3 transitions needed for mobile money to evolve and boost financial inclusion
Padmini Gupta is an award-winning banker and a World Economic Forum Global Leadership Fellow, who is now re-imagining financial services for 250 million migrant workers worldwide, and the billion people who depend on them. A passionate advocate for society’s ignored voices, Padmini has always been a strong proponent for the importance of financial independence and co-founded Rise in 2016, as a way to harness her financial expertise with her desire for global impact.
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Financial inclusion and mobile money – two widely used terms, but often interpreted differently by different people. Both terms have been around for many decades and their definitions have evolved over time.
One of the first successful examples of mobile money we can discuss is M-Pesa in Kenya, starting in 2007 and relying on the operator’s massive distribution network to enabled Kenyans to top-up and move cash. The killer use case for M-Pesa was domestic urban migrants using it to send money back home to their families in villages, which were several hours of drive away. Now, the definition of mobile money has evolved to represent an entirely new set of products – ranging from wallets such as Paytm in India and apps such as Revolut or TransferWise in Europe, to internet banking solutions from banks to cryptocurrencies and now even platforms such as UPI interfaces in India.
Similarly, while financial inclusion started primarily as a term used to describe how some did not have access to a bank account, it now has come to mean a much wider range of services – ranging from credit to insurance. When we assess how mobile money is changing the financial inclusion landscape, it's useful to first understand what is the problem we are trying to solve and how significant is it for the regional economy.
2020 has completely changed consumption habits and digitized financial services at an unprecedented pace – forcing more transactions to happen digitally and online. Financial inclusion has to evolve to cater to the new needs of the masses in the digital era. It's no longer good enough to have a bank account, but you also need a system to transact online. It's no longer good enough to have state-sponsored credit schemes, it's important to have mechanisms to access credit online. It's no longer enough to have access to state-sponsored deposit schemes in an era of negative interest rates, it's critical to have tools which allow people to invest and plan for their futures online.
In short, financial inclusion has to evolve to enable everyone everywhere to participate fully in the new digital economy – create, save, invest, borrow, and grow. And mobile money models have to evolve to enable this to happen. This is especially critical in the MENAP region, where less than one in six adults have access to bank accounts and 85% of all transactions are cash-based.
So, how does mobile money need to evolve to meet the increased needs of the digital era? Three main transitions are needed:
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From Availability to Usability
The first tranche of mobile money solutions focused on making certain services available to the market. Be it WPS (Wages Protection System) providers or digital remittance providers – the important first step was to make these products available. But as anticipated, they only meet a limited set of digital finance needs. Most WPS cards are not designed to be used online and many digital remittance solutions do not digitize the all-important recipient end of the transaction. Most recipients still receive the money in cash and many were unable to use that in the lockdown environment.
The next wave of digital finance solutions has to solve not only the digitization of income, but also of consumption.
A great example of digitization of consumption is the several buy now, pay later products - be it Affirm in the US or Klarna in Europe – which enables people to buy products in installments, without needing a credit card. Likewise, rise’s own efforts on consumption digitization are focused on migrants through partnerships with players such as Homeshopping, which allows Pakistani migrants to buy goods for their families in Pakistan, based on their income history in UAE.
From KYC to Literacy
The region continues to lag versus globally around digital onboarding tools and the focus of mobile money players has been primarily around building KYC (Know Your Customer) solutions, which stop at identifying and validating the customer. However, knowing your customer is not enough, knowing your customer’s financial needs is more important. Most of these underserved customers do not have financial advisors or friends that can help them talk about their money troubles.
A financial health check provided by rise reveals that 8 out of 10 migrants are worried or very worried about their financial future. As a community, we need to do a better job of helping people get a hold of their finances, understand what they are doing currently and how can they improve in the future. Using digital tools to help users improve their relationship with money is critical for fostering financial inclusion in the region.
An area where we have seen this play out first hand is around insurance. Insurance as a product is critical for migrants – either to protect themselves or to protect their families back home, but few of them understand what the product is and most of them only assume that health insurance is the only type of insurance that exists. When rise launched its partnership with Axa to help people get access to affordable insurance, we had to spend a lot of time educating our customer base on what insurance is and how is it different from what they have and how can the product be suitable for them or in some cases – not suitable for them. These kinds of educational engagements are much needed to ensure that financial inclusion delivers broader benefits than just product availability.
From Tech to Fin
Mobile money services or Fintechs in the region have relied on mainly disrupting the tech part of the stack; using digital to improve the onboarding and servicing of customers and in the process reducing the costs. However, just as important is to innovate on the Fin part of the stack. What new financial products and services are needed in the region, which go beyond tech as an interface? We need more innovation on financial products for migrants, for youth, and for SMEs.
Migrants represent almost 70% of the population in the GCC, but end up remitting the vast majority of their income to their home countries. The 120 billion remitted out not only represents a huge outflow of cash out of the economy, but also a lost opportunity for financial institutions here to provide credit, wealth, or insurance products to this market. Implementing more cross border credit products or cross border insurance products is the key to unlock this opportunity for regional players. Another way to tackle this is the new product Xare, from rise, which allows migrants to share access to their cards here with their families back home, instead of remitting. This effectively keeps money in the system, allows FIs to access better credit, insurance, and investment products, and keeps the migrant in control of their finances.
Similarly, if you look at the large youth population in MENA, you notice finance that is embedded to help them find jobs and build careers will be critical to financial inclusion in the region. An example here is Lambda school – giving people money to learn and then getting a percentage of their income as a return.
Finally for SMEs, challenges range from not only lack of financing and debt, but also easy tools to manage their accounts, charge their customers, and pay their vendors. Examples here include players such as Khattabook in India which acts as a one-stop-shop for the entire end-to-end SME digitization - ranging from inventory to bookkeeping and credit.
The good news for the region is we have an opportunity to leapfrog the evolution in other parts of the world and lead with fundamentally new propositions on mobile money. These propositions include focusing not only on product availability but also ensuring the usability of the product and financial literacy, so users can understand why these products matter. We also need to focus on finance as a tool of innovation – particularly embedded finance, so that users can get access to true value.
If we can bring all these aspects together, we can solve the problems for our customers coming up ahead, rather than the challenges of the past.
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