Footprints (digital) a path toward Inclusion

... It is therefore important to elevate the power of inclusion. It is not just a simple financial term, a dream, an illusion. It is a powerful tool for empowerment. It is key to break down barriers, a fundamental catalyst for sustainable development. Data moves financial inclusion from delusion to financial evolution.

London. April 12, 2024

Suddenly those invisible, have become visible: They belong.?

This is the power of the data revolution, the power of digital footprints and how these can be transformed, monetized by the user, becoming capital, in digital form.

Financial inclusion has been, for decades, a big focus of public policy across the world, looking to address the lack of access to financial products and services for the many; at best, access to capital has been unequal. Growing evidence suggests access to capital allows individuals to increase their living standards.

What is inclusion?

According to the World Bank, financial inclusion means individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way. It is considered a “key enabler to reduce extreme poverty and boost shared prosperity”. It has also been identified as furthering 7 of the 17 UN Sustainable Development Goals.

Limited access to capital?

While account ownership has grown over the past decade to 71% in emerging economies (1.7x from 2020 - 2021), access to capital is still elusive for the vast majority. Only 45% of adults in developing economies have the ability to tap extra funds within the next 30 days according to the latest Global Findex report. These numbers evidence there is an urgent need to close the access gap for the many living in emerging economies.?

When looking at the data in the Findex report, we see friends and family are the first-line source of extra funds for 30% of adults in developing economies, despite this relatively accessible safety net, nearly half of those surveyed expressed that the money would be hard to get. Furthermore, women and the poor were less likely than men and richer individuals to successfully raise extra funds and more likely to rely on friends and family as their go-to source. Also, around 50% of adults in developing economies were very worried, in particular, about covering health expenses in the event of a major illness or accident, and 36 percent said healthcare costs were their biggest worry. In Sub-Saharan Africa, worry over school fees was more common than in other regions; 54% of adults are very worried about them, and for 29 percent it is their biggest worry.?

Lack of money, distance to the nearest financial institution, and insufficient documentation were consistently cited by the 1.4 billion unbanked adults as some of the primary reasons they did not have an account. Yet there are clear opportunities to address some of these barriers and it is a must these challenges should be addressed. Enabling infrastructure has an important role to play. For example, global efforts to increase inclusive access to trusted identification systems and mobile phones could be leveraged to increase account ownership for hard-to-reach populations, something that is starting to happen in places such as India. The chief actors in this effort - governments, telecommunications providers, and financial services providers - must invest in regulations and governance to ensure that safe, affordable, and convenient products and functionality are available and accessible to all adults in their economies. It’s in everyone’s best interest but things need to change, mostly, mentality. Collaboration is required through open and transparent dialogue.

Governments, private employers, and financial service providers—including fintechs— could help expand financial access and usage among the unbanked by lowering barriers and improving infrastructure. This is of great foundational importance, eliminating friction by levelling the playing field for innovation in the provision of these services to grow.?

The report also mentions, fifty percent of adults in developing economies borrowed money, although fewer than half used formal means such as taking out a loan from a financial institution, using a credit card, or borrowing through their mobile money account.? The share of adults borrowing formally is, on average, low in developing economies, but it has increased over the last decade from about 16 percent of adults in 2014 and 2017 to 23 percent in 2021. It also suggests, about two-thirds of unbanked adults said that if they opened an account (excluding mobile money) at a financial institution, they could not use it without help.

Worth noting the importance of financial education considering inexperienced account owners who must ask a family member or a banking agent for help using an account may be more vulnerable to financial abuse. Also, one in five adults in developing economies who receive a wage payment into an account paid unexpected fees on the transaction. Together, these issues point to the fact that less experienced financial customers may be more vulnerable to fraud. Thus, investments are needed in numeracy and financial literacy skills, product design that takes into account customer usage patterns and capabilities, as well as strong consumer safeguards to ensure that customers benefit from financial access and to build public trust in the financial system.

Still, the problems are more complex than just fraud. A survey by the OECD back in 2020, found that on average 43% of people,? across 25 countries, facing financial challenges borrowed informally, many of them from friends and family, a network that feels safe, but “many more” from loan sharks. Studies in the UK (yes not EM), indicate 50% face physical violence with other facing among others, extortion. The fact is, there is a profound impact on people's mental health and wellbeing which clearly shows the problem goes beyond financial policy.

According to Carlos Miranda, scientific director of the University el Valle Psychiatric Hospital, in the city of Cali, statistics regarding how loan sharks affect the health of individuals are not well documented "but one knows theoretically that economic stressors are complicated and generate depression and anxiety”. What is clearly documented is the fact there are suicides related to loans with very high interest payments and/or daily payments. To give some perspective, in Colombia police state every four hours a loan shark debt collector is captured by authorities. The dimension is clear, and those more in need are the ones mostly affected.?

Digital Footprint

From the Global Findex 2021 report “The receipt of payments such as wages and government support directly into an account can help achieve development goals. Studies by Blumenstock, Callen, and Ghani (2018) have found that workers who received their wages through direct deposit, which can encourage account holders to leave the money in the account as well as take advantage of auto-transfers to savings instruments, had higher savings than workers who were paid in cash.”

It is also true that receiving a payment into an account—especially if the payment can be used to document a regular income stream over time—can also ease the process of borrowing money formally.

The move to digital makes individuals data rich, something that normally comes first than being economically rich in Nandan Nilekani’s words (Infosys co-founder and one of the architects of the India Stack). Nonetheless, by transitioning individuals from a cash-based transactional environment to one where these same individuals start to cash-in and cash-out digitally, the stepping stones for the creation of digital histories, that leave “digital footprints”, are being cemented. This journey leads to the enablement of capital through the transformation of, once raw data, into structured data that can be “equitised”.?

Some call this the “data empowerment layer”. This data layer is very useful in those economies that have built, or are in the process of building, identity and payments layers.? What you receive as income, what you spend for, how and where you work, your social interactions; in essence, all your social and consumption patterns. All of this is creating a wealth of data that is transforming itself into “digital equity”.??

Moving from database, to data lake, to data being transformed into equity is a foundational change for any economy. Today, most consumer’s information is gated. It lies, stored and siloed, either by your financial services providers, mobile, cable or streaming provider, the tax authority, your employer, and many others. The richness of these data sets lies in the fact they provide insightful, contextual and behavioural patterns that, when properly built into robust decision engines, can be used to build robust credit assessments for wider pockets of the population. It can enable the creation and offering of better and more suited products, or can be used as the source for the developments of new use cases.????

All of a sudden, “digital footprints” make visible those “invisible”. People move from outside the system into belonging, being part of the system. The transition from informal to formal becomes natural.

The power of a consumer’s digital tracks is evidenced bringing value to his digital footprint and thus his digital history. It becomes the equivalent of the local bank branch representative who in the good old days knew who their clients were, their lifestyle, line of business and social dynamics. Allowing the local bank representative to underwrite these members of the community due to their behavioural patterns. Today, your “digital footprints” can allow robust models to construct around those contextual tracks done in the old days by your bank representative.

Building connective tissue?

Welcome sir my name is “Data” and I am your new “Banker”. The old community banker that knew you from head to toe is back in the name of data. Capable of underwriting you with the

trust, provided from the fact data evidences your behavioural patterns far beyond a score.?

APIs, application programming interfaces, are the ones doing the work. They are building the connective tissue, creating the capacity to gather all this information in a reliable way that, when paired with robust data engines, enables the context" the community banker had. Your habits, your consumption patterns and many more of these "digital footprints", can feed these models, putting capital to work by connecting the dots allowing financial providers to better underwrite individuals underserved or never served.

Open Banking?

The connective tissue in the name of APIs has given forth to the open economy with open banking and open finance the “super powers” bestowed on financial inclusion. That is “the why” its encouraging to see the growth in share of adults making or receiving digital payments in developing economies that has gone from 35 percent in 2014 to 57 percent in 2021 at a pace that is higher than the growth in account ownership. This is a fundamental step in order to leverage the value of our “digital footprint” and the power these footprints have to become “digital equity” for individuals and entities.

But for the power of data to be unlocked and become widespread, trust must be built. It is therefore important to highlight the value of robust, accessible digital infrastructure that can provide strong fundamentals to the route to formalisation. A route that at the same time promotes innovation within the safeguards of a balanced regulatory environment.

Financial Inclusion:

According to CGAP “many low-income people also generate rich data trails (e.g., airtime data, social media engagements, mobile money data) that are not being fully leveraged in the design and delivery of financial services. This is due to multiple factors including limited availability of data to financial service providers, legacy technology and legacy business models, low capacity in data processing and analytics, limited infrastructure, and regulatory barriers”.? As technology evolves and cost of access is lowered, new rules and regulations regarding open banking and data (“open”), novel business models are being developed by leveraging digital footprints.

It is therefore important to elevate the power of inclusion. It is not just a simple financial term, a dream, an illusion. It is a powerful tool for empowerment. It is key to break down barriers, a fundamental catalyst for sustainable development.

Data moves financial inclusion from delusion to financial evolution.?

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Federico Suarez

Transatlantic-o Connector

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