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.

Have you read?

Launching the Roadmap to Financial Inclusion With a Focus on Greater Access, Quality, and Protection for Customers 

Citi and MasterCard CEOs Join Financial Inclusion 2020 Global Forum Agenda

Constance Considers 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.”

Growing Income, Growing Inclusion: How Rising Incomes at the Base of the Pyramid Will Shape Financial Inclusion by Sonja Kelly and Elisabeth Rhyne deftly summarizes the relationship between income and formal financial services. It maps those countries that can begin to look forward to big chunks of their populations moving up the economic pyramid. The good news is that incomes are increasing – those earning $1 or $2 a day can anticipate doubling that amount soon.

The bad news is that financial inclusion watchers consider the emerging “vulnerable class” –those with a daily income of $4 to $10 –  to be financially included only when formal suppliers reach them.  Sure, formal inclusion is one kind of inclusion and certainly helpful for some. But the informal to formal continuum is linear. It misses many lateral possibilities that, taken together, could produce multiple robust and interlocking financial ecosystems, with formal options constituting just one part of those systems.

Conventional wisdom goes like this: I am poor and therefore dwell in a primordial, financial murk. As I crawl out of the murk via more income, formal products nudge me onto the dry banks of financial evolution. I am complete. Such thinking feels so natural, so right, so logically unassailable.

But conventional thinking has not proven out this linear progression. While the Kelly and Rhyne paper points to 1) a strong correlation (.76) between income and account ownership and 2) increased access to formal financial services accompanying increased income for the bottom 40 percent of the population, it also says, “for individuals, participation in one sector may not replace or preclude participation in the other. Customers will pick financial products and providers from across the spectrum of formality to meet their needs.”

This last sentence captures my imagination. It inspires me to entreat our financial philosophers: why focus your genius on dragging customers kicking and screaming into banks, or decamping reluctant bankers to the countryside in search of business they don’t want?

Why not, instead, focus on helping folks receive all the benefits we ascribe to the formal system – transparency, safety, convenience, reliability, fair pricing, and privacy – without the expenses of that system (those hefty reserves, that costly supervision), while at the same time improving upon those benefits?

Might we imagine a system better than either the formal or informal system of today? How would this be possible?

Let us digress a bit, first, and turn to the world of energy. Visionaries in energy have questioned the classic electrical grid model (you are included when you are on the main power grid) and look to a world of a more distributive energy, with technology central to the efficient movement of power in and out of extreme nooks and crannies.

We can translate their world into ours. More distributive sources of energy mean more resilience in the system. One power plant goes down but folks still have their lights on – there are lots of nodes of local energy storage to be tapped. Let’s substitute: More distributive sources of financial services mean more resilience in the system. If one bank goes down, folks still have credit – there are lots of nodes of local money storage to be tapped.

One more try: Self-organizing systems of energy (versus monolithic systems of energy) allow for more efficient energy storage and circulation. A home with excess solar power can move surpluses economically to nearby homes in need. Now for finance: More self-organizing systems of money (versus monolithic systems of money) allow for more efficient money storage and circulation. A cluster of people with excess money can move surpluses economically to nearby clusters in need.

At the heart of this translation is smart technology. Technology is making smart energy possible and technology can make smart finance possible.

Picture a world in which I belong to an ASCA, a local savings club (and note, I have seen ASCAs with share-outs ranging from $50 to $15,000). I have developed a nice credit history with this club. Maybe I would like more credit than the club has at the moment. No worries, I “share” my credit history with another club in the network (just as I share a folder in a drop box or share to a select few on Facebook), and they lend to me.

Or imagine that my club has been saving for two years and has a surplus that it would like to lend at a nice profit. Again, no worries, our club searches for a club with a capital deficit – perhaps one at the beginning of a new cycle.

Technology makes all this possible. Even smarter technology would “sense” our patterns and those of other groups and make recommendations.

This lending from one group to another is already happening without the benefit of technology. I just saw it in Nicaragua and India. Search and transfer costs could have been reduced if smart technology had been involved.

Helpful apps are already on the scene. FSD Kenya, a DFID project, has developed a new smart phone app for group use. It is easy to envision a “share” function to draw in all kinds of formal and informal services.

Technology will soon not only enable more distributive financial services (and therefore systemically more resilient services) but also more transparent, convenient, and reliable financial services – all this without asking customers or bankers to change their behaviors. Plus, local knowledge can be fed into the circuitry, reducing risks of all kinds.

The point is not to rule out formal services but to rule them in along with many other options. Smart tools in the hands of creative people will change the face of the financial landscape for all of us, not just the bottom 40 percent.

Kim Wilson is a lecturer at The Fletcher School and a Fellow with the Center for Emerging Market Enterprises and the Feinstein International Center at Tufts University.

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?

Adventurers, Unite: Voyaging Through Data in Our Mapping the Invisible Market Website

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

Financial Inclusion and the World’s “Unbanked” Population