Greta Bull Puts Financial Inclusion Into Context

By Paul Tierno and Linda True

In episode two of our series Financial Inclusion & Beyond, we spoke with Greta Bull, the chief executive officer of CGAP (the Consultative Group to Assist the Poor) and a director at the World Bank. Greta is an expert in development finance, primarily focused on small and medium enterprise finance, microfinance, and digital financial services.

We sat down to discuss the history of financial inclusion efforts and the evolution of the financial inclusion movement, the micro and macro effects of inclusion, and lessons learned from various efforts around the globe. Key takeaways from the discussion include:

  • While global inclusion efforts have taken different paths, they all seem to be converging at the ‘platformization’ of financials services. The modern financial inclusion movement evolved from microfinance in the 1970s and 80s in countries like Bangladesh and reached scale with the creation of digital credit by the mobile network operator (MNO) M-Pesa in Kenya in 2008.
  • Today, fintechs and banks have been competing across a disaggregated landscape of financial services and are moving to new platforms that offer a range of competing services to the public.
  • Financial inclusion has traditionally meant the inclusion in formal financial systems of poor people in emerging markets. Effectively done, it provides access to financial services to people who previously didn’t have them; establishes a viable and reliable alternative to working entirely with cash; and adds value to people’s lives.
  • Financial inclusion can significantly improve individuals lives. Efforts over the past decade have been effective in bringing 1.2 billion individuals into the formal financial system, but 1.7 billion remain excluded. There is still work to do, both in expanding and deepening inclusion and harnessing these efforts to expand global growth.

Please note that the initial interview was recorded prior to the onset of the COVID-19 crisis.

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Transcript

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Paul Tierno:

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

Linda True:

And I’m Linda True. Welcome back to financial inclusion and 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 speak with Greta Bull, the CEO of CGAP, the Consultative Group to Assist the Poor, which works to ensure that financial services meet the needs of the poor.

Greta Bull:

We need to kind of move towards a situation where we’re mobilizing the resources in an economy to contribute to growth. You start getting money into those ecosystems, and that’s what helps fuel growth and job creation. So I think we’re still really at the beginning of this journey. And what we do know is that deeper financial systems do facilitate growth. So what we need to start thinking about is how this massification of formal financial services can do to drive growth in markets, rather than just consumption.

Paul Tierno:

In our first conversation with San Francisco Fed president Mary Daly, we talked a lot about the motivation for the series, why the Fed cares about inclusion and why we think that you all should care as well. Not surprisingly for a domestic policy maker, Mary grounded much of that conversation in the American experience. What’s going on in the US. Today’s episode with Greta Bull is something of a different field. It focuses much more on the international experience, where to be quite frank, much of the foundational work and inclusion has historically taken place. And this conversation is really important. It lays the groundwork for the rest of this series and introduces a number of concepts and tools that we’ll discuss in future episodes.

These concepts transcend geography, and we’ll see how they’re applied across the globe from Asia and Africa, to literally the streets of the mission here in our backyard in San Francisco and Greta is definitely the right person for the job. Greta’s experience in the field has ranged from development finance, to micro and small business, and digital finance, and through that lens, she talked with us about the evolution of financial inclusion efforts from the very early stages of microfinance in Bangladesh to the development of digital credit by mobile network operators, namely M-Pesa in Kenya, and she also talked about the ongoing technological innovations being done by global fintechs.

Linda True:

But according to Greta improving financial inclusion, regardless of the technology used must include three key elements. The first and fundamental goal is providing access to financial services to people who previously didn’t have them. Secondly, it’s about making those services relevant to people so that they see value in using them rather than working entirely with cash. And third, it’s making sure that those services add value to people’s lives.

Paul Tierno:

Greta notes that while financial inclusion initiatives from around the world have been heterogeneous, they all seem to be converging at the same place of large scale interoperable platforms where different parties, whether they’re banks, fintechs, mobile network operators, can plug and play to get their services out to the low income community.

Linda True:

The resilience of robust platforms and coordination among various players in the ecosystem is especially important today. The pandemic has stretched and exacerbated the normal difficulty of making ends meet. This has increased the need and case for elegant technological solutions, as well as uninterrupted access to financial services.

Paul Tierno:

As with some of our other episodes, we’d note that we recorded this interview before the outbreak of the COVID-19 crisis. Okay. Here’s our conversation with Greta. Welcome, Greta, and thanks for speaking with us today, perhaps just to level set. Can you tell us how you define financial inclusion?

Greta Bull:

Thank you so much for having me today. I actually think this is a great question to start with, because what we’ve seen is as the term financial inclusion gets wider attention, it’s the original definition ends up getting quite stretched. So for CGAP, when we talk about financial inclusion, we mean financial inclusion of poor people, generally in emerging markets. We think about three dimensions. First is providing access to financial services to people who previously didn’t have them. Secondly, it’s about making those services relevant to people so that they see value in using them rather than working entirely with cash. And third is making sure that those services add value to people’s lives.

If you take some of the payments services offered by mobile wallet operators in places like Africa and South Asia, those accounts offer a safe place to store money. They help users to send money over long distances reliably, and at low costs, they save people time and reduce the risk that money will get stolen or otherwise disappear. Once you have those mobile wallets in place, it’s sort of a foundational layer where you can start putting other services on top of it, like credit, like savings like insurance, because you get data trails created by those payments services. And so we’re creating an ecosystem for low income people to come into the formal financial sector. That’s the way we see financial inclusion.

Paul Tierno:

I was wondering if you could talk about the varying ways countries are going about promoting financial inclusion. So something that we sort of see when we dig into this topic is that just as there are different phases of economic development, there are also different levels of financial participation. Can you talk about the efforts to boost financial inclusion and what it looks like in different parts of the world?

Greta Bull:

It is actually really heterogeneous the way this has evolved in different parts of the world, but interestingly, we’re all kind of converging in a similar area, but taking different pathways to get there. So just backing up to kind of the very beginning, which was really in the seventies and eighties with the microcredit movement, that’s how we got into this space. So micro finance started in places like Bangladesh, Bolivia, Peru, and it was a way to get financial services, mostly credit, in those days into the hands of poor people. And that idea got picked up. It was very popular for awhile and it’s spread across the world and it’s been pretty successful in a lot of places, but it has always had difficulty reaching scale, and where scale ended up getting cracked was actually in Kenya when M-Pesa came online. So M-Pesa is a mobile wallet service that really took off in 2008.

And what that was, was about sending money, essentially a giant cash management network, so it’s taking agents that could be mom and pop corner stores and people can bring cash in and have that turned into digital money that they can then send over a long distance to somebody in another town. And that person then goes to an agent and caches that money out. So cash in cash out really important principle for financial inclusion in a lot of emerging markets, you have to be able to turn cash money into digital money and digital money back into cash money. And that was kind of the central insight that M-Pesa brought to the table. And you saw that replicated all over Africa. You’ve seen it in places like Bangladesh, you see it Myanmar. And so that was kind of the second wave of innovation. Then you got big companies in places like East Asia.

So, Alibaba is the most famous, but you had an e-commerce company that essentially was founded on the principle of cash on delivery. So I would order something online. Somebody would bring that thing to my house. I would pay cash for it. And that eventually got reverse engineered into a payment system and then a financial institution, Ant Financial is a large financial institution that grew out of Alibaba. But then you saw things like Tencent and WeChat came out of social media and you’ve seen different kinds of financial inclusion type plays coming out of related industries. More recently, you’ll see things like Gojek in Indonesia where people do ride sharing and they get money into and out of the system there. And then credit gets layered on. So there’s been a lot of different innovations in East Asia around this that are all about platforms.

So it’s the platformization of financial services. And then the last one I would say is we’ve seen in India where there’s a different approach taken to this platform idea, which is to build public good infrastructure that can be layered together to bring people in the financial sector. So in India, what they did is they created the Aadhaar ID, many people had basic bank accounts, but then they turbocharged that with stripped down bank accounts in mostly state-owned banks. And then they built the unified payments interface, UPI, which is a payment system that’s owned collectively by the financial institutions in India, but anybody passing a certain licensing requirement can access. And that’s really turbocharged the payments ecosystem. They’re now looking at things like data sharing, and providing credit over that infrastructure. So, there’s been a lot of innovation out of India, but from a really different perspective with the government intentionally coming in and dry innovation in the public sphere with private sector players leveraging that.

So, it’s really heterogeneous, but we’re all headed as these large scale platforms where different parties can plug and play and get their services out to customers and to get out to low income customers, it’s really important to be able to plug into those larger ecosystems. And so the role CGAP plays in a lot of this is sharing knowledge on how these things or developing in different parts of the world and taking insights from Asia to Latin America or Africa to South Asia, and really trying to help foment that innovation ecosystem that we’re seeing emerging all around the world.

Linda True:

The fintechs and financial innovation you’re describing are really exciting. We live in exciting times and it’s incredible to see what’s happening. You mentioned earlier on about how financial inclusion used to be more targeted at credit lending policies. Are there roles that traditional financial institutions, such as banks, can still play in financial inclusion?

Greta Bull:

Yeah, well, they actually play a role in it today, right? So a lot of people think of M-Pesa and they think that it’s Safaricom, or MTN in other countries, or Vodacom, that money sits in a bank account. So the central innovation of what M-Pesa did was to say, “Look, it’s impossible for you, bank X, to bank all of these small accounts and hold that on your core banking, but we can be the front end for you. We bring that money into and take it out of the ecosystem through our cash and cash out network. But that money sits in a float account.” There’s basically a big escrow account that sits in a bank and a bank holds on to those funds on behalf of the customers. And so banks are already pretty well integrated into this. And you saw in Kenya, it was really interesting.

A small corporate bank actually quickly grew to become the largest retail bank in Kenya because they were holding that float account for M-Pesa. So the interesting thing that’s happening in the banking spaces that they’re involved in this, but in a pretty different way. And the financial services value chain is really getting disintermediated by this rise of technology rise of fintechs. And you see different players picking up different parts of that value chain, which creates a challenge for incumbent players because banks aren’t as nimble as some of the fintechs or some of the mobile network operators. And they can’t provide those services in the same digitally native way and have the same kind of user experience. They have a much heavier regulatory burden. And what we’re seeing is that banks are getting attacked on precisely the points where they have the most margin, where they make the most money.

Then they sort of turn into basic dumb pipes of intermediation. So you see the banks now fighting back and trying to provide this kind of service. And over time, we’re seeing these things get a little bit more knit together where banks do what banks do well, mobile network operators, or MNOs, do what they do well, fintechs do what they do well. And so there’s a sort of new level setting. And of course behind all this, you’ve got regulators trying to figure out, “Okay, how do I regulate this new set of financial institutions?” So, in a way, this idea of financial institutions participating in financial inclusion has stretched the meaning of the word financial institution as well. And so there’s a lot of work going on in the regulatory space to think about, “Well, how do I regulate a payment service provider? What’s different about that? How do I regulate somebody who’s doing digital credit? How do I even track what’s going on in digital credit? Because that has pretty big implications for my economy.”

And so I think there’s a reshifting of the balance in terms of how financial services are being delivered, but banks are still pretty heavily present at the backend. I think what they’re trying to do is figure out how to get back at the front end in the middle. And we don’t a hundred percent know where that’s going to play out. And I think that poses a really interesting challenge to more traditional incumbent banks.

Linda True:

Do you see any particular roles that financial institutions should be expanding into?

Greta Bull:

Well, I think that varies from country to country. So it’s kind of hard to generalize. Let’s just take it an African country. Banks haven’t done that in Africa traditionally. And it’s interesting if you look at Kenya, there’s been growth in bank accounts, along with growth in mobile wallets because they couldn’t figure out how to serve the mass market. So a lot of African banks basically are in the business of taking money from large depositors and lending to governments. So, governments borrow heavily in a lot of emerging markets. What M-Pesa did was really sort of crack open the competitive dynamic in a place like Kenya. And we’re seeing this play out in other markets where banks went, ah, there’s an opportunity here. So you see them getting in. They might be getting in through partnerships. And M-Shwari was the partnership I was referring to before where M-Pesa partnered with the commercial bank of Africa.

And they created a small savings, and lending product. And that was really where digital credit started as well. And so that is a savings account, and a credit account for lower income borrowers. So banks still play a really important role intermediating in an economy. If you look at some markets that’s pretty much a few large corporates, it’s the government, maybe some microfinance, especially if there’s a directed lending mandate in that market, but we’re not in a lot of emerging markets really leveraging the full capability of the banking system. And that, I think, is what some of this new innovation in retail finance is helping us to do. And I think actually we’ve really only started thinking about how we can use it for broader economic development.

Paul Tierno:

So it’s interesting to hear you talk about the trend of greater disintermediation by fintechs and how there’s been a balance of shift away to a certain extent from traditional financial institutions, fintechs often try to target the underbite. Is serving the underbite part of financial inclusion? And to be proactive, is it more important to serve the unbanked or the underbanked?

Greta Bull:

I think that question resonates a lot in more developed markets like the US where people are sort of under-banked, they might not use the banking services they have access to. Frankly, in a lot of emerging markets, people just don’t have access to a bank at all. So, I used to live in Peru, right? And if I had my money in a bank and I have a bank account in South Africa, too, it happens there. If you didn’t put more money in, it would just get whittled away through fees. There’s a lot of fees on banking, so people don’t trust the banking system because the banking system doesn’t show them particularly any value. So what people do is they hold their money in cash. And particularly in poor emerging, most people are just completely excluded from the financial system entirely. So if you look at the World Bank Findex survey, which is sort of the best estimate we have of levels of bankness and under-bankness, 1.7 billion adults are still completely excluded from the formal financial system, which is about 31% of adults.

They don’t have access to an account at all. Now, in the last 10 years, the financial inclusion community has done a pretty good job of including people. So, it used to be about 2.9 billion people we’ve included 1.2 billion in the last 10 years. So we’ve really brought that excluded number down. But within that 1.2 billion, there are a lot of under-banked people. So I frankly think we need to do both. And the way the financial inclusion community thinks about it is, okay, how do we get people into the system? How do we get them access? But then the next challenge is usage. And a lot of the sort of new operators like the mobile network operators in Africa are really focused on getting usage rates up because for that expensive cash in cash out infrastructure to work for them, they have to have a lot of volume over the system.

And if all people are doing is sending money home once a month, that’s not enough to make that system stack up. So they’ve got to layer on different kinds of services to the infrastructure that they have, which is why an MTN in Sub-Saharan Africa is looking at integrating fintechs through open APIs into their platform so that they can deepen the services that are provided over it. So it’s not really an either or it’s a progressive case of access and then deepening with usage. So, with access, you get sort of a broad bunch of people coming in, but then you’ve got to really deepen it with usage. And that’s where this issue of value really matters. If people don’t see value in having an account, they will not use it. And so I think where the fintechs are coming in is sort of seeing other ways to make money and bundling things together, right?

So, data really changes the equation. If I make payments or I make money transfers a provider can see those data trails and say, “Hey, this person looks like they might be credit worthy.” They can then give me a credit. And so digital credit started with these kind of spray to play moves, where they would go in and provide a tiny, tiny credit to every single mobile money account holder. And then subsequent rounds, if it gets repaid, you get another loan and then they can sort of build up a data trail and see whether that person is credit worthy. And so by putting people on the map, you can start delivering a wider variety of services and then deepen that engagement with the system. And you don’t have to charge people fees necessarily because you’re making money in different ways.

So, if you look at what’s going on with UPI in India, a lot of big providers like Google, Facebook, others are coming in to provide payment services over UPI. They’re doing that at no cost. And in some cases they’re almost subsidizing merchants to use those payments because what they really want is the data trails on those consumers, both for credit purposes, but also for things like adjacencies advertising purposes. And so, although there are questions about how that data can be used in a market like India. So that’s still working its way out, but by bundling things together can make it affordable to get all the way down to lower income people who you wouldn’t have been able to bank before.

Paul Tierno:

So you talk about how success for fintechs is really about more than just access, but usage. So, to a certain extent, it seems as if fintechs need to drive volume, can you talk about the type of coordination it must require between a fintech, a bank, and then vendors in markets that have traditionally been completely cash based?

Greta Bull:

Yeah, well, it’s still kind of clunky, right? So, I mean, when you have a fully integrated system, like the system that M-Pesa has with CBA and now another big bank in Kenya, KCB, it’s reasonably a deep relationship, but the problem has always been for fintechs, going to a Safaricom, M-Pesa and saying, “I’m a little fintech and I want to integrate to your system. And I then need to be able to get paid by you. I need to have a seamless user experience.” It’s painful. It takes months to integrate into those big mobile money systems. So it’s a pretty awful experience and ends up being a pretty awful experience for users. So if you think the way the app store works, that happens through APIs, and it happens through sort of self service, open APIs where a smaller company can just put something up on the app store, if they meet certain conditions, there’s a whole bunch of stuff that goes on in the background.

That’s where a lot of these guys are heading. So I talked a little bit before about how MTN was experimenting with open APIs and CGAP worked with them on this, and that’s what they want to be. They want to turn into an easy to use platform where a fintech can integrate in a matter of hours or days rather than months, and get their service out and get paid through that platform. And then they start generating a kind of virtuous circle where more and more services come on more and more fintechs have an incentive to deliver those services and more payments and other services start running through the system. The thing that is interesting about what India has done is that they started with that infrastructure, right?

So they said, “Right, we’re going to have an interoperable payment infrastructure, anybody who qualifies can join.” And what you’ve seen is a massive uptick in volumes over that. And so they have made different licensing regimes and different integration to that system that has created a pretty important proliferation of services in India because, hey, it’s a big market, right? And the other thing that’s really interesting about that India experience is that they built it for competition. So in China, what you see is pretty much winner takes all. I am Alibaba, or Ant Financial, I’m going to just grab as much of that market as I can. Very similar to some of the big techs here, right? Facebook, or Google, or Amazon it’s about market share.

What India has done is said, “Right, we’re going to create this public infrastructure where it’s interoperable from the start. We’re going to create some rules of engagement around that. And then you guys can join and you compete on the quality of your service.” And so it’s, it’s flipped the dynamic in a slightly different direction, but it’s also based on API’s and a smooth movement of both payments and data through that system. And now the challenge is coming out of that are, okay, what are the rules around sharing of data and what are the privacy rules around sharing of data? And what does that mean for consumers? What does that mean for businesses? And India has been really grappling with that issue of privacy as has the European union.

Linda True:

While we’re on the topic of financial inclusion, what it means for the individual and what it means for systems, and for countries, financial inclusion can be seen as a win-win situation. A win-win for the individual and win for the national economic growth, would you agree with that?

Greta Bull:

It’s clearly a win for individuals, and we can talk about that in more depth later, but I think frankly, we’re only just at the beginning of this. So, in emerging markets, what financial inclusion has done in the last 10 years is to get money off the sidelines. So if you’ve got cash in the system, it plays its role, but it’s not got the same kind of multiplier effect that you have when you have digital money that moves quickly through a larger financial systems. So, mobile money turned cash into digital, and that means it’s part of the larger formal financial system. Over the last few years, you’ve seen countries start to talk about the percentages of GDP that run as payments over their systems. That’s a little bit of a funny measure, and I’m not sure it sort of indicates contributions to growth, but it does give you an indication of just how much money is flowing through these digital ecosystems.

But as I said before, we’re not really fully taking advantage of this in a way that measurably increases the national economy or growth. So just to give you an example, I talked about these large float accounts that sit in escrow right now. They’re just sitting there. Nothing is going on with that. Sometimes in the case of M-Pesa, it actually goes to a charity and the interest on that float is used for charitable projects. In some cases it’s kept by the banks. In some cases, it goes back to consumers, but it’s not really being leveraged for growth in the economy. And it’s a big amount of money actually. And then you get things like digital credit where there’s a viable business model, but they charge high interest rates. And what we’re talking about is really subprime lending. That plays a role too. And I don’t want to diminish that, but it’s not putting that money to work for growth, right?

And so we need to move towards a situation where we’re mobilizing the resources in an economy to contribute to growth. So what if we thought more about those float accounts as small savings accounts and have some intermediation of those funds, maybe under stricter rules, because it’s a call deposit, right? But that would put a lot of money into play in the economy then better digitization of payments through things like merchant payments. If we were taking payments from merchants digitally, we would then see what the cash flow of that business was. And we could start lending to those small businesses on the basis of real cash flows instead of what they do with their friends on Facebook, which has been very fashionable for the last few years. But cashflow based lending is good MSME lending. And then you start getting money into those ecosystems and that’s what helps fuel growth and job creation.

So I think we’re still really at the beginning of this journey, and we’re not yet thinking fully about how we can leverage what mobile money or digital financial services have done. And your regulators are really starting to come to grips with what all of this means. They’re thinking about more flexible licensing regimes. They’re thinking about how to supervise it. They’re thinking about what to do with these float accounts and thinking about how to deepen financial systems, because what we do know is that deeper financial systems do facilitate growth. So what we need to start thinking about is how this massification of formal financial services can do to drive growth in markets rather than just consumption.

Paul Tierno:

So earlier you talked about a trend of greater dissemination by fintechs and a shift in a balanced to a certain extent away from traditional financial institutions. But we know that even in markets where fintechs have grown that traditional financial institutions, namely banks, remain big players. So I’m wondering if you could talk about how banks can benefit from financial inclusion. Are there reasons for banks to take financial inclusion initiatives on their own and not strictly from regulatory prodding?

Greta Bull:

I think they are. Sometimes I think the regulatory requirements can help. They can be pretty terrible too. And I’ve seen a lot of distortion in, in some of the MSE and SME lending space, but I think there are ways that banks are already getting involved, right? So, we already talked about the float accounts. They hold those float accounts. We could probably do more with the float accounts. Digital credit banks are getting into, so it’s not just fintech providers you saw in Kenya, for example, when interest rate caps got imposed on regular lending, but not on digital credit, the banks moved into digital credit. So they will go where the money is, and they are making money off of these products. But serving low-income people can be really challenging from a commercial perspective, which is why people are excluded in the first place. Micro finance helped get at this, and actually there are fintech businesses out there that are really building new models that serve low income people and do it sustainably.

We see that, for example, in places like Peru and India, where we have specialized licensing regime. So, Peru has been at the microfinance game for decades, and what’s really great about the way they do it is they have a progressive licensing regime where you start out being just a basic microcredit lender, and you can only do a few things and you can go all the way through to a full banking licenses and you progress through multiple stages. And that’s really helped make microfinance mainstream improved. And what you’ve seen is that the biggest banks in Peru have bought microfinance operations and they maintain them separately because there was a prior history and this is where banks get into trouble. Microcredit doesn’t necessarily get you the best returns, so what would happen is they would buy these microfinance entities and they would then sort of dissolve and eventually turn into consumer lending because consumer lending is easier than micro lending, right?

And so what they’ve done now in kind of the second wave of absorbing microfinance institutions, is they’ve held them as a separate thing, so that they’re accounted for separately, and they’re full service banks to those lower income populations, and that works. And so I think we’ve learned a lot of lessons. You can look at India where they have specialized banking licenses. The smart money has started going is in the small business bank license. So, in India, you’ve got a combination of directed lending saying, right, you have to send a certain proportion of your balance sheet has to go into low-income segments, agri, and things like that. So what you’re now seeing is a group of financial institutions that specialize in that and are good at it and can make it work. And then the bigger financial institutions then wholesale into them and they do the front end. So, again, it’s piecing these parts of the financial system together in different ways so that you can actually affordably get those opportunities out to low income people. And so we’re seeing this emerge in different ways in different markets, but it is happening.

Linda True:

So you touched upon this already in your answer, but I wanted to draw more of a comparison and contrast with the US. So the financial inclusion practices in Asia and the US are quite different. You could say that the US is more focused on preventing exclusion, while Asia is more focused on proactive inclusion. So in the US you have red lining rules, which aim to protect against discriminatory lending based on the neighborhood you live. In Asia, you have the credit and loan policies such as micro lending and state directed funding as you already described. So what is your take on the effectiveness of these different approaches?

Greta Bull:

Well, I think they’re trying to solve different problems, so I’m not sure you can compare what’s going on in the US with what’s going on in Asian markets, because one really is making sure that you don’t exclude people on the basis of a thing about them, which is race or neighborhood or whatever you’re trying to manage for. In most emerging markets that the main discriminatory factors, because you’re poor and I can’t make a commercial case stack up. And so I think the difference is that there is active promotion of getting it, particularly in India, actually getting active promotion of getting credit or other financial services into the hands of low income people. And I think it does have a mixed track record. And I don’t want to say it’s perfect, but there are things that can be done to encourage banks and other financial sector providers to get out and lend to the poor.

I don’t know that directed credit, I’ve seen it be very distortionary in many markets where it crowds out the commercial sector. I think it’s really about finding ways to crowd in the commercial sector and make it possible for them to do it. So, again, licensing entities that are motivated to enable to reach that segment, finding ways of connecting them with the larger financial sector. I mean, it’s not rocket science, but it needs to be thought through carefully, so you’re not distorting, you’re promoting. A lot of countries don’t have good ways of measuring that. So we talked earlier about digital credit. Digital credit is something where banks can obviously make money getting these credits out to people, but what’s happening is that there is a subprime credit bubble emerging in places like East Africa, because that is the one place that people can make money.

And so you’re seeing a lot of lenders competing for the same bars who aren’t particularly sophisticated, pretty strong evidence, that there’s a problem of over-indebtedness in those markets, and actually regulators not having any data on what’s going on. So, I did some work about a year ago on Zambia because Zambia actually has data that the regulators gathered on how their credit markets evolve. If you look at what happened, basically, in about 18 months, Zambia went from almost no retail credit in the market to 40% of the lending in any given quarter being digital credit. We know that the problem is even more in places like Kenya and Tanzania that have been at it longer, but they don’t actually know quite how much digital credit there is. And so if you can’t actually measure it, you can’t monitor. Is digital credit going to make the entire financial system fall over? Probably not.

And so the supervisors don’t necessarily pay attention to it because they’re focused on systemic risk, but from a consumer protection risk, and just what that means for your financial system, not knowing that is kind of a problem. And so we’re starting to see countries that are experiencing a big growth in digital credit, starting to look at that pretty closely, but then the problem becomes who’s on the hook? Who’s the lender? The mobile network operators, the channel, somebody else is taking the credit risk. So, there’s this whole chain that’s getting more and more complex. And we’re even starting to see gig platforms or e-commerce platforms that are embedding credit in their offering. And so we’re seeing this kind of proliferation of credit products through the system without really being able to track it back to who’s taking the credit risk and who should be reporting on that, so we even know what’s going on.

Paul Tierno:

Based on your work in Africa and South Asia, what are some of the lessons learned the rest of Asia and the world can benefit from?

Greta Bull:

Yeah, there are lots, but let me just give you a few. And some of them we’ve touched on already. Cash in cash out is really important when you’re serving the poor and we always forget about it. So everybody thinks about this as technology, but actually it was all about getting cash into and out of the system. Most people in emerging markets operate in cash, and if you can’t digitize it and de-digitize it, people stay in cash. And actually my one sort of concern about India is that they didn’t get the payments bank license, right? And so the cash in cash out infrastructure is not there. And I think there’s a real concern about India being pretty heavily focused for now on the upper income segments. And I’m not sure it’s actually getting down to the lower income segments. We don’t know, but I think we can intuit if people can’t get cash money into and out of the system, that’s a problem.

So cash in cash out is vitally important and it’s really expensive to run, so GSMA, which is the industry association for mobile network operators did a study a few years ago and looked at, I think, 10 of the most sophisticated mobile money operations in the world. 54% of their total revenues were going out in terms of merchant commissions. That’s expensive. Finding ways to make that more efficient, finding ways to make that more interoperable and bring the cost of that cash distribution out is going to be really important because the cost of cash is born by us publicly, right? Governments pay for cash distribution. And so in a way what mobile money and the digitization cash has done is to privatize that function. And it’s expensive. So cash in cash out is foundational and really important. The next is that you need these big platforms because to get that scale, you need both interoperability and you need things like payments, APIs, data APIs, things that connect those ecosystems.

And so you need to get that scale. And that scale needs to be bigger than generally one company provides, but then you need other providers to come into those platforms to deepen and make those ecosystems richer. And so finding ways to bring fintech innovators into the system is really, really important because one big provider, it’s pretty hard for them to innovate on every front. And so creating diverse ecosystems is important. And then, finally, consumer protection. Vitally important. This stuff is moving fast. Regulators and supervisors are having a hard time keeping on top of it all. They’re doing a reasonably good job, but it’s hard and they’re not as well resources, they probably ought to be. And we often think about consumer protection in terms of financial literacy, financial education, and that’s important, but we often sort of think in terms of financial health and sort of putting the burden or the entirety of that challenge onto consumers.

We believe that it’s the shared responsibility. So providers really need to be holding themselves to responsible finance standards. And there are some standards out there, but it’s really important to build responsible financial practices into provider business models from the start. Regulators need to be watching this because not all players are operating according to responsible finance standards. And there’s a real risk of a race to the bottom, especially when we’re serving the poor and beyond that data protection and privacy, as we get into data-driven business models is just going to become more and more important.

Linda True:

I wanted to follow up in your answer on financial usage. And I think we would all agree that opening a bank account is not enough. It’s how you use it and how well you use it. And part of that ties into financial competency. What would it take to get the consumer to be financially competent assuming we have regulatory support and educational systems and all that built out?

Greta Bull:

So, there’s a lot of interesting work and discussion here in the US on financial health. And I think that’s a really important paradigm. So it’s a lot about giving people tools that they can use to manage their financial lives better because people often, very educated people, don’t necessarily have good financial management skills. So there really is a need to educate consumers and technology can help doing that, but you and I have smartphones. If you’re dealing with a feature phone in Africa, you may not even be literate. That starts becoming a pretty big challenge. So we do need to find ways to build capabilities of low income people in emerging markets. But there’s a pretty long history of financial education classes and training for entrepreneurs that doesn’t always have the track record. It’s still important. It still needs to be done.

One of the reasons we believe that providers have a responsibility and then regulators have responsibility to make sure providers are doing that is to make sure there’s decent market conduct, because you can’t expect that a poor person who may be illiterate, who may be innumerate is necessarily going to come to this with the skills to deal with it. That’s not to say that poor people aren’t good money managers. In fact, there’s been a lot of work on financial diaries that tell us that poor people are actually very expert financial managers, if they are operating in cash and they control how they’re engaging with the known financial system. But what happens when you start bringing some of these new products into the market, especially digital ones that are increasingly available as you put poor people at risk.

So that takes some of that control away from that person and puts it someplace else. And the reason that poor people are really good money managers is that their margin for error is really, really small. If you earn less than $2 a day, you can’t afford to have any of that money go astray, and so it’s really important that responsible financial practices are built into these services from the start, because you’re dealing with people who don’t have any margin for error. And so by changing the way we engage with the financial system, we have to put in place the right safeguards in these new systems to make sure that we are good stewards of the money of these very poor people.

Paul Tierno:

This has been great, Greta.

Greta Bull:

Thanks a lot, it was really interesting speaking with you today.

Paul Tierno:

We hope you enjoyed our conversation with Greta. It sets the stage for the rest of the series. Greta highlights, how far we’ve come in efforts to include the poor in the financial system.

Linda True:

She also reminded us that nearly 2 billion adults remain excluded, and since this interview, the global pandemic has shown how tenuous financial inclusion is for many and how it disproportionately affected the most vulnerable are so access to financial services is not something to be taken for granted. There is still much more work to be done, but Greta paints a hopeful picture.

Paul Tierno:

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

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