BUSINESS

HOW FINANCIAL INCLUSION

COULD ADD $3.7 TRILLION TO
THE DEVELOPING WORLD
Some 2 billion individuals and 200 million businesses in
emerging economies lack access to savings and credit.
BY IAN ALLISON ON 12/6/16 AT 4:07 PM NEWSWEEK MAGAZINE

People queue to withdraw cash from a local bank, Harare, Zimbabwe,

September 15.PHILIMON BULAWAYO/REUTERS
This article was originally published by International Business Times.

Delivering financial services to the developing world's unbanked people

will add $3.7 trillion to the GDP of emerging economies within a
decade, according to a recent report by McKinsey.

Some two billion individuals and 200 million micro, small and midsize
businesses in emerging economies today lack access to savings and
credit, while those with access must often pay high fees for a limited
range of products. Bringing about financial inclusion is a collaborative
effort from the level of central banks, cooperating in mobile money
systems, down to micro-finance projects providing business loans to
street vendors in sub-Saharan Africa.

For instance, the Bill & Melinda Gates Foundation has a dedicated team
for financial inclusion and digital innovation. Kosta Peric, the Gates
Foundation's deputy director of Financial Services for the Poor, said:
"When I talk to banks, it's a call to action, letting them know that
financial inclusion can be a profitable business. It requires a different
approach and a mix of new technologies, but has huge potential both on
the country side and also for profit making private entities that are
looking for new markets."

Peric has seen much more focus lately from governments and central
banks in Africa and Asia. He also mentioned some interesting concrete
examples of innovation, such as a recently launched interoperable
mobile money system covering the whole of Peru and run by its central
bank. Meanwhile, four mobile money providers in Tanzania have begun
interoperating, and showing quite dramatic increases in volume.

"These types of innovation are how we envisage our Level One Project,
which is to foster the creation of a fully digital and super low cost and
very scalable system that also interconnects with what already exists,"
said Peric.

An example of what he means is clearing and settlement between

different providers. At best you can expect things to be settled the next
business day. "So this doesn't work," said Peric. "In a digital system that
is focused on the needs of financial inclusion and poor people it needs to
be real time and irrevocable. We have looked at ways to make it almost
real time or as close as possible.

"This reduces risk in the system. These providers could be non-banks

and under the regulatory regimes of most countries they would be
subject to risk controls, to prevent one of them from failing by owing too
much money to others."

There are potential solutions here inspired by blockchain design and

innovations like Ripple's Interledger Protocol to connect various
financial ledgers, noted Peric.

He also said to reach a goal of 80 percent financial inclusion means

crowding the market with more players who are closer to customers in
rural areas or the specific populations like farmers.

"These are not banks so it's important that the system implements
controls of risk management and fraud management, because these new
players are not necessarily equipped as well as the banks to do this in a
regulated way."

4G Capital is a fintech company that is doing pretty well providing

financial services to very small businesses in rural areas across Kenya.
This multi-award winning unsecured business loan provider offers a
highly successful line in micro-lending, complimented by customer
training for self-employed traders that lack the education opportunities
or the life skills to unlock their potential.

This year alone 4G Capital has scooped two impact awards, including
being a finalist in the prestigious MasterCard Foundation Clients at the
Centre Prize.

Wayne Hennessy-Barrett, CEO, 4G Capital reels off some impressive

statistics: over 80 percent repeat business; 82 percent female customers;
65 percent of all customers over a 12 month period grow their business
by an average of 300 percent.

"That is directly attributable to the credit we provide and also very

importantly the business training we provide," he said.

"For last 18 months we have had 72 percent net promoter score (NPS)
which is the industry standard for kind of - would you recommend this to
their friends? It's a really big deal. I think Apple is about 65 percent.
Generally financial services is around 36 percent."

In order to achieve these kinds of results, Hennessy-Barrett, who

incidentally is also an advisor to Ethereum, has been strengthening his
data strategy. He has been using simple feature phones to conduct
surveys via SMS to add to his existing customer database.

He said: "We are trying to make better use of our data in order to
develop more predictive credit products for micro segmentation. There is
a huge amount of difference between a lady selling fruit and veg in a
rural market and a small household goods trader; their business cycles
and their margins are very different.

"We don't need to buy other people's data - frankly what we do is much
purer. Our approach allows us to go into data-dark areas and come up
with very strong insights based on conversations using low tech, feature
phones. That allow us to reach, not just the financially excluded, but
what I call the network excluded, the really marginalised.

In terms of data sharing, 4G Capital's customers who want to graduate to

a bank can have their credit data exported with them. "This is part of
what we can give you, because actually it's not our data, it's the
customer's data.

"We have a platform that we want to be the go-to for business working
capital across sub-Saharan Africa. And it's a platform for investors to
redeploy standing pools of capital and achieve risk adjusted yield but
also transformative social effects."

4G Capital is currently building out its data science and analytics

capabilities. Data scientists who would like to take part in a truly
innovative financial inclusion project in sub-Saharan Africa are invited
to get in touch with Wayne.

Newsweek and International Business Times are hosting an Artificial

Intelligence and Data Science in Capital Markets event, taking place on
March 1 and 2 2017 at the Barbican in the City of London.

http://europe.newsweek.com/financial-inclusion-could-add-37-trillion-developing-world-528462