Universal Financial Inclusion in the 21st Century
By: The Mercy Corps Ventures Team
We’re living in a unique moment in history when transformative financial technologies have the potential to create revolutionary new pathways for people to spend, save, send, and secure money. At Mercy Corps, we understand how quickly and powerfully digital technology can transform the lives of the most vulnerable populations, and we believe that we can make financial access universal in the 21st century. But to make that a reality, we need to start reimagining the financial system: We need to rebuild it with the world’s most vulnerable at the center of its design, not on the periphery.
Two major threats confront us. The first is cynicism that universal access to banking and financial services is a naive pipedream. The second is hype, which decries any regulation and promises global, “frictionless” financial freedom to anyone through the mere mention of the words “crypto” or “blockchain.” Both of these narratives miss the point.
The existing financial system and network of bank branches is incredibly fragmented, antiquated, broken, and exclusionary, and it cannot scale fast enough. It’s time to let it go. We have to acknowledge that the challenges of financial exclusion are entrenched in existing systems and the gaps are simply unacceptable. “It’s expensive to be poor” has become an adage for anyone working in financial inclusion. It’s often women entrepreneurs, informal shop owners, smallholder farmers, and the rural poor that face excessive fees and disproportionate costs in the traditional financial system. The reality is that banks typically have considerably high operational expenses in emerging markets, which makes it unattractive to serve “lower-margin” customer segments, like poor, remote users.
A big example of what’s so obviously wrong with the status quo is with remittances — the money that people send across borders to support their families and communities. Remittances are the biggest source of external financing to low- and middle-income countries. But the cost of sending money across borders is very high, with intermediaries charging an average fee of 7–11% and up to 40% on smaller transactions, cutting into the funds that poor people can access. In fact, every year over $50B in transaction fees are charged on remittances alone. To put that in perspective, all the annual government aid that supports developing countries totals $150B. Is this really the best we can do?
A better system is closer than we think. We’re beginning to get a glimpse of this new system as “neobanks” emerge across the world, agent network banking becomes the norm in some countries, telcos create mobile money and become loan providers, and digital currencies and blockchain-based applications lower transaction costs and increase access within and across countries.
But we can’t just wave the wand of technology at this problem. Small farmers in remote areas, people living in informal settlements, refugees fleeing conflict zones, informal workers, and microentrepreneurs don’t fit neatly into one box. Each person that makes up the 1.7B+ unbanked population confronts different challenges and inequities that demand our thoughtful attention and engagement. They may not have access to any official identity documents, credit history, or verifiable income. They live in rural areas, favelas, shantytowns, and slums and may have limited internet connectivity. Many are on the move, whether pursuing shifting livelihoods, fleeing violence, or displaced by climate change. To add to the problem, the majority of the unbanked are women, which leaves them excluded from their own local, national, and global economies and hampers their ability to achieve any level of financial independence.
For traditional financial service providers, lenders, insurers, these people are “too risky” to serve. Even in the U.S., 25% of households are unbanked or underbanked. The underserved and underbanked that have access to bank accounts are stuck having to go outside their bank and pay exorbitant fees from extractive financial services such as payday loans and predatory lenders. The fact that hundreds of millions are underbanked confirms that the problem is the system, not the people.
What We Mean By Transformative Fintech
We’re asking the question ‘What if?’ What if we reimagined the building blocks of our financial system? What if truly global, low-volatility currencies and digital wallets could be accessed with a basic phone and provide financial stability for people living in countries that are struggling with conflict, natural disasters, or unstable governments? What if smart contracts would automatically pay out if a hurricane hits so people wouldn’t have to wait weeks for an insurance claim to be processed? What if we could harness transformative financial technologies for the most challenging environments, through responsible innovation and evidence-based research? What if we abandoned our legacy and exclusionary systems and embraced something new?
Welcome to FinX. We’re out to discover how a broken system that excludes billions can be remade.
Some key technology and social trends are converging to give life to this initiative:
- Emerging technologies are making it possible for any company to become a financial services provider (Angela Strange, a16z). This is happening even faster in developing countries where people are essentially leapfrogging the traditional financial system and transacting exclusively over their phones with mobile money created by telcos (similar to how they leapfrogged traditional telecommunications and the landline). Customers with deep relationships and strong brand loyalty make the possibility of having a non-bank offer you a loan, savings products, or even insurance not just palatable but even preferable.
- More than 70% of the world’s central banks are exploring the merits of central bank digital currencies. But for this to work we’ll need open and interoperable payment rails — universal, open, and user-directed payment networks (Dante Disparte, HBR).
- The new fintech “stack” of digital currencies, wallets, and blockchain-enabled applications (decentralized finance) are presenting the promise of no/low-cost access for all, especially for those who need it the most. With user-directed (peer-to-peer) payments, we no longer need to pay high fees to intermediaries — both the sender’s bank and the receiver’s bank — and can transact directly with others. Blockchain-based applications can code compliance “on-chain” and make fraud even easier to detect. All of this means unbanked people can now access free/affordable payments and financial services and/or intermediaries can recalibrate their cost structure and reprice what they offer to be more equitable and accessible.
- Data empowerment, privacy, and digital ID are providing people with the opportunity to manage their own data and generate value. People can control their data and decide who can access it, while self-sovereign identity systems with data portability could empower users to generate value through their engagement in digital and financial interactions.
Is it so hard to believe that digital currencies, distributed ledgers, and smart contracts can change the way finance works? Perhaps it’s similar to the paradigm shifts faced by generations before us, that had to believe the same for paper money, credit cards, fractional reserves, or even, more recently, PayPal. That said, we know we don’t have enough evidence. These technologies haven’t been around long enough with robust enough use cases to understand their real-world impacts on the status quo or emerging constraints. We are deeply aware that there will be substantial risks for the world’s most vulnerable people if they are excluded again — if their needs are not taken into consideration as these new technologies are designed and deployed. At the same time, we also have to acknowledge the risk that software companies and governments could haphazardly experiment on vulnerable people without taking the proper precautions based on human-centered design principles.
Next Generation Impact
An initiative of Mercy Corps Ventures, FinX is leveraging the 40+ years of experience in frontier markets and financial inclusion of the leading development organization Mercy Corps to reimagine the financial system with the world’s most vulnerable at the center of its design. Our goal is to accelerate global financial inclusion by advancing innovative, responsible distributed ledgers, digital assets, cryptocurrencies, and other digital financial solutions that help people join the global economy and lift themselves out of poverty and create a roadmap for an inclusive financial system.
To do this we’ll be making equity investments in emerging fintech companies, piloting new products and services tailored to vulnerable populations and humanitarian use cases, rigorously measuring impact to build the evidence base, and sharing learnings and failures along the way.
Here are some of the FinX touchstones:
- Demos not Memos — Ground our aspiration on tangible demos, pilots, and investments in companies that emphasize traction against real-world challenges.
- People First — Take a persona-based approach to test new technologies in relation to people’s/firm’s capacities, needs, constraints, and concerns.
- Evidence-based — Use rigorous Impact Measurement & Management approaches to test product/market fit, create real data points, and get us beyond “this sounds like it will work.”
- Transformational — Build catalytic partnerships and drive toward outcomes that are transformational, scalable, sustainable, and replicable within and across countries.
- Transparent — Develop real world use cases in real-time and share insights, learnings, and failures along the way.
We know the unbanked. We know fragile contexts. We are going to leverage our global resources and reach to ensure community voices are heard and that vulnerable populations are not left behind in the fintech revolution.
And we’re not alone on this journey. This initiative is being seeded by Ripple and Rippleworks. Ripple is among the mission-driven fintechs pushing into un- and underbanked communities which, as a collective, could prove to be a powerful ally to NGOs in making accessible and affordable financial services a global reality. This is why we’re building a coalition of partners who also see dramatic change on the horizon and are keen to ensure that the new financial system is inclusive, secure, and protects consumer privacy.
We’ll be sharing what we’re learning here and asking our partners, investees, critics, peers, and others to blog with us and help create momentum toward the inclusive financial system. Join us for the ride. Comment. Question. Engage.