MANILA — Organizations working on financial inclusion often grapple with the question: how to get a large number of low-income individuals and families access to financial services?
For the Bill & Melinda Gates Foundation, the answer is digital.
“There are roughly 2 billion people in the world that don’t have access to formal financial systems. So that’s our broad remit. And our view is that the only way to deliver low-cost, valuable products to the poor at large scale is if it’s digital,” said Michael Wiegand, director of the Financial Services for the Poor strategy at the Gates Foundation.
Low-income individuals and families who don’t have access to formal banking systems often opt to borrow from friends or neighbors in the face of financial hardships, or invest in things such as livestock as a form of saving mechanisms. But Wiegand said these are “not the most efficient and liquid instruments for them to use.” They can in fact be insecure sources of financing in events when the main income earner in the family gets ill, for example, or in the advent of a disaster.
But going digital has its challenges, such as lack of infrastructure, coupled with minimal incentives for private sector investment, and restrictive and often complicated regulatory frameworks.
Devex spoke with Wiegand at the sidelines of the 2nd Asia Finance Forum: FinTech and Sustainable Development to learn how the foundation is working to address these challenges and what progress he thinks the global community has achieved to date in this space. Devex also asked the foundation’s financial services director about what kinds of partners they work with and look for in their work. The following conversation has been edited for length and clarity.
What do you look for in conferences like this focused on fintech?
Conferences like this bring together government officials from a wide variety of developing countries, so it’s an opportunity for us to share our view of how financial inclusion and the different kinds of financial systems and payment systems can be really helpful in terms of broad development, but also in terms of serving the particular needs of the poor. So it’s just a great audience for us to share our thinking about the right approach.
You talked about going digital as being at the core of your financial services strategy. What types of investments are you interested in within this space?
The base structure we think is important to put in place is the payment system. Poor people need to have basic accounts and need to be able to transact with each other, with companies and businesses around them. So a lot of our focus is enabling those kinds of systems, and that requires three things broadly: one is changes in regulation.
Traditionally, countries rely on the banking system to deliver financial services. But there are a lot of barriers for traditional banks in reaching the poor as individuals. And there are other types of companies that have big advantages in their ability to reach the poor. So countries need to change the way they think about financial services and the way they regulate them to both open up to those kinds of companies, the providers of financial services, as well as to make it easier for individuals to get involved.
For example, in a traditional banking system, a customer may need to bring proof of address, tax identification, and a whole series of documents to open a bank account. A very poor person who wants to have a very limited account shouldn’t need to provide all that documentation. So countries should think about how can they have different levels of requirements, depending on the activity and the risk of customers. So we work a lot in terms of guiding countries in changing their regulations and opening up.
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Then there’s a certain amount of infrastructure that needs to be put in place. So while the services will be delivered by private sector companies and they will fund their own investments to reach poor people, you do want to enable those different service providers to talk to each other and to exchange money among each other. And that’s often a shared resource, either government funded or through a consortium of financial service providers. And so that’s an area where we’re involved in helping identify the infrastructure that needs to be put in place. Digital ID systems are another piece of infrastructure that can really help poor people to gain access to financial services.
And then the third thing that needs to happen is the private sector needs to step up and actually deliver products that are valuable to poor people and reach them in rural communities and so forth. And there, as I said before, we’re playing a role more to facilitate the private sector to be able to reach those communities and serve those individuals. But we can also help sort of prime the pump, right? The problem with the payment system is if the businesses around you don’t accept digital payments, then you won’t open an account. But if the residents of the town don’t have accounts, then the businesses won’t open up the system, right? So it’s a chicken and egg problem. So if we can help governments digitize their payments to their citizens, particularly the poor citizens, that can be a real catalyst into getting enough people on the system that other businesses and so forth crowd in.
So we think about our work in terms of the regulations, infrastructure, and then usage.
What progress do you think has been made in breaking through some of these challenges?
We’re really seeing a real groundswell in momentum around financial inclusion. I think if you roll the clock back five years ago, just the idea of digital financial services and financial inclusion in being an important part of development was not sort of commonly accepted.
I think the global dialogue around financial inclusion has changed significantly, and people recognize that digital financial services are really powerful in driving financial inclusion and economic development.
But as you’ve moved beyond convincing governments and multinationals that this is a good idea, the next challenge is how do we do it? And because that requires a big change in mindset and regulatory approach, that’s a real barrier. There was resistance for a variety of reasons.
The second thing that’s really driving momentum now is you see more and more countries where the leaders innovated and created new ways of opening up their financial systems, and you see the variety of approaches that they took.
Now the next round of countries can look to those and sort of pick and choose their approach. For example, the Philippines is a real leader and has done some really innovative stuff to open up their system. India has taken a very interesting approach. A lot of people are familiar with East Africa, which took a very different approach. It’s easier now for the next set of countries to adopt new approaches because they can learn from each other or kind of pick and choose and design a system that’s best for them, but without creating it from scratch.
Do you work mostly with governments and multilateral institutions such as the Asian Development Bank?
Primarily, our work is with governments and multilaterals. And in particular, countries with local partners that are supporting the government in terms of their financial inclusion strategy. But we also think it’s important to engage with the private sector as well. Ultimately, it’s the private sector that has to deliver financial services and products to the poor. And so we need to, at least, understand what are the challenges and barriers for the private sector to reach the most poor and vulnerable individuals, so that we can help identify ways to overcome those barriers. That maybe through changes in regulation or government action, it may be a technology solution that’s missing. For example, our Mojaloop open-source software.
We developed and invested in that because we identified that the private sector — in particular, the new players — are delivering financial services to the poor people. So not traditional banks, but telcos and fintech companies. They’re finding it difficult and expensive to connect to each other, and there wasn’t a standard interoperability, as we call it, so that a customer of one company could send money to a customer of another company easily. We identified that that’s a barrier for the industry globally moving forward. So we invested in some technology that will facilitate that interoperability. That would be an example more of our private sector engagement.
What’s the entryway for other players who would like to work with the Gates Foundation?
We have a set of focused countries where we directly get involved. And those are: Indonesia, India, Bangladesh, Pakistan, Nigeria, Kenya, Tanzania, and Uganda.
In those countries, we’re engaged directly with governments, and as we identify particular barriers, we can potentially engage with the private sector to meet those needs.
So it’s less of a private sector company with a good idea on serving the poor coming to us and us funding them. That’s not really how we typically work. We think ultimately we want to create systems where the private sector can serve the poor without the need for subsidies. There’s a risk if we start funding private sector; it will be funding models that are unsustainable.
The other thing we do is work with large multinational organizations like the World Bank, some U.N. organizations, that can do similar things that we do, like advising governments and engaging the private sector outside of our focus countries, as well as inside our focus countries. That’s a way for us to help support the broader cause outside of those countries in which we’re working.
In some of the discussions, often what you hear are innovations and technologies that cater to making it easier for people to shop online, or obtain documents from different government services. How do you keep the discussion focused on the goal of getting the unbanked to the financial system?
To a certain extent, a lot of the first steps on this journey apply to everyone. So one of the regulatory change in the infrastructure applies to everyone in the country and everyone who is unbanked. In many developing countries, you only have 30-40 percent of the financial population using formal financial services. So you have a lot of middle-income people that are coming into the system.
But we don’t want to create a separate financial system for the poor. We want to create a better financial system for everybody, for a couple of reasons: one in order to get the scale to make this a profitable business, and a sustainable business, it needs to serve everyone. And like any industry — and the financial services in particular — this way, the middle and upper income people bring more revenue to the table than the poor. So it isn’t surprising that a lot of these new emerging companies is focused on that, especially the emerging middle class, as that’s the quickest way for them to get the revenue up to scale.
But they’re now creating infrastructure that’s countrywide that everybody can tap into.
So we’re conscious of the fact that ultimately our objective is purely to make sure these services get into the hands of the poor, but on the way, there’ll be systems that serve everybody. Until at this stage, it’s really getting those broad systems in place, and then once you get them in place, then we really shift our focus to making sure that those companies are serving the poor. But until you enable them to even exist, you can’t take that first step. So it’s a little bit of a sequence.
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