Mark your calendars for Financial Inclusion Week 2022! 

Event

Financial Inclusion Week (FIW) is an annual gathering of the global community working to advance inclusive finance. The four-day virtual event is a forum for exchanging ideas, research, and perspectives from around the world. The Center for Financial Inclusion (CFI) convenes FIW each year and invites partner organizations to showcase work, share ideas on what’s ahead, network with others, and more. The community-driven agenda covers the most pressing topics in our space, helping to inform and advise global efforts to advance inclusive finance. FIW 2022 will be held October 17-20. Registration information will be made available at <a href="https://www.financialinclusionweek.org" target="_blank" rel="noopener noreferrer">financialinclusionweek.org</a> closer to the date.

The theme for 2022 is "Inclusive Growth in a Digital Era." Want to participate in 2022? The call for session proposals is now live! <a href="https://www.financialinclusionweek.org" target="_blank" rel="noopener noreferrer">Learn more about FIW</a> and <a href="https://app.smartsheet.com/b/form/c9a1ca94eb37456f8fae25515dbfe42b" target="_blank" rel="noopener noreferrer">submit your session proposal</a>.

CFI invites sponsors to support FIW. Sponsors help maintain FIW as a free event for our global community and benefit from visibility on their contributions to inclusive finance. If your organization is interested in sponsoring FIW 2022, please reach out to <a href="mailto:center@accion.org">center@accion.org</a>.

In the meantime, check out this <a href="https://financialinclusionweek.org/2021#page-section-61e9c01a780fa32ba37b6cba" target="_blank" rel="noopener noreferrer">playlist</a> of incredible content from Financial Inclusion Week 2021.

Financial Inclusion Week 2022

Upcoming Events

Research Topics

The application deadline has been extended to Aug. 1. 

Inclusive Fintech 50 Application Period is Now Open

Alexandra (Alex) Rizzi

Jayshree Venkatesan

Blog Post

On August 10, the Reserve Bank of India (RBI) released their <a class="Hyperlink SCXW9814176 BCX0" href="https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54187" target="_blank" rel="noreferrer noopener">recommendations on digital lending</a>. This is a significant moment, especially since the Indian government recently withdrew the data protection bill that aimed to protect consumers from the risks of digitalization and data proliferation. The bill, launched in 2019, was designed in light of concerns about data misuse by private players. A new bill is proposed as an alternative. However, while India awaits this, data regulation depends on sectoral regulations. These new recommendations on digital lending will help to regulate the multitude of digital lending apps that have exploded across India, and how they use consumer data.
<h1>Background on India’s Digital Lending Regulations</h1>
In this age of rapid digitalization, innovation opportunities grow as fast as the risks they pose to consumers, making it challenging for regulators to keep abreast of the changes. The RBI Working Group on digital lending reported that the <a class="Hyperlink SCXW115547155 BCX0" href="https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&amp;ID=1189#S24" target="_blank" rel="noreferrer noopener">volume of digital credit has grown twelve-fold</a> between 2017 and 2020. <a class="Hyperlink SCXW115547155 BCX0" href="https://www.cgap.org/blog/evolving-nature-and-scale-consumer-risks-digital-finance#:~:text=These%20risks%20include%20mobile%20app,may%20result%20in%20over%2Dindebtedness." target="_blank" rel="noreferrer noopener">CGAP’s research on risks</a> in digital financial services (DFS) reveals that as of 2021 there are over 60 identified consumer risks, compared to only seven risks identified in 2015; and this list only continues to evolve.
<blockquote class="pullquote--left">India has been at the epicenter of DFS growth, but this growth has been accompanied by growing concerns about consumer risks.</blockquote>
India has been at the epicenter of <a href="https://www.imf.org/external/pubs/ft/fandd/2021/07/india-stack-financial-access-and-digital-inclusion.htm" target="_blank" rel="noopener noreferrer">DFS growth</a>, driven by extensive investments by the government in digital infrastructure, <a href="https://indiastack.org/" target="_blank" rel="noopener noreferrer">India Stack</a> – a comprehensive digital identity, payments and data management system, and investments. The <a href="https://www.investindia.gov.in/sector/bfsi-fintech-financial-services#:~:text=The%20digital%20investment%20market%20is,to%20%2410%20tn%20by%202026." target="_blank" rel="noopener noreferrer">digital investment market</a> in India is projected to be worth $14.3 billion in 2025, growing at a 5-year CAGR of 22.4 percent. This growth in DFS has been accompanied by growing concerns about consumer risks, such as <a href="https://themorningcontext.com/internet/why-does-upi-fail-so-often-for-banks-like-sbi" target="_blank" rel="noopener noreferrer">high failure rates in digital payments</a>, fraud, and poor redressal, among other challenges. Digital lending has been leading the charge on both innovations and rising consumer risks and, in response, the Reserve Bank of India (RBI) <a href="https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&amp;ID=1189#S1" target="_blank" rel="noopener noreferrer">constituted a working group</a> on digital lending in 2021.

This is not the first time the RBI has needed to formulate regulations to protect consumers. The RBI’s past interventions in <a href="https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=20377" target="_blank" rel="noopener noreferrer">microfinance</a> and <a href="https://www.rbi.org.in/Scripts/FS_report.aspx" target="_blank" rel="noopener noreferrer">digital payments</a> have allowed them to balance their conflicting goals of inclusion, consumer protection, stability, and growth-led innovation.

Digitalization and modularization of financial services create new regulatory challenges. Three challenges that stand out in the Indian context are lower entry barriers, India’s complex legal regime, and the absence of guidelines about what consumer data apps can collect.

To allow innovation, entry barriers are low, a concern raised in the<a href="https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&amp;ID=1189" target="_blank" rel="noopener noreferrer"> working group’s report</a> especially as the market matures – a <a href="https://www.tuko.co.ke/378517-digital-lending-fixing-credit-access-barriers-fostering-growth-smes.html#:~:text=Digital%20lending%20is%20uniquely%20positioned%20to%20fix%20credit,poverty%20reduction%20and%20boosting%20national%20wealth%20and%20development." target="_blank" rel="noopener noreferrer">problem that previously has been seen and addressed</a> by regulators in Kenya. In India, this led to the <a href="https://www.centerforfinancialinclusion.org/combating-the-rise-in-fraudulent-fintech-apps">creation of lending apps, several of which were fraudulent and predatory</a>, and were launched during the pandemic when demand was high due to consumers’ loss or drop in income, loss of jobs, and health shocks.

India’s <a href="https://prsindia.org/files/policy/policy_committee_reports/1370600640_FSLRC%20Report%20Summary.pdf" target="_blank" rel="noopener noreferrer">complex and fragmented regulatory and legal regime</a> has been written about extensively in the past, and was acknowledged as a challenge by the RBI Working Group on digital lending in their recent report. In an era of modularization, where efficiency in delivery of digital credit is driven by partnerships with banks and non-bank finance companies, call centers, collection agents, and others, not all entities are directly regulated by RBI. This adds a layer of complexity to India’s already complex legal system that governs lending.

Earlier this month, India’s government <a href="https://themorningcontext.com/internet/india-withdraws-personal-data-protection-bill?type=short" target="_blank" rel="noopener noreferrer">withdrew the data protection bill</a>, which sought to empower citizens with rights related to their data. The removal of this bill now creates challenges for consumers in India, especially women and minority groups who can be targeted and don’t have control over how their data is used. Recent research in India showed that the very act of going online can <a href="https://www.dai.com/fi-cyber-user-trust.pdf" target="_blank" rel="noopener noreferrer">violate societal expectations of women</a>. Besides the obstacle this creates in narrowing the gender gap in India, the lack of laws and guidelines has led digital lending apps to seek <a href="https://www.cgap.org/blog/digital-consumer-credit-india-time-take-closer-look#:~:text=While%20there%20is%20no%20official%20count%20of%20the,least%20157%20apps%20operating%20as%20of%20July%202021." target="_blank" rel="noopener noreferrer">disproportionate permissions</a>, and then use consumer data to <a href="https://www.ft.com/content/16c86479-e88d-4a28-8fa4-cd72bace5104" target="_blank" rel="noopener noreferrer">“debt shame”</a> consumers who delay repayments. The prospect of social censure can be a powerful barrier for women in adopting DFS.
<blockquote class="pullquote--right">Digital environments exacerbate financial services risks that have existed for a long time.</blockquote>
It is worth repeating that digital environments exacerbate financial services risks that have existed for a long time. There are several ways that we see risks evolve in a digital era. Digital lenders in India communicate about prices in different ways, making it harder for consumers to compare and choose. Digital lenders requested processing fees upfront, regardless of whether or not a loan would be disbursed – a scheme profitable for lenders, but detrimental to consumers. Complaint channels in a digital environment are often non-existent or dehumanized, causing many consumers <a href="https://www.cgap.org/blog/analyzing-social-media-spot-digital-consumer-credit-risks-india" target="_blank" rel="noopener noreferrer">to resort to social media</a> to air their complaints. The absence of well-designed complaint channels can be a barrier to consistent use and can contribute to a lack of trust, especially among women. Finally, credit reporting during the pandemic took a backseat due to loan moratoria, and the modularized nature of digital lending meant that fintech lenders would often not report to credit bureaus, weakening existing credit reporting mechanisms even as the digital lending space evolved.
<h1>Positives of the New Recommendations</h1>
Not all digital lending is bad. We know that <a href="https://www.imf.org/-/media/Files/Publications/covid19-special-notes/en-special-series-on-covid-19-digital-financial-services-and-the-pandemic.ashx" target="_blank" rel="noopener noreferrer">timely access to affordable loans can help smooth cash flows, address emergency liquidity requirements, and offer consumers greater choice</a>. Therefore, the RBI’s recommendations based on the working group’s report are an encouraging first step to addressing consumer risks before trust in digital lending is eroded.

The <a href="https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=54187" target="_blank" rel="noopener noreferrer">recommendations for implementation</a> made by the RBI on August 10, include direct execution of loans, mandates to reveal the annualized percentage rate (APR), and a cooling off period that allows consumers to change their minds.

Now with these recommendations in place, regulated entities – institutions that are directly regulated by the RBI – must disburse directly to borrowers’ bank accounts, except in a narrow set of cases of co-lending transactions. This is a positive step that reduces the bargaining power of intermediaries that may be involved and clearly positions that the risk of lending lies with banks and non-banks and not the originators of loans. Therefore, the onus of consumer protection lies with the institution taking on the risk of lending.

The mandate to reveal the APR creates a standard playing field for all lenders and allows consumers to compare rates – a crucial step. Finally, the cooling off period with loans is an excellent move and sets a positive precedent for regulators in other jurisdictions. While this feature is normally associated with insurance products, the extension to loans provides consumers with choice and the ability to change their minds without facing financial losses. However, the operationalization of this recommendation will require consultation with market players, since it does impact lenders’ cash flows.
<blockquote>Even though these guidelines are not a perfect replacement for a comprehensive data protection bill, they do protect against misuse of consumer data gathered through digital lending apps.</blockquote>
While India awaits a new data protection bill and eventually a new law, individual regulators must safeguard consumers’ data privacy interests. Even though these guidelines are not a perfect replacement for a comprehensive data protection bill, they do protect against misuse of consumer data gathered through digital lending apps. They prevent disproportionate permissions from being sought by lending apps, allow access to camera, microphone, and location data as a one-time event during onboarding or checking KYC, and outline standards to be achieved in case of a security breach.
<h1>Gaps That Still Need to Be Filled</h1>
More is needed to establish a common understanding of consumer protection risks and redress mechanisms among all regulated entities and institutions involved in the delivery of loans.

While being transparent about APR is a positive first step, in a market with hundreds of lending apps and several more that launch daily, consumers must be able to compare lenders. This need presents a market opportunity: while price comparison sites exist for insurance products, it is time to have them for digital loans. Ideally, lenders would compete to provide the best terms to borrowers but we likely will need to wait some time for this advancement.

Complaint channels need to be redesigned to be consumer-friendly and regulators need to use <a href="https://www.cgap.org/topics/collections/market-monitoring/tools">appropriate market monitoring tools</a> to analyze and identify early warnings. This also presents an opportunity to test and evaluate consumer complaint mechanisms that exist – an area of emerging research interest for CFI.

And finally, the RBI proposes that underwriting algorithms used by lenders should be subject to audits. The RBI noted that while this recommendation was accepted in principle, it would require further examination prior to implementation. This is an important first step to ensure that high-stakes algorithms aren’t <a href="https://www.centerforfinancialinclusion.org/digital-credit-algorithms-in-india-expanding-access-or-cementing-exclusion">further cementing</a> financial exclusion. At the same time, algorithmic auditing, particularly by regulators of private sector algorithms, is a nascent field and must balance accountability with a company’s proprietary intellectual property. <a href="https://dai-global-digital.com/how-four-awardees-are-paving-the-way-for-a-more-equitable-ai-powered-future.html">Global research on this topic</a> is just beginning and partnerships with regulators would enable practical action.

It Is the Best of Times, and the Worst of Times: India’s New Digital Lending Recommendations

Devina Srivastava

CFI explores how automated decision-making tools for digital credit are playing out for one demographic in India: interstate migrants.

“Essentially all models are wrong, but some are useful,” British statistician George E. P. Box declared. Despite progress made in machine learning and artificial intelligence, digital credit models risk being considered “wrong, but useful” – useful for certain groups such as urban salaried workers, but wrong as they leave behind large segments of the economy whose data trails are too faint or complex for a credit scoring algorithm.  

CFI recently explored how automated decision-making tools for digital credit are playing out for one demographic in India – <a href="https://www.habitat.org/sites/default/files/documents/Leaving-the-City-Behind_Rapid-assessment-with-migrant-workers-Maharashtra.pdf" target="_blank" rel="noopener noreferrer">the more than 54 million</a> interstate migrants – and what this might teach us about the ways data inputs and algorithms intersect with the digital lives of those at the margins.
<h1>Digital Credit in India is Booming, Yet Leaving Behind Large (and Possibly Viable) Segments of the Economy</h1>
The fintech ecosystem has ballooned in India in recent years, with an estimated 2,000 fintech startups and 300 digital lenders, including Buy-Now-Pay-Later (BNPL) players, operating by the end of 2020. Digital lending alone is expected to reach <a href="https://www.reuters.com/article/india-tech-financing-idUSL5N2NK4XL" target="_blank" rel="noopener noreferrer">$1 trillion by 2023</a>. While digital lenders existed prior to the pandemic, they have boomed over the last two years in the rush to conduct business and daily tasks remotely.

Earlier this year, CFI conducted desk research and interviews across the digital finance ecosystem in India and learned that most digital lenders are focused on serving urban, young, and employed consumers. With higher and more predictable income streams, this customer segment creates large volumes of digital data that can be mined to determine creditworthiness. And given the overall size of the Indian market, there is still room to grow before even this segment is saturated. But where does that leave the rest of consumers, including migrants?

While migrants have propelled the growth of vital industries such as <a href="https://cprindia.org/wp-content/uploads/2022/04/Push-the-policy-needle-forward-on-migrant-support.pdf" target="_blank" rel="noopener noreferrer">construction, hospitality, and commercial agriculture</a>, they historically have faced hurdles in accessing formal financial services and government benefits. And now with the increasing reliance on digital data to allocate benefits and make credit decisions, migrants potentially could be further marginalized.
<blockquote class="pullquote--right">A migrant's data trails do not fit the mold built for the urban, young, employed segment digital lenders were designed to serve.</blockquote>
Take the case of Mohan Kumar, an archetypal migrant whose data trails systematically exclude him from financial services. Mohan works in Surat, India in a garment factory, but is originally from a village near Ganjam, Odisha where his family still lives. Recently married, he visits his wife, who now lives with his parents back in Ganjam, for two weeks twice a year. On his last visit home, Mohan and his wife decided to open a stationary store. When seeking advice from friends, Mohan learned about digital loans available through the phone. Although small, these loans helped a few of his peers with fledgling, entrepreneurial ventures. Despite having a steady, full-time job in Surat for the last four years, Mohan is rejected again and again from numerous digital lenders. Simply put, his data trails do not fit the mold built for the urban, young, employed segment they were designed to serve.

Millions of migrants face similar challenges as Mohan. In general, migrants have fainter data trails due to lower levels of digital activity. Many low-income migrants have limited financial and digital capability and do not possess smartphones. And those who do have a smartphone typically only use mobile data when necessary due to the high cost. Additionally, migrants often rely on agents, such as kirana store owners, to assist them with digital transactions, and these transactions may not be directly associated with their identity.

Furthermore, digital lending algorithms do not understand the data trails of migrants very well. Migrants’ mobility causes multiple barriers. Some migrants change phones and phone numbers between their destination and home, which can impede the verification of transactions or authorizing identity via one-time-passwords (OTP), leading to KYC failures. Additionally, a mismatch between the location of the cell tower where a potential borrower applies for a loan and the location where the phone’s SIM is registered could cause the applicant to be rejected. While providers rationalize that the geographic mismatch might imply that a customer would be hard to reliably reach, unfortunately, this can unintentionally screen out viable borrowers who are inherently on the move, such as migrants.
<blockquote class="pullquote--left">Migrants' payment patterns are not well-understood or formalized, organized, or digitized.</blockquote>
When it comes to assessing cashflows to determine repayment capacity, migrants’ digital data trails make it difficult to see the full picture of their economic lives. For example, even if a migrant has established a stable income over multiple years, as is the case with Mohan, often their payment patterns are not well-understood or formalized, organized, or digitized. For example, some contractors provide an advance payment while others pay weekly or monthly, and some cover living expenses for migrants but deduct the costs from their salaries. In addition, migrants’ data trails might show varied consumption patterns in their two locations – for instance, in Surat, Mohan spends his money on accommodations and food, while back in Odisha he spends on household expenses and children’s education. Such variations in earning and spending tend not to fit within lending models’ range of what makes a viable borrower.

Finally, there is the issue of accessibility. Examining the top 30 downloaded digital credit apps in India (15 on the App Store and 15 on the Google Play Store), we found that 28 out of 30 worked only in English, with just 2 offering Hindi. Such limitations favor highly educated segments and inherently exclude vast numbers of potential clients.
<h1>More Effort is Needed to Ensure Digital Credit Does Not Further Exclude Marginalized Groups</h1>
The Reserve Bank of India (RBI) has taken an interest in digital lending and consumer protection issues over the last two years, asking Google to <a href="https://economictimes.indiatimes.com/tech/technology/google-removes-personal-loan-apps-violating-user-safety-policies-from-play-store/articleshow/80267043.cms?from=mdr" target="_blank" rel="noopener noreferrer">remove at least 30 lending apps from the Play store</a> that did not comply with local laws, <a href="https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=52589" target="_blank" rel="noopener noreferrer">convening a working group</a> under the chairmanship of executive director Jayant Kumar Dash, and empowering <a href="https://faceofindia.org/index.html" target="_blank" rel="noopener noreferrer">FACE</a> to become a self-regulatory organization (SRO). The working group focused on a range of consumer protection issues including transparency and disclosure, aggressive sales, consent, and algorithmic design. For instance, one of the group’s recommendations suggests that providers have verifiable audit trails for their algorithms and models should be documented to ensure transparency. While a promising direction, little is understood about what this will look like in practice and how it will balance accountability with the proprietary nature of the models.

Moving forward, digital lenders should find ways to understand and assess the unique activities of groups like migrants through more nuanced models and data inputs that give a more complete picture of a migrant’s economic life. For example, do workers travel back to the same destination each working cycle? How many trips home do they make? How have income patterns shifted within their employment – is it consistent or is it varied?
<blockquote>Digital lenders should find ways to understand and assess the unique activities of groups like migrants through more nuanced models and data inputs that give a more complete picture of a migrant’s economic life.</blockquote>
Providers could draw inspiration from the work of <a href="https://indiamigrationnow.org/" target="_blank" rel="noopener noreferrer">India Migration Now</a> (IMN), which is working to understand the nuances of the data trails of migrants. They are preparing to launch a pilot for a customized, digital lending product for migrants that will leverage both traditional and non-traditional indicators to determine creditworthiness. IMN’s scoring model will leverage data inputs such as frequency of travel, place of origin, destination for migration, frequency of remittance transfer, length of stay at migration location, GPS, and mobile top-up amounts. IMN’s focus on migrants requires commitment, research, time, and resources, which may be less attractive to other digital lenders when there are still potential customers with more robust data trails who are easier to reach.
<h1>What Can Be Done to Maximize the Inclusivity of Algorithms?</h1>
Research: We must do more to understand <a href="https://escholarship.org/content/qt3gt9x28k/qt3gt9x28k.pdf?t=qx7nai" target="_blank" rel="noopener noreferrer">whether specific segments that are already at risk for exclusion</a> are further included or excluded by algorithmic decisions. Researchers could help by leveraging context-specific research about specific segments – for instance, migrants or <a href="https://ncst.nic.in/" target="_blank" rel="noopener noreferrer">scheduled tribes</a> in India – to help data scientists better understand the data trails of these groups and incorporate insights into models.

Guidance and Incentives for Providers: While advancements in auditing and disparate impact testing can measure models' results across a set of sensitive characteristics (e.g. gender, race, religion, ethnic group), providers may not prioritize the inclusivity of their algorithms. In markets like India, for instance, financial service providers continue to focus on growth among customer segments with more “intuitive” data trails and on keeping customer acquisition costs low. In our view, stakeholders such as impact investors and industry associations can engage with providers to provide guidance and/or incentives for inclusive algorithms. CFI <a href="https://dai-global-digital.com/how-four-awardees-are-paving-the-way-for-a-more-equitable-ai-powered-future.html" target="_blank" rel="noopener noreferrer">recently launched a project</a> to help impact investors engage with fintechs on their algorithms during their due diligence processes.

Government Engagement: Because this is a very nascent field, more work is needed to test regulatory approaches and efforts to build the public sector’s capacity for supervision. Government entities, such as the Reserve Bank of India, have begun to think <a href="https://www.centerforfinancialinclusion.org/accountability-for-algorithms-a-balancing-act-for-governments">more strategically about the supervision</a> of high-stakes algorithmic decisions. Ongoing work is needed to understand and advance data protection regulation, national AI strategies, and sector-specific initiatives, such as the RBI working group or Project Veritas in Singapore, to name a few.

Digital Credit Algorithms in India: Expanding Access or Cementing Exclusion?

Lucciana Alvarez Ruiz

Edoardo Totolo

Global Findex 2021: Growth, Stagnation, and (Relative) Decline in Global Financial Inclusion

RFF convenes this week for the first time since 2020, and the rapid pace of change in financial services, and the external world at large, supplies stakeholders with a plethora of issues to discuss regarding emerging risks to consumers.

We Are All in This Together

Ethan Loufield

Prior to the launch of the fourth annual Inclusive Fintech 50 (IF50) competition on June 27, we look at findings from last year’s competition and identify ways to help inclusive fintechs build commercially viable businesses.

There has been a lot of talk in recent years about the promise of fintech to help advance financial inclusion. This has been especially true during the pandemic: acceleration in digital adoption, spurring further growth in the inclusive fintech sector. Much of this growth has taken place in Africa, where fintechs raised <a class="Hyperlink SCXW16100441 BCX0" href="https://thebigdeal.substack.com/" target="_blank" rel="noreferrer noopener">$2.3 billion dollars in 2021, up from $830 million in 2020</a>, helping to catch up with funding levels in South Asia and Latin America.
<blockquote class="pullquote--right">While inclusive fintechs are developing innovative ways to reach new customers, meaningful customer segments remain underserved.</blockquote>
With this growth, there also is more data and insights about fintechs and their customers. Last year, two reports, CFI’s <a class="Hyperlink SCXW14958972 BCX0" href="https://www.centerforfinancialinclusion.org/insights-from-the-2021-if50-applicant-pool" rel="noreferrer noopener">Inclusive Fintech 50: Driving Innovation in an Era of Uncertainty</a> and Catalyst Fund’s <a class="Hyperlink SCXW14958972 BCX0" href="https://bfaglobal.com/catalyst-fund/briter-catalyst-fund-state-of-the-fintech-industry-report/" target="_blank" rel="noreferrer noopener">State of Fintech in Emerging Markets </a>(in collaboration with <a class="Hyperlink SCXW14958972 BCX0" href="https://briterbridges.com/" target="_blank" rel="noreferrer noopener">Briter Bridges</a>), leveraged such data to take stock of the industry’s progress. The reports arrived at similar conclusions: while inclusive fintechs are continuing to develop innovative ways to reach new customers, meaningful customer segments remain underserved and fintech funding remains concentrated.

The truth is that we are still in the early stages of bringing the power of fintech to bear on the challenges that low-income and vulnerable populations face. Advances have certainly been made, but the greatest gains only can be realized through intentional and collective efforts on the fintech frontier. This will help pave the way for strategies to turn these underserved markets into opportunities for growth.
<h1>Outreach to Underserved People</h1>
On the bright side, early-stage fintechs continue to proliferate. Last year, nearly 300 such fintechs applied to <a href="http://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer">Inclusive Fintech 50 (IF50)</a>, an annual competition to showcase early-stage fintechs driving financial inclusion around the world. Expert judges selected 50 winners from this applicant pool based on established criteria of inclusivity, innovation, scale potential, and traction. 

IF50 applicants have shown a continuous drive to innovate, demonstrated by their broad range of product areas, with varied models, partnerships, and customer acquisition strategies. The fintechs also are finding diverse ways to reach underserved people, such as through the provision of in-person digital skills training, use of agents, and product offerings that can be accessed without a smartphone.

Applicants are also designing solutions to address challenges in areas that are fundamental to people’s livelihoods – including climate resilience, health, and support for micro and small enterprises. For example, IF50 2021 winner <a href="https://gotugende.com/" target="_blank" rel="noopener noreferrer">Tugende</a> uses asset finance, technology, and a customer-centric model to help informal sector entrepreneurs in Africa grow their businesses and access value-added services such as medical insurance. Eighty percent of IF50 2021 applicants reported that their solutions helped customers access essential services during the pandemic, such as healthcare, government relief, and clean energy.

&nbsp;

<img class="size-full wp-image-44679 aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/06/Tugende-Snapshot-03-e1655994301976.png" alt="" width="1000" height="599" />

&nbsp;
<h1>Gaps in Inclusivity</h1>
Despite this progress, significant gaps in customer outreach remain. For example, only 23 percent of fintechs in the Catalyst Fund sample reported that women constituted more than 50 percent of their customer base. Moreover, 38 percent of the IF50 2021 applicants do not disaggregate client data by gender.

Catalyst Fund and IF50 both also found that most inclusive fintechs do not focus mainly on low-income people. In the IF50 sample, 41 percent of applicants reported primarily targeting low-income customers. More than 70 percent of startups in the Catalyst Fund sample reported that fewer than 25 percent of their customers live under the poverty line, although poverty rates in the countries where these startups operate are closer to 35-45 percent.

The Catalyst Fund data also showed that as startups grow, they tend to move upmarket. Particularly for early-stage startups looking to raise capital, showing strong acquisition numbers is imperative, and middle- and higher-income customers tend to be <a href="https://medium.com/caribou-digital/what-are-the-limits-of-the-private-sector-in-serving-the-poor-3ee9a9a468fc" target="_blank" rel="noopener noreferrer">easier and cheaper</a> to acquire.
<h1>Concentration in Funding and Geographies</h1>
The pressure to acquire more customers may be driven by the underlying scarcity of funding for early-stage fintechs. Although investment flows have grown dramatically in recent years, funding in emerging markets is concentrated among very few startups. Out of 101 Sub-Saharan African startups in the IF50 2021 sample, five accounted for 65 percent of the funding. In Latin America, five of 36 applicants received 83 percent of funding.

Not only is funding concentrated among a few startups, but those startups are also based in a select few countries. Sixty-four percent of total funding reported by IF50 2021 applicants went to fintechs based in five countries: Colombia, India, Mexico, Singapore, and the United States. In Latin America, four countries (Brazil, Mexico, Uruguay, and Colombia) accounted for over 99 percent of funding in the Catalyst Fund sample. Such geographic concentration particularly excludes countries with lower levels of financial inclusion. Of the 16 countries in the IF50 sample that received over $10 million, only three have financial inclusion levels below 40 percent. Similarly, <a href="https://qz.com/africa/2029505/everything-you-need-to-know-about-fintech-financing-in-africa/?utm_source=email&amp;utm_medium=africa-launch-list&amp;utm_content=017e81c9-90b4-11ec-8d42-724a485ab421" target="_blank" rel="noopener noreferrer">fintech funding in Africa is concentrated in Kenya, Nigeria, and South Africa</a> (87.9 percent), all countries with higher levels of financial inclusion and/or more developed fintech ecosystems.
<blockquote>Not only is funding concentrated among a few startups, but those startups are also based in a select few countries.</blockquote>
Deals are also concentrated in certain types of products: those in payments, digital credit, and neo banks, and those that require a smartphone. In contrast, savings and insurance fintechs receive less funding, as do models that leverage USSD or lower-tech accessibility. IF50 data found that funding to fintechs offering services that require smartphones was about 3.5 times greater than those needing only a basic or feature phone. This may be because lower-tech models cost more to operate and users cannot bear higher-margin pricing.

Investment flows continue to favor men, and along all stages of growth, men founders raise more than women founders. According to 2021 IF50 data, women founders, on average, raised one-third the amount raised by men founders.

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<img class="wp-image-44683 size-full aligncenter" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/06/IF50-blog-post-stacked-graph-1-e1656002022248.png" alt="" width="1000" height="652" />

&nbsp;

Overall, the data demonstrates that the majority of inclusive fintech startups, particularly those servicing more excluded segments, continue to find it difficult to access investment capital.  Being able to prove the business case of untapped markets is difficult, but Okapi Finance, an IF50 2021 winner, aims to demonstrate the potential by focusing on women merchants in Africa’s informal sector.

&nbsp;

<img class="aligncenter wp-image-44681" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2022/06/Okapi-snapshot-01.png" alt="" width="1000" height="599" />

&nbsp;
<h1>Looking Ahead</h1>
While there are opportunities for early-stage fintechs to build commercially viable businesses that are truly inclusive, more effort is needed from the broader ecosystem to ensure that innovative solutions can take hold. Startups are continuing to emerge on the frontier, but they need access to the visibility, resources, expertise, and networks that support their growth into sustainable and impactful companies.

Supporters of digital financial inclusion can help by directing greater attention to innovative startups in overlooked markets. Competitions like IF50 and those organized by <a href="https://www.womensworldbanking.org/fintech-innovation-challenge-2021/" target="_blank" rel="noopener noreferrer">Women’s World Banking</a> and the <a href="https://www.afi-global.org/newsroom/news/applications-open-for-the-2022-afi-inclusive-fintech-showcase/" target="_blank" rel="noopener noreferrer">Alliance for Financial Inclusion</a>, and market insights provided by research organizations like Briter Bridges, also help to raise awareness. Incubators and accelerators, such as <a href="https://bfaglobal.com/catalyst-fund/" target="_blank" rel="noopener noreferrer">Catalyst Fund</a>, can assist in de-risking less proven models and making them more market-ready via grant funding, mentorship, and other venture-building services. And finally, greater investment, particularly in the $250K to $1M range, can help to fuel early-stage ventures pioneering innovative solutions.

The application period for the 2022 <a class="Hyperlink SCXW136892565 BCX0" href="https://www.inclusivefintech50.com/" target="_blank" rel="noreferrer noopener">Inclusive Fintech 50</a> competition will open Monday, June 27, and inclusive fintech startups – especially those at the frontier – are strongly encouraged to apply. The 2022 theme is “Making Digitalization Count.” IF50 is sponsored by Visa, MetLife Foundation, and Jersey Overseas Aid &amp; Comic Relief.

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