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> Posted by Eric Zuehlke, Web and Communications Director, CFI
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Financial inclusion stories and research are published daily, lauding various efforts to bring lower-income people into the formal banking fold. All progress deserves celebration, but also closer examination. When a new initiative takes effect, or a new service deployed, how does that advance us in achieving financial inclusion? A backdrop of sound measurement is critical. A BBVA research team, Noelia Cámara and David Tuesta, recently set out to construct an index that measures the extent of financial inclusion at the country or region level. The index is discussed and applied to 82 countries in the team’s new paper, Measuring Financial Inclusion: A Multidimensional Index. We were especially intrigued to learn that this research incorporates both supply and demand-side data. I recently sat down with Cámara to talk about the project, from challenges in measuring financial inclusion to the implications of the newly-available index.
1. What are the challenges in measuring financial inclusion?
Many issues arise when it comes to measuring financial inclusion. First, there is no single definition for financial inclusion universally accepted in the literature. Most definitions include three dimensions: use, quality, and access. However, when it comes to defining these dimensions, no consensus is found. For instance, the use of financial services is part of the financial inclusion concept, but it is not clear what “use of financial services” really means. Thus, several questions come to the fore: Do we consider having a bank account in the formal financial system to be a necessary condition for financial inclusion? Is having a pre-paid card or microinsurance enough to classify an individual as included? Is using electronic payment intermediation (e.g. paying bills with a mobile phone) a sufficient condition?
> Posted by Elisabeth Rhyne, Managing Director, CFI
Amidst all the excitement about disruptive fintech innovators it helps to sort out what innovations are actually at play. Australia Wealth Investors, together with KPMG-Australia and Australia’s Financial Services Council, have created a list of the top 50 fintech innovators for 2014, based on a combination of ability to raise capital and subjective judgment about the degree of innovation or disruption the company represents.
I clicked on all 50 (so you don’t have to) to get a sense of where the action really is. Here’s my quick and dirty categorization. It may help to read this to the tune of “The 12 Days of Christmas”, starting with:
> Posted by Monica Brand Engel and Jackson Scher, Managing Director and Program Coordinator, Frontier Investments Group, Accion
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Innovative payment solutions are proliferating globally. Enabled by the exponential expansion of mobile phones, social media, “big data”, and internet access, financial players throughout the world are inventing new ways to complete transactions. Disruptive innovations such as prepaid options, NFC-enabled payments, and cryptocurrencies are gaining significant adoption and are changing the payments space. These trends are especially pronounced in emerging markets where many new entrants have chosen to “leapfrog” traditional, resource-intensive systems and dive directly into the seamless and nimble world of digital financial services. Although these exciting innovations in digital payments have the potential to increase convenience for customers and dramatically reduce costs, some challenges remain. Read the rest of this entry »
> Posted by Elisabeth Rhyne, Managing Director, CFI
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What are the most important unanswered questions in financial inclusion?
Last week I was fortunate to participate in the small, idea-packed Conference on Financial Inclusion at Harvard Business School, organized by Professor Rajiv Lal. The attendees were a high-level microcosm of the financial inclusion world, a sort of mini-Financial Inclusion 2020 Global Forum. A prime purpose of the gathering was to identify a potential research agenda.
Among the ideas emerging from very rich conversations, I identified three distinct areas of research: business questions that could be addressed through HBS’s famous case method; research focused on regulation; and social science research focused on consumers. Because what one says at HBS stays at HBS, I cannot identify who offered what idea, but here is a brief summary.
> Posted by Rishabh Khosla, Tahira Dosani, and Vikas Raj, Accion Venture Lab
Small businesses are the engine of employment, contributing up to 85 percent of new full-time jobs in low-income countries, and two out of three new jobs in countries like the U.S. The IFC finds a strong correlation between the health of the small business community, economic growth, and poverty alleviation.
Despite these Herculean responsibilities, micro, small, and medium enterprises (MSMEs) the world over struggle to access the financing they need to maintain cash flow, hire new employees, purchase new inventory or equipment, and grow their businesses. The IFC estimates that the unmet demand for MSME finance in emerging markets is $2.1-2.6 trillion (around 1/3 of outstanding loan balances to this segment). Unlike larger firms that can access capital markets, MSMEs must seek financing from banks or non-bank finance companies (NBFCs). Yet traditional lending approaches often fail to address this “missing middle” because the cost of diligence and underwriting is too high relative to the potential revenues from the smaller loans that MSMEs need. This situation is worse in emerging markets because of a lack of reliable financial data and high levels of informality. According to the Harvard Business Review, the financial crisis only exacerbated the situation: borrower balance sheets are still recovering, and banks, faced with new regulatory requirements, have reduced the share of lending to MSMEs in 9 out of 13 OECD countries.
In this thoughtful and provocative blog post Ignacio Mas lays down a series of challenges for everyone working on financial inclusion. We think that the questions he’s asking need to be talked about. We’re asking three experts — on customer-centricity, on fintech start-ups, and on regulation — to respond to his provocations, and for the next three Wednesdays we’ll publish one of them.
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Have you noticed how narrow the interventions of the chorus of financial inclusion supporters have become? Academic researchers are immersed in proving whether an SMS message sent at the right time can push people to repay their loans more promptly (a.k.a. nudges), or whether someone with more savings is likely to be happier and more empowered in some way (a.k.a. impact evaluations). NGOs fund numerous papers and conferences to promote the idea of seeking early and frequent customer feedback in product design (a.k.a. human-centered design), or of looking into customer data for some clue as to what interests them and how they behave (a.k.a. big data). Donors set up round after round of tenders with subsidized funds to spur fully-grown banks and telcos to try out a new product feature (a.k.a. challenge grants), or to prop up the marketing and distribution wherewithal of selected players (a.k.a. capacity building).
> Posted by Jamie M. Zimmerman, Senior Policy Consultant, CGAP
Achieving financial inclusion by 2020 will depend in large part on the proliferation of fast, affordable, and accessible digital financial services (DFS). Indeed these effective, scalable models were a clear theme at the FI2020 Global Forum hosted by CFI last fall. Yet as excitement for DFS dominated much of the public discussion, a small and diverse set of financial inclusion leaders convened a private side-meeting to discuss an often-overlooked question: what are the consumer risks to these new, innovative digital models?
The meeting, co-hosted by CGAP and UNCDF’s Better Than Cash Alliance, introduced the concept of “responsible digital finance” and revealed heightened awareness of and interest in an array of issues related to the potential consumer risks of digital financial services, including:
Read the rest of this entry »
> Posted by Danielle Piskadlo, Manager, Investing in Inclusive Finance, CFI
It is an exciting time at the nexus of technology and financial services. For assessing creditworthiness, for example, there are now tools available that move beyond traditional methods. Financial service providers are able to identify high potential, low risk entrepreneurs through Entrepreneurial Finance Lab’s (EFL) psychometric testing, which assesses a borrower’s character, abilities, and attitude. DemystData uses the big data available about potential customers to help financial service providers evaluate and validate their loan applications. Along with these two groups, there are many more entering this space, harnessing technologies and data types once separate from financial services to better understand potential clients.
In recent news, banks in Russia are now using GPS to assess borrowers’ credit ratings. Yet-to-be-disclosed banks in Russia have signed an agreement with AlterGeo, the “Foursquare of Russia,” to build a “picture” of users through their location services. At this time it remains unclear what specific information will be collected and how it will be assessed.
> Posted by Sonja E. Kelly, Fellow, CFI
Big data is sexy. It’s new, it’s hip, and we’re only beginning to explore its uses for increasing financial inclusion. McKinsey calls it “the next frontier,” CGAP puts it in its “trends to watch” category, and we’ve talked about it on our blog. Big data is here to stay, and it’s changing the way that the financial inclusion industry operates. But as we proceed with big data, let’s exercise the caution required to ensure consumer protection.
Big data is starting to be used as an alternative to standard credit bureau data, with new scoring methods being created to construct credit ratings for those with thin or poor credit history. Proxies for credit history can be anything from how frequently a person “tops up” their mobile phone credit to the number of minutes spent looking at a loan product online. To determine creditworthiness, analysts look at larger trends in the data in the same way an insurance company might, comparing the individual to the average and looking for factors that correlate with creditworthiness. For example, on average, people who spend longer reading and understanding the terms of a loan online might be more likely to pay the loan on time.
Two groups of people currently share the bulk of potential benefits of big data applied to credit products. First, there are those who have previously been considered a credit risk who should not be classified as such. Perhaps these people have an unfairly low credit score, or perhaps past mistakes do not indicate future credit behavior. Second, there are those who have “thin files,” or not enough information available on them to enable a lender to make a determination of creditworthiness. For these two groups, additional data points could provide more indication about future credit behavior.
While recognizing that big data is an industry game-changer, we do need to keep in mind some critical questions. Big data has a great deal of power to transform financial inclusion efforts, but what are its downstream effects? What are the consumer protection and legal implications? Does big data allow for implicit new discrimination? And as it’s being used now, is it making life better for consumers?
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