Why Invest in Financial Inclusion? A Couple of Medici Articles Make the Case.
A foundational assumption of the FinTech business plans that focus on emerging economies is that innovation will make doing business in a small-transaction economy profitable.
Traditional lenders and other financial service providers have never really cracked that nut. Their legacy systems and bricks-and-mortar mindsets precluded the idea that $100 loans to local entrepreneurs in a Chadian village or a Bangladeshi hamlet could be lent, managed and collected profitably. Or that a deposit-taking branch could be established and staffed. Or that insurance plans could be sold in a volume that would allow distributed risk.
There was, for years, an operational frontier beyond which financial services could not be delivered profitably, and the wide stretches of the world beyond that frontier were left to cash-and-barter, or to the inconsistent and inefficiently run non-governmental organizations whose missions were not aligned with profitable financial relationships. The rigor of the marketplace did not drive the allocation of NGO resources.
FinTech changes the calculation. By its very nature, and which initial operational experience backs up, a blockchain/token/crypto mashup can dramatically lower the cost of service delivery to many communities beyond the old financial frontier.
Two article recently posted on Medici (www.gomedici.com) make pretty clear the incredible potential for FinTech to rapidly expand financial inclusion.
“The progress in extending access to the formal financial system to previously ‘invisible’ groups of the global population is largely attributed to digital financial technologies,” wrote Elena Mesropyan in the first article. “Experts believe that smartphones can dramatically reduce the cost of lending because the apps they run generate huge amounts of data — texts, emails, GPS coordinates, social-media posts, retail receipts, and so on — indicating thousands of subtle patterns of behavior that correlate with repayment or default.”
This is exactly what BitMinutes is focused on: Creating a smartphone-based “banking system” that is literally full-service mobile banking, set up with minimal on-the-ground infrastructure in previously unserved communities worldwide. And then we capture the reams of data cited above to create a developing world credit scoring system to further expand the ability to lend profitably, at far lower rates than a small business person in one of these communities can get today (if at all.)
by · June 28, 2018 MEDICIGlobal Head of Content The World Bank estimates that about 1.7 billion adults remain unbanked…www.gomedici.com
Mesropyan rightly notes that there are risks, and a lot of unknowns, lurking in the process of developing a brand new way of assessing creditworthiness. Just a few are:
- How to account for and limit the impact of race-based, caste-based and other factors that may be embedded in each society that limit broad financial inclusion?
- How to ensure data security? A for-profit enterprise may feel the data they collect is their proprietary information. As the newly included communities learn their rights, they may disagree (the EU’s GDPR process could spread worldwide more quickly than you might imagine in a digital world.)
- How to protect against capricious local governments or regulatory regimes?
- How to ensure accuracy, and manage liability?
Managing these “bad and ugly” aspects of FinTech-driven mobile banking services for 2 billion people is a huge challenge that must be met to deliver profitable financial services to them.
The other article carries on with the same theme, sharing a video from an Exponential Impact episode from Singularity University. Watch the video here:
“If you are trying to make the world a better place, financial inclusion is the key answer. But the definition should be less around giving more aid or more money to keep people poor; it’s more (about) connecting them to the supply chain by empowering them with data.” — Ashish Gadnis
My favorite idea from this discussion is that FinTech solutions will finally deliver the critical ability for billions more people to establish and control their individual economic identity. The system will recognize previously “invisible” people and be able to properly “see” these people as “bankable.”
This will be a long process, but the path is pretty clear, as Jane Barratt emphasizes in the video.