Growth unchained: New technologies coupled with infrastructure upgrades are expanding access to financial services

Financial inclusion remains persistently low in Papua New Guinea, with an estimated 63% of the population remaining unbanked. This has prompted the Bank of PNG – the country’s central bank – and several private institutions to explore financial technology (fintech) as a means to improve access to financial services. Beginning in mid-2017 the bank has actively promoted the distributed ledger technology blockchain as a means to overcome these challenges, launching a series of trials in partnership with the government of Australia.

The technology has a high potential for diverse application across a range of areas, although it remains in its nascent stages. The private sector is also developing additional fintech solutions, including mobile banking and mobile money transfers, the latter of which holds considerable potential for future expansion. Nevertheless, the country’s challenging geography and severe infrastructural deficit remain major stumbling blocks.

BLOCKCHAIN TRIALS: In May 2017 the Bank of PNG announced it had partnered with the government of Australia to investigate the potential for blockchain development in the country. Blockchain is an open-source, anonymous distributed ledger framework that records and validates online transactions. While the technology is most commonly associated with cryptocurrencies such as Bitcoin, it has a broad range of potential applications.

With $200,000 of support from the Australian state, the Bank of PNG announced it would examine the possibility of using blockchain to improve financial services access in rural and remote areas. While financial services have grown significantly in recent years, only around 37% of the adult population has a bank account, according to the central bank. Furthermore, blockchain can also be used to record and verify assets, and could be applied to areas including land ownership and acquisition, which remain a major challenge. The Australian-supported PNG Governance Facility further reported that blockchain could be useful in areas such as internal money remittance, fraud reduction and “know-your-customer”, which is a standard by which banks assess lending risks.

INNOVATIVE SOLUTIONS: The country’s central bank has maintained this focus on blockchain development, sponsoring a “hackathon” in London in early-2017, in which participants were tasked with the development of tech solutions for PNG villages currently lacking infrastructure. The winning idea, provided by blockchain developer Julien Bouteloup, was a device – known as an IDB ox – that enables users to create a unique blockchain identify via an analogue mobile phone, that could potentially be used to access government services, prove asset ownership and carry out transactions.

The developer travelled to the village of Lalaura, east of Port Moresby, to test a working prototype of the device in early-2018. While this highlights the broad range of innovative solutions offered by fintech, cultural barriers and a lack of supporting infrastructure remain an obstacle to the rolling out of such products beyond the pilot stage.

PRIVATE SECTOR INITIATIVES: The private banking sector has also been active in deploying new fintech solutions to boost access to financial services and credit. All four of the country’s commercial banks – Bank South Pacific, Australia and New Zealand Bank (ANZ), Westpac and Kina Bank – launched online offerings in recent years, ranging from online and mobile banking platforms to pilot mobile money projects. Others have focused their future growth strategy on deployment of digital upgrades, including security chipped debit and bank cards and new online services platforms. For example, in December 2017 Kina Bank unveiled corporate and retail mobile banking services including online payments, account balances and the transfer of funds via a smartphone app. Following this, in February 2018 the bank announced plans to improve overall accessibility via fintech, with increased investment in new digital products and services. Cybersecurity remains a concern, and in December 2017, ANZ also launched a new feature for its existing internet banking platform. The bank’s two-factor authentication system introduces new layers of security prior to granting customers online access to their bank account. This follows an earlier move in August 2016 that saw the launch of security-chipped Visa debit cards.

MOBILE MONEY: With mobile and smartphone penetration rising, the market for mobile money services is also expanding. Currently, all the major commercial banks are offering mobile money products, these include: Mobile SMK, by Post PNG; BSP Mobile Banking; BSP’s Wantok Money; Digicel’s CellMoni; Nationwide Microbank’s MiCash; ANZ goMoney; and Westpac’s Everywhere Banking.

The take up rate by consumers has so far been gradual and the market remains far from saturated. Furthermore, the expansion of such products has been impeded by issues relating to the cooperation between banks and telecoms operators.

HARD CURRENCY: While the provision of mobile money options and other fintech products forms a necessary part of the reduction of the unbanked population, it cannot substitute the expansion of PNG’s hard banking infrastructure. Fintech solutions provide a means to carry out transactions and safely store income for later use, but there is still a significant need and demand for access to physical currency from bank accounts. Therefore, building a functional network of cash machines will be necessary to improve financial inclusion. Currently, around 85% of the population of PNG resides in rural areas, where opportunities to purchase goods and services are limited given the prevalence of subsistence farming. As a result of this, the World Bank suggested in 2017 that the country should concentrate on the expansion of infrastructure in larger towns and secondary cities, rather than in smaller villages where security and operating costs are high and demand low.

According to the World Bank, ATM and similar banking services are already present in secondary cities and larger towns in 2017. These include more than 2500 electronic funds transfer at point of sale terminals, 75 bank and microbank branches, 89 district treasury offices, and 105 post office branches – with many already functioning as bank agents. Although these networks are fragmented and overlapping, the bank reports that major money suppliers including the government, exporters, and other players could push mobile money into any potential system by paying salaries, royalties, and purchasing commodities electronically. Payments from these suppliers could directly reach over 500,000 households, or nearly half the country’s population, according to the World Bank.

NEAR-TERM PRIORITIES: While blockchain and mobile money transfers hold considerable potential for future expansion, improving the interoperability of banks constitutes an important first-step in facilitating long-term technological uptake. The Bank of PNG has already been making good progress on this front, through recent efforts to develop a national retail payments system. In 2015, the country’s central bank announced plans to develop such a system for the retail sector as part of its broader ongoing effort to establish a national payments system and improve financial inclusion in PNG.

Work on the development of a retail payment system has progressed steadily since this time, with the Bank of PNG announcing in December 2017 that it had signed a contract with the Russia-based online financial services firm BPC Banking Technologies. Through this deal PNG plans to develop a new national identity card and mobile payments system, to serve as a first step in implementing a retail payment system. Under these plans the company’s Smart Visa system will be used to connect all electronic card and mobile phone payment service providers throughout PNG. Once fully operational the system will enable customers of any financial institution to do business with a customer of any other, using cards, mobile phones and internet banking. It is also planned to connect microbanks, savings and loan societies, and other non-traditional financial actors to the national payments system, improving rural financial services access.

This retail system is being developed as a follow-up to the Kina Automated Transfer System (KATS), an interbank electronic payment system that came online in February 2015. The KATS system has successfully shortened cheque-clearing times and allowed for direct electronic credits between bank accounts in the country, laying the foundation for the future expansion of fintech applications.