We recently spoke with Nikhil Gehani, Director of Communications at MIX, a global data resource for socially responsible investors and businesses, about inclusive finance and what it means for low-income countries. This is an excerpt of that interview.
Why is MIX focused on inclusive finance? How has the inclusive finance landscape changed over the last five, 10, and 15 years? And how has MIX changed alongside it?
“There is robust evidence that inclusive finance is a key enabler for achieving many of the Sustainable Development Goals. For example, financial services make it possible for low-income households and businesses to access off-grid electricity, invest in education, and expand economic opportunities. For inclusive finance to grow and benefit more of these population segments, the industry needs information on the providers of financial services as well as the funding flows to the sector.
“MIX was founded in 2002 to create transparency through information, specifically in the microfinance industry. Over the intervening years, however, much has changed. New areas have emerged, including fintech, which present a promising opportunity for technology and innovation to bridge the remaining gaps between formal financial services and the 3 billion financially underserved people globally. Yet a familiar problem has emerged around the lack of visibility into the capital flowing to these new areas. Similar to microfinance in the early 2000s, the new frontier of inclusive finance requires greater transparency in order to ensure healthy market growth that benefits the poor.
“MIX serves the industry as a global data resource for socially responsible investors and businesses focused on inclusive finance. Through catalytic data initiatives in fintech, digital finance, and agricultural finance, we work to bridge the information gap between investors, donors, and financial service providers. Technology is enabling innovations in business models, product design, and distribution channels—data can help us understand how best to harness these advancements to create positive impact for the financially underserved.”
In January, MIX published a report on standards for inclusive fintech. What are some of the important takeaways from that report?
“If you zoom out, the Results of the Fintech Benchmarks Proof-of-Concept demonstrates the value of collecting standardized data. It shares findings from our effort to test and validate the Data Standards for Inclusive Fintech, which were developed in consultation with industry actors. With standardized data, we can strengthen our understanding of the challenges, opportunities, and performance of financial service providers focused on underserved populations. Not only did this report serve as a test for the data standards, it also yielded some interesting findings that we plan to validate with a larger pool of respondents later this year.
“One finding in particular is important to underscore for the broader ecosystem: national identification is the most common end-user requirement reported by fintechs. This might be unsurprising, yet we know that this is a particularly challenging barrier to inclusion since an estimated 1 billion people worldwide do not have government-issued identification. This signals an important opportunity for innovators, investors, and policy makers to come together to support national-level efforts to address the identification gap.
National ID is the main end-user requirement that is likely to present a barrier to the financially underserved.
“Another interesting finding is on the operational side and informative for fintechs themselves: Firms that use third-party agent networks demonstrate lower costs than those managing their own agent network. We know that agents are critically important to expanding financial inclusion, even for digital financial services that depend on the ability to convert cash into e-money and vice versa. This finding makes clear the importance of partnerships in providing appropriate financial services to new and underserved customers.”
In addition, the report focuses on benchmarking fintechs. Why is this important and what challenges did you face in doing so given the diversity of fintech businesses and business models?
“In developing these benchmarks, and over the course of much of our market research, we heard consistently from investors and funders that one of their primary challenges is not being able to compare the performance of fintechs. Whether it be across geographies, product categories, or distribution models, investors need to be able to compare performance to better assess opportunities and to benchmark their portfolio.
“The diversity across the fintech landscape presents a challenge to creating reliable benchmarks. Ultimately, it is necessary for fintechs, investors, and other ecosystem actors to coalesce around the use of a common set of data points and definitions to bring clarity to a crowded marketplace of ideas and solutions for inclusive finance. Our team is currently prototyping a new data solution, RELAY, that will enable us to collect data from a wider set of fintechs to create robust benchmarks for the industry while generating visibility for these firms.”
In your analysis, what data points rose to the top as most important when analyzing the fintechs in terms of profitability? What about in terms of inclusivity?
“When it comes to profitability, timing is important. Early-stage companies need to understand how costs and revenues will change over time to make informed decisions about when to raise funds and how much they should raise at any given stage. We found from the data that, on average, cost per customer drops between one and four years, which means that firms can decrease their operating costs after initial startup activities. Yet, revenue per customer doesn’t start to increase until after four years. This provides insight into when a firm should look for outside sources of capital to ensure they can reach that inflection point of profitability.
“To better understand the link between fintech and inclusivity, we need to understand how fintech products create a business solution to a market failure. We borrowed from Catalyst Fund’s Triple A Framework as well as our experience implementing the Inclusive Fintech 50 initiative to build the *Inclusivity Framework *that is included in the report. When we asked respondents to identify the business solution that most closely described their core value proposition, we learned that they are focused on delivering accessible, affordable, and appropriate solutions at similar rates. They are accomplishing each in several different ways including improving physical distribution, providing flexible payment structures, or adapting to users’ comfort level by designing with cultural considerations in mind. Interestingly, although fintechs rely on technological innovation, they must balance ‘tech and touch’ to provide solutions that resonate with people new to formal financial services.”
Can you tell us a little more about some of the findings that emerged around gender?
“We are cautiously optimistic about the potential for fintech to reduce the persistent gender gap in financial services. Unfortunately, the data collected from this cohort shows a customer base that is only 36 percent female, much lower than the percentage of female borrowers reported by microfinance intuitions globally. While this could simply be a result of the small sample size used for this proof-of-concept, it highlights an opportunity for both social and commercial impact: Not only are women often best placed to make financial decisions that affect the entire household, they are also an untapped market for fintechs developing innovative solutions. Still, there are examples of fintechs actively addressing the gender gap including Dinarak, part of the 2019 Inclusive Fintech 50 cohort, that built a network of female mobile money agents in Jordan to increase the comfort level of female users.”
How do you think the fintech landscape has been affected by COVID-19 pandemic? For instance, do you think the crisis creates an opportunity for some of the fintechs surveyed or do you think it has created more challenges?
“We recently spoke with 25 early-stage fintechs and investors in our network to understand how they have been affected by, and are adapting to, COVID-19. While their experience varies based on geography, product type, and funding stage, there were four common responses we heard across the board. First, these startups are focused on helping their customers, who are often vulnerable populations including low-income households and small firms. They are cancelling late fees, removing transaction fees, and even providing free services in some instances. Second, fintechs are refocusing on their core business. Nonessential projects and new product development have been put on hold while they use this time to raise capital, refine flagship products, and adjust their strategies. Third, these companies are reconfiguring internal operations. This may come as no surprise as many of us are working remotely (and perhaps with a child on our lap). Some of the fintechs we spoke with said it feels like they are building an entirely new organization. Finally, these startups are looking to build connections with investors so they will be well-positioned to secure capital later this year. Most of the investors we spoke with are focused on their existing portfolios but plan to start rebuilding their pipelines in the fall. So, fintechs are working hard to reduce burn and extend their runway in order to emerge on the ‘other side’ of this pandemic.”
Where do you think fintech is going next?
“The fintech space is evolving rapidly, even with the current slowdown, and the adoption of fintech solutions will only continue to grow. But it is incumbent on the entire ecosystem—from fintechs and investors to donors and regulators—to ensure these new financial products and services lead to positive outcomes for low- and middle-income populations. We must be thoughtful in product design and delivery to not exacerbate the digital divide or gender gap. We must also understand where capital is flowing and where it is not to ensure it reaches the geographies where it is needed most. And we must monitor the uptake and usage of financial services to limit any negative impacts like over-indebtedness. We believe that better data and information can help to ensure that fintech is a force for good.”