Financial inclusion and beyond
Because traditional financial services are not designed for small depositors and borrowers, several non-traditional models have been able to scale up rapidly in this untapped market. But, without a strategic policy roadmap to guide further financialtechnology (fintech) development, these new “connector” models will remain limited in terms of the services they can provide.
In Kenya, the success of M-Pesa, a mobile payments app, has been nothing short of transformational. It took PayPal two NASDAQ listings and almost two decades operating in the world’s largest economy to reach 188 million active customers and $282 billion in annual payments. Although M-Pesa has been operating for less than a decade in a much lower-income market, it had nearly 17 million active users conducting more than $50 billion in cashless transactions last year.
Similarly, bKash now dominates the payments system in Bangladesh to such a degree that “bKashing” has become common Bengali parlance, just as “Xeroxing,” “Hoovering,” and “Googling” are in English.
Other models, such as Microensure and Bima, have also gained ground, offering micro-insurance solutions in emerging countries. Jan Dhan Yojana, a high-priority Indian federal-government programme that provides access to the banking sector for the poor, has enabled 250 million new bank accounts to be opened in less than two years.
New fintech products will have to clear several hurdles to move beyond just improving access to financial services. Services fostering financial-inclusion must deliver a high volume of low-value output, which means they often have to rely on partnerships to meet certain consumer demands. Problems arise when these partners have their own constraints or different priorities.
For example, Microensure and Bima have made insurance solutions available to millions of people; but their services ultimately depend on independent insurers to allocate capital and underwrite insurance policies. Likewise, while there are green shoots of insurance-industry growth in regions like Sub-Saharan Africa, global insurers must constantly adapt to regulatory changes in their primary or home markets, and it is unclear if they have the capacity to expand meaningfully into low-income countries. Or consider M-Pesa itself. Four years ago, it formed a partnership with the Commercial Bank of Africa to add a lending tool, M-Shwari, to its suite of products. It has since opened more loan accounts than any Kenyan bank. But such accounts still number less than a quarter of active M-Pesa users, and M-Shwari still supports only small 30-day loans. M-Shwari is not a core part of either partner’s business.
Nor is it the only product of its kind on the market. The most recent competitor to challenge M-Pesa is mVisa, a partnership between Visa Inc. and two other Kenyan banks. With $400 million in 2016 revenues at stake, Safaricom – M-Pesa’s parent company – will likely focus on defending its core offering before it tries to introduce new products. In Safaricom’s current list of new product priorities to expand financial inclusion, saving-and-loan products are ranked almost last.
Unfettered innovation and entrepreneurship are necessary for connecting the poor to the formal financial system; but, from a policy and development perspective, we need to shift our efforts toward improving the larger ecosystem to realise new fintech products’ full potential.
For example, M-Pesa’s cashless transactions are underpinned by cash contributed by its customers, which is held in trust at any given time. Interest income from these funds is currently disbursed through the M-Pesa Foundation. With a carefully constructed system, this money could be put to even greater productive use. India’s Jan Dhan Yojana programme has mobilised an estimated $6 billion from newly acquired customers, which could be used to provide additional tailored products.
Emerging fintech services can take a lesson from the Chinese e-commerce company Alibaba, which was quick in leveraging its payments platform, Alipay. After Alibaba launched its money market fund, Yu’e Bao, in June 2013, it began reinvesting its Alipay customers’ unproductive micro-deposits.
By the end of 2015, the Yu’e Bao fund manager was overseeing $165 billion in assets and had converted Alipay’s millions of small, financially unsophisticated savers into investors collecting respectable returns. To develop its platform, Alibaba relied on big data to manage the fund’s unique liquidity dynamics; and it benefited from China’s unsettled regulatory framework, though this could change in the future. The Chinese context may be unique; and, indeed, there are growing concerns about risks inherent in the Yu’e Bao model. But regulators and fintech firms should take note of examples like Alipay to develop rational strategic possibilities for this emerging sector. Most important, they should remember that access to finance is not an end in itself, but a means to improve one’s lot.
A recent investigation revealed what can happen when access to financial services is provided in a vacuum. The paper found several instances where officials at Indian public-sector banks were depositing one rupee into customer accounts without customers’ knowledge. These officials were apparently under pressure to reduce the number of zerobalance accounts, all of which, it turns out, were related to the Jan Dhan Yojana programme. Similar chicanery, we now know, was a routine practice at the US bank Wells Fargo. The difference is that customers at the bottom of the pyramid have few banking alternatives. Financial-services access is a much needed start, but it must lead somewhere.