Last month, we gathered a group of expert panelists from around the world for a faiVLive on the possibilities for fintech to serve the poor and reduce inequality. What have we learned about where fintech advances inclusion, and when it creates a new (digital) divide? When does fintech (in the words of Greg Chen of CGAP) build a bridge and when does it dig a moat?
Here we bring you the key takeaways from our discussion, moderated by Timothy Ogden and featuring Lois Bruu, Olayinka David-West, Timothy Flacke, Barbara Magnoni, and Tavneet Suri.
1. Mobile money can increase resilience and risk appetite
Let’s start off with a silver lining takeaway: mobile money can build resilience, and allow people to take the risks necessary for investing in a better future. “Imagine your kid got sick and you didn’t have money for medication, you’d call your friends or family,” is the scenario Suri used to show how poor households rely on informal networks to deal with shocks. In this situation mobile money reduces the transaction cost of tapping into that network, thus making quick, urgent cash cheaply available. In her work studying mobile money in Kenya, Suri observed that “when bad things happen, people are more resilient to them.” Over time this resilience allows poor people to take more risks—particularly women, who are more risk averse. The ease of transferring cash with a simple click is a time, money, and effort saver, particularly for emergencies, and for migrants to remit earnings back home—the two most common use cases in low-income communities. Mobile money has also helped people allocate their consumption more efficiently, and has contributed to poverty reduction in Kenya.
That said, Kenya’s fintech ecosystem isn’t easy to replicate in other Global South countries. David-West noted that Nigeria’s complicated regulatory environment poses ease-of-entry barriers that stifle mobile money growth, and the country’s ethnographic differences call for a product mix that is sensitive and adaptive. Seth Garz observes similar obstacles to fintech ubiquity in some developing countries. Despite the research world making a strong pro-DFS case, and despite abundant reference guides and evidence to optimize DFS, some policymakers and funders are still more concerned about the potential downsides of mobile money systems than they are excited about the opportunities.
2. The need to incentivize consumer protection
One of those potential downsides is consumer vulnerability—once mobile money provides the rails, bad actors can ride those rails just as easily as good faith providers. And consumer protection is often extremely limited in developing countries, especially for poor communities. While in the US, for instance, there is a system that can catch and redress bad behavior by fintechs (for example) or by scammers using digital rails (for example), those systems are still often deployed long after the horse has left the barn. Regulators in Kenya and India are struggling to keep up with predatory lenders. Fintech providers need to demystify information about their terms such that consumers, especially those with financial volatility, know what they are signing up for. This might lead us to think about what kind of incentives would push DFS providers to care about consumer protection in the absence of regulation (Beth Rhyne suggests social image maintenance.)
Outside of making terms more transparent, the other side to consumer protection is data security, which Bruu identified as a crucial starting point for this sector. This risk of leaky data might sound like a privacy issue, but it can also have a monetary cost. As Magnoni observed, “an introduction of credit markets gives people access, but also opens people up to government tax scrutiny.” DFS providers that enter markets with “inclusion” as a mission statement need to recognize these risks, and build mechanisms to protect their consumers’ data.
3. DFS business models differ in developing and developed markets
Apart from consumer protection standards, do developing and more developed countries differ when it comes to fintech? From a demand perspective, there isn’t much of a difference. If you build it, they will come. So while a country’s income level does not reflect its appetite for technology, the real difference lies in the business case. Magnoni: “the business case in the US is very different from the business case in a developing market. If you’re in a developing country and you have a product that has very small margins, you need scale. And in most of the countries we’re talking about, if you want scale, you need to go down-market. You can’t just stay at the top with the urban middle class or urban upper class, you need to penetrate a much broader market.” By contrast, in the US providers can turn a profit without having to venture lower or deeper into the market, and so pro-poor offerings tend to come from non-profits and tend to have a more social bent. The fintech ecosystem in developing countries may look more pro-poor, but that’s because the business model demands it.
4. Customers don’t need more literacy. Fintechs need to design better products!
Ultimately, what is the role of fintech in poverty alleviation anyway? “Technology is a powerful opportunity for financial security. Seizing that opportunity is best done by building out products and services not just at a community level, but an infrastructure level,” we heard from Flacke. The key message there is: the role of fintech providers is to build good products. If fintech providers wish to cater to the unmet needs of the poor, they need original consumer research to better understand the lives of those they serve. Then, they need to design products that are informed by those unique and volatile needs. This also includes more product diversification, as Suri noted the limited options available in the mobile money buffet (see 30 day loans as the extent of product innovation). And while financial literacy maddeningly remains a popular intervention, I propose that DFS providers are the ones in need of an education—an education in what their consumers truly need, and how to make their products more inclusive. Finally, once the fintech sector designs well-informed, inclusive products, David-West reminds us that we then need well-oiled distribution networks and field agents as intermediary nodes to help serve those on the edge of mainstream financial systems. In other words, build it and they will come, but if they are too financially marginalized to come, you need to go to them. The “going to them” part can be expensive, and needs to be prioritized as an investment.
Therein lies the challenge that is a centerpiece of this entire discussion: what really are the priorities of DFS providers, and what incentives do they have to be more pro-poor?