For any market actor, less information equals more risk. Increased risk operates as a disincentive to entering the market or staying in a market. Without proper incentives, why would a provider take the risk to develop a new product or try to reach a new client segment? And why would a customer use a new product? An increase in relevant information may increase incentives for providers and consumers alike. Donors may have an important role to play in addressing these perceptions of risks with well targeted interventions that address information gaps in a market. But what type of information is relevant? And, how does this information alter incentives?
Photo Credit: Solene Ducretot, 2014 CGAP Photo Contest
Information has a critical role in building inclusive financial systems as it can influence: 1) the incentives for providers to innovate to reach poor consumers, 2) the awareness and knowledge of poor consumers to understand services, make responsible choices and ultimately use them to address their financial needs, and 3) the understanding of all actors on what is working and what is not by providing a critical feedback loop to market actors.
Specifically, donors may help:
- By investing in information solutions that take into account how consumers and providers can use relevant data, creating long-term data solutions that address needs well beyond a donor’s intervention.
- By supporting initiatives that reduce the cost of collection and analysis of relevant data, enabling providers to make important business decisions and de-risking the process of innovation.
- By supporting regulators to collect and disseminate data that has use cases that serve the overall public good, such as serving as a feedback loop to market actors.
But there are other factors that are also important for donors to consider as they explore the types of interventions that address information gaps in a market. For example, a donor may look at the stage of market development: is there existing market activity or is it a nascent market? While existing markets generate their own information, the development of new markets requires the identification, collection and analysis of new data. In nascent markets, poor consumers may be invisible to providers as the treasure trove of existing provider data does not include the segments that have been historically neglected. This presents an opportunity for a donor to shed light on the segments that are not yet served.
Donors may also look at data and information needs for a particular type of product: credit, payments/transfers, savings or insurance. Each product has a different set of risks (operational, financial, reputational, etc.) and in turn data requirements. The type of information that would serve the insurance market differs quite substantially, for example, from the type of information needed for a payment service. To calculate the probability of any insurable event, insurance providers would need to have data available on that event occurring. Without such data, insurance providers would have no way of calculating risks and modeling their products. One of the reasons for the recent focus on weather-index insurance, for example, is precisely because the information needed for this type of product – weather information -- is relatively easier to access than data on catastrophic losses from weather related damages. The risks that a provider associated with offering a payment service to excluded customers are more limited and focus primarily on integrity issues: that is, the risk of fraud, money laundering, etc. Thus, the information needed by payment providers about such potential customers – basically, customer due diligence (CDD) – is more limited. Required CDD information is mandated by regulations and can be collected directly from consumers. While donors can help in both types cases, the role of the donor would differ: in the former, the donor may help to gather the data; in the latter case, donors have helped policymakers and providers to shape a risk-based approach to CDD (in accordance with global standards).
Some donors may look at the data and information barriers using a segment lens. What are the data and information barriers that prevent specific excluded segments, such as women or smallholder farmers, from accessing financial services? While barriers for a particular segment will most certainly expand beyond data and information, often the lack of data and information on the segment is one of the key barriers that may make these consumers invisible to providers. For women consumers, very few providers have sex-disaggregated data and thus they would not even be able to use the power of their existing knowledge on consumers to understand needs and reduce risks associated with that specific segment. GSMA members report that only 23% know the gender composition of their client base. A relatively minimal effort to analyze their internal data by gender would reveal a lot of information on how this segment uses existing services and could help identify potential growth areas. A new initiative by GSMA and its members aims to address this issue by committing to reach the women’s market.
In a digitized world where data is growing exponentially, it is ironic that data and information still remains a key barrier in building inclusive financial markets. It is certainly not the quantity of data that limits development, it is the availability of relevant data and the ability to analyze and understand the meaning of such data.
Understanding what data is relevant and for whom is critical for making inroads for specific markets, products or consumers. This series has tried to untangle some of the important issues for donors exploring data interventions to promote inclusive financial services. Much more can be done by donors and their partners.
Indeed, information is key. Memo to donors: Non-profit FINCCLUDE has a mission with parallels to AFI (Alliance for Financial Inclusion) in terms of facilitating the cross-pollinating of success-knowledge to help advance financial inclusion faster. AFI is focused on 'policy' challenges while FINCCLUDE is focused on operational 'strategic and tactical' challenges.
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