> Posted by Tilman Ehrbeck, Partner, Omidyar Network

This post is part of Financial Inclusion Week, a week of global conversation on advancing financial inclusion. This year’s theme is keeping clients first in a digital world. Throughout the week participants will share their thoughts in events and webinars, on social media, and through blog posts. Add your voice to the conversation using #FinclusionWeek.

The digitization of the retail financial services front-end has the potential to unlock access to formal financial services for the 45 percent of working-age adults in emerging markets who are currently disconnected from the global economy. A recent McKinsey & Company study estimates that digital finance could reach the bulk of today’s excluded, mobilize new deposits and expand credit, adding six percentage points to emerging market GDP in 10 years-time, worth some $3.7 trillion. The driving force behind the digitization of retail financial services in emerging markets is the mobile phone. Already today, more people worldwide own a mobile phone than a bank account and by 2020, 80 percent of working-age adults will have a smartphone in their pocket. But to capture this opportunity, a lot still has to come together.

To begin with, the mobile infrastructure needs to be expanded. Data plans can still be very expensive in emerging markets, and low-cost smartphones have limited memory, which means people can use only a few apps. In fact, most emerging market users are connected via 2G feature phones, hindering a number of financial innovations from running on them.

But things are looking up.

India is a good example of movement in the right direction. Aadhaar, the country’s unique biometric identity program, has signed up one billion people and functions as both a public good and a public utility. The government paid for the original infrastructure, but now everybody can use it. More importantly, India’s financial regulators have sanctioned the use of digital Aadhaar identification for Know Your Customer (KYC) purposes, significantly lowering the bar for financial services providers to reach low-income consumers with bank accounts.

In addition, the country’s industry is coming together to create eSignature standards for nation-wide use. And the National Payments Cooperation of India has created a low-cost, retail payments system that works near real-time and enables funds to move frictionless, from any-to-any accounts. From a technology point of view, essentially, these key pieces of infrastructure work as an open API, broadening access to a stack of technologies that can dramatically accelerate digital retail financial services innovation in a completely paperless environment.

Product design is also changing for the better. Historically, financial services have been largely driven by supply-side thinking and language, speaking in traditional, technical categories such as payments, savings, credit, or insurance. But people don’t think like that. As consumers, we think much more in terms of life goals and then use mental financial accounts against these life goals, like saving for our children’s college education or saving for a rainy day. Financial services providers can use behavioral insights to better design products that leverage the digital channel to deliver innovations that are more aligned to the way people think about money. For example, they can now provide tools that smooth daily cash flows and combine functionalities of traditional payments, short-term credit, and high-frequency, low denomination savings. That’s the recipe to M-Shwari’s success in Kenya. Traditional industry product silos are blurring.

Product innovation grounded in behavioral data is also needed to address the financial inclusion gender gap that persists across geographies and income groups. According to the World Bank’s Findex data, that gap is 7 percent globally and 9 percent in emerging markets. And it has not changed since the last two surveys between 2011 and 2014.

Technology and digital finance can help close the gender gap, but it can also exacerbate it in some cases. In sub-Saharan Africa, there are a number of countries where mobile money has narrowed or even closed the gap. In South Asia, by contrast, it actually seems to have widened it, due to societal or cultural factors. There, women are less likely to own or have access to a mobile phone or have the identity documents required to register a SIM card, and they may not be supposed to interact with male mobile money agents.

To better reach women, it’s important to understand how their needs and behaviors as customers may differ from men. Omidyar Network has funded an in-depth research that looks at household financial dynamics through the gender lens. The report highlights how women tend to have far more life interruptions that impact their finances, such as moving for marriage, childbirth, or caring for elderly family members. Within their family’s finances, they tend to play defense, stretching budgets, whereas men are expected to play offense, by building assets. Women have more horizontal networks, while men have vertical ones. Women are often geographically more constrained. All of these factors greatly influence how they experience financial services.

Financial regulation is the last key piece in realizing the upside of digital finance. Regulators have never been so positively inclined to see technology as a way to advance various financial policy objectives—including financial stability, integrity, inclusion, and consumer protection—as in the last few years.

Advancing technology-led financial inclusion will mean, at minimum, that regulators find a common approach across traditional financial services lines and across relevant sectors, such as telecommunications authorities. Common approaches to digital KYC would be one example.

As a second step, they should deepen industry engagements. Despite all the excitement around fintech, only a small portion of new, innovative solutions reach consumers because of this catch-22: Regulators don’t want to sanction an innovation before they understand its potential impact, and innovators are reluctant to invest in the face of regulatory uncertainty. In the U.K., financial regulators are experimenting with “regulatory sandboxes,” where on a thematic basis, agreed-upon innovations can be tested in the market with protection from regulatory enforcement and under real-time monitoring.

Finally, regulators could leverage technology to expand their oversight capacity. The same technologies that create supervisory angst can be used to strengthen supervision. For example, in a digitized world, regulators could use algorithmic, real-time monitoring of relevant system-wide data, rather than waiting for an end-quarter, ex-post review.

Tilman Ehrbeck (@TilmanEhrbeck on Twitter) is a partner at the philanthropic investment firm Omidyar Network.

Image credit: Accion

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