Filling the gaps between financial access and financial inclusion

Last year, investments in financial technology, or fintech, hit an all-time high. But while entrepreneurs and investors tend to focus on products and services to promote financial inclusion in emerging markets, investments in the ecosystems those innovations need to succeed risk being overlooked.

Here are some of the gaps that remain to ensure that rapid advances in mobile communications and digital payments realize their potential social impact and reach the 2.5 billion people who lack access to formal financial services.  

Infrastructure and analytics

“We need to think about access as we think about financial services,” Kurtis Heimerl, whose community cellular networks company Endaga was acquired by Facebook, said at a recent event on financial technology for global development hosted by the Center for Effective Global Action at Google in San Francisco.

Rapid mobile phone penetration in Africa has led to an explosion of transaction and payment services that utilize cellular connections. But those who lack reliable connections find themselves watching from outside the digital revolution. Mobile infrastructure is an important element of the ecosystem that will enable financial inclusion.

Heimerl’s work on the Telecom Infra Project is one of several efforts to expand connectivity that could also extend financial services. But connectivity is just part of the digital infrastructure needed to scale fintech products and services.

Last year, India launched DigiLocker, a cloud-based platform that provides citizens with a secure electronic space for personal documents, including identification, as well as an electronic consent system. Lack of identification can present a barrier to financial inclusion. Ecosystem investments in services like this one is one area where the global development community can play a key role.

The event at Google also showcased platforms leveraging mobile phone data to expand the boundaries of financial inclusion in emerging markets. Panelists represented companies including Inventure and Cignify, both of which translate mobile phone data into credit scores, without which users cannot access certain financial services.

Behavioral insights

Improved products and services like digital wallets or peer to peer lending will not lead to financial inclusion unless people want them and use them, Marina Dimova, vice president at the design and consulting firm ideas42, told Devex.

“There is a higher level need in terms of how you engage the system that will apply to any and all financial inclusion products,” she said.

Human centered design and behavioral economics are enabling programs to create products and services that better meet the needs of the people investors aim to serve, and then to work with these individuals to achieve their financial goals.

The Bill & Melinda Gates Foundation is funding ideas42 to apply the practice of A/B testing, a comparative testing method common to the tech sector, to mobile money services in emerging markets.

“If we start with a very Silicon Valley view that a few exceptional entrepreneurs can build amazing companies and have outsized impact, both from their own company and from a replication standpoint, then how do you create the ecosystem around them that allows them to thrive?” Arjuna Costa, a partner at the philanthropic investment firm Omidyar Network, asked Devex.

Omidyar Network takes a market-building approach to its investments, and for financial inclusion, this means funding not just entrepreneurs but areas like consumer research.

“Digital transactions have replaced human based transactions but they have not replaced human based relationships,” said Katie Macc, co-founder of Juntos, a venture backed by Omidyar Network.

Her company designs tools that helps users grow their confidence in — and therefore their likelihood of using — their new accounts. Studies have shown the power of the personal touch even in automated systems. And the Juntos conversation platform leverages behavior change and human centered design to increase account usage.

Fintech and regtech

M-Pesa, the mobile phone-based money transfer service, took off in Kenya in part because the country’s regulatory authority allowed it to start on an experimental basis. M-Pesa’s early struggles in other countries serves as a reminder that initiatives to bank the unbanked must take regulatory environments into account. Africa’s regulatory patchwork can be both a problem for fintech companies aiming to scale and an opportunity for ecosystem investments.

As fintech startups grow in number, regulators are trying to keep up — and the space has seen some technological “disruption” of its own. The growth of fintech has led to a spinoff sector of regulatory technology, or regtech, which leverages technology to make regulation and compliance more efficient and effective.

“New banking models for the poor pose some pretty critical challenges for financial regulators in that it is requiring them to supervise new platforms, new players, and very distributed banking systems,” Daniel Radcliffe, a Gates Foundation program officer focused on financial services, told Devex. “What will be important in more distributed systems is to have more sophisticated regulatory technology tools that will give central banks real time visibility into these transaction flows.”

"Most of the pioneering work is done by small companies with pioneering entrepreneurs who want to solve problems,” Carol Realini, co-author of “Financial Inclusion at the Bottom of the Pyramid,” said at a recent book talk hosted by Omidyar Network.

Standing before a slide featuring the faces of entrepreneurs, including the founders of Inventure and Juntos, Realini said these companies cannot succeed on their own without the enabling environments and ecosystem investments that allow them to scale.

“It’s a special moment in time for financial inclusion,” she said. “It is possible for everyone in the world to have access to banking that empowers their lives.”

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