The culture of informal work is a topic that Peru’s new president, Pedro Pablo Kuczynski, is promising to tackle, and which banks are already addressing through financial inclusion initiatives such as the creation of a pioneering, sector-wide e-wallet. Silvia Pavoni investigates its potential to ease one of the country's main pressure points.

Peru casual workers embedded

Peru’s newly elected president, Pedro Pablo Kuczynski, has pledged to speed up economic growth through a series of reforms. These include, crucially, a push to formalise much of the country’s employment conditions. And as the new government settles in, the country's banks are enjoying the early fruits of their groundbreaking initiative to promote financial inclusion.

Informal work is a major concern in Peru. Despite some improvements, Peru’s National Centre of Strategic Planning forecasts that by 2021 – the bicentenary of the country’s independence from Spanish rule – a massive 58% of the population will still be engaged in informal work. This represents only a modest improvement from the 64% registered in 2013 and 75% of 2004. The Organisation for Economic Co-operation and Development has also warned about the low formalisation rate in the country.

As a consequence, Peru is also largely underbanked, with credit to the private sector equalling to just 30% of gross domestic product (GDP). This compares to more than 100% in neighbouring Chile. The World Bank has put Peru among the 25 priority countries where it is focusing its efforts on financial inclusion.

Off the grid

For his part, Mr Kuczynski is promising to make more jobs formal, particularly in the mining sector, which is a large contributor to GDP and where informal or even illegal practices are rife. According to US policy centre Inter-American Dialogue, illegal and informal mining generates between $1bn and $3bn every year, and produced about 20% of Peru’s gold in 2015. “[Informality in Peru is] very substantial, among the most significant informal sectors in Latin America. My guess is that under Mr Kuczynski there’s going to be an even greater push than what we’ve seen so far,” says Michael Shifter, president of Inter-American Dialogue, who also warns about the challenges of regulating such a lucrative sector and dealing with community opposition.

Mr Kuczynski’s plan includes the creation of the Mining Promotion Bank, which will provide training and make small loans to companies that comply with environmental standards and ensure that all workers receive pensions. He has also suggested lowering the national sales tax from 18% to 15% and temporarily decreasing income tax from 28% to 10% to ease the transition of small producers to the formal system.

Efforts to improve financial inclusion in Peru, on the other hand, have already led to the creation of a pioneering e-wallet. This is not only the first of its kind for the local market, it is also a fairly unique digital money project in the world in which lenders, as well as telecom providers, have come together to create a single solution that serves all participants’ clients across all mobile channels and bank outlets.

Walter Bayley, chief executive of Banco de Credito del Peru (BCP), the country’s largest bank, says it all started with the realisation that building similar platforms at individual banks would have proved arduous and unprofitable because of the limited scale of the local market. “Several banks, independently, were looking to launch e-wallets but we decided that it wouldn’t have been a profitable venture so we launched it as an association-wide project in which all financial institutions are included,” he says.

The Peruvian banking association set up a company, Pagos Digitales Peruanos (PDP), to develop the project and the e-wallet, Bim, officially launched in February. BCP is among the initial shareholders in the venture, which now has the backing of 34 financial institutions, including many of the country's savings banks, and the three main mobile phone operators: Claro, Movistar and Entel. The software was developed by Sweden-based Ericsson.

Bim at work

The willingness of the financial sector to work together was important, but it was a new piece of legislation that made Bim possible. In January 2013, Peru became the first country in Latin America to allow mobile phone users to make payments and transfer money via text messages without having a bank account. Other countries, among them Brazil, have since followed. Peru’s law also allows agents other than banks and financial institutions to issue e-money. These issuers are subject to less stringent regulations than banks but still fall under the supervision of the banking superintendent.

Furthermore, in September 2013, Peru’s telecommunications regulator, Osiptel, agreed to ensure neutral and non-discriminatory access to telecommunications networks by all e-money issuers. This means that a mobile operator may associate with an IT company to form an e-money issuer and that, when accessing the operator’s network, the e-money issuer should not receive preferential treatment but should be subject to the same conditions as its competitors. Both banking and telecoms regulators created the right environment for the new product. “The law of 2013 defined e-money issuers to the benefit of financial inclusion,” says Cristina Trivelli, managing director of PDP and a former minister of social development and inclusion in Peru.

While less than one-third of adult Peruvians use financial services, mobile phone penetration in the country is 105% (which is made possible by individuals having more than one mobile phone, often on different networks). According to Osiptel, 70% of Peruvians use pay-as-you-go. Unsurprisingly, mobile phone use is high in a country like Peru, which encompasses the Andes as well as a chunk of the Amazon rainforest. On the other hand, the banking system has traditionally been costly and geographically inaccessible for much of the population. 

Bim is designed with rural populations in mind, as it uses informal language and simple processes, and runs on low fees: a transfer costs just 50 cents of a new sol, Peru’s currency. Ms Trivelli notes that the simplified account that can be opened via a mobile phone is designed to comply with anti-money laundering needs – only small transfers and balances can go through the account – and reaches, in theory, anybody with a mobile phone. She would also like to reduce transaction fees in the future to make the service even more affordable.

Through Bim, customers can deposit and withdraw cash at any bank branch or agency of any financial institution that is part of the network, check their balances and top up their mobile credit. They can send electronic money to anyone, even those not signed up to Bim: in such a case the recipient can visit an agent to register for the service or simply withdraw money without registering. From August, further services will be added to allow for online purchases and payment between businesses. Peru’s industrial conglomerate, Gloria, and the local operations of multi-nationals SAB Miller and Coca-Cola have already signed up.

Reaching the unbanked

So far, PDP has enrolled 91,000 customers and aims to increase that figure to about 300,000 by the end of the year, according to Ms Trivelli. More than 30% of accounts originated through Banco de Credito del Peru, which expects to provide about half of the platform’s clients by the end of 2016.

Numbers and usage are under pressure to grow fast, however. PDP will become profitable only when 1 million of its accounts are active, which means executing at least one transaction every 90 days. Ms Trivelli plans to achieve this within five years. “We expect 5 million accounts then,” she says. “We have more customers than we expected but fewer transactions. Bank clients are now over-represented.”

She highlights the large numbers of unbanked Peruvians that Bim aims to attract, for whom the service was designed and where growth will eventually come from. “We want to move from just having a wallet to having a digital payment ecosystem,” she says. “This will provide us with the real value of this endeavour, which is data: with that we expect that all financial institutions working with us can customise their products and reach more people.”

Bankers agree. Mr Bayley says that BCP has been busy devising products, channels and prices to appeal to larger sections of the population, and granular data will help in fine-tuning such efforts. Luis Felipe Castellanos, CEO of Interbank, adds: “We need to create more products to make sure that people take money out from under their mattresses and get familiar with the benefits of keeping it in a bank. We have to continue to connect with customers in a physical way and be more active on the digital front.”

Data centrality

Improving customer data will eventually lead not only to better products but to better risk management. Mr Castellanos notes how after focusing on the definition of products and channels, the digital wallet can also turn into a useful risk management tool. “We can have alternative ways to evaluate risk that are stronger than the traditional ones; we can be more efficient in the distribution [of risk],” he says.

Mr Bayley has already seen how improved risk management has benefited BCP’s bottom line. BCP ended 2015 with a 20% increase in pre-tax profits, by far the highest in the country. Aside from improving efficiency and reducing costs, “we have grown our top line because, over time, we have improved risk management, particularly in retail products”, says Mr Bayley. The bank’s results are particularly interesting as economic growth slowed to 3.3% in 2015, only a slight improvement on the previous year’s 2.8% and far behind the 8.5% registered in 2010.

In the long term, the success of initiatives such as Bim will help to boost banks’ profitability as well as the country’s economy. Higher financial inclusion translates into higher personal income, studies prove. Being able to settle payments on mobile phones rather than bringing cash in person means saving time that can be dedicated to work.

Picking up the baton

Peru’s previous government launched its national financial inclusion strategy in April 2015, which aimed to expand the availability of appropriate financial services and give at least three-quarters of adults access to a transaction account by 2021.

The country’s new president seems equally determined to push ahead with social inclusion programmes.

Regarding Peru’s e-wallet, the main question is whether or not it can reach enough users to turn a profit and become self-sufficient, no longer requiring banks’ funding. And can Mr Kuczynski persuade a congress in which his party only holds 18 out of the 130 total seats to pass his reforms? His programme to formalise work in the mining sector is important to Peruvians because unauthorised mining contributes to environmental contamination and mineral trafficking, and often has ties to criminal organisations. Reducing unauthorised activities will benefit the country, but convincing local communities that rely on them to make a living and that have no social or financial ties with the wider population – and which do not enjoy the benefits such ties bring, such as pensions – will be challenging.

“I think that Mr Kuczynski and his government are extremely competent and respected [when it comes to the management of the] economy,” says Mr Shifter. “The question is about his political skill. Peru is a difficult and complicated country to navigate.”

Higher levels of social and financial inclusion are key to the development of Peru. They are also closely interlinked. Any observer interested in the country’s economy or banking sector must take a close look at both.

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