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Financial inclusion must be done right
EVERYONE knows the proverb "Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime". For too long personal finance has been a vehicle for the informal sector to prey on unsuspecting consumers by giving access to credit under predatory terms.
In developing markets, the problem is compounded by unequal access to basic financial services and limited understanding of their use and benefits. Recently, however, financial inclusion has emerged as a high-priority topic for governments and institutions around the world. But what does it take to really create a more equitable financial system that people feel part of?
Today, fintech innovations are reshaping the global financial landscape. Many of these solutions open financial access specifically for underserved and unbanked populations, helping to drive the issue further into public consciousness. It's a particularly ripe opportunity in Southeast Asia - while smartphone penetration in the region is high, the number of people with bank accounts is low: according to KPMG, in 2016 only 27 per cent of Southeast Asia's 600 million people held a bank account.
Southeast Asia is one region where, if done right, financial inclusion can unlock long-term socio-economic impacts. It was refreshing to see financial inclusion a priority at this year's Singapore Fintech Festival. Announcing the Asean Financial Innovation Network (AFIN), MAS managing director Ravi Menon said: "It's a shame that in this day and age, so many do not have access to a bank account, secure and efficient means of payment, or insurance protection. Fintech firms are able to create agile and mobile digital solutions to access and serve these underserved segments."
Unfortunately, when it comes to practical implementation in markets like Southeast Asia, where it's needed most, solutions are often unviable or short-sighted. Traditional financial tools are either inaccessible to many across emerging Southeast Asian economies, or newer solutions don't foster responsible borrowing, with some fintechs often writing off a consumer's first loan as customer acquisition cost. This not only cultivates poor financial habits, it is also unsustainable and detrimental to socio-economic progress in the long run.
To move towards financial inclusion, the public and private sectors must work together and methodically address inherent limitations in existing financial systems that have resulted in millions being left behind. This can be achieved by providing equal and affordable access to basic financial services, helping build financial identities, and education on the basics of personal finance for unbanked populations.
Taking the Philippines as an example, according to the Asian Development Bank (ADB), just 12 per cent of Filipino adults borrowed from a formal financial institution in 2017 and 35 per cent of cities and municipalities had no actual banking offices.
Not all markets are the same, and every consumer is different. In delivering financial inclusion solutions in the Philippines, Indonesia and soon Vietnam, we've taken a hyper-local approach to cater to underserved customers' specific needs wherever they are. This comes down to really knowing and understanding our local customers: first-time borrowers, MSMEs, and homemakers. In these markets, a significant percentage of consumers and microentrepreneurs don't have bank accounts and have never been approved for a loan, credit card or service from a formal financial institution.
As a result, their financial exclusion is virtually guaranteed: they can't get a loan because they have no credit history, and they can't build a credit history because they've never been approved for a loan. It's a vicious circle. In Southeast Asia, a large number of the financially excluded turn to informal sources that are unsafe and predatory, compounding the issue. According to the Bangko Sentral ng Pilipinas (BSP) 2017 Financial Inclusion Survey, 40 per cent of adults have turned to informal sources for credit.
Addressing this situation requires a collaborative effort with more organisations providing greater access to innovative financial products and services that aren't discriminatory and serve a greater number of people.
This doesn't mean we throw caution to the wind. We've seen fintech companies in the P2P lending space with varying ethical standards in China and Indonesia causing a significant loss of consumer trust and confidence. This doesn't mean the alternative finance market is doomed to fail - it just needs to be delivered in collaboration with local regulators and in a responsible manner that is sustainable.
A business model founded on responsible, purpose-based lending, facilitated by technology that enables convenience, transparency and gives consumers more control - including first-time borrowers with little or no credit history - can help build financial identities for millions, bringing them into the global economy.
The key to initiating a positive relationship with historically undervalued consumers with no formal financial profile is assessing risks based on a wider set of criteria - and this is where technology plays an important role. Traditional and non-traditional data should be used alongside a sophisticated risk management system which also draws on AI, machine learning, predictive analytics, and anti-fraud algorithms to power an intelligent credit engine. This can develop robust risk and credit assessments, predict consumer behaviour, and creates efficiencies in approving and disbursing capital based on consumers' needs.
But working towards a more financially inclusive future can't stop at providing more access for the underserved. The challenge is to make sure that consumers have a strong understanding of the use and benefits of basic financial services so they can maximise the benefits from access to these new tools.
Governments in Asean see the opportunity and have made financial inclusion a priority in every market. The Otoritas Jasa Keuangan (Financial Services Authority of Indonesia) and State Bank of Vietnam among others have taken a forward-looking approach to the important role fintech companies have to play in financial inclusion and are willing to collaborate with the private sector. Indonesia has committed to growing financial literacy in the country from 35 per cent today to 70 per cent by the end of 2019.
At the launch of Cashalo, our consumer-lending platform in the Philippines last month, Joyce Suficienca, acting deputy director, Inclusive Finance Office, BSP, said: "At the BSP, we recognise the potential of digital innovations and new technologies as enablers for financial inclusion. They bring about efficiencies and scale that allow meaningful financial services to reach the unbanked. Promoting responsible and consumer-centric innovations has been the core theme of BSP's financial inclusion initiatives."
Southeast Asia stands at a defining moment in its financial inclusion journey with the recent explosion of fintech companies offering a multitude of services. While the potential for a financial windfall is high, true inclusion requires more than easy loans. It requires companies with a purpose-driven mission. A model that promotes responsible financial behaviour will foster greater inclusion for those with limited or no access to these services, and, over time, bring this expanding and all-important demographic securely into the formal economy. To succeed, financial inclusion requires everyone across the public and private sector to take responsibility and make a commitment to a collaborative approach enabled by technology, combined with a long-term view.
- The writer is co-founder of Oriente. He previously spent seven years as a founding partner at Atomico, a global VC firm with over US$2 billion in assets under management. In 2002, he co-founded Skype, where he also served as chief strategy officer.