Redefining Financial Inclusion in Today’s World
The financial world is agog with the concept of financial inclusion. But the financial inclusion as we knew it, is no longer applicable today. Before, it was focused on building solutions that target specific problems within a country. But the tools, resources, knowledge, and technology we have right now have transcended the idea. We are now equipped to make a global financial inclusion happen. Thus, the need to redefine financial inclusion.
Financial inclusion can be defined in many ways depending on who is defining it and where it is being defined from. Some people see financial inclusion within one country as getting everyone connected from the banked to the unbanked or the underserved. I define it as integrating the world’s unbanked and underserved to the financial ecosystem, be it integrating through the banks or through fintech and other channels.
Financial Inclusion is not new
The concept of financial inclusion is not new. There are many projects around the world that are trying to tackle the problem and integrating the underserved into the financial ecosystem. However, most, if not all these projects are focused on solving problems specific to certain countries. A good example is the M-Pesa of Kenya. It leverages on using SMS payments to integrate the whole country. Bali, a small and tourism-intensive region in Indonesia, Southeast Asia have Balipay. Balipay integrates small communities to use complementary currencies, with interactions done through SMS too.
First-generation financial inclusion projects include the WIR System in Switzerland. Created after the Great Depression, the WIR system was intended to complement the national currency and to help the local communities run efficiently again.
The problem with the financial inclusion projects that we are seeing today is that they are siloed within certain countries, at a time when we should be going towards a very globalized world.
Current Ways to Implement Financial Inclusion
There are a number of ways to implement financial inclusion, most prominently, the use of SMS technology. The ubiquity of mobile smartphones makes it easy to connect people with new financial services. This makes SMS technology a popular tool for developers to use in implementing financial inclusion projects.
1. Donations. Donating funds and having the recipients execute and implement the use of funds received is a simple and commonly used way of implementing financial inclusion. However, it is not unusual for donated funds to sit unused due to bureaucracy; being used inefficiently; or getting lost along the way. This is not an airtight process and will not suffice for long-term and continued implementation. The social service element of donations also comes into play, muddling the financial concept of the undertaking.
2. Working with fintech startups. Many fintech startups are trying to be “inclusive” by making apps to be implemented and used throughout the country or region. For example, Grab is trying to unite the whole Asian region with GrabPay. The strategy is to ride the transport system and expand by adding GrabPay into the system, which people can use as payments within Grab. The problem is that fintech startups make use of the latest technologies to make things happen, which oftentimes are not interoperable with the existing systems. Looking at this dilemma with my experience from running two fintech startups, incumbents, most of the time just want to crush the “fear of the unknown”, nothing more, nothing less.
3. Banking system. Current solutions are counting on banks to help integrate with the unbanked. The irony is that in Asia alone, over 73% of people don’t have a bank account. And most of them do not have sufficient access to financial services. Despite the numbers, most startups today are targeting the minority, a minuscule in a huge 600 million people region. So, connecting through the banking system is a great opportunity in countries like Singapore and Malaysia where large-scale banking networks are already established. But if you go to Indonesia, Myanmar, Philippines, and Vietnam, where banking is not extensively used, you will have major blocks getting the unbanked into the banking system.
Financial Inclusion isn’t just Payments
When we talk about financial inclusion today, people think it’s just integrating the unbanked and the underserved with the financial ecosystem through payments. However, payments are only the tip of the iceberg that actually connects the unbanked and underserved to the financial ecosystem altogether. As my co-founder of Infocorp Roy Lai states, there are actually five levels of financial inclusion:
1. Wallets/Store — Within the Asian region alone, there are many wallet companies trying to be the custodians of funds, offering services very similar to what banks already have, but this time to the unbanked.
2. Payments — Once you can store the funds, you can make payments from A to B, B to A. Payments and transfers are in the next level of financial inclusion.
3. Loans — Taking out loans is an essential financial need especially for farmers who are mostly unbanked. Farmers go through a long and tedious process, and require intensive capital upfront.
4. Investments — Instead of lending to farmers, investors can bankroll chosen projects or farms. Financial inclusion also provides the link between investors and investing opportunities.
5. Insurance — The least thought-of service, insurance is another need that is not really included in the current financial inclusion initiatives today, but is a huge part of the financial inclusion triangle.
It is only when these five elements are encompassed in financial inclusion that we can see real change. Not only can we see a positive change in the people where the underserved would be able to access more financial services, but on their lifestyles as well.
Financial Inclusion on the Regulatory Front
For most developed and emerging market countries, regulators are very strict on the verification process. We would think that KYC (Knowing Your Customers) and AML (Anti Money Laundering) measures are already established with banks and most fintech startups, but not quite so in developing countries.
In more developed countries, things are straightforward. Most people have a bank account, property rights are clear. Emerging markets are also quickly adopting the same systems. In frontier markets though, property rights are unclear and identification processes are not so simple. A simple act of obtaining a proof of address is a complicated process. To wait for these AML/KYC processes to get through is a contradiction to the push for financial inclusion.
The dilemma for most startups today is how to move forward with financial inclusion, and at the same time be compliant and vigilant about what is needed on the regulatory front. If we wait for all the regulatory processes to be in place, then financial inclusion may take much longer to happen. We have to come up with a solution where we don’t have to wait for the identity processes to come in before financial inclusion happens.
Right now, most of the AML processes review transactions the same way, regardless of the amount, transfer method, or reason for the transfer. It doesn’t matter if you send $5, $500,000, or $5 million from one bank account to another. The amount of work on compliance is the same. Hence, it is making things very inefficient and very hard to move forward with financial inclusion. Shouldn’t it be different if the amount is smaller? Would criminals, thieves, terrorists, and embezzlers really go this route by doing multiple $5 transactions?
Using China as an Example
Not only has China changed the lifestyle of everyday Chinese citizens on how they make payments, they have also changed the way they get insurance; how they make investments; and even on how they give and receive cash and other gifts.
Most of the Chinese use two main types of payments — Alipay and WeChat Pay. They use either one for simple daily transactions like buying a cup of coffee. If they need to give red packets during Chinese New Year, they use WeChat Pay to make the red packet payments. If they need to make investments, they can do it through Alipay. They can also earn interest through granting loans and lend funds to Alibaba through its lending apps within Alipay.
Startups outside of China are taught to build up their business on one major use case, do it well and scale it. The problem is that they are scaling on one particular use case only when they actually need to create an ecosystem. Otherwise the service the startup provides is focusing on only one particular aspect of fintech, and so is detached from the bigger the financial ecosystem.
Chinese startups are doing things differently. Instead of focusing on one aspect, they are building the entire ecosystem right from the beginning, scaling and making it great, all very quickly. With this, I think the Chinese way of running a startup has an advantage inmaking financial inclusion happen because these startups usually provide several services at the same time.
Hiccup to the Chinese Way
Chinese startups too have their own challenges. With the government supporting both WeChat Pay and Alipay, there’s still a lot of legacy systems involved. For someone to get a full service account, one needs to undergo banks’ verification process.
The KYC process is a little different in China. China leverages on cell phone numbers as unique identification numbers. Once they are identified through their cell phone number and bank account details, they will be able to use all sorts of services on top of Alipay and WeChat Pay.
However, since a Chinese bank account is a prerequisite to access the full set of services offered by AliPay and WeChat Pay, it is hard for these two giants to expand overseas. Hence the next course of action is for them to go on a massive acquisition spree.
Redefining Financial Inclusion
Financial inclusion today is integrating the world’s unbanked and the underserved to the existing fintech and financial ecosystem, be it integrating through the banks or fintech companies.
If we use the legacy systems to monitor all the transactions for the unbanked, it is going to be very hard to move forward. As discussed in the recent blockchain inclusion conference, the founders of ConsenSys, some of whom are also the founders of Ethereum, emphasized that we need an enlightened policy approach where policymakers are able to identify projects that are for financial inclusion integrating a whole region. They will also need to apply some exceptions or some go around policies hindering financial inclusion. This will pave the way for a bottom-up approach, where technologists and startups can finally help connect all the unbanked and underserved together.
It is time to look beyond the Silicon Valley mindset, where we focused on customer behavior and customer acquisition. In the financial inclusion phase, we need to work with regulators coming top-down and also adopt a bottom-up approach at the same time. We cannot wait for one or the other to happen.
Making Real Financial Inclusion Happen
The real financial inclusion shouldn’t silo different countries. We started with every country trying its best to connect their own country together. We now have the right technologies to actually have financial inclusion go beyond national borders. Instead of focusing on one country or region, we can now target the whole world and its 2.5 billion unbanked and underserved. This is exactly what Infocorp’s Sentinel Chain is going to do.
Only by keeping this in mind then can we see the real financial inclusion happen. One day, we will get to know farmers who need funding, invest properly in their farm or livestock without having to make a wire transfer and also send the money across borders for free.
We have all these technologies to make it happen. All we need now is for the key players: the regulators, the banks, and startups to start working together. For the entire community to work even more closely as a region, instead of as only a country. And to shift our sights from the national scope to a global financial inclusion.
