Former Secretariat Director of the United Nations Secretary-General’s Task Force on Digital Financing of the Sustainable Development Goals

Tillman Bruett

Greta Bull

The CFI-MIX integration is a powerful means to preserve gains both organizations have made for inclusive finance, and to position them to tackle new challenges in a sector going through profound structural change.

Blog Post

<em>This post was <a href="https://nextbillion.net/mix-center-financial-inclusion-joining-forces/">originally published</a> on NextBillion.</em>

The financial inclusion community has been built over many years through strategic investment and coalition building among like-minded donors, practitioners, investors, regulators, researchers and sector support organizations. It is a unique coalition that has been able to effectively move the needle on access to financial services for the world’s poor for more than three decades. Yesterday came news that two key players in the inclusive finance space are joining forces: <a href="https://www.themix.org/">MIX</a>, for nearly 20 years the chief data resource for inclusive finance, and CFI, a leading independent think tank. The two organizations issued a <a href="https://centerforfinancialinclusion.org/mix-and-cfi-announce-strategic-integration-to-drive-industry-knowledge-for-inclusive-finance/" target="_blank" rel="noopener noreferrer">joint press release</a> announcing that, effective next week, MIX will officially become a unit of CFI. MIX’s formidable data skills will complement CFI’s work to empower low-income customers during a time of rapid and profound change in the sector.

The forces of global economic integration and technology have been reshaping industries, giving rise to new actors and business models – and the financial services sector is no exception. Findex, the World Bank’s triennial financial inclusion survey, found that the share of financially included adults rose by 18 percent between 2011 and 2017, progress that is impossible to imagine without digital technology. While much of that rise was driven by mobile network operators and a few tech-savvy banks, the market has unleashed a torrent of innovation that has pulled in companies that are new to financial services, including massive platforms like Google and Tencent. Hundreds, if not thousands, of smaller fintechs are also finding opportunity in this watershed moment to quickly go to market with financial service offerings that are more accessible, innovative and, ideally, appropriate for those who are financially excluded or poorly served.

Yet the more that financial services, especially for low-income segments, become the province of tech-powered platforms and other players who are not required to report to any central authority, the more market data becomes fragmented and siloed. This makes it more difficult to have a complete view of how low-income customers are being reached and whether they are being served responsibly. It’s potentially an unhealthy state of affairs. Trustworthy, accessible information is a fundamental requirement for the proper functioning of any market, so this rapidly accelerating data fragmentation should be cause for concern.
<blockquote>Trustworthy, accessible information is a fundamental requirement for the proper functioning of any market, so rapidly accelerating data fragmentation should be cause for concern.</blockquote>
When MIX was founded in 2002, information asymmetry was one of the defining constraints on inclusive finance. Many of the operators were unregulated credit-only providers, and there were no universal standards – much less a repository for reporting them. With the backing of a cross-section of industry stakeholders, MIX did the hard, unglamorous work of designing data standards to define and measure simple and vital data points such as “active customer” and “self-sufficiency,” which enabled meaningful comparisons between financial services providers. MIX created benchmarks to identify investment opportunities, and built relationships of trust around the world to encourage financial services providers to report their data, and capital markets to make use of it. All of this is easy to take for granted now. But MIX’s work to build a massive storehouse of robust supply-side data helped correct a market failure, which in turn helped unlock billions of dollars in investment flows. MIX is now at the forefront of filling the void of data on fintechs, defining and measuring some of the same data points it worked with in its early days – while also gathering and analyzing additional data demanded by today’s donors and investors, covering areas such as “annual revenue per user” and “inclusivity.”

Just as MIX made important contributions to building the supply-side understanding of inclusive finance, CFI has been one of the leaders on the demand side. Formed in 2009 by Accion as a public good to the sector at a critical moment when widespread over-indebtedness was driving microfinance clients to despair and even suicide, CFI emerged as a powerful voice for consumer protection. It launched the Smart Campaign, a global effort to embed client-centricity into the culture and operations of inclusive finance, and its applied research into the financial behaviors and needs of low-income people has made a major contribution.

The two organizations’ skills, in other words, complement each other perfectly. Data is the raw material that fuels insights and thus advocacy. Those functions are stronger together, and that strength is needed more than ever at this moment, when the same technology revolution that is expanding access so dramatically is also making market data more opaque – and raising important new consumer protection concerns, especially around privacy. The CFI-MIX integration is a powerful means to preserve the gains that both organizations have already made for inclusive finance, and to position them to tackle new challenges together.
<blockquote>The two organizations’ skills complement each other perfectly.</blockquote>
This merger of opportunity happens at a time when the development community has unified around the Sustainable Development Goals (SDGs), an inspiring and ambitious agenda with a price tag to match: almost $4 trillion per year by some estimates. It is a sum that requires crowding in capital on a massive scale. This has resulted in more development assistance being channeled directly into SDG-related investments and less into entities like MIX and CFI, which offer public goods -- information, benchmarks, principles, guidelines -- that catalyze investment, build inclusive sectors and protect citizens. Public goods are particularly important during periods of disruption; they are used by entrepreneurs, policymakers, regulators, journalists and development organizations to find opportunities and make sound decisions. On top of this is another important factor, which is of course the COVID-19 pandemic and the economic earthquake it is creating around the world. As organizations scramble to understand what is happening on the ground, the need for real-time data and principles for the protection of vulnerable customers is more urgent than ever.

In a sector going through such profound structural change, it is also critical for inclusive finance to move away from specialization and silos to build agile, more robust businesses and organizations that contain a wider range of skills, which can operate more efficiently and take greater risks in pursuit of a broader agenda. But that’s easier said than done. Business school case studies abound with examples of mergers and acquisitions that made perfect sense in the spreadsheet but proved a lot harder when organizational cultures and leaders’ resolve were put to the test. We have confidence that this marriage will be a success story, as it is being led by some of the most respected and experienced veterans in the inclusive finance sector, who share a vision and a strong commitment to the future of public goods in the inclusive finance space.

We hope that MIX and CFI’s choice to integrate can serve as an example of successful, mission-driven consolidation for the financial inclusion community. We will need to continue to work together if we hope to match the achievements of the last 10 years of inclusive finance and to overcome the challenges -- and embrace the opportunities -- that lie ahead.

<em>Note: Tillman Bruett is a member of the MIX board.</em>

&nbsp;

&nbsp;

Stronger Together: Why MIX and the Center for Financial Inclusion are Joining Forces

Sustainable development needs digital financial services. Here’s how they can be more relevant for the underserved. 

When planning UNCDF’s third global conference on digital finance in 2017, I half-jokingly proposed the theme be <a href="https://www.uncdf.org/article/4162/dfs4what---building-inclusive-digital-economies">#DFS4What</a>, which ultimately did become the 2018 conference’s focus when we convened in Dakar. The title encapsulated something we had been seeing across our work in Africa and Asia: in least developed countries, the benefits to the majority of the population of having digital accounts, particularly amongst the rural and poor, simply did not outweigh the costs. While we often attribute financial exclusion to policies, business models, product design and practices, we saw in our own data in <a href="https://www.cgap.org/blog/making-digital-payments-work-low-income-farmers">Uganda</a> and other countries that the financially excluded chose to remain financially excluded because a digital account wasn’t better than cash, and it did not solve a very real and immediate need or desire for clients. It’s difficult to move beyond the 35 to 40 percent of the population actively using digital finance accounts unless we could make digital finance more relevant for people’s daily lives.
<blockquote>It’s difficult to move beyond the 35 to 40 percent of the population actively using digital finance accounts unless we could make digital finance more relevant for people’s daily lives.</blockquote>
At the same time, the benefits to developing economies of going digital are considerable. As <a href="https://www.gsmaintelligence.com/research/?file=b9a6e6202ee1d5f787cfebb95d3639c5&amp;download">GSMA has quantified</a>, in 2018, mobile technologies and services generated $3.9 trillion of economic value (4.6 percent of GDP) globally, a contribution that will reach $4.8 trillion (4.8 percent of GDP) by 2023. In 2016, McKinsey estimated that digital finance could contribute 5 to 10 percent to a developing economies’ GDP over a decade.

It also has development benefits. The United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development, UNCDF, the Better than Cash Alliance and the World Bank <a href="https://www.unsgsa.org/files/1615/3738/5820/SDG_Compendium_Digital_Financial_Inclusion_September_2018.pdf">highlighted</a> the many ways in which digital financial inclusion was igniting progress toward the SDGs.

The financial inclusion community faces a conundrum. How do we promote digital finance as something that we believe is good for development even though it may not necessarily be of great (or any) benefit for many of the world’s poor in the short and medium term?

In discussions with colleagues over the past few years, some ideas and approaches have come up that are worth considering.
<h2>1. Make it useful.</h2>
PayGo solar has shown us how a very specific use case that solves a very real need can drive digital financial inclusion. A CGAP brief three years ago pointed out how 30 to 50 percent of PAYG (pay-as-you-go) solar customers in East Africa <a href="https://www.cgap.org/sites/default/files/Brief-Digitally-Financed-Energy-Mar-2016.pdf">opened a mobile wallet</a> in order to purchase a digitally-financed energy solution. These PayGo models are ideal for small assets and services, from clean water to cook stoves to riding on <a href="https://safeboda.com/ug/">safe bodas</a>. Focusing on what digital finance is for rather than on why digital finance is important is key to reaching low income populations.
<h2>2. Make it fun.</h2>
As <a href="https://www.economist.com/leaders/2019/06/08/the-second-half-of-humanity-is-joining-the-internet"><em>The Economist</em> recently pointed out</a>, recent migrants to the digital world spend most of their time chatting with friends and streaming videos for which they happily pay. So it’s important to remember its not only about what people need (or what the development community thinks they need), it’s about what they want. I’m not suggesting that we should ignore the dangers, such as digital credit being used for betting, but we be open to the idea that the drivers of digital financial inclusion may be for social or entertainment purposes, such as downloading music and <a href="https://www.ft.com/content/74e9c2a0-1792-11e8-9376-4a6390addb44">red envelopes</a> for the lunar festival.
<h2>3. Make it lucrative.</h2>
Creating an affordable merchant acceptance network for digital payments has long been seen as the elusive magic elixir for digital financial inclusion. But it may be e-commerce, or more appropriately “<a href="https://www.investopedia.com/terms/m/mobile-commerce.asp">m-commerce</a>,” that drives usage before merchants do. E-commerce in the Asia Pacific region generated over <a href="https://www.telecomreviewasia.com/index.php/news/featured-articles/1640-in-with-the-new-how-fintech-and-e-commerce-are-driving-innovation-in-asia">$900 billion in total revenue</a> in 2017 and as Alibaba has demonstrated with Alipay, e-commerce can drive much greater access to a range of financial services. Last year, Facebook reported that it had over <a href="https://www.cnet.com/news/facebook-marketplace-is-used-in-70-countries-by-800-million-people-monthly/">800 million users in over 70 countries</a> for its Marketplace platform. In places like Myanmar, cash on delivery is the way most users on Marketplace close a deal. While the fate of Libra still hangs in the balance, other companies like Grab have moved into free digital accounts to support their ride hailing and other m-commerce offerings.
<h2>4. Make it free.</h2>
This is a counterintuitive counter proposal to the previous suggestion. The user-pays model of digital finance has always been problematic: to many low-income users, it’s a psychological and, in some cases, financial barrier. Alipay and GrabPay do not charge users directly. They make money on their core business. So too does Telesom Zaad in Somalia, which makes up the cost of managing its mobile money service through the increase in mobile and data sales. Digital finance provides so many positive externalities, efficiencies and cost savings for businesses and governments alike that there is a strong argument to move to a “freemium” model for customers for basic accounts and payments and instead let large corporate, NGO and government users bear the costs.
<h2>5. Make it easier.</h2>
The JAM trinity of India, combining identification, real-time payments, and basic accounts is a great example of how government innovation is building a backbone for businesses of all types to provide and use digital finance. The next challenge for regulators and the industry alike is to create a simple way for m-commerce firms to embed payment options to on-line and in-person payments. Interoperability is not enough. There is a need for better interfaces between m-commerce sites and payment apps and for simple, standard rules of the game and pricing so that anyone who follows and plays by the rules can be part of the digital economy.

&nbsp;

The advent of fintech is making digital finance happen in new ways and by new actors, which are making it useful to people in ways that go well beyond our traditional understanding of financial inclusion. We now see how digital financial inclusion is increasingly being driven by the lure of the broader digital economy in all of it chaos.

This comes at a time when the global financial sector – indeed monetary systems themselves – are in a state of flux. In my work as Secretariat Director of the United Nations Secretary-General’s Task Force on Digital Financing of the Sustainable Development Goals, we conducted a landscape study to look at <a href="https://digitalfinancingtaskforce.org/wp-content/uploads/2019/07/DFET-White-Paper-Final-08-17-afa.pdf">how the changes in finance due to digitalization were impacting sustainable development</a>. What we noted is that beyond digital retail finance and fintech, innovations in global finance are also beginning to have positive impacts on development and financial inclusion. Payments is a clear example, with new, cheaper money transfer services like Remitly and Transferwise making cross border payments cheaper, faster and more secure. Insurance is another, with global insurers deploying increasingly sophisticated index insurance models that are being used to provide small farmers in Africa with crop insurance.
<blockquote>Innovations in global finance are also beginning to have positive impacts on development and financial inclusion.</blockquote>
&nbsp;

Which brings me to my last suggestion:
<h2>6. Make it global.</h2>
It’s easy to get bogged down in all of the barriers to reaching the next 1.7 billion unbanked through digital finance. From connectivity to cybersecurity, the challenges are considerable. Digital finance might be a just small part of many larger developmental, environmental and business opportunities. Digital finance is key to solving energy challenges – and taking advantage of the clean energy opportunity. It is vital for the booming ride hailing and food delivery sectors around the world – sectors which hire a number of poorer members of society, if not sustainably, at least temporarily. It is critical to boosting tax collection and reducing “leakages” in government payments. In short, we have allies, a lot of them around the world, all of whom stand to benefit from digital payments. Our challenge is harnessing them and finding ways to work together to accelerate access to digital finance.

These six suggestions might go a long way toward boosting digital financial inclusion, and, in doing so, boost development and build the digital economy. Do you have any suggestions to add? Share in the comments below!

Tillman Bruett

Latest by Tillman Bruett

Stay informed. Subscribe to our newsletter.