Why is it that despite new technologies and widespread innovation, today's financial sector provides such ill-fitting products and services to so many people and leaves so many more entirely unserved? We are missing a huge opportunity for business, policy and society alike - a missed opportunity with lasting negative effects.
For an economy to thrive, we must have appropriate, affordable financial services available to a majority of people and organizations operating in it. In other words, we need financial inclusion. Historically, however, many financial services have been available only to wealthy and better-off individuals, leaving many disadvantaged and low-income people "unbanked."
Setting the economic stage: from microfinance to macro effects
Since the late 1990s, microfinance has become a major tool for financial inclusion. Microfinance is the provision of small (micro) loans and savings products for people living at the base of the economic pyramid (BOP). It has historical links to rotating savings and credit associations (or ROSCAs) that operate like community lending circles. Microfinance clients are often called microentrepreneurs; classic microfinance is focused on the provision of working capital loans - funding to build and grow small enterprises.
Modern microfinance is typically traced back to the 1970s when Mohammed Yunus began experimenting with making small loans to groups of poor women in Bangladesh. Today microfinance is credited with lifting hundreds of millions of people out of poverty around the world. Collectively, microentrepreneurs represent a formidable force in the global economy.
Yunus' original work was primarily grant-driven: it did not involve commercial capital. However, as the concept caught on - and especially, as repayment rates remained close to 100% over time - investors began to take notice, with mostly great and sometimes negative effects.
The advent of "commercial" microfinance dates to the early 2000s (for context, Yunus was awarded the Nobel Peace Prize in 2006). I was fortunate to be at the proverbial fifty-yard line of microfinance at this time, advising investors, foundations and microfinance institutions (MFIs) around the world. One of my clients was Kiva, which at the time was tiny and less than one year old - ahead of peer-to-peer (P2P) lending platforms like Lending Club, or crowdfunding platforms like Kickstarter. Kiva today is on track to facilitate (cumulatively) more than $1 billion in loans to microentrepreneurs around the world. In places like Congo, Kiva is the largest private lender in the country.
Microfinance works because it is built on a premise of trust and reputational capital, and it meets the needs of people left out of the current system. It enables poor microentrepreneurs to disintermediate loan sharks and, usually, save money for the very first time. This money can help put children in school, provide a buffer for emergencies, and increase resilience overall. The social returns of microfinance are enormous. In addition, at the societal level microfinance proves that being poor does not mean greater risk; it forces us to rethink what, why and in whom we invest.
At the same time, microfinance is not a panacea. We saw that, especially with the entry of venture capital and private equity investors, many MFIs were forced to compromise their core social mission, some markets got saturated, with borrowers taking loans that no socially responsible lender would have ever offered. Often, investors' demands were prioritized over microentrepreneurs' needs. In a few cases, the results were disastrous: MFI client suicides, massive non-repayment, and MFIs going out of business.
In hindsight, during this era we learned the power of commercial capital to help an innovative tool grow and scale. There is no question that without commercial investment, microfinance would not have reached as many people successfully - with overall repayment rates still near 100% - as it did. However, we also learned that funding without a social mission as its unequivocal top priority can be toxic, and that MFIs who do not look at clients' overall needs (including financial literacy) are much more likely to fail.
Microentrepreneurs: from Bangladesh to Brooklyn, Berlin and beyond
Fast forward to today's blossoming sharing economy, with new business models based on "access over ownership" and underutilized assets. We're building community marketplaces in unparalleled ways: from carsharing and ridesharing, to sharing all kinds of skills and spaces. Many of these models rely essentially on new technologies: in effect, we're building online platforms to enable sharing in the offline world.
In the process, an entirely new class of microentrepreneurs is emerging. It includes Airbnb hosts, Lyft drivers, TaskRabbit taskers, Skillshare teachers, Park My Pooch dogsitters, Shyp pick-up people, AnyRoad tour guides, RelayRides car owners and many others. They are earning income, saving money, building livelihoods, engaging in their communities, and sometimes just squeaking by thanks to these platforms. Sharing economy marketplace dynamics are also driven by trust and social capital, reaffirming the conclusion that one's reputation matters more than bank account balance.
The degree to which the term microentrepreneurs is being used today is unexpected, but perhaps not surprising: according to the Freelancers Union, Intuit and other sources, it is estimated that by 2020, more than 40% of the U.S. workforce will be "freelance" - not connected to any one company or organization. So this is not just a sharing economy issue, this is a major economic trend underway.
Some companies, such as the ridesharing platform Lyft, are actively seeking to engage with a broader community. Lyft not only enables its drivers (many of whom were previously underemployed) to earn income, but also it seeks to expand its offerings to lower-income areas through its Community Solutions initiative. However, neither Lyft nor other sharing economy platforms are able to provide financial services. We have yet to effectively fill this gap.
Etsy, a P2P platform for creative goods, shows how these issues and trends play out. Although Etsy is distinct from sharing economy companies (because it does not focus on sharing of underutilized assets), its more than one million sellers around the world are a prime case of microentrepreneurship - and the issues around financial inclusion.
The majority of Etsy sellers lack access to financial services to grow their businesses. Interestingly, Etsy sellers rarely need investment capital. They don't want to grow "big"; they appreciate the P2P nature of the business because it allows them flexibility and to do what they love. In the aggregate, this is as if a leading global corporation (or an entire country) lacks the financial tools to thrive. And ironically, typical responses such as providing access to Small Business Association (SBA) capital aren't appropriate. We need to think differently.
Companies like Etsy, and the broader sharing economy, represent an economic bridge: they have the capacity to help smooth the transition from old to new ways of economic thinking, working, caring for our families and connecting with community. The sharing economy will not solve today's global economic woes, no more than microfinance can (not) single-handedly solve global poverty alleviation. But it is a powerful and helpful option to have that did not exist before, and should be promoted as such.
Three lessons (and three services) for today
Today's microentrepreneurs - and society at large - can learn a lot from past experience with financial inclusion. There are three key lessons:
- Microentrepreneurs in the sharing economy are ill served by financial services.
- Meanwhile, many people who could benefit by participating in the sharing economy are left out of it, because they lack access to appropriate financial tools.
- Points 1 and 2 represent huge opportunities for financial institutions and entrepreneurs alike, on both macro and micro levels. (And I often feel like I am watching a movie on repeat, with a deep sense of déjà vu.)
Unfortunately, thus far the "innovation" we have seen by traditional players has been limited to traditional clients (such as the Barclaycard, which allows well-off customers to donate profits but doesn't actually serve low-income clients directly).
In particular, the following are services that are ripe for development - their market is already primed:
- Income tracking, saving and investment services for microentrepreneurs
- Financial literacy tools: a fundamental building block, which also increases the return for all other transactions and services provided
- Simple credit card access: many sharing economy platforms require a credit card to participate, leaving out many people who could benefit - and thwarting inclusion
The economy, jobs, livelihoods and the role of finance are all undergoing significant shifts. The rise of microentrepreneurship, at scale, represents a new economic force. In order to unlock its full potential, we must develop services to address new needs. In doing so, we may also find a key to success amidst these shifts - and a world of new opportunity.