Driving Financial Inclusion at 4G Speed

The rapid rise of smart phones helps create new sources of true consumer value that financial services innovators around the world are starting to unlock. These "second-generation" digital service innovations have the potential to meaningfully improve people's financial lives.
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Base-of-the-pyramid financial services providers in emerging markets are increasingly using data analytics to pioneer new products for reaching the unbanked. Alifinance in China is using the underlying transaction data of vendors on the giant online platform Alibaba to underwrite small business loans. M-Shwari in Kenya leverages M-Pesa's mobile money data for short-term, unsecured credit. Cignifi analyzes cell phone usage to provide credit as well as savings propensity scores. Lenddo uses online social network data for credit risk assessment. Similarly, a number of companies including Tiaxa and MODE use cell phone data to extend immediate nano-credits to prepaid customers who run out of airtime balances.

All these digital data applications to financial services innovation center on the extension of credit. That is not a coincidence. Traditionally, people and paper-based credit underwriting is cumbersome and costly. The application of sophisticated analytics to new sources of data, including mobile call histories and social networks, promises better results at far lower costs than traditional models.

However, the digitization of the consumer front-end, and therefore the availability of new, massive, and instant data streams, has broader potential that just better credit underwriting. This is particularly true with the rise of smartphone penetration in emerging markets, fueled by rapidily decreasing hardware and data prices. Microsoft and Mozilla have unveiled smartphones that cost as little as $25. According to industry analysts, broadband data charges in Latin America have dropped by more than half over the last three years. As a result, industry obervers report 50% year-on-year growth of smartphone sales in emerging markets. In Myanmar, which only opened up mobile telephony recently, network operators report that a majority of consumers go straight for the low-cost smartphones that have become available, skipping the first-generation feature phones.

Smartphones change the game for the provision of financial services from a technology and business perspective. On the technology side, they provide a far more user-friendly interface and can more easily be connected to other devices around them, for example via Near Field Communication (NFC). On the business side, they can communicate over open data channels with any node in the internet, thus reducing the dependency on the mobile phone operator's Unstructured Supplementary Service Data (USSD) channel and lowering interaction costs. With increased smartphone penetration in emerging markets, we will likely see a proliferation of what Silicon Valley calls "over-the-top" services -- software applications that easily ride on the powerful rails of Internet-connected smartphones already in the consumer's pocket.

The rapid rise of smart phones helps create new sources of true consumer value that financial services innovators around the world are starting to unlock. These "second-generation" digital service innovations have the potential to meaningfully improve people's financial lives. And, by definition, these models have the potential to scale rapidly because their delivery model is entirely virtual, riding on the infrastructure that mobile telephony is already providing.

The GSMA and CGAP have recently suggested several sources of such value that mobile phones in general, but smartphones in particular, are creating:

  • Real time customer interactions allow financial services providers to stay close to their customers and deliver useful information when needed. For example, timely and actionable advice can increase a customer's confidence and trust in the provider. It can also influence how people behave, helping them more effectively manage commitments. Juntos, a startup in Silicon Valley, has demonstrated the impact of an automated messaging algorithm that creates personalized dialogues with customers to keep them engaged in savings. In a recent, randomized-controlled pilot, they showed how such automated dialogues doubled the intensity at which users saved (average balance increased by 74% as opposed to 37% in the control group).
  • Smart and customized user interfaces help customers better understand products and make better choices. California startup RevolutionCredit is demonstrating how bite-sized, "gamified", financial education videos offered at the point of transaction improve how individuals use their credit cards. In a recent pilot, usage of a revolving credit line increased 20% while average balances slightly decreased.
  • Location intelligence can help infer the context of people's specific financial transaction, which can improve usability and reduce transactions costs. In South Africa, a mobile payments provider is piloting the use of location data as a low-cost mechanism to validate self-reported addresses by looking at a cellphone's nightly location patterns.
  • Peer-to-peer connections can strengthen social and financial networks. Studies show that individuals often manage concurrent financial instruments (both assets and liabilities) that involve friends, family or people they do business with. Chamapro is a beta app that helps circles of friends manage savings and lending within social clubs.

Most of these financial services innovations are at their early stages. Some might fail. Not all are exclusively aimed at the base of the pyramid. But collectively, they signal the exciting potential the purposeful use of digital data sources has for the provision of financial services for the poor in developing countries and emerging markets which, until now, have largely remained excluded from the formal financial services we all take for granted in the developed world.

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