Allyse is a former research specialist at CFI.
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Allyse McGrath

Sonja Kelly

More Mainstreaming Financial Inclusion Reports

Financial institutions are leveraging innovation, new technology, social networks, and other tools that inform and engage customers. In doing so, banks are driving greater use of products and increasing consumer confidence.

Report

Banking Sector Approaches to Customer Engagement and Capability explores how financial institutions are leveraging innovation, new technology, social networks, and other tools that inform and engage customers. This brief builds on the belief that good product design builds the financial capability of customers. The research captures a number of successful models, including:
<ul>
 	<li>RBL offering unsecured loans that allow customers to build up a credit score for the first time in India</li>
 	<li>Standard Bank leveraging existing informal group savings culture combined with a lottery to incentivize and reward savings activity in South Africa,</li>
 	<li>A small cooperative bank “rounding up” loan repayments to create an auto-saving mechanism among credit recipients in Mexico.</li>
</ul>
This brief is part of the Mainstreaming Financial Inclusion: Best Practices initiative which aims to facilitate learning and action on how mainstream financial institutions around the world can reach underserved populations with quality financial services. The project is completed in partnership with the Institute of International Finance (IIF), with support from MetLife Foundation.

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Banking Sector Approaches to Customer Engagement and Capability

Jeffrey Riecke

A look at why #FinHealthMatters in the region

Blog Post

This year on Financial Health Matters Day, we at the Center for Financial Inclusion at Accion are taking a look at the new <a href="http://globalfindex.worldbank.org/">Global Findex data</a> and what it says about the financial health of respondents around the world. Because of our recent work on financial health in Eastern Europe and Central Asia, we decided to take a closer look at the Findex numbers from the region.

The 2017 Global Findex shows a substantial increase in account ownership between 2014 and 2017, from 62 percent to 69 percent of adults. However, one indicator that has decreased across this same period is the Findex’s proxy for financial health – the resilience question. This metric measures a person’s ability to come up with emergency funds in the amount of 1/20 GNI per capita in the next month (for reference, this is a little less than $3,000 in the U.S. context, and a little less than 700 dinar in Serbia). Isolating Eastern Europe and Central Asia, the percentage of people who said they could come up with this amount actually decreased slightly from 64 percent in 2014 to 61 percent in 2017.

This data echoes some of the findings presented in the new brief from CFI and the Microfinance Centre (MFC) in Warsaw, <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/986-toward-a-financial-health-tool-for-consumers">Toward a Financial Health Tool for Customers – Test Results from Eastern Europe and Central Asia</a>. As its title suggests, the brief shares findings from a financial health quiz that was tested in late 2017 among the clients and staff of organizations partnering with MFC on its Borrow Wisely Campaign. CFI and MFC are working together to build a smartphone-based tool to assist customers with gauging and improving their financial health, starting with the financial health quiz.

The quiz measured financial health across three categories – day-to-day management, resilience, and longer-term planning. Overall, customers scored highest on questions related to their day-to-day management of finances and lowest in questions related to their financial resilience. Our quiz also asked the same resilience question as the Findex. Respondents scored an average of 63 points out of 100, quite in line with Findex results.

Our test of the financial health quiz in the region revealed that people want help with many facets of their financial lives, from short term money management to longer term planning. As noted in our brief, “They also want to know how to plan in unstable economic conditions; they want a blueprint for steps to take when a financial crisis hits; and they want help setting and sticking to spending limits and reducing or consolidating debts. Several people wanted to know how to talk with their families and involve their children in good financial behavior.”

Despite the desire for better habits that respondents expressed during our financial health testing, the Findex shows savings rates in the region are lower than global averages, with 14 percent of adults saving at a financial institution, compared to 27 percent globally and 37 percent saving in any form, compared to 48 percent globally.

Most of the Global Findex is focused on account access, and the resilience question is not a headline in the narrative released by the World Bank. But all of those working in financial inclusion need to think about how to ensure that financial services are making a meaningful difference in the financial health of customers.

CFI and the Microfinance Centre will continue to use insights like those encapsulated in the brief and the Findex to explore how digital channels may be used to help improve customers’ financial health. We look forward to sharing more lessons learned in our finhealth app <a href="http://www.centerforfinancialinclusion.org/programs-a-projects/financial-capability#BldgFinCapProject">project</a> along the way.

<a href="https://cfsinnovation.org/news/finhealth-matters-day-2/">Financial Health Matters Day</a> (#FinHealthMatters) is an initiative of the Center for Financial Services Innovation (CFSI). This year CFSI is directing particular attention to student financial health. CFSI finds that although 57 percent of Americans struggle with their overall financial health, 75 percent of students aren’t sure if they’d be able to come up with $1,000 in the next month. Learn more and explore ways to get involved in Financial Health Matters Day <a href="https://cfsinnovation.org/news/finhealth-matters-day-2/">here</a>.

Image credit: <a href="https://www.flickr.com/photos/worldbank/4248402729/in/album-72157631291110788/">Brigitte Brefort / The World Bank</a>

Have you read?

<a href="https://cfi-blog.org/2017/06/01/seeking-happiness-and-financial-health-in-bhutan/">Seeking Happiness and Financial Health in Bhutan</a>

<a href="https://cfi-blog.org/2017/03/29/dollar-by-dollar-or-goat-by-goat-how-financial-health-translates-across-oceans/">Dollar by Dollar or Goat by Goat: How Financial Health Translates Across Oceans</a>

<a href="https://cfi-blog.org/2015/06/09/considerations-for-the-pursuit-of-financial-inclusion/">Considerations for the Pursuit of Financial Inclusion – Beyond Account Access</a>

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Findex and Financial Health in Eastern Europe and Central Asia

The U.S. bail bonds system raises serious consumer protection concerns

&gt; Posted by Allyse McGrath, Specialist, CFI

<a href="https://www.flickr.com/photos/85853333@N00/2867482167/"><img class="alignright wp-image-25001" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/02/2867482167_748844b364_z.jpg" alt="" width="330" height="219" /></a>In a criminal justice system that accepts cash in exchange for temporary freedom, a predatory financial service has taken root and become yet another barrier. In the United States, bail bondsman and global insurance companies are <a href="https://www.aclu.org/report/selling-our-freedom-how-insurance-corporations-have-taken-over-our-bail-system">netting</a> between $1.4 billion and $2.4 billion annually from vulnerable people who are unable to pay the bail they need to remain out of custody before they are tried. This is not a new problem. It’s been going on since the early days of the modern U.S. criminal justice system.

Those accused of crimes are given an option to stay in jail or put up an amount of money (bail) for their release prior to trial. (It is important to note that people at this stage are presumed innocent under law.) The bail acts as a commitment device for people to show up to their court hearing. The bail amount is returned if the defendant shows up. If they do not, the court keeps it. Bail amounts vary greatly based on the severity of the crime in question as well as the potential flight risk of the accused party. The average bail amount for a felony arrest is about <a href="https://www.theatlantic.com/business/archive/2017/05/bail-bonds/526542/">$10,000</a>, roughly two months’ worth of the median annual income in the United States. In a study of nearly 30,000 cases where bail was set in New York City, only <a href="https://priceonomics.com/americas-peculiar-bail-system/">37 percent</a> of defendants could afford to pay bail.

Bail bondsmen provide a bond for people who are unable to pay the amount required but want to get out of jail prior to their court date. The bondsman pays the bail in exchange for a non-refundable payment of <a href="https://www.aclu.org/report/selling-our-freedom-how-insurance-corporations-have-taken-over-our-bail-system">10 percent</a> of the full bail amount from the defendant. Once the defendant shows up in court, the bail bondsman receives the full payment back from the court, but the defendant is still on the hook for the non-refundable payment as well as any additional fees the bondsman has charged for services.

The United States has the <a href="https://priceonomics.com/americas-peculiar-bail-system/">highest incarceration rate</a> in the world. In terms of pre-trial jailing, the country holds roughly 500,000 defendants in jail, which equates to about 153 pre-trial inmates for every 100,000 people in the population. This rate is substantially higher than that of other countries with populations above 10 million people. Canada and France, for example, each hold less than 50 people per 100,000 individuals in their respective countries.

Lurking behind these transactions is a system of risk sharing which places the burden on clients, through murky contracts and problematic client practices.

A 2017 <a href="https://www.aclu.org/report/selling-our-freedom-how-insurance-corporations-have-taken-over-our-bail-system">report</a> from the American Civil Liberties Union (ACLU) and Color of Change, a nonprofit civil rights advocacy organization, finds that the bail bonds business depends on large global insurance companies who provide the bondsmen with insurance cover against the risk that the defendant will not show up.

In order to limit their risks, bail bondsmen and the insurance companies backing them often lock people seeking bail and their families into <a href="https://www.theatlantic.com/politics/archive/2015/07/does-the-bounty-hunting-industry-need-reform/399224/">invasive contracts</a>. Often the contracts stipulate that those who receive bail bonds can be subject to invasive surveillance, such as searches without warrant and vehicle tracking. Additionally, defendants are regularly required to put up personal property such as vehicles or houses as collateral. In cases where the value of this property decreases, bail agents are permitted to re-arrest. Often bail agents hire bounty hunters, private contractors with <a href="https://www.forbes.com/sites/instituteforjustice/2016/09/09/its-easier-to-become-a-bounty-hunter-than-a-barber-in-idaho/#35f7c1716a8c">little to no training</a>, to do this work for them.

This practice was <a href="https://www.motherjones.com/politics/2014/06/bail-bond-prison-industry/">made famous</a> by a reality television show called Dog the Bounty Hunter, which aired for 8 seasons on a well-known American cable network. The show documented the actions of Duane “Dog” Chapman, a bounty hunter paid by bondsmen to track down defendants who failed to show up to court. In searching for clips from the show online, you can find Chapman kicking down doors and fences and spraying pepper spray at those who he is out to “catch”.

Many of these practices violate the <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a>, which call for fair and respectful treatment of clients in the debt collection process. They also differ from those outlined in the Fair Debt Collection Practices Act, a federal law that <a href="https://www.consumerfinance.gov/ask-cfpb/are-there-laws-that-limit-what-debt-collectors-can-say-or-do-en-329/">outlines</a> regulations for traditional credit products. In fact, the very practice of selling bail bonds <a href="https://www.theatlantic.com/business/archive/2017/05/bail-bonds/526542/">is illegal</a> in every country except for the United States and the Philippines. As are bounty hunters.

There is a <a href="https://www.theatlantic.com/politics/archive/2015/07/does-the-bounty-hunting-industry-need-reform/399224/">spectrum of regulations</a> on bounty hunters across states. In 18 states, there are virtually no statutory or administrative regulations on the practice. Some states regulate but don’t require bounty hunters to be licensed. In the case of Tennessee, bounty hunters don’t need a license but must undergo an eight-hour training each year from the Tennessee Association of Bail Agents.

Fortunately, bail reform is underway in most states, with several <a href="https://www.theguardian.com/us-news/2017/aug/30/new-jersey-bail-reform-criminal-justice-bond-money">introducing</a> new systems that use algorithms to assess flight risk instead of  bail-based systems. The commercial bounty hunter bail system is even <a href="https://www.theatlantic.com/politics/archive/2015/07/does-the-bounty-hunting-industry-need-reform/399224/">banned</a> in the four states of Illinois, Kentucky, Oregon, and Wisconsin. However, the bail bondsmen and insurance companies profiting from the current system are lobbying against reforms. The report from the ACLU and Color of Change states that the ten insurers that hold most of the market have built strong relationships with the American Legislative Exchange Council, a pro-privatization lobby, to maintain the system.

While complete reform may come slowly, regulation of the bail bonds industry and bounty hunters is urgently needed. Indeed, those accessing bail bonds should receive the same consumer protections as anyone else using financial services in the United States.

Image credit: <a href="https://www.flickr.com/photos/85853333@N00/2867482167/">Jeremy Brooks via Flickr</a>

Have you read?

<a href="https://cfi-blog.org/2016/06/16/the-cost-of-debt-dont-forget-the-legal-fees/">The Cost of Debt - Don't Forget the Legal Fees</a>

<a href="https://cfi-blog.org/2017/01/19/what-a-repeal-of-the-affordable-care-act-would-mean-for-financial-inclusion-in-the-u-s/">What a Repeal of the Affordable Care Act Would Mean for Financial Inclusion in the U.S.</a>

<a href="https://cfi-blog.org/2015/05/29/are-financial-service-providers-gouging-inmates-in-the-u-s-prison-system/">Are Financial Service Providers Gouging Inmates in the U.S. Prison System?</a>

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Exchanging Cash for Freedom: Predatory Bail Bonds in the U.S. Criminal Justice System

Dennis Ferenzy

Webinar

Contrary to the popular narrative, financial institutions view fintechs as partners in innovation, not threats to their core business. By offering better, less expensive, and more innovative products, financial institutions can assert their continued relevance as customer-facing institutions with help from fintech partnerships.

This webinar will explore how partnerships between mainstream financial institutions (e.g., banks, insurers, and payment companies) and fintechs are addressing financial inclusion challenges and expanding access to the formal financial economy for underserved segments of the global population, particularly in emerging markets. It will share insights from a recent report from the Center for Financial Inclusion and the Institute of International Finance.

The report incorporates 24 in-depth interviews with people at the frontlines of this innovation and highlights 14 partnerships focused on financial inclusion that we think exemplify best-case scenarios and good practice.

Webinar: How Financial Institutions and Fintechs Are Partnering for Inclusion

The volume of data in the digital universe doubles in size roughly every two years, <a href="https://insidebigdata.com/2017/02/16/the-exponential-growth-of-data/">estimates indicate</a>. The phrase “data rich” has become common business parlance. In the financial inclusion sector, big data is revolutionizing credit underwriting, product development, client segmentation, financial capability-building, and more. But how is this revolution actually happening? For many banks, it’s through partnerships with fintechs. Ujjivan, one of the largest microfinance institutions in India, recently chartered as a small finance bank, had until recently a limited portfolio at the SME level, which was hindered by high operating costs. This changed thanks to a partnership with the Bangalore-based fintech Artoo.

This partnership is described in CFI’s new joint-report with the Institute of International Finance (IIF), <a href="http://bit.ly/2uWXvFQ">How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines</a>. We discovered dozens of partnerships between mainstream financial institutions and fintechs in emerging markets, and we detailed the workings of 14 of them. The partnership between Ujjivan and Artoo is just one example among many of how financial institutions are increasingly turning to fintechs to improve how they effectively collect, use, and manage data.
<h1>The Value of Better Data Management</h1>
Traditionally, banks collected a great deal of information on loan applicants, but much of it remained in paper form, in loan folders stacked high in offices. With the advent of core banking systems, banks spent a great deal of time transferring data from paper to computer. And once on the computer, much of the richness of the data has gone unused. Largely the data has not been leveraged effectively due to siloed digital infrastructure, inefficient legacy systems, and restrictive or uncertain regulatory requirements. More useful data management relies on the ability to efficiently obtain, store, retrieve, structure, clean, and analyze large bodies of data. This is a monumental task, and best practices and requirements are rapidly changing. Therefore, partnerships with fintechs to help improve data management across an organization can be of tremendous value, helping financial institutions lower costs, identify customer potential, reduce fraud, increase cross-selling opportunities, and expand their customer base.
<h1>The Partnership Between Ujjivan and Artoo</h1>
Beginning in 2012, the partnership with Artoo provides Ujjiva with a digital field application, which is a cloud-based platform that digitizes the entire credit process, including loan generation and underwriting so that field officers enter customer data directly into the system via phones or tablets. As part of this work, Artoo supports Ujjivan’s data management. The platform deepens Ujjivan’s ability to track sales and portfolio performance. Artoo allows agents to capture more data points and consequentially creates more quality data for the bank to use in credit decisions. Data is captured on the Artoo platform, but is still owned by the bank.

<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2017/09/ujjivan-and-artoo.jpg"><img class="wp-image-24076 aligncenter" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/09/ujjivan-and-artoo.jpg" alt="" width="620" height="560" /></a>

Artoo’s platform has led to a 40 percent decrease in loan-processing time and a 50 percent rise in the number of loans processed per agent. The boost in efficiency resulting from the partnership with Artoo has enabled Ujjivan to expand its SME customer base from 60,000 to 200,000 clients in three to four years, an increase of over 230 percent. Following a pilot where the companies split costs, Ujjivan now pays Artoo a subscription fee for the functions it uses.
<h1>Regulatory Challenges for Data Management</h1>
All the financial institutions we spoke with that were creating partnerships in this area faced regulatory challenges surrounding the movement and use of data. For Ujjivan, regulations required that all customer data be stored on servers in India. Artoo had to switch its system from Amazon Cloud Services, with servers housed in the U.S., to a local Microsoft-based cloud service provider.

Meanwhile, in the case of partnerships between banks and fintechs that provide alternative credit scoring capabilities, we saw regulation limiting the flow of data from the banking institution to the alternative risk modeler, and vice versa. This is indeed a point of much contention in many markets and creates some tension in partnerships. Banks seek to maintain control over customer financial data, fearing that fintechs that gain access to data will use it for their own business purposes.

For more on bank-fintech partnerships, including other standout examples, read the report: <a href="http://bit.ly/2uWXvFQ">How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines.</a>

Have you read?

<a href="https://cfi-blog.org/2017/07/31/how-financial-institutions-and-fintechs-are-partnering-for-inclusion-lessons-from-the-frontlines/">How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines</a>

<a href="https://cfi-blog.org/2016/07/21/new-cfi-and-iif-report-reveals-banks-are-leading-financial-inclusion/">New CFI and IIF Report Reveals Banks Are Leading on Financial Inclusion</a>

<a href="https://cfi-blog.org/2017/08/23/juntos-harnesses-artificial-intelligence-to-improve-customer-engagement-for-bbva-bancomer-and-bancolombia/">Juntos Harnesses Artificial Intelligence to Improve Customer Engagement for BBVA Bancomer and Bancolombia</a>

How Artoo Helped Ujjivan Unlock the Power of Data

Contrary to popular rhetoric, banks do not view fintechs primarily as competitors. Increasingly, they seek them as partners.

Contrary to popular rhetoric, banks do not view fintechs primarily as competitors. Increasingly, they seek them as partners. This is the message of <a href="http://bit.ly/2uWXvFQ">How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines</a>—a new joint report from the Center for Financial Inclusion at Accion (CFI) and the Institute of International Finance (IIF). The report, launched today, finds that banks, insurers and payment companies don’t see fintechs as “little more than pinpricks for a banking mastodon with trillions in assets,” as The Economist colorfully described the fintech-bank relationship in 2015. The relationships between these players are more symbiotic than combative, because fintechs and mainstream financial institutions bring different strengths. With partnerships, fintechs get to scale their technology and access capital, while financial institutions gain assistance to improve product offerings, increase efficiency, and lower costs.

As it turns out, these are all goals with special relevance to low-income customers who look for products and services that are more convenient, less expensive, and higher quality. That makes financial institution-fintech partnerships a crucial strategy for meeting the financial needs of the unbanked and underbanked around the world. During our in-depth interviews with over 30 industry participants, both mainstream financial institutions and fintechs, CFI and IIF identified dozens of effective bank-fintech partnerships working at the base of the pyramid in emerging markets. The report highlights 14 of them.

<img class="alignnone size-large wp-image-28688" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2017/07/Strengths-of-FI-and-Fintechs-1024x750.png" alt="" width="1024" height="750" />

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But partnering isn’t a slam dunk. Successful partnerships require financial institutions to get organized for innovation, as astute incumbents have already started to do, and that means changes to business as usual inside the large, complex systems that make up banking organizations. Banks have to create smooth pathways for identifying partners and moving partnerships through internal processes. Sometimes they must redesign their procurement decision-making, and nearly always there is a great focus on how to connect IT systems and the information they contain. While partnerships nearly always take longer than expected and require creativity and flexibility in implementation, they are mutually beneficial and enable both groups to accomplish more than they could on their own.

[caption id="attachment_23947" align="aligncenter" width="614"]<img class="wp-image-23947" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/07/20170726_142824.jpg" alt="Dennis Ferenzy presenting at the report launch event at MetLife offices in New York" width="614" height="183" /> Dennis Ferenzy, Associate Economist at IIF, presenting at the report launch event at MetLife offices in New York[/caption]

For example, though a partnership with BBVA Bancomer, fintech startup Juntos sends personalized SMS nudges to bank customers in Mexico (see figure below), helping new clients to get more out of their bank accounts and increasing account activity. A partnership between fintech Stellar and ICICI bank in India leverages a blockchain ledger and cryptocurrency to enable mobile wallet transactions. Imaginate’s virtual reality technology is being applied to MetLife India’s problem of overcrowded branches. Through partnerships like these, financial institutions gain access to new market segments; create new offerings for their existing customers; optimize data collection, analysis, and management; and deepen customer engagement and product usage. These collaborations are enabling new products and services for underserved customer segments around the world.

<a href="https://centerforfinancialinclusionblog.files.wordpress.com/2017/07/asset-4.png"><img class="wp-image-23906" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/07/asset-4.png" alt="" width="614" height="460" /></a>

In most of these examples, banks are careful to keep fintechs at a distance from core activities, especially in the early stages. They maintain relationships with their customers, they protect customer and transaction data, and they continue to use traditional ways of assessing risk. Nevertheless, by structuring partnerships carefully, banks can conduct tests that will ultimately lead to revamping even these core activities as fintechs bring in new ways to leverage data, evaluate risk, and conduct relationships with customers.

[caption id="attachment_23949" align="aligncenter" width="614"]<img class="wp-image-23949" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/07/d715227.jpg" alt="Michael Schlein, CEO of Accion, speaking at the report launch event at MetLife offices in New York" width="614" height="411" /> Michael Schlein, CEO of Accion, speaking at the report launch event at MetLife offices in New York[/caption]

<a href="/how-financial-institutions-and-fintechs-are-partnering-for-inclusion-lessons-from-the-frontlines-2/">How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines</a> takes a deep look at how financial institutions are organizing to take advantage of the great opportunity of collaborating with fintechs, and the challenges they face in doing so. The report’s in-depth case studies dive into the mechanics of 14 partnerships between fintechs and financial institutions, providing a glimpse into how the two groups are overcoming differences in style and substance to enable collaboration.

We encourage you to explore the report today and to share your own insights on the value of partnerships in financial inclusion.

Have you read?

<a href="https://cfi-blog.org/2016/08/31/commercial-banks-are-partnering-with-fintechs-to-reach-the-unbanked/">Commercial Banks Are Partnering With Fintechs to Reach the Unbanked</a>

<a href="https://cfi-blog.org/2016/07/21/new-cfi-and-iif-report-reveals-banks-are-leading-financial-inclusion/">New CFI and IIF Report Reveals Banks Are Leading on Financial Inclusion</a>

<a href="https://cfi-blog.org/2016/09/08/the-new-wave-of-partnership-models-between-banks-and-fintech-startups/">The New Wave of Partnership Models Between Banks and Fintech Startups</a>

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How Financial Institutions and Fintechs Are Partnering for Inclusion

AXA is partnering with MicroEnsure to extend insurance to new customer segments in emerging markets. Diamond Trust Bank and Kopo Kopo are partnering in Kenya and Uganda to serve retail merchants. Mastercard, Gridnod Bank and Net1 are partnering to reach unbanked social grant recipients in South Africa. Société Générale is partnering with TagPay to attract new customers with mobile-enabled banking products in Ivory Coast and Senegal.

ICICI Bank is partnering with Stellar to build a blockchain-enabled payments network for its customers in India and abroad. Stanbic Bank is partnering with DreamOval to offer a mobile payments platform for underbanked merchants in Ghana. Santander is partnering with PayKey on a peer-to-peer payments platform integrated into messaging applications such as WhatsApp and Facebook Messenger.

MicroBank is working with Entrepreneurial Finance Lab (EFL) to extend credit access to thin-file entrepreneurs in Spain. A major bank in the Philippines is partnering with DemystData to expand credit products to thin-file customers. Ujjivan is partnering with Artoo to reach underserved micro, small, and medium enterprises in India.

BBVA Bancomer in Mexico and Bancolombia in Colombia are partnering (separately) with Juntos, utilizing its automated SMS conversation service to increase customer engagement. PNB MetLife is partnering with Imaginate to provide a virtual branch experience for insurance policy holders in India.

The Value of Partnerships

This panel discussion will explore how partnerships between mainstream financial institutions (e.g., banks, insurers, and payment companies) and fintechs are addressing financial inclusion challenges and expanding access to the formal financial economy for underserved segments of the global population, particularly in emerging markets.

Panel Discussion

Contrary to the popular narrative, financial institutions view fintechs as partners in innovation, not threats to their core business. By offering better, less expensive, and more innovative products, financial institutions can assert their continued relevance as customer-facing institutions with help from fintech partnerships.

This report examines how partnerships between mainstream financial institutions (e.g., banks, insurers, and payment companies) and fintechs are addressing financial inclusion challenges and expanding access to the formal financial economy for underserved segments of the global population, particularly in emerging markets. It incorporates insights from 24 in-depth interviews with people at the frontlines of this innovation and highlights 14 partnerships focused on financial inclusion that we think exemplify best-case scenarios and good practice. Contrary to the popular narrative, financial institutions view fintechs as partners in innovation, not threats to their core business. By offering better, less expensive, and more innovative products, financial institutions can assert their continued relevance as customer-facing institutions with help from fintech partnerships.
<h2>Major Findings</h2>
Mainstream financial institutions partner with fintechs to improve product offerings, increase efficiency, and lower costs – goals with special relevance to low-income customers. By partnering with mainstream financial institutions, fintechs get to scale their technology and can access capital to grow. As a result of these partnerships, low-income customers who are left out of – or poorly served by – the financial sector have greater access to higher quality, more convenient, and less expensive financial products and services.

To facilitate productive fintech partnerships, mainstream financial institutions are organizing internally for innovation, strategically integrating systems and staff, and developing contractual agreements to ensure stability and success. Fintech partnerships enable legacy institutions to engage with and learn from new technology in low-risk, low-cost ways. They are also key to allowing incumbents to compete in a world where alternative players, like Facebook and Amazon, are threatening the central role of financial institutions in the lives of customers. By offering better, less expensive, and more innovative products, financial institutions can assert their continued relevance as customer-facing institution.

One encouraging and somewhat unexpected finding is that the partnerships between financial institutions and fintechs represent a slow but pervasive financial industry shift toward customer-centricity. Better data management and use, new digital banking products, and greater customer engagement all enable better service for underserved customer segments.
<h2>Who Should Read This Report</h2>
The primary audiences for this report are those in mainstream financial institutions who want to know how their contemporaries are engaging with innovators to pursue financial inclusion, and those in fintech companies who want to understand the way banks are likely to approach them. In addition, venture capital firms, multilaterals, and industry associations have much to learn from this research about what drives banks to partner, what gets in the way, and what comes next.
<h2>Acknowledgements</h2>
This report is part of a two-year initiative, <a href="/about/what-we-do/mainstreaming-financial-inclusion-best-practices/">Mainstreaming Financial Inclusion: Best Practices,</a> to help advance efforts of financial institutions to reach customers at the base of the economic pyramid. The initiative and this report were made possible with support from <a href="https://www.metlife.com/about/corporate-responsibility/metlife-foundation/index.html">MetLife Foundation</a>.

How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines

The Affordable Care Act (Obamacare) has been at the center of the U.S. political discourse, and perhaps divide, since it was passed in 2010. Some measures show that Republican lawmakers in the House of Representatives and Senate have <a href="http://www.msnbc.com/rachel-maddow-show/groundhog-day-republicans-vote-repeal-obamacare">voted over 50 times</a> in the past few years to try to repeal the sweeping legislation. As the country prepares for a changing of the guard, Republican lawmakers are already taking steps to put an end to the program.

‘Repeal and Replace’ was the slogan hailed by Republican politicians, including the incoming president, during election season. However, on January 13th, the House of Representatives approved a budget plan which would revoke key elements of the Affordable Care Act (ACA). Meanwhile, they have not yet presented a replacement for the law. The nonpartisan Congressional Budget Office <a href="https://www.cbo.gov/publication/52371?utm_source=feedblitz&amp;utm_medium=FeedBlitzEmail&amp;utm_content=812526&amp;utm_campaign=Express_2017-01-17_10%3a30">reports</a> that the plan to repeal certain provisions of the law without a replacement would leave at least 18 million people without health insurance in the first year, a number which could balloon up to 32 million within 10 years if a replacement is not enacted. In addition, as a result of the proposed provisions, premiums for individual policies under ACA would increase by 20 to 25 percent in the next year, and would likely double by 2026.

At the Center for Financial Inclusion, we define financial inclusion as a state in which every person has access to a full suite of financial services, provided with quality to everyone who can use them. We view insurance as an important element of financial inclusion, allowing clients to secure their assets, homes, and health. This is perhaps most important for lower-income people, who do not have the savings or disposable income to deal with a large, unexpected medical expense.

For many in the United States, healthcare is a significant source of financial stress and one that is amplified without insurance coverage. Healthcare expenses are the <a href="http://www.theatlantic.com/health/archive/2014/10/why-americans-are-drowning-in-medical-debt/381163/">number one</a> cause of personal bankruptcy and the leading cause of debt collections in the U.S. A <a href="https://www.nerdwallet.com/blog/health/medical-bankruptcy/">NerdWallet</a> study estimated that in 2014, 56 million American under the age of 65 will have trouble paying medical bills. It should be noted that even those with health insurance can face medical bills that surpass their abilities to pay. However, <a href="https://www.nytimes.com/2016/01/06/upshot/lost-jobs-houses-savings-even-insured-often-face-crushing-medical-debt.html?_r=0">a poll</a> conducted by The New York Times and the Kaiser Family Foundation in 2016 found that those without insurance (under the age of 65) were nearly three times as likely to have problems paying their medical bills. This same poll reported that as many as 15 percent of people said they borrowed money from a payday lender to pay for medical bills and 63 percent had at one point used up all or most of their savings to do so.

Aiming to tackle both health insurance access and costs, the ACA could be seen as an important financial inclusion effort, and one that has succeeded on certain fronts. The ACA expanded access to health insurance for an estimated 20 million Americans who would have been otherwise uninsured. While premiums <a href="http://time.com/money/4503325/obama-health-care-costs-obamacare/">have increased</a> for many (20 percent for the average family) since the rollout of the ACA several years ago, research from The Kaiser Family Foundation shows that this rate of increase is in fact lower than the industry’s cost increase rate prior to the ACA. Rising deductibles and higher prescription drug spending following the ACA may also stand out as negative impacts of the bill’s provisions and display a need for more regulatory efforts to curb cost; however, it’s difficult to draw a causal connection between these and the effects of the ACA.

The president-elect has recently <a href="http://www.cnn.com/2017/01/15/politics/trump-obamacare/">promised</a> that “[His administration is] going to have insurance for everybody” and that it will be “much less expensive and much better”. I, for one, hope that is the case but have reason to question the real planning behind such promises. A repeal of the ACA without a replacement would strip millions of Americans of health insurance, something that would lead to great financial burden, and perhaps even greater health issues. And speaking from our financial inclusion perspective, it could be the single biggest setback to financial inclusion in the U.S. since the 2008 financial crisis.

Have you read?

<a href="https://cfi-blog.org/2016/06/16/the-cost-of-debt-dont-forget-the-legal-fees/">The Cost of Debt - Don't Forget the Legal Fees</a>

<a href="https://cfi-blog.org/2016/09/16/why-the-fraud-at-wells-fargo-is-a-big-deal/">Why the Fraud at Wells Fargo Is a Big Deal</a>

<a href="https://cfi-blog.org/2015/02/04/keeping-score-the-client-protection-principles-vs-the-u-s-subprime-auto-loan-market/">Keeping Score: The Client Protection Principles vs. the U.S. Subprime Auto Loan Market</a>

What a Repeal of the Affordable Care Act Would Mean for Financial Inclusion in the U.S.

Lawsuits and court ordered wage garnishment are becoming an increasingly common phenomenon for those in the United States who are unable to pay back their debts on time. With little regulation and consumer protection in the legal realm of debt collection, consumers are often left with few resources to fight in court and consequentially little control over the repayment of their debts.

Wage garnishment is the <a href="https://www.dol.gov/whd/regs/compliance/whdfs30.pdf">direct seizure</a> of wages to repay a debt, as permitted by a court order. For years in the United States, the practice of wage garnishment was reserved for collecting child support, student loans, and back taxes. During the recession that began in 2008, debt collectors increasingly turned to the courts as a channel to collect, and the practice of wage garnishment expanded rapidly, including to consumer debts. Rates of wage garnishment have sky-rocketed, more intensely in some regions and cities than others. In Phoenix wage garnishment rates <a href="http://www.nytimes.com/2010/04/02/business/economy/02garnish.html?pagewanted=all&amp;_r=1">increased</a> 121 percent from 2005 to 2013, Atlanta saw a 55 percent hike between 2004 and 2013, and Cleveland saw a 30 percent jump between 2008 and 2009 alone.

The new family of plaintiffs, which includes debt collectors, payday lenders, credit card companies, and medical companies, is entering civil courts at an alarming rate. These entities sue debtors to recover the debt and upon victory in the court (which is overwhelmingly granted) tack on extra fees for the suit and legal proceedings, in addition to receiving permission to garnish wages. Debt buyers are among the <a href="https://www.hrw.org/report/2016/01/20/rubber-stamp-justice/us-courts-debt-buying-corporations-and-poor">heaviest users</a> of civil courts in the United States, and in certain cities they are the most common plaintiffs.

So, why are collectors opting to go through the court system to collect debts? It works.

With relatively low costs to sue and odds of victory tipped heavily in their favor, entering the court system is reaping big payoffs for collectors. After opening a case, collectors are required to provide debtors with an official summons, which advises on the case’s court date, and a complaint, which explains why the debtor is being summoned. From the very onset of this process, the plaintiff and defendant are not on an equal playing field. A large majority of those being sued <a href="https://www.propublica.org/article/unseen-toll-wages-of-millions-seized-to-pay-past-debts">make less than</a> $40,000 a year and lack knowledge of the legal system. In many cases, the defendants may not even be aware that they are in a suit until after the court case has been decided. Ninety to ninety-five percent of the issued summons <a href="http://www.hbo.com/last-week-tonight-with-john-oliver/episodes/3/73-june-5-2016/video/ep-73-clip-debt-buyers.html?autoplay=true">go unanswered</a>, meaning that the defendants do not show up for their court date. When this happens, the plaintiff collectors win the case by default and, in most states, gain permission to collect debts and any additional costs acquired during the legal proceedings directly from wages.

In the cases where consumers do show up for their case in court, they are often unrepresented and are left facing experienced corporate lawyers on their own. It is important to note that as different from criminal cases in the U.S., the government is not required to provide legal representation to defendants in the civil court system. Therefore, defendants must seek and pay for legal assistance on their own.

Once a court order is established, it is very difficult for debtors to reverse the order or protect their wages. While federal regulation <a href="https://www.dol.gov/whd/regs/compliance/whdfs30.pdf">prohibits</a> garnishment of more than 25 percent of an employee’s take-home pay in a month, beyond this, the regulatory environment differs greatly at the state level. Some states, including Texas, North Carolina, South Carolina, and Pennsylvania, <a href="http://www.npr.org/2014/09/15/347957729/when-consumer-debts-go-unpaid-paychecks-can-take-a-big-hit">have banned</a> the practice of wage garnishment for consumer debt altogether. Other states allow collectors to continue charging high interest rates following a court order and the resulting wage garnishment. Additionally, as previously mentioned, many states allow collectors to add their own legal fees to the outstanding debts, with few regulatory guidelines. For example, in a case filed by a debt collector in Louisiana in 2012, $1,782 in attorney fees and $1,509 in court costs <a href="https://www.propublica.org/article/when-lenders-sue-quick-cash-can-turn-into-a-lifetime-of-debt">were added</a> to an original debt of $2,993.

While the court system should be a resource available to corporations to collect money they are owed, the current regulatory environment fails to protect consumers and disproportionately places the costs of the system on their shoulders. Given the gaps in current federal legislation, states should pursue greater protections for their citizens, including limiting the additional interest charges if a court suit is settled, prohibiting the addition of exorbitant legal fees to outstanding debts, and potentially prohibiting wage garnishment on consumer loans all together. In a financial system where consumers are often in the dark, it is important that the legal system does not perpetuate existing inequalities between large corporate lenders and individual borrowers.

Have you read?

<a href="https://cfi-blog.org/2014/01/22/cleaning-up-debt-collection-in-the-u-s/" target="_blank" rel="noopener">Cleaning Up Debt Collection in the U.S.</a>

<a href="https://cfi-blog.org/2014/03/21/cfpb-gives-voice-to-clients/" target="_blank" rel="noopener">CFPB Gives Voice to Clients</a>

<a href="https://cfi-blog.org/2015/02/04/keeping-score-the-client-protection-principles-vs-the-u-s-subprime-auto-loan-market/">Keeping Score: The Client Protection Principles vs. the U.S. Subprime Auto Loan Market</a>

The Cost of Debt – Don’t Forget the Legal Fees

<a href="http://cfi-blog.org/category/financial-inclusion-2020/"><img class="alignright wp-image-8773" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2012/11/fi2020_antilogo.jpg" alt="" width="321" height="71" /></a>&gt; Posted by Allyse McGrath, Senior Associate, CFI

Readers of the <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/global-microscope">2015 Global Microscope</a>, which spotlights the quality of the policy environment for financial inclusion, often focus on the countries at the top of the pack. However, some of the largest improvements in this year’s report are happening towards the bottom of the ranks. This trend appears on a regional scale, with the Middle East and North Africa, the region with the collective lowest scores, showing the most improved scores in this year’s issue of the Global Microscope. In this region, Egypt serves as an example of a country making huge strides even though it’s not among the top 10 countries. In fact, it scores among the very lowest handful of countries.

Up two spots from 53 to 51 out of 55 total markets this year, Egypt improved its score in 7 of the 12 Microscope indicators. The 8-point jump overall can be attributed to many factors, most notably the government’s introduction of a new regulation which broadens financial supervisory to a burgeoning microfinance sector and its welcoming of new electronic payments experiments.

In November 2014, the Egyptian Government <a href="http://www.efsa.gov.eg/content/efsa_en/efsa_news_en/efsa_202_en.htm">enacted</a>  Law no. 141, more commonly known as the “Microfinance Law”, which created provisions for regulating MFIs in the country, previously excluded from the legal framework. This law expanded the reach of the Egyptian Finance Supervisory Authority (EFSA) which now has control over issuing licenses to microfinance institutions in Egypt. After the law’s issuance in 2014, the number of MFIs in Egypt rose from 400 to 640. By the end of 2015, EFSA reported that it had issued 253 licenses. The law which is aimed at ensuring efficiency, transparency, and risk management also <a href="http://www.shandpartners.com/microfinance-law-egypt/">includes</a> a list of “Executive Decrees” by which licensed institutions must abide.

<a href="https://www.flickr.com/photos/29599398@N06/13114119293/"><img class="alignright wp-image-20774" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2016/03/13114119293_06a9a029f6_k.jpg?w=490" alt="" width="270" height="360" /></a>These regulations include certain levels of protecting debtor rights, creditworthiness checks, transparency, caps on microfinance loans for each customer, and regulations on how MFIs may advertise their products, among others. It is important to note that at this point, licensed institutions cannot receive any deposits. Their operations are, instead, restricted only to forms of financial leasing. EFSA has also focused recently on expanding and improving its regulation for insurance providers.

On the electronic payments front, in March 2015, the Ministry of Communications and Information Technology, the Ministry of Finance, the Egyptian Banking Corporation, and MasterCard <a href="http://newsroom.mastercard.com/press-releases/egyptian-government-and-mastercard-collaborate-to-extend-financial-inclusion-to-54-million-citizens-through-digital-national-id-program-2/">launched</a> a partnership aimed at broadening financial access to 54 million Egyptians through an interoperable national ID platform. As part of the agreement, MasterCard will work with the government and private sector agencies to link citizen’s national IDs to the existing mobile money platform. This system will allow the government to issue digital ID cards and move away from cash when disbursing salaries and social benefits. On the consumer-side, the IDs can be used to pay for government fees, mobile bills, merchant purchases, and domestic remittances.

Even with the great potential of both the Microfinance Law and ambitious electronic payments initiatives, the government will continue facing challenges as it (hopefully) continues to move up in the Global Microscope ranks. While the Microfinance Law is a big step, it is far from a national financial inclusion strategy. Additionally, the full effect of the law is still unknown. Specifically, there are concerns surrounding the capacities of smaller microfinance institutions that are, for the first time, regulated, while larger MFIs could be maturing to begin taking deposits. By boxing MFIs into a credit-only box with size limits, the law also cuts off the path that the better MFIs could use to develop into full service financial institutions, including taking deposits. The result can be a microfinance sector that is populated by relatively weak institutions that do not offer a wide range of services.

For more on Egypt’s recent progress and the country’s environment for financial inclusion, read the <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/global-microscope">2015 Global Microscope</a>.

Financial Inclusion 2020 (<a href="http://www.centerforfinancialinclusion.org/fi2020" target="_blank" rel="noopener">FI2020</a>) is a global multi-stakeholder movement to achieve full financial inclusion, using the year 2020 as a focal point for action. This blog series will spotlight financial inclusion efforts around the globe and share insights from key thought leaders in financial inclusion, with a specific focus on quality beyond access.

Image credit: <a href="https://www.flickr.com/photos/29599398@N06/13114119293/">Laura Cuttier</a>

Have you read?

<a href="http://cfi-blog.org/2015/06/30/political-risk-is-keeping-microfinance-ceos-up-at-night/">Political Risk Is Keeping Microfinance CEOs Up at Night</a>

<a href="http://cfi-blog.org/2015/09/16/sizing-up-credit-reporting-in-the-arab-region/">Sizing-Up Credit Reporting in the Arab Region</a>

<a href="http://cfi-blog.org/2015/12/09/where-the-best-place-is-to-be-an-insurance-providerand-other-insights-from-the-microscope/">Where the Best Place Is to Be an Insurance Provider... and Other Insights from the 'Microscope'</a>

Egypt Records Huge Progress in Policy Environment for Financial Inclusion

&gt; Posted by Allyse McGrath, Senior Associate, FI2020, CFI

[youtube https://www.youtube.com/watch?v=YAxL4TB6pmQ?rel=0&amp;w=600&amp;h=338]

Once in a while, we in the Accion D.C. office gather in our state-of-the-art movie theater (a.k.a. conference room) for some collective viewing. Now that the World Cup has ended, this viewing has a lot less to do with fútbol and more to do with our day jobs. Last Friday’s feature was a recently-released documentary that highlights those who are left behind by the U.S. financial system. <a href="http://www.spentmovie.com/">Spent: Looking For Change</a> follows four households who represent the quarter of American households that are underserved and held back by the current financial system.

The film focuses on how families with precarious financial and economic lives end up using services like check cashers, title loans, and payday loans – the tools that those without bank accounts or with poor credit must rely on in the absence of affordable and accessible financial services. In one example, a former nurse and single mother had to stop working to care for an incapacitated family member. She turned to title loans to pay the bills and when she couldn’t keep up the loan repayments, the title company repossessed her car. Another family, which took out one $450 payday loan, is now stuck in a cycle of high interest rates and hidden fees because the family’s income is not high enough to pay off the debt altogether. Each narrative helps us understand why, in 2012, underserved Americans spent an <a href="http://www.cfsinnovation.com/content/2012-financially-underserved-market-sizing-study">estimated $89 billion</a> on interest and fees.

While Spent shines the spotlight on Americans who are excluded from the formal financial sector, it only briefly highlights the innovators who are working to fill the gaps in this system. Since we at the Center for Financial Inclusion like to focus on solutions, we wanted to provide a few examples of innovation in the domestic sphere.

Recognizing the business incentives of addressing America’s commonly underserved segments, many businesses are developing both new financial products and new ways for people to access existing financial services. There are many innovations aiming to use alternative data to assess creditworthiness, a key element identified in the <a href="http://centerforfinancialinclusionblog.files.wordpress.com/2013/10/credit-reporting.pdf">Roadmap to Financial Inclusion</a>. <a href="http://www.cfsinnovation.com/">The Center for Financial Services Innovation (CFSI)</a> found that 42 percent of underserved Americans had a thin or no credit file and 33 percent were considered subprime – both a cause and effect of their exclusion from traditional financial products at commercial banks.

<a href="https://demystdata.com/">DemystData</a>, one of <a href="https://www.accion.org/venturelab">Accion Venture Lab</a>’s portfolio companies, is tapping into social media data in order to assess customers’ creditworthiness, utilizing the “big data” that widespread internet use has built. <a href="http://l2c.com/">Link-2-Credit (L2C)</a> is a credit scoring company which has provided companies the tools to better reach underbanked customers since 2000. L2C uses 16 sources of alternative data, including telco, rental, and real estate data, to provide a more accurate credit score for customers with prime, subprime, or no credit at all. Today, L2C has scored over 220 million customers. Over 60 percent of large banks in the United States use their services, proving the demand for such innovative ways to incorporate the financially excluded.

<a href="http://www.progressfin.com/">Progresso Financiero</a> targets the estimated 23 million Hispanic individuals and entrepreneurs with little or no credit history. The platform provides small, credit-building loans to customers in California, Texas, and Illinois, which can act as an on-ramp to the formal financial system. A typical borrower at Progresso Financiero is able to establish a median Vantagescore credit score of 672 after three successful loans. (Vantagescores range from 300 to 850 with scores 700 and over often qualifying individuals for products with the best interest rates.) The organization estimates that its services have helped customers avoid $170 million in high interest rates and charges associated with alternative informal lending options.

CFSI found that of the <a href="http://cfsinnovation.s3.amazonaws.com/Financial_Technology_Trends_in_the_Underbanked_Marketplace_Report_e-version_May_2013.pdf">70 million American</a> consumers with little or no credit history, nearly half could be reasonable candidates for loans. The only way to include these 35 million Americans is to continue to innovate. New products that are designed to better meet underserved customers’ needs are key to such improvements. New customers, profits, and most importantly, the financial stability of millions of families could be within reach.

From an outreach standpoint, Spent is a significant step in the right direction – a documentary devoted to the importance of financial inclusion. Pass it on!

Have you read?

<a href="http://cfi-blog.org/2014/05/05/the-future-of-creditworthiness/">The Future of Creditworthiness</a>

<a href="http://cfi-blog.org/2014/07/03/financial-capability-stakeholders-join-j-p-morgan-in-new-solutions-lab/" target="_blank" rel="noopener">Financial Capability Stakeholders Join J.P. Morgan in New Solutions Lab</a>

<a href="http://cfi-blog.org/2014/07/15/somalia-facing-drought-with-fewer-remittance-lifelines/" target="_blank" rel="noopener">Somalia: Facing Drought with Fewer Remittance Lifelines</a>

Allyse McGrath

Latest by Allyse McGrath

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