Arjuna Costa on Designing Financial Products for the Unincluded

This is Pacific Exchanges, a podcast from the Federal Reserve Bank of San Francisco. I’m Cindy Li.

And I’m Sean Creehan. Welcome back to Financial Inclusion & Beyond, an ongoing exploration of what we can learn from efforts around the world to improve financial inclusion and wellbeing. In today’s episode, we spoke with Arjuna Costa of Flourish Ventures, a venture firm focused on financial health.

I met a woman who runs a small shop in the front of her house, asked her how she saved. And she went into the back of the store into her house and she brought out five different boxes, plastic and tin boxes. And there was a little bit of cash in each of those boxes. Each of those mini accounts that she keeps in her head had a very specific purpose. One was school fees. One was a new school uniform. One was a niece was getting married. So her mental model of money and savings was complex, but it met where her life was. For years we’ve gone to her and said, “Open a bank account. It’s very secure. The bank is 10 kilometers away and by the way, the bank closes at three o’clock so you’re going to have to come back the next day if you really need the money.”

Arjuna has a depth of experience working with entrepreneurs, bankers, and policymakers, to find innovations that improve the financial and economic health of the world’s poor. He talks a lot about the importance of financial access, empowering people to pursue economic opportunity. And he drives home the point that for too long, the financial sector has thought in terms of standardized products that do not always meet the needs of customers. As he tells us, people do not think and dream in terms of access to a bank account. Instead, they think about their life aspirations, putting their children through school, buying your home, or saving for their retirement.

Yeah, and as we talked about with Arjuna, sometimes it can be as simple as connecting a very real and personal asset, like someone’s gold jewelry, to a more modern financial product that increases the family’s liquidity and return on savings. It’s also about helping people connect their life goals to financial behavior and getting rid of all sorts of existing frictions from daily stress or product design or unintended consequences of regulation that can get between our good intentions and actual behavior.

And there’s clearly a lot for us to learn here in the United States, particularly as we navigate the ever increasing digitalization of financial and economic life, as we emerge from the pandemic.

As with our last episode with Greta Bull, we’d note that we recorded with Arjuna before the outbreak of the COVID-19 crisis, which has emphasized the need for social safety net and fiscal supports to provide the income smoothing that promotes financial resiliency when times get tough. We’ll share some more thoughts there at the end of the episode, let’s get to the conversation.

Maybe we could start off by getting a brief explanation of your own interest in the broader topic of financial inclusion and wellbeing and what work you do on this topic.

I’m a managing partner of Flourish. Flourish is a venture firm, investing in entrepreneurs whose innovations help people achieve financial health and seize economic opportunity. So we back bold ideas, new business models that responsibly harness the power of tech to build a fair customer-centric, financial services sector. We’re an evergreen fund. We invest in early stage ideas. We deploy patient capital and take a very long-term perspective.

For the benefit of the audience, could you share some examples of fintech and digital financial services, how they help build and improve economic resilience of households and individuals around the world?

Sure. There’s a large body of evidence that shows that access to formal financial services helps build economic resilience. For a long time, the sector has been thinking very deeply about this idea of financial inclusion. How do we bring more people into the formal financial services’ sector? But by definition, inclusion is narrow. You’re either excluded or included. Over the last few years, that consciousness and the narrative has changed. It’s moved away from this idea of inclusion towards a more holistic idea of financial health, financial wellness, economic resilience as you said Cindy.

We think about financial health and economic resilience on three dimensions. The first is on a very short-term basis, allow households to withstand the volatility of day-to-day cash flows. If you look out a little further, we need to build resilience. Families, at some point in the year, have an economic shock. How do you allow them to withstand that shock? If you look further out, everybody wants to take advantage of economic opportunity. If you ask people what their aspirations are, they may not talk about it in terms of financial services, but in terms of life events, they want to put the kids through school, buy or build a house, save enough to retire. Those are longer-term aspirations, but there’s a set of financial products and services that match against that. So if you think about this idea of financial health, you’ve got to think across these dimensions.

It sounds in some ways it’s like a hierarchy of needs in some sense of basic food and shelter, and then broader human requirements. So survival on one sense of day to day, and then thinking more broadly.

Absolutely. And we know that families, because of this short-term volatility and uncertainty, they’re under a tremendous amount of financial stress. And the financial stress translates into poor decision-making and poor physical health. By giving them these tools, to your point, Sean, to match that hierarchies of needs, we can have a huge impact on their lives. How do we get there?

It’s a continuum of products and services from payments, credit, savings, insurance, asset accumulation, and asset management. We know these tools. What’s tech done to change this equation? The penetration of mobile phones and smartphones in particular has really changed the game. You layer on top of that, the reach of social media, the advent of all of the big data analytic capabilities, artificial intelligence, natural language processing, machine learning, and then cloud computing. You can now launch a business and get it to scale across the market at a price point that was un-thought about 10 years ago, but that’s only half the picture in my mind. Over the past decade, we’ve actually built a customer centric view of financial services and have a deep understanding of customer behavior. For a long time, we’ve taken a provider and product centric, view of financial services, open a savings account it works for you, that often doesn’t match up to the complex mental accounting that people in the mass market do to make their financial lives meet.

So we’ve gone deep into understanding that behavior over the last 15 years, a number of prominent economists have really advanced the field of behavioral economics, which allows you to take that behavior, nudge it for the better. And then we’ve got this idea of how do we build products with very user centric, design, rapidly prototype those designs, get feedback from the customers, iterate on it. That virtuous cycle overlaid on the technology that I talked about earlier is really where magic can happen. And fintechs, good fintechs are in that overlap, building products and services that really can contribute to these ideas of financial health and economic resilience across the globe.

Could you share some concrete examples about your success stories in Asia and global-wide?

Maybe I’ll start with Asia to your question. Health insurance in India is very complex. We’ve got an investment in a company called Affordplan that helps people save up for planned major medical expenses. And what they do is they negotiate with hospitals to give you a big discount because you’ve done this periodic savings and it’s scheduled. It’s suddenly brought this one time, big expense. It’s broken it down into bite-sized chunks over time that people can be very disciplined and save for. Similarly, there’s a company called Scripbox that we’ve invested in India. It’s a digital-only, mobile-first retail broker. So it helps first time investors save small amounts of money and access the broader stock markets. Actually, it allows you to beat inflation with your savings.

If we think about Asia in general, there are a couple of really interesting themes and trend. Asia accounts for half of the world’s internet users. Majority of them have come online in the last decade and are mobile only. And there’s been a big unbanked problem. And we’ve made huge strides against that. If you think about that broad picture and how it’s played out, there are three different models that have come up. We know that in China, the financial inclusion picture have been dominated by companies like WeChat, Tencent and Alibaba and Ant Financial. India has taken a very different approach. It’s been very much driven top-down by the government who’s built this technology stack, starting with a biometric ID for a billion Indians, 10 fingerprints, and two iris scans building on that as a fundamental layer that allows you to do eKYC. They have created this idea of an e-signature and a digital locker, connected that architecture into a unified payment interface that allows anybody to move money seamlessly across accounts, and then open that up to an API for innovators to build on. So, centralized model — quite different, but has had a huge impact on financial inclusion.

Southeast Asia has taken yet a different turn. You could argue that the largest retail financial services’ provider could be a ride sharing app, or what started as a ride sharing app that has now built out into a lifestyle platform. We invested in Indonesia seven or eight years ago into a company called Ruma. It was building last mile digital financial services for the mass market. Three years ago, we watched the rise of company called Gojek in Indonesia that started out as a ride hailing app for two wheelers. It built a mobile wallet into the app.

So all of a sudden the idea of financial services seamlessly tied into your everyday behavior. You could top up your wallet with the driver. You take the ride, that driver also functioned as a food delivery person. They then built out e-commerce logistics. Money became second nature. You were thinking about the things that facilitated your lifestyle. When we saw that trend, we actually approached Gojek, and there was an acquisition of Ruma by Gojek because they understood the importance of financial services to their future growth.

So can you talk a little bit about any failures that you have learned from?

You really had to ask that question, right? No, of course. We take early-stage risk in untested ideas. So the risk of failure is always high. We compound that by investing in emerging and frontier markets where the ecosystems are less developed. So at a macro level, we’ve had to deal with currency crises, unstable political conditions, uncertain regulatory environments (that numerous times), but more interestingly at a micro level, we find our portfolios full of first time entrepreneurs that increases the risk. There’s a lack of a seasoned mentor network. It’s harder to find talent. So there’s a number of micro risks in building an enterprise, but rather than focus on a single deal, I’d like to address one of the toughest challenges we face.

And I think we could have a robust conversation around this, which is the challenge startups have with working with large established financial service providers. We approach our investing from a sector change lens. We invest in new ideas that directly serve customers, help them build a better financial life. But more importantly, we invest in those ideas for the market demonstration effect. If you can prove that something’s possible, other applicators will bring it to their respective markets. But, we also invest in ideas to allow incumbents to build their contribution to a fairer financial system. Because incumbency in banking as a regulated industry has its benefits. So we’ve invested in a lot of tools and services to better equip the incumbent financial service providers to serve the mass market.

And this has been one of the most intractable challenges I’ve worked on. Every aspect of it is challenging. Even if you have the CEO to buy in to the idea, you’ve got to find the right person in the business unit, the more forward thinking champions inside business units get promoted and you lose them. And this happens time and time again. So you have to start rebuilding that relationship. Then you’ve got to work with internal budget cycles. So you build a relationship with a champion, they get promoted, you’ve got to start again and you’re in the next year’s budget cycle. So you’ve just lost that time. When you get through that, you’ve got to go through the procurement process, which is registering you as part of a valid service provider. Then you go through legal, then you go through IT. Then you’ve got to figure out how to renew it.

This is a long and painful sales cycle, and there’s a big mismatch between the urgency of a startup with limited cash dwindling every day and the urgency within a big bank who tends to be more risk averse. I think we need to figure out how to solve this problem, because as much as the fintech ecosystem is growing, we’ve gone across the globe well established banks with known brands with reach with capital that should be reaching the mass market yet the processes makes adopting new technology a real challenge, and I’ve seen a number of companies stumble on this. So I think if we could, as an industry, figure out how to foster creative partnerships and make it easier to have tech startups, build innovations and have big incumbent financial service providers take them to scale; I think we will solve some of our bigger problems around inclusion and financial health quicker than expecting some of these startups to scale on their own.

So one thing we have observed in Asia and also beyond Asia is that traditional banks, especially the large ones, they are doing their own internal push off innovation into digital financial services. An example would be Ping An in China, have they had any success?

A lot of banks in the emerging markets have lazy balance sheets; treasury bills are high. The rates they pay on savings are very low. The incentive to push further down market to innovate as a result is potentially lower, and their fundamental business models aren’t under big threat because the disruptors are still small. We’re still early in this whole fintech. What might spur a lot of action are players like the super apps coming out of China or Southeast Asia, these horizontal platforms that are starting to get so deep into the everyday lives of customers that they don’t even think about a bank.

My 15-year old son finds it absolutely incomprehensible that I take out a credit card because I get miles on it. I swipe it. And then I go home and I use my bank account because I’ve had it for dozens of years to pay my card. And then we want to watch a movie I use my finger to wake my computer up and login, right? So I think there’s also a generational shift in how we think about money that will drive a competitive response from the bank. To him money should just not be done by Chase and Citibank. It should be done by whoever’s the most convenient provider with the press of a finger.

So it’s interesting that specific example, Uber here in the United States has an expansion of its existing wallet and broader financial services that it provides to both customers. But I think particularly the motivation for them has been for their drivers. Is it reasonable to infer that some companies in the U.S. are learning from what’s going on in places like Southeast Asia?

Absolutely, Sean. That’s one of the most interesting things about the time and place, which is innovation is flowing back to the U.S. from markets like China, India, and Indonesia, the person who built a dominant position in ride sharing also built a dominant position in food delivery and in logistics and a number of other verticals. In the U.S., the markets are competitive that you had to specialize really quickly. Therefore, if you step back and think about it from a consumer perspective, you still have a wallet for your DoorDash. If they were to go into financial services, you have a separate wallet for Uber and a third one for Amazon and FedEx. So in markets where the infrastructure was less built out, the first movers have had a chance to leapfrog and integrate and go horizontal. That to me is much more seamless in terms of the user experience.

Does that integration enable more interesting solutions from a perspective of both inclusion, but more broadly wellbeing that we were talking about before?

I think so because these companies are collecting a ton of data on every user’s lifestyle and they have multiple touch points to them. So they can actually start to tailor products and services that actually meet your needs in the moment at the time that you need it. I think that is a huge benefit rather than seeing a siloed version of your financial behavior. And that hopefully will lead to greater innovation with financial health and economic resiliency as the ultimate goal.

Some of the companies you just mentioned seem to put a lot of efforts into building a ecosystem, but like a ride sharing company going into food delivery and as a kind of services going into people’s day-to-day lives. But I wonder what is your thought on the portability of data and information by customers across different networks.

We absolutely think that customers should have greater control over their data for access to the right sets of products and services when they need it. I think we’ve got a lot of work to do to get from where we are today, because it’s often sitting in walled gardens within different private companies, and it doesn’t really give an individual control over the data.

Are you seeing any interesting approaches to that question or that issue in some of these markets you’re working in, of course in Europe, a lot of people have heard about GDPR (General Data Protection Regulation) and here in California, there’s some emerging approaches more specifically to things like privacy, but to this idea of portability and ownership of data and how you can control your own data.

Europe has probably done more thinking than many other markets that we run across. GDPR for sure is a more thoughtful, forward looking view of the world. They’re also leading the way with their leadership on issues like open banking. What I do see is a number of the more advanced emerging markets, taking a cue from Europe, tailoring for their own market situations, but starting to mimic some of the regulation and the protections everywhere from Brazil and Mexico to markets in Asia.

Related to that, you mentioned Southeast Asia and some of the companies you’ve looked at there and been involved with there. That seems like a particularly challenging region, in some sense, the regimes to establish and protect rights around say data ownership, vis-a-vi Europe, where you have a common market. Do you see that as a barrier, or is that something just to be worked out?

Operating in regulatory uncertainty, whether it’s data or even more specifically around financial services and what you can and can’t do is one of the biggest challenges we run into as an investor in working with our fintechs and guiding our fintechs. We’ve learned from some of our colleagues who focus on issues like digital ID and protection of data as the number of fintechs proliferates, you’re going to have to compete on the basis of the value you provide your customers, but also on the basis of trust. Trust is going to be central to winning in this more and more crowded marketplace. How you handle data, being proactive, communicating your approaches to data privacy will become more and more important. The less talked about issue is the idea of data security. You might have the best of intentions to keep data private, but you’re still open to data breaches. How you use data and how you keep data is something we encourage portfolio companies and startups to proactively engage their customers with build a trusted relationship.

And also trust is not an issue that only FinTech companies needs to deal with after the financial crisis, the whole financial services industry are faced with this challenge of how to restore trust between financial services providers and customers.

Absolutely. Some of the biggest household names in the U.S. are not immune to some of the issues around data breaches and misuse of data. It is going to be a currency if you will, of service providers in general, not just the fintechs.

The tension between privacy and inclusion, from the perspective of some of these technologies leveraging a lot of that customer data you talked about before, how do we balance that desire to both include and expand participation in the financial system from those that have often been left behind with this right for privacy?

There certainly is a tension. If I’m a policy maker or a regulator in a market in Southeast Asia, where 50% of my population is excluded from the formal financial sector, I would probably be more inclined to open up the aperture to use of data that brings more people in. If I’m a customer in those markets, I’m probably more willing to trade off a little bit of data privacy for access to fair, trusted, reliable, affordable financial services. That said, I think we certainly need more thinking, more research done into customer attitudes to privacy. And I think we need to move towards a more common understanding of what it means for an individual to have agency over their own data, access it, control it, share it when appropriate, leverage it, and use it to get from our perspective financial services that are better.

Thinking about other kind of critical financial services, so savings and investment, and connecting back to that idea of wellbeing. So people have now a bank account in India, but driving participation in the financial system that helps them achieve their economic goals. What are the exciting technologies that you’re seeing? I mean, you mentioned some investments in companies that are targeting goal-based savings behavior. So is that a core of a lot of the innovation that you’re seeing is kind of moving away from this idea of just having a bank account, but actually having a specific financial tool for a specific financial economic goal, saving for college, saving for an education?

If I can tell a little story, this is one of my favorite anecdotes from my work. I was probably two hours outside of Jakarta in a little village in Indonesia. And I met a woman who runs a small shop in the front of our house and being a financial services’ geek I automatically fell into talking about how she uses money. And I asked her how she saved. And she told me to wait a minute. And she went into the back of the store into her house and she brought out five different boxes in plastic an tin boxes. And there was a little bit of cash in each of those boxes. Each of those mini accounts that she keeps in her head had a very specific purpose.

One was school fees, one was new school uniforms when the kid hit the growth spurt needed it. One was a niece was getting married and she needed to save for a wedding. She wanted a new refrigerator for her house. So her mental model of money and savings was complex, but it met where her life was. For years, we’ve gone to her and said, “Open a bank account. It’s very secure. The bank is 10 kilometers away. So just get in a bus and it’s a savings account and it will be there no matter what happens. And by the way, the bank closes at three o’clock so you’re going to have to come back the next day if you really need the money.”

There’s a huge disconnect between how she thinks about money and how we or the bank and the traditional service provider thinks about money. Today on a smartphone, a couple of smart programmers can build five different savings buckets, give you an icon that you can customize that matches the mental use of money and with a swipe of your finger, move money from one bucket to the other, the user centricity and the design of the product and then the ability to deliver it at a low cost over a digital medium is where there’s a lot of really exciting innovation happening.

Thinking about this digital financial service and its potential benefits in terms of our financial wellbeing we actually have an assumption embedded there, which is the basic infrastructure is there, internet penetration is there and the cell phone penetration is there. I wonder if there has been any concerns regarding whether there’ll be a widening gap between less tech savvy consumers or populations that do not have access to digital financial services versus a population with access to cell phone, social network apps?

There’s two sides to this. It’s both access and comfort with using the tools. My team and I were in Brazil earlier this summer. And we went with some researchers into some of the lower income neighborhoods, the favelas to actually meet with families and interview them about their financial lives. We met a highly resourceful, confident, successful woman who works as a cleaner and on weekends works as a caterer. She makes probably $4,000 a year. She has a bank account. She knows about the banking app. She doesn’t trust herself to use the app. So she relies on her sister-in-law who she says is more sophisticated than her who works at the local grocery store. At the end of the month, the sister-in-law downloads the app, does the three transactions she needs, shuts the app, deletes the app because she doesn’t trust herself to use the app appropriately.

And the gap between being natively digital, like all of us are sitting here in Silicon Valley, and somebody who might have access to the digital financial service, but doesn’t know how to leverage it, is quite vast. So there are places where some level of human interaction might still be necessary to get people comfort. There is a segment of the population that either don’t have access because of infrastructure problems or have these usage problems. It’s something we’ve learned from a portfolio company of ours that’s based here in Silicon Valley, but operates in Latin America, Asia, and Sub-Saharan Africa called Juntos.

They’ve built a communication platform whereby service providers, banks, telcos can use it to start warm, friendly conversations with their customers, particularly the newly banked. What they’re trying to do is bring back a level of warmth and personalization to an industry or a banking service that has become more and more digitized and remote. You really need to empower people, give them the agency to act on the choices they have and the comfort to know that action will result in the right outcome before we can actually think about saying digital financial services are ubiquitous and beneficial.

And this ties back to the trust issue seem to be a center piece of all this.

Yes, for me, it’s really about user behavior. People’s mental models around money, building trust, building confidence, building comfort. That’s when the relationship between the service provider and the user is at its best.

What do you think are the biggest lessons we can learn, whether thinking about financial institutions here in United States, or just from a policy makers perspective, to take away from a lot of these efforts around the world?

I’d start with this. What characterized the emerging markets for a long time has been the degree of informality. And what that has forced to do is it’s created micro entrepreneurs by necessity. These are people who would love to have a nine-to-five job and a steady paycheck coming in every two weeks, but instead are forced to be entrepreneurial, and figure out how to do two or three different things to put money together, what we now call the side hustle. Unfortunately, more and more people in the U.S. have economic and financial lives that look like that. And there’s been a lot of innovation and research done across the globe that can come back and inform innovators and policymakers in the U.S. as to how to deal with the uncertainty that this micro entrepreneurship by necessity creates. The global flow of ideas and innovation is only going to accelerate, and it is going to be a two-way street from the U.S. to other parts of the world and back here again.

But if we step back, we really need to think about financial health and wellness at a household level, but we also need to think at a systemic level, how do we build towards a fairer financial system that serves everybody, it fully fosters and promotes financial wellbeing and economic security. And for that, I think we need a number of things to come together at a systemic level. We need providers to start keeping financial health front and center and to build business models based on trust. I think we need public private partnerships to develop the enabling infrastructure that allows for things like the low cost payments. We need consumers to have greater control over their data and agency over their data another topic we touched on earlier. And, we want regulators to be able to work within a rapidly digitizing system and be digitally native themselves to lower the cost of regulation.

If we get there, we can envision a world where money is seamless and in the background, and we just live our lives the way we want to and everything that requires a payment or money in or money out happens frictionlessly. One last thought, which is financial services, digital, or otherwise in some ways optimize the money one has. We’ve got to think on two dimensions, one is upstream. How do we create greater economic opportunity? How do we increase the revenue so to speak flowing into this household account? Because that’s when you create greater resilience and financial wellbeing. The flip side of that is downstream. When the money’s not there, how do you build in the protections and the social safety nets that allow families to weather the bumps? A lot of this can be solved with financial services, but not all of it. So I think we’ve got to think along multiple avenues.

So I think you just painted the picture of financial actualization for us. Thank you very much for that.

Thanks for joining us.

No, thank you. My pleasure. Thank you for having me.

We hope you enjoyed our conversation with Arjuna. There’s a lot of exciting innovation going on around the world and user-centric design of financial products, and clearly U.S. tech companies are learning from the experience of their emerging market peers and imagining new financial services that meet the needs of customers.

Yes, and just the whole notion of stopping the extraction of financial tools. People want products that support and enable their lives. The journey to inclusion doesn’t stop when everyone receives a bank account or a mobile payment rail. And as Arjuna reinforces at the end, financial tools only get you so far if you lack basic income and savings. So policy makers need to be clear-eyed on the role of things like social safety nets and public investment in driving economic opportunity.

For more episodes like this, you can find us on iTunes, Google Play, Stitcher, and Spotify. And if you like what you hear, please do leave a review. Feedback from listeners like you will help more people find us. For even more content look up our Pacific Exchange blog available at frbsf.org. Thanks for joining us.