NB Financial Health
How Can Fintech Serve the Poor? A Q&A with CGAP CEO Greta Bull
Fintech innovation is transforming the financial sphere, from the much-hyped Bitcoin to Vodafone’s wildly successful and ever-expanding M-Pesa platform. As governments grapple with how to regulate them, these new tools are changing the way individuals borrow, spend and save – and even helping determine who gets to take part in the global economy.
Few groups know this better than the Consultative Group to Assist the Poor (CGAP), a global partnership of 30+ organizations working together to alleviate poverty through financial inclusion. According to CGAP, 1.7 billion people worldwide have no financial account – and thus face major roadblocks to managing their money, saving for their children’s education or acquiring insurance, among other essential functions.
CGAP CEO Greta Bull is a veteran of the development finance sector, with 18 years of experience working with both financial services providers and policy makers in regions around the world. She’s led the group since 2015, and in that time has witnessed fintech developments – from basic mobile apps to complex AI and machine learning – that she describes as both “breathtaking” and “a bit overwhelming.”
These new innovations in financial services are opening doors to new markets, which is obviously good news for providers. But what will this mean for low-income communities? NextBillion caught up with Bull to follow up on a recent essay in which she offered a strikingly frank assessment of the role – and risks – of fintech in serving the poor. Her views offer an important barometer of an organization and an industry in transition, as the tech revolution continues to reshape financial inclusion.
Katie Beasley: Regarding the fintech sector’s rapid growth, you say in your essay that the poor “remain central to the story but are easy to lose sight of in the excitement around technology and innovation.” In your view, does fintech make a greater positive impact on the lives of poor customers if it has an explicit anti-poverty focus – or can more profit-centric approaches be equally impactful?
Greta Bull: Interesting question. I am not sure it can be said that the most impactful innovations of the last decade – for example, M-Pesa or Alibaba – necessarily incorporated a central anti-poverty focus from the outset. A business model needs to be commercially viable first and foremost – and too great a focus on reaching the poorest may mean the business never manages to get to commercial sustainability or scale. But a strong business case does not necessarily mean that poor people cannot benefit from the service – I think there are fairly clear benefits for the poor in some of these new business models. But they may not be providing services to the lowest income segments or designing their product with the needs of the poor in mind.
On the flip side, the poor are central to the business model of microfinance. Although I remain a fan of microfinance, particularly for its very strong focus on responsibly serving the poor, the sector continues to struggle with scale and a lingering dependence on donor subsidy. We could have a long debate on which of these models is more effective at serving the poor, but I think that debate might not be easy to resolve. They all provide some benefits, and a variety of approaches for different segments is entirely appropriate. The more important consideration to my mind for more commercial business models is to make sure that appropriate consumer protections are incorporated from day one.
KB: You note that influential players are hopping onto the fintech bandwagon, including tech companies like Facebook and Amazon. To what extent do you think they share CGAP’s concern for poor customers’ well-being? And if they don’t share it, how do you see CGAP’s role – or its interactions with these players – evolving?
GB: I don’t think I can speak to the tech giants’ intentions or level of concern for poor customers’ well-being, although the headlines in developed markets certainly suggest that there is room for improvement on issues like data privacy and protection. I think the role for CGAP and others is to shine a light on business practices as they evolve in emerging markets and put pressure on companies to act in responsible ways, preferably embedding financially responsible practices into their products from the start.
KB: You mention in your essay that real impact requires a “solid understanding” of the development context in which a business is operating. With major fintech players from China to Kenya to Silicon Valley looking to expand into different parts of the world, what are the main challenges they face in tailoring their products to new customers with dramatically different socioeconomic and cultural profiles?
GB: What is remarkable about the state of financial inclusion globally is how heterogeneously it has evolved. In some markets, mobile network operators (MNOs) dominate, in others banks and microfinance institutions, and in others, retailers play an important role. In some markets, government have a strong hand, and in others, the private sector takes the lead. The main point here is that every market has its own relatively unique regulatory and competitive environment that needs to be taken into account. The needs of people in those markets are also likely to be different. You can’t just take what has been done in India and transplant it to Ghana. The lessons are good and relevant, but they need to be adapted to local circumstances. From a practical perspective, this simply means that local market conditions need to be well-understood by new entrants and adjustments made along the way. I am writing this from Ethiopia, and I can tell you that the market conditions here are very different from those I have seen elsewhere. Providers will need to deal with a lot of complexity to serve this market effectively.
KB: Which companies today do you believe are good examples of how to successfully replicate both social impact and business success across different regions?
GB: Although they are not perfect, I think the MNOs have done a pretty good job of getting mobile wallets into the hands of a large number of poor customers across Africa, as well as in a number of other low-income markets like Haiti, Pakistan and Myanmar. This is not an easy business model, but they are making it work at scale. I think the big challenge for the emerging platforms is to make sure that more services are run over their infrastructure, and with this, to ensure that those services operate to responsible standards. Responsible digital credit is not just the responsibility of the provider taking the credit risk; meeting a reasonable standard for consumer protection should also be the responsibility of the channel provider, not least because their reputation is involved. There are a number of fintechs that are doing interesting work as well. Business and impact don’t have to be mutually exclusive categories – getting credit in the hands of a merchant through digitizing their cash flows can be just as impactful as a social payment is to a poor household if the merchant is able to expand and create opportunities for others in the community. The study I referenced in the essay about the negative impact on the community of the sudden withdrawal of microcredit in Andhra Pradesh is a good case in point. The entire community suffered when credit disappeared.
KB: What do poor women in particular stand to gain through the expansion of fintech in emerging markets? How can firms benefit by focusing on the inclusion of these women, and what are the main challenges in reaching them?
GB: Women make up more than 50% of the population, so it stands to reason that including them in the economy is good for everyone. Certainly the government-to-person [payments] story has been very favorable to women, but I think new business models also offer interesting opportunities for women. Informal e-commerce and social media-led services in particular seem to have a very female-friendly lens. The challenges are myriad and highly context-specific. CGAP runs a vibrant community of practice and more information on the challenges of financial inclusion for women can be found here.
KB: In sub-Saharan Africa in particular, it seems there’s been policy backlash against some fintech firms, with taxes and regulations causing widespread discontent. Do you think these policies represent a trend that’s likely to grow, or are they isolated incidences that likely won’t survive in the face of public complaints or business lobbying? If this trend grows, how big an obstacle might it present to financial inclusion goals?
GB: The trend towards taxing mobile network operators for money transfers is certainly a concerning one for financial inclusion, particularly if it creates an uneven playing field where, for example, bank transfers are not subject to similar taxation. It could inadvertently end up being a tax on poor people, in the event that operators pass these costs on to their clients. It might also disincentivize the provision of services in harder-to-reach geographies. While I am sympathetic to the need for governments to raise tax revenues, and large mobile network operators are an obvious target, I think it is worth looking carefully at issues of taxation to ensure that they do not create an impediment to financial inclusion.
As I mentioned above, cash management in agent networks is not an easy business case to make work, but the payments functionality it enables is pretty fundamental to the development of the digital economy. I would prefer that we think about creative ways to use tax policy to incentivize digitization and perhaps extend the reach of agent networks to areas that are not commercially viable. South Korea made creative use of tax policy to encourage digital payments in the late 1990s, with very interesting results for both digitization and increasing tax revenue (for more on this, see “Can Tax Incentives for Electronic Payments Reduce the Shadow Economy?” by Sung, Awasthi and Lee, World Bank).
Could agents be incentivized to accept digital payments and the formalization that goes along with it if they received favorable tax treatment, particularly in rural areas? Tax policy is a very complex field, and outside my area of expertise, but I think it is worth examining much more closely how smart tax policies can be used to promote digitization and greater access to formal financial accounts.
KB: Integrated tech platforms seem likely to play a major role in the future of fintech – in your essay you cite successful examples from Asia that include bundling services like ride-hailing, e-commerce and food delivery. It’s clear that platform approaches can thrive with more affluent customers. But what kind of business potential (and potential challenges) do you see down market?
GB: The potential is huge. Although the buyer might be affluent, the seller could be a small business (such as a restaurant) or sole proprietor (like an artisan or a taxi driver), and a more efficient way to reach customers and receive payment from them should be good for business. Once providers begin to operate as open platforms, then smaller fintechs have a way of getting their products to market, and some fintechs will aggregate services for other small businesses. When platforms are open, smaller providers can make use of the connectivity and payments capacity that the large providers bring to the table, much as eBay, Amazon and Google Play help connect small producers to much larger markets in developed countries.
On the challenge side, we still have work to do to integrate different payment systems and open up platforms in emerging markets. CGAP has done a lot of work on helping to promote open platforms, namely through interoperability and Open APIs. But the potential is there. We think this is very important.
KB: Regarding the challenge of cash-in/cash-out for poor customers: Should fintech innovation focus more on finding better ways to transport and distribute cash, or on finding ways to make cash obsolete and bring these customers more fully into the digital economy?
GB: Both. We are not going to flip people from cash to digital overnight – it is a process. But to address the challenges of liquidity management in the agent business, we do need to look for ways to increasingly bring poor customers into the digital economy.
KB: You’ve spoken of your reputation as a blockchain skeptic: What would you need to see, in terms of tech or business model advancements, to buy into the blockchain hype?
GB: It is not necessarily blockchain that I have a problem with; it is the hype. We need to be able to look at new technologies with clear and skeptical eyes and make a decision on whether this technology has applications in our space. At the present time, I don’t see many viable retail use cases for blockchain. That is not to say they won’t come, but we are certainly not there yet. I also don’t think it is the role of the development community to subsidize the leading edge of technology – there are big companies working on this. Let’s let them figure it out. Once they have commercially viable solutions, we can then look for applications in our markets.
Katie Beasley is a communications specialist at NextBillion.
Photo via CGAP on YouTube.
Homepage photo via Wikimedia Commons.