IoV Lodge. Chapter 3: “Kosta Peric and the history of cross-border payments, financial inclusion and interoperability”.

32 min readApr 3, 2019

Introduction.

Welcome back to the IoV Lodge. It has been a while since we met for the last time, but that is on me. Unsurprisingly, it has not been an easy task to draw the attention (and the time) of the most forward-thinking minds within the IoV ecosystem; especially, taking into consideration that we are trying to navigate the rapids of one of the fastest moving industries in the globe: The FinTech Industry.

However, and notwithstanding the desolate scene inside the Lodge, we somehow managed to have the fortune to accommodate Kosta Peric (@copernicc on Twitter), which ended up being both an astounding and an insightful opportunity to have a vast exchange of thoughts with him. Such dynamic helped us to have a much better understanding of his background and the amazing projects in which he has held leading positions.

Since I feel a very particular fascination towards financial inclusion-focused projects (you can say very comfortably that Kosta knows a thing or two about them) and I want to make a decent attempt to transmit the subject matter of this blog-entry as clearly as possible, I decided to change the ordinary format of the Lodge’s chapters.

Hence, throughout this chapter you’ll find an intercalation of the interview we had with Kosta and certain explanations of various concepts and/or projects that are related with the interview itself. This, in an attempt to help the readers of the Lodge to get along with the interview more smoothly and with a better comprehension overall.

I shall, however, warn all the Lodge visitors: This is a very extensive blog-entry, but if you are interested in learning about financial inclusion, FinTech, Internet of Value, cross-border transactions and interoperability, and also in having a better understanding about Kosta’s key roles and fundamental participations in the design, development and implementation of different projects that changed the nature of these financial concepts forever, I strongly advise you to stay with us until the end.

That being said, and without having the intention to aggravate this post with more unnecessary delays, let’s allow this blog-entry to begin with the conversation that we had with Kosta.

Kosta Peric.- “A fundamental piece in the history of cross-border payments, FinTech innovation, financial inclusion and payments interoperability.”

A) SWIFT.

Kosta started a very relevant stage of his career at SWIFT[1] (Society for Worldwide Interbank Financial Telecommunication) about twenty-three years ago. That’s right, 23. Your eyes are not cheating on you.

For those that are not very familiar with this Telecommunication company (if any at all), SWIFT is a cooperative society that was incorporated in Belgium back in 1973 by 239 banks and financial institutions that decided to own the organization back then, and have remained as the owners until these days.

The Belgian cooperative was created with the intention to establish a series of common standards for international financial transactions, a shared data processing system and a worldwide communications network, all of which (when combined) would be capable of introducing an easier and better landscape for cross-border transactions overall.

The first payment message sent through SWIFT was completed in 1977, five years after the incorporation of the society. The rest of the story is pretty much told by itself. We all know what SWIFT meant for the financial industry and how it revolutionized the cross-border transactional world.

It is fairly redundant to point out that a very large majority of the international interbank messages for payments are currently using the SWIFT Network. Data from 2015 says that SWIFT, backed then, was already linking more than 11,000 financial institutions throughout more than 200 countries and territories, whilst it was also handling an average of over 15 million payment messages per day. Even these numbers are probably insignificant as compared to the volume being handled the SWIFT Network in present days.

It is noteworthy to say that SWIFT does not facilitate the transfer of funds, instead, it enables the sending of payment orders, which must be settled by correspondent accounts that the financial institutions have with each other (also known as nostro and vostro accounts). This means that, in order to use SWIFT, each financial institution must have a banking relationship by either being a bank or affiliating itself with one (or more) so as to settle the mentioned payment orders.

The above raises a very interesting question. Who was behind the creation of such interbank messaging system? Who architected it and who was in charge of the complex implementation processes?

With such an overview about SWIFT’s history, we the decided to ask Kosta about his long experience with SWIFT:

IoV Lodge: Could you please provide a general description about your professional background with SWIFT? 23 years sound like a life-time.

Kosta:

“I like to remember my stance at SWIFT as a very productive stage of my career. Working for the Society, I held several roles, most of which were focused on the technology aspects of the SWIFT platform.

I tended to be involved mainly in projects of the Research and Development type, developing new products and services.”

B) SWIFTNet development.

IoV Lodge: I understand that you had a couple of relevant roles that were related with the development and implementation of what today is known as SWIFTNet. Could you share with us your experience with it?

Kosta:

“The most important role I had on SWIFT was the design and deployment of SWIFTNet, the new generation of SWIFT’s payment platform (a project that extended from late 90s to 2008).

As the chief architect, I managed the team who designed the original architecture, then managed the development of the new platform, and finally supervised the migration of the member banks to the new platform.

The current SWIFTNet platform serves well several vertical business segments, from the financial messaging system based on corresponding banking which is the core product, to several other business segments providing secure financial transactions based on real-time and batch paradigms. The system has scaled well over time and continues evolving.”

After this couple of answers, it is fairly difficult to avoid being impressed by Kosta’s background. He essentially was in charge of a team that was responsible for the creation, architecture, deployment and integration of the payment messaging platform that made it possible for SWIFT to scale up its services to the transactional volume handled nowadays. The very aspect of Kosta’s background that amazes me the most, is the impact that he, single-handedly, managed to have in the overall development and success of the world’s economic globalization.

However, not being satisfied with the revolutionary improvements that he helped to implement from the entrails of the global financial ecosystem, he remained very focused on trying to maintain a decent level of innovation within the financial services industry.

C) Innotribe.

IoV Lodge: At the end of your career with SWIFT, you created and were in charge of another initiative called Innotribe. Could you tell us more about it?

Kosta:

“My last endeavor at SWIFT is Innotribe, the innovation arm of SWIFT which I co-created with several colleagues. It was an internal incubator for new products based on open innovation, and later also gathered great success in becoming an industry incubator for financial technology related startups. Innotribe also has a large following at industry events, notably at Sibos. Back in 2009 the term FinTech was not yet invented but it pretty much came out of a small number of initiatives like Innotribe. I tell the Innotribe story in my book ‘The Castle and the Sandbox — Transforming Conservative Companies in Established Industries Using Open Innovation’[2].

As far as I know [The Castle and the Sandbox] was the first publication ever to use the term ‘sandbox’ to designate internal incubators.”

To sum up, in case you were still doubting about Kosta’s remarkable footprint within the payments and financial technologies’ industries, it is fair to say that these owe him (and others that worked with him) not only the creation of a global platform for standardized international inter-bank payments, but also the very creation of concepts like FinTech and Sandbox, which are having a staggering role in the current evolution of financial services. Leaving tribalism and particular preferences aside, these are achievements that cannot simply be ignored.

Moreover, Innotribe was a key driver for Kosta’s interest towards financial inclusion. While he was in charge of delivering one of the most secure and scalable platforms for interbank payments, he realized that there were back at the day, at least, 1.7 billion unbanked people around the world (current assessments are closer to the 2.5 billion figure) that did not have the opportunity to be included as part of the financial system (don’t even think about being able to transact in a cross-border basis).

This is, about one third of the world’s population did not have access to any kind of financial service, at all. I really want to be clear and emphatic on what this shocking statistic means for the entire economic landscape, but more specifically, for those that were left aside from financial progress.

What this statistic effectively means, is that one third of the entire population does not have an alternative to cash. The only manner in which they are able to transact in order to keep up with their daily financial activities and needs (including but not limited to savings, paying for food, education and health, amongst other basics) is through the utilization of paper notes.

The foregoing also means that unbanked individuals are not able, among many other things, to: i) save or send money in a safe or secure manner (they are constantly subject to the possibility of being robbed); ii) pay for goods or services without the need to walk long distances or pay for expensive transportation in order to reach stores that actually accept the payments they want to make; iii) safely receive payments or considerations for their work or products; iv) earn yields; v) invest in financial products that could somehow alleviate their poverty situation; vi) send or receive remittances; vi) obtain loans that could help them to run their businesses or simply finance their regular needs; vii) properly run a business with due accounting and management policies; viii) join the formality and contribute to the development of their country.

In connection with the above, the Gates Foundation published a shivering quote in the FSP site: “Most poor households instead, operate almost entirely through a cash economy. This means they have to save in physical assets, such as livestock or jewelry. Cash gets spent, animals die, and jewelry can be lost or stolen. What’s more, these forms of savings earn no interest and can actually lose value over time. To send money to family, those without a bank account have to rely on couriers or friends who carry cash by bus, which is expensive, insecure, and slow. To borrow money in an emergency, they must turn to moneylenders who charge notoriously high interest rates.”

In other words, they [unbanked individuals] are completely unable to conduct any activity that could eventually touch the financial system. This situation might not appear to have much relevance to many, but the inconvenient truth is that it has mayor consequences in the zoomed-out picture of the global economic landscape. That is, particularly, why I am so passionate about financial inclusion.

The foregoing led us to ask the following question:

D) Bill & Melinda Gates Foundation.

IoV Lodge: You were in charge of many of the most important projects that SWIFT has ever developed and implemented. Could you tell us more about your transition from SWIFT and Innotribe to the Bill & Melinda Gates Foundation?

Kosta:

“Around 2012, one of the subjects that came to Innotribe’s agenda was financial inclusion — the fact that about a third of the world population doesn’t hold a bank account and must transact in cash came to light as a shortcoming of the banking system. Innotribe started progressing this topic and building a network of interesting people and parties, notably at the Sibos Osaka 2012 event. Coming out of this effort, I connected with the Bill & Melinda Gates Foundation and eventually devoted the next step of my career to financial inclusion by starting my work at the Financial Services for the Poor (“FSP”) strategy at the Foundation and moving to Seattle in 2013.

The FSP theory of change is focused on connecting the poor to a very efficient payment platform allowing them to transact wherever they are using simple mobile phones. Doing so has proved to be very beneficial for poor people and families — see Suri and Jack paper as an example here: http://science.sciencemag.org/content/354/6317/1288/tab-figures-data.

The key examples of success of commercial products serving the poor are M-Pesa[3] in Kenya and BKash[4] in Bangladesh. Their services are called mobile money (“MM”), and there is today more than 150 of such systems in sub-Saharan Africa, alone.”

What M-Pesa and Bkash demonstrated -in an overpowering manner- to the entire financial world throughout the longitude of this decade is staggering: It is not only achievable, but also financially reasonable to bank the unbaked without the need of banks’ physical presence.

The exponential proliferation and adoption of mobile devices across all jurisdictions (in conjunction with telecommunication networks), has enabled for companies like M-Pesa and BKash the development of payments and banking-like systems (i.e. mobile money services or “MMS”) that can be made available –remotely- to anyone who is financially able to afford a mobile phone, regardless of its level of sophistication (for some basic transactional operations, the ability to send and receive SMS messages serves the task just fine).

The creation of MMS provoked that, for the first time in history, banks and other similar financial institutions, had to admit that their ability to finance the construction, operation and management of several bank branches was no longer relied on by financial services in order to reach rural and poverty-governed areas that were, previously, considered as financially inaccessible regions. This, since FinTech and Telecommunication companies (“TELCOs”) combined their strengths in order to provide relegated citizens with access to financial services directly from the palms of their hands.

The above, automatically derived in a cheaper, faster, more scalable and accessible alternative to the traditional banking model that implied the need to open branches at every single geographical location (with -financially viable- concentrations of people).

Moreover, on march 28, 2019, Mastercard[5] issued a report, confirming that 15 countries account for over 60% of the global unbanked population, where 607 million people have a mobile phone, but do not yet have a bank account, thus, being mobile technology the best positioned one to provide them with immediate access to the benefits of financial inclusion. The report also states that: “In all but one of these 15 countries (India) people with a mobile phone outnumber those with a bank account by several million (rising to 204 million in China).”

Image obtained from Mastercard’s report.

These statistics provide a very helpful background that helps us to understand the reach of mobile phones versus bank accounts, and the astounding potential that such devices have to instantly include unbanked people into the financial ecosystem.

Following this trend, the Gates Foundation designated[6] as the main goal of the FSP program bringing support to both “government and private sector partners in a shared effort to establish financial services for the world’s poorest to use to build more prosperous and secure lives for themselves, their families and their communities”, which does sound like a very powerful purpose.

That is, indeed, a strong goal that provides deep insights regarding the pursued collaboration between governments and the private sector. Financial inclusion is not simply another of those “governments versus companies” kinds of things. On the contrary, financial inclusion forms part of a very select group of sectors that are extremely beneficial to both governments and companies.

As digital financial services tend to reduce the utilization of cash, they also increase the traceability and transparency of transactions, which consequently improves the supervision abilities of both financial and taxation authorities. On the private sector side, it is more than reasonable to say that the spontaneous addition of large amounts of people to the digital transactional world is proportionally related with their ability to increase businesses’ profitability.

Supporting financial inclusion is a win-win-win-win situation: unbanked people win, companies win, governments win and the global economic landscape wins.

In fact, the objective pursued by the FSP is so powerful, that it has driven the participation of the following heavy-weighted organizations as partners[7] of such program:

E) Interoperability.

When Kosta joined the Bill & Melinda Gates foundation, he was designated as the Deputy Director of Financial Services for the Poor, so he could be in charge of overseeing the strategy and the grants that should be allocated to digital payment solutions for the poor[8].

IoV Lodge: In this line, we kindly asked Kosta to further explain the nature of his current role at the Gates Foundation.

Kosta:

“Our current work at the Foundation is not focused in fostering more of these operations [mobile money offerings], but rather to scale this innovation by making such systems able to inter-operate between themselves, and inter-operate with traditional banking systems and merchant systems. By connecting these systems together, the market of users will increase and the number of unbanked will be reduced faster.

My team specializes in the formulation of what such interoperable payment platforms should look like and assists public and private sector entities in deploying such systems. Our model for this is called Level One Project (http://leveloneproject.org) or L1P. For this to be successful, we also have teams that focus on helping regulators stimulate financial inclusion with adequate regulations, and we have teams focusing on increasing usage of the platforms when they are created by fostering innovation applications serving the poor (one example of such innovative products are solar pay as you go systems such as provided by M-Kopa Solar[9] in Eastern Africa)”.

In this regard, the Level One Project is not only focused in helping both private entities and governments to collaborate in the design and development of the aforementioned interoperable payment platforms, but also in fostering the utilization of such platforms for the creation of innovative applications that are able to bring cheap, reliable and scalable financial services to those that need them the most.

The Gates Foundation describes the idea behind the Level One Project as: “A level playing field for everyone by building one digital financial system in every country around the world”[10]. Essentially, the L1P vision, can be describes as an idea that represents the intention to create a new, real-time digital payments system that is capable of supporting inclusive, interoperable digital economies, and also comprises the implementation of the L1P design principles that will help to achieve this.

The idea outlined above gave rise to the creation of the Level One Platform, which is (as stated by the Level One Project official Guide) a digital platform that intends to facilitate immediate and real-time digital payments, while optimizing the ability of the excluded to participate in the overall financial ecosystem. Most importantly, the platform enables a system that exists along with –and among- other payments systems in the countries where it is implemented, which means it has backwards compatibility with the traditional payment rails.

The notion of interoperability between digital payment systems created an adequate context to move into the next stage of Kosta’s career.

F) Mojaloop.

IoV Lodge: In an attempt to understand where the Level One Platform was positioned as of today, we asked Kosta if he could provide further details on such matter.

Kosta:

“Deploying an L1P aligned payment platform in a country/region is a project that involves many activities beyond software. There are many barriers to overcome, as I explain in my TEDx talk ( https://www.youtube.com/watch?v=II7wV74SU4g&t=98s).

However, we did notice that the software related activities could be accelerated by the availability of a software solution.

As our work [with the Level One Project] evolved since 2013, we realized the need for a readily available and widely available software that allowed stakeholders in the countries and regions to easily implement Level One Project principles. Thus we commissioned the development of Mojaloop, and we have made Mojaloop available as open source in October 2017 at Innotribe Sibos Toronto. Miller Abel and Matt Bohan in my team are involved in Mojaloop besides me.”

IoV Lodge: From your answer, it seems like the Level One Project is directly related with Mojaloop. Is this Correct?

Kosta:

“This is correct. Mojaloop was created with the intention to directly implement L1P principles. However, it should also be seen more generally as a software to connect financial system providers in a real-time retail payment platform (akin to the Level One Platform vision). Such platforms are sometimes referred as “faster” payments in western economies. When we looked at the companies who could help us develop such a system, we focused on a small number of companies that in our eyes were at the forefront of such payment platforms and related settlement processes — Ripple (principally for their novel view of payment settlement without the need for traditional corresponding banking), Dwolla (for their settlement skills), ModusBox (for their API expertise) and Software Group (for their expertise in mobile money systems). Crosslake was selected as the agile development coordinator. Miller Abel in my team is the key driver for the entire Mojaloop development activity.”

IoV Lodge: So, what is Mojaloop? What are the core technologies enabling the Level One Platform that L1P aimed to develop?

Kosta:

“One of the key technologies behind Mojaloop is the Interledger Protocol. Originally designed by Ripple’s Stefan Thomas and Evan Schwartz and now open source, the protocol provides 3 things that are essential to real-time payment platforms: 1) certainty (that a transaction has occurred or not between two parties), 2) security from eavesdroppers and man-in-the middle attack with cryptographic constructs, and 3) efficiency to process large numbers of small value transactions.”

For the benefit of those that are not very familiar with the concept of open source software (which might be seen as a basic concept by many), it is fair to describe it as a type of software in which the source code is released under a license in which the copyright holder grants users the rights to study, change, and distribute the software to anyone and for any purpose[11].

What is even more interesting about open source software is that it may be developed and used in a collaborative manner, thus being a prominent example of open collaboration that can accelerate and easily scale both the development and the adoption of any particular software.

Due to these exact reasons, both Ripple and the Bill & Melinda Gates Foundation decided to convert the Interledger Protocol (which includes the Hyperledger implementation of ILP –Quilt) and Mojaloop, respectively, into open source software, in order to make them available for open and global collaboration through Github at the following links:

Mojaloop: https://github.com/mojaloop/mojaloop.
Interledger Protocol: https://github.com/interledger.
Hyperledger Quilt: https://github.com/hyperledger/quilt

Examples of very successful open source software implementations include Mozilla Firefox, Google Chrome freeware, the full office suite LibreOffice and even the Android operating system for mobile devices. It is said that this kind of software development is capable of generating a more diverse scope of design and perspective than any company, alone, is capable of developing and sustaining long term.

Again, we are not talking increasing companies’ profit margins through software licensing schemes, but about including as much people as possible into the financial system (which is a cleverer strategy), for this would increase the size of the whole cake for every single market participant.

In this context, I wanted to have a better understanding about Mojaloop’s current status, so I jumped into the next couple of questions.

IoV Lodge: In your opinion, what are Mojaloop’s key characteristics that should drive forward the implementation and worldwide adoption of the payments platform?

Kosta:

“Mojaloop’s key advantage in implementers’ eyes is its availability as open source and that is why we see early adoption in Africa. However, as I mentioned above, Mojaloop is only software and every deployment includes many more components and efforts. This is why we don’t expect all L1P deployments to use Mojaloop — some projects may want a different approach driven by different requirements and skills availability, and thus chose other technology solutions.”

IoV Lodge: In line with the above, could you tell us about the financial inclusion projects supported by the Bill & Melinda Gates foundation that are currently working towards the adoption of Mojaloop?

Kosta:

“Sure. As of today, Mojaloop has been used as an enabling technology in the following projects supported by the Gates Foundation L1P (which you will be able to read about in the attached links):

Mowali (https://qz.com/africa/1473527/mtn-orange-partner-on-mobile-money-in-africa/).
TIPS Project in Tanzania (https://www.tanzaniainvest.com/finance/instant-payment-system-project-tips).
WOCCU Project (http://www.woccu.org/newsroom/releases/WOCCU_pursues_digital_financial_inclusion_for_50_million-plus_people_across_Asia).

Knowing that my particular passion towards financial inclusion will not let me ignore the opportunity to try and explain the aforementioned projects, in this particular section of the post, I will address the nature and the implications of such Mojaloop implementations.

I. Mowali (Africa)

Mowali, which stands for “Mobile Wallet Interoperability”, is a joint venture-like program integrated by Orange Group and MTN Group (two of Africa’s largest mobile operators and mobile money providers), which is also supported by the GSM Association (trade body that represents the interests of mobile network operators worldwide, with more than 800 members and 300 associate members).

The program will try to make it possible to send money between money accounts issued by dissimilar mobile money providers in real-time and at a low cost. Mowali was launched with the intention to enable interoperable payments across the entirety of the African continent, which has been characterized by its rapid and wide adoption of MMS. As a matter of fact, there are over 338 million mobile money registered accounts in Sub-Saharan Africa.

Hence, the main goal of Mowali is to leverage the success of mobile money adoption in order to help Africans to gain seamless and cheap access to best-in-class digital financial services through the utilization of their phones. Although the platform could be naturally understood as something aimed for TELCOs, it also encourages banks, money transfer operators and other financial service providers to join the ecosystem and promote the digitization and connectivity of payments.

The introduction of a common payments acceptance brand through Mowali is expected to accelerate both online and physical merchant payments, which should provide an adequate framework for a significant increase in the utilization of international remittances, payroll services and a wide range of financial services, which should linearly become easier and seamless due to the convenience and reach that Mowali will bring to consumers across the African continent.

From the customers’ point of view, Mowali implementation means, as described by the implementers of the program, that: “I can pay or receive money anywhere from my mobile account regardless of my operator”. That is, factually, revolutionary. A platform with these characteristics has the potential to unlock further innovation within the digital financial space and trigger the development of many novel financial services applications, which could not only enable super-efficient payments, but also a series of brand-new services, such as fund-raising, peer-to-peer lending, remittances, savings and investment alternatives (among others) that were previously unfeasible.

The launch of Mowali platform is allegedly supposed to happen in the first half of 2019, and it will be available to any mobile money provider in Africa. At first, Mowali will be introduced across Orange and MTN services, which are currently covering over 100 million registered mobile money accounts and mobile operations in 22 Sub-Saharan African countries. Additional markets and financial services offerings will be introduced as the platform and the service expands.

It is noteworthy to mention that Mowali has no scalability limitations, and it is currently ready to handle the existing 338 million mobile money accounts in Africa[12].

In another interview, Kosta Peric said that “Interoperability of digital payments has been the toughest hurdle for the financial services industry to overcome, in support of financial inclusion. With Mowali, Orange and MTN deliver a solution that will enable them, and other companies, to scale digital financial services across Africa, faster, to everyone — including the poor.”

II. TIPS (Tanzania)

On February 2019, the Bank of Tanzania launched an initiative called “Tanzania Instant Payment System (TIPS) Project” –not to be confused with Europe’s TARGET instant payment settlement system–, which at the time was described as a platform capable of connecting different payment system providers to facilitate easier, faster, cost-effective and secure instant payments.

In connection with TIPS, Benno Ndulu (Governor of the Bank of Tanzania), said in an interview hosted by Forbes in late 2017[13] that: “Interoperability is necessary both for financial inclusion and market maturity, but it is a complex thing to achieve…We are excited to explore implementation of this [Mojaloop] because of how it can simplify that capability for businesses and governments, and speed up access to financial services.”

Moreover, Chris Hamilton CEO of BankservAfrica[14], the largest automated payments clearing house in Africa said: “Our aim as an organization is to offer national payments platforms for the next generation of financial innovators…Mojaloop gives us some tantalizing new options for doing that in a way that integrates with the entire national economy.”

In this line and having in mind that the Mojaloop-based TIPS project will be operated by Tanzania’s Central Bank, it is easy to imagine that the intention is to immediately make it available for everyone in the country in an attempt to foster financial inclusion. In this sense, the platform is currently aiming to leverage and promote interoperability of digital financial services amongst payment service providers by implementing efficient payment clearing and settlement functionalities that can easily scale up to country-sized transactional volumes.

In an interview with TanzaniaInvest, Dr. Bernard Kibesse (Bank of Tanzania Deputy Governor) explained that the implementation of TIPS would take about 18 months and is expected to be operational by June 2020[15].

In other interesting matters, I was fascinated to find out that the latest Monetary Policy Statement published by the Bank of Tanzania revealed that the number of active registered accounts for mobile money stood at 23.3 million in December 2018, as compared with 19.4 million at the end of December 2017. This says a lot about the pace at which the mobile money industry is growing and the scaling needs that it is currently demanding.

As regards to the Mojaloop development part, DFS Lab, an early-stage accelerator focused in helping high-potential entrepreneurs to refine, grow and launch FinTech companies in developing countries, announced[16] on January 31, that it will host a hackathon in Dar es Salaam, Tanzania from April 8 to 12. The technology event will be directly aimed to offer participants (mainly developers and start-ups) an in-depth look into Mojaloop’s open source software and the implementations that have been achieved therein.

In regards with the hackathon Jake Kendall, Executive Director of DFS Lab said: “Interoperability is necessary for financial inclusion, but it can be difficult to achieve. Mojaloop is a true game-changer, and we’re interested to see what new usages will come out of this process. We’re looking for fintech companies and other innovators who recognize that switch based mobile money interoperability is coming and want to work with us to build the next generation of features and products that this enables.”

What is really interesting, is that FinTech companies in Tanzania will be allowed to develop financial applications on top of Mojaloop, while being able to gain immediate connection to the national TIPS system, therefore, leveraging a 100% interoperable and real-time payments system, which is reliably and securely hosted by the Central Bank. All of that at close-to-no cost.

III. WOCCU (Asia).

On February 13, 2019, the Worldwide Foundation for Credit Unions (the social impact affiliate of the World Council of Credit Unions “WOCCU”), which is mainly dedicated to work towards fostering financial inclusion, launched a project aimed to design interoperable, open-loop, low-cost, real-time payment platforms for its global network of credit unions across Asia, exploring the use of the Mojaloop platform[17].

For the implementation of this particular project, WOCCU intends to work along with several regional partners, including the Association of Asian Confederation of Credit Unions (which reaches over 50 million members across Asia), the Credit Union Central of Indonesia and two additional membership associations based in the Philippines — The National Confederation of Cooperatives and the Philippines Federation of Credit Cooperatives.

In connection with Mojaloop, Brian Belch, the President and CEO of WOCCU said: “Many economically disadvantaged populations still lack access to safe and affordable financial services, and digital technologies hold the promise to reach more lower income members cost-effectively. Deploying an open source and shared platform to service existing and new credit union members aligns with our financial inclusion mission, supporting the global financial system to operate in a more collaborative, transparent and inclusive manner.”

In such interview, Brian explained that within the first 12 months since launch, the Mojaloop-based initiative, would be focused on research and planning in order to design and test technologies for building a digital payments platform. He also stated that with the support provided by the Bill & Melinda Gates Foundation, the project would leverage the L1P’s design principles, starting in the Philippines and Indonesia.

After that, the next phase (which is anticipated for late 2019) is expected to be launched and scaled regionally, developing a blueprint for global expansion.

For these purposes, WOCCU will leverage the expertise of the digital financial platform Modusbox (participated in the creation of Mojaloop), who will focus on technical configuration and building a live demonstration platform based on Mojaloop. In other fronts, Paysys Global LLC will be in charge of overseeing the business, regulatory and operational aspects of such platform.

It was also stated by WOCCU’s CEO that the learnings from those initial-level rollouts in Indonesia and in the Philippines will be used to create a regional payment network that WOCCU would later roll out across Asia, ultimately reaching more than 260 million credit union members worldwide.

Interestingly, the abovementioned communication issued by WOCCU’s representatives expressed that while the project’s initial focus is aimed towards activating national payment use cases, WOCCU’s partners are also seeing a high demand for cross-border payments in corridors between the US and Asia.

All of the above led us to our last question to Kosta…

G) Cross-border transactions and correspondent banking derisking.

IoV Lodge: With this large background in mind and all the amazing developments happening within the brand-new Mojaloop ecosystem, which are the next steps for the software?

Kosta:

“As I’ve explained before, Mojaloop’s development roadmap is open source and, therefore, community driven. Particularly, I’d like to emphasize that one of the next evolutions will be towards cross-border multi-currency transactions.”

In other words, one could say that there is not only a crescent need for payment networks interoperability, but also a need for jurisdiction interoperability.

As described in connection with SWIFT’s modus operandi, the actual movement and settlement of funds in a cross-border basis isn’t enabled by SWIFTNet itself, instead, it requires the existence of correspondent banking relationships, which by the way, are being squeezed and made available to fewer and fewer participants as we speak. This, due to a so-called “derisking” practice that the largest correspondent banks rely on in a regular basis to justify their denial of services to smaller financial institutions.

Per a report published by the World Bank on January, 2018[18], since the financial crisis of 2008, global banks have been reviewing their correspondent banking relationships and many have decided to terminate or limit their correspondent banking services (a practice known as derisking) to different jurisdictions, regions or categories of clients. Derisking has been, since then, a process affecting not only local respondent banks, but also money transfer operators “MTOs”.

A fundamental issue that all the bankers interviewed for the aforementioned study agreed on, is that correspondent accounts, including the new ones, are very costly to maintain, thus requiring larger transactional volumes and fees to maintain their financial feasibility. As a result of this, only the largest financial institutions in certain regions or jurisdictions are able to keep-up with the burdens associated with correspondent banking, thus leaving no room for competition in the sector.

The loss of correspondent banking relationships has a direct negative impact on respondent banks and MTOs that might result in: i) the loss of significant number of customers; ii) a significant drop in remittance volumes; iii) the loss of highly profitable businesses, such as the supply of the United States dollar to certain countries; and iv) adverse effects on banks’ ratings.

However, the effects of derisking have not only been a threat to respondent banks. There are cases where clients have also ended-up being significantly affected. The World Bank report I’ve been quoting says, for instance, that in one surveyed country a bank indicated that its costs per transaction in switching the correspondent banking relationship (as a result of being derisked) had risen from USD $9 to USD $50–60.

It is also noteworthy to remark that the most affected ones by this issue are MTOs. In almost all surveyed countries, a number of respondent banks received explicit instructions from their correspondent banks not to service MTOs anymore, whilst financial services provided by MTOs are precisely the type of cross-border financial services that are intensively used in less financially developed countries.

In regards to the derisking issue, the report issued by the World Bank concluded: “First, there is a trend towards a concentration of correspondent banking services with fewer institutions handling larger volumes, leading to the buildup of counterparty risks. Second, the concentration of MTOs and remittances flows in a limited number of banks raises the prospect of systemic risks in a few jurisdictions. Third, in some cases, local respondent banks sought recourse with second tier and less reputable institutions after global banks terminated their CBRs (corresponding banking relationships). This shift warrants close scrutiny from domestic authorities. Last but not least, there are concerns that derisking has resulted in the creation of new, informal channels through which money is now flowing. Circumstantial evidence suggests that informality and greater use of cash and other unconventional channels have resurged in a few places as a possible consequence of derisking. If pervasive, they could undermine AML/CFT objectives by driving financial transactions outside of regulated channels.”

Hence, with correspondent banking derisking, fewer financial institutions are able to directly settle funds with the correspondent banks that provide access to large amounts of corridors. This adds overall friction and costs to cross-border funds movement processes. As a result, these services are systematically being concentrated among a progressively reduced number of participants, therefore: i) decreasing competition and quality of the services; ii) increasing domestic financial systemic risk, and iii) fostering informality and the use of cash in non KYC/AML/CFT compliant manners.

All of the above means that both, respondent banks and domestic MTOs, in order to keep-up with their money transfer and remittance services (notwithstanding the correspondent banking derisking) need to find alternatives to correspondent banking relationships so as to keep their ability to move funds across borders in financially feasible manners.

This is a very interesting opportunity area that the Bill & Melinda Gates Foundation through Mojaloop, the WOCCU through their Mojaloop-based initiative and the Interledger Protocol, more generally, are very eager to address. Global interoperable payment platforms built on top of these open source software protocols could be the alternative that local respondent banks and MTOs are looking for.

And this is pretty much where our amazing interview with Kosta came to an end.

But don’t go yet. In addition to the great thought exchange we just had, I wanted to write an additional section in order to try and clarify some of the doubts that could be nerve-wracking for some of the IoV Lodge readers as regards to Mojaloop relationship with Ripple and Coil.

How are Ripple and Coil related to Mojaloop?

If you managed to make it until this section of the blog, you probably identified that many of the goals being pursued by the Bill & Melinda Gates Foundation actually have a high overlapping degree with those being tackled by Ripple. It is reasonable to say that this is probably the main reason for which the Foundation included Ripple as part of its plans to develop Mojaloop.

As Kosta answered in one of our questions, the Gates Foundation decided to include Ripple in L1P’s endeavors “principally for their novel view of payment settlement without the need for traditional corresponding banking”. In this regard, they saw in Ripple a strategic partner from which they would be able to retrieve valuable expertise on correspondent banking derisking issues. At the end of the day, both Ripple and the Gates Foundation are aiming to create a proper landscape for the success of the Internet of Value.

As of today, Ripple and Coil are scollaborating with the Gates Foundation towards the development, improvement and implementation of Mojaloop. Let’s not forget that one of Mojaloop’s core technologies is the Interledger Protocol, which was created by Stefan Thomas (formerly CTO at Ripple and current CEO at Coil) and Evan Schwartz (engineer at Ripple). Other very talented individuals like Ethan MacBrough (Lead scientist at Coil) have also been involved with the Mojaloop project.

There has been a lot of speculation in connection with Mojaloop’s ability to leverage digital assets (such as XRP) in order to facilitate cross-border transactions. However, both Bill & Melinda Gates Foundation and Coil employees, have clarified that it is not within the current plans to enable digital assets utilization on Mojaloop.

Much of the speculation began when Miller Abel (Deputy Director and Principal Technologist at the Gates Foundation) tweeted out on October 17, 2018 the following: “We are partnering with Ripple and Coil to implement the Interledger Protocol and explore ways in which Mojaloop can support pro-poor payment systems”.

Some overly-optimistic enthusiasts construed the statement above as if the Gates Foundation was literally partnering with Coil in order to leverage the company’s core product (which actually uses XRP) and integrate it within Mojaloop processes.

In response to the rapidly growing misbelief, Miller Abel tweeted later that same day: “Glad to see all the curiosity! Yes, I am real. [smiley emoticon] No Mojaloop is not using XRP”.

In an attempt to bring further clarification on this matter and to put an end to the rumors, Ethan MacBrough tweeted that same day: “…the point of Mojaloop is to make mobile money networks interoperable, and likely will not use XRP. However, it will open up corridors that were formerly closed off, possibly allowing RippleNet and/or xRapid to access new regions”.

So, no. It is pretty clear that Mojaloop doesn’t use digital assets such as XRP, nor is it within future plans to include them as part of Mojaloop’s operations.

A completely different thing is that through interoperability and financial inclusion, Mojaloop could fix corridors that today are excluded from the global economic landscape, thus, enabling the conditions needed for products like RippleNet (and eventually xRapid) to be feasible in those regions.

Particularly, I will continue to enjoy how the achievements derived from the mutual collaboration between the Gates Foundation, Ripple and Coil continue to flourish throughout the next decades.

Finally, to conclude this extensive blog-entry, I considered appropriate to share a quote from Kosta Peric that will probable sound very familiar to you: “As businesses bring additional apps and services to the payment ecosystem, we will enter a new era — the “internet of payments”, in which payments flow over the internet in real-time in the same way information does today.”

This is the story of a man that made banks able to seamlessly transact with each other in a cross-border basis, a man that helped to create the concept of FinTech, a man that wants to put an end to the correspondent banking derisking issue, and a man that wants every single person to be included into the global financial ecosystem. This is the story of Kosta Peric and also the story of digital payments (it isn’t very easy to differentiate one from the other).

[1] As per Wikipedia, SWIFT provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment. Swift also sells software and services to financial institutions, much of it for the use on the SWIFTNet network, and ISO 9362 (https://en.wikipedia.org/wiki/Society_for_Worldwide_Interbank_Financial_Telecommunication).

[2] The Castle and the Sandbox book authored by Kosntantin Peric is available at: https://www.amazon.com/Castle-Sandbox-Transforming-Conservative-Established-ebook/dp/B00BATXSTU/ref=sr_1_fkmrnull_1?keywords=kosta+peric&qid=1551875186&s=gateway&sr=8-1-fkmrnull.

[3] M-Pesa is a mobile phone-based money transfer, financing and microfinancing service, launched in 2007 by Vodefone for Safaricom and Vodacom, the largest mobile network operators in Kenya and Tanzania. It has expanded to Afghanistan, South Africa, India and in 2014 to Romania and Alabania. M-Pesa allows users to deposit, withdraw, transfer money and pay for goods and services easily with a mobile device. M-Pesa has spread quickly, and by 2010 had become the most successful mobile-phone-based financial service in the developing world. By 2012, a stock of about 17 million M-Pesa accounts had been registered in Kenya. By June 2016, a total of 7 million M-Pesa accounts have been opened in Tanzania by Vodacom. The service has been lauded for giving millions of people access to the formal financial system and for reducing crime in otherwise largely cash-based societies (https://en.wikipedia.org/wiki/M-Pesa).

[4] Bkash is a mobile financial service in Bangladesh operating under the authority of Bangladesh Bank. This mobile money system started as a joint venture between BRAC Bank Limited, Bangladesh and Money in Motion LLC, United States of America. BKash users are able to deposit money into their mobile accounts and then access a range of services, in particular transferring and receiving money domestically, making payments and buying airtime pop-up. In April 2013, International Finance Corporation (IFC), a member of the World Bank Group, became an equity partner of BKash. In March 2014 the Bill & Melinda Gates Foundation became an investor in the company, and in April 2018 Ant Financial, the operator of Alipay (a concern of Chinese giant Alibaba Group), became an equity partner. According to Fortune Magazine, 22% of Bangladeshi adults use BKash with around 4.5 million daily transactions (https://en.wikipedia.org/wiki/BKash).

[5] https://newsroom.mastercard.com/eu/press-releases/new-mobile-money-propositions-have-the-potential-to-reduce-the-worlds-unbanked-population-by-more-than-a-third/.

[6] https://www.gatesfoundation.org/What-We-Do/Global-Growth-and-Opportunity/Financial-Services-for-the-Poor.

[7] https://www.gatesfoundation.org/What-We-Do/Global-Growth-and-Opportunity/Financial-Services-for-the-Poor/Partners.

[8] https://www.gatesfoundation.org/What-We-Do/Global-Growth-and-Opportunity/Financial-Services-for-the-Poor/Strategy-Leadership.

[9] M-Kopa is a company that currently sells solar home systems in Kenya and Uganda. These systems are currently considered as unaffordable by many, but also required for several basic survival-driven activities. As a response to this, M-Kopa implemented a financing alternative enabled by mobile money services, where the purchasers of the solar products are allowed to enter into friendly payment plans comprised of an initial deposit, followed by daily payments for up to one year (http://www.m-kopa.com/products/).

[10] https://leveloneproject.org/about-us/.

[11] https://en.wikipedia.org/wiki/Open-source_software.

[12] https://www.orange.com/en/Press-Room/press-releases/press-releases-2018/Orange-and-MTN-launch-pan-African-mobile-money-interoperability-to-scale-up-mobile-financial-services-across-Africa.

[13] https://www.forbes.com/sites/tomgroenfeldt/2017/10/16/gates-foundation-launches-open-platform-to-connect-mobile-finance-in-developing-world/#3367ff4b3c1b.

[14] BankservAfrica is an automated clearing house located in Johannesburg, South Africa and operates both nationally and within Africa. Annually processing billions of transaction valued at trillions of South African rand; BankservAfrica’s clients include banks, corporates, government and the retail sector. By volume of transactions alone, it is rated as Africa’s largest automated payments clearing house (https://en.wikipedia.org/wiki/BankservAfrica).

[15] https://www.tanzaniainvest.com/finance/instant-payment-system-project-tips.

[16] https://www.prnewswire.com/news-releases/dfs-lab-announces-open-applications-for-fintech-hackathon-focused-on-the-mojaloop-software-300787769.html.

[17] http://www.woccu.org/newsroom/releases/WOCCU_pursues_digital_financial_inclusion_for_50_million-plus_people_across_Asia.

[18] http://documents.worldbank.org/curated/en/552411525105603327/pdf/125422-replacement.pdf.