I had the great privilege recently to be invited to represent AFSA and speak at the Global Partnership for Financial Inclusion Forum, held in Chengdu, China. The forum was convened by China as part of their G20 Presidency.
The G20 SME Finance Action Plan Implementation Framework: Credit Infrastructure (document no longer available online) was launched at this forum which was exciting given AFSA’s direct role in 2 of the 3 financial infrastructure elements – secured transactions and insolvency, and our strong links with the third element, credit reporting.
My thanks to China and the People’s Bank of China for hosting this important forum.
In this post I thought I would share with you the talking points from my presentation.
In preparing for my talk today, I was reading about a study released in June by the World Bank Group and the World Economic Forum. The study estimates that the global value of micro, small and medium retailers’ transactions is $34 trillion, of which $19 trillion—more than half—are paper-based transactions.
This finding confirms the importance of maintaining momentum and focus on the development of legislative architecture and digital infrastructure that is capable of supporting a much more progressive, inclusive and streamlined approach to financial transactions.
When we talk about digital financial inclusion the focus is often on the opportunities, benefits and risks that digitalised banking and transactional based services offer underserved populations.
For many individuals and small businesses in the developing world, such services provide the first entry point for them to actively participate in the formal economy. If risks in relation to the underlying digital platforms and intermediaries, or agents, are managed effectively, then this access has the capacity to play a significant consumer protection role; with technology becoming a trusted third party that helps to preserve value for the marginalised and vulnerable groups.
Today I want to consider digital financial inclusion, including the consumer protection elements from another perspective, by looking at the opportunities that exist at the next layer down.
We know that access to affordable finance is a critical issue for the small business sector. The International Finance Corporation estimates that more than 8 million of our region’s small businesses do not currently have sufficient access to finance.
Greater digitalisation of traditional banking type services alone will not fill that gap, unless systems that support the fair and equitable allocation of credit are also made available; a key one being a well-regulated and digitalised secured transaction regime.
From a first principles perspective, a secured transaction system delivers three key outcomes:
enhanced access to finance and economic enablement
financial risk management and
As secured transaction systems become an accepted part of a country’s financial infrastructure, increased financing, leasing and other arrangements occur, which result in enhanced economic participation by SMEs and MSMEs. The key to the success of these types of systems is their capacity to increase transparency and integrate with existing financial infrastructure.
To illustrate what that looks like in practice, I will draw on Australia’s secured transaction model.
I work for the Australian Financial Security Authority—or AFSA for short.
We see our purpose as supporting the flow of credit within the Australian economy through our role of operating and administering Australia’s secured transaction and personal insolvency systems.
Australia’s secured transaction system is supported by the Personal Property Securities Register—PPSR for short. It is a central and completely digitalised register of security agreements involving non-real property.
The PPSR can be accessed through an AFSA run Web User Interface, as well as a wide range of private third party providers that consume an Application Programming Interface (API).
The deliberate decision to allow others to build an interface with the PPSR was in recognition that a secured transaction regime touches all sectors of the economy.
As a result, government alone can never expect to efficiently meet the diverse needs of all user groups. A hybrid public private model helps overcome this by creating opportunities for each market segment to determine the most efficient and effective means of transacting with the register.
This is achieved by the private sector, as agents, being incentivised to invest in the development of innovative solutions for higher volumes, through the creation of a competitive private market. This helps support digital financial inclusion for less powerful sectors of the economy, as it leaves government to focus on maintaining an interface that meets the needs of lower volume users.
As a result of this approach, we currently have around 200 third parties that are whitelisted to build interfaces, with almost 80% of all transactions on the PPSR now occurring via those providers.
Some of these 200 have built interfaces directly into their business decision systems or accounting software, while others have developed new products and services to meet specific market needs.
A key advantage of this hybrid public – private service model is that it also guarantees access for all sectors at a price that is commensurate to the service received. Regardless of whether you are a high volume, high value user and have built an interface—or use the services of a third party provider, or if you are a small business owner or end consumer, all users are charged the same, small fee.
Through this, all potential users within the economy are provided with a cost effective entry point to Australia’s secured transaction system.
Our role then, as government, in maintaining proprietary responsibility for the underlying infrastructure is to use supply side regulatory tools (or RegTech) as a trusted intermediary, to supervise agents who are authorised to deal with the world at large.
By maintaining a centralised and fully digitalised secured transaction system that can be accessed and indeed integrated with other digital financial solutions, the flow of credit is supported in two ways.
Firstly, it helps to address information asymmetry by allowing consumers and business to assess the risks of dealing with others.
For example, a search of the PPSR will help identify if a non-real property asset that a business or consumer is about to buy is encumbered. It also gives those leasing goods or extending credit, some visibility of other transactional arrangements that might need to be taken into account.
This is very important for people on the margins of the economy, the bottom of the pyramid, that are often vulnerable due to their lack of access to information and advice.
A well-regulated secured transaction system helps to level the playing field, particularly for consumers, including MSMEs—who are often trading using a business structure which does not limit their personal liability—when they are looking to buy second hand goods.
Australia’s system gives these groups a capacity to search for such goods before they commit.
Secondly, it helps facilitate the flow of credit by providing individuals and businesses with a wide range of tangible and intangible collateral that they can offer up as security in exchange for finance. The advantage being that a registration of the security agreement on the PPSR gives the credit provider—or the business leasing goods—with a means to take possession of the collateral in the event of default or insolvency.
Through this the PPSR provides a strong platform for financial inclusion—and today supports around a quarter of Australia’s GDP.
The key to a well-functioning secured transaction system is its accessibility to as wide a cross section of the economy as possible. This can only be achieved through provision of highly accessible and integrated digital infrastructure. Such infrastructure serves the needs of small business in a few ways.
Firstly, it brings information to their fingertips to enable more informed risk based financial decision making. Access to this type of information has traditionally been beyond the reach of most consumers and small businesses.
Secondly, a well-integrated system increases efficiency and capacity to access capital using readily available intangible and tangible assets related to their business.
Lastly, a well administered system supports predictability of outcomes, fostering the level of confidence required to encourage borrowing and capital investment within an economy – particularly when effectively integrated with other key pieces of financial infrastructure including credit reporting and insolvency regimes.
I will finish by giving you two real life examples of how the Australian fully digitalised system has been harnessed to support some of those outcomes.
The first example is from the emerging FinTech sector. These companies have the potential to completely revolutionise financing; particularly for individuals and sectors currently underserved by mainstream lending institutions.
So what does this sector need?
They need a wide variety of digital financial infrastructure they can integrate with.
Through this, FinTech companies are able to bring consumers and small business together with previously untapped sources of working capital.
In Australia we are seeing the PPSR being used as an integral part of some of the new financing models, such as peer to peer lending. As a result this sector is growing at a fast rate.
One such FinTech company in Australia has established its business around an invoice trading platform. This business has told us that the PPSR is a key component of their business model because it enables them to search the security interests of a small business in seconds—previously it used to take days—and that
it has streamlined the securitisation process where several companies contribute to invoice finance for a small business.
The second example is a large credit reporting agency in Australia that has told us that:
because they only need to use one national register, it makes access to information on security interests transparent to all users and enables consistent standards of data capture, availability and accessibility. It’s faster, cheaper and more efficient than the previous system
it provides clarity of existing rights that may have existed in other forms and
there’s a greater chance of claiming proceeds if the customer becomes insolvent.
For creditors—and from a credit reporting agency perspective—a search of the register clearly shows if there are other lenders, leading to a better informed and more efficient allocation of credit.
The road to achieving greater financial inclusion isn’t without challenges.
But we mustn’t underestimate the transformative potential of opportunities we each have, to support financial inclusion, business growth and confidence through the development of good policy— working hand in hand with digital thinking that supports a more holistic view of digital financial inclusion and ultimate delivery of highly usable policy outcomes.
We believe the Australian model has relevance for other jurisdictions which is why I am very pleased to have had the opportunity to share with you a little of our experience today and I look forward to our further discussions.
 World Bank. 2016. Innovation in electronic payment adoption: the case of small retailers. Washington, D.C.: World Bank Group. The World Bank - Innovation in electronic payment adoption