In making the case for financial inclusion, advocates often try to appeal to our business sense, rather than just speak to how it can improve people’s lives. In so doing, they often refer to the “business case,” which in some ways feels like an attempt to convince the disinterested or the skeptics. It’s an acknowledgement that in order to muster the resources needed to make the financial system work better for lower income market segments, there has to be a payoff for those who provide the services. The fact is that the future of financial inclusion depends greatly on there being a payoff. And when you stop and think about it, it shouldn’t be that hard to show that there is one.
As the title to this post suggests, the value that financial inclusion can help to unlock could very well be measured in the trillions of dollars. So, what we see is an enormous asset (arguably with the potential to surpass the value of all the gold in the world, for example), and it behooves those of us in the financial inclusion community to capitalize on this to expand our influence in the market.
To help drive home this point, I’ll borrow from my previous experience with RevolutionCredit, one of Accion Venture Lab’s portfolio companies that is pioneering the use of behavioral analytics to help lenders improve credit-decisioning and consumer engagement. While at RevolutionCredit, I built business cases all the time to help our business development team articulate the potential financial benefit that prospective clients could capture by using RevolutionCredit for various use cases, such as improving collections or increasing account activations. And even though RevolutionCredit represents a win-win proposition for both consumers and providers, it was very important to emphasize first and foremost the potential payoff to providers of using our services. Only through our partner providers could we have any effect on consumers.
Similarly, for financial inclusion to have large-scale impact, we need to put on our business development hats and do our best to identify and sell innovative solutions that truly align commercial interests with long-term societal well-being. We need to leverage the market power represented by the current and potential income of lower income consumers to enlist the support of business in building a world that is both financially inclusive and sustainable. The alternative would be to leave the markets largely to their own devices, missing an opportunity for positive disruption. But we’re talking about 3 billion underserved people in markets that are likely to represent an increasing share of future economic growth. So, shouldn’t it be easy to make the case?
What follows is a high-level attempt to construct a financial inclusion business case using some recently updated World Bank poverty line data and findings from the now-famous Suri and Jack study on the impact of M-PESA on poverty in Kenya to inform some of my assumptions. Suri and Jack found that the expansion of M-PESA, which initially allowed users to send and receive money using their mobile phones and later also offered access to savings and credit, triggered a reduction in extreme poverty (living on less than $1.25 per day) by 22% and poverty (living on less than $2 per day) by 13%, primarily among female-headed households.
In a nutshell, this exercise simply ballparks the potential incremental income that could be generated among the 3 billion globally who are financially underserved, using the M-PESA experience as a proxy for the impact that financial inclusion can have. And while this is based on incremental income for consumers, the implication is that much of this income would also translate to additional revenue opportunities for providers as the new wealth flows through the system.
Using World Bank data, I have assumed an average starting income of $3.87 per day for the financially underserved. I have also assumed from the Suri and Jack study that both the percent of people lifted from poverty (those whose daily income is lifted above the relevant poverty line) and the percent by which incomes are lifted (to get these people out of poverty) could range from 10% to 20%. The resulting matrix below shows the present value of the future potential incremental income generated under the different scenarios. (Note that this is on top of the existing income the financially underserved already generate.)
For a walk through the calculations, we can look at the blue cell in the center of the matrix as an example. Here we have a 15% income lift, which would amount to about $212 per person per year ($3.87 x 15% x 365), and we also have 15% of the 3 billion financially underserved (450 million people) experiencing this lift. This would equate to $95.3 billion in incremental income which would continue on and grow into the future. But in order to express what this new stream of income is worth in today’s dollars, we can think of it as a growing perpetuity and discount it back. To do this we have to divide the $95.3 billion by the difference between the discount rate and the income growth rate ($95.3 billion / (10%-3%) = $1.4 trillion) to get the present value. This same walk is how each value in the matrix is derived.
As can be seen from the range of values in this matrix, just by estimating off of this one M-PESA experience alone we’re already seeing a potential trillion-dollar+ payoff. But imagine the combined effect of multiple use cases when the financially underserved are able to benefit from a full suite of financial services. The payoff could be measured well into multiple trillions.
A very quick and simple way to think about this would be to imagine that financial inclusion could help to lift the annual incomes of the 3 billion financially underserved by, say, $250 on average. When you do the math using the same growth and discount rates from the table above, you get a future stream of incremental income with a present value of roughly $10.7 trillion in the aggregate. To put this in context, this would equate to about 14% of global GDP in 2017.
The scale of this opportunity was also highlighted in a previous report by the Center for Financial Inclusion, Growing Income, Growing Inclusion: How Rising Incomes at the Base of the Pyramid Will Shape Financial Inclusion, which projected a near doubling in the incomes (from $3.1T to $5.8T) of the bottom 40% of people in low- to middle-income economies from 2010 to 2020. The growth – fueled predominantly by East Asia, Eastern Europe and Central Asia, and Latin America – is taking place as more people move out of poverty and into what is called the “vulnerable class,” defined as having an income of $4 to $10 per day. While people in this income group may not yet have reached the middle class, the report discusses evidence showing that higher incomes do translate to increased usage of formal financial services and emphasizes the need for financial service providers to better understand customers in these segments and appropriately design products in order to win their trust and business.
This is not to downplay the complexity of the challenges we face in trying to build a sustainable and financially inclusive world, nor is it an attempt to suggest that everything can be solved through commercial means. But using these business case approaches to help frame the opportunity is ultimately about enhancing our ability to turn market forces onto the problems we care about most. There truly is a big payoff here that goes beyond dollars and cents because business opportunities are really a function of human well-being in the long run. When we develop commercially viable financial services that can help low-cost private schools improve their facilities, smallholder farmers increase crop yields, families afford solar energy, and entrepreneurs improve sanitation (just to give a few examples), we are effectively steering money into the basic life needs that really are prerequisites for authentic, long-term business growth. Our ability to cultivate new markets that can sustainably grow well into the trillions of dollars is ultimately predicated on our ability to improve the human condition. At the end of the day, this is why the future of financial inclusion is about much more than financial services.
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