All humanity can benefit from the digitisation of finance

Greta Bull

US author James Baldwin once observed: “Anyone who has struggled with poverty knows how extremely expensive it is to be poor.” In times of crisis, being poor is not only expensive, it can be a matter of life and death. When living on less than $2 a day, the margin for error is vanishingly thin.

Developed countries have experienced serious disruption in 2020, but this pales in comparison with the suffering the Covid-19 pandemic has inflicted on emerging markets. The World Bank estimates that as many as 150 million people may fall back into extreme poverty by the end of 2021, mainly in Africa and south Asia. And much is still unknown about the duration and the impact of the crisis. When the pandemic finally eases, the road to recovery will be long and difficult.

The good news is that advances in financial services delivery over the past 10 years have given governments new tools to help poor families cope during times of crisis. In Kenya, the government swiftly reached an agreement with mobile money provider M-Pesa to reduce charges on money transfers to zero, so families could receive money from relatives living far away without losing a large portion of this scarce resource to fees. The government also delivered social payments to low-income households over M-Pesa’s extensive distribution network.

Countries that invested in financial infrastructure, such as Kenya, India and Peru, were able to provide support to their citizens much more easily than those who did not. Leveraging low-value accounts, biometric identification and a payment system, India delivered social payments valued at less than $20 per recipient to a staggering 200 million poor women in three waves over a three-month period in the early stages of the crisis.

As these examples show, the financial sector has provided a lifeline for the poor during the crisis, but it has an equally important role to play in the recovery. The challenge will be to build on the advances we have made so far in financial services delivery in a way that creates a more equitable financial sector for all going forward.

The long road to progress

As we entered 2020, the world was making good progress in bringing affordable financial services to poor communities in emerging markets and doing so on financially sustainable terms. The microfinance movement proved in the 1990s and 2000s that there are viable business models that can profitably serve low-income people with savings and credit products. Today, microfinance is a well-established industry, with well over 140 million customers worldwide and $124bn in microloans outstanding. Commercial impact investors invested upwards of $17bn in microfinance, demonstrating the commercial viability of the model.

In the late 2000s, M-Pesa in Kenya kept the ball rolling on inclusive finance by demonstrating two important principles: first, that low-value transactional accounts could be provided to very low-income people by an account aggregator, managing individual accounts at the front end, while the money in those accounts was held in a pooled account in a regulated bank at the back end. This changed the cost dynamics of providing accounts to people who previously had been too costly to serve. The second thing M-Pesa proved was that there was ample demand for payment services among the poor, and those services did not have to be provided by a bank. Today, M-Pesa runs a payment system in Kenya that far outstrips the banking system in its size and reach.

In parallel, Alibaba and Tencent in China demonstrated the ways that financial services could be embedded into other digital services that people want, like e-commerce and social media. These two internet giants helped to build real-time payment systems in China and expanded credit to small and medium-sized merchants operating on their platforms.

As these crucial insights spread around the world, they helped to bring 1.2 billion people into the formal financial system between 2011 and 2017. The thread running through these examples is simple: poor people benefit from access to formal financial services in multiple ways, and successful business models exist that are based on serving low-income people.

Digitised financial services create a virtuous circle: a transactional account creates data trails that enable providers to layer on additional products, such as savings and credit. An M-Pesa account enables poor people to send and receive money with wider social networks in times of crisis, extending a crucial social safety net across a larger geography and enabling poor people to deploy their time and labour in more productive ways. Digitised accounts enable the leasing of affordable solar home systems and other appliances that improve household welfare by extending the day past sunset, reducing harmful fumes from cooking fires and preserving food. Increasingly, these models are being used to bring the poor into the digital economy through the leasing of smartphones. Once those devices are fully paid for, they can be used as collateral for loans for other essential services such as school fees.

As technology and innovative business models enable firms to reach consumers in entirely new ways, retail financial services, once a sleepy and staid corner of the banking industry, are undergoing profound disruption. Fintechs that provide financial services more nimbly and at lower cost than traditional banks are changing the way consumers use financial services, and tech giants like Amazon, Google and Alibaba are bringing their formidable customer engagement and data analytics capabilities to the party.

Finance is increasingly embedded in the digital economy, integrated into social media, messaging apps, e-commerce and gig platforms. While many of these innovations are focused on lucrative segments such as millennials and high-income consumers in developed countries, the fintech revolution is also helping providers and governments reach lower-income households. This has potentially profound implications for those living at the bottom of the pyramid, provided they are connected to the digital financial system of the future.

Financing the future

As the focus shifts from emergency relief to recovery, the financial sector has a vital role to play in fuelling economic growth and jobs. Payments connect people to the digital economy, where income-generating opportunities are increasingly found. Productive credit helps sustain livelihoods by providing liquidity and investment to micro and small enterprises and helps expand larger businesses that are important for job creation. Insurance protects assets, both physical (equipment) and intangible (health). Savings can support investment and also provide a safety net in times of trouble.

While much progress has been made in building more inclusive financial systems, much more remains to be done: 1.7 billion people still lack access to even basic transaction accounts, and the range of services is uneven and expensive. And as the trend toward digital accelerates, the access gap in smartphones and data plans will become increasingly apparent. As the world emerges from the Covid-19 pandemic, a new push will be required on multiple fronts to bring more people into the digital economy. This will require collaboration between policy-makers, businesses, investors and donors.

Enabling regulation has been an important driver of innovation, but progress remains patchy. Innovation offices and regulatory sandboxes can help facilitate collaboration between providers and regulators, but more needs to be done to build regulatory and supervisory systems that can enable innovation and provide meaningful prudential oversight of new kinds of providers. As new customers are onboarded, it will be equally important for policy-makers to build guardrails on market conduct and consumer protection.

Open market infrastructure, like interoperable payment systems and data-sharing schemes, has played an important role in helping lower the cost for financial institutions serving the poor. Building these systems requires collaboration between market participants, technical skills and investment, all of which are likely to be in short supply in a post-Covid world. There is an important role here for the private sector to work with development finance institutions and donors. Creative solutions leveraging public funds will also be required to put smartphones and data in the hands of poor people, so they can participate more fully in the digital economy.

Fintech entrepreneurs are pushing the boundaries of pro-poor innovation, but they will require access to capital to prove the concept and expand their businesses. The time to profitability may be longer for those serving the poor. There is an important role for banks and patient impact investors in channelling resources to these innovative start-ups.

The Covid-19 pandemic, by demonstrating just how important financial inclusion is to the wellbeing of billions of people living in poverty, offers the opportunity to build a financial system that works for everyone. A digital future can provide more opportunities for the poor. But it will take a determined push by corporate leaders working in collaboration with policy-makers, providers, investors and donors to make this a reality.

Greta Bull is CEO of the Consultative Group to Assist the Poor, an independent think tank dedicated to financial inclusion.