By Ruoxi Lyu

In 2011, Milagros migrated to Lima from Iquitos, the capital of the Peruvian Amazon, to make a living.

Every month, Milagros transferred part of her wages to support her family. However, it was arduous for her mother to withdraw the funds. From an isolated town with no bank branches to the closest agent, her mother had to travel about 45 minutes by boat, sometimes at the risk of being robbed.

This was the epitome of the lives of exceeding 10 million Peruvians at that time.

As an upper-middle-income country, Peru is experiencing robust economic growth. However, the complex landforms of Peru, such as the rugged Andes Mountains and the arid Costa, are impeding financial institutions to distribute evenly across the country, with nearly 60% located in Lima. Additionally, service providers usually consider remote and underpopulated rural places less lucrative. In 2017, obstacles including long distance to financial institutions and expensive services kept more than half Peruvians away from a financial institution account.

Since the beginning of this century, traditional financial services have been digitalized by Peruvian public and private sectors, typically transplanted to mobile phones. Thanks to the high penetration of mobile phones in Peru, which reached 112% in 2016, financial services are becoming accessible at fingertips for a larger population.

Just as Daniel Schydlowsky, Superintendent of the Superintendence of Bank Insurance and Private Pension Funds (SBS), said, “Not since the invention of paper money has anything as important happened as the invention of payments with cellular phones. It’s extraordinarily powerful, particularly in places where geography is difficult.”

Bim: A National Digital Payment Scheme

In recent decades, there have constantly been endeavors to explore mobile payments in Peru. However, a nationwide breakthrough cannot be easily achieved for the “closed-loop” nature of these digital payment tools, which means transactions are limited within distinct types of network and bank accounts. On the other hand, traditional bank services have been being disrupted by emerging platforms, such as Wanda, formed by Telefonica and MasterCard, and a similar one offered by Claro and Citi.

In 2015, the Association of Banks of Peru (ASBANC) responded to the furious market competition by launching Modelo Perú (Peru Model), a collaborative approach to build a national mobile payment ecosystem. Subsequently, Pagos Digitales Peruanos S.A. (Peruvian Digital Payments, abbreviated PDP) was established to design, maintain, and manage Billetera Móvil (mobile wallet, Bim), the world’s first fully-interoperable national mobile money platform.

Applicants can open a Bim account in less than one minute by sending a text message quoting their national identity card (DNI) or turning to any of the over 8,500 physical agents, usually pharmacies and mom-and-pop shops in urban areas. Then users can operate through SMS or USSD on either smartphones or feature phones even without preexisting bank accounts or Internet access.

Besides user enrollment, agents are responsible for cash-in and cash-out transactions. Bim users are allowed to perform basic financial operations, including P2P transfers and mobile top-ups, with or without agents. Users can transfer money to anyone, even if the recipient has not signed up with Bim. More financial services have been successively added over the years, including utility payments, micro-savings, loans, and insurance.

PDP, the company in charge of Bim, has cooperated with many national institutions to diversify beneficiaries since Bim was launched.

Thanks to PDP’s cooperating with the National Tax Administration (SUNAT), more than 425,000 small business owners are now able to pay taxes through Bim, instead of closing up, traveling to the bank, and queuing for a long time.

Bim has also been identified as an alternative to decreasing costs in social transfers. PDP contacted 6447 mothers in Juntos (a national conditional cash transfer program for low-income families) in 2016, and 7.1% of the beneficiaries had been using Bim to accept transfers by the end of 2017. During a three-year period, the proportion of cash-based government payment transactions had lowered from 45% to 15% by 2017, partly due to the prevalence of digital payments.

The achievement of Bim is extraordinary. Two years after launch, more than 600,000 users were active in the platform. The number of times of transactions was nearly 8 million, and the total transaction amount was over 266 million soles. Nationwide, the number of people who made or received digital payments increased from 22% before Bim was launched to 34% in 2017.

“Today with electronic money, we begin a new era in Peru,” said Oscar Rivera, former president of ASBANC, in the press conference when Bim was launched.

Social Enterprises: Efforts to Help More Precisely Defined Groups

Peruvian social enterprises are an indispensable part in the course of digital financial inclusion. While national schemes function as strategic blueprints, fintech startups can tailor services based on more accurate customer needs to include the traditionally excluded population.

Agente Cash: Facilitating Utility Payment in Rural Areas

Pallamarca is a village and historical monument to the north of Cajamarca, an ancient district in the Andes. For local dwellers, paying electricity bills and recharging were easier said than done. A villager had to travel about 5 hours to the nearest town to pay the bills or the utilities would be cut off. This was pervasive in rural areas of Peru.

Despite a daunting and unattractive task for business-led service providers to discover the rural district, Agente Cash considers it a responsibility to include more rural people in the digital ecosystem. Founded in 2014, Agente Cash aims to provide financial services for people in remote rural areas through its agent network. It presently focuses on processing online utility payments, free from physical obstacles.

Agente Cash links rural users with electric companies by developing local grocery or pharmacy shop owners as agents, which will be trained to process payment and offer prepaid electric recharge. Local users only need to periodically approach the nearest agent with a cell phone and transfer money through SMS or IVR with no additional charge. The transaction will be immediately updated to the servers of the corresponding electric companies.

As currently the only company that provides this type of service in most of the northwest regions of Peru, Agente Cash is fully aware that it is not always advanced technologies that can satisfy people’s fundamental needs. By leveraging elemental technical tools and innovative business models, the company is piloting other businesses such as mobile top-ups, transfer payment distribution, and microcredits, to provide more comprehensive financial services.

More importantly, according to co-founder Erick Rodríguez, some potential customers are proactively approaching the company to get more convenient financial services, which is a significant step towards greater financial inclusion.

Tienda Pago: Providing Microcredit and Mobile Wallet for Mon-and-pop Stores

Tienda Pago is a Peruvian lending business founded in 2014. Through combining mobile wallets and credit facilities, it tries to build an infrastructure to facilitate mom-and-pop shopowners who lack financial background or history.

Bodega owners can operate cashlessly in a “close loop” via a mobile phone app or SMS. They will receive a working capital loan of about $450 to buy inventory from designated Fast Moving Consumer Goods companies (FMCGs) that Tienda Pago has an agreement with, including Coca-Cola. One or two weeks later, these shop owners will repay Tienda Pago the credit with turnover.

The digital circle with the media of cell phones allows store owners to operate conveniently and safely, as well as build their credit history. Enrolled mom-and-pop store owners can now avoid severe inventory breakage, sell 20% more than stores that do not have the company’s line of credit, and consolidate businesses.

Financial Inclusion in COVID-19: Escalating Uncertainties and Challenges

The pandemic is threatening financial inclusion by worsening inequality: low-skilled workers are negatively affected disproportionately, child labor would increase due to lower household income, and smallholders would be more vulnerable and need more financial aid.

A tighter collaboration is anticipated between public and private financial service providers to react with agility during and after the epidemic. They are urged to digitalize business to maintain services, and at the same time ensure isolated residents and those with basic education levels are not excluded when face-to-face instructions are discouraged.

Digital payment tools in both public and private sectors of Peru, taking Bim as an example, are foreseen to continue functioning unprecedentedly, especially to fulfill the urgent need of government-to-person (G2P) payment to expand the scope of beneficiaries in the time of COVID-19. New financial transfer programs in the epidemic have covered one-third of Peruvian population.

A Brand-New Start

By 2019, all major banks in Peru had opened online channels to make basic transactions, including the largest bank and financial service provider, Banco de Crédito del Perú (BCP). For people like Milagros and her mother, convenient bank services are finally not a pipe dream.

Compared to developed countries and some developing counterparts, Peru has just started the long journey towards financial inclusion. The pandemic could be the onset of a brand-new stage by reflecting on current achievements and making future strategies.

As Martín Naranjo, president of the Center for Financial Studies of ASBANC, said, “Financial inclusion is not a problem of being ignorant, but being ignored.”

Ruoxi Lyu is a student at Xi’an Jiaotong-Liverpool University majoring in International Business with Spanish. She is interested in financial inclusion and fintech related topics.