The following post was originally published on the CGAP Blog.

A great transformation is shifting the weight of global power, population, and economic growth from what was once called the first world to what can no longer be called the third, and more precisely toward the middle-income countries that are still, somewhat anachronistically, labeled emerging markets.

Through that shift, enormous numbers of people are moving out of poverty into the “vulnerable” class. Living on perhaps $4 to $10 per day, they are not quite middle class, but they possess, for the first time, a small amount of discretionary income above bare survival. In many countries, this group is, or will soon be, the largest segment of the population. For the first time, these hundreds of millions of households are starting to figure as prospective customers in the market analysis of companies around the world.

There is also a transformation going on in financial services, built on these rising incomes and fueled by information technology breakthroughs. Now is a time of creativity and experimentation with new products, providers, and delivery systems for financial services – and, importantly, outreach to previously excluded clients.

The responses of businesses and even nations to the opportunities presented by these demographic and technology shifts will create winners and losers. The winners will be companies that address this market while it is still relatively open, thereby securing their position in the world of the future. The winners will be nations that open their financial systems to the creative business models needed to serve these new customers, and thereby promote a productive and connected citizenry.

This is the message of Financial Inclusion 2020, a project of the Center for Financial Inclusion at Accion. Financial Inclusion 2020 has conducted an extensive consultative process through five working groups with over 40 total members from over 30 countries and input from over 100 reviewing experts. These groups have created a series of roadmaps to inclusion on each of five topics: financial capability, addressing customer needs, technology-enabled business models, credit reporting, and client protection. The Center is grateful to all the participants and partners – CGAP, the World Bank, and the IFC among them – as well as key project sponsors Citi, Visa, MasterCard, the Gates Foundation, Western Union, MetLife, and others.

The roadmaps caution that although winners will emerge, the opportunities can also easily be lost if those pursuing financial inclusion fail to recognize and respond to the unique character of the new market. Several of the Financial Inclusion 2020 working groups concluded that purveyors of financial inclusion urgently need to shift to a more deeply customer-based perspective.

That is because the people in the vulnerable class are different. They do not imitate middle class customers in the rich world, even if they aspire to reach the middle class. Their experiences, beliefs, values, and habits reflect their histories as poor and excluded. In their world, formal institutions like banks are not trusted partners.

Businesses that succeed with these new customers will need to enter the minds and milieus of the vulnerable class. Why would a first time customer, for example, want a bank account? If cash is the only way for him to pay and be paid, perhaps he wouldn’t. What private or cultural aspirations motivate a woman to save? What preparations are mature adults making for their old age? Successful “includers” will draw on the rich knowledge that already exists about the financial lives of the previously excluded, and they will spend time directly listening to these prospective customers. Businesses must always hear from customers, of course, but in this case the mindset gap may be especially large and bridging it will require unusual responsiveness.

Businesses that succeed will also recognize the special financial capability development needs of customers who have never used formal services. They will begin to use every client touch point as an opportunity to inform clients and assist them to develop confidence through “learning by doing.” They will take advantage of technology to create dialogue with customers, while guarding the instances when face-to-face works best. The roadmap on financial capability highlights the insights from behavioral economics as an important source of guidance on how to build financial capability. It encourages businesses to partner with behavioral economics experts in their product design work. Businesses that succeed will also embrace consumer protection. Whenever a new customer segment comes on stream, businesses face a risk that early bad experiences can taint perceptions in a viral way, even if unfairly. With this new segment – inexperienced in the use of formal services and often of limited literacy or education – that risk is especially striking. And the very business opportunity that draws providers to this new market will also attract the less scrupulous or outright fraudsters. For these reasons, it is in the interest of providers seeking to address the base of the pyramid to work with both their own staff and like-minded providers to ensure that the marketplace is distinguished by strong consumer protection standards. The working group on consumer protection envisioned consumer protection principles becoming a core part of banking’s professional identity.

The national social and economic goals of policymakers and regulators will more likely be met if they, too, enhance their customer perspective. While providers have only their own investments to lose, for policymakers the whole market is at stake, and that makes missteps very costly. Market risks that affect whole population segments can arise from weaknesses in consumer protection regulation, and governments also have a strong interest in promoting financial capability – either directly or through schools, media, and social organizations. Governments can also make it easier for providers to enter this market by carrying out (or commissioning) demand-side research and data collection and making the results available to providers as a public good. And of course, regulators have a great deal of work to pave the way for new technologies and providers.

These observations reflect a sample of the findings from the five Financial Inclusion 2020 roadmaps, released this week. The roadmaps offer recommendations ranging from broad principles, such as discussed here, to a host of specific action points. They are intended as vehicles for dialogue and consensus building. Financial Inclusion 2020 will now enlist the collective insight of a broader group of stakeholders to distill the Roadmap’s thinking and help implement action at the FI2020 Global Forum in London on October 28-30, 2013. The Forum will bring together leaders from the public and private sectors to promote a global agenda for bringing about the financial inclusion of more than 2 billion people around the world, using the year 2020 as a focal point.

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Constance Considers Financial Inclusion

A new private equity fund to back financial services providers targeting low-income clients in Africa, and South and Southeast Asia raised $204 million in its initial investment round and aims to amass another $200 million in the coming months. Managed by LeapFrog Investments, an emerging markets fund manager, the fund will invest in companies offering financial services such as general insurance, life insurance, savings, pensions, and investments products to low-income clients.

This is the second fund from LeapFrog. Its first, sized at $135 million, has a portfolio of seven investee companies whose financial products have reached over 18 million people across 13 countries. Many investors from the first fund have also contributed to this second venture. Investors of this initial investment round spanned major insurance groups, global banks, asset managers, and development finance institutions, including MetLife Inc., Prudential, Swiss Re, JPMorgan Chase & Co., CDC, and Oikocredit.

The demonstrated appeal of the new fund represents the enormous opportunity for the expansion of financial services in these emerging markets. “There are 1.9 billion emerging consumers in LeapFrog’s target regions, and their spending power is forecast to rise from $2 trillion today to $5 trillion in the coming decade,” LeapFrog’s President and Founder Dr. Andrew Kuper said of the fund.

Eight country markets are targeted in the new initiative: Indonesia, Philippines, India, Sri Lanka, Kenya, South Africa, Nigeria, and Ghana. In 2012, the annual financial services growth across these regions averaged 17.4 percent, more than four times the year’s nominal global GDP growth.

For more on the new fund, click here. For more on the implications for financial inclusion of rising incomes at the base of the pyramid, check out our second FI2020 Mapping the Invisible Market paper, Growing Income, Growing Inclusion.

Image credit: thriol

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It’s hard to replicate the learning value that comes from a good infographic. One such gem we were glad to recently come across is The Kenyan Journey to Digital Financial Inclusion from GSMA. Released shortly after GSMA’s 2013 Mobile Asia Expo, the infographic chronicles the development of mobile money in its flagship country of Kenya. Through the infographic you can trace how policy decisions and product innovations worked together to connect three quarters of the Kenyan people to electronic payments and other products. It shows clearly how one innovation paves the way for more, leading to a burst of innovations in the past two years.

To view the infographic in greater detail, click on the image above.

For more fun with infographics, check out one we released for the second FI2020 Mapping the Invisible Market paper, Growing Income, Growing Inclusion.

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Global Movement into the Vulnerable Class, and What it Means for Financial Inclusion

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:

1. A more financially-literate population
2. Increased competition on rates and customer service among banks
3. 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.

For more information on Financial Inclusion 2020, sign up for campaign updates.

Nate Gonzalez and Alina Kogan are Investment Officers with Accion Venture Lab.

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Global Movement into the Vulnerable Class, and What it Means for Financial Inclusion 

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.”

As an avid advocate of financial inclusion, I am deeply saddened by the fact that several hundred years after the first bank opened, 50 percent of the global adult population still lacks access to formal financial services.

The good news is that this may not be the case any longer. So I eagerly read the recent paper from Elisabeth Rhyne and Sonja Kelly from the Center for Financial Inclusion at Accion that talks about how growing incomes could lead to growing inclusion. I am glad that the authors have brought this phenomenon to the forefront.

I agree that rising incomes could be a key catalyst for elevating financial inclusion globally. I have experienced firsthand the tectonic shift in the income profiles and demand for financial services in India reflected in data from the United Nations Statistics Division. It shows that the percent of the population below the poverty line in India has dropped from 45 percent in 1994 to less than 30 percent in 2010.

Source: United Nations Statistics Division, 2013.

Alongside poverty decreasing in India, on average, everyone is sharing in India’s successful economic rise. Those at the bottom of the pyramid—the first and second quintiles—have doubled their GDP per capita between 2000 and 2010, and we expect to see a similar twofold increase over this decade.

Source: World Economic Outlook, 2012; Kelly and Rhyne, 2013; UN-WIDER global income inequality database, as visualized on the Mapping the Invisible Market website.

To illustrate that point, today every second person in India has a cell phone, while in the mid-1990s only a few people had access to phones at all (landlines). And while getting a job out of college in the mid-1990s was primarily a privilege of the graduates from top-tier engineering and management schools, now it is common to see graduates with multiple job offers from a broad spectrum of educational fields and institutions. This trend is also reshaping the demand for financial services. The stakes are getting too high for the Indian people to depend on informal financial services, and they now need the security of formal services. And the dream of every Indian today is to send their kids to school and participate in the county’s prosperity; they are trying to do their share by earning more, they just need help from financial institutions and regulators to create the right products for them.

Rising income is definitely a catalyst for elevating financial inclusion globally. However, as Elisabeth and Sonja point out, a proactive focus and a systematic approach from regulators, financial institutions, and other key stakeholders will be required.

One such approach is using basic electronic payments, like bill payment, as an on-ramp to financial inclusion that I outline in my paper A New Perspective on Bill Payment – A Demand-Based Path to Financial Inclusion. There can be no doubt that action needs to be taken and the Financial Inclusion 2020 initiative being led by the Center for Financial Inclusion at Accion and sponsored by several global companies including MasterCard is a great step in the right direction.

For more information on Financial Inclusion 2020, sign up for campaign updates.

Amit Jain is part of the Global Payments Strategy Knowledge Center in MasterCard Advisors. The Payments Strategy team works with MasterCard clients around the world to develop and implement successful strategies across their payments businesses. Mr. Jain is a seasoned professional with nearly 15 years experience in the industry including financial services, management consulting, venture capital and technology. A key focus of Mr. Jain’s career has been to work with senior executives on key strategic issues affecting their business.

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FI2020/MasterCard Webcast: Growing Income, Growing Inclusion

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On Tuesday, in conjunction with the release of our second FI2020 Mapping the Invisible Market report, Growing Income, Growing Inclusion: How Rising Incomes at the Base of the Pyramid Will Shape Financial Inclusion, we hosted a live, interactive webcast with MasterCard. The webcast explored the relationship between rising incomes and financial inclusion, including the opportunity for inclusion presented by the emergence of the “vulnerable class.” The session also spotlighted the Mapping the Invisible Market interactive data tools (available here and here), as well as MasterCard’s work in supporting financial inclusion globally.

Hosted by MasterCard’s Nicole Ward, the webcast’s presenters were CFI’s Sonja Kelly and Elisabeth Rhyne, and MasterCard’s Tara Nathan. Here’s a few of the points that were made during the discussion.

• Rising incomes, changing demographics, advances in technology, and government engagement are factors that are coming together to further financial inclusion
• Global GDP has been growing for the past 30 years, with a projected increase from $61 trillion in 2010 to $85 trillion in 2020
• From 2010 to 2020, the annual income of the bottom 40 percent in low and middle income economies is projected to double, from $3.1 trillion to $5.8 trillion
• In many populous countries, the BOP will move into the vulnerable class in this decade
• At the country level, there is a strong correlation between income and financial inclusion, both in account ownership and account use
• There are many possible on-ramps to financial inclusion, including bill pay, G2P payments, no-frills accounts, and mobile money transfer
• The transition from informal to formal financial services depends on many factors, including income level, income flow, employment formality, and social relationships
• Incorporating the vast influx of new clients requires scaling up client protection and financial education
• MasterCard is working with the government of Nigeria on a national ID program to provide a single proof of identity that also has the ability to deposit, receive, withdraw, and pay

For a video of the full webcast, click here. For the new Growing Income, Growing Inclusion report, click here.

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First Report from FI2020′s Mapping the Invisible Market Highlights Implications for Financial Inclusion as World’s Demography Changes

The Financial Inclusion 2020 campaign 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.”

This post is based on research from the Mapping the Invisible Market project published in the paper Growing Income, Growing Inclusion by Sonja E. Kelly and Elisabeth Rhyne. The paper was released today, and can be downloaded at mapping.financialinclusion2020.org/growing-income-growing-inclusion.

The World Bank, UN, and The Economist are all talking about it: growing income around the world. The UN’s goal to halve the number of people living in poverty by 2015 has already been achieved, and the media frequently spotlights growth in emerging markets contrasted with reports of malaise in the EU and US economies. In low and middle-income economies, it isn’t just the wealthy or the well-connected who benefit from this growth. Real incomes are rising among the poor, moving hundreds of millions of people from extreme levels of poverty into levels at which they begin to have more income flexibility.

Over the course of this decade, the bottom two quintiles in many of the world’s most populous countries will see movement into and even beyond the “vulnerable class,” defined as having an income of $4 to $10 per day.

In 2010, the bottom 40 percent of the populations, in low and middle-income economies constituted a market of $3 trillion. By the end of the decade, the real spending power of this market will nearly double, to $5.8 trillion.

Last year, the World Bank’s Global Findex reported that the number one reason that people did not have a bank account was that they did not have enough money. We also see a moderately strong statistical connection between income and account use in the bottom 40 percent.

With higher personal income, financial management will likely shift to more formal services as people gradually “outgrow” their informal mechanisms. The time it takes a person to make this shift depends on a number of factors, including the level, source, and volatility of an individual’s income as well as the availability of suitable services.

Understanding this transition is essential as policymakers and providers seek to prepare for it. If providers can offer appropriately tooled products, higher incomes at the base of the pyramid will translate into greater financial inclusion. If policymakers can encourage growth while safeguarding it, they will be able to anticipate challenges to client protection for customers using formal financial services for the first time.

Offering appropriately tooled products and anticipating client protection challenges, of course, are not limited to places that will see high growth over this decade. Much of Africa’s bottom 40 percent, for example, will continue to be under the $4 to $10 per day range, and in these places, creative application of technology and mission-driven organizations will play a key role in increasing financial inclusion.

For more on the connection between income and inclusion, head on over to the Mapping the Invisible Market website at mapping.financialinclusion2020.org.

For more information on Financial Inclusion 2020, sign up for campaign updates.

Figures’ source: Authors’ calculations based on World Economic Outlook and UNU-Wider database on inequality 

Have you read?

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