16 Mar, 2017

Fintech can be the unbanked’s best hope for financial inclusion

16 Mar, 2017

If you had asked anyone in the region about fintech just a couple of years ago, you would have been met with blank stares – and not the eyes-glazing-over kind that some people get when someone mentions finance. Today, it’s the fancy, shiny sports car that just pulled up in the town square; it’s all everyone seems to be talking about, and they’re all wondering if they can hitch a ride.

There’s a lot to be said about fintech’s different applications; from peer-to-peer lending, to micropayments, to Bitcoin and blockchain wallets and marketplaces, the possibilities are as diverse as the average person’s financial needs. To put it simply, there’s something for everyone. Or is there?

Fintech is well placed to give the current financial system a good shake up, that much is true. However, there is a large number of people around the globe that are not even part of that system. These are the so-called unbanked. Their number is about two billion adults in 2015, according to the World Bank’s estimates.

The unbanked have no access to banking services and institutions that developed countries take for granted. They don’t have bank accounts, they can’t apply for loans. They use cash for their everyday transactions and their savings account is their mattress. A credit card is little more than a colorful piece of plastic, as far as their immediate needs are concerned. But the whole point of fintech is that it works differently than traditional financial institutions. Being smaller, nimbler, and innovative, fintech startups can reach those people in ways that banks never can.

Striving for inclusion

Financial inclusion, the dogma of making financial services available and affordable to disadvantaged and low income members of society, is not a new idea. Initiatives such as the Alliance for Financial Inclusion have been around for several years. Perhaps the most well known is Vodafone’s mobile payment initiative, M-Pesa, which began in 2007 and is currently available in Kenya, Tanzania, South Africa, Afghanistan, India, and more recently across Eastern Europe.

But now, with the advent of new technologies, fintech startups seem to be getting in on the action more than ever before, says Markus Gnirck, co-founder and global COO of accelerator Startupbootcamp Fintech. “Financial inclusion takes a big piece of the fintech pie,” he tells Tech in Asia. While Gnirck doesn’t feel fintech is defined solely by its financial inclusion potential, it’s a very important part, especially in Southeast Asia.

“We have timely real-world problems that can be solved by fintech startups,” he says.

Some of those startups are part of Startupbootcamp Fintech’s current accelerator program.

Kyepot, for example, aims to enable lending and borrowing within small, trusted groups, using social tools. Sidd Gandhi, the company’s co-founder and CEO, brings in his expertise of 14 years in the banking sector, which also allows him to put fintech’s rise into perspective. Established financial institutions, he says, have always used advanced technology, but that is now changing.

mobile phone payments

Even older devices can be instrumental to people getting access to online payment systems.

Fintech is making this technology available to people who had never had access to it before, Gandhi argues. “That’s where we come in, as firms who can actually use new, lightweight technology,” he says. Just like several industries that are being disrupted by startups working with new solutions to old problems, the idea is to use those channels and devices that are becoming popular, such as mobile phones, web, and mobile internet connectivity, to reach people and areas that were unreachable before.

“I think fintech helps scale up normal human behaviors that have been in this local context in Southeast Asia,” chimes in Syakir Hashim, co-founder and COO of SkolaFund, a startup that aims to provide scholarships to underprivileged students via crowdfunding. “It’s natural for people to help their family members, their community members, and their fellow countrymen.” So far, initiatives like scholarships have been based on affluent benefactors offering money to the less fortunate. What SkolaFund proposes brings in the middle class, leveraging technology to increase financial assistance options for low income students.

Overworked and underbanked

It might be argued that even more than the unbanked, fintech has a better chance of aiding the underbanked – those who do have access to the financial system, but only up to a point. Even in Singapore, there are small businesses that don’t have access to lending services from large banks for a variety of reasons. Singapore-based startup Capital Match uses peer-to-peer technology to connect such small- and medium-sized enterprises in need of a loan to investors.

“The debt market for SMEs is very stratified right now,” says Pawel Kuznicki, Capital Match co-founder and CEO. “You either get a cheap loan with a bank at an interest rate of 5 to 10 percent per year, or if you are not lucky, you are a typical SME given a very high loan rejection rate by banks in this segment. You will either not be able to access debt/working capital at all or you will have to settle for super high rates.” That means 5 percent and upwards per month.

So what Capital Match does is to give small business owners access to a large pool of private savings, which come from investors who are promised a premium on their savings. Before technology such as the one Capital Match utilizes, those underbanked business owners would have to look for alternative lending sources, which would potentially leave them vulnerable to crippling debts or unscrupulous, unregulated lenders.

This way, these businesses have the opportunity to scale up to a point where they can take full advantage of the financial system that was so impenetrable before. “Every business started somewhere,” Kuznicki says. “By providing the capital to those small businesses, they are actually able to grow and once they reach a certain scale, banks are happy to serve them.”

Accessing finance through social media

So the technology is there to provide alternative financial routes to these people. Actually accessing those services is still a problem, however. Most of those ideas materialize on the web, and are available via a computer or a mobile device. Can people in rural areas such as remote places in India or farms in Indonesia, with limited access to the internet and a lack of digital infrastructure, be expected to have this kind of equipment?

As it turns out, people in such areas in Asia have increasingly more access to phones – whether feature phones or low-cost smartphones – and that is enough to take advantage of many services provided by fintech. “India is a massive place, with a population of around 1.3 billion, but there are 918 million phones,” Gandhi points out. “Yes, the lack of ubiquitous use of the smartphone is a barrier in the rural areas, but we can still leverage feature phone technology and integrate some of our services to actually give people this access.”

And mobile phones are just the beginning. “Interestingly, in Indonesia, a lot of people don’t know what the internet is, but they know what Facebook is,” Hashim notes. “So this presents a different kind of challenge.” SkolaFund actually plans to use social media such as Facebook to promote awareness and attract scholarships, as the company has noticed that people like to donate money through Facebook. Given that people use social media much more often than online banking, it’s only natural to attempt to utilize this avenue that has so far gone unnoticed in this context.

farmer in rural indonesia

Fintech startups have to go the extra mile to reach unbanked people in rural areas through existing infrastructure.

“At the end of the day, you have to reach out to consumers wherever they like to interact,” Rakhil Fernando, founder and CEO of mobile micropayments startup Kashmi, offers. “So if social media is the way where you can reach out to them and provide some kind of financial services solution, you have to work within that space. I think startups can do that far more effectively than existing players who find it harder to be nimble.” Fernando figures that the startup can tap into local merchants with physical points of sale, effectively converting them into stations for users to credit or debit their ewallet. In this way, existing infrastructure turns into a way to use these services. It may be hard to find a big bank’s branch in the Indonesian countryside, but a 7-11 is probably never too far away.

This way also highlights how important it is to go slow, to familiarize people with these services without completely overturning what they know. “Disruptive innovation doesn’t work,” Gandhi explains. “It’s incremental innovation [that is key], which is why we need to have a physical distribution channel for that last mile integration. That is the key to rural areas, and you have to really interface with people, to put feet on the ground.”

Technology as a means, not a barrier

It seems a lot of emerging markets are a lot more prepared to receive those technological solutions than people in developed countries believe. Money remittances in Bitcoin are on the rise in the Philippines, for example, because it is both cheaper and quicker than using mainstream methods.

Yet established economies in the US and EU are slower to accept transactions in Bitcoin – probably because there is no pressure to do so. “I think education-wise it doesn’t really take long to talk about [solutions like Bitcoin] in new emerging markets. In Germany or the UK, or the United States, it would take a long time to replace the trust we have in our euros, pounds, and dollars,” Gnirck says. “Whatever the technology, it’s about how we can do things faster and cheaper, and pass on the benefit to our customers,” says Gandhi.

“We serve some businesses that do not even have a website,” Kuznicki says about his own field. “However, with increasing awareness and adoption of alternative financing by small business owners, peer-to-peer lending will secure a permanent place in the banking industry.”

There be gold in them hills

Ultimately, a lot of the concerted effort towards helping the unbanked comes down to a question of profit. The efforts of NGOs and a lot of startups’ sense of social responsibility aside, projects at a scale where they can meaningfully help people will need to prove worthwhile in order to achieve substantial results. There is, of course, the inherent overall benefit of more people participating in the financial system by saving, investing, and using money for purchases.

But several parties are now seeing even more value in reaching out to this underserved segment of the global population, and are recognizing the market opportunity there. Last year, private equity firm Leapfrog Investments raised US$400 million for social impact investments in Asia and Africa, an unprecedented amount of funds aimed at providing financial services to low income populations.

In other words, financial inclusion through fintech is not only possible, it’s also a huge market; one that startups with fresh ideas and innovative products could benefit from while at the same time bringing about significant social change. “It’s not just in terms of the unbanked and underbanked, but also about the middle class,” Gnirck says. Southeast Asia is poised to welcome millions of people into the middle class within the next decade. It’s getting much easier to imagine many of those people being included into the mainstream finance system thanks to new fintech startups

Source: Tech In Asia


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