Transparency and verified data as keys to financial inclusion
Expanding access to basic financial services, such as bank accounts and credit, is an important step in eliminating poverty and many related diseases of our society. Lack of such access is now an unsolved problem for both developed and developing countries, and despite many efforts, none have yet proven effective. Technological tools for financial transparency can be a highly scalable, low-cost answer to this problem yet to be revealed by institutions struggling for financial inclusion.
Though financial inclusion is not one of the major use-cases we currently target in Frank, we see great untapped potential in the solutions for unforced financial transparency. Unfortunately, this potential has not yet been revealed by professionals working on the problem of financial inclusion for the government or with the most reputable and dedicated foundations, such as the Melinda and Bill Gates Foundation, Kapor Social Innovation, Omedyar Network, and others. They do not yet see transparency as a major key to solving this problem. Rather, they mostly see their task as one of building banking infrastructure in the regions where there are no reliable financial systems yet.
Half of the world adults do not have bank account. World Bank. 2014
However, in countries with the most developed and accessible financial infrastructure, basic banking products still remain unaffordable for many people. According to the FDIC, one-third of all US households do not have a savings account, and up to 25% of low-income households do not have any type of bank account at all. Fears of costly maintenance and overdraft fees prevent people from opening accounts, while more advanced services like credit and short-term loans are available for them only through high-cost alternative providers, not mainstream banks.
Financial services are much more costly for providers if rendered to low-income clients, and thus they are more expensive for such clients compared to what well-off households pay. Microfinancial platforms like Kiva, which makes loans available to low-income lenders below the market price, are great but most are likely unsustainable solutions. They provide a low or even negative rate of return that, though already admitted as a normal practice by social impact investors, still puts at risk the sustainability and growth potential of charity-dependent solutions.
In developing economies, 35% of small firms report access to finance as a major obstacle to their operations. World Bank. 2014
At the same time, a major part of the cost structure of bank services is not infrastructure — it is the risk of fraud. Usually when microcredit organizations lend poor people money with higher rates, it doesn’t necessarily mean they are getting higher earnings. A higher default rate leads to higher cost of capital. Those clients who exploit the system and take credit (often multiple, from different financial organizations) without the ability to repay this money or the willingness to build a way out of poverty through entrepreneurship are credited by the system on the same terms as honest, hardworking people. This is sometimes due to corruption, but in general, it arises because of the inefficiency of providers to distinguish trustworthy low-income clients from those who are not.
70% of small and medium enterprises (SMEs) in emerging markets lack access to credit. The current credit gap for SMEs is estimated to be US$2.6 trillion. World Bank. 2015
If we find a cheap solution enabling trustworthy low-income clients to distinguish themselves, we can make certain financial products not only accessible but also affordable by reducing the risks to those that the banks face when they provide services to well-off clients in developed countries. The highly scalable, low-cost solution for this task can be a tool for financial transparency of the lender, if such tool makes available reliable data from verified sources about transactions of the lender. Imagine how much easier it would be to provide capital for a micro-business if investors could see how the money is spent in real time. The risks of providing loans to employees of such transparent enterprises are also significantly lower.
Transparency empowers unless it demands too high a cost to maintain. With technological solutions that make this process simple and effortless, the untapped potential of transparency will help our society in its major challenges.
In Frank, we are building a public-facing transparent ledger for social ventures that wish to show the outside world how they utilize funds. You can sign up for email updates at frank.money or chat with us on Twitter at @frankmoneyinc.
If you would like to share you ideas or sign up for a test, please get in touch at be@frank.money.
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