Written by Christian Tondo, Superintendence of Banks, Banco Central del Paraguay

The Paraguayan experience with digital financial services

In April 2017, Alliance for Financial Inclusion (AFI) and the Central Bank of Paraguay organized a workshop to analyze ways of increasing interoperability of means of payment in the country. The workshop brought together financial regulators and market players to chart out a direction for addressing issues with lack of interoperability. Today, Paraguay is on its way to solving these issues with a market-led strategy. Read on to learn about Paraguay’s experience with digital financial services.

The introduction of e-money accounts

The Paraguayan experience with digital financial services (DFS) started in 2008 with domestic remittances and electronic payments performed through mobile phones. This type of transactions — via e-money accounts — act as an entry point to formal financial services for the unbanked. An innovative feature of e-money accounts is that it can be linked to a bank account, providing access to a wider range of financial services such as savings, transfers, and credit.

The use of e-money accounts reduces cost and time for remittances, making transactions traceable and safer. Starting phase of implementation was carried out between 2008 and 2014. Paraguay’s stable macroeconomic environment was key for the evolution of e-money; the per capita income and cellphone ownership were growing. However, the level of financial inclusion was still low. The 2013 Paraguay’s Financial Inclusion Survey showed that 42 percent of the population didn’t have access to formal financial services. This context was conducive to develop the business structure supporting electronic money.

Commercial agents’ network

In 2008, two mobile network operators (MNOs), Personal and Tigo, launched their services for payments and remittances. They utilized their existing network of commercial agents to offer cash-in, cash-out and money transfer services through e-money. However, during their first commercial stage, both MNOs faced low levels of acceptance, mainly explained by the relatively complex user registration process. Tigo’s reaction was to simplify this process and to focus on performing domestic remittances instead of payments. The service was re-launched in 2010 under the name Giros Tigo. After the product adjustment, Tigo had opened 1.7 million accounts as of June 2017, which means that more than 37 percent of the adult population had access to financial services through this type of accounts.

The evolution of domestic remittances in the last five years is based on the expansion and usage of commercial agents’ networks from both MNOs. They have more than four thousand active agents that provide top-ups, and cash-in and cash-out services where customers perform these transactions two or three times a week from both MNOs. The agents are present in Paraguay’s 17 administrative subdivisions; however, they have higher presence in cities with a larger population density.

Regulating mobile network operators

Initially, the Central Bank decided not to regulate MNOs’ remittances and electronic payments. The regulator focused its efforts on monitoring the evolution of the industry. Once both clients and transactions reached considerable volume, then the Central Bank issued the Regulation for Electronic Means of Payments (Resolution 6, March 2014). This is the legal framework that formalized MNOs’ electronic money business. This framework  covers a wide scope: defining the market conditions for participants, determining guarantee deposits, specifying due diligence and client identification processes, establishing service distribution and outsourcing mechanisms, providing guidelines on consumer protection and transparency, and is equipped with a mechanism that support financial inclusion for unbanked clients. Lastly, the framework defines the capacity of the Central Bank to regulate interoperability in the future.

The road ahead for Paraguay

Today Paraguay faces the challenge of upscaling the degree of interoperability between networks performing electronic payments and remittances. The 2014-18 National Financial Inclusion Strategy identified interoperability as a highly important objective.

However, despite the Paraguayan model evolving, challenges remain regarding interoperability among companies of electronic means of payments, banks and financial institutions, as well as card providers and payment facilitators. The system is heading towards making interoperable transactions, such as payments and remittances, among associated companies. Interoperability enables users to send and receive money across various operators/providers in a simple and cost-effective manner. This helps providers to collaborate with other stakeholders in the ecosystem and scale transaction volumes to create economies of scale. View the case study to learn more.

AFI provides a platform for dialogue

The workshop organized by AFI and the Central Bank of Paraguay provided the opportunity for participants to identify challenges regarding interoperability. The main bottlenecks identified by participants were low amount of payments performed by the banking network, competition issues related to card licensing and low digitization of payments.

Participants also expressed interest in solving issues surrounding the current process of integrating e-money accounts with a financial institution account, as well as establishing transparent and affordable commissions for companies of electronic means of payments and banks. The workshop helped private sector participants and regulators identify a roadmap to increase interoperability and interconnectedness among stakeholders, and translate these benefits to end users through more affordable financial services.