Increasing access: Use of electronic payments may improve financial inclusion

It has been widely argued that achieving greater financial inclusion – the delivery of financial services at affordable costs to lower-income segments of any given population – is an effective way of reducing poverty and promoting economic growth and development. The UN has suggested that financial inclusion objectives should include providing all households with a full range of financial services, including savings, deposits, money transfers, credit and insurance; ensuring financial institutions are sound and safe; facilitating sustainable and secure investment; and allowing for competitive markets that are more affordable for consumers.

INCLUDING EVERYONE: Successive Trinidad and Tobago governments have supported the idea of promoting greater financial inclusion. Compared to some countries, the twin island republic has a comparatively smaller challenge to face, given that it enjoys relatively higher per capita income and higher bank penetration rates. Calculated on a purchasing power parity basis, the country’s per capita income of $32,200 in 2015, was one of the highest in the region, and more than double the Latin America and Caribbean average of $15,500. World Bank data also shows that, on average, roughly half (51.4%) of the population aged 15 years in Latin American and Caribbean developing countries had a bank account in 2011, while, in T&T, the proportion was significantly higher at just over three-quarters (75.9%).

BEING INFORMED: However, there is still a clear need to increase financial inclusion, and the country has been pursuing improvements for a number of years. In 2014 the then-governor of the central bank, Jwala Rambarran, described two main aspects of financial inclusion in T&T: one, to protect consumers from the effects of financial turbulence (such as the 2009 collapse of CLICO, the country’s largest insurer); and two, to ensure that the population is properly informed “to make responsible decisions about managing their money”. Government initiatives in this regard have included the launch of the Financial Inclusion Education and Training Institute (FIDA) in 2014. FIDA works with the Ministry of Education to bring financial inclusion education into schools and has held interactive workshops with the principals of all primary and secondary schools in recognition of the importance of financial literacy.

The new government is also supportive of financial inclusion goals, although it has yet to outline a strategy. Areas of concern include informality in the labour market (where people work outside the tax and benefits system) and money flows linked to illicit activities, like drug trafficking.

LESS CASH, MORE GROWTH: According to a study published in May 2016 by credit company MasterCard, excess dependence on cash transactions in the economies of both T&T and Jamaica is slowing economic growth by stimulating informality, increasing corruption, and limiting financial inclusion.

The study, titled “Evaluating the Social Cost of Cash”, by Friedrich Schneider of the Johannes Kepler University of Linz, in Austria, argued that the T&T economy could grow by an additional 3.5% if the country increased its electronic payments by 30% across a four-year period. It held that, while cash was once a positive driver of economic growth, it has now become a constraint, by generating direct and indirect costs. These include the costs associated with tax evasion and financial exclusion. In contrast, the non-cash economy made it easier to carry out transactions, particularly for micro and small businesses, which also benefitted from a more secure store of value. “There is a perception that cash doesn’t bear any cost. But there is a huge cost for society,” Gabriel Zuliani, senior VP and general manager of MasterCard for the Caribbean, told OBG. “Often times, the consumer does not see that cost and does not carry that cost, but society feels it.” Costs include the production, distribution, collection and security aspects of physical currency, and the additional requirement for substantial investment in counterfeit protection. In Jamaica, MasterCard calculated that some 90% of transactions were carried out through cheques and cash, while only 10% of transactions were being conducted electronically, with about 30% of the economy on an informal basis.

OUT OF THE SHADOWS: A similar degree of informality was recorded in T&T. Zuliani told OBG that all countries in the region, including those with a comparatively high GDP per capita like T&T, share similar issues of high cash dependency, low electronic payments usage and large shadow economies. Reducing informality would help increase financial inclusion and boost economic growth. In fact, according to earlier academic research by Schneider and Andreas Buehn, of the university Dresden, the average size of the shadow economy in 76 developing countries around the world was 35.2%, measured as a proportion of official GDP in the year 2004/05.

In this study, the shadow economy was defined as “all market-based legal production of goods and services that are deliberately concealed from public authorities”, including the avoidance of tax, social security and labour regulations. This definition excluded criminal acts, such as illicit drug production and trafficking. According to Schneider and Buehn’s calculations, in the six years up to 2006, the shadow economy in T&T was 35.7% of GDP, close to the average for all developing economies. It was ranked broadly in the middle of the table as number 39 out of the 76 nations covered. The countries with the smallest shadow economies were Singapore (13.3%), China (13.4%), and Vietnam (15.7%). Those with the largest shadow economies were Bolivia (67.3%), Panama (64.2%) and Peru (60.1%). Relative to its neighbours, T&T’s shadow economy was shown to be slightly smaller than Jamaica’s (36.7% of GDP), but larger than those of the Dominican Republic (32.2%) and Costa Rica (26.2%).

The Economist Intelligence Unit, in its “Global Microscope 2016 – the enabling environment for financial inclusion”, produced a different, more up-to-date assessment of action in favour of financial inclusion. This report considers whether countries are creating a favourable environment for financial inclusion by assessing 12 key indicators, including: government support; regulatory and supervisory capacity, supervision of credit portfolios and deposit-taking activities; electronic payments; market-conduct rules; and grievance redress and dispute-resolution mechanisms. The report uses these factors to develop an index for each country on a scale of zero to 100 and ranks a total of 55 countries. In the 2016 report Colombia and Peru topped the ranking with 89 points each, followed by India and the Philippines in joint third place.

T&T ranked in the lower half of the table, in 37th place, with a score of 45 – just below the average score of 49 for all 55 countries. Compared to the 2015 report, T&T’s score improved, up by three points from 42, but it dropped one position in the ranking, from 36 to 37. This was explained by the relatively faster rate of improvement within other countries.

In its country-specific commentary, the report noted that, after a number of years of sustained improvement, T&T’s progress towards greater financial inclusion had slowed in 2016. The report commented, “It remains to be seen whether the current administration will place a priority on financial inclusion.” It also noted that some state-funded initiatives, such as lending through the Agricultural Development Bank, have hindered private sector microfinance and financial inclusion operations by reshaping client expectations.

PETROL STATIONS CASH IN: Despite the benefits, not all businesses favour a move to electronic payments. In late 2016 a dispute emerged when the T&T Petroleum Dealers Association (PDA) announced that its affiliated petrol stations would insist motorists pay for fuel exclusively in cash. The PDA had been complaining of rising costs associated with credit cards that it could not pass on to consumers, as petrol prices are set by the government and centrally controlled. The PDA said that, under severe cost pressure, the service stations could no longer afford to pay between 1.3% and 3% commission on electronic payments charged by the banks. One distributor, National Petroleum, announced that its 61 stations would accept electronic payments.

Responding to the PDA position, the Bankers’ Association of T&T (BATT) issued a statement emphasising the benefits of such payments, in particular convenience and the safeguarding of motorists “against unwanted attention from having too much cash in their possession”. The BATT also noted the trend towards a more cashless society: “In today’s fastpaced world, as customers become more technologically savvy, electronic payments are the norm.”