In emerging economies, the growth of mobile phone use has contributed to an explosion of data that can be fed into algorithms to make predictions about individuals, including who is creditworthy, and offer financial products and services. As of 2020, <a href="https://www.gsma.com/r/wp-content/uploads/2020/09/GSMA-State-of-Mobile-Internet-Connectivity-Report-2020.pdf" target="_blank" rel="noopener noreferrer">half of the world’s population used mobile internet</a> and digital finance offerings have grown in tandem, often framed as engines of financial inclusion. The massive growth in available data and companies to serve customers that had previously been invisible to the financial system might suggest that the problem of thin-file customers has been solved and long-standing financial inclusion gaps are closing.

But the truth is, we don’t know what the impact is yet.

So amidst the rush to generate and leverage new data trails, CFI is embarking on a learning agenda around financial inclusion at the data margins. In pursuit of that, we are rethinking assumptions, and learning from broader tech-oriented conversations about the intersection of alternative data, algorithms and digital profiling, and how these more technical issues interact with socio-economic and gender-oriented issues surrounding digital literacy, financial capabilities, and social norms.
<h2>What Does it Mean to Lend to a Phone Line?</h2>
In the context of financial inclusion, making people visible to the financial market nowadays increasingly means having a digital financial identity based on volumes of (mobile) data that’s both related and unrelated to the actual financial behaviors of an individual. The expansion of digital lending, for example, utilizes non-traditional mobile data such as SMS, device usage and model information, social network activity, contact lists, call logs, app use, location data, and more to construct a picture of an individual’s cash flow or income.

Some of these sources are intuitively linked to financial activity, such as SMS receipts for mobile wallet transactions. Other data -- referred to by some as <a href="https://www.upturn.org/static/files/Knowing_the_Score_Oct_2014_v1_1.pdf" target="_blank" rel="noopener noreferrer">“fringe” alternative data</a> -- like social media activity, is further removed and its value as a fair and accurate predictor of creditworthiness is less established.
Given that data-driven models leverage phone-specific variables, the limits on women’s phone use or migrants’ access to a SIM card will change the data trail they leave and, in turn, the decision that an algorithm may make about their access to a loan.
<blockquote class="pullquote--right">The limits on women’s phone use or migrants’ access to a SIM card may change the decision an algorithm makes about their access to a loan.</blockquote>
In developing economies, women are less likely to own a phone and <a href="https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2020/05/GSMA-The-Mobile-Gender-Gap-Report-2020.pdf" target="_blank" rel="noopener noreferrer">access mobile internet</a>. Phone-sharing commonly acts as a barrier to phone ownership for women as well as other vulnerable groups like migrants or refugees. It’s prevalent due to cost constraints or gaps in identity documents required for registering a SIM card. What does it mean when an algorithm is facilitating lending to a phone line, rather than an individual? What are the implications of this and other extant barriers in determining how inclusive these new tools are?
<h2>Risks of Data Marginalization: Where to Begin?</h2>
In the U.S. and Europe, risks and evidence of data marginalization have prompted calls for greater oversight, but little research has documented what these risks look like in the data environments of developing markets. There is much that we need to learn:
<ul>
 	<li>How large is the risk of cementing exclusion in a data-driven financial system for consumers at the data margins?</li>
 	<li>What strategies and tools are available to companies, investors, and regulators to address these risks, and what resources and skills do they require to be effective?</li>
 	<li>What are the incentives for private sector companies to act on this risk?</li>
 	<li>Globally, we see strides made on data privacy and emerging digital rights, but how will people with limited digital capability be able to meet these new rights and responsibilities?</li>
</ul>
CFI and others, like our friends at <a href="https://www.womensworldbanking.org/insights-and-impact/report-algorithmic-bias-financial-inclusion-and-gender-primer-opening-up-new-credit-to-women-in-emerging-economies/" target="_blank" rel="noopener noreferrer">Women’s World Banking</a>, are beginning to address these questions and establish a learning agenda for the sector.

It is critical we set out on a path for answers now in this period of global data ecosystem transformation. As a fintech from Southeast Asia explained, “You can’t make those [anti-bias] changes when you’re doing a million loans a day… a little bit of a loss now and a gain later is better than taking a loss at that scale.”

Let this remark serve as a wake-up call for all development stakeholders that are building data solutions today not to lose sight of the people behind the mobile phones and to examine how technology and data can help us build an inclusive tomorrow.

This topic is one of CFI’s strategic pillars, so consider this the first mile of a learning journey that will take all of us to a better understanding of data risks and opportunities as they relate to financial inclusion. Stay tuned to this space, sign up for <a href="https://centerforfinancialinclusion.us5.list-manage.com/subscribe/post?u=394352ae963270aef6c51680d&amp;id=9df382106a" target="_blank" rel="noopener noreferrer">CFI email updates</a>, and follow us on social media for coming explorations of data risks and opportunities and how they affect low-income consumers.

Rethinking Financial Inclusion at the Data Margins

Financial Inclusion at the Data Margins

Alternative Data

Financial Technology

Data Analytics

Delivery Channels

Digital Financial Services

Blog Post

Perhaps more than ever, 2020 provided us an opportunity to reflect on that for which we are thankful. One thing we’re thankful for at CFI is our <a href="https://centerforfinancialinclusion.org/blog/" target="_blank" rel="noopener noreferrer">blog</a>, a place where CFI and our community of contributors share their unique perspectives and calls to action for inclusive finance. The 76 posts of 2020 offer incredible insights into a wide range of themes and projects across many geographies.

Not surprisingly, since late March, nearly every CFI post has covered or mentioned COVID-19 in some form or fashion. But the top 10 posts (by unique page views) also dove into topics such as data and consumer protection -- pillars of CFI’s <a href="https://centerforfinancialinclusion.org/reflecting-on-the-past-and-charting-a-new-direction/" target="_blank" rel="noopener noreferrer">new strategy</a> -- over-indebtedness in Kenya, internal migration, women’s financial inclusion (another key, cross-cutting CFI strategic focus area), a deep dive into resilience, and even how comics were used to spread COVID-19 awareness.

Happy reading, and happy new year!
<h2>1. <a href="https://centerforfinancialinclusion.org/pandemics-and-natural-disasters-what-can-we-learn-from-past-disasters-to-help-with-todays-pandemic/" target="_blank" rel="noopener noreferrer">Pandemics and Natural Disasters: What Can We Learn from Past Disasters to Help with Today’s Pandemic?</a></h2>
Two weeks after the WHO declared the COVID-19 outbreak a pandemic, Managing Director <a href="https://centerforfinancialinclusion.org/people/mayada-el-zoghbi/" target="_blank" rel="noopener noreferrer">Mayada El-Zoghbi</a> wrote about how this crisis compares to previous ones: namely, the Indonesian tsunami of 2004 and the Pakistan earthquake of 2013. She pointed out that households experience shocks similarly, regardless of the cause, and that the systemic nature of the shocks means that the firms and FSPs that serve them need to measure and implement the right responses to meet the challenge. She also predicted that the pandemic would be a “tipping point” for platform financial service provision.
<h2>2. <a href="https://centerforfinancialinclusion.org/what-is-the-future-of-microfinance-q-and-a-with-paul-dileo/" target="_blank" rel="noopener noreferrer">What Is the Future of Microfinance? Q and A with Paul DiLeo</a></h2>
This year was a tipping point for microfinance, too, noted <a href="https://centerforfinancialinclusion.org/people/paul-dileo/" target="_blank" rel="noopener noreferrer">Paul DiLeo</a> in this interview with CFI. DiLeo is the Managing Director of Grassroots Capital Management and a veteran faculty member of CFI <a href="https://centerforfinancialinclusion.org/board-leadership-for-impact-program-overview/" target="_blank" rel="noopener noreferrer">board governance training</a>. He is also coeditor of a recently published volume, “The Future of Microfinance.” DiLeo suggested that investors in this space resist the temptation to move on to the next “bright, shiny object” in financial inclusion and continue to support microfinance to preserve social missions and benefit target populations.
<h2>3. <a href="https://centerforfinancialinclusion.org/resilience-and-the-three-phases-of-response-brac/" target="_blank" rel="noopener noreferrer">Resilience and the Three Phases of Response</a></h2>
In May, BRAC’s microfinance director <a href="https://centerforfinancialinclusion.org/people/shameran-abed/" target="_blank" rel="noopener noreferrer">Shameran Abed</a> and <a href="https://centerforfinancialinclusion.org/people/laurie-j-spengler/" target="_blank" rel="noopener noreferrer">Laurie J. Spengler</a>, the CEO of Courageous Capital Advisors, wrote that resilience is the “connective tissue” between the three phases of response: relief, recovery and rebuild. The authors advocate for assessing resilience through two lenses, opportunity and risk, and point out that the pandemic is an opportunity to invest in resilience because “recurring dividends will be realized by all.”
<h2>4. <a href="https://centerforfinancialinclusion.org/data-globalization-vs-data-localization/" target="_blank" rel="noopener noreferrer">Data Globalization vs. Data Localization</a></h2>
Before the pandemic hit, CFI’s <a href="https://centerforfinancialinclusion.org/people/ethan-loufield/" target="_blank" rel="noopener noreferrer">Ethan Loufield</a> and Credit Suisse’s <a href="https://centerforfinancialinclusion.org/people/shweta-vashisht/" target="_blank" rel="noopener noreferrer">Shweta Vashisht</a> wrote about how the flow of data across borders is a contentious issue countries encounter when developing data protection laws and regulations. They present arguments for data localization, but ultimately conclude that data can, and should, be allowed to flow across borders with the right frameworks in place.
<h2>5. <a href="https://centerforfinancialinclusion.org/data-consent-lets-share-the-burden-for-effective-consumer-protection/" target="_blank" rel="noopener noreferrer">Data Consent: Let’s Share the Burden for Effective Consumer Protection</a></h2>
Also part of the <a href="https://centerforfinancialinclusion.org/data-protection-and-financial-inclusion-why-it-matters-introduction/" target="_blank" rel="noopener noreferrer">Data Protection and Financial Inclusion: Why It Matters</a> series, this post argues that it’s futile for small tech to keep up with high-standard consent practices, and that the path from data consent principles to implementation is, for low-capacity environments, “littered with landmines.” Vashisht and Loufield conclude that successful solutions need to be shouldered by both consumers and providers.
<h2>6. <a href="https://centerforfinancialinclusion.org/q-and-a-using-comics-for-covid-19-awareness/" target="_blank" rel="noopener noreferrer">Q and A: Using Comics for COVID-19 Awareness</a></h2>
<a href="https://centerforfinancialinclusion.org/people/graham-a-n-wright/" target="_blank" rel="noopener noreferrer">Graham A.N. Wright</a>, founder of MSC, sat down with CFI to discuss a series of informative comics his team produced to get the word out about the dangers of COVID. The colorful comics, complete with protagonists warning clients about the hazards of the virus and how they can help knock it out, informed how real-life group meetings and staff visits have been conducted.
<h2>7. <a href="https://centerforfinancialinclusion.org/support-for-indias-migrants-during-covid-19-navigating-potential-gaps-in-the-system/" target="_blank" rel="noopener noreferrer">Support for India’s Migrants During COVID-19: Navigating Potential Gaps in the System</a></h2>
The lockdown in India had massive impacts, perhaps for none more than internal migrant workers, who left for home villages in droves when work dried up. This post warned that system-wide social payments challenges boded poorly for these vulnerable workers due to, among other reasons, ATM access constraints and domicile restrictions of state governments. The post was authored by <a href="https://centerforfinancialinclusion.org/people/shashank-shreedharan/" target="_blank" rel="noopener noreferrer">Shashank Shreedharan</a> and <a href="https://centerforfinancialinclusion.org/people/jithin-jose/" target="_blank" rel="noopener noreferrer">Jithin Jose</a> of LEAD.
<h2>8. <a href="https://centerforfinancialinclusion.org/its-time-to-protect-kenyans-from-a-digital-lending-laboratory/" target="_blank" rel="noopener noreferrer">It’s Time to Protect Kenyans from a Digital Lending Laboratory</a></h2>
CFI’s <a href="https://centerforfinancialinclusion.org/people/alex-kessler/" target="_blank" rel="noopener noreferrer">Alex Kessler</a> warns readers that the breakneck growth in mobile lending and aggressive debt collection and debt stress have raised enormous consumer protection red flags. This article offers key statistics on mobile money’s exponential growth there, highlights the need for consumer protection-oriented algorithms, and suggests calls to action for regulators.
<h2>9. <a href="https://centerforfinancialinclusion.org/reimagining-inclusive-finance-with-women-in-mind/" target="_blank" rel="noopener noreferrer">Reimagining Inclusive Finance With Women In Mind</a></h2>
In this <a href="https://centerforfinancialinclusion.org/about/what-we-do/financial-inclusion-week/" target="_blank" rel="noopener noreferrer">Financial Inclusion Week</a> post, we meet Carla, a fictitious -- but very realistic -- mother of three young children living in a village in Tanzania. Carla’s story is like that of millions of poor women in the Global South who are excluded from financial products that weren’t designed for them. CFI gender lead <a href="https://centerforfinancialinclusion.org/people/julia-arnold/" target="_blank" rel="noopener noreferrer">Julia Arnold</a> asks our community if we are listening to women enough, and implores our sector to design and deliver financial products and services with the Carlas of the world in mind. She also provides early thinking around CFI’s gender work in 2021 and beyond.
<h2>10. <a href="https://centerforfinancialinclusion.org/can-financial-inclusion-moderate-impacts-to-coronavirus/" target="_blank" rel="noopener noreferrer">Can Financial Inclusion Moderate Impacts of Coronavirus?</a></h2>
It’s fitting that we round out the 2020 list with our very first COVID response post, written by research lead <a href="https://centerforfinancialinclusion.org/people/eric-noggle/" target="_blank" rel="noopener noreferrer">Eric Noggle</a> and published on March 20. While alarm bells in the media had sounded long before, this was one of the early posts in the inclusive finance space that offered a clear call to action for this “major stress test,” namely, getting as much money as possible into the hands of those who need it most -- and doing so as quickly as possible. How did governments of the world do? Read our December <a href="https://centerforfinancialinclusion.org/rapid-response-for-social-payments-during-covid-19/" target="_blank" rel="noopener noreferrer">policy brief</a> for examples of many governments that innovated quickly to get social payments into the literal and digital hands of citizens.
<h3>We hope you continue to read and share views from our blog in 2021. For a sneak peek into the kind of content you'll see, revisit these Financial Inclusion Week posts (plus #9) related to our top priorities for inclusive finance:</h3>
<h3>• “<a href="https://centerforfinancialinclusion.org/financial-services-are-needed-to-help-low-income-people-mitigate-and-adapt-to-climate-change/" target="_blank" rel="noopener noreferrer">Financial Services are Needed to Help Low-Income People Mitigate and Adapt to Climate Change</a>” By Eric Noggle
• “<a href="https://centerforfinancialinclusion.org/covid-19-ushers-in-new-challenges-for-consumer-protection/" target="_blank" rel="noopener noreferrer">COVID-19 Ushers in New Challenges for Consumer Protection</a>” By Lauren Braniff
• “<a href="https://centerforfinancialinclusion.org/data-for-inclusive-finance-delivering-on-the-promise-for-consumers/" target="_blank" rel="noopener noreferrer">Data for Inclusive Finance: Delivering on the Promise for Consumers</a>” By Alexandra Rizzi and Alex Kessler</h3>

Consumer Protection

Enabling Environment

Trends

Underserved Groups

Women

COVID-19 has reinforced the importance of financial services in helping people navigate the effects of the pandemic and lay the foundations for recovery. The rapidly changing context presents a unique opportunity for fintechs and other digitally driven business models to step in and onboard new customers to meet this evolving demand.

The 2020 iteration of the Inclusive Fintech 50 competition maintained the core value proposition of the 2019 initiative — a transparent methodology, independent judging panels comprised of industry experts, and a strong focus on inclusion — while iterating to ensure relevance in a particularly challenging year. The 2020 competition attracted 403 qualified applicants operating in 111 countries and reaching 116 million customers.

Drawing on the data submitted by the 2020 cohort of applicants, this paper provides insights as to how early-stage fintechs are adapting to the current economic uncertainty and continuing to advance financial inclusion and resilience for the estimated 3 billion financially underserved people worldwide.

Follow CFI and #InclusiveFintech50 for updates on Inclusive Fintech 50. For more information about the competition, insights from previous cohorts, and more, visit <a href="http://www.inclusivefintech50.com">InclusiveFintech50.com</a>.

Inclusive Fintech 50 White Paper [2020]

Inclusive Fintech 50

Financial Service Providers

Fintechs

Brief

The four largest tech companies reported more than <a href="https://www.nytimes.com/2020/07/30/technology/tech-company-earnings-amazon-apple-facebook-google.html" target="_blank" rel="noopener noreferrer">$28 billion in profits</a> in the second quarter of 2020. In the last 5 years, revenues of the world's largest tech companies have grown by <a href="https://www.mbres.it/it/publications/report-websoft" target="_blank" rel="noopener noreferrer">118 percent</a> versus only 10 percent by traditional manufacturing. Data is their “<a href="https://www.bernstein.com/Bernstein/EN_US/Research/Publications/Instrumentation/BigDatasHolyGrail.pdf" target="_blank" rel="noopener noreferrer">holy grail</a>,” (consumer personal data generates more than <a href="https://www.barrons.com/articles/why-google-and-facebook-could-dominate-big-data-51602622199" target="_blank" rel="noopener noreferrer">$50 billion in annual revenue</a> just in data broker and marketing data services) to the point that we could actually call those companies -- Apple, Facebook, Alibaba, Amazon, and others -- “digital multinationals.”

As these digital multinationals move into the lucrative and data-rich finance business, the authorities mandated to supervise the financial market -- to preserve the resilience of the financial sector, foster competition, and protect users -- are ill-equipped to oversee them.
<blockquote>The authorities mandated to supervise the financial market are ill-equipped to oversee digital multinationals.</blockquote>
This is an issue because the digital multinationals that increasingly shape our economies and societies, often in a legislation and oversight vacuum, have sought conquest of the financial system and its large -- and largely profitable -- data swathes. Alphabet (Google), Alibaba, Amazon, Apple, Facebook, and Tencent offer financial services, either wallets associated with their main products, or as standalone products.
<h2>Examples of Digital Multinationals’ Big Moves Into Financial Services</h2>
Tencent, for example, has two integrated payment platforms, Tenpay and WeChat Pay (also known as WePay) that are often referred to as a single payments platform and control <a href="https://www.forbes.com/sites/ywang/2018/03/28/is-alipay-losing-to-wechat-in-chinas-trillion-dollar-payment-war/#4662fc418822" target="_blank" rel="noopener noreferrer">40 percent of the mobile payments market</a> in China, making it the second-largest payments platform after Alibaba’s Alipay. Tencent integrates WeChat Pay into its growing ecosystem of WeChat mini programs and online-to-offline services, which offer food deliveries, online shopping, ride hailing, and other services to the messaging platform's 1.06 billion monthly active users. Alibaba's affiliate, Ant Financial, integrates Alipay into Alibaba’s Taobao and Tmall marketplaces. Both Tencent and Ant Financial are increasingly investing in, or partnering with, retailers that offer special discounts to WeChat Pay or Alipay users, and also offer microloans and wealth management products.

Facebook, the world’s leading social media network outside China, has started to roll out Facebook Pay to 2 billion WhatsApp users. In August, the Central Bank of Brazil first authorized, <a href="https://www.bloomberg.com/amp/news/articles/2020-06-23/brazil-s-central-bank-suspends-whatsapp-payments" target="_blank" rel="noopener noreferrer">and then stopped</a>, Facebook from providing payment services to <a href="https://venturebeat.com/2020/06/15/facebook-brings-payments-to-whatsapp-starting-in-brazil/" target="_blank" rel="noopener noreferrer">120 million WhatsApp users</a> in Latin America’s largest market. The bank said it had reversed its original decision to ensure competition in the payment system market, allowing the regulator more time to evaluate potential risks to the country’s payment infrastructure, and to work out whether WhatsApp is compliant with regulation. The WhatsApp payment service was also tested in <a href="https://www.techradar.com/in/news/whatsapp-pay-roll-out-will-be-further-delayed-heres-why" target="_blank" rel="noopener noreferrer">India</a> and Mexico.

Google, which has been in payments since Google Checkout’s launch in 2006, offers retail, peer-to-peer (P2P) and bill payments with Google Pay, and has partnered with eight banks to integrate digital banking. While U.S. adoption has been slow, in India -- where a whopping 98 percent of smartphones run on Android -- Google Pay has enjoyed stupendous growth, with 67 million active users as of September 2019 and $110 billion in annualized payments volume. Importantly, Google has focused on payments to boost engagement and capture data, not to reap fees -- although it takes a <a href="https://www.mobiloud.com/help/knowledge-base/what-are-apple-and-googles-fees-and-revenue-share-percentage-on-in-app-purchases-and-subscriptions" target="_blank" rel="noopener noreferrer">30 percent margin</a> on all sales within the Google Play app store.

Finally, Apple, the world’s most valuable company, uses Apple Pay to enhance the iOS platform and capture a greater share of its customers. It also takes a juicy fee on payments made in its app store.
<h2>A Capabilities Gap That’s Miles Wide</h2>
The analytical and technical capabilities of these firms far exceed those of the authorities charged with regulating them. The firms are using artificial intelligence and cloud computing to exploit the data of their users through surveillance capitalism and data mining. This is done exclusively to increase shareholders' value. Meanwhile, central banks and other agencies, which are already barely equipped for the oversight of the more traditional financial sector, are now being charged with overseeing products of digital multinationals they are not familiar with. Most supervisors rely on outdated tools such as Excel, and the uptake of new supervisory technologies is still slow. We witness astonishing delays in data validation and a scarcity of insights generated to conduct risk-based supervision and contain fraud. The roll out of reliable predictive models is also unavailable to most financial authorities. Benoît Cœuré, the new head of the Bank for International Settlements (BIS) Innovation Hub has highlighted the risks, challenges, and opportunities for financial authorities in a recent <a href="https://www.bis.org/speeches/sp200819.pdf" target="_blank" rel="noopener noreferrer">speech</a>, a call to action for the digital transformation of the public authorities that administer the financial sector.
<blockquote>We witness astonishing delays in data validation and a scarcity of insights generated to conduct risk-based supervision and contain fraud.</blockquote>
In the “<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3595344." target="_blank" rel="noopener noreferrer">data stack</a>” paper that I co-authored with Arend Kulenkampff and Matt Grasser before the pandemic, and in the 2018 <a href="http://www.r2accelerator.org" target="_blank" rel="noopener noreferrer">RegTech for Regulators Accelerator</a> (R2A) <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3249283" target="_blank" rel="noopener noreferrer">white paper</a>, we pointed at the risks of the “big data divide” between digital multinationals and financial authorities, and discussed the importance of upgrading supervisory technologies (suptech) and making new approaches to digital transformation mainstream. We also presented possible solutions to extend the benefits of the adoption of artificial intelligence (AI) and other technologies to increase competition and support innovation in the financial sector.
<h2>Pandemic Increases Urgency</h2>
I believe that the pandemic has made these demands even more urgent, and point at some priorities that financial authorities and multilateral and philanthropic organizations should consider in light of the value of financial data in today’s context, the power dynamics that are shifting with the deepening of the data divide, and the pressing need for upgrading financial supervision.

The lockdowns and physical distancing measures that governments have put in place in response to the pandemic make urgent the need for action. This year, a significant share of the world’s population was forced to work remotely and is spending more time online than ever before. During early shelter-in-place orders in the United States, daily users of Facebook increased 12 percent year over year to 1.79 billion. Monthly usage across its family of apps, which also includes Instagram and WhatsApp, rose 14 percent to 3.14 billion. And Facebook’s mostly ad-based business rose along with them: the company’s revenue was up 11 percent year over year. More than ever before, the majority of us rely on e-commerce, social media, online communications platforms, and remote, cashless transactions. This translates into growth of profit and power for the giant digital multinationals: in its fiscal 2020 third quarter, Apple posted quarterly revenue of $59.7 billion, an increase of 11 percent from the same quarter one year ago. In the quarter that ended in July, Alibaba delivered revenue growth of 34 percent, year over year.

On the regulatory side, the recently conducted <a href="https://www.jbs.cam.ac.uk/insight/2020/new-global-covid-19-fintech-study-launches/" target="_blank" rel="noopener noreferrer">World Bank-CCAF Global COVID-19 FinTech Regulatory Rapid Assessment Survey</a> (results forthcoming) will give insights into what sort of action will be needed by revealing key internal challenges for supervisors that have emerged during the pandemic. Check back here in the coming weeks for a link to those results.
<h2>Risks to Consumers</h2>
These trends represent an increased risk to consumers. First, without the right tools to identify and weigh risk, it will be challenging (impossible?) for financial authorities to supervise the rising digital-native financial sector and the giant digital multinationals. The <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3596276">automation of compliance reports</a> and tools to effectively monitor the health of financial service providers (FSPs) accessing granular and timely data are priorities, particularly at a time when on-site supervision is constrained. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3596276" target="_blank" rel="noopener noreferrer">Digital channels for complaints</a> (e.g., chatbots), and other tools to create better insights into the customer experience, are also needed.
<blockquote>Digital channels for complaints, and other tools to create better insights into the customer experience, are also needed.</blockquote>
Second, digital multinationals may snuff out the smaller, innovative FSPs, applying the same <a href="https://www.ft.com/content/39b5c3a8-4e1a-11ea-95a0-43d18ec715f5" target="_blank" rel="noopener noreferrer">“buy and kill” tactics</a> that have already come under scrutiny in other sectors, posing risks of concentration, and slowing down innovation. This tactic may bring new, much needed, competition into the financial sector at first. Some of them may provide their services for free to retain customers, boost engagement, and capture data, benefiting affordability. However, the long-term impact of the “buy and kill” tactics could be that smaller, innovative, local fintech startups that aim to serve niches of the market -- in some cases, those focused on addressing the needs of more vulnerable segments of the population -- get mopped up.

To correct the imbalance of power between giant digital multinationals and data-poor FSPs, and to counteract the emerging big data divide, a level playing field needs to be established for financial data access and usage. (This includes other data -- from telecoms, for example -- that is relevant for financial customers to make choices, and relevant for FSPs to design and roll out new products).
<h2>A Potential Solution</h2>
One way to level this playing field is a new <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3595344." target="_blank" rel="noopener noreferrer">Open Data Commons</a>, which guarantees access to rich and plentiful data to all market players and customers, and equips them with tools to make them meaningful and actionable. This establishes a shared data platform for the generation, exchange, and dissemination of insights to serve specific use cases for FSPs, customers, and other stakeholders.

&nbsp;

Financial Authorities’ Tools Must Evolve to Catch Up with “Digital Multinationals”

Payments

Policy, Regulation and Government Initiatives

<img class="alignright wp-image-40142 size-thumbnail" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/grateful-emoji-283-150x150.jpg" alt="grateful " width="150" height="150" />
<h2>Grateful</h2>
I am feeling an incredible level of gratitude to all the people who participated in Financial Inclusion Week last week. We had more than 1,200 people register for FIW’s various events. The agenda featured more than 40 sessions covering a broad spectrum of topics, time zones, and regions. Each and every session required planning and coordination. A huge thanks goes to all of our partners who chose to participate and share their learning and experiences during FIW.
<h2><img class="alignleft size-thumbnail wp-image-40143" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/monocle-5-150x150.png" alt="" width="150" height="150" />Curious</h2>
I am already a major advocate for women’s financial inclusion and believe the inclusive finance industry needs to get more sophisticated on this topic. The CFI <a href="https://youtu.be/MxXWHaNhYcY" target="_blank" rel="noopener noreferrer">podcast on social norms</a>, the Caribou Digital session on <a href="https://www.youtube.com/watch?v=SbIBJO_7cJs&amp;feature=youtu.be" target="_blank" rel="noopener noreferrer">features that drive women’s usage of DFS</a>, and the Pinbox session, "<a href="https://youtu.be/b2ulPv9INEA" target="_blank" rel="noopener noreferrer">Saving the Next Generation from Old Age Poverty</a>" (especially women, who live longer) were eye-opening. I am curious to see where our collective focus on this topic will take us.
<h2><img class="alignright size-thumbnail wp-image-40144" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/tempted-heart-eyes-emoji-150x150.png" alt="heart eyes emoji " width="150" height="150" />Tempted</h2>
There were so many sessions to choose from that there were moments I felt like a kid in a candy store. Fortunately, the sessions have all been recorded and I can go back to the ones I missed and catch up on them (and I will have a full year to do that). I’ve even mapped out a plan of action for when I’ll get up to speed on what I missed. This week, I plan on listening to the Inclusive Finance India <a href="https://youtu.be/E0Snagg7TYM" target="_blank" rel="noopener noreferrer">session on remittances</a> and GSMA’s session, "<a href="https://www.youtube.com/watch?v=B3Khho7Bgac&amp;feature=youtu.be" target="_blank" rel="noopener noreferrer">Beyond One Billion: Exploring the State of Mobile Money in Africa</a>."
<h2><img class="alignleft wp-image-40145" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/connected-emoji-300x268.png" alt="connected emoji" width="184" height="164" /></h2>
<h2>Connected</h2>
We have all been struggling to adjust to our new, social-distanced and Zoom-based world, and I was worried that more virtual events might be difficult. I was surprised at how connected I felt to the inclusive finance industry. I learned so much from the various panelists, whether it was the elaborate -- yet achievable -- <a href="https://www.youtube.com/watch?v=FLWs9JMdj7M&amp;feature=youtu.be" target="_blank" rel="noopener noreferrer">ideas posed by Sarah Gammage</a> on the role of financial services in mitigating climate risk and supporting livelihood adaptation, or <a href="https://www.youtube.com/watch?v=qjVT1EaN3QE&amp;feature=youtu.be" target="_blank" rel="noopener noreferrer">David Medine’s insightful explanation</a> as to why consent-based systems are no longer relevant for addressing data usage and data privacy concerns. There’s been a lot of talk that this industry has become more fragmented as we each dig deeper into specific silos, but this week showed me the power of coming together. It takes some effort, but the results are evident.
<h2><img class="alignright size-thumbnail wp-image-40146" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/tired-emoji-150x150.png" alt="tired emoji" width="150" height="150" />Tired</h2>
But, alas, I am human and not a complaints bot or <a href="https://www.youtube.com/watch?v=9tXAN0oicVE&amp;feature=youtu.be" target="_blank" rel="noopener noreferrer">algorithm</a>, like the ones covered in some sessions. This means by the end of the week I was tired after an incredibly packed agenda and so many interactive sessions.
<h2><img class="alignleft size-thumbnail wp-image-40149" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/cry-emoji-4-150x150.png" alt="cry emoji" width="150" height="150" />Sad</h2>
That’s why my next emoji is complex. Despite my tiredness, I am sad to see FIW 2020 come to an end. I hope that this community that has come together to share and learn from one another can somehow keep the momentum going. At CFI, we will certainly do our best to engage and learn from our partners.
<h2></h2>
<h2><img class="alignright wp-image-40150" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/lightbulb-emoji-2-300x292.png" alt="inspired lightbulb emoji " width="161" height="157" />Inspired</h2>
My final emoji is my overwhelming sense of inspiration. I hope you found FIW as inspiring a learning event as I did. From our first day with the panel, "<a href="https://www.youtube.com/watch?v=im7EP5TtGdA" target="_blank" rel="noopener noreferrer">Serving Low Income Households Impacted by Climate Change</a>," to the last day with Aspen Institute’s session, "The Road to 2030: An Action Agenda for Inclusive Financial Systems," I am inspired that so many organizations are already thinking about and taking action on some of the toughest challenges that poor people face during this extraordinary time in history.

&nbsp;

Financial Inclusion Week and My Emoji Roller Coaster Ride

Financial Inclusion Week 2020

Mobile Banking

Pensions and Retirement Saving

Saving

The Rizzi family recently returned to the US after living in Italy for three years, during which time a love for all things pizza was cemented. I could write a whole blog about the best Roman pizzeria (it's Roscioli), so when a colleague told us, the data team, about a recent <a href="https://news.stanford.edu/2017/08/03/pizza-privacy-stanford-economist-examines-paradox-digital-age/" target="_blank" rel="noopener noreferrer">study about pizza and data privacy</a> – MIT undergraduates were willing to relinquish their friends’ personal information in exchange for a free pizza – we were interested.

Should we chalk the results up to college students’ love of late-night snacks? Not exactly. This year, the Ipsos Global Trends survey across 33 countries found that despite growing concern around big data, nearly <a href="https://www.ipsosglobaltrends.com/2020/02/data-dilemmas/" target="_blank" rel="noopener noreferrer">half of respondents said they would trade their information away</a> in return for personalized services and products. This was a 7 percent increase since the last time the survey was conducted in 2013. It’s easy to assume that this implies that people don’t care about data protection, but it fails to account for the frequently zero-sum choice presented to consumers for whom access to vital products and services increasingly relies on digital gatekeepers. The financial inclusion field is no exception.
<h2>Unchecked Superpowers?</h2>
For the unbanked and underbanked and those that work with them, the explosion of available data, data-crunching services and data-enabling regulatory schemes bring unprecedented potential. A BFA paper called certain artificial intelligence applications "<a href="https://bfaglobal.com/wp-content/uploads/2019/03/FIBR-Artificial_Intelligence_FINAL_MAY2018-1.pdf" target="_blank" rel="noopener noreferrer">practical superpowers</a>" and the possibilities to unlock wealth and opportunity for the poor indeed seem extraordinary – from prospecting and credit scoring for thin-file consumers to well-timed nudges for saving, from fraud management and complaint chatbots to access to e-commerce platforms and <a href="https://www.cgap.org/blog/open-banking-7-ways-data-sharing-can-advance-financial-inclusion" target="_blank" rel="noopener noreferrer">open banking regimes</a>. At CFI, we feel the case has been <a href="https://centerforfinancialinclusion.org/accelerating-financial-inclusion-with-new-data-2/" target="_blank" rel="noopener noreferrer">well-articulated</a> for supporting a myriad of <a href="https://www.cgap.org/research/publication/using-satellite-data-financial-inclusion" target="_blank" rel="noopener noreferrer">data-driven tools</a> and will continue to be made.
<blockquote>Data-driven tools must also be examined for their risks, pitfalls and unintended consequences.</blockquote>
Our perspective is that for these opportunities for financial inclusion to be fully realized, they must also be examined for their risks, pitfalls and unintended consequences for low-income consumers. This lens is not meant to throw a wet blanket on innovation and enthusiasm, but to have a clear-eyed focus in a world where data is <a href="https://cloudian.com/blog/getting-a-handle-on-data-growth/#:~:text=According%20to%20IDC%2C%20the%20world's,all%20this%20data%20the%20same." target="_blank" rel="noopener noreferrer">growing by the zetabyte</a> (10^21) every month, where tens of thousands of individuals become digital immigrants every day and where innovation <a href="https://www.centerforfinancialinclusion.org/data-consent-lets-share-the-burden-for-effective-consumer-protection" target="_blank" rel="noopener noreferrer">races ahead of traditional guardrails</a> on data protection and privacy.

Our vision is that digitization is catalytic for the poorest and most vulnerable consumers, not just those who are already on the pathway to digital inclusion. Looking at developed markets where smartphone ownership is widespread, we still see vulnerable communities trapped in a state of <a href="https://socialchangenyu.com/review/the-surveillance-gap-the-harms-of-extreme-privacy-and-data-marginalization/" target="_blank" rel="noopener noreferrer">data marginalization</a>, due to gaps in technology access, fear of documentation, or failures of mainstream data collection mechanisms. As the use of alternative data to drive financial products grows and other data tracking systems, such as biometrics, expand, developing countries may see more data silos and failures in capturing a holistic picture of the lives of the poor.

We see evidence of this when looking at the consumer base of digital credit products, which tend to be <a href="https://www.centerforfinancialinclusion.org/making-digital-credit-truly-responsible" target="_blank" rel="noopener noreferrer">younger men living in urban areas</a>. There are many reasons why women may not be accessing these products, but failing to account for <a href="https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2020/05/GSMA-The-Mobile-Gender-Gap-Report-2020.pdf" target="_blank" rel="noopener noreferrer">limits on women’s use of smartphones</a> is a structural barrier to collecting accurate data to use in digital credit decision models. Pushing for rapid onboarding to digital finance without an understanding of these dynamics could lead to a more entrenched digital divide, unintentionally excluding those who could benefit most from new products and services because of their incomplete digital footprints.
<blockquote>CFI plans to build on its experience in financial consumer protection to focus on key questions around data and financial inclusion.</blockquote>
CFI plans to build on its decade of experience in financial consumer protection to focus on key questions around the promise of data and financial inclusion. And we are raising several of these issues as part of <a href="https://pheedloop.com/fiw2020/virtual/" target="_blank" rel="noopener noreferrer">Financial Inclusion Week 2020</a>.
<h2>Hot Topics</h2>
<h3>Responsible Algorithms</h3>
The data-driven predictions in the financial inclusion space that have grabbed the most headlines in recent years have been on <a href="https://www.accion.org/digital-lenders-can-help-unlock-full-financial-inclusion" target="_blank" rel="noopener noreferrer">consumer creditworthiness</a>. In economies where there is less access to reliable financial data, providers are leveraging other sources, the bulk of which come from mobile phones but can also include social media, geospatial data, etc., in order to make underwriting decisions. Today there is limited visibility into the type of data that financial service providers are collecting and how they are using it, with few incentives for transparent data practices.

CFI is interested in examining how financial inclusion actors approach the use of algorithms and automated decision-making, especially using alternative data, as their use becomes ever more pervasive in the industry. Within this arena are several important topics, including how to effectively measure capacity to repay with alternative data as well as how to mitigate against biased decisions. Although algorithms and automation don’t necessarily lead to discrimination, bias can occur at <a href="https://medium.com/impact-engineered/understanding-bias-in-algorithmic-design-db9847103b6e" target="_blank" rel="noopener noreferrer">varying stages</a> – from the data sources, processing, model development, or outputs. And there are heightened risks that biases, which could undermine financial inclusion goals, could arise from data that does not paint a full enough picture of a low-income person or customer segment.
<blockquote>Algorithms are not designed to be interpretable or explainable.</blockquote>
Compounding this, algorithms are not designed to be interpretable or explainable, and are often treated as trade secrets that are only understood by few within an organization. Data protection frameworks have emerged in developed markets that empower consumers with data rights vis-à-vis automated decision-making, and rely heavily on <a href="https://gdpr-info.eu/art-22-gdpr/" target="_blank" rel="noopener noreferrer">consent</a>. As the principles in these frameworks percolate into emerging markets, we wonder what constraints and barriers there are in their implementation.
<h3>Beyond Consent</h3>
While notice, choice and informed consent have been the traditional approach to data privacy, those concepts seem ill-equipped for our data-driven world. For instance, you probably already knew that the apps you use monitor your location to send you custom advertisements, but did you know that a <a href="https://www.wired.com/story/wired-guide-personal-data-collection/" target="_blank" rel="noopener noreferrer">hedge fund might also buy</a> that geolocation data to figure out which stores you like? Or that there is a whole industry of data brokers – scraping, compiling and collating bits of data about you to monetize and make predictions about your behavior? <a href="https://www.fastcompany.com/90310803/here-are-the-data-brokers-quietly-buying-and-selling-your-personal-information" target="_blank" rel="noopener noreferrer">Acxiom</a>, one of the biggest, operates in more than 62 markets and has information on over 2.5 billion consumers. Especially for low-income or vulnerable consumers, who are both often targets for data collection efforts and less likely to understand or use basic privacy protections, consent-based approaches seem insufficient. New approaches beyond consent are <a href="https://www.cgap.org/events/beyond-consent-why-new-approaches-data-protection-and-privacy-digital-age-are-needed" target="_blank" rel="noopener noreferrer">clearly needed for data</a> protection in financial inclusion (and beyond), but what might those look like in practice, who bears the cost for them and who determines their efficacy?

We hope you continue to engage us and challenge us on these issues, not only during this <a href="http://www.financialinclusionweek.org" target="_blank" rel="noopener noreferrer">Financial Inclusion Week</a>, but as we roll out our new <a href="https://centerforfinancialinclusion.org/reflecting-on-the-past-and-charting-a-new-direction/" target="_blank" rel="noopener noreferrer">strategy</a>. There will always be tension – sometimes healthy, sometimes unhealthy – in the use of technology for inclusive finance: will it make better lives within reach? Or will technology overstep and infringe on privacy rights….or worse?

Data for Inclusive Finance: Delivering on the Promise for Consumers

Financial Inclusion Strategy

Responsible Digital Finance

Data from across the financial inclusion industry shows the economic upheaval COVID-19 is causing throughout Nigeria. <a href="https://www.centerforfinancialinclusion.org/msmes-in-lagos-struggle-due-to-covid-19-but-remain-positive" target="_blank" rel="noopener noreferrer">In addition to data collected by CFI</a>, we examined the results of four other surveys of COVID-19’s impact throughout the country. When considered collectively, the data tells a story in which the public health crisis has led to policies which slowed economic activity. Consequently, income has declined—for employers and employees alike—and there appears to be massive reductions in available work. The data also suggests Nigerians’ capacity to respond is finite as households draw down savings and struggle to repay debts, exacerbating their struggle to put enough food on the table.
<h2>Survey Summary</h2>
CFI looked at five surveys that have been conducted since COVID-19 reached Nigeria. A summary of those surveys—including sample size, notes on sampling method, survey dates, and major topics covered—is available in Table 1.

There are three things to highlight about this set of surveys which are meaningful when interpreting the results. First, the survey methods used varied, and <a href="https://news.gallup.com/opinion/methodology/233291/why-phone-web-survey-results-aren.aspx" target="_blank" rel="noopener noreferrer">these different modes have shown to yield different responses to the same question in other studies</a>. BFA used an online survey, GeoPoll’s survey was delivered via SMS to its database of respondents while CFI, i2i, and the World Bank conducted surveys by phone.

Second, the samples target different populations of interest and the selection methodology differed. BFA used a sample of paid, online respondents while GeoPoll relied on its database of mobile subscribers who tend to be younger, more literate, and wealthier than the population at large. CFI’s sample of MSMEs were clients of Accion Microfinance Bank in Lagos. Only i2i and the World Bank surveys were nationally representative. This diversity can help give confidence in patterns we identify: <em>there is strong circumstantial evidence the trend is true</em> if all five surveys show a similar trend with a similar magnitude. A downside, though, is that because of the heterogeneity in methods, circumstantial is the best we can do—this is not an empirical comparison.

Third, these surveys happened at proximate but not identical times. BFA’s survey was the earliest and the <em>initial</em> World Bank survey, which includes two waves, also happened shortly after the pandemic struck. i2i’s longitudinal survey was conducted <em>during a two-and-a-half-month period</em>. These differences are relevant because of the immediacy of COVID-19’s impact. Even differences of a few weeks could have had meaningful effects on responses.

Nigerians Are in Desperate Need of Relief as COVID-19 Reduces Wealth and Stresses Coping Strategies

CFI MAP Research

Nigeria

Sub-Saharan Africa

COVID-19 and MSMEs: Data and Analysis to Understand Impact

Test of a Lifetime: COVID-19 and Financial Inclusion

Challenges and Crises

Entrepreneurs of MSMEs

Resilience

Financial Health

Micro, small, and medium enterprises (MSMEs) in Indonesia are suffering in the wake of COVID-19 according to data collected by CFI. Seventeen percent of the businesses in the sample have closed, and 85 percent of those that continue to operate estimate their profits have decreased, often by 50 percent or more.

Owners of the MSMEs that were operating at the time of the survey remained optimistic despite the economic downturn. Almost two-thirds reported they were covering their business expenses with revenue and thought they could keep their doors open for another three months based on how things were going. In addition to altering their business practices to stay open, the data on owners’ use of financial tools suggests that they are drawing down their financial resources, raising concerns that they have little cushion for the months ahead.

From July 13 to August 8, 2020, CFI conducted phone interviews with a random sample of <a href="https://bina-artha.com/" target="_blank" rel="noopener noreferrer">Bina Artha Ventura (BAV)</a> clients in Indonesia. BAV, which is <a href="https://www.accion.org/mastercard-and-accions-partnership-to-unlock-millions-of-underserved-microbusinesses" target="_blank" rel="noopener noreferrer">participating in Accion’s partnership with Mastercard</a>, is a microfinance institution that uses a group lending methodology to serve entrepreneurs, mostly women, who predominantly live in rural areas. CFI completed 730 interviews, 660 of which were with female MSME owners. Two-thirds of the owners ran sole proprietorships while 31 percent ran microenterprises (one to 10 employees). Those microbusinesses employed an average of three people before the pandemic. MSMEs in the sample have been operating for almost eight years on average. Most businesses were grocery or food stands, although farming and the sale of household goods were also common. This is one of six surveys CFI is conducting in Indonesia as part of its <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact" target="_blank" rel="noopener noreferrer">ongoing effort to study the impact of COVID-19 on the financial health of MSMEs</a>. As with data from CFI’s first survey in Nigeria, the data from this survey is <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/indonesia" target="_blank" rel="noopener noreferrer">presented in this interactive dashboard</a>.
<h2>Survey Insights</h2>
<h4>Nearly one in five women-led businesses have closed. They were almost twice as likely to close as male-led businesses.</h4>
<blockquote>Of the women-led microbusinesses that closed, 78 percent said they were completely confident that they would reopen in the future, but only 57 percent of the women-led sole proprietorships that closed said the same.</blockquote>
Since COVID-19 struck Indonesia, 18 percent of women-led businesses in the sample have closed. These closures have proportionally impacted businesses of different types and sizes, and they have been driven largely by a drop in customer demand, likely the result of restrictions on movement being enforced in the country. The owners of these businesses were generally confident that they would be able to restart their business in the future, but there were major differences based on how large the businesses were prior to the pandemic. Of the women-led microbusinesses that closed, 78 percent said they were completely confident that they would reopen in the future, but only 57 percent of the women-led sole proprietorships that closed said the same. Importantly, women-led businesses were almost twice as likely to close as male-led businesses. Of the 70 male-led businesses in the sample, only 10 percent had shuttered their operations.
<h4>COVID-19 has led to dramatic declines in profits, but roughly two-thirds of businesses say they are covering their expenses.</h4>
<blockquote>70 percent of operating businesses reported a decrease in profits of 50 percent or more.</blockquote>
Businesses generally did well in the year before the pandemic struck. Fifty-six percent of respondents reported their profits increased compared to the year before while 38 percent said they had stayed the same. Only 5 percent of people said their profits had declined, but that number has skyrocketed since COVID-19: 85 percent of businesses reported that their profits have declined compared to pre-pandemic levels. Those declines have been dramatic, with 70 percent of operating businesses reporting a decrease in profits of 50 percent or more. While profit levels shrunk dramatically, owners were confident that they would be resilient to this shock. Sixty-three percent of owners said they were covering their expenses just with business revenue and think they could continue operating for at least three months based on how things were going.
<h4>MSMEs are trying to survive by changing business practices to boost revenue and cut costs, including reducing their labor force.</h4>
<blockquote>Half of operating microenterprises reported that they cut employees.</blockquote>
MSME owners are employing a mix of revenue-boosting and cost-cutting measures to ensure their revenues continue covering their expenses. For instance, a third of all operating businesses reported offering discounts to stimulate sales while a fifth chose to raise prices instead. Almost a fifth of businesses started a delivery service since the pandemic began. Cost-cutting measures were also common. For those businesses with employees, reducing the size of their workforce and work hours for staff was an important strategy. Half of operating microenterprises reported that they cut employees, leading to a 42 percent reduction in employment within this segment. This action likely had downstream effects. Many owners reported that they were working longer hours to meet customer demand or make ends meet, potentially a result of a reduced workforce.
<h4>In addition to their businesses, owners’ households are enduring, but data on financial tools suggests their margin of error is small.</h4>
Three-quarters of households reported that they were covering all their expenses with non-debt income sources. Severe food insecurity – defined as people going to bed hungry because of a lack of money – was relatively low at 10 percent. In comparison, CFI’s survey of urban MSME owners in Lagos, Nigeria found that 34 percent of owners reported severe food insecurity in their households.

While this is encouraging, a closer look at the financial tools owners are using to cope with the crisis suggests that conditions are likely to worsen. For example, 22 percent of owners sold a household asset to keep their business running. Of the households that sold an asset, only 63 percent reported being able to cover their expenses compared to 79 percent who did not sell an asset. Similarly, 47 percent of MSME owners reported skipping a loan payment, and those owners were less likely to have covered their household expenses by a similar margin compared to those who had made their payments.
<blockquote>Savings also appears to have collapsed in the months since the pandemic hit.</blockquote>
Savings also appears to have collapsed in the months since the pandemic hit. Since March, only 38 percent of people reported saving while 53 percent reported withdrawing money from savings. In the year prior to the pandemic, 84 percent of people reported saving compared to 54 percent who said they withdrew money. While the comparison is not one-to-one because of the different periods, it is certainly not encouraging, especially because savings is another indicator of households’ ability to cope. Ninety percent of owners who had saved since March reported being able to cover their household expenses compared to only 67 percent of owners who had not saved.

Collectively, this analysis implies respondents have dwindling financial options. Only so many assets can be sold, and savings will dry up if not replenished. Debts not repaid choke future lines of credit. These underlying patterns may help to explain a less optimistic sentiment shared by respondents: 79 percent said they could only cover their essentials for a month or less if their income sources dried up.
<h2>Summary and Reflections</h2>
Since the pandemic reached Indonesia in March, 17 percent of businesses have closed, profits have collapsed, and employment has plummeted. Women-owned businesses have been hit especially hard, with 18 percent of them closing compared to only 10 percent of male-owned businesses. Owners who managed to keep their business open reported a high degree of confidence in their ability to continue operating, relying on a mix of revenue-boosting and cost-cutting business practices to ensure their revenues continue to at least meet their expenses. This has helped stave off catastrophe at home, where food insecurity remains low and people continue to cover their household expenses.

However, data on the use of financial tools suggests owners and their households have little margin for error in the months ahead. Selling household assets, skipping loan payments, and net savings withdrawal activity indicate that respondents are already relying heavily on financial tools to meet their basic needs. Without a change in their circumstances, it is unlikely that MSME owners will be able to replenish these resources. Thus, it is reasonable to expect a worsening financial situation in the months ahead.

<em>This survey is part of our partnership with <a href="https://www.accion.org/mastercard-and-accion-partner-to-unlock-growth-for-millions-of-underserved-microbusinesses-around-the-world" target="_blank" rel="noopener noreferrer">Mastercard Center for Inclusive Growth</a> to understand the impact of COVID-19 on MSMEs.</em>

MSMEs in Indonesia Are Surviving but COVID-19 Leaves Little Margin for Error

CFI MSME Financial Health Data Team

Indonesia

East Asia and Pacific

MSME/SME Finance

Credit

This is the second part of CFI’s blog series exploring 2019 data from <a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer">Inclusive Fintech 50</a> and <a href="https://www.themix.org/fintech-benchmarks" target="_blank" rel="noopener noreferrer">Results of the Fintech Benchmarks Proof-of-Concept</a> to shed light on current gender disparities in the fintech industry -- both at the management level and in their customer base. This blog post focuses on the role fintechs can play in designing products with women in mind, and thus help to close the gender gap in financial inclusion. It is structured around two broad observations and concludes with several recommendations for fintechs and researchers.
<h2>1. There is a gender gap in the customer base served by fintechs</h2>
<blockquote>The median fintech had only 36 percent female customers.</blockquote>
The Inclusive Fintech Benchmarks data reveals a gender gap in the customer base served by inclusive fintechs. Given the social aim of these fintechs, gathering critical demographic information is paramount to product design and meeting customer needs. However, only 20 out of 45 fintechs recorded sex-disaggregated data on their customer base. Among these 20 fintechs, the median fintech had only 36 percent female customers. This again drives home the need for such data, in particular to understand whether women were specifically targeted, and if so, which strategies were most effective. And if women were not specifically targeted, it would also be useful to understand how these female customers were attracted in the first place.

Perhaps it is not surprising that these fintechs have a low female customer base. Women in developing economies are <a href="https://globalfindex.worldbank.org/" target="_blank" rel="noopener noreferrer">9 percentage points</a> less likely to have a bank account than men, <a href="https://www.gsma.com/r/gender-gap/" target="_blank" rel="noopener noreferrer">8 percent less</a> likely to own a mobile phone, and <a href="https://www.vitalvoices.org/2019/09/international-literacy-day-the-literacy-gender-gap/" target="_blank" rel="noopener noreferrer">7 percentage points</a> less likely to be literate. These gaps in financial and digital literacy are much wider in certain regions, such as South Asia and East Africa.

Access to financial services is a key enabler for women to achieve financial independence and economic empowerment. However, women face unique and often intertwined barriers in accessing financial services, including but not limited to regulatory constraints (i.e. registrations requiring national ID cards), the aforementioned low <a href="https://gflec.org/wp-content/uploads/2017/07/The-Gender-Gap-in-Financial-Literacy-A-Global-Perspective-Report.pdf?x87657" target="_blank" rel="noopener noreferrer">financial</a> and <a href="http://www.oecd.org/internet/bridging-the-digital-gender-divide.pdf" target="_blank" rel="noopener noreferrer">digital literacy</a> levels compared to men, and social norms that may restrict their mobility and financial decision-making autonomy. One of the biggest barriers women face in accessing financial services is the <a href="http://mujeresinnovadoras.com/wp-content/uploads/2018/09/Exploring-Fintech-Solutions-for-Women.pdf" target="_blank" rel="noopener noreferrer">lack of money or regular income</a>.

However, mobile money has the potential to narrow the gender gap in financial inclusion. An analysis of the Findex 2017 data by <a href="https://www.gsma.com/mobilefordevelopment/blog/the-promise-of-mobile-money-for-further-advancing-womens-financial-inclusion/#_ftn2" target="_blank" rel="noopener noreferrer">GSMA</a> finds that countries with high mobile money usage have indeed narrowed the gender gap in financial inclusion. By transacting digitally, women do not need to travel to inconvenient locations or where they feel unsafe, and they can make payments securely and privately. A <a href="https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2019/12/IRC_Report_R_WebSpreads.pdf" target="_blank" rel="noopener noreferrer">study conducted</a> on the <a href="https://www.rescue.org/" target="_blank" rel="noopener noreferrer">International Rescue Committee’s</a> (IRC) mobile money cash-aid programs in rural Sindh, Pakistan found that IRC’s consistent financial and digital literacy trainings played a crucial role. Female clients were not only able to use mobile money to receive their cash-aid, but appreciated the convenience, privacy and speed of mobile money.

Globally, however, women are still <a href="https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2019/03/GSMA-Connected-Women-The-Mobile-Gender-Gap-Report-2019.pdf" target="_blank" rel="noopener noreferrer">33 percent less likely</a> than men to own a mobile money account, mainly attributed to lower rates of mobile phone ownership and lack of access to identity documents. Some state governments in India, for example, have <a href="https://epod.cid.harvard.edu/article/mobile-phone-gender-gap-why-does-it-matter-and-what-can-we-do" target="_blank" rel="noopener noreferrer">initiated programs to subsidize phone ownership</a>, which helps to address the access gap but not the usage gap. Efforts to overcome women’s barriers to accessing financial services need to be coordinated, recognizing that women are not a homogenous group or customer segment. Fintechs are uniquely positioned to help close the gender gap in financial inclusion while also serving an untapped market that represents a large potential revenue source.
<h2>2. Female-led fintechs are more likely to target female clients and other underserved populations</h2>
<blockquote>Female-led fintechs appear more likely to serve female clients.</blockquote>
The 2019 Inclusive Fintech 50 data reveals that female-led fintechs target different markets than non-female-led fintechs. The Inclusive Fintech Benchmarks sample of 20 fintechs further shows that female-led fintechs appear more likely to serve female clients. The median female-led fintech had a customer base that was 58 percent female, compared to 35 percent female for fintechs that did not have women in leadership positions.

Diverse organizational leadership provides numerous benefits. For fintechs, female leaders can play a pivotal role in designing and marketing financial products to meet the needs of women. Although female-led and non-female-led fintechs in the Inclusive Fintech 50 2019 data target broadly defined “underserved” customers at similar rates, female-led fintechs are more likely to support micro, small, and medium enterprises (MSMEs), as well as farmers and rural households. Fintechs that do not have women in leadership positions are more likely to instead target their products to the general public, which may not produce as great an impact on financial inclusion.

&nbsp;

<img class="aligncenter wp-image-39779 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/09/Primary-Target-Market-of-Female-Led-Fintechs-V2.png" alt="" width="1059" height="678" />

Additionally, segmenting and targeting more female customers represents a market growth opportunity for fintechs. Much like sex-disaggregated client data, segmentation also forces providers to understand the specific needs of their target customers and the unique barriers they face. For instance, <a href="https://www.financedigitalafrica.org/wp-content/uploads/2018/02/FiDA-Snapshot-9-Best-practices-in-big-data-analytics.pdf" target="_blank" rel="noopener noreferrer">JazzCash Pakistan</a> wanted to understand how to improve women’s mobile wallet usage. In exploring this, their research partners, Women’s World Banking and ideas42, found that female and male customers used JazzCash accounts in very similar ways and that the real problem was not usage but acquisition. Female customers accounted for only 15% of new account openings, likely due to marketing campaigns aimed at men. With further research, the team was able to design solutions to accelerate the acquisition of new female customers.
<h2>Recommendations</h2>
<h3>For Fintechs</h3>
<ul>
 	<li>In order to ensure that they include female customers, fintechs must gather data on the gender makeup of their customer base. As mentioned earlier, among the 45 fintechs in the Inclusive Fintech 50 Benchmarks report, only 20 could report the number of female customers served, indicating a data gap. Having this data would enable fintechs to track their contribution to female financial inclusion and identify areas for growth.</li>
 	<li>Fintechs must be intentional about including female customers when designing products. They would benefit from thinking about whether their product is designed in a way that excludes women, even if it is unintentional. This can only be accomplished by conducting market research on female customer segments to better understand their needs, preferences and barriers. It is imperative that providers design compelling use cases to meet women’s financial needs. Addressing this gender gap can also represent a commercial opportunity. For instance, if mobile operators could close the gender gap in mobile ownership and use in low and middle-income countries by 2023, this would provide an <a href="https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2019/03/GSMA-Connected-Women-The-Mobile-Gender-Gap-Report-2019.pdf" target="_blank" rel="noopener noreferrer">estimated $140 billion in additional revenue</a> to the mobile industry.</li>
 	<li>Fintechs should also consider gender when marketing and selling fintech products. For instance, <a href="https://www.womensworldbanking.org/insights-and-impact/its-as-easy-as-a-b-c-how-a-b-testing-helped-onboard-more-women-customers-through-mobile-account-referrals/" target="_blank" rel="noopener noreferrer">JazzCash Pakistan recently tested behaviorally informed text messages</a> to encourage current JazzCash users to send more referrals to women. Forthcoming data from <a href="https://www.themix.org/relay-fintech" target="_blank" rel="noopener noreferrer">RELAY</a>, a fintech data solution developed by MIX, will examine the share of female agents among fintechs that rely on an agent network.</li>
</ul>
<h3>For Researchers</h3>
<ul>
 	<li>Further research should examine the role of fintechs in serving women. Some questions to explore further can include: how to monitor the performance of fintechs; how to co-create products and solutions with female customers; effective marketing strategies to onboard women; the relationship between fintechs and the SME credit gap; and whether credit scoring algorithms introduce gender bias.
<blockquote>Fintech products alone will not produce meaningful change in the lives of women.</blockquote>
</li>
 	<li>Additional research is needed on the intersection between female financial inclusion and the societal and regulatory constraints that women face. Fintech products alone will not produce meaningful change in the lives of women without addressing broader disparities in digital and economic inclusion.</li>
</ul>
We are excited to delve deeper into the 2020 Inclusive Fintech 50 data to answer some of the questions we were not able to answer based on the 2019 data here. Nevertheless, this two-part blog post has highlighted several important ways in which advancing women’s inclusion in the fintech space, both at the leadership level and among the customer base, is not only the right thing to do, but also the smart thing to do.

Including Women Customers in “Inclusive Fintech”

Fintech startups have leveraged technology to lower transaction costs and reach underserved populations. These technologies can <a href="https://www.worldbank.org/en/results/2013/04/01/banking-on-women-extending-womens-access-to-financial-services" target="_blank" rel="noopener noreferrer">expand</a> financial services to women, who are often <a href="https://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_external_corporate_site/news+and+events/news/bridging+the+gender+gap+in+access+to+finance" target="_blank" rel="noopener noreferrer">excluded</a> from formal financial services. The COVID-19 pandemic makes it even more critical to address gender equity, as <a href="https://www.womensworldbanking.org/insights-and-impact/building-resilience-how-to-ensure-women-are-not-left-behind-as-a-result-of-covid-19/" target="_blank" rel="noopener noreferrer">evidence</a> indicates women have been disproportionately impacted by the economic impacts of the virus. While fintechs can play an important role in designing accessible and meaningful solutions for marginalized populations, they can also run the risk of exacerbating the digital divide, including the mobile <a href="https://www.gsma.com/mobilefordevelopment/resources/mobile-gender-gap-report-2019/" target="_blank" rel="noopener noreferrer">gender gap</a>.

This two-part blog post explores data from <a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer">Inclusive Fintech 50</a> and <a href="https://www.themix.org/publications/fintech-benchmarks-report" target="_blank" rel="noopener noreferrer">Results of the Fintech Benchmarks Proof-of-Concept</a> to shed light on current gender disparities in the fintech industry – both at the management level and in their customer base. We provide initial insights and recommendations for investors and fintechs on overcoming some of these challenges. We hope the research community digs deeper into the disparities we highlight to understand the nuanced and sometimes intertwined barriers that female founders face, as well as how fintechs can serve the needs and preferences of female clients.

Two key insights emerge from the data focusing on early-stage fintechs:
<ul>
 	<li>Female-led fintechs face unique challenges when raising funds, but when they do, they demonstrate greater revenue generating potential compared to fintechs without women in leadership positions.</li>
 	<li>Perhaps not surprisingly, there is a gender gap in the customer base served by fintechs, and there is significant room for them to grow by addressing this gap.</li>
</ul>
In this first post, we will focus on the first point. Below are five broad observations.
<h2>1. Women are underrepresented among fintech CEOs and founders.</h2>
Female-founded companies are traditionally underrepresented in venture capital funding, and the fintech industry is no exception. In 2019, companies with a female CEO <a href="https://www.allraise.org/assets/pitchbook_all_raise_2019_all_in_women_in_the_vc_ecosystem.pdf" target="_blank" rel="noopener noreferrer">represented 11 percent of all venture capital deals</a> made globally (this increases to 20 percent if a female founder is included). However, only 7 percent of fintech VC deals had a woman in a CEO position.
<blockquote>Women are particularly underrepresented in fintechs founded in certain regions.</blockquote>
The 2019 Inclusive Fintech 50 data present a similar trend: 19 percent of the 400 applicants are female led, as defined by at least one female founder or executive. Women are particularly underrepresented in fintechs founded in certain regions – Middle East and North Africa (MENA) has the lowest share of female-led fintechs (only 8 percent), while Latin America and Caribbean and Sub-Saharan Africa stand marginally better at 15 percent and 11 percent, respectively. Furthermore, the data does not examine founders by country of origin, and female founders from developing countries may face unique barriers. As one female fintech founder from Sub-Saharan Africa explained: “A lot of the funding goes to foreign male founders. That’s one of the biggest challenges.”

<img class="aligncenter size-full wp-image-39748" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/08/Number-of-female-fintech-leaders-region.png" alt="graph" width="887" height="641" />

It’s important to put this data in the broader context of women’s representation in the workforce. Financial services have long been <a href="https://www.ftadviser.com/opinion/2019/12/04/financial-services-15-year-gender-diversity-failure/" target="_blank" rel="noopener noreferrer">dominated by men</a>. There is a misconception and unconscious bias that women do “better” in roles like HR, marketing and implementation versus strategy and innovation. For instance, according the <a href="http://www3.weforum.org/docs/WEF_GGGR_2020.pdf" target="_blank" rel="noopener noreferrer">World Economic Forum</a>, women make up about 26 percent of workers in data and AI roles, 15 percent in engineering roles and 12 percent in cloud computing roles, compared to 40 percent in marketing, 37 percent in sales, and 35 percent in product development.

It’s also no secret that women – particularly women of color – are underrepresented in educational programs, like MBAs, that can provide them a stepping stone into the financial services industry. While 2019 saw an increase in the number of female MBA applicants, socio-cultural values and norms can influence a woman’s ability and decision to attend higher educational programs. Programs like <a href="https://girlswhocode.com/">Girls who Code</a> and <a href="https://girlsintech.org/">Girls in Tech</a> are working towards eliminating the gender gap in technology and recruiting/encouraging young women to enter the tech industry.
<h2>2. Female-led fintechs generate higher revenues than those without women in leadership positions.</h2>
The 2019 Inclusive Fintech 50 data did not survey fintechs on revenue per customer, but preliminary evidence from the Fintech Benchmarks Proof-of-Concept reveals that female-led fintechs generate higher revenues. Among the sample of 45 fintechs, female-led ones had nearly three times the revenue per customer of non-female-led fintechs, but also three times the cost per customer. This year’s Inclusive Fintech 50 data will examine whether this trend holds true in a larger sample.
<blockquote>Among the sample of 45 fintechs, female-led ones had nearly three times the revenue per customer.</blockquote>
These findings add to the evidence of the strong relative performance of female-led fintechs, and are consistent with research across sectors demonstrating the revenue potential of female-led companies. For example, <a href="https://www.bcg.com/publications/2018/why-women-owned-startups-are-better-bet.aspx" target="_blank" rel="noopener noreferrer">research from BCG</a> finds that female-founded startups generate 10 percent higher revenue than their male peers over a five-year period. Similarly, a study of 3,000 top global companies by Credit Suisse shows that female leadership is associated with <a href="https://www.wgea.gov.au/sites/default/files/documents/csri-gender-3000.pdf" target="_blank" rel="noopener noreferrer">higher profitability and superior financial returns</a>.
<h2>3. Female-led fintechs are able to raise funds at similar rates to their counterparts, but disparities persist in certain regions, namely, those with wide financial inclusion gender gaps.</h2>
The BCG study also revealed that female-founded startups raise less than half of what male-founded startups raise. A Harvard Business Review piece <a href="https://hbr.org/2017/06/male-and-female-entrepreneurs-get-asked-different-questions-by-vcs-and-it-affects-how-much-funding-they-get" target="_blank" rel="noopener noreferrer">echoes</a> the same conclusion – female founders are asked more challenging and skeptical questions during pitches, which leads to lower funding. This practice may be traced back to the stereotypes women face of not being the “right fit” for the role/sector.
<blockquote>Female-led inclusive fintechs raise 24 percent more than non-female-led startups.</blockquote>
The data from Inclusive Fintech 50 presents a more optimistic picture. At the median, female-led inclusive fintechs raise 24 percent more than non-female-led startups. This trend is largely driven by funding in formal investment rounds, echoing research in the U.S. from the <a href="https://startupsusa.org/women-founded-venture-backed-startups/#main-findings" target="_blank" rel="noopener noreferrer">Center for American Entrepreneurship</a> that once a female-founded startup is funded, it receives similar funding to male-founded startups in additional fundraising rounds.

<img class="aligncenter wp-image-39735 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/08/meadian-annual-amount-raised-by-female-fintech-leaders-1.png" alt="" width="899" height="654" />

However, we again see that there are stark differences across geographies. The median female-led fintech raises approximately three-fourths as much as non-female-led fintechs in Latin America, two-thirds as much in East Asia and Pacific, and nearly one-third as much in South Asia. In Sub-Saharan Africa and North America, female-led fintechs raise more at the median than non-female-led fintechs, though they raise 74 percent as much in Sub-Saharan Africa when measuring the average rather than the median, as noted in this <a href="https://www.themix.org/publications/measuring-funding-flows-for-digital-financial-inclusion" target="_blank" rel="noopener noreferrer">white paper</a>. In Europe and Central Asia, there is no observed gap in funding.

Perhaps it is not surprising that these regions also have a large gender gap in broader financial inclusion. For instance, the <a href="https://www.gsma.com/mobilefordevelopment/blog/the-promise-of-mobile-money-for-further-advancing-womens-financial-inclusion/#_ftn2" target="_blank" rel="noopener noreferrer">gender gap in mobile money usage</a> is 25 percent in Latin America, 21 percent in East Asia and Pacific, and 75 percent in South Asia. In these regions, the same <a href="https://blogs.worldbank.org/voices/gender-gap-financial-inclusion-three-ways-shrink-it" target="_blank" rel="noopener noreferrer">regulations and social norms</a> that prevent women from opening bank accounts may also provide additional hurdles for female entrepreneurship in a male-dominated industry.
<h2>4. Female-led fintechs have less funds available to get started, but receive a boost from angel investors.</h2>
During the initial stage, female-led fintechs have less capacity to invest personal funds into their ventures than non-female-led fintechs – they can put in only 19 percent of what a non-female-led fintech does (see figure below). As a result, many female founders and CEOs can fail to make it to formal funding rounds, thereby reducing the number of female-led fintechs from the start.

<img class="aligncenter wp-image-39736 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/08/median-annual-amount-raised-female-led-fintech-BY-FUNDING-STAGE.png" alt="graph" width="891" height="647" />

These findings are consistent with a <a href="https://www.goldmansachs.com/citizenship/10000women/news-and-events/10kw-progress-report/progress-report-full.pdf" target="_blank" rel="noopener noreferrer">study by Goldman Sachs</a> that found that female entrepreneurs in emerging markets often do not seek external financing due to challenges of navigating the process or perceptions of likelihood of success.

Female-led fintechs have performed particularly well with angel investors. Another recent <a href="https://www.tandfonline.com/doi/abs/10.1080/13691066.2020.1747692" target="_blank" rel="noopener noreferrer">study</a> found that female entrepreneurs have greater success receiving funding from angel funders than from early-stage and late-stage VCs. The Inclusive Fintech 50 data show a similar trend, with the median female-led fintech raising 80 percent more than non-female-led fintechs at the angel investor stage.
<h2>5. The network effect is weaker for female-led fintechs.</h2>
Fintechs that are “networked” – part of a fintech hub, incubator, accelerator, or award – raise <a href="https://www.themix.org/publications/measuring-funding-flows-for-digital-financial-inclusion" target="_blank" rel="noopener noreferrer">more funding than non-networked fintechs</a>. However, female-led fintechs managed to raise only 8 percent more if they were networked. Meanwhile non-female-led fintechs raised 43 percent more if they were networked. This trend is consistent with a report which found that <a href="https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/venture+capital/vc-resources/vc-gender-financing" target="_blank" rel="noopener noreferrer">accelerators widen the equity financing gap</a>, with male-led startups experiencing a 2.6 times increase in funding raised post-acceleration relative to female-led startups.
<blockquote>Female-led fintechs managed to raise only 8 percent more if they were networked.</blockquote>
Additionally, a study that employed network analysis to <a href="https://endeavor.org/content/uploads/2015/06/Fostering-Productive-Entrepreneurship-Communities.pdf" target="_blank" rel="noopener noreferrer">assess the collective impact of entrepreneurship communities</a> found that start-ups that received experience, mentorship, or investment from an entrepreneur who has led a company to scale were approximately two times more likely to achieve top performance. It would be prudent to explore further what this means for female entrepreneurs who may face barriers accessing entrepreneurship communities that may be male-dominated.

<img class="aligncenter wp-image-39737 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/08/networked-multiplier-of-female-led-fintechs.png" alt="graph" width="845" height="614" />
<h2>Recommendations</h2>
<h3>For Investors</h3>
<ul>
 	<li>Investors have the potential to address this underrepresentation by investing in more female-led, early-stage fintechs, particularly in regions such as Asia and Latin America. Investors can not only seek out fintechs with strong programs that support female leadership, but also screen out those that do not. As described above, there is evidence that female-led fintechs produce higher revenues.</li>
 	<li>In order to address funding disparities for female-led fintechs in early stages, investors can adopt gender lens investing, particularly when providing grant funding. This will build upon work done by DFS Lab, Flourish Ventures, FinEquity, and Women’s World Banking, who have sponsored a female-focused fintech competition.</li>
 	<li>Incubators and accelerators can also support early-stage, female-led fintechs by actively recruiting female startups and supporting them in raising funding and also assessing whether their programs themselves are female-friendly.</li>
 	<li>Gender-diverse hiring practices and implicit bias training are vital for investors and incubators/accelerators to reach these goals. Moreover, while we were not able to distinguish between women of color founders and white women, evidence on the institutional barriers and discrimination that people of color face likely apply to the fintech space. Implicit bias trainings play an important role in raising awareness on lending practices.</li>
</ul>
<h3>For Researchers</h3>
<ul>
 	<li>Research organizations can provide valuable evidence to build a case for investment in female-led fintechs and the nuanced barriers that female-led fintechs face. Building upon work by organizations such as Women’s World Banking, researchers can demonstrate that female-led fintechs produce strong financial returns while also making unique contributions to financial inclusion.</li>
 	<li>Additional research is needed to examine the challenges faced by female fintech founders. Inclusive Fintech 50 data sheds light onto funding amounts received by female fintechs, but it does not address potential disparities in the likelihood of receiving funds, or other discrimination that female founders -- particularly women of color -- may face.</li>
</ul>
Be on the lookout for the next post, when we will discuss how fintechs may be able to close the gender gap in financial inclusion for their users.

Including Women in “Inclusive Fintech”

Equity Investing

Impact Investing

Valuation

Eric Noggle

Senior Research Director, Climate Resilience and Adaptation

Alex Kessler

Ezra Mannix

Chrissy Martin Meier

Simon Agez

Matthew  Barger

Simone di Castri

Mayada El-Zoghbi

Alexandra (Alex) Rizzi

Madeleine Longwell

Maha Khan

Carrie Ruh

Howard Miller

Gabriela Zapata

Jacob  Winiecki

Jorge Hernandez

Tillman Bruett

Greta Bull

Dan Kleinbaum

Isabelle Carboni

Jacqueline Foelster

Amin Khairy

Keyur  Patel

Marshall Lincoln

Latin America and The Caribbean

Mexico

Banks

Partnerships

Access Usage Gap

Financial Capability

Personal Financial Management

Agent Banking

Rural Populations

Telcos

Report

Though Nigeria’s government has set ambitious goals for financial inclusion, the majority of its people lack a formal bank account. Accion has worked in the country since 2007 to expand access to financial services.

New data from CFI’s <a href="https://centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener noreferrer">survey of micro, small, and medium enterprises (MSMEs) in Lagos, Nigeria</a>, show the staggering impact of COVID-19. Since the <a href="https://www.bbc.com/news/world-africa-51671834" target="_blank" rel="noopener noreferrer">first confirmed case</a> of COVID-19 in Nigeria in late February, 9 percent of the 737 businesses in the sample have closed; the number of employees has declined by 51 percent compared to its high point the preceding year; and 80 percent of businesses have seen their profits decline.

The data also show MSME owners’ households in a precarious position. More than half of business owners said their household is currently not covering their expenses from earned income, and if their income were to dry up, nearly 60 percent would be unable to pay for essentials within a month. Food insecurity is high, too – one-third of respondents reported they or someone in their household has gone to bed hungry in the past two months because there has not been enough money to buy food.

This survey is part of CFI’s multi-country effort to <a href="https://centerforfinancialinclusion.org/understanding-covid19s-impact-on-financial-health-of-msmes/" target="_blank" rel="noopener noreferrer">understand the impact of COVID-19 on the financial health of MSMEs</a> and is the first of six longitudinal surveys in Lagos. Broadly, the survey seeks to understand which businesses are shuttering their operations and why; how the performance and practices of operating businesses have changed; what financial tools MSMEs are using and whether their use is correlated with businesses’ resilience; and how changes in these livelihoods are related to changes in household well-being. The initial survey aimed to establish a retrospective baseline for firm performance and financial tool use in addition to capturing changes in behavior and outcomes since COVID-19 arrived in Nigeria. Future surveys – which will occur every two months for the next year – will track these indicators over time.

From June 16 to July 15, 2020, CFI conducted phone interviews with a random sample of Accion Microfinance Bank (AMfB) clients living in Lagos. AMfB is participating in <a href="https://www.accion.org/mastercard-and-accion-partner-to-unlock-growth-for-millions-of-underserved-microbusinesses-around-the-world" target="_blank" rel="noopener noreferrer">Accion’s partnership with Mastercard</a>, which supports the digital transformation of financial service providers. CFI completed interviews with 737 respondents, 55 percent of whom were women. Two-thirds of the businesses in the sample were micro-enterprises (1 to 10 employees) while another quarter were sole proprietorships. Most business were well-established, with an average operating age of 13 years. There was a healthy mix of businesses, including grocers, school operators, and manufacturing businesses.

CFI is presenting its data from this survey effort in this <a href="https://centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/nigeria/" target="_blank" rel="noopener noreferrer">data dashboard</a>. The dashboard is a living document – it will be updated as CFI refines and conducts new analysis, and as new data from other surveys becomes available.
<h2>Survey Insights</h2>
<h3>Nine percent of businesses have closed since COVID-19, but owners are confident they will reopen again.</h3>
The data show that 64 of the 737 businesses in the sample shuttered their operations since COVID-19 arrived in Nigeria. Of these, 40 of the businesses closed because of government restrictions on their businesses. School operators were disproportionately affected. Of the 44 school operators in the sample, 52 percent reported not operating. Of all the other types of businesses – like grocers, tailors, or electronic stores – with an n of 10 or more in the data, only the share of restaurants that have closed cracked double digits at 12 percent. At the time of the survey, these entrepreneurs were confident that they would reopen their businesses when government restrictions are lifted.
<h3>Total employment is down by 51 percent. Closed businesses are a major contributor to the decline, but nominally small losses incurred by microenterprises are adding up.</h3>
The survey asked respondents to report the largest number of staff – full-time, part-time, and seasonal –they employed at one time in the 12 months preceding coronavirus. They included family members if they were paid a wage. Against that benchmark, employment has plummeted. Prior to coronavirus, MSMEs in the sample employed 3,001 people. At the time of the survey, that number had dropped by 51 percent to 1,468 people.

Two major patterns are contributing to the decline. First, business closures are a significant driver of net job loss, largely because so many schools, which are major employers, shut down. A mere seven percent of the entire sample – representing 53 closed businesses – accounted for 44 percent of net job losses, and closed schools accounted for nearly 80 percent of that. Second, many microenterprises have lost a nominally small number of employees (on average, just more than one), which collectively has a significant impact on employment. The 463 operating micro businesses have lost 550 employees, roughly a third of all jobs lost.
<h3>Those job losses are symptomatic of the drop in profits that 80 percent of MSMEs are experiencing.</h3>
Prior to COVID-19, 63 percent of businesses reported their profits increased compared to the year before, but the pandemic has halted that progress. Eighty percent of businesses reported their profits have fallen since the start of the pandemic. Including the businesses that have closed, half of all businesses said they can no longer cover their operating expenses. If there is any consolation, it is that most businesses – even those with a negative cash flow – reported a modest runway before needing to shutter operations. Based on how things were going at the time of the survey, 72 percent of operating businesses estimated they could manage for at least another 3 months before shutting down.
<h3>MSMEs are employing a variety of coping strategies to keep their businesses afloat.</h3>
Businesses were coping using a diverse mix of strategies. For instance, in addition to the dramatic reduction in the workforce, owners are cutting employees’ hours and working longer hours instead. About 11 percent of owners increased prices, 38 percent reduced prices, and 28 percent had done both. Similarly, 32 percent of respondents stopped selling to customers on credit while 29 percent started doing so. Meanwhile, the number of people making savings withdrawals since the pandemic began outpaced the number of people making deposits by just more than two-to-one. For reference, this ratio was effectively one-to-one in the year before the pandemic began.
<h3>Many owners’ households appear to be on the precipice, with an inability to cover expenses and indications of food insecurity.</h3>
Predictably, given their businesses’ performance, owners’ households appeared to be struggling. Fifty-six percent of owners said their household could not cover all their expenses with the combined income household members are earning. If income were to dry up completely, the cushion for the households appears to be very small – 60 percent of owners said their households could cover expenses for a month or less. Households’ financial struggles are having very real impacts: roughly a third of owners reported someone in their household had to go to bed hungry at some point in the past two months because there was not enough money to buy food.
<h2>Summary and Next Steps</h2>
Collectively, this preliminary analysis of CFI’s survey data suggests MSMEs in Lagos are being walloped by COVID-19. The general slowdown in economic activity resulting from restrictions on movement has led to a dramatic reversal of MSMEs’ fortunes. With profits declining, owners are slashing jobs and resorting to a mix of strategies to keep operating. While they expect to be able to do so for a few months, their households stand to suffer more in the near term as expenses of essential items outpace the income available to pay for them.

While the sample is not statistically representative of MSMEs in Lagos, this information adds to the growing set of data available from <a href="https://datastudio.google.com/u/0/reporting/1yyG5QHGV-v-bxw6pJNZvwtqnIfCLj-7q/page/rw0JB" target="_blank" rel="noopener noreferrer">Bankable Frontiers Associates</a>, <a href="https://covid19tracker.africa/country/NGA/summary" target="_blank" rel="noopener noreferrer">insight2impact</a>, and the <a href="https://www.worldbank.org/en/country/nigeria/brief/monitoring-covid-19-impact-on-nigerian-households" target="_blank" rel="noopener noreferrer">World Bank</a>, among others, examining the impact of COVID-19 on households and livelihoods in Nigeria. In a future blog post, we’ll examine the learnings from the collective pieces of work in-depth, but each indicates severe economic stress consistent with this data. For instance, both the insight2impact and World Bank data indicate food insecurity occurring at similar rates to what was seen in this survey. Additionally, CFI will examine what policymakers can do to help mitigate these concerning findings. Whatever the intervention, it must happen quickly. In the meantime, business will struggle and dinner plates will be empty.

<em>This survey is part of our partnership with <a href="https://www.accion.org/mastercard-and-accion-partner-to-unlock-growth-for-millions-of-underserved-microbusinesses-around-the-world" target="_blank" rel="noopener noreferrer">Mastercard Center for Inclusive Growth</a> to understand the impact of COVID-19 on MSMEs.</em>

&nbsp;

MSMEs in Lagos Struggle Due to COVID-19, But Remain Positive

Development funders are increasingly embracing the potential of digital financial services (DFS) to promote financial inclusion. As these funders – bilaterals, multilaterals, development finance institutions and private foundations – continue to look for ways to respond to emerging crises and opportunities, the support for digital finance and the ecosystem around it is increasing in prominence. However, until now, we have not had a systematic way of understanding how much funding was committed to DFS and where it was going.

In order to create an evidence base and understanding of where and how funds flow to DFS, we developed a unique and innovative methodology to identify, classify and measure the funding flows going to DFS. This project aims to help the inclusive finance sector better coordinate, fill gaps, and identify new pathways for funding the sustainable development of digital financial services for financial inclusion. This report highlights four key findings gleaned from an early analysis to test and refine this methodology. The findings can provide funders with information to guide their approaches to supporting the development of reliable and effective DFS systems for the benefit of low-income populations around the world.

How the Development Sector Is Channeling Money to Digital Financial Services

Most of Mexico’s people lack access to a formal bank account. Accion has worked in Mexico for decades to create a thriving and competitive financial sector that embraces innovation and protects its clients.

As we’re writing this, there are officially over 150,000 COVID-19 cases in Mexico, where <a href="http://bfaglobal.com/" target="_blank" rel="noopener noreferrer">BFA Global</a> and <a href="https://www.metlife.com/corporate-responsibility/metlife-foundation/" target="_blank" rel="noopener noreferrer">MetLife Foundation</a> have launched <a href="https://bfaglobal.com/project/finnsalud/" target="_blank" rel="noopener noreferrer">FinnSalud</a>, a 3.5-year program focused on financial health, helping cooperatives and their members withstand the impacts of the pandemic. During this crisis, financial service providers (FSPs) focusing on low- to moderate-income populations are particularly vulnerable due to increasing liquidity constraints, and have critical roles to play to help clients weather the storm.

An initial step that complements broader <a href="https://bfaglobal.com/insight-type/blogs/scenario-planning-can-help-mexican-financial-cooperatives-prepare-for-covid-19-impact/" target="_blank" rel="noopener noreferrer">agile scenario planning</a>, portfolio stress testing is a risk management best practice that can help institutions understand the leading indicators and potential outcomes for the institution. It simulates how a financial institution’s portfolio and financials would perform against a set of possible scenarios to identify and gauge risks, giving management insights to understand and mitigate vulnerabilities. The COVID-19 pandemic creates both an urgency and a context for stress testing.
<blockquote>The COVID-19 pandemic creates both an urgency and a context for stress testing.</blockquote>
In the wake of the pandemic, there are key risks related to portfolios, operations, and levels of capital, so we have developed a <a href="https://bfaglobal.com/wp-content/uploads/2020/05/Opciones-para-las-instituciones-financieras-frente-al-COVID-19.pptx.pdf" target="_blank" rel="noopener noreferrer">Guide of Operational Suggestions</a> and a <a href="https://docs.google.com/spreadsheets/d/1hT6SGkF1KH3s3WOcq5z0YsFbJaxmOfwH9tAKyQDudcA/copy" target="_blank" rel="noopener noreferrer">Stress Testing Model</a> to help cooperatives better prepare.
<h2>Setting the End-Client Context</h2>
Before jumping into the financial modeling side of the stress testing process, we built an informed view of the potential drivers and changes in behavior of FSP end clients. Concurrent to the stress testing process, BFA Global has researched the <a href="https://bfaglobal.com/insight-type/blogs/the-impact-of-covid-19-on-financial-lives/" target="_blank" rel="noopener noreferrer">impact of COVID-19 on financial health in eight markets</a>, including Mexico. This research indicates that incomes are already impacted and expenses have increased, putting significant pressure on cash flow, among many other new challenges.

Among the eight countries studied, Mexican small businesses and entrepreneurs have access to an extremely limited cash and asset cushion to draw from, and face the highest pressure to potentially close their enterprises if the shutdown continues for an extended period of time. <a href="https://www.findevgateway.org/es/blog/2020/06/como-esta-afectando-el-covid-19-la-salud-financiera-de-las-microempresas-mexicanas?utm_source=SPANISH_+Weekly_Update_%239_+Monday_June_8_2020&amp;utm_campaign=SPANISH_+Weekly_Update_%239_+Monday_June_8_2020&amp;utm_medium=email" target="_blank" rel="noopener noreferrer">Insights from this research</a> and interactions with our cooperative partners revealed multiple factors that we have had to incorporate into our thinking and stress testing:
<ul>
 	<li>Cash flow pressure will reduce members’ ability and willingness to dedicate limited resources toward loan repayments.</li>
 	<li>Restrictions on movement will make it more difficult to interact with existing clients and will reduce their ability to visit branches.</li>
 	<li>Reduced income will force many people to draw on savings to meet immediate needs.</li>
 	<li>FSPs may need to close branches and limit or cease field operations by loan officers and/or agents.</li>
</ul>
<h2>Stress Testing Model for Cooperatives</h2>
The open-source stress testing model considers three phases of the coronavirus crisis:

<strong>Propagation</strong>: The adverse effects on economic activity begin to be felt.

<strong>Peak</strong>: A large part of the population is confined to their homes and few economic activities are carried out.

<strong>Post-crisis</strong>: The economy begins to open to the new normal.

While developed within the Mexican cooperative context, this tool and process can be useful to a wider range of financial institutions grappling with the COVID-19 crisis globally. The model calculates key performance indicators (KPIs) for each risk category with different levels of intensity.

<img class="aligncenter wp-image-38950 size-full" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/06/finnsalud-modeling-screenshots.png" alt="screenshots of stresstest models" width="974" height="583" />
<h2>Primary Components of the Model</h2>
<h3>Inputs</h3>
Primary data fed into the model includes financial statements, past inflows and outflows – such as deposits and withdrawals from savings and current accounts and term deposits – average loan disbursements and payments, and effects of some government measures. Some of the regulatory reports that the cooperatives are required to send to the Comisión Nacional Bancaria y de Valores (National Banking and Securities Commission) – including minimum catalog, investments in securities, bank loans, liquidity ratio and capitalization requirements – are also used as inputs, as well as the timely information on COVID-19’s impact on a portfolio.
<h3>Calibration</h3>
After loading these inputs into the model, FSPs are given options to set the timeframes for each phase of the crisis, and calibrate the input variables for the two scenarios under four dimensions:
<ol>
 	<li>Institutional portfolio (loans, savings, term deposits)</li>
 	<li>Change in operations due to COVID-19</li>
 	<li>Capital</li>
 	<li>Liquidity management of treasury assets</li>
</ol>
<h3>Outputs</h3>
From the initial situation, the model calculates, on a weekly basis, the balance sheet, income statement, available cash balance and regulatory indicators of the liquidity ratio and the level of capitalization according to the conditions that the cooperative expects to face.
<h2>Deploying the Stress Testing Model with FinnSalud Cooperative Partners</h2>
BFA Global has been working with two Mexican savings and credit cooperatives as part of the FinnSalud program. These organizations serve a client base that is largely low-to middle-income and offer a suite of products that includes savings, term deposits, loans, payments, insurance and more.

We began the stress testing process with FinnSalud partners in late April as Mexico entered Phase 3 of the coronavirus pandemic, with government measures enacted to promote social distancing, further reduce movement, and restrict non-essential economic activity to lower the risk of overwhelming the country’s health system.

In the Mexican cooperative context, we considered two COVID-19 impact situations: a soft scenario and a worst-case scenario. Furthermore, our stress testing with cooperative partners focused on a few key variables:
<ol>
 	<li>non-performing loans as a percentage of overall portfolio,</li>
 	<li>growth (or reduction) in client base and issuance of new loans, and</li>
 	<li>member savings, as measured by average weekly amount of withdrawals per client, and the percentage of the client base making a withdrawal each week.</li>
</ol>
These variables largely drive bottom line impact and, more importantly, cooperatives’ cash flow and liquidity levels.

While the stress test outputs and exact results will be different for each institution, we found a few insights that could help the broader financial inclusion and financial health sectors and other FSPs as they embark on a similar journey.

&nbsp;

Stress Testing in Crisis: Helping Savings and Credit Cooperatives in Mexico During COVID-19

<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

APIs are often viewed as potential solutions for traditional financial institutions, particularly small and midsize banks, to partner with upstart financial technology companies (fintechs) to offer innovate products, especially to low-income customers. In practice, however, d<span data-contrast="auto">ue to the maturity of the fintech market, </span><span data-contrast="auto">fear of losing competitive advantage, and a variety of strategic errors in planning for and developing APIs, smaller banks and </span><span data-contrast="auto">fintechs</span><span data-contrast="auto"> do not often succeed in deploying API solutions for inclusive finance. </span><span data-ccp-props="{&quot;134233279&quot;:true,&quot;335551550&quot;:6,&quot;335551620&quot;:6}"> </span>

In this report, based on<span class="TextRun BCX2 SCXW4216040" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun BCX2 SCXW4216040"> nearly two dozen interviews with leaders at fintech companies, small and midsize banks, and large financial institutions,</span></span> CFI Fellow <a href="/bio/dan-kleinbaum">Dan Kleinbaum</a>, <span class="TextRun BCX2 SCXW71634487" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun BCX2 SCXW71634487">examines the extent to which APIs are meeting their potential to facilitate bank and fintech partnerships that advance financial inclusion</span></span>. Dan breaks down what API integrations between banks and fintechs look like and how typical deployments work. Finally, he offers four recommendations for how to improve <span class="TextRun BCX2 SCXW235310262" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun BCX2 SCXW235310262">API deployments between banks and </span></span><span class="TextRun BCX2 SCXW235310262" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="SpellingError BCX2 SCXW235310262">fintechs</span></span><span class="TextRun BCX2 SCXW235310262" lang="EN-US" xml:lang="EN-US" data-contrast="auto"><span class="NormalTextRun BCX2 SCXW235310262"> to deliver financial services to underserved communities.</span></span>
<h2>A Typology of APIs</h2>
It is useful for leaders at financial institutions to understand the types of APIs common in financial services. For examples, in API aggregator and platform models shown below, a third-party provides APIs on behalf of financial institutions to institutional customers (e.g., fintechs) in its network. The aggregator or platform may also provide sales, marketing, onboarding and other services. We also explore open and private API models in the report.
<h3>API Aggregator and Platform Models</h3>
<img class="size-large wp-image-37835" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/03/CFI55_API_deployments_FINAL-fig05_graphic-LOGO-1024x596.jpg" alt="API Aggregator and Platform Models" width="1024" height="596" />

API Deployments in Inclusive Finance

What counts as financial inclusion? Reporting the number of active accounts in a country is a common way to measure progress in financial inclusion. But as access to, and uptake of, accounts increases, we need more powerful indicators to help us understand the dynamics of how people use financial services, and digital financial services in particular.

At <a href="https://i2ifacility.org/">insight2impact</a>, we’ve spent the last four years exploring these questions and have tested our measurement frameworks and emergent indicators on both demand-side survey data and transactional data in Mexico and Nigeria. We also went further by linking the data sets for the same person to analyze a more complete picture of people’s financial lives, both within and outside of formal financial services. What we found was both curious and transformative for our thinking on how we measure financial inclusion.
<h2>Frequency as a Means to Track Digitization</h2>
The first step to financial inclusion is <a href="http://www.worldbank.org/en/topic/financialinclusion/overview">having access to a transactional account</a>. If I choose to take up an account, I’m able to store money or send and receive payments, but if I use my account very rarely, am I still financially included? Maybe I receive a payment and immediately withdraw it all at an ATM. What if all the transactions I need to do can only be done in cash?

Analyzing frequency of usage gives us an indication of how populations are (or aren’t) switching to digital channels for transacting. We analyzed bank transaction data in Mexico to better understand financial service usage patterns. Debit-card usage by customers was relatively high, with 78 percent using their cards weekly, but 60 percent of monthly card usage occurred at ATMs to withdraw cash, not for purchases via POS or online. The frequency of ATM vs non-ATM card usage paints a more realistic picture of digitization in Mexico. It’s a picture of incomplete digitization, with cash remaining central for most people.

Secondly, we linked the transaction data to survey responses to compare people’s online vs offline transaction behavior. This revealed that most people still use cash for their regular expenses, even if they have a bank account. The graph below shows both banked and unbanked people’s cash usage for regular expenses such as rent and bills, and daily expenses such as groceries and transport. Cash was ubiquitous, regardless of gender, socio-economic segment or account ownership. By only counting the accounts, we would miss the scale of non-digital financial lives.

Counting More than Accounts: What Can Frequency of Transactions Tell Us About Financial Inclusion?

As a means of reaching underserved customers at low cost, financial institutions have designated authority and responsibility to banking agents to deliver financial products and services. Agent banking is a model for delivering financial services whereby an institution — be it a financial service provider or a mobile network operator — partners with a retail agent to extend services in remote or hard-to-reach areas.
<blockquote>Innovative financial institutions are streamlining and digitizing their processes, and utilizing real-time data and analytics to increase both the efficiency and effectiveness of agent networks.</blockquote>
Despite the growing volume of agents, the agent network model is rife with utilization and operational challenges. The good news is that technology offers financial institutions an opportunity to make agent models more efficient and productive for themselves and their customers. Based on in-depth interviews with industry experts and senior bank officers, and supplemented by a review of the literature, this brief examines the role of technological innovation as a potential driver for improving the quality and maximizing the productivity of agent models.

We found it useful to study this topic across two time-horizons: the short-and long-term; and from the perspectives of the main stakeholders in the agent network triad: the financial institution, the agent, and the customer. This structure allows us to account for two key trends: 1) the diminishing role of cash as a payment form, and 2) an increasing readiness of institutions to embrace digital transformation. It also allows us to explore commonly-cited challenges with agent networks through an illustrative, hypothetical narrative lens, giving voice to each stakeholder group. The narratives are accompanied by real-world examples of how technological integration and innovation has helped to improve and streamline processes within agent networks. Finally, we anticipate that in a future financial services ecosystem that is digital and cashless or cash-lite, we will see the role of the agent evolving from transaction processors to solution providers.

Leveraging Technologies to Improve the Quality and Maximize the Productivity of Agent Models

There’s much anticipation that combining new data and artificial intelligence will transform the pace of financial inclusion and the scale at which it’s possible.

It’s easy to see why. AI is being used to rapidly perform tasks that would otherwise require endless hours of human labor. It can, for example, sift through and analyze enormous volumes of <a href="https://www.centerforfinancialinclusion.org/to-bank-the-unbanked-start-using-alternative-data">non-traditional sources of data</a> to expand access to credit. It can digitally verify identities, detect fraud, and <a href="https://www.centerforfinancialinclusion.org/juntos-harnesses-artificial-intelligence-to-improve-customer-engagement-for-bbva-bancomer-and-bancolombia">improve customer engagement</a>.

Institutions view AI as a tool that could greatly expand the number of customers they serve without having to scale their workforces by anywhere near as much.

This reasoning is compelling, but it obscures a wider point: the technologies that drive automation require people with specialized technical skills to implement, monitor, and refine them. These people are, for now at least, in very short supply.

We’re the authors of an upcoming report investigating the risks that will arise as financial institutions increasingly embrace AI (to be published by the <a href="http://www.csfi.org/">Centre for the Study of Financial Innovation</a> [CSFI] later this year). Our research suggests that one of the most fundamental of these risks - and a threat to institutions, their customers, and the financial system as a whole - is a pervasive skills gap.
<h2>The Data Scientist Problem</h2>
Last year, the CSFI’s "<a href="https://www.centerforfinancialinclusion.org/finance-for-all-wedded-to-fintech-for-better-or-worse">Finance for All</a>" report surveyed respondents from the financial inclusion sector on the 20 greatest “banana skins” – risks financial inclusion professionals believe pose the greatest challenges for service providers. At the top of the rankings was technology: the risk that the industry fails to take advantage of new technologies or implements them poorly.

Meanwhile, one of the fastest rising risks was talent: the ability (or not) of service providers to attract and retain suitably qualified staff. In 2016, it ranked 15th; last year it was 8th. But this ranking, if anything, understates its importance. In many ways talent risk lies at the heart of technology risk.

A <a href="https://www.centerforfinancialinclusion.org/accelerating-financial-inclusion-with-new-data-2">report</a> published last year by the CFI and the <a href="https://www.iif.com/">Institute of International Finance</a> (IIF) found:

“Banks face a tremendous shortage of experienced data scientists and engineers, as well as AI experts, all of whom are needed to help convert big data “noise” into meaningful insights. Even relatively basic data skills are lacking in many major institutions, resulting in wasted resources, project delays, and squandered opportunities.”

Who are these people in short supply, and why do their skills matter?

Data scientists write the algorithms that underpin AI applications and determine which data should be used as inputs. They work with data engineers, architects, and operations specialists to test, implement, and monitor these algorithms on an ongoing basis for flaws and failings. Before doing any of this, they must work closely with the business in order to gain a detailed understanding of customer requirements. In other words, they define what it is the AI should do.

There is a global shortage of data scientists. A recent study by LinkedIn, for example, <a href="https://economicgraph.linkedin.com/resources/linkedin-workforce-report-august-2018">found</a> that “demand for data scientists is off the charts” in the US. It identified a deficit of more than 150,000 professionals. The Chinese shortfall is predicted to reach 1.5 million vacant positions by 2020.
<blockquote>This shortage is especially pronounced in the developing countries, which tend to have higher levels of financial exclusion.</blockquote>
This shortage is especially pronounced in the developing countries, which tend to have higher levels of financial exclusion. For example, in 2017 it was <a href="https://www.itproportal.com/features/a-snapshot-of-data-scientist-jobs-around-the-world/">estimated</a> that there were just 300 to 400 data scientists in the whole of Thailand - and a current deficit of around 1 million people in the Asia Pacific region as a whole. A further concern is that the gap between leading AI centers and the rest of the world is likely to diverge rather than converge over the coming years. A <a href="https://www.mckinsey.com/~/media/McKinsey/Featured%20Insights/Artificial%20Intelligence/Notes%20from%20the%20frontier%20Modeling%20the%20impact%20of%20AI%20on%20the%20world%20economy/MGI-Notes-from-the-AI-frontier-Modeling-the-impact-of-AI-on-the-world-economy-September-2018.ashx">report</a> by the consultancy McKinsey found that increasing adoption of AI threatens to: “widen gaps between countries, companies, and workers.”
<h2>Traditional Financial Institutions Could Struggle to Attract Technical Talent</h2>
Data scientists and other AI specialists with in-demand skills are likely to have competing opportunities for well-paid and exciting work from many different industries. Nimble fintech start-ups with business models that use AI to rapidly scale financial services in previously unreachable markets may be an attractive destination. However, staff of Accion’s fintech investment funds report that talent acquisition ranks very high on the challenges their investee companies face.

More traditional financial institutions - from banks to MFIs - could find it even harder to sell themselves. A large number of respondents to the Finance for All survey were concerned that traditional institutions are not offering enough to attract and retain ambitious talent – in terms of compensation, challenging work, and advancement opportunities. A respondent at an MFI in Zimbabwe predicted, “There will be increased mobility of skilled staff to more challenging and rewarding institutions, as well as more technologically mobile institutions.” In particular, skilled technical people who might otherwise be interested in the industry are frustrated by legacy IT systems and infrastructure, which make it difficult to perform even basic IT tasks - let alone collect and analyze new kinds of data and collaborate with external AI providers.
<h2>Consequences of Not Attracting the Right People</h2>
For those service providers seeking to develop their own AI capabilities - particularly the largest financial institutions - the challenge is twofold. They need to attract a sufficiently deep pool of technical talent to avoid rushing solutions to markets that are buggy and vulnerable to outages and hacking. They also need to attract the right people – data scientists who understand the financial inclusion sector and can help build applications designed to meet the needs of customers, rather than building clever solutions in search of a problem. The need to find skilled technical people with relevant domain expertise makes a small pool of prospective candidates even smaller.

But it isn’t just the innovators that need to get this right. The majority of institutions that don’t intend to develop their own AI capabilities are also threatened by the absence of specialist knowledge – because they will <a href="https://www.centerforfinancialinclusion.org/how-financial-institutions-and-fintechs-are-partnering-for-inclusion-lessons-from-the-frontlines-2">increasingly form partnerships</a> with fintechs.

To form successful partnerships, these institutions need to know which AI applications and third-party providers can be adapted to their business models - and, equally importantly, which should be avoided. They need to understand how to shape a strategy around AI: to what extent and in what ways they should rely on third party solutions, and the capital outlay and time needed to implement them. There are myriad other risks brought about by the decision to employ AI, from how to protect sensitive data to how to comply with regulatory requirements. It is difficult to mitigate these risks without specialist knowledge.

This is especially important in a climate where institutional survival may depend on the ability to adapt to new technologies. Alongside the fintechs that provide effective and useful solutions will be others that are prematurely hyped. Todd Farrington, Director at Symbiotics S.A. in Mexico, observed in Finance for All, “The proliferation of fintech solutions is promising, but many algorithms remain insufficiently back-tested, many companies young and overly ambitious.” Decision makers at partnering institutions who are under pressure need people who can demystify the rapidly changing technological environment.

There are also potential implications for market structures. The concentration of AI talent in developed economies could lead to more multinational financial institutions – or fintech start-ups that originate in developed countries – capturing large underserved markets and undermining the competitiveness of local operators. If foreign entrants gain decisive market share via first mover advantage, they’re likely to benefit from economies of scale that domestic competitors will find difficult to overcome.
<blockquote>If foreign entrants gain decisive market share via first mover advantage, they’re likely to benefit from economies of scale that domestic competitors will find difficult to overcome.</blockquote>
<h2>Prioritize Data Science Training</h2>
These are not questions with straightforward answers. The training of many more data scientists and other AI specialists needs to be prioritized, in financial institutions’ boardrooms and at a national level. The South African government, for example, <a href="https://businesstech.co.za/news/government/267135/government-wants-one-million-data-scientists/">said</a> last year that it would train one million young people in data science skills over the next decade. Firms will have to get better at attracting technical staff, by improving incentives and overhauling antiquated IT infrastructure.

The crucial point is that the industry needs to prioritize bridging this skills gap immediately, and for the longer term. Otherwise, we may well find that the key factor limiting the benefits of the AI revolution in financial inclusion is not the technology or the data, but the ability to attract the right people.

Is Human Talent the Limiting Factor? Financial Inclusion, New Data and AI