We’re living in the golden age of fintech. The explosion of new innovations, efficiencies, and solutions allow us to create better, faster, cheaper, and safer financial services than anything we’ve ever seen before. It’s an exciting, important moment — and if we capitalize on the opportunities, we can significantly accelerate the creation of a financially inclusive world.
As I discussed at Fintech Americas, we’re seeing several exciting trends in fintech that could help provide billions of people with the financial tools they need to build better lives. If we understand these trends, we can help accelerate the future.
Trend 1: We have better data and we can use it to make billions of people visible
Data is exploding; so is our ability to use that information.
In the past, the financial industry relied on historical financial data or manually-collected, paper-intensive information. Now, data from mobile phones and smartphones, utility bills, school payments, GPS, and even psychometrics can inform and improve financial services for the underserved.
But it’s not just the quantity of available information that’s increasing: it’s also our ability to organize, interpret, and use that data. Those abilities will only increase as the quantum of data continues to grow. And as machine learning develops further, we’ll be able to wring even more observations and conclusions from more data.
Today, every click can shed light on who we are. Every half hour, the internet and internet-connected devices generated digital data equal to all the written works in human history.
Imagine how much more that rate will increase. Smart cars, refrigerators, televisions, and speakers like Google Home and Amazon’s Alexa record and learn from nearly every action we take. This year, smart devices will outnumber the world’s total population for the first time. By 2020, we’ll be using 25 billion devices connected to the internet. We’ll be online all the time.
Previously, banks and financial service providers had to take lengthy, time-consuming, and expensive steps to verify that their customers were who they said they were. Fulfilling these ‘Know Your Customer’ (KYC) requirements is particularly expensive in emerging markets; data makes this step almost instantaneous and inexpensive. More data can also make hundreds of millions of people who have no credit history visible and attractive to lenders. New information can reveal prospective borrowers’ behaviors, priorities, and financial capabilities that had once been hidden from lenders, making the cost of doing business far less daunting.
Trend 2: Digital payments are better and provide the rails to reach people who have been left out
Just like music escaped from vinyl and news escaped from paper, money wants to be electronic. Digital payments are growing rapidly, and that’s very promising for financial inclusion.
This began in Kenya with M-Pesa and person-to-person payments, but similar technology is now being used more widely. From Peru to Pakistan, several countries are now creating the infrastructure for digital payments. This is important because most of the world already have cell phones. Countries are now creating the digital rails that other financial innovations — delivered by mobile phones — will ride on.
This will save clients time and money. Today, someone may spend hours traveling and waiting in lines to make a single utility payment. But soon, she’ll be able to do that at a push of the button, without leaving her home. That’s significant progress.
Trend 3. It’s cheaper than ever to work with the underserved
Some fintech innovations create new products and services. Others make existing products more efficient for the businesses that operate them. But there’s no question that some innovations are resulting in dramatic reductions in costs for the end users themselves. This is vital to creating a financially inclusive world: it makes financial services more affordable and obtainable to new users. And it helps ensure that they continue to use financial services over the long term. We’re already seeing how online money transfers are significantly cutting the cost of international remittances in some corridors by as much as 80 percent.
In South America, Brazilians pay some of the highest interest rates in the world: tens of millions of people pay 200–400 percent APR on credit cards, overdraft, and personal loans. In many cases, these extraordinarily high rates result from inefficient loan processing and distribution. But fintech innovators are changing this. Using a digital platform for secured loans, these processes are becoming significantly more affordable, cutting home and auto equity loan APRs to 15 percent and 23 percent, respectively.
Enterprise services that help businesses control costs are important, too. These savings can be passed on to customers. Distributed ledger technologies, for instance, have significant potential. Bitcoin may get the attention, but the applications for an instantaneous and effective ledger will have much greater consequence. Transaction verification, identity, KYC, fraud protection, and the digital origination of loans can all significantly reduce back-office costs.
For banks and other financial service providers, using tech to lower operating costs isn’t a given: mature organizations have cultural resistance to adopting new ways of doing things, particularly when the status quo is already successful. Many financial institutions also believe that if something wasn’t built in-house, then it’s not as valuable. That simply isn’t the case. Financial institutions need to get over these hang-ups and integrate technology — if only to reduce costs and improve their bottom line. And as the cost of services declines, working with the underserved becomes more attractive.
Trend 4. Expectations are changing in ways that are empowering the underserved.
These advances and market changes encourage broader use; as customers use products more often, they develop higher expectations for their financial services.
With their phone in hand, asking clients to wait in line or travel half the day to complete a transaction or verify their identity becomes unacceptable. Instead, customers learn that banking practices that were once slow, manual, and in-person can and should become instant, automated, and remote. Financial service providers need to understand this.
Moreover, when customers realize that their data is valuable, they’ll demand value in return. As exposure to technology increases, we’ll have higher expectations for what it should do, how it should work, and how it should help us. We need to begin by addressing our clients’ needs, creating beneficial services, and delivering user experiences that are intuitive, if not delightful.
Trend 5. Bank/Fintech partnerships are hard, but they’re the way forward
A few years ago, the conventional wisdom held that it was going to be fintechs versus banks, that they were two opposing forces destined to fight one another. In 2015, a Financial Times headline summarized a new study: “McKinsey warns banks face wipeout in some financial services.”
Clearly, that didn’t happen. Banks have far too many inherent advantages. Instead, we’re seeing that partnerships are a win-win for both startups and the more established players. Their roles aren’t adversarial — they’re complementary.
The Center for Financial Inclusion at Accion (CFI) and the Institute of International Finance released a report earlier this year that sheds light on how banks and start-ups are beginning to work together. Partnerships aren’t easy, but they’re worthwhile. If we can combine the innovation of the fintechs with the scale of the established institutions, we can accelerate the future.
Trend 6. Governments are advocates for financial inclusion — but they need to do more
Governments have always played a central role in financial inclusion. That role is evolving — from a regulator of how the world is today to an advocate for how the world can be tomorrow.
Governments are increasingly using Government-to-Person (G2P) payment services to distribute benefits, pensions, and salaries. They should also encourage citizens to use G2P services to pay their taxes electronically; doing so can help build out payments and encourage wider usage.
They can also provide the policies that developers need to innovate. India is a great example of what a government can do when it commits to financial inclusion. By prioritizing financial inclusion, the Indian government has created a raft of technological and regulatory changes that have helped hundreds of millions of people gain accounts and benefit from the formal sector. India Stack includes the Aadhaar universal identity program, which is biometrically-linked and can be used to send/receive money through a unified payments interface.
The CFI studies government’s role through a partnership with the Economist Intelligence Unit. Together they regularly publish the Global Microscope, which ranks 55 countries by the quality of their financial inclusion regulations. It’s a powerful ranking system that uses transparency to name and shame policymakers, identifying who’s doing what well — and who’s not.
Governments and regulators need to be more flexible to encourage innovation. The U.K. and Mexico both have created sandboxes that allow for innovation. Other governments have rolled out national identification programs, robust credit bureaus, digital signatures and account registration, and tiered KYC. These all can make it much easier to enroll in and use financial services.
These trends are only starting to emerge and change our work. If we understand them, we can help accelerate them and harness them to help billions of people who have, for too long, been left out. We can help people get the financial tools they need to improve their lives.