Can you help me find some positive deviants?

I guess I should explain the term first. I’m not talking about an optimistic misfit, or an affirming nonconformist, or a heavy metal band with uplifting lyrics. Instead I’m using one of <a href="https://positivedeviance.org/">my favorite terms</a> from behavioral science. Positive deviants are individuals or groups who find better solutions to problems than their peers, without having more resources or facing easier challenges than others.

A positive deviant is someone who succeeds when others are failing, a person who finds a way out when everyone else is stuck. The purpose of studying these deviations from the norm is to learn from the strategies of the positive deviants to see if others can adopt them and get similar results.

I recently was selected as a <a href="https://www.centerforfinancialinclusion.org/2019-cfi-fellows">CFI Research Fellow</a> to study positive deviance in the banking industry. Specifically I will be looking at banks that provide accounts for clients receiving social welfare payments from the government (G2P payments), seeking to find banks that invest in serving this client base.

In countries around the world, governments distribute regular cash payments to those living below the poverty line. Sometimes these payments come with conditions, like keeping the children in school and receiving regular medical checkups. Sometimes they come as part of a public works project. And sometimes they have no conditions at all.

<a href="https://publications.iadb.org/publications/english/document/How-Conditional-Cash-Transfers-Work.pdf">Studies</a> have shown that these payments, even when very small (US $20 to $50 per quarter), can help families move out of poverty by stabilizing incomes. In addition, these payments can <a href="http://www.fao.org/3/a-i5157e.pdf">reduce the intergenerational transfer of poverty</a> by increasing the chances that parents can afford to send their children to school so that they may have better job opportunities than was previously possible.

Years ago, governments made these payments in cash. That’s right, a big truck loaded with cash would pull up to a local government office and drop off a bundle of bills. Local officials would distribute this cash to those on the government social welfare rolls. As you can imagine, much of this money never made it to the right people.

Today, governments use a quicker and less leaky method. They set up bank accounts for each beneficiary and deposit the money directly in their account. Now, in most cases, these accounts serve as a mailbox for those receiving the payments—as soon as the money comes in, its owner will go to the bank or an ATM and withdraw the full amount.
<blockquote>Why don’t recipients of social welfare payments keep money in the bank?</blockquote>
Why don’t recipients keep any money in the bank? Research by Guy Stuart of Microfinance Opportunities, and a CFI Fellow, looked at this question from the demand side and <a href="https://www.centerforfinancialinclusion.org/government-to-person-transfers">found</a> that the people receiving these payments:
<ul>
 	<li>Don’t trust the banks – Why should they leave their money with rich people they don’t know when they can keep it at home?</li>
 	<li>Don’t know about other products and services the banks have that might be useful to them.</li>
 	<li>Don’t see any benefit to leaving money in their account – especially when getting the money out requires a long walk to a bank branch or ATM.</li>
</ul>
<a href="https://www.centerforfinancialinclusion.org/bio/larry-reed">My research</a> will look at the supply side of this challenge. I can make a business case for why banks should invest in this customer base as part of a long-term strategy for building profits. It goes like this:
<ul>
 	<li>Banks accounts tend to be very "sticky." (A UK <a href="https://www.theguardian.com/money/2013/sep/07/switching-banks-seven-day">study</a> that found that people there changed spouses more frequently than checking accounts.)</li>
 	<li>Governments disburse social payments to large numbers of people, essentially handing over a ready-made client base.</li>
 	<li>Banks that offer products and serve these clients well will earn their loyalty.</li>
 	<li>Over time, many of these people will move out of poverty and have <a href="https://www.womensworldbanking.org/insights-and-impact/women-mexico-digital-g2p-financial-inclusion/">more active accounts and larger balances</a>.</li>
 	<li>This gives the banks that offer these accounts a chance to acquire large numbers of customers long before their competitors become interested.</li>
</ul>
<h2>A Different Perspective on G2P Payment Customers</h2>
Unfortunately, most banks do not see it this way. Since the money does not stay in the bank very long, they don’t see a way to make money on these accounts. They will set them up if the government will pay the cost of operating them, but they don’t want to invest resources into this customer base. This means that they don’t offer the types of products that meet the needs of these customers and they don’t take the time to help their customers learn how to use their accounts. Lack of <a href="https://strategiccfo.com/customer-profitability/">customer profitability</a> becomes a self-fulfilling prophecy.

So, I'm on my search for positive deviants, looking for banks that go against the grain and see these customers as part of their strategy for generating profits over the long term. The key criteria for banks to qualify as positive deviants in this area are:
<ul>
 	<li>Actively pursuing clients receiving social welfare payments from the government</li>
 	<li>Developing products designed for the needs and aspirations of these clients</li>
 	<li>Helping their clients learn how to make the best use of these products</li>
 	<li>Showing results in clients using more banking services over time</li>
</ul>
One of the banks I will be visiting is BHD Leon Bank in the Dominican Republic. They have <a href="https://www.povertyactionlab.org/evaluation/leveraging-government-transfers-offer-low-risk-microcredit-dominican-republic">invested in serving people receiving social payments</a> through Progresando con Solidaridad (PROSOLI), the government’s primary anti-poverty program. PROSOLI organizes its payment recipients into savings groups. BHD Leon provides savings accounts for these recipients, with debit cards for the account holders. BHD Leon also provides accounts a range of financial services to the owners of <em>colmados</em>, the small convenience stores where most people shop. It has set these stores up as banking agents, so those receiving G2P payments can use their debit cards to purchase food and supplies while also making their deposit for their savings group. This drives more traffic to those stores that bank with BHD Leon. By seeing the G2P payment recipients as part of a larger financial ecosystem which includes savings groups and convenience stores, BHD Leon has found a way to provide neighborhood service to the PROSOLI recipients while also expanding its business with the owners of neighborhood stores.

So how about it, have you come across any banks that deviate from the norm in this way? If so, please let me know in the comments below.

Thanks for your help.

<em>Have a listen to the <a href="https://www.centerforfinancialinclusion.org/webinar-meet-the-2019-cfi-research-fellows">CFI webinar</a> I recently participated in to learn more!</em>

Searching for Positive Deviants

CFI Research Fellows Program

Payments

Blog Post

Eric Noggle

Senior Research Director 

Simone di Castri

Alexandra Rizzi

Larry Reed

Michael Schlein

Susy Cheston

Alissa Fishbane

Joseph Smolen

Rwanda

Sub-Saharan Africa

China

Kenya

Alternative Data

Data Analytics

Enabling Environment

Financial Service Providers

Financial Technology

Fintechs

Policy, Regulation and Government Initiatives

Agent Banking

Appropriate Product Design and Delivery

Client Treatment

Complaint Resolution

Consumer Protection

Credit

Credit Provision

Delivery Channels

Digital Credit

Digital Financial Services

Mobile Banking

Privacy

Telcos

Underserved Groups

Fraud

P2P Lending

Social Impact Metrics

Report

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

Today there are close to 700 million mobile money accounts registered worldwide — a number that, if it were a population, would rank as the world’s third-largest country. East Africa continues to lead in digital financial innovations as well as account usage, with two-thirds of the combined adult populations of Kenya, Rwanda, Tanzania, and Uganda actively using mobile money. With the proliferation of mobile financial services, particularly among underserved populations, it is vital that users be treated fairly and with dignity. In the momentum to define responsible digital finance and recognize providers of high-quality financial services, the industry must not forget the consumer.
<h1>Client Voices: Why We Listened</h1>
<a href="/about/what-we-do/the-smart-campaign/">The Smart Campaign</a>, a global initiative to create an environment in which financial services are delivered safely and responsibly to low-income clients, has long recognized that client perspectives are often underrepresented in consumer protection discussions. With the Client Voices Project, the Campaign questions whether the industry’s assumptions about what constitutes problematic treatment rightly reflect what clients themselves worry about.

The dual objectives of the project are to solicit input from low-income clients about what they consider good and bad treatment in their interactions with financial service providers and to assess the prevalence of consumer protection problems among these clients, using quantitative surveys. The project is designed to act as a catalyst for financial service providers, regulators, industry associations, consumer advocacy groups, and others to improve client protection in ways that are grounded in client feedback.
<h1>Major Findings</h1>
Based on a survey of over 1,200 people in three districts in Rwanda, this report delves into the experiences of individuals who use digital financial services (DFS), the main client protection issues they are concerned about, and the impact and prevalence of negative experiences. We find that mobile money enjoys a high degree of satisfaction and trust from clients in Rwanda, even though 40 percent of clients report being targeted by fraudulent schemes, which have become increasingly sophisticated.
<blockquote>Customers report wising up to scams and fraud, but with a continuous influx of new mobile money users and fraudsters who innovate quickly, the threat is real and constant. Fraud represents the greatest potential to damage customer trust and engagement with mobile money in Rwanda.</blockquote>
However, there are many ways that DFS operations and practices can be improved to better protect clients and strengthen trust. Client recourse mechanisms, for example, represent an important area for improvement: many clients shared that they feel helpless and unsure about what to do after realizing they have been duped. Additionally, for business models that rely more on the mobile interface than on human interaction, clients increasingly rely on agents for information and guidance. This presents an opportunity to provide better service, as well as a risk for poor client treatment.

We hope that providers, industry associations, support organizations, regulators, consumer protection advocates, and clients can benefit from these findings to create a stronger, more inclusive client protection ecosystem. We offer specific recommendations for many of these stakeholders.

Client Voices: Rwandans Speak on Digital Financial Services

<em>&gt; Posted by Michael Schlein, President and CEO, Accion</em>

[vimeo 174714924 w=640 h=360]

Over the last few years, we’ve made great progress in expanding financial access for those left out of the economic mainstream. From 2011-2014, more than <a href="http://www.worldbank.org/en/programs/globalfindex" target="_blank" rel="nofollow">700 million</a> people gained access to new financial accounts. If you’ve just been reading the headlines, you might assume that telcos and fintech start-ups are the primary forces driving that progress.

But the newest study from the <a href="http://www.centerforfinancialinclusion.org/" target="_blank" rel="nofollow">Center for Financial Inclusion at Accion</a> and the <a href="https://www.iif.com/" target="_blank" rel="nofollow">Institute of International Finance</a>, “<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/748" target="_blank" rel="nofollow">The Business of Financial Inclusion: Insights from Banks in Emerging Markets</a>”, found that of the 721 million adults who gained access to new financial accounts between 2011-2014, 90 percent of them did so at more traditional financial institutions.

Telcos and fintech start-ups have been getting the headlines; the banks have been getting the job done. That’s important, exciting news.

This report shows that, for the first time, banks, all around the world, are seeing financial inclusion as a core business function. <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/748" target="_blank" rel="nofollow">The Business of Financial Inclusion</a> report shows that banks are creating lean, viable business models to reach customers they have never reached before. Digital payments are the main gateway for commercial banks to reach underbanked customers. They take many forms – transactional accounts, salaries and bill payments, G2P, and P2P. This means cheaper, more secure, and more convenient payments. Instead of spending hours traveling to make a single utility payment, mobile money allows you to push a button.

But technology is doing more than providing customers with more channels. It’s also powering data analytics, back-office systems, and product innovation. The combination of banking’s view of the base of the pyramid as a business opportunity, leaner business models, and back office efficiencies is how we’ll reach more people, and provide them with the tools they need to help themselves.

<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/748" target="_blank" rel="nofollow">The Business of Financial Inclusion</a> report also shows how highly the banks regard microfinance, as both an investment opportunity and, more importantly, as a partner in reaching the ultimate clients. These partnerships between banks and microfinance institutions are transforming financial inclusion ecosystems.

<strong>Account Access versus Usage</strong>

The 721 million new accounts that the world added between 2011-2014 represent tremendous progress; with banking committed to pursuing financial inclusion, I’m confident that we’ll add hundreds of millions of more new accounts in the coming years.

But opening accounts is just the first step. Too often newly-opened accounts remain dormant. Compared to high income countries, people living in low income countries use their accounts much less frequently – and sometimes not at all. And opening dormant accounts is not our vision of financial inclusion.

We know there is much more work to be done. And we are seeing promising signs. The State Bank of India, for example, has led a major effort to open up accounts and, in the first 18 months, we have seen zero account balances fall from 90 percent to 40 percent.

Now that a host of new banks are committing themselves with this cause, they must acquaint themselves with this important distinction: access is a necessary condition for financial inclusion, but customers must <em>use </em>those accounts to realize the potential of inclusive finance. To ensure that customers remain active, engaged users, we need to keep working to gain the trust of our new clients, to develop products that make sense for them and to make sure they have the capability to use these powerful tools well.

Financial exclusion is an urgent problem. Providing someone with financial services now might make the difference between their children going to school today or waiting for their grandchildren – or great-grandchildren – to realize that opportunity.

And this is a problem that we can solve. The digital revolution has changed the boundaries of our imagination. And this <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/748" target="_blank" rel="nofollow">report </a>shows that instead of viewing financial exclusion as a failure of the banking system, we have turned a very significant corner – and now the banks have begun to see the enormous opportunity at the base of the pyramid. This is important progress.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2016/07/13/new-video-susy-cheston-interviews-dr-william-derban-on-the-business-of-financial-inclusion/">New Video: Susy Cheston Interviews Dr. William Derban on “The Business of Financial Inclusion”</a>

<a href="https://cfi-blog.org/2016/07/07/the-business-of-financial-inclusion-insights-from-emerging-market-banks/">The Business of Financial Inclusion: Insights from Emerging Market Banks</a>

<a href="https://cfi-blog.org/2016/07/19/banks-in-financial-inclusion-improving-the-customer-experience/">Banks in Financial Inclusion: Improving the Customer Experience</a>

New CFI and IIF Report Reveals Banks Are Leading Financial Inclusion

China’s economy has experienced tremendous growth in recent years, with a booming micro, small, and medium enterprise (MSME) market. There are over 50 million MSMEs in China that collectively account for over 60% of China’s GDP and over 50% of the government’s tax income. These businesses create 80% of total employment in China’s urban areas.

Despite China’s overall economic growth, the need to foster full financial inclusion is still imperative. In 2010, 38 million MSMEs lacked access to formal financial services, forcing them to borrow informally from friends, family, and moneylenders.

<em> </em>

<a href="http://cfi-blog.org/category/financial-inclusion-2020/"><img class="alignright wp-image-8777" style="border: 0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2012/11/fi2020_antilogo1.jpg" alt="" width="321" height="71" /></a>The news is out. Ezubo is a Ponzi scheme. The lending company, a P2P platform in China, has bilked 900,000 private investors out of a stunning <a href="https://www.washingtonpost.com/world/asia_pacific/how-a-huge-chinese-ponzi-scheme-lured-investors/2016/02/08/fcbae776-ca9c-11e5-b9ab-26591104bb19_story.html">US$7.6 billion</a>. Ezubo is China’s largest ever online scam—but it is not alone. It is one of 2,612 P2P sites that bring lenders and borrowers together in China’s <a href="http://www.cnbc.com/2016/02/01/chinese-police-bust-76b-ponzi-scheme-at-p2p-lender-ezubao.html">$2.6 trillion</a> wealth management industry. Of those, the China Banking Regulatory Commission (CBRC) says that <a href="http://www.bloomberg.com/news/articles/2016-02-03/china-s-biggest-ponzi-scheme-shows-rot-in-internet-financing">more than 1,000</a> are “problematic.” We expressed concerns about this very P2P lending market in China in our <a href="http://www.fi2020progressreport.org/">FI2020 Progress Report</a> released four months ago.

But first, how could this happen with Ezubo? Ezubo had been in the vanguard of the hot e-finance market, and was <a href="http://www.cnbc.com/2016/02/03/investors-scared-of-china-stock-markets-were-lured-by-ezubo-ponzi-scheme.html">named</a> "online credit financial brand of the year" by China's National Business Daily in 2015. It was lauded on Chinese state television and received implicit endorsement from high government officials. It engaged in cross-border trading with Myanmar—something that would not seem possible without government oversight. China is supposed to be in a big campaign to root out corruption. Yet it seems there are just two possibilities: Chinese regulators either knew about the scam and kept silent, or they missed it altogether. Could Ezubo have duped or paid off every one of the local, provincial, and national authorities who had oversight?

That’s why people who were suddenly stripped of their wealth not only feel duped by Ezubo, they also feel duped by the government. After all, this is only the latest allegation of fraud against a market that has been enthusiastically championed by the government and only loosely regulated.

While we didn’t call out Ezubo by name, we did throw down a warning about the Chinese e-finance explosion in our <a href="http://www.fi2020progressreport.org/">FI2020 Progress Report</a>, saying:

<em>The Institute of International Finance reported in November 2014 on the particular challenges of exponential growth in financial services through e-finance in China. The report lauded the great promise of e-finance for improving financial inclusion, but </em><a href="https://www.iif.com/publication/research-note/chinese-internet-finance-explosive-growth-challenges-ahead"><em>noted</em></a><em> </em><em>concerns about consumer protection. In the midst of stratospheric growth of </em><a href="https://www.nri.com/~/media/PDF/global/opinion/lakyara/2014/lkr2014202.pdf"><em>P2P lending</em></a><em>, China has seen many P2P lenders abruptly closing shop and vanishing. In 2014 alone, 275 P2P platforms in China failed. China has proposed regulations designed to crack down on platforms that are not sufficiently capitalized or are at higher risk of default. In the meantime, individual investors are at risk. In some of the most egregious cases, P2P fraudsters absconded with investors' money on the first day that they opened for business.</em>

This paragraph was part of our analysis of <a href="http://www.fi2020progressreport.org/client-protection/">Client Protection in the Digital Age</a>. In the FI2020 Progress Report, we said that technology has the potential to decrease fraud and increase protection—but that technology can also bring new dangers, including new kinds of fraud that can emerge when regulators have not caught up to the advances of financial technology. No matter what technology is involved, the bottom line is that customer protection policies need to develop alongside technology innovations.

In China today, the price of failing to do so is 900,000 people who have been robbed of their wealth—and 21 Ezubo executives who are now in custody. We’ll hope that client protection indeed catches up to the P2P platforms, lest another Ponzi is in the works.

<em>Kudos to the sharp economists of the Institute of International Finance who first clued us in to the dangers of China’s e-finance market.</em>

<i>Financial Inclusion 2020 (<a href="http://www.centerforfinancialinclusion.org/fi2020" target="_blank" rel="noopener">FI2020</a>) is a global multi-stakeholder movement to achieve full financial inclusion, using the year 2020 as a focal point for action.</i> <i>This blog series will spotlight financial inclusion efforts around the globe and share insights from key thought leaders in financial inclusion, with a specific focus on quality beyond access.</i>

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2015/09/15/insights-into-an-evolving-peer-to-peer-lending-industry-in-china/">Insights into an Evolving Peer-to-Peer Lending Industry in China</a>

<a href="http://cfi-blog.org/2015/10/01/rating-progress-toward-financial-inclusion-on-a-scale-of-1-to-10/">Rating Progress on Financial Inclusion on a Scale of 1 to 10</a>

<a href="http://cfi-blog.org/2014/09/23/chinas-microfinance-landscape-nonprofits-microcredit-companies-rural-financers-and-alibaba/">China's Microfinance Landscape: Nonprofits, Microcredit Companies, Rural Financers, and Alibaba</a>

&nbsp;

Why We Aren’t Surprised that Ezubo, the P2P Lender in China, Is a Ponzi Scheme

<em>&gt; Posted by&nbsp;Tyler Aveni, Research, PlaNet Finance China</em>
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Peer-to-peer (P2P) lending is on the rise – as evident by the hundreds of articles on the subject that have sprung up just this year. However, P2P, generally defined as individuals bringing together small sums of money to lend to other individuals, is hardly a new concept. Moreover, this process of lending amongst communities of small businesses and friends has been moving online for a decade now. And while money is now most commonly transferred between strangers, interconnectivity online has allowed the process to feel almost as intimate as lending among friends and family.

The two earliest entrants into the P2P industry have gained steady followings since their beginnings in 2005: Zopa, a large commercial P2P platform in the U.K. boasts high returns and low interest rates for participants; the U.S. non-profit Kiva facilitates philanthropic P2P lending, wherein microentrepreneur clients of “field partners” or local financial institutions in developing countries are paired with those willing to lend at a zero percent return (i.e. indirect P2P). Through nearly a decade of innovations and new players emerging, P2P has slowly become a disruptive force. Total origination remains moderate with some $2.4 billion originated through P2P in the U.S. last year, but growth has recently skyrocketed.The U.S. market is estimated to swell to$32 billion by 2016. By 2025, the global figure could be as much as one trillion.*

Why such fast growth?



The appeal of online lending is two-fold. First, humanizing the lending process draws on a public sense of community. Many people prefer supporting others in a transparent system of lending as opposed to relying on traditional investing and/or saving options offered by banks. Some borrowers say that knowing other individuals are on the hook, rather than a bank, has incentivized them to go the extra mile in making repayments. In this way, P2P is almost strikingly traditional in that it integrates elements of “group pressure”– a successful innovation in microfinance organizations throughout the world – into the lending process.

Second, P2P lending is often a cheaper form of lending. Online transactions mean little need for brick-and-mortar establishments. P2P lending in the West has developed advanced credit evaluation analytics, lowering default risk and, by extension, reducing costs further. The result is better returns and lower interest rates for most investors and borrowers. Consequently, existing borrowers and small and medium-sized enterprises have come in droves to refinance their debts via P2P platforms.

Rishabh Khosla of Accion’s Venture lab sees other innovations taking shape. One of these is “affinity based lending,” or lending amongst those of a particular group. At StreetShares, a U.S. P2P platform that targets veteran groups and veteran businesses, borrower and investor acquisition has taken on a new grassroots quality. Khosla notes that&nbsp;“The key to vastly lowering the cost and making this market happen is low-cost borrower acquisition, low-cost lender acquisition, and then a really good engine in the middle to assess and underwrite these borrowers.”

P2P lending is pushing financing toward greater credit accessibility in myriad ways. When defined broadly, financial inclusion has already felt the positive effects of P2P lending’s development. Credit for small businesses means economic growth, entrepreneur support, and potentially more employment. Consumers trapped into exploitative interest payments on credit card debt can find some reprieve with P2P refinancing. High-achieving students and P2P lenders are proving to be an especially attractive combination. Many borrowers voice their satisfaction with the entire process.

“Last-mile” borrowers are being affected as well, albeit at a slower pace. A reflection of the unique challenges in reaching poorer regions, a different sort of P2P business model has taken root in the developing world. Partnerships, such as Kiva’s, between microfinance institutions (borrower acquisition) and P2P portals (lender acquisition) have given a new swath of rural borrowers access to credit. Over-indebtedness caused by high interest rates and poor individual credit evaluation remains a concern. However, supporting the better-performing, lower-risk microfinance companies means formal loans are being made available, an attractive option to those who might otherwise resort to loan sharks.

In developing and developed markets alike, potential for high returns has attracted institutional investors who now see the industry as better-developed and less risky compared to its earlier years. As a result, institutional big money is pouring into the industry (both in the form of equity investments into platforms and total loan origination by them), adding to the rapid growth of P2P lending. China, home to the largest P2P market, serves as a good example: total loan origination via Chinese P2P companies has grown more than 200 percent in 2014.**&nbsp;This marks a global trend. With so many large investment firms getting involved, the industry looks distinctively more commercial.

But perhaps social and commercial interests stand to benefit from one another. A P2P industry with more visibility, even if primarily profit-driven, could benefit a whole range of P2P lending companies, from the philanthropic to the bank-like. After all, both types of platforms aim to improve on and fill gaps in current lending practices. The fact remains, however, that growing interest is moving the industry closer to institutional players. P2P companies and their business models may very well be absorbed by banks as part of a new age of efficient banking. What this would mean for P2P lending is unclear, but many are understandably wary of trusting big business to champion fair lending practices.

Regardless, authorities are clamoring to work out regulations for the nascent industry as P2P companies scale up. During this stage of rapid change in P2P lending, it will remain essential to keep track of where the industry is going and how best to try to shape it. Accordingly, Planet Finance will address some of the pressing topics in our upcoming research on P2P lending practices worldwide. The research comes as part of our Microfinance Robustness Program which promotes the sustainability of the microfinance sector and is supported by Credit Suisse, a partner of both Planet Finance and the Center for Financial Inclusion.

By exploring impacts of P2P lending in different communities and evaluating the potential it holds for extending financial inclusion, we hope to illuminate a socially minded narrative, one that discusses innovative bank to P2P company partnerships, and address concerns of P2P lending fueling over-indebtedness.There is currently a need to better define the P2P lending space, to better understand the complexities and risks of various business models, and to provide a more involved discussion of how the industry is progressing. Both the unfairly served and “underbanked” alike will ultimately benefit.

* Estimates from Research and Markets distributed report “Peer-to-Peer Lending: Global Facts and Figures 2014”

**Estimates from wangdaizhijia.com, a China P2P market monitoring website

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2014/09/23/chinas-microfinance-landscape-nonprofits-microcredit-companies-rural-financers-and-alibaba/">China’s Microfinance Landscape: Nonprofits, Microcredit Companies, Rural Financers, and Alibaba</a>

<a href="http://cfi-blog.org/2014/08/06/reality-check-three-ways-we-hype-up-financial-inclusion-break-throughs/">Reality Check: Three Ways We Hype Up Financial Inclusion Breakthroughs</a>

<a href="http://cfi-blog.org/2014/10/30/fueling-the-economic-engine-global-experiments-in-small-enterprise-lending/">Fueling the Economic Engine: Global Experiments in Small Enterprise Lending</a>

The Role of Peer-to-Peer Lending in Financial Inclusion

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.

&gt; <em>Posted by <em>Ignacio Mas, Independent Consultant</em></em>

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I guess it happens in all human endeavors; we sometimes get carried away wishing things were the way we think they ought to be. Let me provide three cautionary observations relating to financial inclusion: about how we measure it, how we talk about it, and how we assess it. The point is not to dampen enthusiasm about the possibilities, but to reflect on our progress in a more realistic way.

<strong>Industry Showcases and the Numbers Game</strong>

Through numerous industry conferences and blogs, certain players get put up as shining examples for the industry to follow. M-Shwari is perhaps the latest one, I guess because it delivers large customer numbers to an industry that is still largely focused on coverage rather than usage, and it represents the kind of telco-bank partnership that many have been fantasizing about.

M-Shwari may indeed be every bit the financial inclusion success that it is made out to be, but how is one supposed to judge that, based on the sparse numbers that have been released? This is pretty much <a href="https://www.linkedin.com/groups/MShwari-PAR-credit-blacklists-lessons-4416977.S.5875716438848729089">all we know</a>: as of March 2014, 6.8 million registered customers, of which 3.6 million were active, collectively had $46 million in deposits and $14 million in loans outstanding; 15 percent of loan requests were approved, and 2.7 percent of loans were non-performing. Now, is the savings balance total the result of each of the 3.6 million active customers squirreling away $13 for a rainy (more like drizzly) day ($46m ÷ 3.6m = $13), or is it more likely that most of the savings comes from fewer than 100,000 busy traders who are saving $500 ($46m ÷ $500 = 92,000) in order to create more transactional head-room for their linked M-Pesa account? We just don´t know. But then, how can we have an opinion on M-Shwari's efficacy as a financial exclusion buster?

We must refrain from unduly extolling cases on which we have not been invited to know enough. We need to look beyond average balances, which are typically highly skewed by large balances at the very top of the distribution. Donors, policymakers, and pundits must start asking for customer distributions before parading any savings effort as a success.

<strong>Digitization of Payments and the Journey to Cash-Lite</strong>

What do we mean when we talk about <em>digitization</em> of G2P payments? Most government payments have for a long time been digitized, at least at source. No ministry holds a huge cash stash to pay pensions and welfare benefits. Now the trend is to pay these directly into beneficiaries' digital accounts, rather than to intermediary entities for onward distribution of the cash. But when beneficiaries are paid digitally, the practice pretty much universally is for them to withdraw the money in cash immediately and in full at local shops acting as agents, who have the thankless task of procuring the cash. So, in what sense has the payment been digitized? The same amount of cash is still involved, it just got to beneficiaries through a different channel. All we've done is outsource <em>last mile</em> cash distribution to retail outlets, via a financial service provider.

This is not to say there is no net benefit: account-based G2P payments are much less prone to corruption, and bank agents may be closer to where beneficiaries live than the old government cash distribution points. But people's money is for the most part no more <em>electronic</em> than it was before. And by the way, this is true as much for P2P as for G2P payments, and in Kenya as much as everywhere else.

Moreover, because most electronic accounts are largely empty, users do not have a natural preference for paying electronically at the corner store, so local electronic acceptance by local merchants does not take off. Contrary to frequent commentary, digitization of payments is therefore not leading to a <em>cash-lite</em> world. We are confusing the digitization of payments (how money moves around) with the <a href="http://community.businessfightspoverty.org/profiles/blogs/ignacio-mas-intensifying-mobile-money-usage">digitization of money</a> (how money is held).

<strong>Impact Evaluation and Silver Bullets</strong>

Few would argue that there are any silver bullets—understood as simple solutions to complicated problems—in development. We know that progress occurs from the interplay of various forces and interventions—access to education, information, markets, finance, infrastructure, legal and physical security, etc.—and that none of these individually stands a chance to transform lives. The impacts of finance happen mostly through indirect channels, through a process not unlike multiple particle collisions. So when we insist on measuring the impact of financial inclusion programs by carefully isolating single treatments/collisions, aren't we secretly wishing to find a silver bullet?

While I understand intellectually the need to conduct impact evaluation, how realistic is it to <em>expect</em> to find sustained, systematic impact from narrowly defined and precisely controlled financial interventions? How much mileage will we get from building ever-more precise Hadron Supercolliders in the social sciences?

I'm just sayin'...

<em>Image credit: <a href="http://www.afi-global.org/policy-areas/other-financial-inclusion-policies" target="_blank" rel="noopener"><span style="text-decoration: underline">IPA</span></a></em>

<img src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/04/picture-174-1340397583.png" alt="" width="80" height="80" />

<em>Ignacio Mas is an independent consultant. You can learn more about his work <a href="http://www.ignaciomas.com/" target="_blank" rel="noopener">here</a>.</em>

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2014/03/20/microfinance-and-savings-outreach-what-are-we-measuring/">Microfinance and Savings Outreach: What Are We Measuring?</a>

<a href="http://cfi-blog.org/2013/04/10/measuring-and-missing-financial-inclusion/" target="_blank" rel="noopener">Measuring (and Missing) Financial Inclusion</a>

<a href="http://cfi-blog.org/2014/06/20/electronic-g2p-for-the-poor-does-electronic-social-protection-need-better-consumer-protection/" target="_blank" rel="noopener">Electronic G2P for the Poor: Does Electronic Social Protection Need Better Consumer Protection?</a>

Reality Check: Three Ways We Hype Up Financial Inclusion Breakthroughs

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