A Frog in the Well – Risk in the Age of Digital Financial Services

“We think too small, like the frog at the bottom of the well. He thinks the sky is only as big as the top of the well. If he surfaced, he would have an entirely different view’” - Mao Tse-Tung

Too often, financial inclusion providers don’t think about risk until it is too late. The ability to identify, understand, and develop strategies to mitigate risk are key to ensuring the sustainable growth of the market.

Since 2008, the Center for Financial Inclusion has partnered with the Center for the Study of Financial Innovation (CSFI) and Citi Foundation to carry out Finance for All, a survey to identify and assess the risks associated with providing financial services to the financially excluded – people who lack or have limited access to banking, savings, or insurance products. Advances in technology have created new opportunities to reach the financially underserved and have brought new players into the market, but large scale change has also created new sources of risk, which are often poorly identified and understood. Finance for All, formerly known as Microfinance Banana Skins, is the first research effort of its kind to identify key sources of risk, and in doing so, provide perspective on the security and regulation of markets, their vulnerability to political manipulation, and the robustness of business models to meet the challenges posed by these risks.

If you are a financial inclusion provider, observer, or investor, we welcome your participation in the 2018 Banana Skins survey. You can access it and respond here.

Recognizing seismic changes in the market over the last several years, this year’s Finance for All survey solicits input from a wide range of stakeholders in the financial inclusion industry. What were once termed the “financially excluded” are now considered “emerging customers,” a sign of the market opportunity as well as the need to adapt products to better serve this customer group.

A recent partnership between AXA, a mainstream insurance provider, and MicroEnsure, a microinsurance provider serving the base of the pyramid, speaks to the scale of the opportunity in this market. The estimated market size for microinsurance is 3-4 billion and less than 10 percent of the emerging customer populations are insured (3 percent in certain regions in Africa). Through partnering with MicroEnsure, which has already made significant inroads in addressing the needs of emerging customers, AXA has been able to provide services to 10 million previously unserved or underserved customers through its global initiative.

Key to the growth of initiatives such as the partnership between MicroEnsure and AXA is an understanding of the risks and barriers inherent in serving these markets. For example, limited and irregular income was once a barrier preventing many companies from serving emerging markets. As the success of companies such as AXA show, however, serving this market can be quite lucrative when the risks in doing so are properly understood and addressed.

The 2016 Banana Skins survey provided a strong benchmark for perspectives on risk across a wide range of stakeholders. Across all stakeholder groups, the top four risks included strategy, risk management, change management, and technology. The notable increase in the ranking of technology from 15th to 4th place between 2014 and 2016, the largest change in ranking of any risk, indicates that the failure of service providers to capitalize on new developments in infrastructure technology is a challenge that many in the industry are facing head on. As these risks become more pressing and, in the case that they are not adequately addressed, harmful to providers, the risk landscape will shift even more dramatically.

The survey this year is transformative and the views of new actors in this space should offer great insights. While risk is not a new concept to technology-driven service providers, the implications are often not fully considered in conversations about strategy. Through gaining a more complete understanding of different types of risk, the market will be better prepared for sustainable and safe growth for all.

To participate in the 2018 “Banana Skins” survey, click here.

Have you read?

Strategy Is the Biggest Concern for Financial Inclusion Providers in 2016

2014 Banana Skins Report Reveals Overindebtedness as Biggest Concern in Microfinance Industry

Banana Skins 2012: Improving MFI Governance



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