ADBs New Financing Partnership Strategy Convergence of Telecom and Financial Services

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ADBs New Financing Partnership
StrategyConvergence of Telecom and Financial
Services

• BAFT 2nd Asian Bank to Bank Forum

Martin Endelman Principal Guarantees and
Syndications Specialist Office of Cofinancing
Operations Asian Development Bank
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Topics

• ADB
• Update
• New Financing Partnership Strategy
• Electronic Money Revolution
• Cellphones - the Convergence Engine between
  Telecom and Financial Services

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ADB

• Update
• New Financing Partnership Strategy

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Asian Development Bank

• The regions multilateral development bank,
  established in 1966
• A partnership for development, with
• 67 members (48 regional, 19 non-regional)
• 41 borrowing members
• Receives two-thirds of its capital and staff from
  Asia-Pacific region
• AAA Rated

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Strategic agenda

• Vision
• A region free of poverty
• Mission
• Help Developing Member Countries reduce poverty,
  and improve living conditions and the quality of
  life
• Promote regional and sub regional cooperation and
  integration

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Operations 19962006

• Loans
• 643 projects, 61.2 billion
• Guarantees
• 27 projects, 3.2 billion
• Equity investments
• 59 investments, 0.9 billion
• Technical assistance
• 2,910 projects, 1.8 billion

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Loan approvals in 2006

• Transport communications 23
• Energy 19
• Agriculture Natural Resources 14
• Finance 13
• Multisector 10
• Water Supply, Sanitation 5
• Education 5
• Law, Economic Management, Public Policy 4

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Windows of operation

• Public sector operations
• support sovereign clients
• sub sovereign clients - with or with out host
  government guarantee
• through loans, guarantees, technical assistance,
  and other cofinancing
• Represents about 95 of ADBs business

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Windows of operation

• Private sector operations
• direct assistance to private enterprises -
  without government guarantee
• through loans, guarantees, equity investments and
  syndications
• Represents about 5 of ADBs business, but growing

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New policy framework

• In 2006, a new comprehensive policy and operating
  framework for commercial cofinancing was
  established though the
• Financing Partnership Strategy
• Review of ADBs Credit Enhancement Operations

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New policy framework

• This replaces all previous policies regarding
• Commercial cofinancing
• Guarantee
• CFS and other syndication products
• and gives us far greater flexibility to
  innovate, and meet new and changing needs of
  financing partners and clients

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Guiding principals

• ADB should forge effective partnerships with a
  wide variety of cofinanciers
• to mobilize risk-taking capacity
• Fill market gaps and promote investment in
  frontier countries or sectors

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Guiding principals

• ADB should focus on its comparative advantage
• taking long-term sovereign and
  non-commercial risks
• While letting its cofinancing partners focus on
  theirs
• taking short- and medium-term commercial risks

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Our products services

• To implement this strategy, we use Credit
  Enhancement Products, which include
• Guarantees which take risk
• Syndications which lay off risk

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Our products services

• Guarantees - allow ADB to support
• a variety of debt instruments
• provided by different financing partners
• by covering or taking various combinations of
  risk
• Commercial or credit
• Political
• (and represent the front door)

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Our products services

• Syndications - enable ADB to
• transfer or sell some or all of the risk
  associated with its
• Direct loans
• Guarantees
• support larger projects
• reduce exposure - at anytime
• (and represent the back door)

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Our products services

• When ADB shares recovery under a syndication -
  financing partners benefit from ADBs
• Charter Privileges and Immunities
• Currency conversion/transfer
• Expropriation
• Withholding taxes
• De-facto Preferred Creditor Status
• Least chance of debt-rescheduling

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Electronic Money Revolution

• Cellphones - the Convergence Engine between
  Telecom and Financial Services
• Philippine Experience using Cellphones to
  transfer electronic money

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New competition

• Commercial banks face new competition from
• Lenders and borrowers dealing directly with each
  other
• without traditional bank intermediation
• and new technology allowing money to be moved
  within a country or between countries
• faster, easier and safer

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New technology

• However, will require bank regulators and AML
  authorities to
• define, measure, monitor, control and supervise -
• new forms of currencies and monetary
  instruments,
• which include -

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New currencies examples

• Virtual Currency
• China web site operators asked to limit use of
  online game currency like "QQ coins for fear of
  money laundering
• E-Gold
• e-currency backed by gold used as internet
  payment system

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New currencies examples

• WebMoney
• basket of currencies offered on the internet
  which by-passed traditional banks
• anonymous transfer of up to 150 euros
• value can be transferred anywhere on the system

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New currencies examples

• And
• Wireless electronic money
• which changes tokens of value (coins, paper etc)
• into electrons, passed between Cellphones
• located within or outside a country

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Wireless electronic money is what allows
Convergence

• between
• Telecoms and
• Financial Institutions

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Electronic money

• Value is generally stored on a computer server of
  a financial institution
• Server does not have to reside in the country of
  activity
• Settlement process can take place anywhere

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Electronic money

• In the 1990s
• Low cost encryption permitted safe/secure
  movement of value over emerging electronic
  systems
• The internet established the wired digital
  highway
• for consumers and business to utilize the
  technology

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Electronic money

• In the 1990s
• In some places a 2-3 drag on GDP was caused by
  traditional payment systems
• Up to 5 of the value of a transaction
• was caused by such payment systems

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Know your customer?

• But this early form electronic money raised some
  questions
• Who sent the electronic money?
• Was there personal appearance when opening
  accounts?
• Was there face to face contact at cash in and
  out?
• Are accounts linked to a holder
• to identify usual and customary patterns?

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Know your employee?

• And what about internal risk management?
• Was there AML/fraud training?
• Who has access to systems that can open accounts?
• Was proper due diligence done on
• store front operators and
• other out source service providers?

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Financial Action Task Force on Money Laundering

• June 1996 FATF Recommendation 8 states
• countries are to pay special attention to money
  laundering threats from new or developing
  technologies that may favor anonymity and take
  measures if needed

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Financial Action Task Force on Money Laundering

• 1996 FATF Typologies Report recommendation
• FATF to be proactive and to work with the
  vendors and users of cyberpayments technologies
  to identify vulnerabilities, and to build
  appropriate safeguards

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Wireless value transfer

• The drivers
• Wireless communications technology
• principally driven by the GSM second generation
  2G networks and SMS text messaging.
• Affordable cellphones
• I billion in use by 2007

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Wireless value transfer

• The drivers
• Imaginative telecom business seeking increase
  revenue
• willing to be on the cutting edge
• Large un-banked market of overseas workers that
  stretched around the world
• needing safe, secure remittance and other value
  transfer flows

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Remittances

• Small amounts of money earned by workers in one
  country and spent but their families in another -
  add up
• World Bank estimates for remittances worldwide
• 125 billion formal
• 75 billion informal

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Wireless electronic money in the Philippines

• Background to cellphone market
• 95 of the market is prepaid
• Largest population of short message service (SMS)
  users in the world
• a very mature market
• Over 35 of population own a cellphone
• 95 of remaining market has access to a cellphone
  through friends or family

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Why convergence in the Philippines?

• Telecoms (Globe and Smart) focused on overseas
  worker remittances for good reason
• Value of remittances in 2005 through formal
  channels was some 10.7 billion
• In 2007 this could be 15 billion
• Typical remittance size 200-300

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Why convergence in the Philippines?

• Accessible device cellphone
• First and last mile cellphone coverage near
  universal in the Philippines
• Inexpensive for small businesses
• no special equipment other than cellphone
• Technology easily understood by market

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Who benefits?

• Overseas foreign workers (OFW)
• saving and remitting cash
• average all up cost can be as little as 9 per
  300 - compared to 35
• Families in the Philippines
• receiving and spending cash
• remotely located on 7,107 islands
• often non banked

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Who benefits?

• Businesses
• Fast settlement of accounts with debit card
  advantages
• No requirements for major purchases at point of
  sale - cash out or cash out

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Who benefits?

• Philippine Government
• more accurate monitoring of remittance flows
• reduces petty corruption in government services
  which can be paid direct by citizens
• cutting edge customs facilitation and payment
  system to be cellphone based
• securitization possibility

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Globe G-Cash

• Regulated by BSP and AMLC as a money services
  business
• telecom-centric
• Strict limits agreed to by Globe and regulators
• Maximum per day - PhP40,000 (800)
• Maximum per month - PhP100,000 (2,000)

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G-Cash Phone to Phone
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Smart

• Largest wireless provider in Philippines
• 98 prepaid over 12.5 million subscribers
• Worlds first electronic cash card linked to
  mobile phone in 2000
• teamed with Banco de Oro (BDO) for KYC and
  pre-funded accounts

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Smart

• 2004 first text-based remittance system (Smart
  Padala)
• funds sent direct to cellphone of beneficiary
• no more need for physical delivery of cash
• ensuring that the cash remittance remains secure
  and confidential 
• Tied to a large number of retail and service
  locations

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Smart

• Regulated by BSP and AMLC
• as a Bank
• due to co-branded MasterCard issued by BDO
• Limits agreed to by BDO and regulators
• Max per day (cash out) - PhP10,000 (200)
• Max per day (purchases from merchants) -
  PhP20,000 (400)

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Different models for AML

• Globe - viewed as Money Services Business
  (Telecom-centric)
• Smart - viewed as bank tied to BDO,
  (Bank-centric)
• Both compliant with Central Bank AML requirements
• ID on subscriber and beneficiary
• Valid ID required for both parties to obtain
  service

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Different models for AML

• Both
• are closed systems re KYC
• use pattern recognition systems to monitor
  account/ subscriber activity for anti-fraud and
  AML
• are required to report any suspicious activity to
  the AMLC
• are subject to AML compliance examinations by
  regulators

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Can the wireless Train be slowed down

• Not likely
• Well thought-out electronic money programs -
  targeted at worker remittances - can help
• Overseas workers transfer their savings home
• faster, easier and safer

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Can the wireless Train be slowed down

• Banks do what they do best
• and not hold physical tokens of value
• Business
• get cash faster and safer
• Governments
• reduce corruption

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Can the wireless Train be slowed down

• A cellphone can and should be seen as is a
  simple, low cost way to
• open access to financial services to all
• in developed and developing countries
• urban and rural
• rich and poor

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Where do you fit?

• Wireless value transfer will be coming your way
  in some manner
• As compliance officers you need to begin scanning
  now
• The BOP author Dr Prahalad the 4 billion to 5
  billion living on 2 a day 13 trillion a year
• The cellphone will drive that market

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Where do you fit?

• KYC will be a challenge since no credit history,
  permanent address, or in some cases
  identification at all
• Risk will be there for money laundering, fraud,
  terror financing, drugs and other crimes

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Where do you fit?

• You will need to be creative and cautious as you
  move into these areas.
• It is still a very new area, law enforcement has
  not penetrated the system in the Philippines
  since they do not have the tools
• Web sites attached should help you

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For more information

• www.adb.org
• http//www.adb.org/Documents/Others/OGC-Toolkits/A
  nti-Money-Laundering/default.asp
• John F. Forbes
• jforbes_at_adb.org

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Helpful Web Sites 1

• www.adb.org/Documents/Others/OGC-Toolkits/Anti-Mon
  ey-Laundering/default.asp
• www.amlc.gov.ph/
• www.fsa.go.jp/fiu/
• www.kofiu.go.kr/HpEngMainFset.jsp
• http//www.bos.frb.org/economic/eprg/index.htm
• http//www.treasury.gov.za/
• http//www.fic.gov.za/
• http//www.gov.ph/

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Helpful Web Sites 2

• http//www.privateline.com/
• http//www.digitaltransactions.net/
• http//www.paymentsnews.com/
• http//www.wirelesswatchjapan.com/
• http//www.cyberpartnership.org/
• http//inventors.about.com/
• http//www.cellular-news.com/
• http//www.schneier.com/
• http//www.atmmarketplace.com/

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Helpful Web Sites 3

• http//www.bis.org/
• http//www.nttdocomo.com/
• http//www.itu.int/newsroom/
• http//www.e-pso.info/
• www.gartner.com/Init
• www1.globe.com.ph/default.aspx
• http//www.smart.com.ph/
• www.sktelecom.com/eng/cyberpr/press/1196835_3735.h
  tml