The following post was originally published on the Ashoka Changemakers’ blog.

We are living an exciting time for financial inclusion. The microcredit model proved it’s possible to reach the poor and underserved masses with financial services in a profitable manner and at scale.

While there is still plenty of work left to be done to expand access to basic livelihood finance, the next natural question is: what’s next? The socioeconomic base of the pyramid (BOP) needs a full range of financial tools to improve their lives, from credit to insurance to savings, transfers, and more—and traditional “status quo” models will likely not be sufficient.

Where will this disruptive technology and business innovation come from to realize the promise of full financial inclusion?

Startups can drive innovation in this space. Certain characteristics of early stage companies put them in a great position from which to experiment and develop innovative products, technology, and delivery models.

Small, standalone companies are often more nimble and less saddled by complex hierarchy and bureaucracy (policies, decision-making, and red tape), and often have more lean cost structures.

These features enable startups to better course-correct and adapt based on customer or market realities, as well as pursue niche markets, products, or strategies which would not satisfy the investment criteria of bigger players. And these niche strategies may eventually mature into “disruptive” innovations that can steal market share from established players, or show the way for the incumbents to take the idea to scale.

However, this has not always been true of financial services, which has traditionally been a tricky area for startups to navigate. Financial services are heavily regulated, often requiring specialized licenses and protracted conversations with regulators to push big ideas.

New entrants must often bring significant money to the table, particularly for capital intensive lending businesses, or for business-to-customer (B2C) offerings that depend on an established distribution infrastructure and a big marketing budget to succeed.

Compare this to your average Internet startup that can launch from a garage with a couple programmers and an Internet connection. Finally, incumbents like big banks and mobile operators often aggressively guard opportunities in the space, and have focused on building vertically integrated financial service empires to cater to the full range of individual and corporate needs, rather than opening up their platforms to the offerings of smaller players that can plug into their existing distribution platforms.

But the times are changing. It’s now easier than ever to be a startup pursuing financial service innovation.

The increasing ubiquity of mobile phones—2.8 billion and counting!—offers a channel to reach people with financial services. Mobile payments platforms like M-Pesa can be used as the “rails” on which innovative financial services can be offered—for example, enabling people to pay for micro-insurance with micro-premiums, or “pay as you go” for solar energy or clean water access.

To read the rest of this post, visit the Ashoka Changemakers’ blog. 

Paul Breloff and Nathan Gonzalez of Accion Venture Lab are both “thought leaders” for the Changemakers “G2012 Mexico Financial Inclusion“ competition.

Image Credit: Ashoka Changemakers

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What’s Wrong with “Banking the Unbanked?”

The following post was originally published on the Ashoka Changemakers’ blog.

People in the developed and developing worlds manage their money differently. Although they conduct complex financial lives, they do not have bank accounts as money management hubs.

To deal with their low and uneven income streams, poor people, “keep savings at home; join savings clubs and savings-and-loan clubs; transact with family, friends, neighbors, and employers; and, where doing so is feasible and attractive, sign on with formal licensed providers.” They keep track of their finances in their heads, often assisted by what behavioral economists call heuristics or rules of thumb, such as keeping business and personal money in different pockets, or setting aside a handful of rice every day.

By contrast, most people in developed economies center their economic lives on bank accounts. With apologies, I draw on my own experience.

All my significant routine transactions pass through my account, including salary, debit card purchases, major payments (taxes, insurance, mortgage), and monthly bills. Credit card purchases are incorporated into the account via a monthly bill.

Even cash transactions are consolidated in the form of ATM withdrawals. As a personal cashflow statement, my bank account is nearly perfect, although for my personal balance sheet, I have to consult a few additional documents, like mortgage, pension, and investment records.

When a person with a low income in the informal sector opens a bank account, the rest of their financial life may not change. It will take a more complex transition for an informal money manager to move to an account-centered financial life.

This observation suggests that we need a better measure of financial inclusion than bank accounts. I have one alternative to suggest.

When the Global Findex was released in April, it marked the first time that financial inclusion statistics from clients were available on a globally consistent basis. The Findex headline was about the number of people with bank accounts (41 percent of all adults in developing countries and 89 percent in the developed countries – see chart).

It is no surprise that policy makers use bank accounts as the top indicator of financial inclusion: most of them use bank accounts like I do. And although the bank account is perhaps the easiest financial inclusion number to track, at times, it seems that increasing the number of people with accounts – “banking the unbanked” – becomes a policy goal in itself.

The Findex data shows that many bank accounts in the developing world are relatively inactive. In high income countries, the vast majority of account holders (72 percent) use their accounts actively (that is, they make more than two withdrawals per month, a useful definition, though somewhat arbitrary).

Not only do fewer people have bank accounts in low- and middle-income countries, those that have accounts do not use them much. In fact, only 16 to 17 percent of those with accounts use them actively.

Many people appear to use their accounts simply as a way to get paid or receive government benefits. Use of an account for such purposes is a decided improvement over counting out cash – it costs less and is more secure.

While possession of a bank account may be a step toward financial inclusion, it should not be confused with genuine inclusion. While a bank account puts people on a path toward financial inclusion, we cannot be at all certain that they are proceeding down the path.

A village of coffee farmers I once interviewed in Uganda traveled most of a day to town where a marketing company clerk handed them their coffee proceeds in envelopes filled with cash. On the way home they were prey to highway robbers.

Later, they were given bank accounts, but the only change was that they now stood in the bank’s withdrawal queue instead of the coffee company’s queue. They still traveled to town, still took their cash home, and were still prey to robbers.

Their financial lives did not change in any significant way. However, they would now show up in national statistics as “banked.”

To read the rest of this post, visit the Ashoka Changemakers’ blog. 

Today Elisabeth Rhyne and CFI participated in the Twitter-based #SocEntChat about Global Financial Inclusion, hosted by Ashoka Changemakers. During the week of October 9, Changemakers will highlight Rhyne as its Speak Up thought leader on financial inclusion. 

Image Credit: Global Findex

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The following post by Natalie Zuniga was originally published on the Ashoka Changemakers’ blog with the title “Join @Changemakers and @G20Mexico on October 9th for a #SocEntChat about Global Financial Inclusion.” 

On October 9, 2012 from 11am to 1pm EST, Ashoka Changemakers will host a multilingual (English, Spanish, Portuguese) #SocEntChatabout promising solutions to achieve full financial inclusion. Experts and social entrepreneurs working in the field will convene and answer your questions during a Twitter-based discussion. Special guests Center for Financial Inclusion (@CFI_ACCION) and FINO (@Jatinhandoo) will join the conversation.

This #SocEntChat follows the closing of the entry period for the G2012 Mexico Financial Inclusion competition, which received 257 entries from 62 countries. Visit the competition page to check out solutions from around the world and to give social entrepreneurs your feedback.

Have you observed key barriers within the financial inclusion ecosystem? What can private institutions, NGOs, and the public sector do to open up access to affordable, quality financial services for all? Do you have experience with thriving citizen-based financial inclusion initiatives? How can those be taken to scale?

This is your chance to make your voice heard, or ask thought leaders your most burning questions!

To read the rest of this post, which includes instructions on how to join Tuesday’s financial inclusion discussion, visit the Ashoka Changemakers’ blog. 

In addition to CFI participating in this Twitter chat, during the week of October 8 Changemakers will highlight CFI Managing Director Elisabeth Rhyne as its Speak Up thought leader for financial inclusion, and share a new blog post from Rhyne on money management among the poor and the movement to bank the unbanked.

Image Credit: Microfinance Opportunities/Ashoka Changemakers

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