If everyone had a bank account, the global economy could expand by $3.7 trillion by 2025, a recent report showed. New digital tools, like mobile money accounts and peer-to-peer lending, can bring millions of people into the formal financial system, opening up their ability to save, borrow, and live better lives. Already, 700 million individuals gained bank accounts between 2011 and 2014.
Still, a leading figure in the financial inclusion community says we’re only at the beginning of efforts to innovate in the underbanked space (2 billion people lack access). Tilman Ehrbeck, partner at the Omidyar Network, a social impact fund that’s invested in a string of fintech startups, says there’s a need to match services to real-world financial behavior (as opposed to what providers think people want), integrate saving, borrowing, and cashflow management products, and to bring down regulatory barriers, allowing new entrants to flourish. He builds on these ideas below.
Omidyar recently commissioned research looking at a particularly underserved group: women in developing countries. Women lag men by nine percentage points in access to bank accounts overall (in South Asia, the gap is 18 points). Using financial diary data, the research finds that women face more interruptions in their financial lives than men (for instance, when they have kids). They play more “defensive” or “backstop” financial roles (while men make the flash purchases). Their social networks are more horizontal than vertical (they transact with peers, rather, say, merchants up the supply chain), and their spending is more geographically restricted.
Ehrbeck says there’s a need for financial products that cater to small, inconsistent incomes, that offer “nano-credit, retail lay- away plans and flexible financing,” and that better support “life transitions” (for instance, accounts should be easier to reactivate after no-use periods). “Most traditional financial [products] are defined from the supply side and even from the regulatory side,” he says. “But people behave quite differently with respect to their money. And, in some places, technology has actually increased the gender gap [around financial services].”
RUMA, an Omidyar investee in Indonesia, is an example of a financial service aimed at women. It offers a stored value card called Mapan that allows friends and community members to save money collectively, and then buy big-ticket items from an online company catalog (fridges, computers, scooters, and so on).
Mobile money services, like M-Pesa in Kenya, have a secondary advantage of allowing customers to start building credit histories. People with wider social networks who lots of transactions tend to be less risky from a creditor’s point of view. “The digitization of retail financial services creates data for short-term credit purposes,” Ehrbeck says. Customers can be assessed for loans, micro-insurance, or pay-to-buy product (like solar panels in Africa). Omidyar companies Lenddo, which uses social media data, Cignifi (mobile), and EFL (psychometric testing) are all examples of unconventional credit scoring that open up finance to more people.
Ehrbeck says there’s a need for integrated platforms that do more than one financial service: what he calls a “Pocket Einstein.” It could be an app that summarizes your available balance, that highlights late fees and penalties, that offers short-term credit to get over an unforeseen expense, that lets you put aside a small savings for retirement, or that cautions you when you’re about to make an unwise financial decision. Ehrbeck describes it as a sort of financial Fitbit: a personalized on-board adviser that keeps you on-track with your goals. “What used to be three financial products–short-term credit, payments and savings–becomes one solution offering–which is day-to-day cash flow management,” he says. Such integrated income-smoothing products have been suggested for the U.S. market, as well as for poorer countries.
In getting financial services to more people, a bona fide identity is as important as the service itself. In India, the central government has issued 950 million people unique, biometric IDs using iris scans and fingerprints. The Aadhaar program allows banks to offer accounts to more people and at an estimated 75% of the cost of old signature-to-paper methods. Future financial services will cater to the non-literate with audio and video cues, rather than signatures and form-filling, Ehrbeck says.
By 2020, 80% of adults worldwide are likely to have smartphones, allowing financial services to switch completely from the physical sphere to the digital one. To assist in the switch, some governments, including the U.K. and China, are considering issuing parallel digital currencies as well as paper-based ones (Ecuador already has digital cash). eCurrency Mint, an Omidyar-funded startup, provides central banks with the necessary infrastructure. “It’s a way of expanding access to finance within the current regulatory regime,” Ehrbeck says.