Piotr Godzinski
Startup Contributor

How Should We Understand the Financial Inclusion Buzzword

By Piotr Godzinski | Wed, 01/27/2021 - 13:08

For most fintechs, “financial inclusion” has become a must-have stamp. While there is nothing wrong with wanting to improve people’s lives, whatever aspects we decide to focus on, this buzzword is not a global "label." It's a bit more complicated than that.

Many stakeholders believe financial inclusion is about changing people’s behavior, transforming cash into “digital” money, offering new forms of bank accounts or card payment tools. Well, it can’t be only this. Not only is it difficult to change people’s behavior but such a focus leaves most of them out of the picture.

The predominant use of cash in many markets isn’t only due to a lack of access to digital solutions. Such behaviors have deep and clearly understandable reasons. Cash is tangible, it seems “safe” in our pockets, it’s always “there,” everyone “understands” cash.

Let’s refocus on the definition of financial inclusion: “Financial inclusion is defined as the availability and equality of opportunities to access financial services.” (Wikipedia).

Following the cash-based transactions example, the challenge with financial inclusion might be about understanding current existing transactions and translating them into data that formal financial institutions or any financial stakeholder can digest. At least that seems to be the major and crucial first milestone to reach. Transforming those transactions (into digital) might be the second.

In Mexico, our first market, that would mainly be capturing and understanding offline cash-based transactions. In other markets (where more transactions are being performed “online”), it might be about translating them into confidence scores right away (cheers to Esusu).

Understanding the Customer is Key

Our leitmotiv is to understand the customer. Understanding and respecting customer behaviors is the first step to building the financial inclusion bridge: A solution that most of them can and will use.

Financial Inclusion Through Access to Bank Accounts

Neobanks are often quoted as financial-inclusion players. That’s partially true. They enable customers to get a bank account faster, easier and cheaper than from traditional financial institutions. For some users, it’s effectively the first option to be banked. Neobanks and their investors are putting in a lot of effort and money to make it happen, and let’s face it, it takes courage.

Their value proposition is powerful: disrupting the banking industry. They offer an alternative to traditional banks and to keeping cash at home. Whatever the use case then, it’s nice. Naturally, such companies face lots of challenges, such as finding a business model. Some will succeed.

Yet, they can’t focus on existing cash-based transactions, which are, as mentioned, the first step prior to going digital. Their expertise relates to what happens digitally and, although they provide solutions to deposit cash and offer incentives for card usage, what happens offline stays offline. Fair enough. The offline focus is somebody else’s job.

Financial Inclusion Through Access to Affordable Credit

Pawnshops aside, most of Mexican direct to consumer cash loans are unsecured digital lenders.

What’s their influence when it comes to “the availability and equality of opportunities to access financial services?” Well, they are a real and working solution for many borrowers. They are in a risky business, which is that they might not get the loans back.

The nature of their setup, being unsecured, introduces some limitations. As much as they wish to address anyone who wants to prove they are a good borrower, they can’t. Therefore, their loans are available to users for whom sufficient financial data is accessible. And that’s exactly the kind of data underserved adults are lacking.

Digital Secured Lending Role

At Finnu, we decided to add physical collateral to the 100 percent digital consumer loan setup. We lend against our users’ smartphones, without the need to physically collect them. In a nutshell, we have the capacity to remotely limit the device usage in case of a missed instalment. In exchange, we offer loans with higher acceptance rates and lower interest rates compared to other digital lenders.

This is the goal, isn’t it? To offer a solution that most can use. Giving (almost) “equal access to opportunities to access financial services.” Obviously, we do not lend to users flagged as fraudsters by the industry or to borrowers with high indebtedness.

That being said, are we a financial inclusion stakeholder? Not yet, but we will be. To be of help and have a real impact we must:

  • Accept cash payments/disburse loans in cash so we digest existing cash-based borrowing behaviors. That’s in process and happening soon
  • Scale
  • Reach borrowers without any options for personal loans other than offline pawnshops and help them access liquidity and build/improve their credit scores
  • Enhance our model to be even cheaper than we already are (when we launched, we were several times cheaper than some unsecured digital lenders) 

Every startup’s end goal is to have an impact. Our mission is to offer equal access to financial products.

Photo by:   Piotr Godzinsky