Responsible finance is a mission-driven approach that seeks to financially include vulnerable and underprivileged. It is powered by compliant technologies and products that increase access in a fair and increasingly personalized manner. Responsible finance is key to lifting people out of poverty. People who are out of poverty generate an economic value which feeds back into the banking ecosystem. Everyone wins. Unfortunately, responsible finance in OIC and emerging countries is often lip service because it suffers from customer onboarding costs which discourage the sort of banks who have market trust and distribution muscle to actually make it happen.
Thus, the key to an innovative, resilient, and inclusive financial sector are FinTechs. They have agile hyper-competitive cost models because of disruptive technology. The real question is will they make it happen in alliance with governments or in alliance with existing banks? We believe banks should take the lead. Their incentive to invest in this area is data. Countries that balance the attraction of financial inclusion by data led companies with intelligent privacy laws, will have put in an important building block for mission-driven banking. Responsible finance and Islamic finance have always been spiritually the same, but they need to meld together functionally now. The reason is that most net unbanked are now in OIC countries where aversion to traditional banking remains high. Islamic finance can help unlock this conundrum and Green Islamic Finance will be key to global financial inclusion for this very reason.
If governments take the lead, they need to look at issuing green bonds to fund these society critical efforts. It is important for Green Bonds to cost the same or even less than standard debt for them to succeed. Cost of standardization can make Green bonds cost more. We feel standards should be set by third parties keeping the cost of standardization in mind with input & approval from the UN’s SDG team.
The key to scaled financial inclusion is deeper data collection into poverty’s subsegments. Measuring of the poverty journeys and their relationship with money as they emerge and launching hyper-personalized products to address these sustainably. Only this research will reveal intervention attack vectors and clarify the what, when and how – What should be the product. When in the lifecycle of the subsegment should you launch it and what is the go-to-market. As an example for small scale farmers, who go deeper into poverty because they do not have enough cash for inputs, strategic microfinance combined with best practices for their crops delivered via mobiles funded by the government and data funded by a telecom, could be an option. This is just one mapped journey with a personalized response. There could be hundreds. Design and digital financial inclusion are now inseparable.
The role of regulators is as always critical and financial inclusion will live and die with their actions. Here are some key things they can do that will help
Build a framework for how non-banking actors can provide financial services
Enable within regulation the essential pillar of “agents”, for scale and trust based conversion
In parallel build a powerful anti-AML tiered KYC system to manage risk. The government with universal digital identity should be a stakeholder
Build consumer protection without affecting the ease and speed of onboarding and Customer Experience
Growth should be a great driver for banks to have a financial inclusion play but costs and a culture that is product focused and not impact focused are seemingly impossible chasms to cross. FinTechs using a combination of mobility (for cost-effective access at scale) AI (For personalization) and biometrics (for identity) stand the best chance of leading the charge here.