How the Underbanked Can Prosper from Going Cashless

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At the start of his keynote address during the most recent Wharton Social Impact Conference, Ed McLaughlin showed on projection screens a clipping of a Philadelphia Inquirer headline from February 11, 1986: “Apartheid Foes at Penn End Sit-in.” As a member of the Penn Anti-Apartheid Coalition, he had been among the 70 students who 20 days earlier had begun the round-the-clock sit-in outside the office of then-Penn president Sheldon Hackney. On the planned final day of the demonstration, about 150 students rallied at noon to demand that Penn trustees divest $92 million in university-owned stocks and bonds in companies that operate in South Africa.

McLaughlin, now chief emerging payments officer for MasterCard, also displayed the headline of a press release that was just a few days old: “SASSA MasterCard Debit Card Boosts Financial Inclusion.” It marked McLaughlin coming full circle — “SASSA” stands for South Africa Social Security Agency, and MasterCard, with McLaughlin leading the company’s development and commercialization of payment product platforms, had distributed more than 10 million of the debit cards to South Africans.

That nation’s banked population, according to the survey FinScope South Africa 2013, had grown by 8% since 2012. Seventy-five percent (27.4 million) of the adult population now are banked, meaning they have accounts with a mainstream financial institution. The survey attributed to the SASSA debit cards the addition of 1.9 million people in 2013 to the banked population.

“We at MasterCard are working in South Africa, with the government itself, to now bring financial inclusion to many of the very people who were so tragically and brutally excluded by the earlier governments,” McLaughlin said. “The arc of history does bend toward justice. We can start with a terrible situation and use the tools at our disposal to actually help all sorts of populations that were previously excluded.”

The financial system to which those South Africans now belong is vast — almost two billion MasterCards facilitate transactions in 150 currencies in 210 countries, McLaughlin noted, connecting 36 million merchant locations with financial institutions. The company was founded in 1966 as Interbank Card Association and renamed MasterCard in 1979. In 2010, MasterCard launched MasterCard Labs, which focuses on creating innovative new methods for making and processing electronic payments.

Mobile phones, McLaughlin stated, have enabled MasterCard to reach previously inaccessible populations. McLaughlin said he envisions a world without cash, “where every connected device a consumer has can be a commerce device.”

McLaughlin envisions a world without cash, “where every connected device a consumer has can be a commerce device.”

“We are in the connections business,” he noted. “What I think is truly inspiring is the opportunity we have to use all of that capability, all of that technology, that we’ve developed to serve people like us, and use it to reach people and help people in the communities that have never had access to that before.”

A Cashless Society

Before taking on his current role, McLaughlin worked in MasterCard’s franchise development and compliance division, focusing on global rules, licensing and brand standards. He joined MasterCard in 2005 after serving as a vice president for product and strategy at Metavante, a financial services technology company. He came to Metavante after that company acquired Paytrust, an online payments company that McLaughlin co-founded and for which he served as CEO.

More than 85% of the world’s transactions, McLaughlin noted, are still based in cash. And cash, he added, causes all sorts of drags on the economy.

“One of the folks we work with calls cash ‘the poor man’s enemy,’” he said. “It’s incredibly expensive. We estimate that cash causes about a 1.5% drag on economies, simply for the cost of handling it. Cash is the basis of corruption. Cash is the basis for all sorts of illegal activities. But perhaps the worst part about cash is that it’s not very useful. It’s limited to physical transactions, which also means entire populations, huge swaths of people, are now cut off from everything digital, everything electronic.

“It’s almost a new apartheid,” he continued. “Think about it. Think about the access to education. Think about the goods and services that are available online. You need access to electronic funds. You need access to banking in order to be able to take advantage of that. So most of the world’s population today still lives at the mercy of the cash-based economy. And we can help.”

“Cash is the basis of corruption. Cash is the basis for all sorts of illegal activities. But perhaps the worst part about cash is that it’s not very useful.”

According to McLaughlin, MasterCard has helped in places such as Nigeria, where the National Identity Management Commission collaborated with the company in what McLaughlin called “a perfect case study.” MasterCard produced 13 million National Identity Smart Cards, embedded with biometric identification chips and electronic payment capabilities. The introduction of the chips, McLaughlin said, reduced fraud from counterfeit cards and transactions by 98%. The cards also contributed to the financial education of their owners, who McLaughlin noted were checking their balances up to 30 times per month. Cardholders, he added, can progress from having no financial tools to more easily accessing government subsidies, then to banking and acquiring credit for investment.

“This is not, and can never be, about taking cut-down versions of products that are used in one market and simply trying to apply them to another market,” McLaughlin noted. “It has to be based on a profound understanding of how we can help those individuals, how we can help that community. How do we take the skills, capabilities and technologies we have and tailor them precisely right to bring those benefits?”

Freedom from Constraints

The unbanked and underbanked populations that McLaughlin spoke of tend to be young (42%, he said, are 15 to 34 years old), urban (52% today, 60% by 2030) and female (54%).

Among the several case studies McLaughlin detailed were Zuum, a service that allows Brazilians to transfer money, buy credits for prepaid mobile phones and pay bills with their phones; a partnership with the United Nations World Food Programme that provides Syrian refugees in Lebanon and Jordan with electronic vouchers for food, and “Flous,” Arabic for “money,” which incorporates the Etisalat mobile network and can be used on any mobile phone to transfer, load or withdraw cash across Egypt.

“Don’t think about participating in an industry. Think about how you can change it.”

“One unintended benefit of getting out of this cash-based distribution model,” McLaughlin said, “is that during the disruptions and uprisings that were happening in Egypt, literally the only government employees that got paid were the ones that using this system. They were freed from the constraints and disruptions of the physical world.”

Regardless of the community, he added, MasterCard prices transactions the same way. In the aforementioned cases, merchants get a modest discount, but the key, for McLaughlin and the company, he said, lies with removing barriers to participation.

As for his advice to students in the audience, McLaughlin championed boldness with an eye toward a final product’s effect on the consumer. “Don’t think about participating in an industry,” he said. “Think about how you can change it. I’ve always tried to have that sense of a mission. When I was designing software, [I] never [forgot] about who the person is who will be using it. Is using my stuff going to make their life better, make their job better, make their day better? As long as you never lose that spirit, that drive, I think many different industries are open to you.”

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