The marriage metaphor appropriately captures the link between technology and financial inclusion as we launch “Finance for All 2018: Wedded to Fintech, for Better or Worse,” a new report on what financial inclusion stakeholders see as crucial risks facing financial service providers in emerging markets who work with those with little or no access to these services.
There are two key takeaways here. One is that fintech-enabled models are powerful drivers of financial inclusion and strong partnerships will contribute to their success and long-term sustainability. That technology is a force for good in the quest to achieve full financial inclusion is undeniable.
The other takeaway is that concerns about the marriage are ubiquitous. In fact, technology came out as the top risk out of 18 risk areas ranked by survey respondents, with strategy risk ranked a distant second (it was number one in the 2016 survey). Three hundred financial service providers, investors, regulators and observers from 70 countries participated.
What they’re saying about technology
Many respondents cited its potential to facilitate growth and revolutionize financial service provision by expanding outreach, improving efficiency, and better understanding client needs. Yet this enthusiasm is tempered by concerns that this new technology brings with it new and perhaps not well understood risks, particularly with respect to client protection and data security.
“The use of technology has huge potential in reaching and servicing the unbanked, yet we cannot do it without a probable increase in the inherent risk of failure of systems or infrastructure, data breaches and leakage of information. These pose a threat to cyber security, while the multiplicity and network of providers involved in providing finance could blur lines of accountability that could pose risk to consumers,” noted one regulator in Southeast Asia.
While technology has the opportunity to scale impact in financial inclusion, some technology providers may not align with missions of financial service providers (FSPs), focused on serving the base of the economic pyramid. Respondents to the survey stressed the downsides to loss of human touch and catered products that mass automation of technologies may bring. Ethan Loufield, director of strategy and operations at the CFI office in Washington, D.C., stressed in the report that “financial services are not inherently good or bad, but they can be designed and delivered in ways that target positive outcomes. And while many providers are trying to do this, when you look under the hood at what’s happening in practice you find that many such providers have a very difficult time measuring and articulating what the positive outcomes might be.”
Staying focused on the needs of clients and their varying levels of engagement highlight the importance of partnerships and establishing an ecosystem to better understand strengths, weaknesses and opportunities to work together. Many financial service providers are sitting on a wealth of client data that could be used more effectively to serve a larger number of clients. However, the inevitability of partnerships between FSPs and fintechs comes with the high risk choosing the wrong partner.
“With digitization and other forms of cost cutting and efficiency enhancement, partnerships are unavoidable. Once a process involves external partnerships, the risk of one or more partners failing a service provider will always be there. Good selection of partners is key in overcoming such challenges,” according to survey respondent and board member of UGAFODE in Uganda, Olive Kabatalya.
Why should I read this report?
“Finance for All: Wedded to Fintech, for Better or Worse” is important reading for everyone working to advance financial inclusion because new entrants, new technology and new models are redefining the ecosystem of financial inclusion and bringing much promise as well as a lot of hype. There is no longer one business model fits all. Digitization has brought in new players and models. It has changed expectations and the risk landscape for clients and both existing and new players.
Not surprisingly, stakeholders view this evolution and related risks through different lenses, focusing on certain risks while paying less attention to others. The report provides us a platform to highlight and understand different risk perspectives, ask questions and to spark discussion about our own strategies to reach full financial inclusion.
What can be done?
Fintech providers ought to keep customer centricity the focal point of any technology rollout. While this sounds straightforward, we sometimes lose sight of our purpose as we add new bells and whistles and venture into new territory in “big data:” alternative data, psychometrics and the like.
For those more established, mainstream financial institutions, partnering with fintechs to improve product offerings, increase efficiency, and lower costs–goals with special relevance to low-income customers–ought to be paramount, as we discussed in the 2017 CFI report “How Financial Institutions and Fintechs are Partnering for Inclusion.”
To facilitate productive fintech partnerships, mainstream financial institutions are organizing internally for innovation, strategically integrating systems and staff, and developing contractual agreements to ensure stability and success. Fintech partnerships enable legacy institutions to engage with and learn from new technology in low-risk, low-cost ways. They are also key to allowing incumbents to compete in a world where alternative players, like Facebook and Amazon, are threatening the central role of financial institutions in the lives of customers. By offering better, less expensive, and more innovative products, financial institutions can assert their continued relevance as customer-facing organizations.
Do read the banana skins report when you have a moment, and join the discussion!