Megan Oxman

In a cash-only economy, innovation should empower world’s poorest with financial services: The E-Pay Innovation Award carries a $10,000 prize for the most pioneering startup

Editor’s Note: This post originally appeared in Mobile Payments Today and has been reposted with permission.

Imagine a global economy based entirely on cash. You receive your weekly pay in cash; you pay your rent in cash; you pay your monthly electric and water bills in cash; you apply for a loan and receive the money in cash; and you save cash under the mattress in case of an emergency. It seems almost unimaginable in the United States and Europe, but the fact is, of the 2.6 billion people who live on less than $2 per day, nearly 80 percent do not have access to a bank account.

Despite being disconnected from the banking system, many of the world’s poorest actively use informal financial tools. This means that they use cash, physical assets (e.g., jewelry and livestock), or informal providers (e.g., money lenders and payment couriers) to meet their financial needs — which can include receiving remittances, saving to buy fertilizer, and insuring against illness. Unfortunately, these informal tools are often unreliable, hard to use and expensive. And when large problems arise, such as a major illness in the family, the tools often break down, leaving the households exposed.

One of the great myths of the developing world is that the poor are in a static state of chronic poverty. In reality, many are constantly transitioning into and out of poverty due to cycles of fortune (getting a new job) or misfortune (health shock). The right financial tools can help a poor household capture an opportunity to move out of poverty, or weather a shock without being pushed deeper into poverty.

At the Bill & Melinda Gates Foundation, the Financial Services for the Poor team believes that better, more formal financial tools can substantially lower the cost of shocks to the poor. At present, banking services are prohibitively expensive for the poor to utilize, mainly due to the cost of distributing banking services through traditional channels such as bank branches and ATMs, high run-rates for opening and maintaining an account, and the lack of adjacent revenue pools like earning interest off large balances or providing mortgages. Innovative and sustainable methods are needed to provide affordable financial services to those who earn under $2 per day. One bright spot seems to be in the growing mobile industry. Thus far, we have seen a large drop in costs and increased access when mobile channels are used.

In spite of the success of services like the Kenyan digital payments system M-PESA, which is now utilized by more than 70 percent of poor households, we feel there are many more opportunities to creatively break down the barriers associated with delivering financial services to the poor that are left unexplored for lack of initial funding. For this reason, FSP has partnered with the Electronic Transactions Association (ETA) to launch an industry-wide competition to find the most innovative electronic payments technology with the potential to make a profound impact on the global market, particularly to unbanked or under-banked consumers in the developing world.

There will be two types of awards issued in conjunction with the 2013 ETA Annual Meeting and Expo in New Orleans from April 30 to May 2. First, FSP is supporting complimentary turnkey exhibit space in the Expo’s inaugural Payments Next Zone for up to six startup companies – innovators with great ideas for serving the under-served who may lack the resources to show their products to the world. Second is the E-Pay Innovation Award, a $10,000 prize to be awarded to the most innovative exhibiting startup.

There is huge potential in transferring the innovations of the developed world to help the poor in the developing world, but change requires action from all types of innovators — from entrepreneurs to inventers to financiers. For this reason, FSP is excited about its partnership with ETA and the opportunity to deliver financial services to the world’s poorest with life-changing innovations.

Megan Oxman is a program officer of Innovative Finance within the Financial Services for the Poor (FSP) team at the Bill and Melinda Gates Foundation. Learn more about the E-Pay Innovation Award and Payments Next Zone.

financial inclusion