Compliance and the Cost of Financial Inclusion.

It Is Expensive to be Poor

It is estimated that 850 million adults worldwide lack an accepted form of identification.

Individuals without government issued identification document or with no fixed address may not be eligible to open an account and, therefore, will have no access to basic accounts.

In addition, in low-income countries men have formal IDs at a prevalence that is 50% higher than women.

The disparity to financial exclusion of women from the financial system can be stark.

The following are key to combat Financial Exclusion:

? SDD - Simplified Due Diligence (fintech innovation including IDV/biometric innovation)

? RBA - Risk Based Approach (vs so called 'gold-plated' approach to KYC/AML and compliance processes) when onboarding customers.

While The Financial Action Task Force (FATF) standards recognise that there is friction between facilitating access to financial services and the need to implement its recommendations its overarching role is to protect the market from misuse and ensure illicit financing through unregulated products do not occur.

Yet the informal economy which millions rely upon for their bread and butter continues to thrive and in many instances it would be difficult to argue with the poorest and most exposed that these players themselves do not protect the most vulnerable from financial exclusion.

As the FATF readily admits, “In the majority of the surveyed countries where Hawala and Other Similar Service Providers (HOSSPS) are legal, they are considered to play an important role in providing financial services to the unbanked population.”

Establishing a robust financial inclusion strategy within a risk management framework is a critical factor not just for the regulators but for private companies especially innovative Fintechs looking to bridge innovation for good without compromising good governance and showing a path to revenue (for investors).

Significant advancements have been made to bring unbanked and underbanked individuals into the formal financial sector is the development Digital Financial Services.

A basic mobile wallet can store value and then evolve into more advanced mobile products that enable a variety of transactions such as peer to peer transfers, international transfers, airtime top-up, or bills and payments.

In the early 2000’s, Mobile Network Operators (MNOs) had the vision to enable men and women who typically used cash to start using their mobile phones for financial transactions.

Safaricom PLC and its M-PESA Africa launched a program demonstrating that the private sector can play a leading role in the empowerment of financially excluded populations.

It is, however, important to note that not all individuals either have access or are able to use technology and take advantage of Digital Financial Services and other developments. Digital literacy is still a huge challenge that compounds financial exclusion and stops many onboarding.

Product fit and risk based approaches to onboarding are a vital in creating processes and solutions that avoid a cookie cutter approach.

Product Development

For startups operating lean, it is incredibly challenging but can be rewarding once you tick the boxes from MVP to suitable partnerships.

Product development for Fintechs should put RBA (risk based approach) at the top of its planning to ensure the financial inclusion piece is also top of mind.

Something that at an early stage at Indelible Inc. Ltd we have worked on tirelessly (iterations abound through market feedback especially from the diaspora and our partners in Africa).

For the Indelible app to address financial inclusion at its core we considered the following:

? The business model and strategy

? Products being too high risk/not in line with overall risk appetite

? Difficulties in reaching out to potential customers

? Challenges related to performing KYC/CDD

Building in Compliance and considering Financial Inclusion for Indelible as founder you are often taking the top down approach, especially when looking at untapped markets such as Africa - The TAM (total addressable market) is vast.

Any founder that tells you their fintech product can be rolled out to 1.4 billion people (i have heard it) is delusional and i would highly recommend they read the following book by the enigmatic Dipo Faloyi:

To take the bottom up approach, or the potential SAM (serviceable available market) have provided the best learnings.

Speaking to diaspora and UK impact investors, understanding their motivations to want to use yet another digital platform and in times of geopolitical uncertainty how we could make a difference.

Also considering how digital value can be modernised to play a role in driving users to the product at an early stage.

I have been fintech for some time and an expert in Africa and have built significant relationships across the continent.

The biggest challenges to monopolies from Telcos, Banks and significantly well funded Fintechs will always come back to whether customers find convenience and sufficient motivation to support yet another payments company.

Convenience applies to ease of onboarding customers. For Fintechs these are the critical early steps to adoption and retention.

Measuring CAC and LTV (those early users and keeping them) includes not just cost of marketing but cost of compliance.

The value theory built into product positioning and pricing included cost of compliance and a product that is truly designed to tackle existing inequalities.

Compliance At Every Touchpoint

Compliance is everything (especially in markets like the UK) but in order to ensure you as the founder are true to your mission, it is important to strike the balance.

That not withstanding with a multitude of solutions from regtech innovation (examples that spring to mind include Onfido, Sumsub, ComplyAdvantage, Quantexa, Detected - the UK is a leader in this space), payment startups can be selective and strike that right balance.

Frictionless payment product though still needs human intervention.

In the building of payment technology that crosses borders is that make sure your team from software development to MLRO to administrator are fully aligned to understanding that financial inclusion can be woven into a compliance driven product.

Supervisors (eg. regulators like the Financial Conduct Authority) ultimately take the purview of whether private sector players are truly ready, willing and organised to manage risk, sufficiently capitalised to operate.

At Indelible we have been quick to embrace partners to ensure full compliance in the UK and our target markets in Africa.

We have obtained necessary support and local licenses but as the lead i have also ensure that any partners we work with understand that driving financial inclusion must be done on RBA.

We have taken a tiered approach to evaluating our two core products which involved reward based crowdfunding and the real secret sauce (to be revealed)

Building Financial Inclusion is building trust

If the informal sectors are to fall into line with regulatory frameworks the private sector will play a fundamentally vital role in ensuring customers new, old, young, old, are given the basic tools to ensure longevity.

LTV or lifetime value for startups is a key indicator for investors. Yes many want to also see the passion and understand the reason for being but ultimately fintechs looking to drive real value need to find a balance in productivity and empathy.

It is something that openly i had struggled with for a number of years. However taking full ownership of building IP has created clarity.

For underbanked or unbanked customers, those that are marginalised by the breakneck speed with which new technology can exclude them, its important to remember that they are also looking for innovation that goes beyond just a basic bank account:

As usage goes beyond basic products, compliance and monitoring builds a clearer picture for the needs and checks required on customers. Again product developers should consider the multitude of options that do now exist to integrate into their apps or joint ventures.

Where do we go in 2024?

Mutual evaluation processes are key in protecting countries and their systems from financial crime.

The FATF states “a country must demonstrate that, in the context of the risks it is exposed to, it has an effective framework to protect the financial system from abuse.”

Fair point. The private sector plays a major part in ensuring that balance i spoke of above works. Being actively involved in that ME process enables fintech leaders to be at the table and formulate plans to ensure that Compliance and Financial Inclusion can marry without bastardising creativity for fintech startups.

As i also mentioned above there are many options to partner up. The UK has been long established as a beacon of good governance and remains a leader in the Fintech space.

Mission led founders do not need to really invent anything, just ensure that the partners you team up with support your early stage goals, especially if you are experience and gravitas in developing markets gives them opportunities that otherwise would be out of their comfort zone and understanding.

The end goal is to ensure customers come, they feel welcome, they stay (and yes, they spend).

The FATF and Central Banks are there to provide stability to a system that otherwise can get ahead of itself and of course without rules and regulations no investors looking at Fintech opportunities in developing markets would budge.

For product owners, founders, team members on a mission - keep going and keep talking. Get the right people on your side because if you are building Fintech for Good, your work is too important to fail.

While You Are Here:

Please feel free to drop me a line on LinkedIn .

I am always happy to speak to those that i can help or that potentially can help my new venture Indelible.

Lets keep it real and avoid those that are sent to waste your time ( free advice)

Happy 2024 all.