Financial inclusion lessons from developed and emerging markets

There are certainly things the rest of the world can learn from those financial inclusion pioneers in United States. But there are many things the United States could learn by looking to the rest of the world.

Financial inclusion is changing. What was once a global scene dominated by microfinance is now an exciting, varied landscape including a panoply of new products, players, underserved customers and ideas. There’s a lot happening, and a lot to learn.

Sadly, despite great efforts to promote collaboration and knowledge sharing in the financial inclusion industry, the U.S. market seems relatively isolated from the rest of the world. This is a shame, because other countries could learn a lot from the U.S. — and, excitingly, the U.S. could learn a lot from what’s happening abroad.

American innovators have the advantage of access to innovative technologies, widespread Internet and telecommunications options, and a robust financial marketplace. These factors create a fertile ground for domestic financial inclusion innovation — and they hint at the likely evolution of less-developed markets abroad, as these markets catch up technologically and economically.

Paul Breloff
  1. Paul Breloff

Innovators in the United States, in turn, would be wise to follow breakthroughs in the developing world, many of which have blossomed out of necessity in less-sophisticated technical and financial environments. And it’s often startups who are leading and showing the way. Early-stage innovators can usually more nimbly uncover, experiment with and cultivate these opportunities, showing what’s possible whether at home or abroad.

At the Accion Venture Lab, we invest in the most innovative financial inclusion startups around the world. We provide small amounts of equity capital (typically around $300,000) and contribute our time, organizational expertise and network to maximize the chance our investees can succeed. In just over a year of operations, we’ve seen some amazing ideas and new solutions that we’re eager to see scaled to improve the reach and quality of financial services to underserved customers.

As we branch out across the globe, we are as likely to endorse an idea and team in Sub-Saharan Africa or South Asia as in our backyards of New York, San Francisco or our hometown of Washington, D.C.

This is a fun job — and one with a unique view of the developments both in the United States and abroad. So, what can emerging markets learn from the United States?

Internet penetration in the United States dramatically outpaces most emerging markets, and a host of American financial inclusion players are way ahead when it comes to maximizing the potential of the Internet and social media. But that is changing quickly as overseas markets catch up, opening up exciting possibilities.

The Internet can be a portal to finding new customers, better assessing the fit of different products, deepening a relationship or making financial service interactions more social and engaging (for example, Facebook and trends like gamification used to make prepaid cards and small business loans more accessible or cheaper). U.S.-based pioneers like PayPerks, Yattos, eMoneyPool, Quippi and others are proving how Internet or social media-based platforms can improve financial services to the underserved. In many cases, these digital platforms have formalized practices and products like money transfers and savings circles that have traditionally been offline, informal or brick-and-mortar-based. And as Internet access and usage rise swiftly in emerging markets, these models will only become more relevant.

Also, the U.S. is a leader when it comes to alternative and “big data”-driven credit assessments. The potential to incorporate a range of new data sources into traditional credit analysis goes hand-in-hand with expanded Internet access and economic digitization. The United States has been ahead of the curve for years in terms of building the capabilities to aggregate and analyze countless terabytes of data to better manage risk and reach new customer segments.

Today, as our digital footprints explode, companies like DemystData, Kabbage, LendUp and others are leading the way into a new era in which a variety of data can be credit data — assuming our data scientists, programmers and algorithms can keep up! Even in the United States, we’re only just on the cusp of this data revolution, but we believe these approaches can be game-changing at home as well as abroad. These new ways of operating will also enable providers to responsibly serve customer segments that have been traditionally ignored by mainstream banks, such as immigrants, students and millennials, and other “thin file” minorities (i.e., those with limited credit history).

There are also lessons to learn from the United States’ complicated and heterogeneous provider and regulator landscapes. Without question, the United States is one of the most rich and diverse financial service markets in the world, with a complex patchwork of regulatory bodies and regulations (becoming a bit less patchwork with the exciting entry of the Consumer Financial Protection Bureau).

Furthermore, a rich diversity of providers and players here at home fit into a horizontally disaggregated financial services ecosystem. Consider the broad set of financial service providers you deal with on a daily basis: Many people use different providers for checking accounts, investment brokerage, insurance, credit cards and other services. Compare this with the state of play in many African or Asian countries, where a single financial regulatory body works with a handful of dominant, vertically integrated “one-stop shop” banking behemoths, alongside a few niche players that can address more particular needs in microfinance, payments or other areas.

Should other countries emulate the bramble-bush complexity of our domestic system? Probably not. But there’s plenty of inspiration to be drawn from the variety of bank and non-bank actors (particularly retailers) that play a critical role in extending financial access deeper into the American socioeconomic pyramid.

And the United States can and should learn from emerging markets, too. In countries like Kenya, the mobile money application M-PESA has leveraged widespread cell phone access to build a payments product and ecosystem that leapfrogs traditional payments systems, drawing over 15 million users in just 5 years. The use of existing, installed infrastructure (the handset) in place of expensive legacy point-of-sale terminals and plastic credit cards offers an exciting, low-cost alternative to business-as-usual domestically, particularly among underserved groups and for low-value transactions. For a great case study in this arena, check out how Kopo Kopo is expanding merchant acceptance of M-PESA as a mainstream, daily payment option.

Moving even a step further, M-PESA has recently teamed up with Commercial Bank of Africa (a large bank in the region) to build a robust savings and credit offering in addition to the money transfer product. That service now reaches over 5 million customers, who have saved over $300 million and received $60 million in loans in the year since the program’s launch.

Emerging markets are also building data-driven credit models of their own, which can serve as examples for the U.S. Startups Cignifi and First Access help financial institutions assess borrower creditworthiness (and more) by analyzing the ways customers use their cell phones — how they make calls, text, buy and so on. This data can be knitted together to form rich behavioral profiles with predictive relevance for credit repayment behavior. Entrepreneurial Finance Lab tries to solve a similar credit assessment challenge related to small businesses, administering a test to probe innate entrepreneurial ability, intelligence and integrity. The company Lenddo has built a social media site helping underserved customers access short-term credit. Its model is based on peer endorsements and uses an analysis of a customer’s “social graph” (i.e., a customer’s social media and “digital” footprint) to make lending decisions and reach previously underserved customer segments.

The best innovators we have found are deeply immersed in markets like the United States, as well as India, Kenya, Mexico and a handful of others. There are certainly things the rest of the world can learn from those financial inclusion pioneers in United States. But there are many things the United States could learn by looking to the rest of the world. We hope this cross-fertilization and “cross-inspiration” will exponentially improve financial inclusion around the world.

Paul Breloff is the Managing Director of the Accion Venture Lab, which provides seed capital and support to innovative financial inclusion startups around the world. For more information, please see www.accion.org/venturelab