In April 2021, a <a href="http://kenyalaw.org/kl/fileadmin/pdfdownloads/bills/2021/TheCentralBankofKenya_Amendment_Bill_2021.pdf" target="_blank" rel="noopener noreferrer">bill</a> that proposed licensing digital lenders was passed by the Kenyan parliament and is now pending approval from the national assembly. Among other things, this bill would require all digital lenders to submit product pricing to the Central Bank of Kenya for approval before launching, a move that seeks to lower predatory interest rates. Further, non-performing loans would be capped at <a href="https://www.businessdailyafrica.com/bd/economy/mobile-phone-lenders-risk-closure-in-cbk-bill-3376538" target="_blank" rel="noopener noreferrer">twice the amount of the initial loan defaulted</a>, which means lenders won’t be able to perpetually increase the amount to be paid back through late-payment fees.

Much has been <a href="https://www.bloomberg.com/news/features/2020-02-12/tech-startups-are-flooding-kenya-with-apps-offering-high-interest-loans" target="_blank" rel="noopener noreferrer">written</a> on the fintechs that have flooded the Kenyan market since 2016. FSD and CGAP published alarming <a href="https://www.cgap.org/blog/kenyas-digital-credit-revolution-five-years">evidence</a> in 2018 showing that in addition to a saturated digital lending market, an increasing number of digital borrowers in Kenya became over-indebted, which furthered them into <a href="https://www.microsave.net/2019/09/18/11310/" target="_blank" rel="noopener noreferrer">poverty traps</a>. Digital lenders such as OKash and Branch reportedly publicly shamed debtors by <a href="https://restofworld.org/2020/okash-microlending-public-shaming/" target="_blank" rel="noopener noreferrer">texting their friends, family, and colleagues</a>. Further, high-interest rates and non-transparent fees resulted in APR’s above <a href="https://qz.com/africa/1975202/kenya-prepares-to-crack-down-on-high-interest-loan-apps/" target="_blank" rel="noopener noreferrer">400 percent</a>, making it more difficult for some low-income borrowers to repay. In some instances, repayment was possible, yet it meant sacrificing other payments like food, medicine, or school fees. And finally, millions of borrowers were reported to credit bureaus for <a href="https://www.cgap.org/research/publication/consumer-protection-digital-credit" target="_blank" rel="noopener noreferrer">loans smaller than $10</a>.

During the COVID crisis, the Kenyan Central Bank issued a number of measures to ease the debt burden on borrowers, such as <a href="https://www.centralbank.go.ke/uploads/press_releases/850440997_Press%20Release%20-%20Credit%20Reference%20Bureau%20Regulations%20-%20April%202020.pdf" target="_blank" rel="noopener noreferrer">forbidding</a> unregulated mobile-based and credit-only digital lenders from reporting any late borrowers to credit bureaus. Although this helped ease debt stress on consumers during the crisis, this drove many digital lenders out of the market as levels of default skyrocketed, leaving <a href="https://www.theelephant.info/data-stories/2020/09/18/covid-19-regulatory-measures-could-widen-kenyas-financial-access-gap/" target="_blank" rel="noopener noreferrer">many Kenyan borrowers underserved</a>. The entire loan market in Kenya shrank due to COVID-19; today, these platforms lend around <a href="https://www.businessdailyafrica.com/bd/opinion-analysis/editorials/cbk-regulation-of-digital-lenders-is-long-overdue--3378386" target="_blank" rel="noopener noreferrer">2 billion shillings a month</a>, compared to 4 billion shillings in early 2020.

The proposed bill by the Central Bank of Kenya unfortunately will not address the issue of making digital credit both safe and accessible. The bill focuses on product pricing only, and it doesn’t address the underlying challenge of digital lending platforms: a weak credit assessment model. Such a model <a href="https://www.ted.com/talks/shivani_siroya_a_smart_loan_for_people_with_no_credit_history_yet?language=en" target="_blank" rel="noopener noreferrer">extracts large amounts of data from the borrower’s phone</a> and runs it through algorithms that approve or deny the loan. Many digital lenders mitigate the risk of a light-touch credit assessment with above-market APRs and hidden late payment fees, thus being able to generate profit and returns to their investors.

The primary problem is digital lenders do not measure the capacity of someone to repay, but their willingness to repay, and these are drastically different concepts. Willingness refers to the genuine disposition of a person to pay back their loan. Capacity, on the other hand, refers to the person’s ability to generate enough money in the future to pay back the loan without having to forgo essential expenses.
<blockquote class="pullquote--left">Digital lenders do not measure the capacity of someone to repay, but their willingness to repay and these are drastically different concepts.</blockquote>
For example, I might score very well on a digital risk assessment. My geo-trace shows I go to work every day, my call log shows I call my mom regularly, and my browsing history shows I do not engage in sports bets. These measurements indicate I am a responsible citizen who complies with her duties, suggesting that I have a high willingness to repay a loan. However, I might have astronomical medical expenses that the digital lender is unable to detect. Or I might be sending significant remittances to my family. Both of these relate to my repayment capacity and are measures that digital lending apps tend to ignore in favor of automated decision-making based on more readily available data.

By comparison, traditional banks run thorough credit risk assessments, sometimes so thorough that they are slow and expensive. These banks have credit committees and risk analysis departments that challenge relationship managers on the loan proposals they present. The result is that most people granted a loan have the means to pay it back. This method excludes the majority of the world’s population from the financial system, however, it also ensures that most people who are granted a consumer loan actually have the capacity to repay.

So where do we draw the line? How do we expand access to credit to low-income people and informal workers and also protect them from default? How can we measure their capacity to repay in a cheap, digital, and rapid manner? Should we prohibit alternative, digital, phone-based metrics that only assess someone’s willingness to repay?
<h2>A Possible Solution</h2>
The answer could be a measure in between. One idea is that the Central Bank of Kenya could only grant a license to digital lenders that incorporate the borrower’s capacity to repay in their credit assessment algorithms. This means, finding a way to measure, prove and integrate the person’s real income and expenses. Another option could be asking lenders to integrate proxies for repayment capacity. For example, mobile money records could be matched with the borrower's geolocation to determine where and why they are being paid and predict how stable his or her income is. Coupled with strong data protection measures, this and similar metrics could help curb the high default rate and loan-stacking among digital borrowers in Kenya without causing financial exclusion.

Further, as suggested in a <a href="https://centerforfinancialinclusion.org/making-digital-credit-truly-responsible/" target="_blank" rel="noopener noreferrer">publication produced by CFI</a>, the Central Bank of Kenya should withdraw a digital lender’s license upon surpassing a threshold percentage of non-performing loans as a share of the total loan portfolio. This would force the lenders to improve their algorithms and creatively design more capacity-measuring metrics. And finally, the CBK should explicitly require licensed digital lenders to cross-check an individual’s loan performance with each other before issuing further credit to prevent loan-stacking. Although the Digital Lenders Association of Kenya (DLAK) advocates for digital lenders to be able to receive and submit borrower information to credit bureaus, this practice has not addressed loan stacking in the past and only served to blacklist millions of borrowers for small amounts. Therefore, digital lenders should be allowed to view and report outstanding loans, yet with very limited power to blacklist a late borrower.
<blockquote class="blockquote">The CBK should explicitly require licensed digital lenders to cross-check an individual’s loan performance with each other before issuing further credit to prevent loan-stacking.</blockquote>
Kenya cannot go back to the old bank-driven model which financially excluded most of the population, yet Kenyans cannot keep paying the price for the financial experimentation of tech startups. Digital credit should be responsible, affordable, and inclusive. With this new bill, the Central Bank of Kenya is getting closer to achieving it. However, the root cause of the problem is the evaluation algorithm and the business model that stems from it. Without addressing this, little will change for Kenyan borrowers.

Digital Lending in Kenya: Willingness vs. Capacity to Repay

Kenya

Sub-Saharan Africa

Alternative Data

Financial Technology

Client Treatment

Consumer Protection

Credit

Credit Provision

Digital Credit

Financial Service Providers

Fintechs

Interest Rates

Over-indebtedness

Responsible Digital Finance

Underwriting

Blog Post

Last year, the 2020 <a href="https://www.inclusivefintech50.com/white-paper-2020" target="_blank" rel="noopener noreferrer">Inclusive Fintech 50 competition</a> recognized 50 fintech startups that were adapting to the COVID pandemic in remarkable ways, continuing to deliver valuable services to excluded communities in a time of acute need.

This year, the 2021 IF50 competition seeks to recognize early-stage, inclusive fintech startups that are continuing to push the frontier of financial inclusion, driving innovation in an era of uncertainty. The competition seeks to spotlight startup teams that are helping low-income customers and micro and small enterprises not just respond to the emergency, but rebound, rebuild, and recover after the past year’s devastation. Managing Director of CFI, <a href="https://www.centerforfinancialinclusion.org/bio/mayada-el-zoghbi" target="_blank" rel="noopener noreferrer">Mayada El-Zoghbi</a>, highlighted the timeliness of the theme noting, “As the world continues to wrestle with the challenges presented by the pandemic, fintechs can play an important role in helping those most impacted move towards recovery. For example, by supporting micro and small enterprises, which have been devastated by the pandemic but will be ground zero for eventual economic recoveries across the developing world.”

As the COVID pandemic continues to rage in many parts of the world, fintech startups and services have proven to be an invaluable lifeline for vulnerable people, enabling <a href="https://www.worldbank.org/en/news/press-release/2021/05/12/defying-predictions-remittance-flows-remain-strong-during-covid-19-crisis" target="_blank" rel="noopener noreferrer">remittances</a>, <a href="https://www.womensworldbanking.org/insights-and-impact/focus-on-colombia-g2p-payments-in-response-to-covid-19/" target="_blank" rel="noopener noreferrer">G2P payments</a>, and <a href="https://m-kopa.com/covid-19-response/" target="_blank" rel="noopener noreferrer">emergency hospicash</a>. Their value has not been limited to emerging markets, <a href="https://www.thebusinessresearchcompany.com/press-release/digital-payments-market-size" target="_blank" rel="noopener noreferrer">digital payments have almost doubled in volume</a> globally, and the <a href="https://www.adjust.com/blog/fintech-and-mobile-finance-usage-surges-in-2020/" target="_blank" rel="noopener noreferrer">use of fintech apps has soared</a> in developed markets. In both developed and emerging markets, we have seen remarkable growth in mobile money <a href="https://qz.com/africa/2010332/mobile-money-helps-airtel-africa-safaricom-mtn-after-covid-19/?utm_source=email&amp;utm_medium=africa-weekly-brief&amp;utm_content=81c2dab1-b98a-11eb-b2fa-128a8124fc78" target="_blank" rel="noopener noreferrer">uptake</a>, the <a href="https://www.worldbank.org/en/news/press-release/2020/12/03/fintech-market-reports-rapid-growth-during-covid-19-pandemic" target="_blank" rel="noopener noreferrer">volume</a> of fintech transactions, and even <a href="https://finance.yahoo.com/news/vc-investment-fintech-more-doubles-050100463.html" target="_blank" rel="noopener noreferrer">investment</a> in fintech.

These higher rates of fintech acceptance present new opportunities for startups to deliver effective financial services to underserved people. As <a href="https://centerforfinancialinclusion.org/people/mark-pickens/" target="_blank" rel="noopener noreferrer">Mark Pickens</a>, Senior Director of Social Impact, Visa Inc., a founding sponsor of the competition, noted, “Digital payments are an onramp for financial inclusion, helping people and businesses meet their needs and stay afloat in the current context.”
<blockquote class="pullquote--left">Digital payments are an onramp for financial inclusion, helping people and businesses meet their needs and stay afloat.</blockquote>
Not only are more people using fintech solutions more frequently and for more use cases, but their financial needs and habits are also already changing in lasting ways. <a href="https://qz.com/india/2006292/the-pandemic-has-made-savings-a-priority-for-indian%5B%E2%80%A6%5Ddium=daily-brief&amp;utm_content=99a00a1f-b22e-11eb-8e49-fe521f7ceeec" target="_blank" rel="noopener noreferrer">Savings rates have increased in India</a>, even as unemployment has increased and salaries have decreased. Demand for insurance has also increased, in developed markets like the <a href="https://www.actuarialpost.co.uk/article/increased-demand-for-private-medical-insurance-after-covid19-18468.htm" target="_blank" rel="noopener noreferrer">UK</a>, but also in emerging markets like <a href="https://www.business-standard.com/article/finance/high-demand-for-comprehensive-health-policies-as-covid-cases-soar-again-121042200061_1.html" target="_blank" rel="noopener noreferrer">India</a> and across the continent of <a href="https://www.brookings.edu/blog/africa-in-focus/2021/03/03/figures-of-the-week-african-insurance-market-poised-for-growth/" target="_blank" rel="noopener noreferrer">Africa</a>.

These changes mean that fintech startups have the opportunity to go beyond short-term fixes, like <a href="https://centerforfinancialinclusion.org/rapid-innovation-how-fintechs-are-adapting-under-covid-19/" target="_blank" rel="noopener noreferrer">emergency savings, repayment flexibility</a>, and <a href="http://www3.weforum.org/docs/WEF_The_Global_Covid19_FinTech_Market_Rapid_Assessment_Study_2020.pdf" target="_blank" rel="noopener noreferrer">fee waivers and reductions</a>, which many implemented in response to the pandemic last year. Fintech startups can rise to meet new needs and habits of underserved people, to enable the rebuilding that is needed going forward. <a href="https://bfaglobal.com/bio/maelis-carraro/" target="_blank" rel="noopener noreferrer">Maelis Carraro</a>, Director of <a href="https://bfaglobal.com/catalyst-fund/" target="_blank" rel="noopener noreferrer">Catalyst Fund</a> and an IF50 judge, observed, “Throughout the pandemic, fintech startups demonstrated their ability to adapt to meet their users’ needs and have seized the opportunity to do so. Now more than ever, users need their agility, creativity, and innovation to enable an inclusive recovery.”

To innovate during these difficult times and deliver solutions for recovery and rebuilding, startups will need to shift their focus to longer-term financial health and resilience. <a href="https://www.linkedin.com/in/krishnathacker/?originalSubdomain=sg" target="_blank" rel="noopener noreferrer">Krishna Thacker</a> of <a href="https://www.metlife.com/sustainability/MetLife-sustainability/MetLife-Foundation/" target="_blank" rel="noopener noreferrer">Metlife Foundation</a>, co-founding sponsor of IF50 observed that, “Tech can help providers reach further and faster, but the real focus must be on engaging the customer and changing their outcomes to go beyond inclusion to build resilience”.
<blockquote class="pullquote--right">The real focus must be on engaging the customer and changing their outcomes to go beyond inclusion to build resilience.</blockquote>
Fintech startups are already recognizing this opportunity:

<a href="http://dinarak.com/" target="_blank" rel="noopener noreferrer">Dinarak</a>, a fintech startup that won the 2019 IF50 competition, helped the Government of Jordan deliver social transfers digitally soon after the pandemic broke out. In doing so, recipients were registered for a Dinarak wallet, and the startup became known as the bank for poor people. With the customer acquisition and trust challenges largely addressed, the startup can now turn its attention to designing products and services that can help these users rebuild their lives and livelihoods.
<ul>
 	<li>In Ghana, last year’s IF50 winner <a href="https://www.oze.guru/" target="_blank" rel="noopener noreferrer">OZE</a> was able to leverage data from small businesses using their management app to offer them emergency credit precisely when they needed it most.</li>
 	<li>South Africa’s <a href="http://www.a2pay.co.za/" target="_blank" rel="noopener noreferrer">A2Pay</a> was able to make a <a href="https://bfaglobal.com/insights/fintech-innovations-to-enable-mse-recovery-in-south-africas-townships/" target="_blank" rel="noopener noreferrer">similar adaptation</a>, offering spazas (informal convenience shops in townships) working capital to stock inventory precisely when they lacked the liquidity to do so.</li>
 	<li>Finally, <a href="https://www.awantunai.co.id/" target="_blank" rel="noopener noreferrer">AwanTunai</a>, a 2019 IF50 winner, has helped hundreds of SMEs digitize payments, invoicing, and purchasing, which has enabled them to survive COVID lockdowns.</li>
</ul>
However, these opportunities are not guaranteed. Pickens noted that, “Fintechs are key to enhancing access and the benefits of digital adoption for the underserved. Visa is committed to work with the payments ecosystem on initiatives such as Inclusive Fintech 50, to support small and micro business owners to become digitally enabled and rebuild stronger, more competitive and resilient businesses for the recovery of our communities.”

To encourage and spotlight startup efforts that go above and beyond, this year’s <a href="https://www.inclusivefintech50.com/2020-judging-panel" target="_blank" rel="noopener noreferrer">IF50 judging panel</a> is looking for startups, like those mentioned above, that are helping to rebuild economies, communities, and households in ways that are more inclusive, resilient, and empowering. El-Zogbhi notes, “As difficult as this crisis has been, it has prompted a surge in fintech innovation and an openness to new ideas, the benefits of which could be applied to other challenges beyond the pandemic. We need to be intentional about how we can use this as a springboard for making advances elsewhere, such as with women’s financial inclusion, the responsible use of data, and in navigating the impacts of climate change.”

The <a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer">IF50 competition</a> brings together leaders in the inclusive fintech community, including startups, investors, and experts. The judging panel consists of leading investors, startup founders, and other stakeholders, each with a unique ability to identify models, features, and channels that can truly transform people’s lives.

Not only will participating startups benefit from the exposure and networking among the judging panel, but winners of the competition will also be globally recognized as leading the way in inclusive fintech. This year’s winners will be featured along with leading investors and industry experts during <a href="https://centerforfinancialinclusion.org/about/what-we-do/financial-inclusion-week/" target="_blank" rel="noopener noreferrer">Financial Inclusion Week</a>, an annual series of digital events organized by CFI to bring together the inclusive finance community to exchange on the latest developments and key issues facing the sector, in early November. Such exposure and networking improve startup visibility and credibility among investors; 19 winners from the 2019 cohort have since raised $182.5 million. Winners will also be featured in <a href="https://www.inclusivefintech50.com/briefs" target="_blank" rel="noopener noreferrer">research and insights work</a> at the Center for Financial Inclusion.
<blockquote class="pullquote--left">Winners of the competition will be globally recognized as leading the way in inclusive fintech.</blockquote>
Moreover, this year’s award package includes new support tools from Visa. Winners will be able to take advantage of Practical Business Skills, a global digital platform created by Visa to deliver free educational resources to help small and micro business owners make confident, informed decisions to grow their businesses. Winners will be able to customize and co-brand this turn-key solution to support the local recovery efforts of the small and micro-businesses they serve. Winners who are <a href="https://partner.visa.com/homepage.html" target="_blank" rel="noopener noreferrer">eligible</a> for Fintech Fast Track will be automatically pre-qualified for the program, which provides access to Visa’s ecosystem partners, online licensing and APIs to help fintechs enhance and introduce new and innovative payment experiences. These tools, together with the networking and platform that IF50 provides, serve as an invaluable platform for startups at the earliest stages of their journey.

Inclusive Fintech 50 is sponsored by MetLife Foundation, Visa, and Jersey Overseas Aid &amp; Comic Relief, with support from Accion and IFC. There is no fee to apply, and we encourage all interested fintechs to submit their applications within four weeks of the competition launch on June 28. Applications will be accepted in English, Spanish, and French. The 2021 winners will be announced in October.

Inclusive Fintech 50 Launches 2021 Competition: Driving Innovation in an Era of Uncertainty

Inclusive Fintech 50

When Goldman Sachs came under fire for offering women lower lines of credit than men on the now <a href="https://www.nytimes.com/2019/11/10/business/Apple-credit-card-investigation.html" target="_blank" rel="noopener noreferrer">infamous Apple Card</a>, they defended the product against charges of sexism by explaining that gender had not been an input to the credit scoring model. If an applicant’s gender was never fed into the algorithm, how did credit decisions end up discriminating against women who had similar credit histories as men?

Gender-blind credit scoring is an example of what many AI bias researchers call “fairness through unawareness,” an approach that intentionally excludes data on sensitive attributes like race, ethnicity, religion, or sex with the goal of reducing discriminatory outcomes. Behind this approach is the idea that eliminating markers of different group identities will prevent basing decisions on those characteristics. This has led to failures in the past, notably <a href="https://cpb-us-e1.wpmucdn.com/sites.suffolk.edu/dist/3/1172/files/2014/01/Rice-Swesnik_Lead.pdf" target="_blank" rel="noopener noreferrer">redlining</a>. Recent research has shown it can also make <a href="https://arxiv.org/abs/2009.06251" target="_blank" rel="noopener noreferrer">discrimination harder to detect and address</a> in the era of algorithmic decisions.
<blockquote class="pullquote--right">“Fairness through unawareness” intentionally excludes data on sensitive attributes like race, ethnicity, religion, or sex with the goal of reducing discriminatory outcomes.</blockquote>
As algorithms <a href="https://www.centerforfinancialinclusion.org/the-stories-algorithms-tell-bias-and-financial-inclusion-at-the-data-margins" target="_blank" rel="noopener noreferrer">transform the financial sector</a>, we need a better understanding of how to mitigate against discriminatory outcomes to ensure that those left out of the digital ecosystem today do not face further financial exclusion. Otherwise, we may not know how many Apple Card equivalents exist in inclusive finance.

This post explores the challenges and tradeoffs of using sensitive attribute data for detecting discrimination in the context of evolving data protection norms and regulations.
<h2>The Perils of Fairness through Unawareness</h2>
The idea may seem counterintuitive: if you remove gender from the data inputs of a credit model, how does the algorithm consistently assign a lower limit to women? The reason is that credit scoring algorithms are crunching larger amounts and new sources of data, which means that the model can inadvertently use proxies for sensitive attribute data in decisions, even if that was not the intention of the model developers. For instance, the <a href="https://journalofbigdata.springeropen.com/articles/10.1186/s40537-019-0180-9" target="_blank" rel="noopener noreferrer">type of phone</a> someone uses or the <a href="https://dl.acm.org/doi/10.1145/2721896.2721908" target="_blank" rel="noopener noreferrer">apps a person installs on their phone</a> can act as proxies for gender, age, or other characteristics.
<blockquote class="pullquote--left">Models can inadvertently use proxies for sensitive attribute data in decisions, even if that was not the intention.</blockquote>
A very simple method for testing algorithmic bias within a credit scoring model requires only a few variables like the actual default rate, the actual score of the individual when approved, and the variable you want to test with your algorithm, such as gender or race.
<h2>Data Tensions: Privacy vs. Anti-Discrimination</h2>
So, why isn’t this done? The answer lies in data limitations, sometimes based on very legitimate concerns about histories of injustice. It illustrates one of the challenges of detecting and monitoring for bias in algorithmic systems without infringing on privacy rights.

Many countries around the world prohibit collecting sensitive data or basing credit decisions on protected categories either under their banking regulations or under new data privacy legislation. In India, lenders are prohibited from discriminating on the <a href="https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=764" target="_blank" rel="noopener noreferrer">grounds of sex, caste, or religion</a>. In the U.S., the Equal Credit Opportunity Act (ECOA) made it illegal for credit providers to discriminate based on sex, race, national origin, and other protected characteristics in response to widespread denials of credit to women and people of color. ECOA prohibits lenders from collecting this data in the first place, even for the purpose of detecting discrimination, because of fears it will be used improperly to further perpetuate bias in consumer lending. Research in the US shows that discriminatory trends have been <a href="https://arxiv.org/pdf/1912.06171.pdf" target="_blank" rel="noopener noreferrer">hard to detect in consumer lending</a> and that a lack of sensitive attribute data has also created enforcement challenges.

While not all lending regulations prohibit the collection of sensitive data, data privacy legislation introduces new limits on this data. The General Data Protection Regulation (GDPR), which has become the model for legislation in many developing markets, bars certain sensitive data from being collected or processed -- including data on race and ethnic origin, political opinions, philosophical beliefs, sexual orientation, and biometrics -- without individual consent.
<blockquote class="pullquote--right">Concerns about safely and properly using sensitive attribute data are valid given histories of discrimination and surveillance of minority groups in both wealthy and developing countries.</blockquote>
On top of GDPR, the European Commission has recently put forward <a href="https://digital-strategy.ec.europa.eu/en/library/proposal-regulation-laying-down-harmonised-rules-artificial-intelligence" target="_blank" rel="noopener noreferrer">draft legislation to regulate artificial intelligence</a>, with specific provisions for AI systems classified as high risk, which includes credit scoring. The draft legislation suggests that AI providers should process “special categories of personal data” to monitor and correct for bias in the public interest, but does not clarify collection practices or consent processes for such data. Concerns about safely and properly using sensitive attribute data are valid given histories of discrimination and surveillance of minority groups in both wealthy and developing countries. Changes in regulatory frameworks to allow for use of this data to mitigate against further discrimination require public trust bolstered by technical solutions that protect against misuse. Depending on a country’s history or in places experiencing active or simmering conflict, technical solutions may not be enough. For example, in a country like Rwanda where <a href="https://www.nytimes.com/2004/04/09/world/a-decade-after-massacres-rwanda-outlaws-ethnicity.html" target="_blank" rel="noopener noreferrer">ethnic distinctions are banned</a>, the tensions around sensitive identities make it difficult to fathom collecting and using such information, especially by the government.
<h2>Data Ecosystems in Emerging Markets: It’s Complicated</h2>
This tension between privacy and anti-discrimination may be exacerbated in developing markets by the <a href="https://centerforfinancialinclusion.org/rethinking-financial-inclusion-at-the-data-margins/" target="_blank" rel="noopener noreferrer">limited digital footprints</a> of customers at the data margins, as well as paltry knowledge on how data trails and protected groups intersect.

Sex-disaggregated data is still <a href="https://data2x.org/wp-content/uploads/2020/03/MappingGenderDataGaps_Economic.pdf" target="_blank" rel="noopener noreferrer">largely unavailable</a> in the financial sector and for many economic indicators in developing markets. Beyond availability, there is less understanding of how women’s lives and the barriers that shape their economic behaviors are reflected in data used for credit decisions. The reality is that gender, ethnic, or religious identities interact with other indicators (like income, asset accumulation, or technology use) and will impact individuals’ data trails in ways that may misrepresent individuals’ potential and result in disparate outcomes (i.e. access to a financial product). Fairness through unawareness approaches are blind to this intersectionality.
<h2>Where Do We Go From Here?</h2>
As an industry, we can do more to understand the data inputs for digital financial services and how socioeconomic realities present in these datasets, especially for traditionally excluded groups. There will still be tradeoffs between privacy and anti-discrimination, but managing those tradeoffs requires a conversation between providers, regulators, donors, and the public to identify what is possible and explore the right balance.

These conversations can start with the many open questions that exist from a technical perspective. For instance, can <a href="https://ieeexplore.ieee.org/document/8970908" target="_blank" rel="noopener noreferrer">third parties</a> play a role in securely storing sensitive data, or are there options to use <a href="http://proceedings.mlr.press/v80/kilbertus18a/kilbertus18a.pdf" target="_blank" rel="noopener noreferrer">encryption</a> or <a href="https://spectrum.ieee.org/artificial-intelligence/machine-learning/engineering-bias-out-of-ai" target="_blank" rel="noopener noreferrer">synthetic data</a> techniques? Can regulators develop tools that allow them to estimate the demographic characteristics of a dataset, like the <a href="https://www.consumerfinance.gov/data-research/research-reports/using-publicly-available-information-to-proxy-for-unidentified-race-and-ethnicity/" target="_blank" rel="noopener noreferrer">Consumer Financial Protection Bureau has done</a> in the U.S.? Can investors encourage investees to design monitoring and evaluation indicators to help answer questions about how their algorithms perform on inclusion?

While the road ahead may be complex, starting these conversations and bringing the public into them, especially those whose lives will be affected by algorithmic decisions, will be crucial for building trust. We need to engage with emerging research on possible solutions to see what might be appropriate in developing markets. At the very least, financial inclusion stakeholders should know enough to respond to any gender-blind or fairness through unawareness approaches in digital finance with healthy skepticism.
<blockquote>Starting these conversations and bringing the public into them, especially those whose lives will be affected by algorithmic decisions, will be crucial for building trust.</blockquote>

Reducing Bias in Algorithmic Decisions Cannot Rely on “Blind” Approaches

Financial Inclusion at the Data Margins

Data Analytics

Enabling Environment

Policy, Regulation and Government Initiatives

Privacy

For low-income women, digital financial inclusion offers an opportunity to upend entrenched gender inequalities by entering spheres from which they have been otherwise excluded. Financial services delivered via mobile phone can bridge the last-mile gap, bringing financial tools and services directly to women where they work and live. However, women are underrepresented customers of digital financial providers and platforms. Well-established impediments such as cost, literacy, and normative barriers (that shape the way people behave and expect others to behave) prevent low-income women from using such services at the same rate as men. These demand-side constraints, combined with a dearth of sex-disaggregated customer data, leave most fintech firms without a clear picture of women’s wants and needs for digital financial tools. As such, most mass-market tools are not designed with women in mind.
<blockquote>Demand-side constraints and a dearth of sex-disaggregated customer data leave most fintech firms without a clear picture of women’s wants and needs for digital financial tools.</blockquote>
It’s not just digital financial inclusion: Fewer women than men have access to formal bank accounts and mobile technology. Globally, 65 percent of women, compared with 72 percent of men, have bank accounts, while 197 million fewer women own a phone than men, according to the <a href="https://www.gsma.com/r/gender-gap-2019/" target="_blank" rel="noopener noreferrer">GSMA Mobile Gender Gap Report 2019</a>. Regional variations make these gaps more striking. In Sub-Saharan Africa, for example, home to many promising emerging market fintech innovations, the mobile gender gap is 15 percent, while in South Asia (including Pakistan, India, and Bangladesh) the gap is 28 percent. Further, access to formal bank accounts is extremely low across Africa. For example, the gender gap in account ownership in Kenya, according to the table below, looks to be only about 8 percentage points. However, the gap widens when adults with only a mobile money account are disaggregated from formal bank accounts and mobile money accounts. Around 65 percent of men in Kenya have both a formal bank account and mobile money account, while only 50 percent of women do. Interestingly, the gender gap in adults with only a mobile money account is reversed; more women than men have only a mobile money account, likely because the barriers to entry are lower than for a formal bank account. This trend can be seen throughout Africa.

<img class="aligncenter size-full wp-image-41359" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/01/Sample-of-countries-in-Africa-Table-VF2-800.png" alt="table " width="800" height="412" />

Given the gender gaps in bank account ownership and mobile technology, it is not difficult to see why many fintech firms do not have visibility on how to better serve women. With fewer women users, and little to no sex-disaggregated data around how women’s use of and needs for these products differ from men’s, it can be difficult to identify low-income women’s needs and preferences. Excluding women is often unintentional — “gender-blind” design is thought of as an inclusive strategy. If “bias” is not baked into the design, the thinking goes, then anyone who wants to use the product can. Unfortunately, the opposite is true. Gender-blind product and platform design strategies allow products to flow in the way they always have: into the hands of those who are already in the marketplace and who make the decisions about who else can benefit from or access these products. A “gender-intelligent” or “gender-aware” approach, on the other hand, seeks to overcome women’s specific constraints through <a href="https://financialallianceforwomen.org/download/how-fintechs-can-profit-from-the-multi-trillion-dollar-female-economy/" target="_blank" rel="noopener noreferrer">data-driven design based on market research</a> in order to create distinct customer value. And the numbers in the table demonstrate that men disproportionately benefit from bank accounts and mobile technology.
<blockquote class="pullquote--left">We show the potential of gender-aware design, and how to design for specific needs and constraints of women, while accounting for the norms that define their lives.</blockquote>
This brief examines design principles employed by two fintechs, <a href="https://paycode.com/">Paycode</a> and <a href="https://extramileafrica.com/" target="_blank" rel="noopener noreferrer">Extramile</a>, working in Sub-Saharan Africa. We show the potential of gender-aware design, and how to design for specific needs and constraints of women, while accounting for the norms that define their lives. These two examples provide insights into why intentionally focusing on women can bring benefits to this largely untapped market and how fintechs can design products that meet women’s needs. Only by improving women’s meaningful use of financial services through concerted efforts to close the gender gaps will low-income communities and households begin to see potential economic benefits from inclusion, benefits that will also flow back to the providers that serve them. It is vital that fintechs move away from gender-blind or -neutral strategies toward gender-aware <a href="https://www.ifpri.org/publication/beyond-access-gender-transformative-financial-inclusion-agriculture-and-entrepreneurship" target="_blank" rel="noopener noreferrer">and even transformative strategies</a> that bake in access pathways for potential customers with limited knowledge or physical mobility. <a href="https://medium.com/hh-design/the-world-is-designed-for-men-d06640654491" target="_blank" rel="noopener noreferrer">Gender-blind design is not gender-neutral</a>.
<h2>Fintechs in Sub-Saharan Africa and a Gender-Blind Approach</h2>
According to data collected by <a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer">Inclusive Fintech 50</a> (IF50) -- a competition founded by MetLife Foundation and Visa, with support from Accion and IFC, and additional funding from Jersey Overseas Aid &amp; Comic Relief -- only six of the 403 fintech applicants claimed women as their target customers. Most applicants selected “rural households,” “MSMEs,” or “low-income individuals” as their target market. This belies the fact that all of these fintechs reach women — for many of the IF50 winners, women make up nearly 50 percent of their customers. Indeed, women make up a large proportion, if not the majority, among those market segments.

This trend continues among the IF50 fintechs focused on the African continent. Of the 2020 winners in Africa, the product and livelihood focus ranged from mobile banking, water and utility payments, mobile-based crop insurance, and a range of credit and savings products directed at low-income populations. For example, OKO secures the income of farmers of unirrigated farms in Mali and Uganda through a mobile-based crop insurance that automatically compensates them if they suffer from adverse weather.

<img class="alignright wp-image-41342" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2021/01/Social-Norms-Table-VF-1005x1024.png" alt="" width="400" height="407" />Within the profile descriptions of the 15 IF50 winners based in or delivering services in Africa, their customer segments were primarily described as “unbanked,” “underserved,” or “low-income.” A few mentioned women, but most called out their customers by their lack of access to financial services. Only three out of the 15 mention women in their key problem statement, while eight mention “unbanked” populations. Identifying women as their target market is not a requirement, even if women make up nearly half of their customers. But by calling out their target customers in terms of livelihood rather than by gender, these fintechs may assume that every “unbanked” person or MSME has the same level of access to their products. This is rarely, if ever, the case.

If these fintechs do not see women as their target market, how do they reach so many women? Gender-blind product design does not translate into complete exclusion — but it does mean that a product is more likely to reach and work well for certain segments of customers, namely men. Gender-blind design can be seen in mass-market items like car seatbelts and mobile phones as well as digital financial tools such as chatbots with basic financial literacy information or a mobile wallet. In some cases, targeting certain livelihood segments may lead fintechs to see where their design is ill-suited for their women customers and make adjustments. In 2019, <a href="https://www.uncdf.org/article/5171/uncdfs-sprint4women-design-sprint-competition-to-increase-zambian-womens-financial-inclusion-kicks-off" target="_blank" rel="noopener noreferrer">UNCDF hosted a design sprint in Zambia</a> for fintechs seeking to increase their female customers — the finalists all designed and modified their products after interacting with women customers. In other cases, women may in fact be a central target segment, but aspects of a woman’s life, such as normative constraints (like care responsibilities or intra-household decision-making), and thus the product doesn’t achieve desired inclusion or impact.

The Case for a Gender-Intelligent Approach: An Opportunity for Inclusive Fintechs

Agent Banking

Delivery Channels

Digital Financial Services

Mobile Banking

Payments

Partnerships

Saving

Underserved Groups

Women

Brief

The severe economic impacts of COVID-19 on low-income households and small businesses have underscored the need for innovative solutions that can build greater financial resilience. Findings from <a href="https://centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener noreferrer">surveys of MSMEs</a> conducted by the Center for Financial Inclusion (CFI) show that since COVID-19 struck, many small businesses in Indonesia, Colombia, and Nigeria have either had to close or found their profits significantly decreased. At the same time, the pandemic has provided opportunities for inclusive fintechs to <a href="https://centerforfinancialinclusion.org/rapid-innovation-how-fintechs-are-adapting-under-covid-19/" target="_blank" rel="noopener noreferrer">leverage their agility and adaptability</a> to strengthen and support the financial resilience of low-income, financially underserved customers.

Financial resilience is the ability to mitigate, adapt to, and recover from shocks and stresses in a manner that reduces chronic vulnerability and facilitates inclusive growth. Individuals must deftly navigate a delicate balancing act to stay afloat and may be thrown off course by a whole host of shocks, ranging from unexpected health crises to weather-related disasters that can disrupt otherwise appropriate financial plans. The nuances associated with financial resilience can complicate the financial service industry’s ability to develop and design comprehensive solutions for low-income customers.
<blockquote class="pullquote--right">PesaKit and reach52, two winners of the 2020 Inclusive Fintech 50, have responded to the extraordinary challenges posed by the COVID-19 pandemic by continuing to innovate to meet their customers’ needs.</blockquote>
PesaKit and reach52, two winners of the 2020 <a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer">Inclusive Fintech 50</a> -- a competition founded by MetLife Foundation and Visa, with support from Accion and IFC, and additional funding from BlackRock and Jersey Overseas Aid &amp; Comic Relief -- have responded to the extraordinary challenges posed by the COVID-19 pandemic by continuing to innovate to meet their customers’ needs. In this paper, we share insights on how these two fintechs have adapted to a challenging economic landscape to serve as early examples of how fintechs have leveraged their agility and innovation during crisis. These findings build on the 2020 Inclusive Fintech 50 <a href="https://www.inclusivefintech50.com/white-paper-2020" target="_blank" rel="noopener noreferrer">white paper</a> that draws on the data submitted by the 2020 cohort of applicants and highlights how fintechs are continuing to advance financial inclusion and resilience for the estimated 3 billion financially underserved people worldwide.

Agility Breeds Resilience: A Tale of Two Fintechs Innovating in the Face of a Pandemic

Cambodia

East Asia and Pacific

India

South Asia

Philippines

Tanzania

Challenges and Crises

Health Insurance

Insurance

Inclusive insurance

The year 2020 will forever be remembered for COVID-19 and the changes that have ensued as a result. Each day we read about how COVID-19 is impacting low-income people, micro-and small enterprises, the financial sector and low- and middle-income countries; but more than just reading about it, we are all simultaneously living through the impact it is having on our day-to-day lives.

For me, as I reflect on the past year, I can’t help but be thankful for staying gainfully employed, quickly and seamlessly adjusting to working from home, and adjusting CFI’s work program to collect data and do our research using virtual tools. But the results of our research are a daily reminder that my lived experience is very different than the lived experience of the majority of people in developing countries. CFI’s research with micro and small enterprises in <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/nigeria" target="_blank" rel="noopener noreferrer">Nigeria</a>, <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/india" target="_blank" rel="noopener noreferrer">India</a>, <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/indonesia" target="_blank" rel="noopener noreferrer">Indonesia</a> and <a href="https://www.centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/colombia" target="_blank" rel="noopener noreferrer">Colombia</a> is showing the hardships that these often informal firms are going through.

Early in this pandemic, we wrote about <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">what made this crisis different</a> from any other. The systemic nature of the crisis and the lack of clarity on its duration stood out and made this crisis a test of a lifetime. What have we learned from the responses to COVID-19 undertaken around the world and has inclusive finance risen to the occasion?
<h2>Cash Transfers for the Most Vulnerable</h2>
In June of 2020, I wrote a blog post about the <a href="https://centerforfinancialinclusion.org/covid-19-reveals-the-limits-of-individual-action-and-market-based-solutions/" target="_blank" rel="noopener noreferrer">limits of individual action and market solutions</a>. I made the case that this pandemic was different and that the duration of the lockdowns, the loss of incomes and jobs, the overall contraction of the economy and, in turn, demand for goods and services meant that public policy had to play a bigger role in the COVID response than in other prior crises.

This has been playing out in real time and it’s been incredible to see the enormity of the response across the globe. CFI’s brief on <a href="https://centerforfinancialinclusion.org/rapid-response-for-social-payments-during-covid-19/" target="_blank" rel="noopener noreferrer">social payments</a> features many examples of how governments were able to step up cash transfers to individuals and firms to help them withstand the enormity of the shock on their lives. The World Bank tracks the number of social protections measure undertaken around the globe, and in its most recent count in <a href="http://documents1.worldbank.org/curated/en/295321600473897712/pdf/Social-Protection-and-Jobs-Responses-to-COVID-19-A-Real-Time-Review-of-Country-Measures-September-18-2020.pdf" target="_blank" rel="noopener noreferrer">September 2020</a>, it identified measures in 212 countries or territories, covering 1,179 social protection measures. Of these, 158 countries have opted for cash transfers and 93 have offered in-kind food or food vouchers. Combined, 1.8 billion people have benefited from cash and in-kind transfers, of which 1.3 billion were cash recipients. This represents a 217 percent increase, globally and on average, in social transfer payments compared to pre-COVID levels.
<blockquote class="pullquote--left">We must build upon digitized cash transfer programs to build systems that can be leveraged in future crises.</blockquote>
While we don’t know precisely how many countries opted for digitized cash transfers, CFI’s research shows that many countries expedited regulatory measures to enable contactless distribution and rapid opening of transaction accounts. Undeniably there will be hiccups with such rapid shifts to digital channels, and more research is needed to better understand how and whether vulnerable people have been able to fully avail of this unprecedented outpouring of assistance. As we continue to investigate and hopefully refine these programs, we must also build upon them to ensure that this is not just a one-off logistical operation, but an opportunity to build systems that can be leveraged in future crises. Even more importantly, providers and others involved in these programs should focus on the beneficiary experience so that users see value in using these new accounts. Only when a service creates value in people’s lives will it displace what they are already using.
<h2>And What About Micro and Small Enterprises?</h2>
Cash transfers have been a lifeline for vulnerable people around the globe, but there are fiscal limits to how much this instrument can solve all COVID-19 wreckage. Cash transfers support the economy by putting money in the hands of people who will buy basic goods and services. This does support aggregate demand in the economy, but it has not been sufficient to preserve or create new jobs. For this, we need to rely on micro and small enterprises (MSEs), which, according to <a href="https://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_723409/lang--en/index.htm" target="_blank" rel="noopener noreferrer">ILO’s research</a>, employ seven out of 10 people globally. Medium and large firms are important drivers of employment, but for our purposes we focus on informal firms that serve and employ low-income people.

Yet when we look at how the COVID-19 response has addressed the needs of MSEs, the picture is precarious. CFI’s research shows that many of the MSEs in the samples we’ve researched are struggling. Half of them have had to lay off more than 50 percent of their workers, and revenue has been hit hard. When it comes to coping strategies, we see big differences across the markets which could be explained by differences in the samples themselves (gender breakdown, rural/urban breakdowns, etc.), but also in macro-level conditions, government responses, and a myriad of other factors. Although our samples are not nationally representative nor directly comparable, the MSEs we surveyed are customers of microfinance institutions in some of the biggest markets in the world, and therefore tell us something about the engines of employment in the developing world.<img class="alignright wp-image-40915" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/12/map-government-transfers-CFI-data-1024x686.png" alt="map government transfers CFI data" width="600" height="402" />

When it comes to government transfers, we see that 43 percent of the owners of MSEs in our research in Indonesia benefited from this support. This drops to 2 percent in Nigeria, and 13 and 14 percent in Colombia and India, respectively (see map).

The benefits of the digital economy have been magnified under COVID, but have these benefits trickled down to MSEs? Our research shows a mixed bag. Few MSEs in our sample have leveraged digital platforms to sell their products. Colombia is the only country in our sample where more than 10 percent of MSEs started to sell on digital platforms as one way of coping with the pandemic.
<h2><img class="wp-image-40916 alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/12/MSEs-on-digital-platforms-map-CFI-data-1024x665.png" alt="" width="600" height="390" /></h2>
Our data shows that MSEs are adapting to market conditions in more analog ways. For example, many have added delivery services – 20 percent in Indonesia, 38 percent in Colombia, 60 percent in India and 28 percent in Nigeria. But more often, MSEs are cutting workers and their employees are working longer hours; they are offering customers credit, not repaying their loans, offering discounts, or increasing their prices. You can explore the full dataset <a href="https://centerforfinancialinclusion.org/covid-19-and-msmes-data-and-analysis-to-understand-impact/" target="_blank" rel="noopener noreferrer">here</a>.
<h2>Institutions That Serve MSEs</h2>
Supporting MSEs does not necessarily mean direct government transfers. In the long term, micro and small enterprises need access to capital, payments and other financial services accessible to them when they need it. They need access to new markets; and they need access to knowledge and services that improve their efficiency and reduce their operating costs. MFIs, cooperatives, fintechs, social platforms, and ecommerce platforms are all increasingly addressing one or more of these needs. While there are signs of hope, much more can be done to support MSEs to survive and thrive post pandemic.
<h3>Microfinance Institutions</h3>
MFIs serve an estimated <a href="https://www.convergences.org/wp-content/uploads/2019/09/Microfinance-Barometer-2019_web-1.pdf" target="_blank" rel="noopener noreferrer">140 million people</a>. Early in the pandemic, there was widespread concern that liquidity constraints could wipe out many of the financial institutions that serve low-income customers and MSEs. CGAP’s <a href="https://www.cgap.org/research/data/results-dashboard-cgap-pulse-survey-microfinance-institutions" target="_blank" rel="noopener noreferrer">Global Pulse Surveys</a> have shown that fears were exaggerated. However, <a href="https://centerforfinancialinclusion.org/are-moratoriums-good-policy-and-good-for-fsps/" target="_blank" rel="noopener noreferrer">moratoriums</a> around the world have put both repayments and new lending on hold. Once moratoriums end, will these institutions resume lending? Will their clients repay? Will their clients <em>be able</em> to repay? CFI’s research with MSE clients of MFIs shows that many have already skipped loan repayments as a coping strategy, from 55 percent of respondents in Nigeria and Colombia, to 47 and 48 percent of respondents in Indonesia and India, respectively.
<blockquote>Once moratoriums end, will these institutions resume lending? Will their clients repay? Will their clients <em>be able</em> to repay?</blockquote>
CFI’s engagement with the <a href="https://centerforfinancialinclusion.org/people/microfinance-coalition/" target="_blank" rel="noopener noreferrer">Microfinance Coalition</a> -- a group of 14 microfinance networks that have come together to advocate for microfinance institutions to regulators, investors and donors -- indicates that the future of these providers rests on how investors, both debt and equity, manage their responses to the crisis. As MIV loans come due, will they roll over their loans? Will they increase their lending, despite covenant infractions? The largest MIVs have taken a coordinated approach and <a href="http://www.e-mfp.eu/sites/default/files/news2020/2020-04-24%20MIV%20Covid-19%20coordination%20MoU.pdf" target="_blank" rel="noopener noreferrer">signed an agreement</a> to avoid a pre-emptive approach by one or more that undermines other investors. This is a good sign, but it has not yet been tested. As closed-end MIVs need to exit, will equity shareholders buy them out? Will new quasi-equity structures come in to smoothen these transitions?

Both MIVs and the Microfinance Coalition want development finance institutions (DFIs) to step in. DFIs have been busily serving their own investees (read these interviews with <a href="https://centerforfinancialinclusion.org/dfis-financial-inclusion-and-the-covid-19-response-a-qa-with-machal-karim-of-cdc/" target="_blank" rel="noopener noreferrer">CDC</a>, <a href="https://centerforfinancialinclusion.org/questions-for-eib-group-dfis-financial-inclusion-and-the-covid-19-response/" target="_blank" rel="noopener noreferrer">EIB</a> and <a href="https://centerforfinancialinclusion.org/dfis-covid-19-and-financial-inclusion-a-conversation-with-richard-greenberg-of-dfc/" target="_blank" rel="noopener noreferrer">USDFC</a>), and several have been in discussions to seek a collaborative response, although nothing yet has been made public. Experience from the 2009 financial crises revealed that the DFI-led emergency facility, the <a href="https://www.kfw-entwicklungsbank.de/PDF/Evaluierung/Ergebnisse-und-Publikationen/PDF-Dokumente-A-D_EN/Alle_Entwicklungsl%C3%A4nder_MEF_2016_E.pdf" target="_blank" rel="noopener noreferrer">Microfinance Enhancement Fund</a>, was too slow in the making and did not serve its original intent of shoring up liquidity when MFIs needed it most. In light of that, it might be too optimistic to expect that DFIs will be able to structure something in time, although many of us still hope for this outcome.

The institutions the Microfinance Coalition represents serve 80 million clients in 69 countries, 23 of which are least developed countries. While united in their advocacy, there is a great deal of nuance among their experiences and that of other MFIs beyond these networks. In some countries, MFIs that rely on local debt markets are less susceptible to cross-border capital. And in some markets, like India and Egypt, the regulators’ responses have allowed MFIs to operate despite the moratoria. MFIs that take deposits have also indicated that in some markets, deposits are up, not down, something that’s counterintuitive but has happened many times before in prior crises. Early signs show that MFIs are likely to be more resilient than expected, and those that have diversified funding sources, such as deposits and local debt, are likely to weather this storm better than non-bank lenders with cross-border debt obligations.
<h3>Fintechs and Platforms</h3>
Unlike in the 2009 financial crisis, today there are more diversified sources of capital, markets and business services for MSEs, including those offered by fintechs and big tech platforms. The <a href="https://www.jbs.cam.ac.uk/wp-content/uploads/2020/12/2020-ccaf-global-covid-fintech-market-rapid-assessment-study.pdf" target="_blank" rel="noopener noreferrer">Cambridge Centre for Alternative Finance</a> conducted a rapid assessment of fintechs globally and found that, on average, fintechs grew in the first two quarters of 2020, by 13 percent and 11 percent respectively. Customer bases and transaction volumes of fintechs operating in emerging and developing markets grew faster than fintechs in developed markets; however, we don’t have sufficient information to assess whether MSEs or low-income people more generally are being served. Data from the <a href="https://static1.squarespace.com/static/5bede261f2e6b1e5ead0a0ba/t/5fce636a74a40730fbccc79b/1607361396896/MIX+IF50+Whitepaper+2020.pdf" target="_blank" rel="noopener noreferrer">Inclusive Fintech 50</a> competition, which narrows the lens to fintechs that serve low-income people and small firms, finds many more fintechs identified MSEs as their primary target market in 2020 than in 2019, signaling that fintechs see an opportunity for growth with this segment. Most of these fintechs offered credit services, but an increasing number also offered insurance to MSEs (see graph below).

<img class="aligncenter wp-image-40936" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/12/Graph-IF50-serving-SME-market--1024x484.png" alt="graph" width="701" height="331" />

It is difficult to unpack the data on platforms and its potential impacts on MSE. <a href="https://i2ifacility.org/system/documents/files/000/000/133/original/Africas_digital_platforms_trends_report.pdf?1587129896" target="_blank" rel="noopener noreferrer">Research by i2i</a> in Africa finds that platforms grew by 18 percent in 2019 across the continent, but it is unclear which types of firms are driving this growth. The largest of these platforms -- Jumia, Takealot, and Konga -- represent ecommerce, which could bode well for small producers selling on them. Anecdotal evidence in some countries could be indicative of something bigger happening with MSEs moving to digital platforms. For example, in Indonesia, platforms like <a href="https://www.thejakartapost.com/news/2020/09/14/bukalapak-gains-3-million-new-merchants-mostly-in-smaller-cities.html" target="_blank" rel="noopener noreferrer">Bukalapak</a> indicated that they have registered 3 million new merchants in the first seven months of 2020.
<h2>So What?</h2>
As I reflect on all of these developments during 2020, I think there is much to be thankful for. There is also some concern that the aggregated results may not be enough to cushion the pain of the pandemic for low-income people and MSEs in developing countries. On the positive side, government transfers to 1.8 billion people has bought some time. But the more fundamental and structural support that enables firms to retain their workers -- and to recover -- are not yet visible.

We have a lot to do in 2021.

Have We Passed the Test? Reflections on the Test of a Lifetime

Test of a Lifetime: COVID-19 and Financial Inclusion

Entrepreneurs of MSMEs

Financial Inclusion Strategy

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]

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”

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

Maria Gabriela Coloma Ponce de Leon

Malika Anand

Alex Kessler

Jacobo Menajovsky

Julia Arnold

Tess Johnson

Jonathan Fu

Mrinal Mishra

Mayada El-Zoghbi

Chrissy Martin Meier

Simon Agez

Matthew  Barger

Simone di Castri

Maha Khan

Carrie Ruh

Howard Miller

Lauren Braniff

Malacci Ohrt

Alexandra (Alex) Rizzi

Dan Kleinbaum

Latin America and The Caribbean

Benin

Ghana

Uganda

Complaint Resolution

Fraud

Transparency

Trends

MSME/SME Finance

Microfinance Institutions

Banks

Financial Capability

Product Pricing

Telcos

Report

The majority of Kenyans have mobile money accounts; their activity demonstrates digital financial services’ potential. Accion helps Kenyan innovators harness emerging technologies to create new financial services.

India is a global leader in financial inclusion. For over a decade, Accion has worked with and learned from India’s innovators, investors, and policymakers to expand economic opportunity for its people and businesses.

The past decade has seen an increase in predatory and fraudulent practices in digital finance and fintech. In the last 10 months, there has been an increase in anecdotal evidence that the COVID-19 pandemic has led to a proliferation in the methods and tools predatory and fraudulent providers are using to exploit vulnerable households and businesses (see recent media coverage <a href="https://www.bloombergquint.com/law-and-policy/financial-frauds-have-seen-a-spike-due-to-dependence-on-digital-payment-platforms-ajit-doval" target="_blank" rel="noopener noreferrer">here</a> and <a href="https://www.mediapost.com/publications/article/354201/finance-mobile-apps-most-exposed-to-fraud-gaming.html/" target="_blank" rel="noopener noreferrer">here</a>).

In exploratory work using high-frequency mobile application data for 71 countries, we document the <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3588453" target="_blank" rel="noopener noreferrer">increasing scale and scope of these new methods</a>. We observe that some of the most downloaded mobile apps in a number of countries following the outbreak of COVID-19 include finance-related apps that show signs of being either predatory or entirely fraudulent. For example, there is a growth in personal lending apps luring new users to pay nominal service fees to obtain access to cheap loans, but which are revealed to offer no actual service. The release dates of these apps coincide with the onset of COVID and related government lockdowns and are initially buttressed by extremely high ratings driven by tens of thousands of apparently fake reviews. After a duration, some appear to be eventually removed or blocked on the app stores.

For this and other reasons, we categorize these apps as being highly likely instances of fraud. The graph below depicts this after the onset of lockdowns in India, where we saw a wave of lenders fitting these criteria pop up and quickly attract many users. Notably, the adoption of these fraudulent lending apps surpasses that of pre-existing lending apps from known, legitimate providers during this period. We also observe examples of apps set up to mirror legitimate sites (e.g., mimicking existing government or finance apps), but that appear to be designed to phish sensitive information from unsuspecting users. (India is used to illustrate such issues, but similar examples occur in a range of other markets, such as Nigeria, Philippines, etc.)

Combating the Rise in Fraudulent Fintech Apps

The economic crisis brought about by the COVID-19 pandemic is disproportionally impacting small businesses and low-income households. While there is emerging evidence about how individuals and MSMEs have been impacted by COVID-19, the impact on the providers that serve these customer segments is less clear, particularly when tech-enabled providers play an important role in mitigating the economic impacts of the pandemic for households and businesses by <a href="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/PFFIEA.pdf" target="_blank" rel="noopener noreferrer">deploying services quickly and efficiently</a>. Additionally, fintechs are well-suited to <a href="https://www.consultancy.eu/news/4523/covid-19-crisis-also-an-opportunity-for-fintechs-says-bcg" target="_blank" rel="noopener noreferrer">bounce back</a> and reorient themselves in times of crisis given their <a href="https://www2.deloitte.com/us/en/pages/financial-services/articles/beyond-covid-19-new-opportunities-for-fintech-companies.html" target="_blank" rel="noopener noreferrer">agile nature</a>. However, in order to determine how best to support fintechs, more information is needed to understand how these providers have adapted to a challenging economic landscape.

To understand more about the impact on and the role of these providers, CFI, in partnership with the <a href="https://scbf.ch/" target="_blank" rel="noopener noreferrer">Swiss Capacity Building Facility</a>, conducted research to understand fintechs’ early adaptation and coping models under COVID-19. This brief draws findings from the <a href="https://www.inclusivefintech50.com/" target="_blank" rel="noopener noreferrer">Inclusive Fintech 50</a> applicant data coupled with key informant interviews with investors and fintechs conducted in March 2020. During June and July 2020, 403 early-stage fintechs (Figures 1 and 2) applied through a publicly available online form that gathered data related to target market, financials, product details, as well as seven COVID-19-specific questions exploring changes in fintechs’ business and operating models between December 2019 and May 2020. The findings also include COVID-19 survey findings from six 2019 Inclusive Fintech 50 winners.
<h4>Inclusive Fintech 50 Sample Distribution
Figure 1. Inclusive Fintech 50 Distribution by Product Category</h4>
<img class="alignnone size-large wp-image-40001" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-1-v3-1024x627.png" alt="" width="1024" height="627" />
<h6>N = 409
Note: Infrastructure includes a fintech whose main business is to provide processes and tools that enable multiple types of financial services such as credit, payments, insurance, and personal wealth management.</h6>
<h4>Figure 2. Inclusive Fintech 50 Distribution by Fintech’s Operating Country</h4>
<img class="alignnone size-large wp-image-40002" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2020/10/Table-2-v3-1024x671.png" alt="" width="1024" height="671" />

The findings show these early-stage fintechs innovated rapidly to meet the changing needs of their customer base, while simultaneously reconfiguring operating models, internal policies, and growth strategies. Importantly, the findings present clear opportunities for investors to play a central role in expanding financial services to the underserved through these critical providers.<strong> </strong>

Findings from our research reflect five key takeaways:
<ol>
 	<li><strong>Fintechs are operationally resilient.</strong> Fintechs are maintaining a cash buffer and employing diverse strategies to keep their staff on board.</li>
 	<li><strong>New partnerships.</strong> The pandemic is enabling early-stage fintechs to increase their business opportunities by creating new partnerships with banks, government, and non-governmental organizations (NGOs) that need to digitize their services.</li>
 	<li><strong>New approaches to customer acquisition.</strong> Early-stage fintechs are employing digital delivery channels like platforms to increase uptake.</li>
 	<li><strong>New products and product changes.</strong> Early-stage fintechs are pivoting products to meet client needs. Payments and — surprisingly — savings and financial management fintechs grew their services between December 2019 and May 2020.</li>
 	<li><strong>New funding sources:</strong> Almost all of the fintechs have had to change their fundraising strategies in light of COVID-19, mainly diversifying their funding base.</li>
</ol>
While fintechs have shown resilience by innovating and evolving their offerings in the wake of the COVID-19 crisis, their biggest need remains access to capital in order to continue innovating.

Rapid Innovation: How Fintechs are Adapting Under COVID-19

In the <a href="https://openknowledge.worldbank.org/bitstream/handle/10986/12272/9780821389270.pdf?sequence=6" target="_blank" rel="noopener noreferrer">New Microfinance Handbook</a> (2013), Mayada El-Zoghbi and Barbara Gähwiler wrote about how donor funding to the microfinance sector was concentrated in a small number of institutions in a handful of countries, and that this called into question the catalytic nature of donor funding.

“Internal systems often reward disbursements of large amounts of funding, creating a bias toward markets and recipients of funding that can absorb large amounts easily,” they wrote. “More challenging obstacles for financial inclusion that may require small, long-term, and patient funding are too often ignored.” To illustrate the point, they used data from the 2010 <a href="https://www.cgap.org/topics/collections/international-funding" target="_blank" rel="noopener noreferrer">CGAP Funder Survey</a> demonstrating that more than 50 percent of all single-country donor commitments went to just 15 countries, including some of the more developed microfinance markets like India, Bangladesh, and Kenya.

A decade on from that first attempt by CGAP to map funding flows for financial inclusion, we know a lot more about the potentially catalytic role of donor funding, thanks in part to the widespread adoption of the <a href="https://www.cgap.org/research/publication/new-funder-guidelines-market-systems-approach-financial-inclusion" target="_blank" rel="noopener noreferrer">market systems approach</a>. We’ve also seen big <a href="https://www.centerforfinancialinclusion.org/how-the-development-sector-is-channeling-money-to-digital-financial-services" target="_blank" rel="noopener noreferrer">shifts in the financial inclusion sector driven by technology</a>, and the emergence of digital financial services (DFS) and fintech as areas for funders seeking development impact.

Over the past eight years, MIX, a unit within CFI, has partnered with CGAP to track the evolving landscape of financing for financial inclusion and this year spearheaded an analysis of funding flowing specifically to DFS – the first of its kind in the industry. This <a href="https://centerforfinancialinclusion.org/how-the-development-sector-is-channeling-money-to-digital-financial-services/" target="_blank" rel="noopener noreferrer">recently published analysis</a> suggests that funding for DFS may be following similar patterns to the growth of microfinance such that there's a concentration of funding in a relatively small number of countries, which also tend to be relatively financially included (and high-income).

In fact, the 15 countries that receive the most funding for DFS account not just for half but for three-fourths of total development spending (as of the end of 2018). This includes a number of middle-income countries, like China, Brazil, and India, as well countries like Kenya and Bangladesh that are low-income but have relatively established financial ecosystems. While the digital revolution is held up as an opportunity to expand financial access to those currently unserved, we find that funding to countries with already high levels of financial inclusion is 2.5 times as much as the funding to the least financially included countries.
<blockquote>Funding to countries with already high levels of financial inclusion is 2.5 times as much as the funding to the least financially included countries.</blockquote>
Microfinance went through this. As the concentration problem arose, funders recognized the need not just to support existing markets and institutions but to develop ecosystems for new players to emerge. They shifted to supporting regulations for non-bank entities to lend to financially excluded people and businesses (for example, new legal statuses, like the NBFC MFIs in India). These regulatory changes allowed for hundreds of new institutions to be established and microfinance to spread into new markets, attract capital, experiment, and expand the reach and range of services. Funders also supported the proof of concept of new business models and product innovations for new, specialized microfinance institutions.
<h2>A Debate Over the Additionality of Development Funding</h2>
There is a buzz around fintech that development funders seem to find hard to resist. As Greta Bull wrote in <a href="https://www.cgap.org/blog/great-expectations-fintech-and-poor" target="_blank" rel="noopener noreferrer">her essay on fintech in 2019</a>, “Anything with a technology tag gets funding and attention, whether it is solving a real problem or not.” Our new data shows that, while a few years ago funders were supporting the digital growth of a range of institutions – banks, MFIs, mobile money providers, and fintechs – in the past two years, 100 percent of DFS funding to financial institutions has gone to fintechs. Are development funders providing the risk capital needed to build new investment-ready inclusive businesses? Maybe. But we have also seen large equity investments in fintech companies that have already raised significant money from impact investors and commercial venture capitalists. This raises the question: where exactly is the additionality of this development money?
<blockquote>We have seen large equity investments in fintech companies that have already raised significant money.</blockquote>
Again, maybe we can look at microfinance for some suggestions on where to go. Funders to microfinance came to the realization that they may not be the best entities to invest in MFIs. This led to the development of the Microfinance Investment Vehicles (MIVs), which pooled investments from public and private funders and provided the expertise and the necessary structure to respond to <a href="https://centerforfinancialinclusion.org/microfinance-coalition-mivs-team-up-in-response-to-covid-19/" target="_blank" rel="noopener noreferrer">specific needs</a> of the microfinance sector. As of last year, almost $17 billion was deployed by these specialized fund managers, according to a <a href="https://symbioticsgroup.com/wp-content/uploads/2020/02/symbiotics-symbiotics-2019-miv-survey.pdf" target="_blank" rel="noopener noreferrer">survey by Symbiotics</a>.
<h2>Conclusion</h2>
The DFS sector is still young, and it is good that these debates are already happening. Ideally, funding to financial inclusion should be built around detailed theories of changes that address market failures and are catalytic in nature. This might mean rejecting a big investment in a high profile fintech in favor of small, long-term, and patient funding. The hope for funders must be that, in ten years’ time, when we’re looking back at how funders supported the growth of financial inclusion in a period shaped by technology and global crises, that funding was shown to be additional, pro-poor, and instructive for how to go about effectively supporting the next big thing.

Have We Been Here Before?

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

One billion mobile money accounts.

This is the headline figure that emerged from this year’s <a href="https://www.gsma.com/sotir/wp-content/uploads/2020/03/GSMA-State-of-the-Industry-Report-on-Mobile-Money-2019-Full-Report.pdf" target="_blank" rel="noopener noreferrer">State of the Industry Report on Mobile Money</a> by GSMA. The growth in mobile money accounts is indeed remarkable. But beyond this number, the report tells the story of an evolving industry, marked by significant advances in volume of activity, types of transactions, people using the services, and emerging business models.

Based on the current trajectory, mobile money accounts are on pace to generate $1 trillion in annual transactions by 2023. Will COVID-19 derail this progress? Or will the pandemic demonstrate the power of mobile money, and further fortify the critical role mobile money plays in low- and middle-income countries (LMICs)?
<h2>The Digital Ecosystem Comes to Life</h2>
Ever since mobile money emerged in the mid-2000s, businesses, researchers, and those working to advance inclusive finance have talked about how to get more money to stay in the system (see examples <a href="https://www.cgap.org/blog/m-pesa-replacing-cash-kenya">here</a> and <a href="https://www.cgap.org/blog/mobile-money-10-things-you-need-know">here</a>). If funds stay in the mobile money ecosystem, the complexity and inherit cost of cashing in and out in remote areas is diminished and users can benefit from other products and services beyond money transfer. In the early days, most people put money in for the sole purpose of someone else taking it out. That story seems to finally be changing (at least in some markets) as we now see a higher value circulating than exiting the global mobile money ecosystem ($22 billion vs $18 billion). Further, we also now see more digital transactions than cash-based transactions, indicating that people are leaving money in their digital wallets and using those funds to make digital transactions.

The report points to a few reasons for this shift. First, digital payments are quickly becoming a routine part of people’s lives. Taxis, schools, shopkeepers, and even governments increasingly <a href="https://www.betterthancash.org/tools-research/reports/opportunities-of-digitizing-payments">accept mobile money payments</a>, so the need to take cash out of the system to conduct daily transactions is lessening. Second, the industry is finding ways to make it easier for people to make those routine transactions, such as QR codes and overdraft coverage. For example, the report cites that merchants using QR codes transact three times more in value than those without. And third, mobile money providers are offering value-added tools to help micro and small enterprises not only better manage digital payments but also other business functions, such as inventory management and accounting.
<blockquote>The evolution toward a digital ecosystem is uneven worldwide.</blockquote>
That said, this evolution toward a digital ecosystem is not necessarily seen evenly throughout the world. Latin America and the Caribbean saw a decline in active accounts and transaction volume in 2019. And while South Asia has a high overall number of registered accounts, the percent of active accounts in the region is the lowest in the world. In India and Bangladesh, a survey of adults with a SIM card but no mobile money account found that their primary reasons for not using mobile money include a preference for cash and a high number of alternate ways to transfer money.

Sub-Saharan Africa, by contrast, has the highest percentage of active accounts at 50 percent (see graph below). In Mozambique, the same survey found that literacy and skills were the biggest obstacle to mobile money usage rather than a preference for cash. It’s clear that the evolution of mobile money is context specific and the trajectory will not look the same everywhere. But in many parts of the world, more is needed to develop the ecosystem in a way that provides value to the user, either by providing a service that beats the alternative options (e.g. faster, more convenient, less expensive) or offers new services not available via other channels (e.g. digital credit, value-added services for MSMEs, insurance, etc.).


One Billion Accounts in the Pandemic Era: Insights from GSMA’s Mobile Money Report

“<a href="https://www.themix.org/publications/fintech-benchmarks-report" target="_blank" rel="noopener noreferrer">Evidence shows</a> that fintechs face difficulties raising capital, especially those that are addressing the last-mile challenges that leave an estimated 3 billion people underserved by the financial sector.”

When we wrote these words just a few months ago, the world looked very different. Since then, the challenges facing fintech startups have increased exponentially as a result of the COVID-19 pandemic. In April, we spoke with <a href="https://www.themix.org/news-blog/disrupting-fintech-four-ways-early-stage-firms-are-adapting-to-deal-with-the-effects-of-covid-19" target="_blank" rel="noopener noreferrer">fintechs and investors</a> to understand how they were coping with the crisis. We found that fintechs are reconfiguring internal operations, refocusing on core products, and helping customers weather the storm – all while looking for the cash they need to prove their business model and scale. Investors have reported that, in the midst of the crisis, they are pausing investments or looking mainly to those startups whom they <a href="https://twitter.com/TheDFSLab/status/1257718687081156613?s=20" target="_blank" rel="noopener noreferrer">met in person</a> before the pandemic. Some fintechs we spoke with reported a lead investor abandoning a Series A, for example, or they paused fundraising to focus their attention on managing through the crisis.

Those conversations happened a little over a month ago. Now, investors are telling us that as the immediate crisis subsides, they are looking to engage with fintechs – especially those that have proven resilient through the crisis. As they do, however, the traditional tools that investors and fintechs rely on to find each other – travel, conferences and meetings over coffee – may not return for months or even years. If the absence of these traditional tools prevents investors from discovery, the industry risks missing out on many emerging fintechs – particularly those who are developing ideas designed specifically for a post-COVID world.

To avoid missing out, investors will need a robust and creative set of tools to support remote discovery. There are already a wide range of data services available for investors and startups to find information on the current investment landscape and recent deals, ranging from Crunchbase to Pitchbook to Owler. Yet we’ve learned that investors and fintechs focused on emerging markets and inclusivity find that the existing data does not fully cover emerging markets or is focused primarily on later-stage companies.
<blockquote>Investors will need a robust and creative set of tools to support remote discovery.</blockquote>
In the wake of COVID-19, we are pleased to see an initiative, <a href="https://www.findthenest.org/" target="_blank" rel="noopener noreferrer">The Nest</a>, take the lead in leveraging an innovative, low-cost way to support remote discovery. The Nest is a weekly Zoom “shark tank” designed to connect aspiring entrepreneurs in frontier markets with angel investors from around the world. It has raised more than $450,000 in the month since its inception. The company behind The Nest is <a href="http://www.untapped-inc.com/" target="_blank" rel="noopener noreferrer">Untapped</a>, itself a fintech supporting innovation in frontier markets through asset financing.

The founder, Jim Chu, recently told us that the virtual forum makes it easier to create a “critical mass” of interest from both investors and early-stage startups to build the ecosystem in frontier markets. The critical and diverse mass of investors, he believes, has been the key ingredient for The Nest’s success, as it increases the risk appetite of those who have not invested in frontier markets before.

“If you have a whole group of investors coming together, there’s more trust and knowledge because there will be that one person who will have expertise in a given sector or market.” Interestingly, the Nest has seen more interest from those who typically don’t invest in frontier markets.

The online platform reduces barriers to entry for early-stage startups: they don’t necessarily need access to Silicon Valley networks or trips to meet potential investors. Moreover, investors can obtain key financial indicators during the virtual pitch and conduct due diligence remotely with support from locally based investors. The Nest currently is most active with African startups, but plans to decentralize further by partnering with local angel investor groups in Asia, Latin America and the Caribbean to ensure that global investors connect with regional investors and leverage the knowledge they bring and close the capital gap that many early-stage startups face.
<blockquote>We are developing a data solution for fintechs and investors to support remote discovery and address investors' and fintechs' needs in the post-COVID world.</blockquote>
Meanwhile, at MIX, a unit within CFI, we are developing <a href="https://www.themix.org/relay-fintech" target="_blank" rel="noopener noreferrer">a data solution</a> for fintechs and investors to support remote discovery and address investors' and fintechs' needs in the post-COVID world. For fintechs, this solution will partner with <a href="http://www.inclusivefintech50.com/">Inclusive Fintech 50</a> – which launches on June 15 – to offer a new incentive to 2020 applicants: dynamic, targeted data on investors to help fintechs focus their fundraising efforts. We are also partnering with <a href="https://bfaglobal.com/project/catalyst-fund/">BFA’s Catalyst Fund</a> to offer fintechs a survey and analysis to illuminate how their customers are being impacted by COVID-19 in terms of financial health, income generation, and product usage.

For investors, the solution will provide access to fintechs’ profiles as well as the ability to generate customized industry benchmarks based on a standard set of performance KPIs – thereby supporting remote discovery and industry research. The solution will also provide specific data and insights relevant to how fintechs have coped with the COVID-19 crisis, including data on how the crisis has impacted, for example, cash runway and customer growth rates. This data will help investors understand which fintechs are best placed to succeed as the crisis subsides and investors are ready to rebuild pipelines.

Are you a data provider interested in partnering with the MIX team to offer better data and insights on inclusive, early-stage, and emerging market fintechs? <a href="mailto:fintech@themix.org" target="_blank" rel="noopener noreferrer">We’d love to hear from you</a>.

&nbsp;

&nbsp;

Fintech’s Next Big Ideas Might Be Discovered Remotely

<h1>Why Consumer Rights and Responsibilities?</h1>
The <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a> provide a common framework for financial service providers (FSPs), policymakers, and clients to better understand and discuss consumer protection issues. While much of the Center for Financial Inclusion’s (CFI) work with the financial inclusion industry has focused on providers and regulators, there is a third crucial constituency: clients.

Client awareness and capability is a critical component of effective financial consumer protection. Clients have the right to demand fair treatment and lodge complaints with government authorities, but these rights mean little if they don’t know what constitutes lawful treatment or how to access complaints channels. Similarly, clients play a role in protecting themselves by practicing behaviors to maintain their privacy and safety. While FSPs can institute protective processes and regulators can craft policy safeguards, improving client awareness of their rights and responsibilities helps consumers play their part to support a sustainable financial system.

This report provides lessons learned from initiatives in Ghana, Uganda, and Benin to raise consumer protection awareness among clients through multimedia campaigns, digital tools and other outreach strategies. It covers country-specific consumer protection issues and the individualized campaigns to address these issues. We also offer five key takeaways to help inform future client protection and empowerment awareness building activities.

Clients Deserve to Know: Using Radio to Educate and Empower Consumers in Africa

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