Financial Inclusion 2020 - Center for Financial Inclusion blog

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Financial Inclusion 2020: The Essential Debates

Will microfinance continue to be relevant in 2020 and beyond? Should regulators or the industry lead on client protection? Will data analytics replace traditional credit reporting systems?

August 2015 For more, visit www.financialinclusion2020.org

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August 2015 Take a moment to celebrate the good work being done on financial inclusion around the globe. The World Bank highlighted the work of many key players when it announced commitments to Universal Access. The Institute of International Finance (IIF), with nearly 500 members around the globe, has also taken on a leadership role in financial inclusion. There are creative partnerships such as mobile operators providing free insurance as a reward for customer loyalty. Technology continues to expand at a breathtaking pace, with promise for customers at the base of the pyramid. This all adds up to progress and, indeed, the 2014 Global Findex shows some significant gains in inclusion in all regions. And yet, in the midst of so much to celebrate, it is easy to lose sight of the vision of full, meaningful financial inclusion—a vision of quality as well as access. It’s also easy to forget that there is really no such thing as “global” financial inclusion—that, in fact, inclusion is by nature a last mile challenge—or, for digital financial services, a “last tap” challenge. Financial inclusion happens by the millions when technology solutions come into play, with countless diverse players making up complex ecosystems. But what really counts is how that plays out in one market, one person at a time. That’s why we are proud to announce our work with dozens of financial inclusion leaders around the world who together are hosting FI2020 Week later this year. From November 2-6, 2015, FI2020 Week Partners have each committed to host one conversation about the most important issues needed to address financial inclusion in their own contexts. While there are many partners still shaping the details of their participation, we are looking forward to learning from conversations held by Accion, AVAL Consulting in Ecuador, CGAP, Child & Youth Finance International, Fidelity Bank Ghana Limited, Good Return, Grameen Foundation, the Institute of International Finance, Innovations in Poverty Action, J.P. Morgan Chase & Co, LeapFrog Investments, Making Cents, MetLife Foundation, the Microcredit Summit Campaign, the Micropension Foundation, the Pakistan Microfinance Network, and the World Bank. These leaders—and many others whose plans are soon to be announced—will focus on issues they find critical to their own work. Together they will move the world a little closer to the vision of full financial inclusion for all. We hope you will join us. In the meantime, we trust that you will enjoy the responses in this edition to a few fun questions we think are some of the most compelling right now in the financial inclusion community. We also look forward to your participation in a brief survey that you can find on page 10 that attempts to assess progress toward financial inclusion using some of the recommendations from our Roadmap to Financial Inclusion. By adding your opinions, you will help inform our upcoming FI2020 Progress Report. In all of this, we look forward to your joining the conversation however you can, wherever you are. Best regards,

Note: The FI2020 Steering Committee, made up of

Susy Cheston Senior Advisor, Financial Inclusion 2020

global leaders in financial inclusion, advises on the FI2020 strategy and particularly its core activities to convene and engage key stakeholders around the vision of accelerating full financial inclusion. The Center is grateful to the members of its Steering Committee-- CGAP, Citi, the Bill and Melinda Gates Foundation, MasterCard Worldwide, MetLife Foundation, and Visa. The Center is also grateful for on-going support from Credit Suisse as its Founding Partner.

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Released in 2015 Global Findex The World Bank’s Global Findex database is an unparalleled resource tracking how people manage their money. Covering 140 countries, the resource includes data from both 2011 and 2014—allowing us to see how financial inclusion has changed over time. According to the dataset, the percent of people in the world with an account has grown from 51 percent to 62 percent in the last three years. Read the full report here, or for a brief summary of the data in each country visit the Little Data Book on Financial Inclusion.

By the Numbers: Benchmarking Progress Toward Financial Inclusion

Explore the data and check out all 26 charts in this slide-deck.

Exploring The Business of Doing Good With Anton Simanowitz Anton Simanowitz, co-author of the new book The Business of Doing Good and Larry Reed, director of the Microcredit Summit Campaign, recently sat down with Susy Cheston, senior advisor to FI2020, to discuss how organizations can do good work and turn a profit, particularly in the microfinance sector. Listen to their conversation now to hear Anton’s insights from his case study of AMK, a social enterprise which has had great success in providing financial services to persons living in poverty in rural Cambodia. Please listen to the podcast here.

In this data-rich report, released in June 2015, we have let the numbers speak for themselves. CFI has drawn from the comprehensive Findex data as well as other sources to create 26 charts that show some of the most important aspects of global financial inclusion today. Our analysis highlights a few surprising trends regarding the disconnect between access and usage and resilience at different income levels. Additionally, you may enjoy the projections we have made that offer one scenario of what financial inclusion might look like in 2020. Download the report here. Download Key Messages from the report here.

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Financial Inclusion 2020: The Essential Debates

Will Microfinance Continue to be Relevant in 2020 and Beyond? Microfinance as a development strategy has in the past few years been eclipsed by the excitement around financial inclusion. This transition reflects the recognition that people need a full range of financial services (while microfinance has largely been about credit) and that a wider range of actors are interested in providing those services. The microfinance sector itself has experienced challenges, including crises of overindebtedness in several markets and impact studies that suggest less transformational results than had been hoped. Is microfinance a thing of the past? What does the future hold for microfinance and the many microfinance institutions (MFIs) around the world? Will traditional banks and new fintech companies replace them in serving the base of the pyramid? “I certainly think that MFIs will look very different in 2020 relative to what they are today. However, I would not agree with the prediction that their roles will be absorbed by legacy financial institutions on one side and by start-up FinTech innovators on the other. There will surely be a far more diverse ecosystem of financial service providers than that but there will be a clearer divide/ specialisation between the institutions that serve the customers and the institutions that own the products.” -Bindu Ananth, Chair, IFMR Trust & IFMR Holdings

“I don't care whether an institution providing financial services to the previously unbanked used to be an MFI that became formalized or used to be a big bank that went downscale. I just care that they are providing high quality and affordable services to the poor. Are current MFIs that provide services over and beyond financial services going to continue to find synergies with other providers? Yes. At least I see no reason to think that will change. And, yes, fintech companies are going to be huge. Why? Because there are often low barriers to entry to application-based tech innovations, and because tech innovations likely lower transaction costs radically for providing financial services to the currently under or unbanked.” -Dean Karlan, President, Innovations for Poverty Action

4 “In Latin America, the microfinance industry has focused almost exclusively on credit and has only recently begun to expand to a broader product range. The industry is acknowledging the need to adapt to increased competition from large scale, commercial providers. But to stay relevant, MFIs need to change even more. They need to start working with more collaboration and synergy, integrating new players that can help them to improve their efficiency, increase distribution channels, and incorporate new services. They have a responsibility to recognize that their clients have different needs, and to improve their portfolio. They need to think more broadly and understand that clients are changing and becoming more informed, more selective, and more reliant on technology. And they need to be sustainable for long-term success. However, microfinance is not going to disappear. While the (still slow) entrance of giant commercial players may mean increased competition, there will always be a role for microfinance. Microfinance will continue to be a tool to help reduce poverty and improve living conditions. It has a strong social foundation—one that transcends the push for high profits. I see MFIs changing, but they won’t disappear—they will continue to have relevance for the economic and social development of individuals and communities.” -Liza Guzman, Vice President, Accion

“I try to emphasize to MFIs that they need to start re-imagining microfinance and re-inventing their organizations. Conventional microfinance as we have known it is going away. In India not too long ago, microfinance was seen as a mono-line activity: tiny, short-term loans of 50,000 rupees, through a joint liability group model, to poor women, who re-paid weekly. As they grew, MFIs essentially attempted to cover all client segments with that old model. Now the world of micro is much bigger. The demand for finance of a “micro” nature is much wider and cuts across an extremely diverse segment, including moving upward to provide access to small and medium-sized enterprises. MUDRA Bank, where I am a board member, is a new Apex level development finance institution in India that will provide loan services to small entrepreneurs outside the service area of regular banks, using last mile agents. You could call it “microfinance plus plus”.. Soon after MUDRA was announced, I just at random began to count small entrepreneurs on the road between where I live and work. My commute is only two kilometers through a residential area, yet just on one side of the road I counted 38 small entrepreneurs. These citizens are supporting their families and are economically vibrant but not connected to formal financial system. Don’t they need finance? Of course, they need finance! They need something in the range of 20,000 to 200,000 rupees. The new “micro” serves a different kind of client, and we need to move out of the traditional framework to encompass diverse segments. Much is changing, as new categories of institutions are starting to force new models. The Reserve Bank announced two new specialized classes directed at financial inclusion: small finance banks and payment banks. Alongside those developments, the Postal Bank of India is likely to get a license soon. With an extensive network, their presence on the ground will be huge. As well, the banking correspondent network is starting to stabilize. In the next three years you will see many different institutions that are financial inclusion-focused. To reach more broadly, microfinance institutions in India have to re-invent themselves. And it’s happening. Of 72 applications to become small finance banks, 18 were microfinance institutions, and my hope is that 5 to 7 of the more mature among them will get a license. Financial inclusion is in large measure about getting the delivery architecture right, and in India I think we are finally getting it right.” -Alok Prasad, Principal Advisor, RBL Bank

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Should Regulators or the Industry Lead on Client Protection? The ideal balance in client protection is often conceived as a three-legged stool in which regulators, providers, and consumers work at equal levels of responsibility. At this time, this balance remains unachieved. However, experiences in different markets have shown regulators, providers, and in some cases consumers stepping up. Globally, regulators have often taken the lead, but initiatives such as the Smart Campaign prove that there is room for providers to move beyond compliance. Is a balanced three-legged stool realistic?

“Why would a provider get into client protection without an adequate economic driver or direct incentive? The construct of expecting providers to bear the cost of client protection is fundamentally unsound and intellectually flawed. Only social businesses designed ad initium would do something of this kind, so practically by default, the regulator has to take the lead. I’ve been a regulator and on the commercial side with Citibank, so I have seen both sides. I would argue that client protection is a public good. Providers, like all commercial organizations, are focused on private gain or profit. It’s hard for providers to do something which essentially is a public good and in some ways is not aligned with their core business drivers. We see experiments with self-regulation, and MFIN became the first self-regulatory organization (SRO) in Indian finance. This is certainly a leap of faith on the part of the Reserve Bank. I’m not sanguine about the success of this experiment, based on our limited pilots. Time and again we have seen that it is a hard struggle to put into place a framework of self-regulation. It is not yet clear how the Reserve Bank will monitor the SROs. It has put in place certain guidelines, with SROs required to submit a quarterly report, but I suspect that even the regulator is in some fashion trying to figure out how a good SRO should work. The thinking will certainly evolve. My fear is that unless a good constructive dialogue emerges between the industry and the regulator, this model won’t go very far. The industry must put its best foot forward and engender heightened confidence. Are there good examples of providers taking the lead and embracing client protection? In the limited context of financial services, beyond symbolism and halfhearted commitments, I can’t think of any great examples. Symbolically, yes; in truth, no. Regulation has to carry client protection or it won’t be there on a large scale. -Alok Prasad, Principal Advisor, RBL Bank

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“Effective client protection will always require leadership by regulators. The definition of client protection is hazy in many people’s minds, and the margins between client protection and MFIs’commercial interests can become blurred. Client protection must include: protection from over-indebtedness; fair and respectful treatment; and responsible pricing. However, the definitions of these can be problematic and open to interpretation. While industry associations/networks should play a leading role in defining these, this rarely happens due to the clash of definitions with the short to medium term commercial interests of the leading MFIs in each market. Therefore, regulators in many countries have stepped in to specify: 1. Limits on the amounts MFIs can lend to individual clients 2. MFI collection conditions and action that can be taken in case of default 3. Limits on interest rates and other charges that MFIs can attach to their loans This does not necessarily mean providers should play a lesser role. Their failure to agree to reasonable self-regulation leads to regulators stepping in on behalf of clients. As a result, MFIs often get inappropriate limits – loan amounts that are low relative to clients' needs, unremunerative interest rates for the MFIs and, as in the case of Andhra Pradesh, India, conditions for collection that are virtually impossible to meet (such as collection only in the presence of government officers!). The failure of the concept of self-regulation leads to the expectation that providers play a lesser role, but this failure does not make it appropriate that providers take a back seat to client protection. Ideally, consumers should also play a role by using consumer complaint mechanisms of MFIs, networks, and regulators. MFI clients, however, tend not only to have imperfect information on how to make such complaints but also usually feel that making complaints is wasted effort . So, again, while it is expected that consumers will play a lesser role, it is not appropriate that they do so.” - Sanjay Sinha, Managing Director, M-CRIL

“Who is best suited to lead on financial client protection? The answer should be simple, and it is – the providers of financial services themselves! The ideal provider is one who acts in the interest of its clients, and understands that client protection is more than 'checking a box.' For responsible providers, client protection is a part of its DNA. Its policies and processes account for the potential negative consequences from access to financial services and mitigate them. Harm is minimized, and is promptly identified and remedied if it occurs. Clients are heard and they help improve the provider’s products and services. Client protection is a continuous journey that requires on-going monitoring and pro-active engagement. The risks of not pursuing client protection are high. There are too many stories of the ripple effects of harm caused by pushing financial products that do not meet clients' needs, or by the mistreatment of just one disgruntled employee. An organization that adopts voluntary standards is more likely to pay attention to and monitor risks and performance on an on-going basis rather than at intervals. It is also more likely to understand the mutually reinforcing nature of client and institutional benefits. When products match client needs and clients and are treated well, institutions benefit from increased loyalty and lower losses. Unfortunately, there is no perfect market where every provider recognizes this responsibility, which is why regulation is necessary. While providers can act, regulation must step in to level the playing field when they do not. There are also limitations to what providers can do in the absence of reliable sources of information. Clients have the responsibility to disclose correct information and financial capability is key. Provider-led industry standards are a powerful tool that allows client protection to be realistic and feasible for providers. I look forward to continuing to see how providers of financial services recognize and embrace this responsibility.” - Isabelle Barres, Director, The Smart Campaign, Center for Financial Inclusion at Accion

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Financial Inclusion 2020: The Essential Debates

Will Data Analytics Replace Traditional Credit Reporting Systems? In Data analytics using alternative sources of data are generating ways to assess the creditworthiness of thin-file customers who have been traditionally left behind by standard metrics. These innovations have the potential to replace traditional credit reporting systems for customers at the base of the pyramid in the near future. While larger firms have begun to incorporate alternative sources into their frameworks, many question if they will be agile and flexible enough to compete with smaller start-ups. In economic development circles, it has become fashionable to make bold proclamations about the future of credit risk assessment for the financially excluded. These statements usually involve declaring victory for a raft of new entrants—typically tech firms such as Alibaba, Google, Facebook, LinkedIn—while sounding the death knell for traditional credit bureaus. Indeed, at the recent World Consumer Credit Reporting Conference, one senior IFC officer reprised the speech at the beginning of the classic 1970s film The Paper Chase: "Look at the person to your left, now look at the person to your right. One of these will not make it home." He predicted that, in the not so distant future, some traditional players would not survive long enough to return to the event. The primary basis for such predictions is the conviction that Big Data will empower a new breed of solutions providers to bring products to the consumer credit market that bypass credit bureaus. The formula is something like this: (Big Data + mobile telephony) x alternative data / (machine learning x artificial intelligence) = BBCB (bye-bye credit bureaus). Certainly there have been some impressive developments. If Alibaba can transform Ant Financial Services into a fully functioning lender on the basis of Alibaba’s house file data, this would rank in the impressive feats column. Despite this and other accomplishments, there are good reasons to believe that traditional credit bureaus will continue to play a significant role—possibly even an expanding one—with the provision of financial services to the base of the pyramid and missing middle borrowers for the foreseeable future. Consider: • Credit bureaus are entrenched in many markets, have existing relationships with lenders, and are continually adding new data assets into their repository to increase coverage. • If a lender uses an alternative data model to extend credit, it will report the loan and repayment data to a traditional credit bureau, increasing the depth and rigor of the traditional credit bureau's database. • Financial services firms are heavily regulated and are mostly unable or unwilling to furnish their customer payment data to an alternative data repository. These facts suggest that future new entrants seeking creative ways to drive financial inclusion using alternative data or Big Data will act as complements to traditional credit bureaus rather than direct competitors. In all likelihood, the relationship that will emerge will be symbiotic and to the benefit of traditional credit bureaus and borrowers alike. If so, traditional credit bureaus would become more valuable to lenders and their position further entrenched. My organization (PERC) and a growing number of others will continue to promote the use of alternative data as a tool to drive financial inclusion. I fully expect to be seeing familiar faces at the World Consumer Credit Reporting Conference well into the future.” -Michael Turner, President & CEO, PERC

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"Many of the world’s people have limited access to credit, as they have “no file,“ a ”thin file," or an “old file” in traditional credit bureaus – which are, especially in more developed markets, the main (or only) point of reference for credit underwriting. In the U.S., 45.5 million adults are categorized as “credit invisible” or “unscorable” with traditional credit scoring models. Low-income individuals tend to be most disadvantaged — 45% of low-income Americans are categorized “unscorable.” Solutions other than those provided by traditional credit bureaus are needed. In many emerging markets credit bureaus do not even exist. The exponential growth of internet and smartphone adoption is creating an explosion of digital data, from GPS to social media to online transaction records. These “Big Data” could reveal an individual’s character, common sense, capacity, and other traits to predict ability and willingness to pay – leading to expanded access to finance for those who are creditworthy but currently invisible. Innovative data mining and analytics models provide opportunities for faster, cheaper, and more accurate ways to assess creditworthiness, particularly for low-file individuals and businesses. Data analytics could help banks and other financial institutions serve segments that would otherwise be too costly. FirstAccess, our portfolio company operating in Tanzania and Kenya, leverages cell phone data and other customer behavioral patterns to provide information on consumer creditworthiness to lending institutions. DemystData aggregates and analyzes data such as utilities payments, focusing on ways to use public but unstructured data to help financial institutions make better credit decisions.` We are also excited about the idea of customer empowerment through the use of alternative data solutions in which customers can take control of their credit identities and proactively create new information. Instead of retrospective data, now customers can actively prove their creditworthiness or rehabilitate past records. RevolutionCredit uses video-based psychometric assessment to identify creditworthy customers and enable providers to offer lower prices. Along the same lines, the Entrepreneurial Finance Lab (EFL) employs psychometric and non-traditional applicant data to create a credit score — gauging ethics, honesty, intelligence, attitudes, and beliefs — which help measure risk and potential among loan seekers. In India, CreditMantri helps underbanked, credit negative, or new-to-credit consumers improve their financial health through a web platform and call center that helps consumers access their credit reports, understand their credit scores, improve their creditworthiness, restructure outstanding debt, and access relevant services from financial institutions. At Venture Lab, while we believe that traditional credit bureaus will remain relevant, and rightfully so, we are excited to further harness the potential of next generation data analytics by investing in companies that offer innovative solutions that could complement the current system. If we ignore these players, we risk continuing to ignore the population that needs financial access the most. We are keen to help develop win-win solutions for the “invisible,” the “unscorable,” and the providers who are looking to unlock this next tier of financial services customers. -The Venture Lab Team at Accion

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Financial Inclusion 2020: The Essential Debates

Building a Model Legislation Just a few months ago, the Microfinance CEO Working Group released its latest publication: Client Protection Principles: Model Law and Commentary. The Model Law creates a legal framework for financial client protection based on the Smart Campaign’s Client Protection Principles. The model law is intended to be used as a tool for legislation development, as an assessment vehicle for understanding client protection regulation, and to help craft codes of conduct or guidelines from within the industry. Read the full document here.

"I participated in one of the first reviews of the Model Legal Framework, and I could tell from the discussion we had that this would be a document of the highest quality, of tremendous use for regulators around the world, regardless of their stage in protecting consumers of financial services in their countries." -Mariela Zaldivar, Deputy Superintendent of Market Conduct and Financial Inclusion, Superintendence of Banking, Insurance and Private Pension Funds, Peru

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We need your help assessing progress toward financial inclusion On October 1, the Center for Financial Inclusion will launch the FI2020 Progress Report on the State of Financial Inclusion. This interactive web-based report will track industry progress toward achieving full financial inclusion across the five areas outlined in the Roadmap to Inclusion: financial capability, client protection, technology-enabled business models, credit reporting, and addressing customer need. As a part of this report, we want to share your insights on progress towards full financial inclusion in the markets in which you work. Please click here to share. Your scores will be anonymous and will be included in an aggregate “People’s Score” for each roadmap area on the interactive site. Thank you!

Become a FI2020 Week Partner FI2020 Week will take place during the week of November 2-6, 2015. Each FI2020 Week Partner will host one conversation about the most strategic ways to advance financial inclusion in their own context. This event is designed to be as flexible as possible in both content and format. For instance, one organization is planning an all-day strategic summit with diverse stakeholders, while another is planning a small meeting with close colleagues in the industry. Yet another is hosting an hour-long webinar. This one-pager provides more details on the objectives of the week and how to get involved. We would be glad to answer any questions that you may have on what is involved in becoming an FI2020 week partner and to discuss your options for participation. We want this to fit in with your own goals for your own work, so we hope you will consider how this event can further your own objectives, while at the same time being acknowledged as part of the larger FI2020 umbrella. During FI2020 Week, we will capture highlights from each event through video interviews and notes on key take-aways, which will then inform a video and an e-magazine to be distributed to thousands of global financial inclusion leaders. If you are interested or have any questions on how to get involved, please contact Allyse McGrath at [email protected]

“From a macro level point of view and as governor of a central bank I was used to thinking, 'No country can develop without an efficient financial system.' But now, I look at things differently. I think more about people as opposed to systems. And I can confidently say today, 'No person can develop without having access to financial services.’" - Jean Claude Masangu, Former Governor of the Central Bank of the Democratic Republic of Congo Read this blog post and more on the CFI blog.

Financial Inclusion 2020 is guided by a Steering Committee made up of global leaders in financial inclusion: Citi, CGAP, the Bill & Melinda Gates Foundation, MasterCard Worldwide, MetLife Foundation & Visa. We also wish to thank Credit Suisse as the Founding Partner of the Center for Financial Inclusion.

About FI2020 Financial Inclusion 2020 (FI2020) is a global multi-stakeholder movement to achieve full financial inclusion, using the year 2020 as a focal point for action. Private sector players, regulators, industry developers, technology providers, and other actors have come together to focus on reaching new and underserved markets with a full range of quality services.

About CFI CFI is an action-oriented think tank working toward full global financial inclusion. Financial inclusion is a state in which everyone who can use them has access to a range of quality financial services at affordable prices, with convenience, dignity, and consumer protections, delivered by a range of providers in a stable, competitive market to financially capable clients.

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