Not long after I joined CGAP in late 2015, I began to wonder when the global development community might hit “peak financial inclusion,” the point at which everyone would realize that, despite all the enthusiasm for universal financial access, signing people up for accounts was not going to miraculously solve poverty. We had reached other “peaks” before, first with microfinance and again with mobile financial services. Always, the reality of a promising solution was more complicated when we got into the heart of the matter, and collective disappointment followed. While the goal of universal financial access by 2020 was an important rallying cry that enabled us collectively to make impressive progress — with the World Bank’s Findex survey highlighting that 1.2 billion people were newly included in the formal financial system between 2011 and 2017 — we have long been aware that access to an account alone is not what really matters. The question left hanging was, “Okay, people have access to an account — now what?”
Like peak oil, peak financial inclusion always seems to be on the horizon, never quite arriving. It might be because, in both cases, we are essentially focused on the wrong thing. The point is not the oil, or the account, for that matter. It is what you can do with it. With oil (or its equivalents), we can power a car or generate electricity. If we can find something else that can reliably do this for us, like solar power or wind, then peak oil doesn’t really matter anymore. We can get where we want to go by different means. The same holds true for a financial account. We shouldn’t care about the account in and of itself. After all, a financial service on its own doesn’t really have much to do with poverty alleviation. It is what we can do with that account that matters. But if our overall objective is getting accounts into the hands of poor people, as it has been for most of the last 10 years, we are making an implicit assumption that there is a clear development purpose in simply having that account. Is that the correct assumption to make? If signing people up for accounts is the end goal, then our attention is immediately focused on the machinery of delivering those accounts. What regulatory changes are needed to encourage account ownership? What business models? How do we drive scale so that the cost to serve is reduced enough to make those services available to all? The machinery is important. It is clear that regulatory innovation, new distribution models, connectivity and data are fundamentally changing the way financial services are delivered. But are they delivering changes in the lives of the poor? The story here is less clear, as our impact and evidence work has illustrated.
At CGAP, we have spent the better part of the last two years thinking about how to frame our work differently. What if we change the equation fundamentally by starting with a different question: what matters to poor people? And how can financial services help them to improve their lives? By asking the question this way, we start with the impact we want to see and work backwards to figure out, first, if and only then how financial services can provide an answer. We started by asking what poor people need: in other words, what does it mean for poor people to seize opportunities and build resilience? And how do we connect that with our work on innovation in financial services delivery?
Like everyone else, poor people want to improve their lives. They want economic opportunity and to be able to take advantage of it. They want some level of economic security. And they need mechanisms to protect themselves when things go wrong. Financial services do not offer solutions for all of the problems facing poor people, but they can provide answers for some of them. To narrow to a set of topics that would help focus our work, we chose three broad buckets of objectives where we thought financial services could play a meaningful role:
- Income Generation. People need reliable and predictable sources of income. This may come from a formal job, a family business, day labor, social commerce, gig work or a government payment.
- Essential Services. People need services that help them use their time well, improve their capabilities or ensure their physical well-being, like access to electricity, clean water, sanitation, education and health care on affordable and predictable terms. Increasingly, access to digital connectivity also falls into this category of essential services.
- Protection and Safeguards. We are all subject to emergencies and shocks, but poor people are more vulnerable than most, so we need to think broadly and flexibly about the kinds of solutions required. They could relate to creating income floors through social transfers, emergency or health crisis mitigation, managing the effects of climate change or conflict, or even protection from financial services providers themselves, by promoting different consumer protection strategies.
By orienting our work around these three objectives, we can ask ourselves tough questions about how digital innovation will help poor people to generate income, access essential services or protect their basic standard of living. That really cool cryptocurrency innovation? How will it deliver on one of those three objectives? An arcane regulatory question? Ditto. A sexy new tech-driven business model? The same. It may be important for the development of the financial sector writ large, but will it help the poor? If we can’t make a clear case, then we shouldn’t be doing it, no matter how interesting or exciting it might be from an innovation perspective.
We recognize that other topics might have been included here, but after some debate, these three areas seemed to us to be the most essential and to be places where there is some evidence that financial services can make a difference. They map well against the opportunities and resilience framework at the highest level of our theory of change, and they also map to a number of the United Nations’ Sustainable Development Goals (SDGs), which are increasingly the organizing principle for the donor community. Under Income Generation, we can contribute to tackling SDG 8 (Decent Work and Economic Growth). Under Essential Services, we can potentially touch on SDG 3 (Good Health and Well-Being), SDG 4 (Quality Education), SDG 6 (Clean Water and Sanitation) and SDG 7 (Affordable Clean Energy). Under Protection and Safeguards, we can potentially focus on SDG 1 (No Poverty) and SDG 2 (Zero Hunger). And, of course, SDG 5 (Gender Equality) should be embedded in everything we do.
Public policy, business models, enabling infrastructure and customer value are still important drivers of inclusive finance and are the bedrock of our work. What we are trying to do now is think harder about how the interplay between these four areas can deliver services that are relevant to poor people. CGAP started its life firmly planted in the income generation space — microcredit was all about helping people support their families and grow their income — and, in many ways, this new thinking takes us back to our roots. What is different now is that we have a more nuanced understanding of the ways in which financial services do and do not make a difference in the lives of the poor, as well as of some of the risks associated with financial inclusion. By turning our attention back to old problems, we think we can move the ball forward in a meaningful way while remaining firmly grounded in all we have learned in the last 25 years. We think this also amounts to putting financial services back in their appropriate place with respect to poverty alleviation — as supporting, rather than starring, actors.
In closing, while it is perhaps incorrect to say that we have passed peak financial inclusion, it is fair to say that something fundamental has shifted. Financial inclusion feels like it has been coopted as a term by slick fintechs seeking to attract digitally native millennials or the emerging global middle class with a more appealing choice of services, rather than trying to reach the poor. Many in the financial inclusion community have begun to look beyond accounts, to understand what the poor need and how financial services can contribute to those needs. That is the reason that access to an account is not one of the SDGs.At CGAP, the three objectives we have identified provide a powerful new constellation of guiding stars to help us better deploy the innovation that has emerged in recent years to solve important and persistent development challenges. We look forward to working with our many partners around the world to make sure that financial services are put to work on behalf of the poorest and most vulnerable.