> Posted by Nate Gonzalez and Alina Kogan, Investment Officers, Accion Venture Lab
The Financial Inclusion 2020 project at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”
Over the past year at Accion Venture Lab, a new program that invests in financial inclusion start-ups, we were initially surprised to see a rapid proliferation of online personal financial management (PFM) tools and rate comparison start-ups popping up across Latin America, particularly in Colombia and Brazil. These companies aim to present consumers with a consolidated view of their finances across various financial products (e.g., bank and investment accounts, loans, insurance products, credit cards), educate consumers on financial literacy, provide budgeting tools, and often, make money (through qualified leads to banks) by suggesting better products for consumers based on pricing and needs assessments. On the surface, this trend must seem premature, considering internet usage across the continent remains under 50 percent and online banking rates are even lower. But if you dig into the changing income distribution data across Latin America coupled with existing financial sector market dynamics, this trend toward increased financial education on available products and services begins to make a bit more sense. The rapidly evolving income shifts across the region highlight the importance of democratizing data as a means to further financial inclusion.
Latin America has experienced significant change over the past several years, which has resulted in millions of people moving into the ranks of the middle class. Between 2003 and 2009, Latin America’s middle class expanded by 50 percent, from 103 million to 152 million, accounting for roughly 30 percent of the total population in 2010. In Brazil alone, over half of Brazil’s 190+ million people are considered middle class, and a majority of them rose to middle class status in just the past five years. CFI just released a new report, Growing Income, Growing Inclusion: How Rising Incomes at the Base of the Pyramid Will Shape Financial Inclusion, which details changing income patterns across emerging economies and the subsequent implications for financial inclusion focused initiatives globally. In addition to the growth of the middle class, the report highlights that almost 40 percent of the current population in Latin America are considered part of the “vulnerable class,” defined as pre-middle class persons with incomes from $4-10 per day. This group has experienced similar high growth rates over the last five years. The CFI report predicts that this “rising tide” trend will continue.
It’s important to note that many among this upwardly mobile group across Latin America are part of a young, tech savvy generation that increasingly make use of online tools. This group has come of age during the rise of the internet, online services, and smart phones. This familiarity with technology is not limited to the middle class. Venture Lab has observed that the younger cohorts within the vulnerable class are just as likely to be aware of technological trends and to engage online (even if not from a dedicated device). The willingness of these younger groups to engage with technology presents an opportunity for providers to push content that builds financial capability through low-cost channels that can achieve deeper penetration across Latin American social strata.
So, why the need for PFM and rate comparison tools? It’s a well documented phenomenon that most Latin Americans are deeply distrustful of their local banks. Often (for those who are banked), the only idea more painful than dealing with one’s own bank is the thought of switching to another bank. Distrust of banks has created a sort of reverse “stickiness,” whereby customers are more likely to stay with their current financial services provider, not because they like the service, but because they feel it will take too much effort to go find a better option since there is little perceived differentiation among financial providers. The Banco de Colombia in the Superintendency’s 2012 report noted that lack of awareness and information on the various financial products available in the market is one of the key factors hindering financial inclusion efforts in the country.
PFM and rate comparison services help “democratize” information, allowing consumers to make rational decisions about products and providers based on an abundance of data and comparison points not previously available in an easy-to-use, consolidated format. Furthermore, these start-up businesses (e.g., Banlinea – Colombia, ROCKET – Colombia, GuiaBolso – Brazil, Konkero – Brazil) allow consumers to make these decisions in a “safe” place, inside the comfort of their own homes. Successful financial capabilities building campaigns, paired with the democratization of data on products available, pricing, and other disclosures, holds promise on several fronts:
- A more financially-literate population
- Increased competition on rates and customer service among banks
- Better-suited products in response to customer choices
We assert that financial inclusion means fair and accessible services for all stakeholders. The rise of PFM and rate comparison tools, combined with complementary financial education curricula, helps correct an information misalignment within the financial services sector that has plagued Latin America for many years. The immediate beneficiaries of these services will be middle class, but the rise of a younger, more tech savvy generation across social strata means that these services may also provide a path upward for those in the vulnerable class.
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Nate Gonzalez and Alina Kogan are Investment Officers with Accion Venture Lab.
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