g. product

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targeting on next-best activity basis) or risk exposures (e.g. for credit repayment or
insurable event risks).

Much of the information in this layer gets generated transactionally over time, through the
normal course of customer interactions with providers. Therefore, this layer is
fundamentally about creating a transactional memory or historical track record for each
user. This would typically include a customer´s earnings history or loan repayments. For
lower income segments with less regularity of income and less history of formal credit,
alternative data types might include their history of bill payment and airtime top-ups. In
some places, customer data can also be acquired from external data repositories and
aggregators, such as credit bureaus, property registries, moveable asset registries, and
business registration registries.

In addition to capturing and storing the data, it is usually processed through a variety of
statistical and machine-learning techniques to develop summarized data with some
presumed predictive power. This can for instance drive segmentation and credit scoring.

A fundamental policy issue is who owns the data that is generated in the interaction of a
customer with a provider. From both a policy and service architecture point of view, this
layer involves some important considerations around data reporting to data aggregators
(e.g. which providers have an obligation to contribute data to credit bureaus?), restrictions
on data sharing (what customer data can providers share with or sell to other providers?),
and customer consent requirements (when must customer consent be given, and what
format must that consent take?)

3. Storage of value layer

This layer implements the real-time accounting of digital money balances held by all users
in the system. It is a purely accounting function that keeps track of the amount of digital
money that is associated with each user, that is, linked to each digital identity. This layer is
therefore associated primarily with the storage of value function of money.

This function is implemented through secure IT platforms which over time have
incorporated many additional features and services, and have therefore become fairly
complex. The recent introduction of mobile money services represents in some ways a
radical simplification of these account management platforms, from rigid core banking
systems (CBS) to much lighter wallet-based systems.

Central banks have traditionally assumed a monopoly in the issuance of money in physical
format (coins and notes, i.e. currency), but have outsourced the creation of money in digital
format to licensed (and in most cases, private) institutions.

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The business of maintaining digital balances on behalf of customers creates a basic trust
problem: users need to feel comfortable that they will be able to call on or dispose of their
digital money balances which they have parked with certain providers at appropriate times
in the future. Therefore, the main policy issue at this layer is one of ensuring the proper
accounting and investment of funds stored by users, which is done through prudential
regulation and supervision.

4. Real-time money transfer layer

This layer implements the debits and credits that are involved in money transfers between
accounts, which may be held by different users and providers. This layer adds the means of
payment function of money to the previous layer, and is the basis for all forms of specialized
digital money transfer services, such as P2P (person-to-person) transfers, CICO (cash
in/cash out), bill payments, and merchant payments.

From the customer side, the value of this layer is premised fundamentally on the speed and
universality of payments. In the limit, customers want to be able to pay anyone, for any
purpose, instantly.

As a result, electronic payment systems exhibit strong network effects: the value enjoyed by
individual users on a payment network grows with the number of users —potential
payment counterparties— on it. Therefore, the economics of the business tends naturally
towards a winner takes all market structure. Early advantages tend to get inalterably locked
in over time through the sheer power of network effects, rather than necessarily through
the continued unique efforts and investments made by the operator involved. It is therefore
important for policy to lead towards interoperable payment platforms, which let all players
take advantage of market-level network effects.

The other value driver in payments is the minimization of payments risks, through:

• Establishing the legal basis for payment finality (or irrevocability).

• Structuring payment systems on a credit push rather than pull basis (i.e. turning pull
payments into a request to pay which, if accepted, triggers a credit push).
• Reducing interbank transaction settlement times, through appropriate clearing and
settlement infrastructures.
• Reducing interbank counterparty risks by running large-value payment systems
through funded accounts at the central bank.

5. Cash conversion

This layer is about the physical distribution network that allows users to complete the cash
leg of CICO (cash in/cash out) transactions (the other leg being a specialized form of a
money transfer between the two parties). To ensure adoption of and trust in new digital

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forms of money, it is essential to provide backward compatibility with the legacy payment
system – cash. This is generally implemented through an agent network controlled directly
by the provider or sub-contracted to one or more specialized agent network managers.

The main challenge at this layer is sorting out the logistics so that there is enough cash
liquidity in locations near where users might need to cash in or out. The key trade-off is,
therefore, one of geographic density (which translates into proximity for users) versus the
cost of organizing a large network of liquid cash points.

6. Payment addressing layer

An interconnected payment system requires an addressing system whereby each potential

payee is assigned a unique address. This is has traditionally been done on the basis of bank
code and bank account number, or PAN for cards. However, these addresses tend to be hard
for ordinary people to remember. Some systems have leveraged other unique addressing
systems that users already have, such as mobile phone number and an official ID number.
Paying to mobile phone numbers is more convenient for people, who tend to share and
store each others´ phone numbers. And paying to official ID numbers may be easier for
public sector payers, who are required to identify beneficiaries by their ID number.

India has recently launched a new Virtual Payment Address (VPA) which operates in a
manner akin to the web addresses that identify internet resources in a user-friendly way.
Customers can select their own username, and that is appended to the name of their
payment service provider (e.g. vinay@icici). Payments made to this address would first
need to query ICICI to resolve this address into a valid ICICI bank account number.

The use of more flexible addressing systems can serve two purposes. First, it offers added
level of convenience to payees who can select their own addresses, and to payers who can
deal with more memorable addresses. Second, it can level the competitive playing field by
ensuring that no single player gains control over the payment addressing system – as
mobile operators may do when payment are addressed to phone numbers which are strictly
under their control.

7. Open access interface layer

It is a lot to ask any player to worry about the previous layers, which are largely premised
on high volumes of transactions, as well as to excel at the next set of layers, which are
largely about differentiation, innovation and customer understanding. Therefore, it is
important for smaller, more focused and more nimble players to have access to the services
provided by players operating on the previous layers so that they can concentrate on
customer adaptation and innovation. This is best achieved by defining clear Application
Programming Interfaces (APIs) which developers can use to create services.

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These APIs may be offered by private players on a purely commercial basis. Banks have
traditionally refrained from doing so, and mobile money operators are only now starting to
open up their APIs though they generally make them available to selected partners only
rather than on an open basis. On the other hand, some fintech players, such as Stripe and
Hover, make it specifically their business to build and resell an open API layer.

Indian and European authorities are driving the creation of a set of APIs that licensed banks
must implement and offer to licensed payment providers (through their Unified Payments
Interface and XS2A initiatives, respectively. Both these initiatives seek to open up the
customer-facing service innovation space by creating a class of app-based providers which
do not fulfill any of the core banking (i.e. account opening and management) or payments
(i.e. clearing and settling) functions. Instead, their focus is on presenting the underlying core
banking and payment capabilities to customers in an intuitive, easy-to-use way. To do that,
they need to be able to access customer´s account information from, and pass on customer´s
transactional requests to, their underlying financial service provider in a way that does not
undermine banking security and secrecy.

8. Standard tools layer

Payments services generally try to solve mainly for speed, convenience and reliability. But
when it comes to arranging one´s business or personal transactions over time —what we
may loosely call money management—, this involves much deeper engagement with
psychological and social factors, as well as closer integration into routines and processes.

In the personal finance space, one key service design issue is combining users´ desire for
and sense of discipline (providing for the future) with flexibility (being able to satisfy
current wants or needs). The essence of good money management is money separation and
lumping (i.e. assigning different purposes and even moral values to different pots of
money). Similarly, in a business setting, digital money systems need to incorporate the kind
of manageability and control tools that can fit seamlessly into day-to-day business
processes. For instance, digital payments need to accommodate the various (often multiple)
approvals that are required in a business setting, they need to integrate more seamlessly
into business IT systems, they need to support the procurement and invoicing process, they
need to be linked to more information that helps in reconciliation processes, etc.

This layer is therefore about packaging the fairly limited and specific functionalities of the
previous layers into a diverse set of customer experiences around payments, whether in a
personal, social or business setting. This is where simple financial services come into
contact with the complex reality of life and business. Because this is about fitting standard
payment capabilities into a rich variety of contexts, it is hard to imagine this can be done
exclusively through a prescriptive, overly rigid, standard set of products. Rather than
focusing on a narrow set of solutions, this layer is about enabling mass customization of
solutions by letting users pick and choose among a wide variety of tools. In this way, users

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are engaged in a process of co-creating their own solutions – by assembling the set of tools
that fit their needs and using them in their own creative ways.

This is the layer of maximum innovation, because it´s where simple basic services are made
into more diverse and complex offerings by adding manageability features that connect
with customers´ real or psychological needs. This is in fact where most successful digital
platforms excel. Whether it is Ebay, Amazon, Facebook or SnapChat, these platforms are all
conceived as a one-size-fits all service that exposes a rich and growing variety of tools to all
users. But each user draws on different tools to meet their unique shopping, communication
or expressive needs. Why should digital finance be handled any differently?

9. Structured product layer

The previous layer can be thought of as a set of self-help tools that users can draw upon to
suit their individual needs and habits. In addition, providers may choose to package
collections of tools and standardize their features and terms so as to create off-the-shelf
solutions that cater to broader customer segments. Such productized solutions can be an
effective way for providers to market more integrated customer propositions, to
communicate more segment-targeted offers, and to generate higher levels of awareness
about their solution set.

This is the layer that implements more rigid financial commitments and contracts between
users and providers that span across time. Services at this layer are structured as a
sequence of (committed or potential) transactions that play out in time — each of which
may be cleared and settled in real time, though they are not coincident in time. The
resulting kinds of services can be broadly categorized as savings, credit or insurance, based
on whether users initially owe or are owed money, and what triggers future payments in
the opposite direction.

At this layer, a broad range of differentiated services should flourish, each targeting
particular customer needs and niches. This layer is essentially a bundling of the capabilities
of all previous layers, offered to customers in a packaged format.

10. Customer participation layer

The objective of this layer is to increase customer engagement, understood as the number,
frequency and range of interactions that occur between a customer and a provider. Greater
engagement may not be directly related to increased usage of the underlying financial
services, though in practice engagement strategies will seek to enhance customer
awareness of, familiarity with, and loyalty to the provider´s services.

Common tools to drive engagement are establishing channels for interactive

communications (e.g. SMS reminders or polls), increasing the scope for personalization

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(through personal profiles and user selection of service options), and creating opportunities
for customer co-creation of their service propositions.

11. Issue resolution layer

This layer includes all the customer care mechanisms designed to address users´ questions
and problems, including exception handling and resolution of conflicts between the
provider and the user. Fulfilling this function is key to preserve customer trust. Yet this can
be a very time-consuming and labor-intensive process for providers, and if not handled
properly can wipe out the profitability of low-value customers.

There is therefore a need to develop automated wizards that help customers find the
answers they need, more sophisticated engines and workflow processes to address
customer issues, and quick and low-cost online arbitration mechanisms to resolve customer
disputes. This is probably the layer that will require most amount of innovation, though it is
probably fair to say this is generally seen as a next-generation issue in a digital financial
inclusion context.

Implications

Need to embrace new fintech players. The layer model exposes the growing diversity of
service elements and skillsets that are required to build meaningful digital financial
inclusion. Policymakers and regulators need to find ways to allow new fintech players who
seek to fill existing capability gaps, within a risk-based framework.

Focus on core enablers. Policies must address as a priority the barriers that are common to
most if not all financial services. This will naturally lead to more participation and
innovation by service providers and fintech players.

From access to usage. Financial inclusion goals must focus on effective use of financial tools
by low-income people and small businesses alike. Financial services can only have an
impact if they are experienced often, and help address a variety of user needs. The drivers
of usage ought to jointly articulate the why, what and how of an inclusive digital finance
grid: by making services relevant and intuitive, convenient and easy to use, universal and
diverse, and appropriately priced and sized.

Digitization of money, not just payments. The costliest component of the digital money grid is
the interface with the legacy system – cash. The need for CICO networks will be reduced if
people are willing to store their value in digital format. That´s not the reality today: we
observe a widespread practice of people withdrawing money they receive digitally,
immediately and in full.

Positioning the Catalyst Fund fintech portfolio on the fintech stack

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We can use the stack to position the
Catalyst Fund investee companies, and
in this fashion assess the balance of
contributions that we can expect the
Catalyst Fund learnings to make against
each layer. Of course, most companies
have to span multiple layers of the
stack in order to create commercially
viable propositions. We have therefore
positioned companies based on the
biggest problem they are seeking to
crack.

[To be completed – I need more insight

on these companies]

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