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The World Bank Group is putting its balance sheet behind a $700mn initiative designed to help banks and fintechs in emerging markets overcome one of the less visible barriers to participating in the global payments system: settlement risk.
World Bank backs $700mn initiative to boost access
The International Finance Corporation (IFC), the World Bank Group’s private-sector arm, will provide guarantees covering a portion of the credit settlement exposure associated with financial institutions using international payment networks.
Mastercard is participating through a $500mn global settlement exposure facility intended to help financial institutions in emerging markets access its network without being constrained by existing financial requirements.
Visa has agreed a separate risk-sharing arrangement expected to support approximately $200mn of settlement exposure over five years, initially focusing on financial institutions across 14 countries in Latin America and the Caribbean.
Settlement risk becomes a barrier to payments growth
The agreements address an important but rarely discussed constraint on the expansion of digital payments.
Participation in global card networks requires financial institutions to satisfy credit, collateral and settlement requirements designed to protect the network and its participants if an institution fails to meet its obligations.
For larger banks this is generally part of the cost of doing business. For smaller banks, fintechs and institutions operating in emerging economies, however, those requirements can consume scarce financial capacity and restrict their ability to issue cards or expand payment services.
IFC’s intervention effectively introduces another balance sheet into that equation. By assuming part of the settlement exposure, it can reduce the risk associated with bringing qualifying institutions into the international card ecosystem without requiring Visa or Mastercard simply to weaken their risk standards.
That makes the programme as much a piece of payments infrastructure policy as a financial inclusion initiative.
$700mn of risk could unlock $280bn of payments
The potential multiplier is substantial.
IFC estimates that financial institutions participating in the initiative could generate around $280bn in additional digital payments. It expects them to issue 360mn more cards and increase the number of active digital-payment users by 90mn, including 39mn women.
Those numbers illustrate a broader challenge facing the payments industry. Moving consumers and merchants away from cash is not simply a matter of deploying better technology, launching another wallet or persuading people to use cards.
Banks and fintechs also need access to the underlying financial and network infrastructure capable of supporting those transactions.
For Visa and Mastercard, there is an obvious commercial dimension alongside the development argument. More participating financial institutions ultimately means more cards, greater acceptance and more transactions travelling across their networks.
For local banks and fintechs, meanwhile, reducing settlement constraints could allow them to compete in markets where digital payment penetration remains comparatively low.
The next payments battleground is access
The initiative also demonstrates how the next phase of global payments growth may differ from the last.
Much of the industry’s expansion over the past decade has centred on technology: mobile wallets, contactless payments, real-time infrastructure and increasingly sophisticated processing platforms.
In many emerging markets, however, the constraint can sit further down the stack. Institutions may have the technology and customers but lack the financial capacity required to participate fully in global payment ecosystems.
IFC’s programme attempts to address precisely that bottleneck.
And that makes the most interesting comparison not the size of the guarantees themselves, but what they could unlock: $700mn of risk capacity supporting an estimated $280bn expansion in digital payments.
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