Like many others, CGAP began exploring the fintech space a few years ago. There is a lot to be excited about fintech, but as Greta Bull cautioned in her recent essay, “Great Expectations: Fintech and the Poor,” poor people are becoming “easy to lose sight of in the excitement around technology and innovation.” It is becoming increasingly clear to us that we need to better understand how fintech can be deployed to reach the under-served more effectively and create deeper value in their financial lives.
How can we do this? Perhaps due to how investing in innovation works, the hype around fintech centers on the beginning of the fintech journey: when a company pitches a new solution, raises investment and wins prizes based on an idea. We need to give more attention to the later stages of the journey, once a solution has reached customers and its impact can be assessed. Did using satellite data actually expand access to insurance for poor farmers in Kenya? Did a new payments app really increase young people’s use of mobile payments in Tanzania? We don’t always know the answers to these questions. As a result, we often don’t have a sound understanding of fintech’s impact on financial inclusion.
At CGAP, we have spent the past two years working with fintechs around the world to get a better read on the types of innovations that are emerging and whether they, in fact, improve the lives of poor people. We selected 18 firms from a pool of nearly 200 that responded to a call for proposals, after conducting a set of interviews and country visits to better understand their solutions. We selected firms that had a solution but that were early-stage enough that they did not have proof points on whether it worked. We then set up rigorous pilots to test whether their services worked as stated, created value for under-served customers and eased age-old pain points in delivering financial services to the poor. Our goal was not to place bets on the next fintech success. It was to identify early-stage areas of innovation and test over time whether they addressed specific pain points experienced by low-income customers.
As described in our new report, “Fintechs and Financial Inclusion: Looking Past the Hype and Exploring Their Potential,” we found several innovation areas where we think fintechs are bringing relevant solutions. One of them, for example, is what we call “connections-based finance.” A common pain point among low-income customers is that they are often deemed uncreditworthy because they lack formal credit and payment transaction histories. Several years of financial diaries research has shown that poor people often have complex financial lives that involve financial relationships with others in their communities, professions and families. Some of the fintechs we worked with are trying to address this challenge by creating or leveraging these relationships, using digital connections between people to build creditworthiness and offer small amounts of credit that can fill cash-flow gaps, such as through person-to-person loans and digitized savings groups.
Patasente, an online merchant platform in Uganda, is a good example of this type of innovation. Microbusinesses in Uganda must often wait 30 to 90 days to receive payments for deliveries, which creates cash-flow problems for them. Patasente takes an industry like dairy farming and brings the entire supply chain of buyers and supplier online. It digitizes orders, payments and invoices to improve creditworthiness for the last-mile supplier. This enables small businesses to obtain financing against approved purchase orders or invoices. It also allows investors to earn good returns by guaranteeing or lending to small, growing companies. CGAP found that low-income borrowers were eager to engage in Patasente and that repayment rates were high. Though it was clear that the platform’s ability to scale would depend on attracting more individual lenders through better loan pricing or by partnering with banks to offer loans on their behalf, Patasente appealed to low-income borrowers because it solves a significant challenge in their lives.
Another innovation area we explore in the paper is smartphone-based payment apps. As smartphone penetration grows, poor customers in many countries have access to several payments’ apps, but their phones' limited data plans and storage capabilities discourage them from engaging. Some fintechs are designing a new class of smartphone payment apps that take these constraints into account.
NALA is an app that acts as an interface on top of Tanzania’s mobile money payment systems and allows users to transact faster. It does not require any data connectivity and takes up very little storage (and is even designed to work on USSD). In our pilot, we found that NALA especially appealed to low-income millennials who had recently acquired smartphones and had limited access to financial services. When these customers used simple payment features, such as budgeting tools, transaction histories and other features not generally available on USSD menus, they slowly increased their wallet balances and transactions. The app proved particularly useful for people who were undertaking complex transactions. For bill payments, the app clearly lists a customer’s services and accounts to minimize the chances he or she will enter the wrong bill pay or account number.
Just like connections-based finance innovations, smartphone-based payment apps face challenges. To scale, they must appeal to a diverse customer base — not just under-served customers. To run successfully, they must be able to forge connections with payment providers, whether through APIs or other means. However, these solutions addressed real and specific needs of poor customers.
Our latest paper identifies several more innovation areas. Going forward, CGAP will be digging deeper into business models and innovation areas identified in this paper and beyond, particularly as fintechs scale beyond the early stages. Our pilots to date have focused mostly on payment and credit solutions, but as fintech progresses, we will also track models in savings, insurance and financial planning that address important customer pain points. Ultimately, our hope is to create evidence for promising models and, more broadly, to offer guidance on how funders and investors can assess whether their fintech investments are centered on the poor.
Of course, investing in fintech innovation involves risk. As is the nature of start-up innovation, not all the pilots CGAP has done to date have been successful. Yet errors or failures can yield important lessons for future strategies. In a follow-up blog, we will share some of the lessons we have learned so far.
Very valuable insights — great research. Thanks a lot for the very informative paper on Fintech startups and inclusion. One way of looking at technology innovations in finance I suppose is (I) fintech generally serves/impacts a set of objectives, not necessarily inclusion, (II) fintech can be applied by startups, tech companies (platforms, service providers, etc), financial institutions (and neobanks), (III) fintech can support the delivery of financial services (retail and businesses), back-end or business process optimization, and regulatory compliance. The paper mentions the first and second aspects. As CGAP will further support the development community by facilitating a common understanding of emerging business models in fintech that have the potential to advance financial inclusion, it could be worth to adopt a broader taxonomy on the 3rd aspect and include in future analyses of fintech for inclusion further use cases or applications such as for digital identity verification, collaborative customer due diligence / eKYC, alternative credit scoring solutions, marketplaces/platforms, automated complaint resolution, etc. A complex undertaking but perhaps one worth pursuing. Thank you again very much for this great paper.
It's nice to see NALA Money recognized here. This is what fintech for good really looks like.