That was a fun debate at Fletcher.

This or that? Formal or informal? Pro or con? Of course the answer always lies somewhere in the middle, it’s about and rather than or, to use the trite expression. It would certainly be ironic to seek to be inclusive by excluding options.

But in the case of financial inclusion, where a number of formal and informal services vie for relevance, what does this happy medium look like? I don’t see it as a bountiful fruit platter that people can pick from (now formal, now informal) as much as a richly layered cake.

The cake analogy is to represent the idea of platforms, of capabilities arranged horizontally and interworking with each other. Each layer brings a flavor, a texture, a color to the cake, but it is only when slices cut through the entire stack that the full cakeness comes through.

Let’s count the layers of financial inclusion. You need an identity layer, so that information can be traced back to individuals and histories can be constructed. You need an efficient money transfer layer, so that money can move efficiently and without delay between the various players when they are near or far. You need a cash distribution layer, with a multitude of localities where you can exchange various forms of money (cash to electronic, large bills into small change), on demand. You need enforcement mechanisms, so that IOUs can be trusted. You need a reliable accounting layer to keep track of all these contracts and IOUs. You need creative packaging of money transfers and IOUs into higher-level financial contracts (savings, credit, insurance, and combinations of all these) that connect more directly with people’s problems and needs. You need social connections and knowledge, so that people can variously give, lend, guarantee, and vouch for each other. You need people who can become evangelists, connectors, educators, marketers, to get others involved. You need, you need, you need…

I don’t mean to make it sound more complicated than it really is, or to bias the discussion towards formal just because I used some big words in there. Go through the list again: each of these functions can be done formally or informally, and in fact savings groups do all of the above in their own way. But we shouldn’t strive to create two layered cakes, the nutritious-but-wobbly and the glitzy-but-indigestible. The formal and informal layers need to mix in seamlessly.

M-PESA is a good example of that. It builds on a formal national ID layer, a semi-formal cash in/out layer, and an informal “send money home” customer use case layer. This interworking of the hugely formal (the biggest telco in the land, acting under the watchful eye of the all-powerful Central Bank) with the all-pervasive, timeless informal (the gifting and sharing economy) is what Susan Johnson called The Rift, and she appropriately revealed it to be the source of the magic that has lit up Kenya with electronic money. M-PESA is as much a triumph of the formal as it is of the informal.

At the Fletcher debate, I may have surprised some who know my personal journey by stating that M-PESA is not financial inclusion. It most certainly is not, but neither is any single layer in the cake. I said it not for the reason that most people tend to argue: that, since the M-PESA product offering is spartan, then it cannot be true financial inclusion. I most vehemently reject that the “true” financial inclusion layer, the litmus test of whether something is or isn’t financial inclusion, concerns the product layer. Consider this analogy: do we count access to clean water by the number of people who can find 500cc bottles of water at the local shop? No, with access we expect pipes and taps and stuff like that. That’s what creates convenience, reliability, affordability. It’s about the delivery mechanism as much as it is about the water itself. Again, the magic is happening lower down the layer stack.

So no, by itself M-PESA does not amount to financial inclusion, but in a sense it is also much more than financial inclusion. By making larger and remote payments more efficient, it has enabled a whole bunch of impacts that goes well beyond whether people decide to borrow or save. That’s the advantage of operating at the lower layers: it is less glamorous because the customer benefits are far less concrete and measurable, but it creates a much broader array of potential channels to impact. Vested as we are in the topic, we cannot make the mistake of judging M-PESA only through the lens of financial inclusion.

So why is that, despite all this M-PESA talk and forced to pick at the debate, I sided with the informals? Because I don’t think we as a development community should see our role mainly or exclusively as being to serve up billions of poor people captively to a small set of larger formal institutions who heretofore have shown little interest in helping the mass market. Let’s continue to build layers of the cake, as many and as diverse as possible, formal if they’ll play ball, informal if they don’t.

Image credit: Livelob.com

Ignacio Mas is an independent consultant. You can learn more about his work here.

Have you read?

Green High Heels vs. Pink Flip Flops: The Extreme Inclusion Debate

Extreme Inclusion Debate Part II: Financial Inclusion is Informal Financial Inclusion

In Defense of Formal Financial Services: Moving Beyond the Parking Lot and Onto the Highway

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.”

Recently, as part of the Extreme Inclusion Conference at the Fletcher School at Tufts University, I watched a debate between industry leaders on whether financial inclusion means formal financial inclusion. It was a debate that had me slightly uncomfortable. To impose such a rigid definition of financial inclusion seemed cruel, given that there are informal products in existence that meet many financial needs. On the other hand, I myself have seen the superiority of well-designed formal financial products in better addressing the financial needs of people living in poverty.

There was one exchange during the debate that clarified the issue for me. In defense of informal financial services, Daryl Collins waved a $10 bill in the air and thanked a Tufts PhD student for lending her the money to pay her parking fee the day before. She remarked that without this informal financial service (a short-term, no-interest loan), she would have had to find an ATM—an inconvenience when she just wanted to leave the parking lot.

While the example was effective in showing the audience that they use informal financial services every day, there were a few things that do not allow us to generalize it to those who operate largely in the informal sector. First, it isn’t dependable. While convenient, the exchange relied on the fact that this was a one-time occurrence with a great deal of trust between the two parties. If Daryl were to ask to borrow $10 every day from this PhD student, the student would likely start to say no, or would charge some kind of a fee (I know that if I were a PhD student regularly lending money to Daryl Collins, I might ask what kinds of jobs she has open in her Financial Diaries work!). Second, it is a relatively small amount of money by U.S. standards—it isn’t an exchange that is scalable. $10 might buy lunch here in the U.S. or lattes for two. Finally, and most importantly, it ignores the possibilities of technological or environmental change. If, for example, Daryl could have paid with her credit card rather than with cash, she most likely would have chosen her credit card and not have consulted the kind student. I personally operate cashless whenever possible.

Beth had a clever response to Daryl that provoked more than a few chuckles from the audience: “Daryl herself proves that informal financial inclusion’s only role is to get us out of the parking lot.” Beth was exaggerating for effect, of course. But she nicely turned the parking lot example into a metaphor. Beth’s reframing of the argument offers that there is a role for informal financial services – it is just one that becomes less and less central if formal services are available.

In a perfect world, our formal financial services and the environment around us would be ideally suited to our financial needs. Every person who used formal financial services would be treated with dignity, and their rights would be respected.

Unfortunately, we do not live in a perfect world.

We do need informal financial services to get us out of our own financial parking lots so that we can increase our speed and efficiency in managing our money, saving for the future, and insuring against risk. Informal financial services play a very important part in the financial inclusion game, but it isn’t our ultimate goal—it’s just part of the journey.

A big thanks to Kim Wilson for putting together such an engaging debate—I came away grateful for having been able to listen to the conversation. For more on this topic, stay tuned to this space as we’ll be sharing a post from Beth Rhyne that summarizes her own argument in support of the proposition that financial inclusion means formal inclusion.

And in case you were wondering, I voted for the pro-formal team.

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

Have you read?

Scaling Up Formal Savings: Lessons from the SEEP Annual Conference

Promoting Formal Financial Savings: Know Your Goal, Know Your Competition

A Holistic Approach to Money Management