In Chapter 5 we provided a broad perspective on global economic trends and how financial inclusion is a vital stepping-stone in economic development. In this chapter we address the specific financial services that citizens in emerging markets need. The current lack of these services in many nations mirrors other systemic social problems, such as political exclusion or discrimination. So as not to understate the significant hardships that financial exclusion can create for individuals, we will review in this chapter the specific barriers people face when they try to save and borrow by means of formal and informal sectors, and we will examine how these factors diminish their capacity to escape poverty. We then explore how fintech companies such as Paytm, Jumia, and Lazada have managed to design new products and models to offer low-cost financial services even to people in the most remote rural areas.
The uneven distribution of resources, such as labor, capital, and technology, can limit economic growth. This is one reason financial inclusion is such an important precondition for realizing strong, long-term growth within an economy.1
Beyond the macroeconomic benefits, financial inclusion leads to significant social and personal benefits. Consider the basic benefits of having a bank account: It allows individuals to save, earn interest, balance household consumption, and raise productive investment. Moreover, a bank account can empower women and give them more economic equality.2
Although more people have gained access to bank accounts, there is still considerable work to be done. Between 2011 and 2017, the percentage of adults worldwide with a bank account increased from 51 percent to 69 percent. This is encouraging, but 1.7 billion adults were still unbanked in 2017 according to the World Bank Global Findex. If we look deeper into that database, we find that nearly half the world’s unbanked people lived in seven countries: Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan. In the aggregate, in 2017 women constituted 56 percent of the unbanked; gender has clearly played a role in financial exclusion rates. In countries such as China, India, and Kenya, the gender gap has remained wide, with women constituting 60 percent or more of the unbanked. In addition to the struggles of women, the undereducated have been disproportionately excluded from formal banking. Globally, 62 percent of the unbanked have a fifth-grade education or less.3
For these people to make gains in financial inclusion, there must be a thriving demand, a cost-efficient supply of easy-to-access services, and appropriate regulation to incentivize and protect the underserved.
It is also important to recognize that people need more than a bank account. The financial needs of individuals and families evolve along a life cycle, as shown in Figure 6.1.
FIGURE 6.1 Essential life cycle of financial needs of low-income people
Figure 6.1 shows that the life cycle of financial needs starts with the basic need for money transfers.
When households have access to these types of formal financial products and services, they tend to enter an upward cycle toward increased wealth and well-being. By contrast, the absence of these basic financial services can derail low-income households and push them into debilitating debt cycles and downwardly spiraling poverty traps.
An investigation into the causes of financial exclusion should include an analysis of why some people opt out of formal accounts even when such services are available. The World Bank Global Findex survey includes seven possible reasons for such behavior. Three reasons are related to cultural or family factors, such as religious beliefs or preference for sharing one family account. These voluntary reasons can be addressed via incentive policies, information campaigns, and social welfare.4
The four remaining reasons are related to practical obstacles: distance to banking services, high cost, lack of documentation, and lack of trust in formal institutions. Whatever the cause, an individual’s choice to avoid formal financial institutions leads to direct negative outcomes—including reduced savings, reduced access to credit, lack of insurance, and particularly difficult circumstances for persons with disabilities, the elderly, women, and migrants.
In developing economies, a common alternative to saving at a financial institution is semi-formal or informal savings, such as a “savings club” or a moneylender. One common type of savings club is a rotating savings and credit association. These associations generally pool weekly deposits from all members and then disburse the amount to a different member once the savings target is met (typically in weekly disbursements).
In 2017, 25 percent of savers in developing economies reported that they saved this way. Within the unbanked population, the share of informal saving is even higher. About 28 percent of the unbanked reported saving; of those, 83 percent saved in informal or semi-informal ways. In total, about 150 million unbanked adults in developing economies save semi-formally. In sub-Saharan Africa, up to 65 million unbanked adults save semi-formally, including 35 million women.
Although formal bank account ownership has increased steadily across most developing markets, the accumulation of formal savings has stagnated. Globally the share of adults with an account rose from 51 percent in 2011 to 69 percent in 2017. However, the share of adults worldwide who saved formally only increased from 23 percent to 27 percent during the same period. In China and Malaysia, only 43 percent of account owners reported having saved formally in 2017. The share was about 30 percent in Kenya, South Africa, and Turkey—and as low as 20 percent in Brazil and India.5
The microfinance movement around the world has been a response to restricted access to credit from formal financial institutions. Local moneylenders have notoriously filled this space with usurious practices, exorbitant interest rates and mortgage packages, and coercive recovery tactics. These problems are widespread. According to the World Bank in 2018, almost half of all borrowers in the world sought credit from family and friends. In 2017, 79 percent reported having borrowed only from family, friends, or other nonformal sources.6
In developing economies (globally), 7 percent of adults reported borrowing to start, operate, or expand a business. On average, about half of them reported borrowing from a financial institution and half from family, friends, or other informal sources.
In developing countries, a large share of the GDP comes from small and medium companies, including subsistence farmers, traders, and shopkeepers. These businesses need different types of financial services. A street vendor or trader is likely to require short-term financing for the purchase of supplies. Small-scale producers may need long-term loans to buy equipment or to employ and pay employees. Subsistence farmers may need seasonal financing to help with planting, growing, and harvesting.
Although formal financing exists in all countries, many traditional banks refuse to lend to small and medium businesses because the amount borrowed is typically too small to cover transactional costs related to the bankers’ time and evaluation services. Many of these small and medium businesses are not registered with the government; most are not financially literate and therefore do not retain accounting records, such as a balance sheets or income statements. As a result, banks typically require borrowers to offer collateral against the loan. However, most small and medium businesses are financially constrained and lack collateral. Many of the people who own their land, homes, farms, or shops have no official proof of ownership. This renders their properties ineligible as forms of collateral. Weak regulations and laws also complicate matters. In some countries, women—including impoverished and middle-income women—face another notable constraint: They are often denied bank accounts unless a father or husband first approves it and the male “co-signer” presents proper documentation.
Thus, few small and medium businesses can gain credit assistance from formal financial institutions. Some of these businesses turn to moneylenders who offer short-term loans at very high interest rates. Similarly, an informal borrower might use a pawnbroker’s services, which requires using expensive items as collateral. If the borrower has not repaid the debt when the repayment term has expired, the pawnbroker may sell the asset. In the case of seasonal agricultural loans, agents often provide credit to farmers, but only if the agent is allowed to sell the crops or take a percentage of the profits.
Most literature on financial exclusion and / or inclusion focuses on credit, savings, and payments. Less attention has been given to insurance and risk coverage, which is a major negative outcome for those who lack access to formal financial accounts.
To better understand the need for formal insurance and risk coverage, consider what some agricultural workers in developing nations face. In 2017, four out of ten people in East Asia and South Asia reported living in a household where growing crops or raising livestock was a main source of household income. In sub-Saharan Africa, the ratio was five out of ten. About half of those people in both regions had experienced a bad harvest, significant livestock loss, or adverse weather patterns in the previous five years. In these cases, most bore the entire financial calamity without insurance or government assistance. Without access to insurance, agriculture becomes a high-risk enterprise for low-income households.
Those employed outside agriculture are also highly vulnerable because they operate within the informal labor sector without job security or benefits. People without insurance can be devastated by the death of a primary earner, fires, theft from small enterprises, floods, hailstorms, and other common issues. A lack of health insurance, for example, is a serious concern for many low-income families. If a major illness strikes the primary earner, a low-income household can become trapped in debt. Elderly persons and persons with disabilities who lack a pension can become destitute. The agriculture and capital of low-income rural populations often are ruined by natural disasters.7
The primary factor limiting access to insurance is cost. On the supply side, many insurance companies are unable to reach break-even levels of profit; they often operate at a loss. On the demand side, it is difficult to create affordable insurance products for low-income rural populations due to the risks and barriers describe above.8
People in the lowest quintile of emerging economies are usually the most vulnerable and financially excluded segment of a population. In most economies, that population often includes the homeless, people with disabilities, the elderly, and religious minorities. They have a much lower likelihood of accessing formal financial services. In India, for example, the Dalits, or “untouchables,” are considered low caste, which makes accessing formal financial services exceedingly more difficult for them than for persons of higher castes.
Globally, women are less likely than men to receive formal financial services. Findings suggest that in India women who lead households tend to face tougher credit restrictions than men due to low educational attainment and wage discrimination.9
As urbanization spreads in emerging economies, and as jobs migrate from rural areas to towns, cities, and international locations, the need for safe and effective remittance channels becomes even more essential. The bulk of household income for many rural families comes from money transfers sent by migrant workers. Without formal remittance services, these funds are often hand-delivered in cash by family and friends, which invites pilferage.
Now that we have reviewed some of the negative impacts of financial exclusion, we turn to the benefits of financial inclusion—and the ways fintech can improve lives.
Financial inclusion benefits individuals in many ways. Because having a formal bank account enables people to invest, balance consumption, and better manage financial risks, financial inclusion helps people harness resources that promote specialization and innovation.
Financial inclusion also benefits national economies. It can boost economic growth and productivity by increasing access to capital, improving resource allocation and risk management, and reducing information asymmetries.10
However, it is important to remember that a large portion of people in developing countries work in traditional sectors, such as agriculture. Because innovation and productivity growth tend to take place within the nonfarming sectors of an economy, rural citizens are often excluded from the formal economy. This presents a strong need for technology that can enable higher productivity by improving the speed, reliability, transparency, and cost of information delivery.
Fintech innovations have the capacity to improve the transaction system, increase productivity, and help countries transition workforces from traditional to modern sectors—factors that improve economic growth.
There is a growing body of literature regarding financial inclusion and economic growth. Most is built on Solow’s theoretical growth model, according to which increased savings will raise the levels of capital and output per effective worker. However, there is a dearth of significant empirical evidence that links financial inclusion and macroeconomic growth.
Jose de Luna Martinez in 2017 studied the remarkably high level of financial inclusion in Malaysia, where 92 percent of the people have an active deposit account. Malaysia has achieved this due to twenty years of concerted effort by government and financial sector leaders. After the 1997 Asian financial crisis, Malaysia formulated two financial sector master plans that comprehensively diagnosed barriers to inclusion and prescribed policy actions that were executed under a robust monitoring system. Over time these factors have contributed to the sustained, stable growth of Malaysia’s financial system.11
Sahay and his colleagues in 2015 examined global proxies, such as the number of ATMs, bank branches, and transaction accounts. These researchers reported a positive correlation between financial inclusion and economic growth. However, they found that the marginal benefits of financial inclusion decline at higher levels of development. They also pointed to the significant challenge of determining the direction of causality between inclusion and growth. Further research is needed to tease out whether growth drives inclusion, or whether inclusion drives growth.12
Lawrence Okoye and his fellow researchers in 2017 used thirty years of time-series data sourced from the Central Bank of Nigerian to examine the link between financial inclusion, economic growth, and poverty reduction. They found that financial inclusion—measured by financial deepening indicators and the loan-to-deposit ratio—supported poverty reduction but did not induce economic growth.13
Babajide and his colleagues in 2015 ran a similar study on Nigeria. They did find a statistically significant, positive association between financial inclusion (measured by the number of deposit account holders / number of bank branches) and economic growth per worker. The differing results likely reflect the challenges in accurately measuring financial inclusion.14
In India, Dipasha Sharma in 2015 found a positive association between economic growth and various measures of financial inclusion, including banking penetration in rural areas and the availability and usage of banking services. The author chose India as the country of interest due to its heavy reliance on banking institutions and because India mandated the building of bank branches in rural areas.15
We have conducted our own analysis of financial inclusion and growth by studying the empirical relationship between various indicators of financial inclusion and economic growth within seventy-four emerging economies. Following the theoretical framework of Sharma’s work in 2015, our model incorporated two distinct dimensions of financial inclusion: penetration and accessibility. We defined penetration as the proportion of a population with account ownership and the total number of commercial bank depositors. Accessibility was defined as the number of branches and ATMs per one hundred thousand adults. These two categories of indicators were meant to demonstrate the pervasiveness and reach of financial services within the countries we studied.16
The overall results indicated a strong, positive association between measures of banking penetration / accessibility and gross domestic product per capita (Figure 6.2). Proving the causal relationship between financial inclusion and economic growth would require more work. However, we can say that providing affordable, low-fee services for the poor has a positive impact. By making significant investments in modernizing the national payment infrastructure and encouraging fintech innovation, financial services can become more accessible and sustainable for customers (financially and geographically) due to the lower cost of technological products.17
Data sources: International Monetary Fund, Financial Access Survey, https://
Note: The scatter includes the years 2004 to 2019 (depending on the countries) for the following countries: Argentina, Bangladesh, Brazil, Chile, China, Colombia, Hungary, Indonesia, Malaysia, Pakistan, Peru, Poland, Romania, Thailand, Turkey.
FIGURE 6.2 GDP per capita vs. borrowers from commercial banks (per 1,000 adults)
In addition to improving economic growth, fintech has helped the underserved in specific ways that are related to their financial wants and needs. It offers reduced transaction costs and eliminates layers of intermediation, which could enable greater financial inclusion.
As an example, leveraging cellular networks to offer financial solutions has the potential to reduce costs by 80 to 90 percent relative to the cost of physical bank branches. Another added benefit is that mobile solutions can be rapidly deployed. In emerging markets, more adults had a cellular phone than a bank account and / or credit cards. According to a GSMA report, smartphone penetration is expected to reach 80 percent globally by 2025. Key countries contributing to the significant increase are India, Indonesia, Pakistan, Mexico, and Africa.18
Financial services, technology, and the real-world needs of people overlap. However, traditional financial services, such as physical bank branches, are more limited in their ability to meet needs when compared to mobile and internet banking. This highlights an immediate opportunity for fintech providers. When underserved segments of the population begin receiving services they value and trust, more people will subscribe to mobile phones and services, thus creating a virtuous cycle.
Fintech leads to greater inclusion by seamlessly offering financial products and services that meet the real-world needs of people. Fintech unbundles processes and then offers customized and rebundled services that meet customers’ specific needs—in a cost-efficient manner. By contrast, mainstream financial institutions have found it challenging to offer services that meet the needs of the underserved.
Unbundling Financial Processes: Fintech has unbundled the core functions of financial intermediation, such as settling payments, assessing and sharing risks, and allocating capital. Unbundling enables new players—payment service providers, aggregators and robo-advisors, peer-to-peer lenders, and innovative trading platforms—to enter the market. The emergence of these new players increases the pressure on existing banking and financial institutions to adopt new technologies and to offer better services and pricing.
Processing Speed: Fintech increases the speed of processing transactions. This enables higher transaction frequency and opens the door for companies to offer a wider range of services and to scale up the acquisition of new customers. Lenders can improve the speed and veracity of credit decisions. By reducing the need for a physical presence in a bank branch, fintech makes financial services available all day and every day while substantially reducing transaction costs.
Multiplying the Scale and Scope of Logistics: By offering digital payment solutions, fintech enables e-commerce to reach the most remote populations and geographies. This is exemplified by the Chinese example of Alibaba’s Alipay, which significantly reduced costs for both buyers and sellers.
Most emerging economies are characterized by the high use of cash. Globally, in 2013 about 80 percent of consumer transactions were carried out in cash. In 2017 an estimated 300 million bank account owners worldwide worked in the private sector and received payments in cash. In India, 10 percent of account owners, or 90 million users, received private-sector wage payments in cash; that share is almost twice as large in Indonesia, Myanmar, and Nepal.19
Cash is also the prevalent payment mode for agricultural product sales. This impacts about 275 million individuals in developing economies, including 15 million in Bangladesh and 80 million in China. In fact, most vendors and retailers in India still do not accept digital money, which presents a significant engagement opportunity for fintech solutions.
Globally, in 2017 at least 145 million self-employed adults with an account received business payments exclusively in cash. These included about 15 million in Indonesia and nearly 12 million account owners in Brazil.
What explains the high usage of cash across various sectors and transaction types? In emerging economies, bank branches are rarely built in rural areas. This increases the time and distance required for customers to transact at banks, which reduces the time they can devote to productive purposes. Customers carrying cash across long distances (to reach the bank) face increased theft risks and high transportation costs.
Moving from cash to digital payments is a potentially easy and seamless entry point into the formal financial system, even for those without a bank account. This shift is likely to improve transaction efficiency. Cash stored under a mattress is vulnerable to theft, soiling, and spoilage—problems that digital money solves.
Digitizing the payments described above offers several benefits to all members of the ecosystem. Banks and finance providers can increase data collection, which could provide the information needed to extend and deepen access to new products and services for both retailers and customers. By digitizing payments, suppliers who distribute goods to retail stores and businesses can improve the efficiency of payment collection. Digital payment solutions remove the anonymity of peer-to-peer (P2P) transactions in cash, and they offer a transaction velocity and responsiveness that far outmatches cash.
If we compare the total number of bank accounts to the number of mobile phones held by consumers, we can reasonably conclude that cash will not retain its dominance for long, especially in emerging economies where few people have access to banking but nearly everyone has a mobile phone.
In order to transition away from cash, government must create the proper infrastructure to support digital payments and implement public policies and incentives that facilitate the digital transition. Incentives might include allowing citizens to receive social benefits with digital wallets.
India has made significant strides toward a cashless digital society. This transition started with the use of Aadhaar’s biometric authentication system (which was described earlier) and then a movement toward demonetization. India’s government has sought to promote broader financial inclusion and a more efficient financial services industry, and to tackle the corruption and fraud that cash payments allow.
In 2014 the Modi government launched the Pradhan Mantri Jan Dhan Yojana (PMJDY), a financial inclusion program designed to expand affordable access to financial services such as bank accounts, remittances, credit, insurance, and pensions.
People opened ten million bank accounts with the help of the Aadhaar-based verification system. By 2017, three hundred million bank accounts had been opened. Since then the PMJDY has included the option of an account from which depositors can withdraw money even with a zero balance. An insurance policy is also attached to this account type.20
Because Aadhaar can be verified online, mobile payments are now possible, including via zero-balance bank accounts. By linking mobile phones to Aadhaar and PMJDY, the government has successfully provided people with documented identities, bank accounts, and a means of transaction. This effort has significantly enhanced financial inclusion and has helped people save time and effort. It has also prevented leakages and has hindered corrupt bureaucrats from misusing power. This system of bundling financial services together has been dubbed the India Stack.
Implementing Aadhaar alone, however, did not put an end to the cash-based black-market economy, which citizens used to avoid paying taxes by using off-the-books cash transactions. So, on November 8, 2016, the Indian government removed all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi series. Overnight, India eliminated vast amounts of wealth accumulated through tax evasion. Removing the value of cash currency essentially made India’s black-market economy obsolete.
To compensate for the sudden cash shortage, the Indian government created a digital payment platform called BHIM, which was powered by Aadhaar. The new system was structured to be highly inclusive, enabling smartphone and non-smartphone users to make digital payments. In October 2016, one month before demonetization, the government payment system was processing an average of 100,000 digital interbank transactions daily. A year later the updated system was processing 76 million daily payments. According to the finance minister of India, by August 2017 the country had retired $45 billion in cash in favor of the new virtual transactions system.21
The government did not stop there. Leaders also decided to reform the tax system. India is a federally structured country, like the United States. The federal government and state governments collect taxes. India has twenty-eight states, each with its own tax laws and rules. This decentralized system results in an opaque and difficult-to-navigate system, with seventeen tax categories, including sales, value-added, and interstate transportation.
On July 1, 2017, India merged all seventeen categories into one transparent system—the GST—that simplified the tax structure for businesses. A month later, one million companies had registered with the new system. The GST has facilitated better taxation practices and has helped small and medium businesses save money and get loans.
The India Stack prevents intermediaries from pocketing the money and helps citizens receive their full entitlements, free of corruption and bribes. More people are receiving their pension benefits, and twenty-five million households now have gas subsidies directly deposited into their bank accounts. Banks have far greater liquidity. Small and medium businesses have an all-time-high lending rate.22
Physical bank branches require large, fixed costs, making them a difficult investment to justify in less-populated areas in developing countries. For rural populations, there is a two-way mismatch. First, bankers are reluctant to service customers who lack proper KYC documentation or loan collateral. Second, potential consumers are not willing or able to travel to faraway branches, and they often cannot meet minimum deposit requirements.23 As a result, people in rural areas have been excluded from the formal system.
This exclusion fueled the formal microcredit movement, which was initiated by microfinance institutions (MFIs). Grameen Bank, founded in Bangladesh, treats low-income people as creditworthy and bankable despite lack of collateral. MFIs have offered credit, savings, and insurance solutions on a grand scale, bringing financial and social inclusion to millions of impoverished borrowers, most of whom were women. These MFIs have paved the way for the formal banking sector to follow suit, but there is still much to be done.
Quick deployment, competition, technological advancement, and reduced access costs have propelled the growth of mobile services in developing countries. In India, the first two mobile phone operation licenses were issued in 1995. In 2001 that number increased to at least four. As cell phone coverage expanded, the number of users grew. As of 2018, India had more than a billion mobile phone users, second only to China. Coverage for these two countries continues to grow.24
Mobile phone ownership is widespread among the unbanked. Globally in 2017 about 1.1 billion unbanked adults—representing two-thirds of the 1.7 billion unbanked adults in the world—had a mobile phone. In the seven economies where half the world’s unbanked adults live, more than half of those adults have a mobile phone (the exception is in Pakistan). In China, the share of unbanked individuals who own mobile phones is as high as 82 percent.
This upward rate of global cell phone use has the potential to advance financial inclusion. In Indonesia, 33 percent of adults cited distance as a barrier to opening an account with a financial institution. Among those people, 69 percent reported having a mobile phone. In the Philippines, 41 percent cited distance as a barrier to opening a bank account and 71 percent of those people reported owning a mobile phone.
Technology has ensured that even basic devices can enable transactions, thereby reducing the need for branch banking. In sub-Saharan Africa, relatively simple, text-based mobile phones have powered the spread of mobile money accounts (for example, M-Pesa).
Fintech has achieved initial mass adoption levels in emerging countries. In 2017 the average fintech adoption rate was 46 percent. China and India had the world’s highest fintech adoption rates, at 69 percent and 52 percent, respectively. In 2017, 84 percent of the population surveyed in Australia, Canada, Hong Kong, Singapore, the UK, and the United States were aware of local fintech services as opposed to 62 percent in 2015.25
Fintech’s success in emerging markets comes not only by way of its ability to tap into a large tech-literate population but also by reaching those who had previously been financially excluded. South Africa, Mexico, and Singapore are likely to become significant fintech players, with borrowing and financial planning as the fastest growing fintech services. All of this indicates growing opportunities for the expansion of mobile banking.26
We can see there is fertile ground for mobile-based financial services. But for financial services to move out of the bank branch, providers need the following essential elements: physical infrastructure, such as electricity, mobile, and internet networks; technology solutions, such as mobile phone applications and sufficient security; financial institutions, such as banks and insurance companies that are willing to customize products and services for the underserved; and government regulation in the telecom, banking, and insurance sectors.
The demand for nontraditional financial services is spawning innovation and growth in numerous types of fintech services, with greater intensity in emerging markets. Low-income economies have historically been early fintech adopters.
Data source: Ernst & Young, “Global FinTech Adoption Index 2019,” https://
Note: The figure shows FinTech adopters as a percentage of the digitally active population. All averages are shown on an unweighted basis. Gray bars represent advanced economies while black bars represent emerging economies.
FIGURE 6.3 Fintech adoption rates across countries as a proportion of the digitally active population
There are two main explanations for this surge fintech demand within emerging economies (Figure 6.3). First, emerging markets usually have large, young populations who more readily adopt new technologies. In 2017, 48 percent of fintech users were age twenty-five to thirty-four, and 41 percent of fintech users were age thirty-five to forty-four. Moreover, 13 percent of users in both age groups have accessed five or more fintech services.
Second, most emerging markets are bypassing older technologies and jumping straight to fintech as governments crack down on cash circulation (as in India). The convenience of mobile technology also drives this trend. Advanced markets, such as the United States and Europe, have societies and infrastructures built around established credit card markets. Ironically, this contributes to slower fintech adoption rates in developed nations.
In terms of engagement (number of users), the most popular fintech applications help people make payments. But other notable services—insurance, lending, investment and savings, financial planning, and e-commerce—are also gaining prominence.27
Fintech payment methods in emerging economies allow businesses and individuals to make or accept payments without merchant accounts. Mobile wallets are so popular that most traditional banks now offer a digital wallet application as a supplement to savings accounts. The popularity of these technologies started with international remittances.
In 2016 international remittances worldwide amounted to over $583 billion. According to the World Bank, Mexico in 2012 received $23 billion in remittances from the United States, followed by China ($13 billion), India ($11.9 billion), and the Philippines ($10.6 billion). With such volumes, it is not surprising that fintech innovators have considered investments in these payment channels to be low-hanging fruit.28
Western Union, which started as a telegram company in 1851, now has the largest reach of any remittance service. The company has 500,000 agents in more than 200 countries who support transactions in more than 130 currencies. Western Union’s customers can transfer money online, through an app, or in person to a bank account or to a prepaid card. In 2016 Western Union completed 268 million transactions amounting to over $80 billion. The company controls around 25 percent of the market share with $5.4 billion in revenue.29
India issued payment licenses to several domestic players in the telecom sector and to some nonbank finance companies. The goal was to extend more financial services to the underserved in India. Similarly, apps for payments, such as Paytm, MobiKwik, and Freecharge have flourished in India. Given the size of India’s market, other global players, such as Google Pay, Samsung Pay, and Amazon Pay, are expected to follow MobiKwik’s lead. WhatsApp, which has more than 200 million users in India, will soon pioneer payment facilitation. It is expected to drive large volumes of peer-to-peer (P2P) payments and become a popular platform for merchant payments.30
Because India had a predominantly cash-based economy, Paytm realized that if they launched a noncash payment service, they would have to keep costs low while increasing convenience. To pay for additional phone service using a credit card or internet banking platform, customers could use a Paytm mobile wallet linked to their names and mobile numbers. Because most Indians did not have high-end phones and because they faced frequent connection failures, Paytm created a simpler platform than the system offered by telecom companies.
Paytm was most successful among moderately affluent people age eighteen to forty-five because most of them owned mobile phones. Prepaid mobile phone users, who were 95 percent of mobile users, were also a large consumer base. With the advent of Paytm services, people no longer had to walk for miles in the heat to select mobile phone plans. Furthermore, Paytm offered them a wide range of services—at their fingertips.
Paytm profited and grew as digital payments were gaining popularity in India. To capitalize on this growth and to better position themselves against competitors, Paytm started to offer a wider array of services. They added a recharge feature for direct-to-home (DTH) television services. Seeing that online travel agencies were a $3 billion industry and that the sector was expected to grow by another 40 percent, they started offering bus tickets. They expanded next to utility bill payments. By 2013 they were processing six million utility bill transactions, primarily through mobile phones, which generated $11 billion in revenue. They expanded into school and college tuition payments, a $100 billion sector. Paytm began with ten schools and eight colleges. By 2017 their services had reached 25,000 campuses. They even worked with India’s Nation Highway Authority to create radio frequency devices that allowed for cashless toll payments.
Paytm’s first turning point came in 2014 when Uber introduced Paytm as a payment method. The partnership benefited both companies, as many users opened Paytm accounts just to use Uber. Paytm started with 200,000 Uber customers at the end of 2014. That number jumped to 5.3 million by 2016. Paytm then expanded its offerings by partnering with Meru Cabs, M-taxi, and Jugnoo. In 2015 Paytm opened a peer-to-peer service that offered a way to quickly transfer money without added costs. This was focused, not on remittance services, but instead on replacing cash.
The second turning point came when Alibaba and its subsidiary, Ant Financial, invested heavily in Paytm and introduced a new technology from China: QR codes. Each retailer was assigned a QR code, which allowed customers to simply scan the QR code to process their payments. This model was so prevalent in China that customers even used it on chat apps.
As Paytm launched this business model in India, the company helped both customers and merchants. There was little or no fee charged for moving money around the Paytm platform. However, when a merchant or an individual transferred funds into their bank accounts, Paytm charged a 2 or 2.5 percent fee. By the end of 2016 Paytm was processing 5 million transactions through an offline network of 1.14 million merchants. In 2018 the average number of daily transactions was 5 million with an average of eighteen weekly transactions per user. More than 7 million merchants were registered. As of 2018 Paytm was accepted at 75 percent of India’s retailers that accepted Visa and MasterCard.
In 2015 Paytm received a license to become a “payment bank,” a new kind of banking entity designed to serve unbanked customers. The bank offered services such as savings accounts, current accounts, deposits up to 100,000 rupees, remittance services, third-party mutual funds, and insurance and pension products.
China has also seen explosive growth across online e-commerce and social networking platforms. The nation provides payment services that are almost universally accepted within China; they are used by low- and high-income, rural and urban households. These platforms include Alipay, developed by the Alibaba Group’s affiliate Ant Financial, and Tencent’s Tenpay, which operates the social media platforms WeChat and QQ.
Most banks and fintech companies have recognized that it is better to collaborate with traditional companies than to compete. But some service providers bypass the banking sector altogether. As previously noted, M-Pesa enables financial inclusion by providing money transfer services, local payments, and international remittance services with a basic mobile device.
All in all, investing in payments has been low-risk, and the efficiency and cost reductions of these innovations have been tremendous. There is a large and growing market for payments in emerging economies.
One of the largest success stories in the payments sector was M-Pesa in Kenya. Many Kenyan citizens are not able to open a bank account because they do not receive formal wages or income (most people are paid in cash). Bank transfers are prohibitively expensive, especially for smaller transactions. Transferring money to distant unbanked family members is expensive and challenging. It can also be risky. For example, many people ask the drivers of matatus—privately owned minibuses—or train conductors to transport money to distant relatives, only to see the money disappear.
Unlike banking, mobile technology is widespread and low cost. Kenya skipped the landline phase and jumped right to cellular technology. It is relatively inexpensive to get a device. Calls cost only two to four cents per minute and a text message costs only one cent. This means that even those in abject poverty can access a mobile phone. By 2000 most Kenyans had obtained a mobile phone.
Safaricom (Vodafone’s Kenyan branch) wanted to create a financial service that could be conducted on a basic cellular phone (not a smartphone). “Originally, we worked on the idea of microfinance loans using mobile phones, and trialed a prototype service in Thika, north of Nairobi. What we found in practice was that people who received loans were sending the money to other people hundreds of miles away. In hindsight, we had inadvertently identified one of Kenya’s biggest financial challenges. So, we took a chance and re-engineered the loan system to focus squarely on transmitting money from one phone to another.”31
The Central Bank of Kenya cooperated with Safaricom to launch M-Pesa in 2007. Conscious that premature regulation could stifle innovation, the Central Bank of Kenya chose to closely monitor and learn from early M-Pesa trials and to formalize regulations later. This cooperation made it possible for Safaricom to start a financially viable service, which had a huge impact on financial inclusion and significantly alleviated poverty in the country. In return for the cooperation of the Central Bank of Kenya, Safaricom agreed to deposit the value of the M-Pesa accounts at commercial banks and set aside a percentage of these balances for a nonprofit trust fund.
Any citizen can open a M-Pesa account with a valid ID and a phone number. There are tens of thousands of kiosks operated by small businesses all over the country. People can deposit or withdraw money from their M-Pesa accounts through text messages, or they can complete transactions over their phones using the SIM-based M-Pesa menu. Consumers can also pay for goods and services directly from their mobile phones if the business has a M-Pesa business account.32 There is no interest rate, and the relatively small fees are associated with sending and receiving money.33
Safaricom’s target for the first year was 350,000 customers, but it reached 1.2 million. After only three years the company had nine million clients—40 percent of Kenya’s adult population.34 In 2017 there were “thirty million users in ten countries and a range of services including international transfers, loans, and health provisions. The system processed around six billion transactions in 2016 at a peak rate of 529 transactions per second.”35
Several studies covering the social and economic impacts of M-Pesa have indicated positive effects on financial inclusion in Kenya. Eleven key advances in 2009 where identified in which M-Pesa had made community-level economic impact for both users and nonusers of the service. In order of impact, these were money circulation, transaction ease, money security, food security, human capital accumulation, business expansion, social capital accumulation, employment opportunities, financial capital accumulation, physical security, and quality control.36 M-Pesa’s influence is even more significant in rural areas than in cities because in rural areas alternative banking services (such as Western Union) are scarce. Many people in rural contexts who are defined as “bankable customers” are distant from the banks.
M-Pesa has made transactions safer and has helped people develop new financial skills, such as calculating a budget, maintaining a balance, building up savings, and so on. Moreover, mobile money services have helped an estimated 194,000 Kenyan households climb out of extreme poverty. They have also helped 185,000 women move from farming to business occupations.37
In addition to helping people with payments, fintech is also improving the lives of people who lack access to credit. A primary barrier to providing lending services to the underserved is that banks classify these populations as high-risk borrowers. Low-income individuals are usually unable to provide collateral or guarantors. Even in China, where there has been enormous fintech progress, extending credit to rural and low-income populations continues to be an issue.
Traditional banks are risk-adverse and typically focus on the lowest-risk borrower profiles. This partially explains the existence of “loan sharks” who overcharge people who lack alternative lending options.
Fintech promises to change credit assessment paradigms for underserved customers. Technology can assess creditworthiness using alternative sources of data, such as payment transactions and telecom usage data, as well as online behavior analytics. These analytics can paint a more complete picture of creditworthiness and credit risk. As an increasing number of digital transactions take place, more data is recorded. This data can be used to build multifactor credit profiles and enable a faster and more equitable credit approval process for people rejected by banks. As fintech companies construct more savvy learning curves and data collection strategies, credit scoring will become increasingly robust.
Once credit risk can be assessed for a broader range of people, fintech can offer ways to match alternative lenders with borrowers. Peer-to-peer (P2P) lending models focus on creating new channels for intermediating savings and loans. They mobilize savings from individuals and route them directly to borrowers. Like banks, P2P platforms aggregate small deposits. That enables lending. The platforms play an intermediating role: gathering information about borrowers, assessing risk profiles, and bundling borrowers into various risk pools. Then the risk is directly assumed by the lender.
On the supply side, P2P platforms can reduce operations costs. There are no bank branches, credit assessments are automatized, and cash collection is digitized. These cost-saving processes open the door for providers to offer smaller loan transactions than banks could process. If the risk is priced appropriately, the incentives to lenders will be aligned with the risks, and the lenders will understand the risks.38
What about the demand side? Because lower-income people and those living in remote areas are often unable to save money at formal financial institutions, they are forced to find other ways to save. However, alternative savings propositions—investing in livestock, for example—tend to be risky. The added risk encourages more consumption and less saving. Thus, peer-to-peer lending can be very attractive to the unbanked. Even the wealthiest people who seek a higher yield, and thus are prepared to assume more risk, may find P2P lending attractive.
However, peer-to-peer lending platforms require a solid transactional system and platform. The example below describes how the Paytm in India managed to transition from a cash-based to a digital payments system. It also shows how new services are being built to create a full platform infrastructure for unbanked people.
As a result of building a large payments platform, Paytm in India now offers competitive interest rates to borrowers with savings accounts. Customers who want to earn higher returns can opt to move balances greater than 100,000 rupees into a linked deposit or money market mutual fund. This contrasts with the offerings of traditional banks, which have a minimum balance requirement for savings accounts and where customers must give specific instructions for making a deposit or investment.
Importantly, in India demonetization is under way. When 90 percent of India’s physical money circulation was temporarily halted, Paytm became the default payment method. As a result, Paytm’s user base grew to 300 million people in 2018, including 80 million active users.
When a fintech platform gains that many customers, it can use advanced data collection to match lenders with borrowers, thereby becoming a peer-to-peer loan marketplace. That could be Paytm’s next big move.
Another crucial area where fintech is helping people in practical ways is in connecting buyers and sellers through e-commerce. Jack Ma, founder of Alibaba, Ant Financial, and Alipay, has been a vocal supporter of financial inclusion for rural customers. Alipay and WeChat Pay bring the rural population of China into the fintech fold in part by offering them mobile wallets to use when buying goods and services provided by Alibaba and Tencent.
E-commerce can be particularly helpful for small businesses, for it enables local shops to sell products far beyond the store’s physical reach. Merchants can avoid paying high fixed costs associated with building new stores (rent, staffing, and so on). Instead, for a relatively low cost small-business owners can utilize search engines, social media traffic, and online reviews to drive sales at a relatively low cost.
People in Chinese villages help each other learn how to sell traditional items or fresh produce online. In slightly larger villages, people set up small factories to produce goods to sell on Alibaba’s e-commerce platform. Alibaba wants to keep this momentum going. They plan to invest $1.6 billion dollars in 2019 to build 1,000 county-level and 100,000 village-level service centers. In 2017 alone, the number of village service centers doubled to more than 30,000 villages.
Alibaba’s competitor WeChat has also introduced new technology to rural populations, enabling small businesses to set up app-based business accounts to market and sell goods and services. Users share products and services with groups or friendship circles through the app. The seller needs only a picture, a product description, and a QR code linked to the seller’s bank account.
There are benefits of e-commerce to consumers as well. E-commerce gives people access to a wider range of products and service providers at more competitive prices, and it levels out information asymmetries. For example, people in rural India use internet kiosks to find information on prices, buy insurance, purchase fertilizers and seeds, and consult with agronomists. Corporations such as ITC provide kiosks and purchase the harvest directly from farmers. These types of agribusinesses have led economic and social transformation for farmers in rural and remote areas.39
E-commerce and digital business can encourage rural populations to shift to mobile wallets. Digital payment methods are paving the way for business opportunities and improving financial inclusion.40 The next horizon for these services is Africa. An informative case study is Jumia, which had to build a logistics infrastructure and innovative payment mechanism to enable larger-scale e-commerce.
In 2015 Nigerians made 98 percent of all retail purchases through informal markets, such as open-air markets and street stalls. The number of modern retail outlets remained small due to high real estate costs, difficulties in securing land titles, and poor infrastructure. Most upper-middle-class individuals imported products from outside the country. However, with the weakening naira (Nigeria’s currency), importing was expensive and impractical for businesses. At that time Nigeria was also a logistically difficult place to navigate. Roads were congested and small towns were hard to access. The nation was also plagued with crime and fraud, causing distrust among consumers. Many Nigerians preferred to deal with businesspeople directly rather than remotely through phone or internet, and when they ordered goods online, they would only pay for them upon delivery.
In this complicated context, Jumia built its own e-commerce logistics team with trucks, delivery vans, and motorbikes. The company hired more than 1,500 employees. Workers sorted and packaged in the main warehouse, and then shipped products to a pickup station (a free delivery option for consumers). By the end of 2015 Jumia had a five-day service delivery option in rural areas, next-day delivery in city centers, and one hundred pickup stations.
Jumia also created a group of agents who traveled door to door, tablets in hand, to encourage households to buy products from Jumia’s website. For these efforts, agents were offered a 20 percent commission. J-Force helped Jumia build stronger relationships, increase brand recognition, and understand customer needs and behavior.
Within four years Jumia had become the leading e-commerce business in Africa. In 2015 Jumia delivered over 1.6 million orders in twelve countries and employed 1,800 people. This exceptional growth has attracted some of the biggest investors in the world. The company raised $300 million from Goldman Sachs, AXA, and Rocket Internet. It is the only company in Africa to be valued at more than $1 billion. By 2016 the company had operations in fourteen African countries and three million customers.
However, Jumia did not find a profitable business model and suffered from very high investment in inventory combined with the high fixed costs of its delivery operations. The board looked to Alibaba’s successful e-commerce approach as a model to emulate: If Alibaba could work in a country as vast as China, Jumia could work in Nigeria. Jumia executives decided to become an open marketplace. Jumia would open its platform to third-party sellers, who would be responsible for their own inventory. Jumia would focus on billing and logistics, such as pickup and item delivery. By shifting to an open marketplace, it was easier to scale up without exponentially increasing inventory.
But as Jumia continues to search for the winning e-commerce formula, it is increasingly turning its sights to fintech—specifically, Jumia Pay, its in-house payments solution. The company’s goal is to expand its payment service across the continent. Jumia’s fintech plans also include building a lending marketplace to allow customers and sellers to access loans and insurance. The Jumia Lending service supplies third-party financial institutions with data to determine the credit worthiness of its merchants and to offer them working capital loans.
Jumia is still an unfinished business, but it illustrates the fact that in emerging markets there are multiple interdependencies between e-commerce platforms, payment solutions, physical infrastructure, and logistics. Financial inclusion in rural areas goes hand in hand with the development of commerce.
Alibaba’s story illustrates how synergies between Big Data analytics, mobile technology, and fintech can lead to greater banking inclusion, particularly for underserved and difficult-to-reach populations. It is probably the most advanced and broadest ecosystem that a single company can bring together.
Alibaba used its logistics expertise and a strategy to reach rural populations. This strategy relied on the sale of local produce. The first initiative provided villagers with broader access to information, goods, and services. The company set up rural service centers at local grocery stores, installing computers and internet access. They trained local youth to work on behalf of Taobao Marketplace, which facilitates consumer-to-consumer (C2C) retail sales by providing a platform for small businesses and individual entrepreneurs to open online stores in Chinese-speaking regions. These centers became a valuable channel for rural communities to enter the mainstream economy and gain access to a wide variety of goods and services at much lower costs.
The second effort related to the sale of local produce. Using its extensive network of rural partners, Taobao began to route agricultural and other products directly to consumers. This helped local sellers secure a better price for their produce. With the middlemen removed from the equation, incomes for producers and sellers rose. This business opportunity encouraged village youth to avoid migrating, because they had new livelihood options at home.
Alipay—a third-party mobile and online payment platform established in 2004 by the Alibaba Group—helped build trust between Alibaba’s online buyers and sellers by creating a digital escrow system that replaced cash on delivery. As the organization expanded into global logistics and infrastructure, Alipay utilized its technology, internet-based financial services, and Big Data analytics to generate credit scores, gauge customer creditworthiness, better understand expenditure patterns, and provide small loans to borrowers.
By 2018 Alipay’s products served the needs of all customer segments:
Alipay’s effort to reach China’s underserved population was motivated by the high rates of migration away from rural areas. This urbanization left only 46 percent of China’s population in villages, which contributed to unlivable conditions in villages and left rural populations without basic financial services. Alibaba’s ventures, which expanded access to internet and mobile phones, helped increase farmers’ incomes and contributed to the growth of local economies. Alipay’s initiatives redefined consumption and income paradigms for rural areas.
One of the most striking outcomes of the Alipay effort is that western China’s relatively underdeveloped areas have higher use of the Alipay digital payment system than do developed areas. Financial inclusion gaps between Shanghai (ranked number one) and Tibet (ranked lowest) dropped from 4.9 times to 1.5 times between 2011 and 2015.
Following its massive success in China, Alibaba is beginning to duplicate its services in adjacent Asian markets. In 2016 the company acquired Lazada, an e-commerce marketplace in six Southeast Asian countries. This created synergies for Southeast Asian merchants to build relationships with successful counterpart sellers in China. Alibaba also introduced new technology and ideas to strengthen Lazada’s position. The first was payment gateways. Southeast Asian customers preferred paying through ATM deposits or cash on delivery. Only 2 percent to 11 percent of consumers used online payment systems, and 70 percent to 80 percent of Southeast Asians did not have bank accounts. To help loosen these constraints, Lazada introduced HelloPay, a secure online platform that enabled non-cardholders to make payments.
In anticipation of Amazon’s entry into the region, Lazada partnered with Netflix and Uber to form Live-up, a platform that competed against Amazon Prime by offering discounts for Netflix, Uber, Uber eats, and Taobao. This partnership helped Lazada tackle logistical issues while also giving customers access to products, content, and shipping alternatives—essentially strengthening Lazada’s ecosystem.
The Lazada expansion highlights how the platform can patch together various services: transport (with Uber), entertainment (Netflix), payments (HelloPay), and digital platforms to develop commerce in rural areas of emerging markets.