November 22nd, 2017

Meaningful financial solutions can help poor people manage day to day, deal with risk and invest in the future.

It was an honour and a bit intimidating to be invited as a debater for the final session of the Mastercard Foundation Symposium on Financial Inclusion this year. Even though I had not attended earlier events, I had heard that the debates were always provocative and one of the event highlights. This year’s motion was: “Disruptive innovations in the financial sector can no longer respond to the daily challenges of poor people.”

The debate organisers asked both those arguing for the motion (Graham Wright of MicroSave and Mamie Kalonda of FINCA DRC) and those against (Owureku Asare of Ecobank and I) to fully adopt our sides regardless of our personal views. Graham and Mamie did an excellent job of pointing out some of the risks and the potential for a digital divide even though both have been significant advocates for the potential of digital financial services. Owureku and I also sought to make a strong case against the motion even though we have experienced the challenges of execution and impact first-hand.  Although I am not exactly sure what I said under the bright lights and in front of the giant timer counting down my 4 minutes, I thought it could be useful to turn our notes into a blog.

Photo credit: MasterCard Foundation | SOFI2017

In our opening statement, (after poking fun at Graham Wright for dressing as Steve Jobs…), I started out by aligning with the 60% of the audience who had voted against the motion and emphasised that Owureku and I believe that that disruptive innovation CAN respond to the daily challenges of poor people and then went on to define the main terms.

Disruptive innovation (as coined by Harvard Business School professor Clayton Christensen) means applying technology in new ways that change the way that markets work. The financial sector spans the formal finance spectrum from microfinance institutions to fintechs to insurance to traditional banks. Most importantly, the daily challenges of poor people refer to how financial solutions can be MEANINGFUL in helping poor people manage day to day, deal with risk and invest in the future.

Disruptive innovation CAN respond to needs of poor people because of the following five reasons and many more.

First, disruptive innovation in the financial sector already has a track record in providing tools that help poor people manage their lives:

• Microfinance applied lending technology in new ways through groups to help microentrepreneurs grow businesses and increase income.
• Mass market banks stripped down technology meant for high street banks to offer simple savings accounts that poor people could use to put money aside for the future.
• Mobile money applied technology meant for buying airtime to create a new way to ‘send money home’ that helped people access resources from social networks in faster and larger lumpsums. There are a plethora of ways poor people now use mobile money to face daily challenges.
• Digital savings & credit providers applied mobile money paybill technology to enable instant opening of accounts and non-traditional credit scoring delivering fast and convenient loans. Recent data from Kenya shows that investing in business and farms, meeting daily needs and paying for education are the top uses for digital credit. Investing in education and business are the top purposes for digital savings.
• Pay as you go models combined paybill technology and ability to meter use to enable asset financing in energy and agriculture reducing household costs and enabling acquisition of productive assets.

Second, the pace of disruption is continuing to accelerate. For example, in Kenya:

• it took 115 years for banks to reach 25% of the population but only 2 years for mobile money;
• microfinance never reached 25% of the population but it has only taken 5 years for digital savings and credit to do so; and
• landlines never reached 25% but it took only 16 years for mobile phones and it looks like about 8 years for smartphones. Recent data predicts that 80% of mobile phones in Kenya will be smart by 2022.

Third, with increased mobile penetration, especially new opportunities unlocked by smartphones, increased connectivity and digitisation of the lives of poor people enables us to discover more about their daily challenges in real time.  These insights paired with other work can create new financial solutions that can be tested radically faster to iterate and improve the ways that finance creates value in the everyday lives of poor people.

Fourth, increasing incentives for financial sector players to partner with those outside of the financial sector to increase capacity and business opportunities.  Kenyan banks submitted more than 70 new products for approval to the Central Bank last year with the majority of them being over mobile channels and in partnership with technology and fintech companies. (Owureku shared many more examples about how banks in Ghana and elsewhere are partnering with others to meet the daily needs of the poor.)

Fifth, new technologies that are evolving now and those that don’t even exist yet have the potential to create new use cases that can solve challenges in ways that are more valuable for poor people and more profitable for the financial sector.  Especially when they are paired with the new consumer insights being discovered digitally.  For business models that are not yet profitable, disruptive innovation is one potential path to turn these around. For example, how can we extend the success of short-term digital credit for daily needs to longer-term credit appropriate for investments? How can we use chatbots and augmented intelligence to inject behavioural science insights into financial solutions?  How can the possibilities unlocked by increased smartphone  penetrations create new user interfaces for intuitive money management tools relevant to the daily challenges of poor people?

Disruptive innovation CAN deliver solutions to the daily challenges poor people face.

After the debate was closed and the audience voted again, the pros gained some votes but 60% of the audience still believed in the power of disruptive innovation for responding to the daily challenges of poor people. Once we took off our debating hats, we were freed up to share our thoughts on both sides of the debate. I noted my concerns about how much of an impact finance (digital or not) is having in improving the lives of poor people and the rationale behind FSD Kenya’s strategy to move to engage more in the real economy to create value through financial inclusion. Our debaters and participants from the crowd raised excellent points about the risks of disruptive innovation such as signs that digital credit may be leading some customers to over indebtedness and making temptations like mobile sports betting more prevalent. Although smart phones are growing, they are unlikely to reach the poorest and most vulnerable as soon leaving them with less options as more services are offered through apps. Those without any phone are even worse off.

As we walked off the stage, my fellow debaters and I shared our hopes with each other that we had provoked people to think deeply and more importantly act swiftly to ensure that the power of disruptive innovation makes a real difference in living out the theme of the Symposium to put clients at the centre.

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