Posted on

‘In my world, it’s called theft’: How Ajay Banga wants to change inclusion

Count the CEO of Mastercard among those who think in-kind donations and financial aid systems are corrupt.

“We are in the business of killing cash. And so, who is the single biggest generator of cash in an economy? It’s the government paying its citizens and giving social benefits,” he said. “During the distribution of those social benefits globally, 30 to 40 percent of what’s distributed does not reach the citizen. In the NGO world that’s called leakage, in my words it’s called theft.”

Banga wants business leaders to take economic development more seriously; to stop looking at financial inclusion through their short-term returns lens, rethink how they see capital and open up to the “enormous” money-making potential of bringing people out of poverty, he said Wednesday on the main stage at the Bloomberg Global Business Forum in New York.

“I’m through with ticking the boxes in the corporate sphere,” Banga said. “That’s not what brings change… the more we talk about the long-term and we say ‘Ajay, I’m not making more money at this and I’m doing for the long-term,’ nothing is going to change.”

Mastercard is currently working with Western Union to create a digital infrastructure model for refugee camps focused on mobile money, digital vouchers and cards, with Kenya as their test bed. The point is to remove the intermediaries and losses associated with in-kind donations, brings funds directly to beneficiaries and give people some control over their financial health.

The work is still in an exploratory phase, but the plan is to use Mastercard’s digital voucher program to provide chip cards to refugees and host community members. The cards would be loaded with points they can spend on everyday purchases and are designed to work on or offline so participating agencies such as the International Rescue Committee can monitor different programs.

“We’re using technology and getting them to record their payments on an electronic mail, so that they can go to a bank and say, ‘You can see I have this much revenue everyday,’ and the bank can make a better decision on lending,” he said of the company’s efforts in Kenya. “By their using it, I make money from their transaction. The bank makes money. The [small businesses] are happy. That, to me, is a business opportunity that is connected to our core competencies.”

First step for business leaders: know the difference between “so-called poverty alleviation” and taking people from poverty to prosperity. The former is only the first step toward prosperity and legitimizes the idea that there isn’t enough of a business incentive in this work, he said.

But there isn’t any trust on this topic between governments and private companies, and that’s a huge problem, he added.

Banga said his company spends a lot of time in developing countries trying to convince governments and other groups about the importance of applying technology to drive inclusive growth or give people identities (because if someone doesn’t have a formal identity it’s “kind of like being in prison”), he said. Mastercard has committed to pulling 500 million financially excluded people onto the financial grid; he said it’s currently at 330 million.

“The first reaction from government and multilateral institutions is: why is this guy doing it and what’s in it for him?” he said.

A spokeswoman for the International Rescue Committee said the it “welcomes the investment and innovation from the private sector to build up the digital infrastructure that would make the delivery method faster, more versatile and transparent and lead to the delivery of better aid.” “Cash relief” is one of the most efficient and effective forms of aid, she said, specifying that cash can be digital cash as well as hard cash.

But the reality, to Banga, is that when business people see money in it, change tends to actually take place.

“My only anthem is, ‘Look, there’s money in this.’ At the risk of sounding mercenary: when you want change, you want return.”

Image via Bloomberg

Posted on

‘A story the world needs to invest in’: Inside SBI’s inclusion efforts

A fully inclusive financial ecosystem is arguably the Holy Grail of fintech. While there is much that fintech solutions can and should improve across all aspects of legacy financial services in the developed world, they largely work just fine if you have access to them.

Being inclusive doesn’t just mean that basic banking services like checking and savings accounts are available to all citizens, it also means extending offerings beyond those services to investment opportunities and insurance and pension products. India, with its population of 1.3 billion, stands to gain the most from this; 19 percent of its citizens have no ID card, no financial access and the country “doesn’t really have any social welfare,” according to Arundhati Bhattacharya, chairwoman of the State Bank of India.

The 212-year-old SBI is the country’s largest bank. It handles about 440 million accounts and 23 percent of the country’s banking transactions. Bhattacharya spoke about her organization’s efforts to advance financial inclusion at the Bloomberg Global Business Forum in New York Wednesday.

“It is not the have nots that have any fear because they really have nothing to lose,” she said. “It is the haves that need to understand: unless the kind of difference that we have seen growing amongst the top 5 percent and the bottom 10 percent… is bridged, we are not looking at any kind of sustainable society.”

Other banking leaders have a lot to learn from SBI, which is probably why Bhattacharya was invited to the event; U.S. banking and finance leaders came to speak on prospects for expanding trade and the future of energy in the Middle East.

“Most big business understand this and therefore, they too are eager to participate in this [inclusion] experiment,” she said. “But having seen it working in India… it’s a story that can be replicated in very many places and it’s a story that the world really needs to invest in.”

Between India’s Aadhaar authentication system and its efforts to digitize financial services and commerce as much as possible, the country has made great strides in financial inclusion. SBI, according to Bhattacharya, has concluded that to achieve financial inclusion, initiatives need to be accessible, affordable, high-quality and easy to use. That’s a challenge for privately owned banks — a huge factor in why SBI has found so much success compared to banks in the developed world.

“In the initial stages, such accounts are really not commercially viable,” she said. “Privately-owned banks, even though they may feel that this is the right way to go, don’t have the ability to do so because quarter and quarter, they have to report results.”

The Indian government owns 57 percent of SBI.

And in the initial phases of programs motivated by inclusion, banks aren’t going to see positive results show up in their quarterly earnings reports, Bhattacharya said. That’s why on Wednesday she called on the business and political leaders and investors in the room to rethink “what they are going to give a premium on and what they’re going to discount.”

“We are told very frequently that there is a discount, on account of the fact they know we have to carry out certain government mandates, such as these programs,” Bhattacharya said. “It’s high time that society at large realized that if you’re going to have a stable society, if you are going to have a sustainable growth… organizations that are part of such things should actually be given a premium, and not a discount.”

India’s Unified Payment Interface is a system that enables seamless payments between various organizations. An individual can connect a checking account at one bank to the mobile banking app of another bank, transfer money to someone whose account is held at a different bank and is connected to his own various accounts at various insititutions — for example.

In addition to this system, banks’ existing branch presence and no-frills savings accounts called Jan Dhan accounts, India also has Aadhaar, the digital identifier that requires only people’s scanned fingerprint to perform a financial transaction. Thanks to these individual initiatives, Bhattacharya said SBI has issued more than 70 million debit cards, sold 20 million simple life and accident insurance policies and a million pension products — all at very affordable rates.

“The fact of the matter is, we have realized that the business model has to be volumes and not high margins,” she said.

Image via Bloomberg

Posted on

How lending startups are trying to edge out payday lenders

Despite transaction fees as high as 15 percent and annualized interest rates as high as 400 percent, a staggering 10 to 12 million Americans take out payday loans each year.

And a new legion of lending startups serving non-prime borrowers like LendUp and Elevate are hoping to cash in on the space traditionally held by payday lenders, a market estimated to be worth $38.5 billion. (Other online lenders like Prosper and SoFi target borrowers with high credit scores.)

“If you take out the fintech lending, what are the options? With traditional banking, it’s basically credit cards,” said George Hodges, director of strategy and fintech innovation at PwC.  Most banks and lenders don’t offer loans below a threshold, usually $3,000.

The selling point for startups: Customer experience and financial inclusion. Fintech companies like LendUp, Elevate and others have jumped in with a promise to lower fees and broaden access to credit.

These online lenders compete directly with payday lenders on customer experience. That’s not hard to do. Traditional payday lenders don’t exactly have the greatest reputations — it’s considered high-risk borrowing that preys on the poorest and often offers a less-than-glamorous in-person experience. Still, they’ve been the de facto way to get small loans quickly — especially for those with weak credit.

Fintech startups operating in the market are also pushing a customer-centric approach, saying they work with the customer on repayment terms instead of resorting to heavy-handed, predatory tactics.

“If a customer is struggling to make payments, we offer flexible terms and programs to help that person get back on track. We have a strict policy on nonaggressive collections practices,” said Elevate CEO Ken Rees. “If in the end, the individual must default on their loan, we write it off as a loss.”  

Another sell that fintech startups offer is to help get customers who are underbanked or have thin credit files into the financial system. While Elevate offers loans between $500 and $3,000, LendUp offers customers options below $500 with opportunities to increase the amounts after showing good repayment history. Both offer installment loans that allow customers to pay back the loans over time and assess ability to pay using a broader range of data than just raw credit scores.

“Along with the application of industry-leading advanced analytics, we are able to ensure that we loan money to the most deserving applicants — those who are most likely to be able and willing to pay loans back,” said Rees.

LendUp doesn’t touch traditional credit scores for many of its products including its short-term loans, relying on alternate data sources including information provided from subprime credit bureaus.  “A hard inquiry on the customer hurts their credit score — for a loan of a month, you don’t want to damage their score, so we’ve chosen not to use FICO or the big three credit bureaus,” said COO Vijesh Iyer.

The other related selling point is to position themselves as inclusive.

If fintech lenders are able to use advanced data analytics technology to underwrite a larger cohort of borrowers, it’s a win for financial inclusion, said Hodges, who acknowledges these loans aren’t a cure-all for poverty. But what happens after the loan is an important difference when compared to payday loans.

“In addition to the APR, it’s what happens at the end of the loan,” he said. “In payday lending, it rolls over [if the customer can’t pay on deadline] — it’s not designed to lift themselves up or build savings.”

By contrast, fintech startups say they help customers gain a foothold in the financial system. LendUp and Elevate say customers that have good payment histories can lower their APRs over time and have the option of getting their payment history reported to credit bureaus.

But this does come at a cost.

Both Elevate and Lendup have annualized interest rates that can go into the triple-digit percentages for new customers. Iyer said APRs depend on the state, but a look at LendUp’s sample fees for California on its website shows annualized interest rates for a new borrower that range from 214 to 459 percent, depending on the amount loaned and the repayment time frame. Meanwhile, according to Rees, Elevate’s average APR is 149 percent (but there is a range, depending on credit, employment and loan repayment history and other factors). In comparison, payday lender Advance America’s APRs for the same state are 456 percent, according to its website.

Despite the high interest rates, these loans are intended for quick payback, so to lenders — whether fintech or payday loan companies — the high interest just amounts to a fee for a service banks aren’t well-positioned to provide.

“We think of what we charge customers as more of a fee than an APR,” said Iyer. “For a 14- to 30-day loan of $250, we’re looking at a 15 percent fee; we view that as comparable and in many cases cheaper than what your bank charges you for an overdraft.” He noted that converting interest rates into APRs doesn’t make sense for a short-term loan.

The FAQ section of Advance America’s website has a similar message: “A typical fee for a payday loan is $15 per $100 borrowed. … Often, the cost of a cash advance may be lower than the alternatives considered by many people, such as paying a bill late or incurring overdraft fees from banks and credit unions.”

To Jamie Fulmer, svp of public affairs at Advance America, the entry of new players on the market is a positive development, but the notion that their products are substantially different from payday loans may be a stretch.

“A lot of these companies that are touting a better alternative are trying to make their product look better than a traditional payday loan, and that’s just marketing spin,” he said.  “Some are not operating under the same regulatory framework we’re operating under, and some are doing exactly what we’re doing but marketing it in a different way.”

Still, the fees for small-dollar loans draw criticism from consumer advocates.

“Whether it’s Elevate or a payday loan operator, it’s primarily the same problem — these loans are high-cost and targeted to individuals who don’t have capital or assets to begin with that are excluded from personal loans or high-credit products,” said Ricardo Quinto, communications director at the Center for Responsible Lending, a nonprofit advocacy group with links to a credit union.

From a venture capitalist perspective, it’s too early to tell if fintech lenders’ business models can be sustained over the long term.

“The bets they’re making is that they’ve got all sorts of data, and put that into an algorithm and make better determinations of whether someone is able to repay a loan,” said Vica Manos, director at Anthemis Group. “We still need to see how it plays out. None of these lending propositions have actually been tested in a crisis situation — they haven’t gone through a downturn to test how robust the algorithms are.”

Posted on

The challenge of solving for financial inclusion

There is no shortage of financial access, health and literacy apps.

But while financial inclusion has taken off as a hot buzzword in the industry, it remains a tough one to tackle. That’s because, beyond the specter of legal and technological issues, financial applications usually depend on digesting data from customer bank accounts. That’s a problem when the people in a startup’s targeted demographic don’t have a bank account. So startups have refocused on financial “health” instead of “inclusion.”

Most financial health apps are savings assistants, like Digit or Qapital; or spending trackers like Moven or Clarity. Some, like Credit Karma or Nerdwallet, exist to help people improve their credit scores. Acorns and Robinhood are there to educate people about investing and let everyday people dip their toes in something that was once exclusive to high finance. But they all require users to link their bank accounts in order to register; they’re not for the unbanked.

And if TD Bank’s recent partnership with Moven is any indication, these startups can be hard to sustain as businesses and probably will need to partner with — or sold to — a bank.

“People approach financial inclusion from strictly technology and investment standpoints,” completely lacking empathy, said Christine Lu, CEO and founder of America Innovates and an investor in impact investment app Aspiration. “People are unbanked for a reason. You can’t lead with technology first to find solutions to the unbanked if you don’t understand why they are and continue to be unbanked… it’s an oxymoron almost.”

It’s not that different from the realization bigger financial institutions are waking up to: technology is a feature — a tool even — but it’s not the solution to the industry’s many problems. So despite jobs (in all industries) becoming more and more reliant on technology expertise, business as usual still rests in the hands of the industry experts.

Too often, Lu said, founders of these solutions don’t genuinely understand the problem they’re trying to solve: why people are unbanked. There’s a vague awareness, but they often don’t fully comprehend “when a family is $700 away from financial ruin or when a predatory fee is the difference between being able to cash a checker buy milk for the baby.” Too often, privilege gets in the way.

That’s why Lu said she centers her investments around the people running the company and their life experiences. The technology will come later, she said.

“I have no doubt that those obsessed with solving for financial inclusion will be able to find the technology to build the solution,” Lu said. “I’ve looked at a lot of these apps, but they’re just features of the broader problem they’re trying to solve.”

Another barrier to adoption, according to Monica Brand Engel, a partner at Quona Capital, is that marginalized people just might not have the time for it. They’re some of the strongest and savviest consumer demographic, she said, as they often need to figure out how to survive with much fewer resources than most.

“They have problems with the most basic parts of their lives — paying bills is a challenge, getting to work is a challenge, everything they do is difficult. If you offer them a benefit they are probably more than willing, but they also have been offered a lot of quick fixes before and so they’re skeptical. They’ve gotten used to a certain way of being informed and figured out how to make things work.”

So even though most fintech developments have evolved around changing consumer behavior, the more interesting investments for Engel are in startups with their eyes on changing the cost structure of a business and applying technology to risk analytics.

For example, in Latin America and some part of Asia there’s a big move toward digitizing invoices. It’s driven mainly by governments’ desire to collect taxes, but with a digital record of every sale, lenders can use it to identify different consumer touch points, inflows, outflows, risk. There’s no need to send a loan officer.

“Those tech apps rapidly change the cost structure of financial services,” Engel said.

Engel has also spoken extensively about using mobile devices — it doesn’t even have to be a smartphone — in emerging markets to create alternative data that can bring people into the formal financial system.

In the U.S., however, huge companies like PayPal and Amazon may already have the lead on that — and the financial stability to make it a long-term offering. Both companies now offer services for those who get paid in cash, don’t have bank accounts or debit cards and don’t use credit cards. Both have enough users and partners in their networks to emulate Ant Financial’s use of new payment methods to produce alternative data and ultimately bring more people and commerce into the economy.

“It’s been clear for a while that PayPal has a vision to democratize financial services,” Anuj Nayar, head of global initiatives at PayPal, told Tearsheet earlier this year. “A lot of this stuff we’re doing specifically to hit the underserved. People are being disenfranchised … it’s incredible how high a proportion of the U.S. population couldn’t raise $400 in an emergency.”

Posted on

Why the future of credit could lie in ‘social vouching’

With the growing number of tools to bring people out from the world of check cashing into the mainstream financial system, the notion of inclusion continues to be a major theme in the field. But to technology developers working on ways to enhance access to credit, the future lies in rethinking what’s meant by financial inclusion.

“The question around the unbanked makes the normative judgment that being banked is a state to be in,” said Om Kundu, founder of Inspirave, a platform that lets users save for big-ticket purchases. Kundu was one of three panelists that spoke on technology and financial inclusion at Fordham University’s social changemakers conference Monday — part of FinTech Week taking place in New York. “There are lots of parts of the world where people are getting access to financial services without a bank account — it’s more about helping you achieve your goals.”

For Kundu and others working in the space, ‘inclusion’ is more about creating a another kind of credit system that’s based on social vouching and support. Inspirave’s platform, Kundu said, brings in the notion of a social network of friends and family that can help an individual reach their financial goals and in turn, help vouch for the individual. Instead of a formal credit score, the idea of using a social network of referees acts as a powerful counterpoint to traditional credit assessment systems that exclude millions of Americans who don’t have bank accounts or credit cards.

“We don’t think of traditional due diligence of loan underwriting, a formal business plan or technical due diligence,” said Kelly Chan of Kiva U.S., a nonprofit that’s the U.S. arm of a global online marketplace for crowd-funded small-scale loans. “We’re looking to a social community knowing you have a group of supporters to back you or vouch; for example, ‘Sally is a wonderful mother worthy of Kiva loan.'”

The notion of ‘social underwriting,’ Chan said, can create economic opportunities for Kiva’s 3,700-strong community, many of whom are small-business owners. Traditional banking tools also often don’t address personal finance needs of the lowest-income Americans, particularly those at the lowest rung of the income scale. For Jeff Kaiser, chief operating officer of Propel, a startup that developed an app to track food stamp account transactions, providing accessible tools is key.

“It’s about building better products and understanding the needs [of the users],” he said. “It’s not about passing judgement from the formal financial space — we need to build products that are less expensive and provide convenience in a digital format.”

Despite the ‘do good’ objectives, building a sustainable revenue model can make or break any startup. Propel is not currently generating significant revenue, Kaiser said, but the company is working on deals with merchants who could advertise within the app. While Inspirave’s revenue is based on partnerships with merchants and banks, the future, said Kundu, will be more about monetizing the data.

“People are articulating their future purchases and that’s valuable — we expect to harness insights to partner merchants and financial institutions.”