Financial Inclusion Initiatives Work Best When Honest Profit Seeking is Included

The impediments that hinder the absorption of billions more people into formal, fair, reliable financial systems are easy to see, if hard to remove. Infrastructure designed to serve larger-transaction consumers struggles to deliver services profitably to poor communities globally.

And the informal, paper-based systems in place are rife with fraud and corruption.

All the FinTech innovations that have great promise to lower the cost of financial service delivery, and cut out the rent-seeking local middlemen, need to fight through what we call “old thinking,” the tendency to prefer the current system over unfamiliar new technologies.

“Old thinking” is actually a dodge used by entrenched special interests, who are making their profits by keeping the system inefficient and opaque.

Enter the Philanthropic Impulse

CGAP, an NGO affiliated with the World Bank, recently launched the sixth of its initiatives to alleviate the structural conditions that keep up to two billion people outside the formal financial system.

With a mission to expand financial inclusion, CGAP creates projects to model how best to improve local financial networks and regulatory systems to expand financial inclusion.

“CGAP successfully proved through a decade of experiments that interventions combining asset transfer, training, financial services and social mentoring can lift families out of poverty,” it noted in a recent update. “Rigorous assessment through 10 pilots in eight countries showed that incomes and household consumption rose at all but one site. Today, this approach is being adapted in almost 100 programs in 43 countries.”

Great news, except that it took a decade of hard work to break old mindsets and change behaviors in 10 pilot communities. I am sure they have the data that tells us how many people where positively impacted by these pilots, and how many people the 100 new projects encompass. It is probably counted in the hundreds of thousands rather than millions. That is slow progress at best.

CGAP seeks to act as a catalyst, bringing together all the actors within a community and helping them remove the “old thinking,” which are based on corrupt practices and lack of knowledge. The idea is that once the new systems and behaviors are established, CGAP moves on to the next community. Our concern? How well do these new mindsets and behavior sets stick? This is not reported in the article, perhaps because it will take another decade to measure that, and backsliding is as likely as progress. The purveyors of past practices are still there, hoping to regain their lost advantages.

Held up against the small-scale CGAP programs is the runaway success of the M-Pesa phenomenon in Kenya, where NGOs played smaller roles in the rapid expansion of that mobile-phone-based financial inclusion program. Here the progress stuck, and the bad actors of the old informal economies have been (at least in part) sidelined.

The key difference was the existence of financial reward, and transparency to protect the honest participants. People profited by bringing more people into the network, and the digital accounting provided a secure place to keep the gains. The profit motive here was harnessed to the good of the mass of people involved, unlike in opaque economies where corruption deadens the spirit of entrepreneurship. The good actors have enough leverage to keep the old thinkers at bay. Digital innovation, driven by cloud-based services delivered directly to the consumer via their phone, end ran the rent-seeking middlemen.

NGOs like CGAP are often forced to work with those middlemen, attempting to reform them rather than subvert them. This is why I worry that their good work may not last in those communities where all their hard work was invested.

Harness the Profit Motive to Accelerate Progress

We need to move faster than CGAP if we want to move the 1.7 billion people still lacking basic financial services into the modern world of digital banking within a few decades. We need to deliver inclusive programs directly through ubiquitous mobile phones and local merchant networks.

BitMinutes follows this path. Our mission is to make the prepaid airtime minutes every mobile phone owner in these communities buys fully exchangeable. This turns a restricted asset into a more useful alternative currency. When prepaid minutes, already used within a phone network as an informal currency, become transferrable across networks, all sorts of digital financial services can more easily be delivered by financial service providers. M-Pesa worked, remember, because one mobile operator dominated the market. BitMinutes make that scenario possible regardless of the number of MTOs in a country.

The second success reported by CGAP supports our opinion, and has more promise in breaking down the barriers to financial inclusion:

“Another success was CGAP’s work in Ghana supporting the government’s efforts to revise its mobile money regulations. After more enabling regulations took effect in 2015, account access grew significantly to reach over 11 million active mobile money users by 2017. The average number of mobile transactions per month doubled, and the balance in mobile money accounts grew sevenfold between 2013 and 2017.”

Here CGAP is, in effect, working with government to remove bad actors by reforming regulation. Removing bureaucratic impediments to the profitable application of new digital technologies removes “old thinking” by simply making the old thinkers irrelevant.

Financial inclusion is accelerating, and CGAP is helping, especially when they focus on eliminating red tape. But FinTech innovation, driven by profit motives shared broadly with community members, will move faster.