SIGNATORY SERIES | FINANCIAL EDUCATION FOR RESPONSIBLE DIGITAL INCLUSION

Shea Flynn, Camille Parker, and Allison Ryder
07 Feb 2020

Financial inclusion has garnered broad support across the public and private sectors, with a range of actors developing innovative technologies and programs to help consumers in emerging markets gain access to financial products and services. However, with insufficient financial education, literacy and capability, vulnerable populations are likely to encounter over-indebtedness, fraud, or simply choose the wrong products for their financial needs.  Financial education has the power to build trust and customer resilience in rapidly evolving digital economies. The World Bank Group over the last year has echoed lessons we see still today, that “trust, not technology, is the real obstacle” to scaling digital financial inclusion.

Financial capability matters most for the vulnerable

Financial capability, defined as the ability to use one’s knowledge and skills to effectively select and manage financial resources, is one approach to mitigating consumer risks and building trust that is critical for sustainable financial inclusion. OECD studies further show that financial literacy is strongly correlated with financial inclusion; people with low levels of financial literacy tend to have low levels of financial inclusion and vice versa. Moreover, low levels of financial literacy carry significant costs which are magnified for the poor or vulnerable. People with weaker financial literacy skills tend to absorb higher transaction costs or incur higher debts than necessary, among others. Financial literacy matters because it enables consumers to be more informed about when or how to borrow, save, invest and become more resilient in the long run.

 A global financial literacy survey concluded that “despite increases in access to finance globally, only 1 in 3 adults are financially literate.”  This gap is greater in emerging markets, where digital financial services or fintech companies have prioritized building applications to expand access to financial services.  Innovations to advance financial education could provide value-added benefits particularly for customers in poor or rural areas. Without prior financial and digital literacy, customers receiving or seeking financial products are at risk, as they are less informed and their ability may be limited in how best to use financial services.

Lessons from traditional financial education

 To date, there has been mixed successes overall with the various methods used to provide financial education, ranging from mass-market media campaigns to small group, classroom-based trainings. In emerging markets with limited access to technology and multiple demographic groups, mass-market and group financial education programming has shown to be relatively successful. Mass-market, national level financial education campaigns introduce basic financial concepts to a broader audience through advertising campaigns, entertainment, and publicly available resources. While these programs lack the personalization of other categories of financial education, they are effective in ensuring that financial education messaging reaches a broad audience.

For example, the Reserve Bank of India’s Project Financial Literacy disseminates online resources and tutorials on key financial education topics in 13 languages. The initiative also organizes a “Financial Education Week” each year that promotes key themes to target audiences. In addition to these more “traditional” forms of advertising, other programs have aimed to spread financial literacy messages through innovative means, such as radio shows and television. In South Africa, the World Bank teamed with a popular soap opera to incorporate messages about the dangers of debt and predatory loans into its storyline. Research following this type of intervention found that viewers were more likely to be knowledgeable about borrowing sources and less likely to engage in gambling.

 To provide more curated content, group-based models for financial education have also been effectively implemented in emerging markets. Group trainings provide the benefit of tailoring the strategies and curriculum to a certain demographic or consumer profile. This approach is often employed to encourage youth to adopt savvy financial practices earlier in life. One example of group-based financial education is Egypt’s youth savings groups created under the Enterprise Your Life Project. This project, designed in partnership with Making Cents and Plan International, offers a curriculum of twenty, targeted half-hour training sessions to teach youth participants enterprising life skills and financial literacy. Another project in Uganda focuses on improving financial literacy among family units. These examples are among a number of notable financial education initiatives, in addition to others by the Mastercard Foundation, UNCDF, MSC, Mercy Corps Agrifin Accelerate, Making Cents and CGAP. These efforts rely on the premise that creating opportunities for young people to talk about money management with their family encourages them to adopt smart financial behaviors into adulthood.

More recent World Bank research has suggested that traditional approaches remain ineffective at substantially improving financial literacy and behavioral habits. Moreover, these approaches to financial education are expensive and hard to scale. Digital technology, on the other hand, can provide an innovative alternative given their greater outreach to more customers at a lower cost.  Due to the mixed results of using traditional financial education mechanisms, digital-low-touch, solutions have surfaced as an enabler for financial literacy in emerging markets.  Fintechs and digital finance partnerships have an opportunity to tailor financial education approaches to meet specific needs of customers in developed and emerging markets.

 

Teachable moments for digital inclusion

Financial education programs are leveraging digital technologies to bridge the gap between financial literacy and capability to reach broader audiences. Through a range of new partnership strategies, nonprofits, financial institutions, and multilateral organizations are pioneering creative approaches to bring financial knowledge and personalized financial education to marginalized populations in emerging markets.

As an alternative to traditional financial education models, evidence continues to show that individual financial education techniques at “teachable moments” can be a highly effective means for increasing financial literacy, especially with new technology innovation. In emerging markets with limited internet connectivity and smartphone penetration, SMS text messaging can be the best way to engage with potential customers. Fintech companies are rapidly developing these SMS platforms because they are easy to scale and provide access to personalized financial education.

Making Cents International created an SMS-based financial education platform to help prepaid mobile customers make better financial decisions for 30 countries in Latin America, Asia, Europe, and Africa. Its interactive, 12-month curriculum includes nearly 500 incoming and outgoing interactive SMSs, making it one of the more expansive digital financial education campaigns. Juntos and Arifu are two other examples of fintechs that are combining communication technologies like SMS, audio recordings, and video with digital analytics and automation to interact with customers’ needs at the right time.

In addition to evolving financial education tools for digital lending and savings, an IFC report emphasized that financial literacy in insurtech is equally important, especially in emerging markets, where individual households and small businesses may not be attuned to the risks they face and may end up losing all their savings due to events such as illness or loss of their business to flood or fire. Inclusivity Solutions, a Signatory to the Guidelines for Responsible Investing in Digital Financial Services applies a Human Centered Design as part of its insurtech solution to offer and educate its potential clients.

Responsible investing for digital financial health

Further innovation and investments are essential to strengthen financial education for sustainable digital inclusion.  A group of private sector investors have been co-leading a global effort to implement Guidelines for Responsible Investing in Digital Financial Services. These guidelines focus on good governance, risk management, consumer protection and with the broader aim of enabling financial well-being for the unbanked and underserved. As financial services continue to be delivered in rural or remote areas in emerging markets, inclusive finance actors, together with fintech innovators will play a critical role in providing just in time financial education for those who need it most.

About the Authors:  Allison Ryder, Camille Parker and Shea Flynn are Graduate Research Fellows at Georgetown University, Walsh School of Foreign Service.  This post is part of a series to broaden partner collaboration and harness evolving experiences from co-founding, current and prospective Signatories of the Investor Guidelines.

DIGITAL CREDIT AUDIT REPORT: EVALUATING THE CONDUCT AND PRACTICE OF DIGITAL LENDING IN KENYA

03 Feb 2020

Digital credit has been instrumental in granting formal credit in ways that were not conceivable a decade ago. It has provided individuals with the tools to manage their day-to-day needs and working capital for small enterprises. Survey data reveals that over six million Kenyans have borrowed at least one digital loan. Beyond these daily use-cases, digital credit is increasingly used to finance non- routine needs such as school fees and pay for healthcare. However, while there are any bright spots, expanding access is just the first step towards realising the potential of credit to create long-term sustainable value.

The expansion of digital credit and the proliferation of digital lenders has increased attention to wider consumer protection issues. Pricing continues to be a concern, even in the presence of market infrastructure that mitigates part of the risk inherent in lending decisions. Access to infrastructure, such as credit information sharing, is disparate across lenders. Data privacy and ownership is starting to emerge as a concern. The absence of an overarching regulatory framework means anyone can lend. When credit is easy to access without safeguards, cases of debt stress begin to surface. Inevitably, there have been growing concerns to regulate the sector with concerns that some of the gains made are being eroded. However, regulation is frequently misrepresented as simply being about restricting what market actors can do. Often, carefully crafted regulation can actually support effective market function.

Research and analysis can play a role in generating a clear case for policy action, providing ex post evidence for success or the need for change in a regulatory area.

Originally posted on FSD Kenya’s website

EXPLORING THE LINKS BETWEEN FINANCE, TECHNOLOGY AND GROWTH IN KENYA

23 Jan 2020

Starting with microcredit in the late 1980s, there has been a growing movement of multilateral institutions, private foundations, non-profits, corporations and governments that aims to provide formal financial services to low-income market segments around the world. This movement is largely motivated by the conviction that access to financial services reduces poverty. Over time, the focus of this movement has shifted from microcredit towards encouraging access to a wider, more comprehensive range of financial services, including savings, payments and insurance. There is also a growing emphasis on digital finance – the use of modern information and communication technologies (ICT) to help improve the quality and convenience of financial services, while lowering the cost of acquiring and servicing often isolated customers whose income streams support only relatively small or infrequent transactions.

Kenya has become both a posterchild and focal point of this movement. Today, mobile money is a key pillar of the country’s financial infrastructure and is central to commerce, household finance and innovation. Largely as a result of mobile money and later banking services offered on mobile phones through partnerships with mobile money operators, financial inclusion has grown at an astonishing rate of over 9.4 percent per year from 27 percent in 2006 to 83 percent in 2018. And as a share of GDP, banking system deposits increased from 30 to 44 percent between 2000 and 2016.

While there is a growing body evidence on the individual or household-level impacts of the adoption of specific financial products by low income population segments in Kenya, what is less clear are the wider economywide spill-over effects generated by the activity of a larger financial sector, rapid financial innovation and greater financial inclusion, in particular the effects on labour productivity and sustained long-run growth. While poverty reduction is often cited as the key goal of financial inclusion investments, sustained economic growth isn’t often explicitly mentioned as a means to that end, although a key finding of development research is that growth is one of the most effective ways to pull people out of poverty.

This paper proceeds surveys theories of economic growth and describes different facets of Kenya’s own recent growth experience, economic complexity and technology landscape using publicly available data and contrasts Kenya’s experience with of a group of comparison countries. Secondly, it examines the theoretical and empirical links between the financial sector, technological change and growth; provides an overview of key development in Kenya’s financial system and tries to unpack how those developments connect to the growth trajectory described in the first section.

THE 2019 FINACCESS HOUSEHOLD SURVEY

09 Apr 2019

The 2019 FinAccess household survey is the fifth in a series of surveys that measure drivers and usage of financial services in Kenya. The 2019 report was officially launched on April 3rd 2019. The four previous surveys of 200620092013 and 2016 have shown that Kenya has made significant progress in fostering financial inclusion, with the latest survey providing a thirteen year perspective on Kenya’s financial landscape.

Formal financial inclusion has risen to 82.9 percent, up from 26.7 percent in 2006, while complete exclusion has narrowed to 11.0 percent from 41.3 percent in 2006. The disparities in financial access between rich and poor, men and women, and rural and urban areas have also declined remarkably. Key drivers of these changes include: the growth of mobile money, government initiatives and support, and developments in information and communications technology (ICT).

Originally posted on FSD Kenya’s site

PARTNERING WITH PROVIDERS TO SET DFS STANDARDS FOR CLIENT PROTECTION

Alex Taylor, Wayne Hennessy-Barrett
17 Jan 2019

By Alex Taylor, Wayne Hennessy-Barrett

This post, the first of two on pilot assessments for digital credit standards, features a Q & A with 4G Capital CEO Wayne Hennessy-Barrett.

Digital lending has the potential to close the credit demand gap for unbanked, low-income customers, but the rapid growth of the sector has raised consumer protection concerns.

In Kenya alone, a leading testing ground for the digital credit sector, there are more than 50 providers and an estimated one in four Kenyans have taken a digital loan. With mobile phone ownership saturating developing markets, we can anticipate similar acceleration in the digital lending space globally.

Recent findings have generated debate over whether or not these new products are translating into real benefits for base of the pyramid consumers. Demand is rising from investors, regulators, and providers for ways to demonstrate responsible practices in digital lending.

To fill the gap, the Smart Campaign has undertaken research to better understand risks and benchmarks for responsible digital financials services. In partnership with MFR, we’re working with providers to conduct field assessments that identify best practices and help us to determine where to set the bar for responsible behavior. These field assessments, industry research, and engagement with DFS providers in Smart’s Fintech Protects Community of Practice will lead to standards for responsible digital credit that are sustainable for the industry while keeping client needs as the central focus.

4G Capital, a digital MSME lender in East Africa and a member of Fintech Protects, recently partnered with the Smart Campaign to conduct a field assessment. We asked 4G Capital CEO Wayne Hennessy-Barrett for his take on responsible digital lending and the value of industry standards for consumer protection.

Q: Tell us about the origins of 4G Capital and its products.

WHB: We began operations in Kenya in 2013, starting with microloans for enterprises using only mobile money. As our relationship with our customers grew, we began informal coaching and mentoring of clients to improve their performance. This evolved quite quickly into a program of enterprise-skills trainings packaged with each loan. We now have a number of different working-capital credit products which are the right size and timed according to the specific needs of the business user, and we’re also scaling with partners to reach tens of thousands of new clients each month.

Q: What was your motivation for joining Fintech Protects and inviting the Smart Campaign to work with 4G in a field assessment of responsible practices?

WHB: We have always been a mission-driven business. As a fintech lender, Fintech Protects was the perfect forum to share our experiences and learn from others to find ways to close the finance gap, which leaves so many businesses and families excluded.

The field assessment was a rigorous, end-to-end audit of whether we were able to ‘walk the talk.’ It is nearly impossible to self-assess with the right level of accuracy. Either you’re too hard on yourself, or you get distracted by successes and don’t zero in on the things that need to be fixed.

Q: What did the field assessment confirm about your business? What surprised you?

WHB: I was delighted, but not surprised, by the level of professionalism and rigor exercised by Smart and MFR. It was encouraging to get positive feedback on the positive customer outcomes we continue to see consistently – that really is the most important thing that we need to reinforce and protect.

Q: How do you think about scale and growth of your business in the context of a blended high-touch/high-tech model?

WHB: Accounting for inflation, forex risk and future value of money, this is the $64 Billion Question!

We need to scale to reach more excluded people, catalyze more value chain growth, and, of course, grow our own business. Our transformation program (which is a continuously evolving cycle) sees our AI and technology developing to continue to improve predictive underwriting to further deliver value to our clients as part of supporting their overall financial health. This should free our people to really focus and excel at what they’re good at: relationships, customer care, and contributing their own experience and knowledge to help us evolve with our clients’ needs.

Q: Of all the areas that the Client Protection Principles cover, what do you think will be the single most important issue digital lenders must contend with over the next five years?

WHB: It has to be data protection. There are a ton of fintech lenders who are trying to do good things at the moment, but where data can sometimes be gathered in a way clients, if fully aware, would find really intrusive. We need to reset the conversation about data and the way businesses conduct themselves so that even the most remote and excluded have digital self-sovereignty and power over their own data.

Q: How do the client protection standards provide value to you as a business?

WHB: Happy clients = happy business. It really is that simple.

This was originally posted on CFI’s website

DIGITAL CREDIT IN KENYA

23 Aug 2018

Digital Credit is growing rapidly and is democratizing credit with instant, automated, and remote processes, meeting short-term liquidity needs of low- and middle-income populations. Digital credit, at the onset, has demonstrated financial outreach – offered even to credit invisible customers, who do not have an account ownership or a credit history.

This presentation focuses on the digital credit landscape in Kenya.

Digital Financial Services: Challenges and Opportunities for Emerging Market Banks

25 Sep 2017

The digital transformation that has upended industries from retail and media to transport and business-to-business commerce is now sweeping the financial services industry, through the wide dissemination of digital financial services. This was inevitable, as ubiquitous computing power, pervasive connectivity, mass data storage, and advanced analytical tools can easily and efficiently be applied to financial services. After all, money was already extensively (though not exclusively) created, used, stored, processed, and delivered electronically.

Immediacy and personalization have become the norm for consumer goods and services. Consumers have rapidly become accustomed to making purchases with a touch of their finger wherever they may be, receiving tailored recommendations, choosing customized products, and enjoying delivery of almost any item directly to their front door. Businesses failing to adapt quickly to these technological developments can fail dramatically, and many have already done so, including Tower Records, Borders Books, Blockbuster Video, and countless travel agents and brick-and-mortar retailers. Consumers’ new
expectations apply to digital financial services as well.

Technology has transformed business-to-business and within business interactions, too, enabling reconfiguration of design, production, marketing, delivery, and service functions through distributed supply chains, freelance design, outsourced manufacturing, and contract warehousing and delivery. These reconfigurations are mediated by online marketplaces and distributors, and assisted by back-end support operations and data analysis that together drive better risk assessment, faster fulfillment and more efficient customer service.

The same types of disruptive market innovations and reconstituted value chains are now emerging in the form of digital financial services. This poses distinct challenges for incumbent providers such as banks, finance companies, microfinance institutions, and insurance companies, as financial technology—or FinTech—innovators enter their markets. Incumbents, too, can benefit from these developments, which will enable them to broaden financial access, introduce new products and services, and serve customers more efficiently by deploying new technologies internally or in partnership with external innovators.

Fraud in Mobile Financial Services: Protecting Consumers, Providers, and the System

09 Sep 2017

This Brief highlights how fraud is impacting mobile money providers, agents, and consumers, as well as efforts to reduce risks and vulnerabilities to fraud in mobile money and related services. While it is not possible to remove fraud entirely from any service—mobile money included—the examples addressed here show that fraud is a major issue in several key markets for consumers and agents, and that there are simple steps providers can take to reduce their vulnerability to common fraud types.

These steps include improving internal controls, building agent capacity to protect themselves and their customers, and revisiting procedures such as account access and SIM swaps, where necessary, to prevent common fraud schemes. With the introduction of new products and delivery channels, the types of fraud will continue to evolve, which means that monitoring mechanisms, such as compliance checks and customer feedback channels, will continue to be key elements to effective fraud and risk mitigation.

Building a Secure and Inclusive Global Financial Ecosystem

08 Sep 2017

The 2017 Brookings Financial and Digital Inclusion Project (FDIP) report evaluates access to and usage of affordable financial services by underserved people across 26 geographically, politically, and economically diverse countries. The report assesses these countries’ financial inclusion ecosystems based on four dimensions of financial inclusion: country commitment, mobile capacity, regulatory environment, and adoption of selected traditional and digital financial services.  The report further examines key developments in the global financial inclusion landscape, highlights selected financial inclusion initiatives within the 26 FDIP countries over the previous year, and provides targeted recommendations aimed at advancing financial inclusion.

Improving Client Value from Microinsurance: Insights from Kenya, India and The Philippines

18 Jun 2015

The primary goal of the International Labour Organization (ILO) is to contribute with member States to achieve full and productive employment and decent work for all. The Decent Work Agenda comprises four interrelated areas: respect for fundamental worker’s rights and international labour standards, employment promotion, social protection and social dialogue. Broadening the employment and social protection opportunities of poor people through financial markets is an urgent undertaking.

Housed at the ILO’s Social Finance Programme, the Microinsurance Innovation Facility seeks to increase the availability of quality insurance for the developing world’s low-income families to help them guard against risk and overcome poverty. The Facility, launched in 2008 with the support of a grant from the Bill & Melinda Gates Foundation, supports the Global Employment Agenda implemented by the ILO’s Employment Sector.

Research on microinsurance is still at an embryonic stage, with many questions to be asked and options to be tried before solutions on how to protect significant numbers of the world’s poor against risk begin to emerge. The Microinsurance Innovation Facility’s research programme provides an opportunity to explore the potential and challenges of microinsurance.

The Facility’s Microinsurance Papers series aims to document and disseminate key learnings from our partners’ research activities. More knowledge is definitely needed to tackle key challenges and foster innovation in microinsurance. The Microinsurance Papers cover wide range of topics on demand, supply and impact of microinsurance that are relevant for both practitioners and policymakers. The views expressed are the responsibility of the author(s) and do not necessarily represent those of the ILO.