<p>Read Rachel&#8217;s full biography on the <a href="https://www.accion.org/bio/rachel-morpeth">Accion</a> website.</p>


Senior Associate, Global Investments, Accion

Rachel Morpeth

Young people flocking to better pay in urban hubs is just another symptom of an over-indebtedness problem that requires modern solutions. 

Blog Post

The term “rural brain drain” was popularized nearly a decade ago when two sociologists published a book documenting <a href="https://www.wired.com/2010/02/how-do-we-stop-hollowing-out-the-middle-of-america/">their experience living in Iowa</a>. Their goal was to understand the exodus of a young, educated workforce from rural areas to urban hubs. Today there are many factors contributing to this population shift, among them deindustrialization, lack of high-paying jobs, and weak broadband connectivity. A <a href="https://www.federalreserve.gov/publications/files/consumer-community-context-201901.pdf?mod=article_inline">Federal Reserve</a> report published earlier this year brought to light another reason for this phenomenon that dozens of states are grappling with: student loan debt.

The student debt crisis made headlines in 2010 when student loan debt surpassed credit card debt in the United States, at a staggering $1.56 trillion today, student debt is growing much faster than <a href="https://www.finder.com/student-loans-to-overtake-mortgages">mortgage debt</a> (10.4 percent per year versus 0.6 percent for mortgages). According to the Federal Reserve Bank of New York, nearly two-thirds of this financial burden falls on Americans under the age of 39.

As young people are increasingly burdened by student debt, they are flocking to the places that offer high-paying jobs: cities. According to Pew Research, <a href="https://www.pewresearch.org/fact-tank/2018/03/16/how-millennials-compare-with-their-grandparents/">88 percent</a> of millennials live in metropolitan areas. The average age is higher in <a href="https://www.citylab.com/life/2018/05/mapping-americas-aging-population/561200/">the Midwest and the Appalachians</a>, regions that are struggling to keep pace with urban hubs in terms of broadband access, variety of jobs, quality of higher education institutions, and other success factors in today’s markets. As evidenced by the Fed’s report, individuals with student debt are less likely to remain in rural areas than those without debt. Furthermore, nearly two-thirds of the students most burdened by debt leave rural areas within one year after entering repayment. The term for this migration pattern has been coined the “rural brain drain,” and its impacts on the economic vitality of these regions are increasingly apparent. The inability of rural areas to attract a young, educated workforce is deepening the rural-urban divide.
<blockquote>Young people are flocking to the places that offer high-paying jobs: cities.</blockquote>
Some may argue that widespread access to education loans has created better opportunities for younger populations all over. However, according to U.S. Census data, wages have been stagnant since the 1970s, while the average cost of public college tuition has increased almost four fold. Simultaneously, homeownership among those under 35 has dropped <a href="https://www.census.gov/library/stories/2018/08/homeownership-by-age.html">10 percent</a> since 2006, and birth rates have declined every year since 2007. People in the age groups we might expect to be buying homes, settling down, and raising the next generation cannot afford to do so.
<blockquote>Wages have been stagnant since the 1970s, while the average cost of public college tuition has increased almost four fold.</blockquote>
We often look to countries like Finland, Denmark, and Norway, which offer tuition-free college to their citizens, as paradigms of what could exist here at home. Which country has the best model for us to try to replicate? According to former Secretary of Labor Robert Reich, the answer is <a href="http://inequalityforall.com/wp-content/uploads/2014/12/A_Visual_StoryPDF.pdf">the United States</a>. In post-war America, tuition fees were waved for veterans, and there was a massive proliferation of public universities. The GI Bill was one of the important factors that led to a tripling of the number of Americans with a bachelor’s degree from 1950 to 1977, and these educated workers helped the U.S. to grow to have the largest and most prosperous middle class in the world. At this time, public tuition was about 6 percent of an average male salary, compared to today’s 25 percent.

Times have changed, however, and modern problems require modern solutions. Refinancing and forbearance can provide some relief, but they ultimately increase debt in the form of interest. Other <a href="https://www.forbes.com/sites/andrewjosuweit/2017/11/05/6-ways-congress-can-help-ease-the-student-loan-crisis/#1cdcbb656cf6">proposals</a> to remedy the student debt crisis include erasing all debts, boosting the tax deduction for those making on-time payments, expanding the Pell grant program, creating a tiered system that lowers or eliminates debt based on income, and proper adherence to the <a href="https://www.nerdwallet.com/blog/loans/student-loans/public-service-loan-forgiveness/">Public Service Loan Forgiveness Program</a>. The latter program was created in 2007 to forgive remaining student loan balances of those who have worked for 10 years in public service. In 2017 applicants first became eligible for relief through this program, which has a two-year budget of $700 million. However, as of April this year, only 1.5 percent of those funds have been utilized. While the <a href="https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service/temporary-expanded-public-service-loan-forgiveness#how-qualify">requirements</a> for forgiveness are publicly available, the Department of Education has come under fire for not providing clear guidance to successfully navigate them.

Some believe that a policy to eliminate all or most student debt would be a major <a href="https://www.marketwatch.com/story/canceling-14-trillion-in-student-debt-could-have-major-benefits-for-the-economy-2018-02-07">economic stimulus</a>, spurring job creation and narrowing the wealth gap over the next decade. Our recent history proves that a well-educated population fuels a virtuous cycle of growth through competitive wages, increased tax revenues, and expansion of jobs. An affordable education lies at the foundation of this cycle, and will be a key factor in creating a more economically inclusive rural and urban America.

Rural America: Another Casualty of Student Loan Debt?

There are a few reasons why a new universal basic income pilot in Stockton, California, is different. 

What would you do with an extra $500 a month?

Mayor Michael Tubbs of Stockton, California, posed this question to his constituents last year. In February, the city began its 18-month universal basic income (UBI) pilot. Through a privately-funded program, Stockton’s government will distribute <a href="https://www.huffpost.com/entry/stockton-california-universal-basic-income_n_5c697700e4b05c889d20203a">$500 on a monthly basis</a> (the first $500, pre-paid debit cards have been sent), no strings attached, to 130 of its low-income residents. <a href="https://www.ycombinator.com/about/">Y Combinator</a>, a California-based startup accelerator, plans to launch a similar trial this year in Oakland.

Tubbs knew there would be obstacles in getting this pilot off the ground; he would have to convince people across the political spectrum that it was a good idea. However, there was one segment he did not expect push back from: the people the program intended to help.

“There were conversations I had with folks who are one paycheck away from deprivation saying, ‘We don’t deserve anything,’ so really the challenge has been reshaping the conversation. This is not a handout. This is part of what you get as a citizen of Stockton. You are eligible for this not because you need anything, but because you are a citizen of this city, ” Tubbs explained in an <a href="https://iop.harvard.edu/forum/stockton%E2%80%99s-economic-empowerment-demonstration-guaranteed-income-initiative">interview</a> last year. He hopes that this program will empower people to have more agency.
<h2>Differences Between Stockton's UBI Pilot and Others</h2>
A UBI pilot like this has never been done in the U.S. before, so it’s difficult to hypothesize how the Stockton trial will turn out. While most pilots focus on the quantitative data – how funds are spent, whether employment rates changed, and the like – the Stockton pilot aims to <a href="https://basicincomepodcast.com/podcast/updates-stockton-basic-income-trial-feat-mayor-michael-tubbs-lori-ospina/">humanize the results</a>. Through surveys, qualitative interviews, and local artists, the city intends to engage participants more deeply and stimulate discussion more broadly.
<blockquote>Humanizing the results: Stockton's universal basic income pilot participants will be engaged deeply and stimulated by discussion.</blockquote>
Finland recently ended a <a href="https://www.nytimes.com/2018/05/02/opinion/universal-basic-income-finland.html">two-year trial</a> that awarded 2,000 Finns roughly $630 per month, but that was targeted exclusively at the unemployed.

The fact that it targeted exclusively the unemployed is important for a couple of reasons. First, it didn’t teach us how people who have a source of income, especially on the low or irregular end, would treat this extra funding. Second, the Finnish government changed its unemployment laws concurrently with the pilot such that if you could not prove you were actively seeking a job, you lost your government benefits. In the first three months, <a href="https://yle.fi/uutiset/osasto/news/finlands_activation_model_brings_benefit_cuts_for_94000_people/10145894">94,000 Finns saw their benefits cut</a>.

UBI is not meant to be contingent, and cutting other benefits shifts the financial liability for things like health care back to the individual. In many ways it’s similar to Clinton’s <a href="https://aspe.hhs.gov/report/personal-responsibility-and-work-opportunity-reconciliation-act-1996">Personal Responsibility and Work Opportunity Reconciliation Act</a>: among other things, it forces the unemployed to accept gig work, and businesses can lower wages because people have to accept a job or risk losing benefits.

The closest thing we’ve seen to a large-scale UBI is the Alaska Permanent Fund, which has been active since 1982. The fund receives most of its capital from the revenue of oil companies operating within the state; each year, payments of equal amounts are distributed to all Alaskan residents (generally between $1,000 and $3,000). A 2018 report found that this cash transfer program <a href="https://www.nber.org/papers/w24312.pdf">did not significantly decrease employment</a>. However, as climate change issues surge, there are growing concerns regarding the source of revenue of the fund. While some board members <a href="https://www.juneauempire.com/news/what-does-the-alaska-permanent-fund-have-to-do-with-climate-change-this-group-will-tell-you/">attempt to downplay</a> the percent of the portfolio invested in fossil fuels, its former Chair William Moran <a href="https://www.adn.com/opinions/2018/05/24/how-alaska-permanent-fund-investment-policies-fail-to-consider-the-changing-world/">noted</a> last year that “every last cent of the $65 billion initiative is a financial derivative of fossil fuel interests. ” This sends a message that if the price is right, oil companies can buy their way into operation.

The United States already has an antipoverty cash distribution program called the Earned Income Tax Credit (EITC), which is designed to support low-income Americans. The program differs from the UBI concept in several important ways, however. It primarily supports people with children, rather than focusing on individuals. The disbursal amount varies each year, and it is only distributed once a year. This means that recipients never know how much they will receive, and often spend it on overdue expenses. <a href="https://www.nytimes.com/2012/04/17/us/antipoverty-tax-program-offers-relief-though-temporary.html?hp">Critics argue</a> the lump sum would be more effective if dispensed in installments.

Given that less than 10 percent of the EITC payout goes into savings account, this points to the critical problem that people still can't survive on working wages alone. Research by economist Alan Krueger shows that <a href="https://qz.com/851066/almost-all-the-10-million-jobs-created-since-2005-are-temporary/">nearly all jobs created since the recession have been contract, part time, or contingent</a>. These types of jobs don’t provide the same benefits as a 40-hour per week role, and it is increasingly <a href="https://scholar.harvard.edu/files/lkatz/files/katz_krueger_cws_v3.pdf">less likely that your job will provide the security</a> that it did 20 years ago. Some of the most successful companies in the past decade,<a href="https://slate.com/business/2018/12/google-walkout-protests-contract-workers.html"> including Google</a>, contract more than half of their staff. In combination with the rising concern of job loss to automation, UBI could be an insurance policy for future downturns that require workers to accept less stable short-term or gig positions, especially for those who have dependents, less varied skillsets, or otherwise require a degree of employment stability.
<h2>Beyond Income: Work Isn’t Just Monetarily Rewarding</h2>
Some scoff at the idea of UBI, deeming it welfare for those too lazy to work and believing it would lead to workforce gaps. However, according to the Economic Policy Institute, nearly <a href="https://www.epi.org/publication/poor-people-work-a-majority-of-poor-people-who-can-work-do/">63 percent of poor people in the U.S. who are eligible to work are currently employed</a> full or part time, and many of those who aren’t – about 3.3 million – are actively seeking employment. Furthermore, work is generally not just about a paycheck; unemployment is enormously traumatic, and studies have shown that people <a href="https://harris.uchicago.edu/news-events/news/universal-basic-income-policies-dont-cause-people-leave-workforce-study-finds">find purpose in work</a>. When it comes to poverty, a willingness to work is not the problem, but rather that work itself is no longer the solution. The next big economic idea will have to consider a myriad of factors – from increasing digitization to the ever-expanding wealth gap – to push for a more economically-inclusive society.

The idea of universal basic income isn't just about social justice – it's about stimulating economic growth. The United States <a href="http://inequalityforall.com/wp-content/uploads/2014/12/A_Visual_StoryPDF.pdf">prospers most</a> when it has a healthy middle class; in 1940, it was almost guaranteed that a child would grow up to have a higher income than his or her parents. By the mid-1980s, that probability was <a href="https://www.brookings.edu/blog/up-front/2018/07/25/fewer-americans-are-making-more-than-their-parents-did-especially-if-they-grew-up-in-the-middle-class/">down by about half</a>. When those who have less do better, <a href="https://www.americanprogressaction.org/issues/poverty/news/2011/12/06/10771/10-reasons-why-cutting-poverty-is-good-for-our-nation/">everyone benefits</a>: health costs go down, innovation goes up, and social mobility improves.
<blockquote>Universal basic income isn't just about social justice – it's about stimulating economic growth.</blockquote>
While UBI alone is not a panacea for economic inequality, its time has come as a force for serious and meaningful economic prosperity, and a counter to the ballooning inequality from which the U.S. suffers.

Work Isn’t Just About Money: Universal Basic Income and Potential Benefits for U.S. Working Poor

The state of inclusion in the country in terms of financial access, financial health, debt and savings levels, and more.

The state of inclusion in the country in terms of financial access, financial health, debt and savings levels, and more

I walked past the International Monetary Fund on Pennsylvania Avenue on a sunny Saturday morning, a few blocks from the White House. Three large posters of international faces filled their windows, covered by the text <em>#EndPoverty</em>.

Across the street, two homeless men emerged from their tents.

More than 1 in 10 Americans – nearly 45 million people – are living below the poverty line. The United States has one of the highest poverty rates in the developed world, second only to Israel. A survey conducted by CareerBuilder estimated that <a href="http://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey">78 percent</a> of Americans are living paycheck-to-paycheck – a number that has been steadily increasing each year. The U.S. consistently <a href="http://www.businessinsider.com/the-richest-countries-in-the-world-2017-3/#18-australia-gdp-per-capita-48806-39820-13">ranks</a> as one of the most affluent countries in the world, yet these statistics obscure the financial health of its population and how its wealth is distributed.

It is well known that profitably serving low-income clients can be a challenge. Earlier this year, Bank of America <a href="https://www.npr.org/sections/thetwo-way/2018/01/24/580324251/bank-of-america-ends-free-checking-option-a-bastion-for-low-income-customers">eliminated its free eBanking checking accounts</a>, which now require a $1,500 daily minimum balance or a $250 monthly deposit to avoid a $12 monthly “maintenance” fee. If Bank of America were a country, it would have the 8<sup>th</sup> highest GDP in the world, at <a href="http://www.annualreports.com/Company/bank-of-america-corporation">$2.2 trillion in assets</a>. It started in San Francisco as a bank for the common man. Surely it can follow the lead of many <a href="https://www.nerdwallet.com/blog/banking/best-free-checking-accounts/">other financial institutions</a> and offer a bank account that works for low-income people.

As we’ve written on the blog before, several of the day-to-day services that banked populations take for granted are costly and time-consuming for the unbanked. Cashing a check? Fee. Obtaining a pre-paid debit card? Fee. Transferring money? Fee. Money order to pay bills? Fee. Although these fees might seem small in dollar terms, they add up over time, and for Americans living paycheck-to-paycheck, every penny counts. According to consumer advocate Bill Bartmann, the 68 million financially underserved Americans spend an average of <a href="https://www.huffingtonpost.com/bill-bartmann/financial-exclusion-why-the-poor_b_7001914.html">$108 per month</a> per person on financial services.

Globally, financial inclusion is evolving and advancing. Where are we on progress in the United States?
<h3>Financial Access</h3>
Access to financial services in the United States is improving. Roughly <a href="https://obamawhitehouse.archives.gov/blog/2016/06/10/financial-inclusion-united-states">7 percent</a> of American households lack access to a bank account, and around 20 percent have a bank account but also use financial services associated with the financially excluded, like payday loans. By comparison, in 1989, 14 percent of U.S. households lacked a bank account. Improvements in services access were especially pronounced among those in the bottom income quintile and among minority households, which, over the period of 1989 to 2013, experienced an increase in access from <a href="https://obamawhitehouse.archives.gov/blog/2016/06/10/financial-inclusion-united-states">56 to 79 percent and from 65 to 87 percent</a>, respectively.
<h3>Financial Health</h3>
In terms of financial health, the Center for Financial Services Innovation (CFSI) finds that <a href="https://cfsinnovation.org/research/2017-financially-underserved-market-size-study/">57 percent</a> of American adults are struggling financially – with either large sums of debt, irregular income flows, and/or sporadic savings habits. The Federal Deposit Insurance Corporation (FDIC) estimates that approximately 91 million U.S. adults are credit-challenged, stemming either from being low-file or having a subprime credit score below 600.
<h3>Debt Levels</h3>
Last year saw the country reaching an all-time high in terms of total household debt, at roughly <a href="https://www.cnbc.com/2018/02/13/total-us-household-debt-soars-to-record-above-13-trillion.html">$13 trillion</a>, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data. This was the fifth rise, with increases across the credit card, auto, mortgage, and student loan categories.

Arguably the most dramatic rise has been in student loan debt. In 2008, student debt made up only <a href="https://www.nytimes.com/2017/05/17/business/dealbook/household-debt-united-states.html">5 percent</a> of total household debt, but by 2017 this had increased to 11 percent. As of 2017, student loan borrowers owe a total of $1.3 trillion. Moreover, roughly one in ten student loan borrowers are behind on repayments, which is the highest delinquency rate of any type of loan in the country.
<h3>Savings Levels</h3>
According to data from the U.S. Bureau of Economic Analysis, the personal savings rate in the United States is at roughly <a href="https://www.fool.com/saving/2016/10/03/heres-the-average-americans-savings-rate.aspx">5.7 percent</a>, meaning that for every $100 earned, $5.70 is saved for purposes including emergencies, retirement, and the proverbial rainy-day. While this figure is a substantial improvement over the 1.9 percent savings rate before the financial crisis in 2008, a recommended healthy savings habit would involve setting aside between 10 percent and 15 percent of income.

Like many other countries, retirement savings in the United States are a growing problem as more baby boomers reach retirement age. According to Census Bureau data, older Americans were the only demographic that experienced a <a href="https://www.theatlantic.com/business/archive/2018/02/pensions-safety-net-california/553970/">poverty rate increase</a> between 2015 and 2016. Across the country’s adult population, the Census Bureau finds that two-thirds of Americans don’t contribute any money to a 401(k) or other retirement account.
<h3>Industry Progress</h3>
Over the past decade, transformations in technology, products, and business models have pushed the U.S. to meet a growing demand for financial inclusion.

As of February 2016, there were over 2,000 U.S. fintech start-ups, and fintech venture capital is steadily growing. One the biggest fintech success stories in the United States is the peer-to-peer mobile-based payment service Venmo. Owned by PayPal, Venmo has exhibited staggering <a href="https://www.dailydot.com/debug/venmo-growth-chart/">growth</a>. In the first quarter of 2015, Venmo processed $1.3 billion in payments, while two and a half years later, in the third quarter of 2017, the figure was $9 billion. In an effort to compete with Venmo and other payment apps, commercial banks are expanding their financial service offerings. A consortium of banks that includes Wells Fargo, Bank of America, JP Morgan Chase and Capital One rolled out Zelle in 2017, which is based on a similar model and allows for free, instant transfers between accounts of registered users.

Nationwide, there are more than 800 <a href="https://www.forbes.com/sites/darden/2014/06/05/fighting-financial-exclusion-how-to-serve-88-million-americans-who-have-no-bank/#111284992a5c">Community Development Financial Institutions</a> (CDFIs), private organizations fighting financial exclusion in rural areas (often deemed “bank deserts”) and disadvantaged urban zones. For customers who want to make sure their money is used to benefit communities, Morgan Simon of the Candide Group <a href="https://nextbillion.net/avoiding-the-ick-factor-four-easy-steps-to-align-your-investments-with-your-values-in-2018/">suggests</a> breaking up with your bank in favor of more socially-minded financial institutions like CDFIs, credit unions and community-based commercial banks.

Despite the increasingly digital payment structure of the U.S. financial system, millions of Americans still prefer cash over card. While 80 percent and 75 percent of American adults have a debit or credit card, respectively, more than 99 percent <a href="https://www.bostonfed.org/publications/research-data-report/2017/the-2015-survey-of-consumer-payment-choice-summary-results.aspx">report</a> that they still use cash. Innovative companies that recognize the need for payment flexibility are starting to fill in the gaps. <a href="http://paynearme.com/en/">PayNearMe</a>, for instance, offers remote transactions at more than 28,000 locations, such as CVS and 7-Eleven. At these neighborhood retailers, payments can be made for bills, rent, tickets and even taxes to participating entities located elsewhere.

At a federal level, the U.S. has implemented several programs to expand financial inclusion. To help alleviate the issue of inadequate retirement savings, the Obama administration introduced <a href="https://myra.gov/">My Retirement Account</a> (myRA) for people without access to employer-sponsored retirement plans. While the program was not well-advertised and saw low usage during its three years of activity, it was a step in the right direction. The retirement accounts didn’t carry fees or minimum balance requirements, and any earnings or withdrawals were tax free. Unfortunately the program was <a href="https://www.forbes.com/sites/nextavenue/2017/07/28/r-i-p-myra-retirement-account-gone-too-soon/#3c8b88077885">dropped</a> by the current administration in December 2017.

Eradicating financial exclusion in the United States will require cooperation among all sectors, public and private. While there may not be a simple solution, everyone has something to gain from creating a solid financial foundation for low-income Americans.

<em>Featured image credit: Doug Focht via <a href="https://www.flickr.com/photos/99077624@N00/2272841875/">Flickr Creative Commons</a></em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2018/02/02/exchanging-cash-for-freedom-predatory-bail-bonds-in-the-u-s-criminal-justice-system/">Exchanging Cash for Freedom: Predatory Bail Bonds in the U.S. Criminal Justice System</a>

<a href="https://cfi-blog.org/2016/05/02/in-the-united-states-gender-gaps-in-financial-literacy-and-pay-persist/">In the United States, Gender Gaps in Financial Literacy and Pay Persist</a>

<a href="https://cfi-blog.org/2016/10/13/who-is-to-blame-for-global-de-risking-the-united-states/">Who Is to Blame for Global De-Risking? The United States?</a>

&nbsp;

Financial Inclusion in the U.S. – Are We Making Progress?

Danielle Piskadlo

<em>The following post was <a href="https://www.microfinancegateway.org/library/challenges-governing-digital-world">originally published</a> on the Microfinance Gateway.</em>

As a hub of technology-based innovation, sub-Saharan Africa (SSA) leads the world in mobile money accounts. 12 percent of adults in the region have a mobile money account, compared to <a class="ext" href="http://datatopics.worldbank.org/financialinclusion/region/sub-saharan-africa" target="_blank" rel="noopener">2 percent globally</a>. In a <a class="ext" href="https://www.fsdafrica.org/wp-content/uploads/2016/01/16-01-08-New-Foreign-Policy-Report-2016.pdf" target="_blank" rel="noopener">recent global survey</a> measuring progress towards financial access and usage, five of the ten highest scoring economies hailed from SSA. However, financial exclusion remains acute.

The fact that most of Africa’s population lacks access to formal banking services but has one of the highest mobile penetration rates in the world provides the perfect breeding grounds for the use of financial technologies to grow a customer base. However, as disruptive technologies and business models continue to revolutionize the financial inclusion landscape in Africa, they present new challenges to leaders and boards.

These challenges can only be overcome through creative, forward-thinking solutions and active dialogues across governance bodies – boards and regulators. Board members, CEOs, regulators and fintechs will come together to advance these issues in Ethiopia on October 12-13 at the Center for Financial Inclusion at Accion’s (CFI) <a class="ext" href="https://www.eventbrite.com/e/governing-in-a-digital-world-roundtable-tickets-33625424550" target="_blank" rel="noopener">Governing in a Digital World</a> roundtable, a side event to <a href="https://www.microfinancegateway.org/training-events/african-microfinance-week-2017-creating-values-smes-new-key-role-microfinance">African Microfinance Week</a>. In the meantime, let’s take a quick look at a few of the challenges to be discussed, and their respective solutions.

<strong>Challenge #1: Creating a level regulatory playing field for providers of financial services</strong>.

Regulators of financial institutions are charged with the vital mandates of safeguarding the stability of the financial system and protecting consumers. It therefore follows that financial regulators would impose strict controls on large, deposit-taking institutions. Anytime a financial service provider goes into government control or closes, it creates a mistrust of formal financial services and clients react with: “this is why we are going to put our money under the pillow.”

Clients may be scared of banks and microfinance institutions<i> </i>(MFIs), but many have phones and money to send, so they like the idea of cash in, cash out solutions. This presents an opening in the market for fintech companies such as Zoona and M-PESA, who now provide large-scale and important financial services such as money transfers and payment options. These digital financial solutions help promote key financial inclusion goals of reaching more remote populations, increasing convenience and reducing costs.

Fintechs, however, by virtue of their partnerships with mobile network operators (MNOs), are regulated by the information, communications and technology (ICT) regulators instead of central banks. Therefore, banks and MFIs looking to provide clients with similar digital financial solutions may face more stringent regulatory or licensing requirements than fintechs.

To help level the playing field, the Center for Global Development <a href="http://www.microfinancegateway.org/library/financial-regulations-improving-financial-inclusion-center-global-development-task-force">recommends</a> regulating based on activity, not institution type, and by level of risk to clients and the financial system.

<strong><img class="alignright wp-image-24209" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/10/eng_hello-bangladesh-md_shafiqur_rahman_2016_09-22-2017.jpg" alt="" width="350" height="235" />Challenge #2:</strong> <strong>How can boards get the information they need about potentially disruptive technologies that may drastically impact their business?</strong>

To remain relevant in an evolving financial landscape, the boards of financial service providers need to develop strategies to stay competitive and keep pace with new financial technology solutions. For instance, Venmo, a popular app for payments and money transfers which <a class="ext" href="https://www.marketplace.org/2017/07/26/life/venmo-making-us-petty" target="_blank" rel="noopener">managed over USD 17 billion</a> in transactions last year, is having the effect of loosening many customers’ ties to the traditional banks that previously provided these services.

Technology is so important to all businesses that boards of financial service providers have to think about how they get information about technology. When looking at board composition and skill sets, they should consider including a technology expert who is able to advise strategically on technology considerations and projects. Alternatively, boards can contract technology experts to provide independent advice and share learnings from other projects.

A <a class="ext" href="http://www.pewinternet.org/2016/03/22/technology-adoption-by-baby-boomers-and-everybody-else/" target="_blank" rel="noopener">2016 Pew research survey</a> found that millennials (ages 18-34) are the highest reported users with every technology, far-outperforming all other age groups. However, a <a class="ext" href="http://bohse.com/images/file/Board_of_Director_Series/Non-Profit_Board_Statistics.pdf" target="_blank" rel="noopener">BoardSource survey</a> found that about half of board members are between the ages of 50-64. Given this generational divide, some boards are more seriously considering age diversity when recruiting new board members. In addition, boards should be regularly meeting with clients to understand first-hand the technologies clients have and how they use them. Market research and client focus groups can also help to inform boards about upcoming technologies. Boards need to be receptive to what they are hearing and understand how best to react.

<strong>Challenge #3:</strong> <strong>How to differentiate where clients prefer the speed of technology versus the quality of person-to-person (P2P) customer support?</strong>

Effective board governance and leadership involves determining how to allocate limited resources. Although digital financial services allow for speed, lower costs and convenience, there are some financial services that ultimately require more human touch.

Research conducted in Kenya by a CFI fellow <a class="ext" href="https://cfi-blog.org/2017/07/06/what-does-effective-human-touch-look-like-in-kenyas-digital-age/" target="_blank" rel="noopener">concluded</a> that there are three areas in which customers prefer P2P interaction: 1) to establish legitimacy of a product, 2) to fully understand the product, and 3) to resolve problems. Clients prefer digital services for inquiries or services that can be automated, such as loan renewals or account-to-account transactions. In addition, women, elderly, and rural residents tend to favor more “high touch” service, while men, youth, and urban dwellers tend to be more comfortable with “low touch” approaches.

Finally, there are activities that attract mid-range levels of human interaction, such as call centers, personal emails and texts, and in-app chats. Companies are finding that the most effective digital services deliver a “human” experience. <a class="ext" href="http://juntosglobal.com/" target="_blank" rel="noopener">Juntos</a>, for example, is a platform that allows financial institutions to carry on personalized, electronic conversations with customers through text messages using powerful data analytics that tailor messages to customer behavior. The texts are so personalized and friendly that many clients in Colombia wish Juntos a <a class="ext" href="https://www.cgap.org/sites/default/files/Working-Paper-Juntos-Finanzas-A-Case-Study-Oct-2015.pdf" target="_blank" rel="noopener">Merry Christmas</a> via text during the holidays.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/10/04/how-can-microfinance-institutions-in-the-middle-east-and-north-africa-manage-risk-and-meet-client-demand-governance-is-key/">How Can Microfinance Institutions in the Middle East and North Africa Manage Risk and Meet Client Demand? Governance Is Key?</a>

<a href="https://cfi-blog.org/2017/07/24/uber-governance-fails/">Uber Governance Fails</a>

<a href="https://cfi-blog.org/2017/08/28/catalyst-fund-lessons-on-getting-early-stage-fintech-startups-investment-ready/">Catalyst Fund: Getting Early-Stage Fintech Startups Investment Ready</a>

&nbsp;

The Challenges of Governing in a Digital World

The devastating effects of Hurricane Harvey colored headlines across the nation. Two weeks later, Houston, Texas <a href="http://www.khou.com/news/local/residents-still-wait-for-flood-water-to-recede-in-west-houston/472654690">remains</a> partially submerged. The resulting financial damage will likely exceed that of Hurricane Katrina, which struck the Louisiana coast in 2005. Harvey is taking Katrina’s title as the most catastrophic storm in America’s history. A <a href="http://www.politico.com/magazine/story/2017/08/28/climate-change-hurricane-harvey-215547">Politico</a> headline, however, poignantly suggests another message that perhaps we should all be taking away: “Harvey Is What Climate Change Looks Like.” Harvey is classified as a “<a href="https://www.washingtonpost.com/news/wonk/wp/2017/08/29/houston-is-experiencing-its-third-500-year-flood-in-3-years-how-is-that-possible/?utm_term=.67d747da65c6">500-year flood</a>,” meaning a flood of this magnitude has a 1-in-500 probability of occurring in any given year. Yet this is Houston’s third 500-year flood in three years. Harvey’s successor, Hurricane Irma, has also caused death and devastation, while heavy flooding in South Asia has resulted in the deaths of over <a href="https://www.theguardian.com/world/2017/aug/30/mumbai-paralysed-by-floods-as-india-and-region-hit-by-worst-monsoon-rains-in-years">1,200 people</a> across India, Bangladesh, and Nepal.

Economic activity generates greenhouse gases that impact climate change, and climate change, in turn, affects economic activity. In the case of Harvey, the South Texas Cotton and Grain Association has estimated <a href="https://www.texasagriculture.gov/NewsEvents/NewsEventsDetails/tabid/76/Article/4333/Texas-Department-of-Agriculture-Responds-to-Hurricane-Harvey.aspx">$150 million</a> in crop losses. As natural disasters continue to occur with increasing frequency, financial service providers (FSPs) must ask themselves: what economic ramifications should be anticipated, especially in rural communities, and what can be done to overcome these obstacles?

Some of the consequences of climate change include drought, reduced food security, flooding, fires, landslides, and crop failure. Accordingly, it’s the agriculture sector that suffers a large brunt of climate change’s effects. Although humans have little immediate control over extreme weather patterns, there are steps we can take to buttress our economic well-being while determining how to reduce greenhouse gas emissions over time. For example, by financing innovative agricultural techniques, such as drainage systems, drought-resistant seeds, crop rotation, and <a href="https://www.ecowatch.com/5-ways-vertical-farms-are-changing-the-way-we-grow-food-1882019986.html">vertical farming</a>, FSPs can encourage new methods that will allow the populations most vulnerable to climate change to continue to thrive.

FSPs no doubt have a plethora of challenges to navigate, including many that appear more direct and immediate – market competition, client satisfaction, institutional funding, political instability, and so forth. It would be easy to dismiss climate change as a factor that cannot be controlled. However organizations are recognizing that it is not something to be ignored, and have started to develop solutions. Let’s take a look at a few examples.

Asobancaria, the banking association in Colombia, launched an initiative in 2016 backed by the country’s government called <a href="http://www.asobancaria.com/protocolo-verde/">Protocolo Verde</a>, which, among its activities, uses “green bonds” to finance projects in the environmental sector. These include clean transportation, green buildings, bioenergy, and energy efficient resources. Elsewhere in the region, the Inter-American Development Bank implemented <a href="http://www.ecomicro.org/en-us/Home/About.aspx">EcoMicro</a>, a program that partners with financial institutions to help them provide green financial products to rural communities. Among its products, EcoMicro has designed loans for projects ranging from solar panels to smaller installments such as <a href="https://www.youtube.com/watch?v=JyvFE53IX6A">energy efficient refrigerators</a>.

The United Nations has adapted two programs that focus on green microfinance. The first program is the Microfinance for Ecosystem-based-Adaptation to Climate Change (<a href="https://www.dropbox.com/s/r4j66t8rwie0iwh/1.%20Microfinance%20for%20Ecosystem%20based%20Adaptation_Options%2C%20costs%20and%20benefits.pdf?dl=0">MEbA</a>), which is working to improve the resilience of agricultural workers and rural populations in Latin American and the Caribbean that are particularly susceptible to the impacts of climate change. In addition to developing new financing solutions for MFIs to offer to lessen these impacts, they are also working to detect knowledge gaps among MFIs and their clients.

The second UN program is called <a href="http://www.uncdf.org/en/cleanstart">CleanStart</a>, which finances clean energy and technical assistance in six nations across Africa and Asia. CleanStart co-invests in innovations from financial institutions, distributed energy service companies, and providers of financing for clean energy. Energy consumption is a major household expense in these regions; for example, a Ugandan household might spend <a href="https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=UG">$20 per month on energy</a>, a whopping 40 percent of the average monthly income. Furthermore, because women and girls still take on most of the domestic responsibilities, they are disproportionately affected by the health impacts of dirty energy. By investing in efficient, quality energy, CleanStart is able to reduce the expensive costs associated with nonrenewable energy, and also improve household productivity in impoverished communities.

Harvey is not a one-off occurrence. It is part of an alarming, growing trend. Landscapes are changing before our eyes. During California’s drought, I remember watching agricultural lands turn to desert in just a few short years of driving between UCLA and my home near the Bay Area. As the ramifications of climate change become increasingly visible, FSPs will have to not only improve the efficiency of their own practices, but also continue to develop innovative products and services that aim to mitigate their impacts. FSPs can have a powerful influence on these climate developments by supporting financial markets that encourage the creation of environmentally-friendly and sustainable services that will allow societies to prosper.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/01/27/the-green-digital-finance-alliance-launched-by-ant-financial-and-the-united-nations/">The Green Digital Finance Alliance Launched by Ant Financial and the United Nations</a>

<a href="https://cfi-blog.org/2016/11/11/combatting-pollution-in-delhi-with-clean-energy-financing/">Combating Pollution in Delhi with Clean Energy Financing</a>

<a href="https://cfi-blog.org/2016/11/29/what-to-consider-when-investing-in-green-microfinance/">What to Consider When Investing in “Green” Microfinance</a>

Rachel Morpeth

Latest by Rachel Morpeth

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