Does Fintech Have Us Spellbound?
Fintech reached near-record levels of investment in 2018 and the trend shows no signs of slowing in 2019. In the development community, fintech has emerged as a shiny new object holding out promise to improve the reach, quality and effectiveness of financial services for the poor. And there is good reason for this excitement: digital technology can provide new delivery channels, lower costs and more appropriate products for the three billion financially underserved people around the globe.
But how can investors, donors and others separate genuine promise from all of the hype? In a provocative essay published last month, CGAP CEO Greta Bull cautioned the industry: “Fintech seems to be the solution to every development problem, sometimes in ways that have me questioning my sanity. Anything with a technology tag gets funding and attention, whether it is solving a real problem or not.” So, how can we identify which companies and which products offer impact potential without being spellbound by the latest ‘shiny object’?
To start to answer this question, our team at MIX partnered with FinDev Gateway to host the webinar “What makes a fintech inclusive?” We invited leading organizations to share their frameworks for determining the potential of fintechs to contribute to better outcomes for the financially underserved (if you missed the webinar, you can watch the recording).
First, remember why we’re here
At the strategic level, it is critical to remember why we’re here in the first place. Sarah Willis, Director of Financial Health & Inclusion at MetLife Foundation, suggests we ask ourselves: What can a low-income person achieve through the use of financial services or fintech? For fintech to be impactful, MetLife Foundation believes that it must contribute to financial stability for low- and moderate-income people. When assessing the potential of fintech in general, we must ask some key questions: Is it improving people’s ability to manage their day-to-day financial needs? Is it helping them to face unexpected financial challenges? And is it providing opportunities for greater stability? Because technology has a well-documented ability to distract us, keeping a keen eye on what we’re trying to accomplish is a necessary lens through which to view financial technology for the poor.
Second, consider the sector level
There is also the financial sector level to consider. According to Machal Karim, who leads the impact management of CDC Group’s investments in financial services, building more inclusive financial sectors requires finding an appropriate balance between commercial sustainability and impact sustainability. To do this, CDC Group articulates an impact thesis for each investment, focusing on four potential impact pathways: 1) improved products; 2) increased volumes of capital; 3) improved cost structures; and 4) managing risk. The impact pathway must be grounded in the investee’s business model, demonstrating the centrality of impact.
Third, evaluate fintechs using a comprehensive approach
But with new fintechs sprouting up seemingly overnight, it is especially important for investors to be able to assess early-stage companies. Without much evidence for proven strategies, impact or business models, investors must determine whether startups can help users achieve something. Aside from being accessible and affordable – two parts of Catalyst Fund’s Triple A Framework – fintech startups must also create tangible value propositions through tailored products that are flexible, fast, and simple to use. In other words, they must be appropriate. Maelis Carraro, Deputy Director of Inclusive Fintech at BFA and who also runs the Catalyst Fund, emphasizes how important it is for a fintech to recognize that many customers have never had access to financial products before and may not be digitally savvy. Inclusive fintechs should not only offer value through their products but also build trust in financial services, which may require striking the right balance between technology and human interaction.
Fourth, take care not to create greater barriers to inclusion
Finally, according to Gayatri Murthy, a financial sector specialist at CGAP, a fintech must provide a better experience, improved products or new value propositions at the client-level to contribute to financial inclusion in a meaningful way. Some fintechs are beginning to scale and demonstrate their value, but for many it’s still too early to determine viability and impact. Without strong frameworks for understanding the impact potential, fintech could end up creating greater barriers to inclusion for people who are illiterate, lack regular access to a phone or face other obstacles.
Financial technology has the ability to transform the financial lives of the underserved. But the glamour of fintech must be tempered by a willingness to undertake the less glamorous work of proving value, measuring impact, and building trust. As investors and donors navigate the new products, technologies, and companies, these and other frameworks can help improve our ability to determine, with more confidence, what makes a fintech inclusive.