BY SHERAN MUNASINGHE
Sheran Munasinghe is a first-year Energy, Resources and Environment student and editor of SAIS Perspectives.
The SAIS Development Roundtable hosted Michael Schlein for a conversation about the future of financial inclusion in the face of the COVID-19 pandemic. Mr. Schlein is the President and CEO of Accion, a nonprofit organization dedicated to giving the underserved access to the financial tools they need to improve their lives.
Over the last decade, enormous progress has been made to bring people into formal financial systems. The COVID-19 pandemic threatens to derail this headway, and for the first time, a reversal trend is occurring. According to a World Bank study, more than a hundred million people will fall into extreme poverty due to COVID-19. The emerging markets, where social distancing is nearly impossible, public health infrastructures are overwhelmed, and access to basic necessities is minimal, have been especially affected by the pandemic.
Accion is dedicated to creating a financially inclusive world. And financial inclusion is about resilience; it is about giving people the tools to go through crises and build better. In advanced economies, access to credit cards, loans for small businesses, health insurance, and monthly salary are often taken for granted. Life is more convenient because of those financial tools. But 3 billion people across the globe are still invisible to the financial world, without access to any of those tools as they still live in a cash world. Accion wants to change that by helping people access the tools they need to help themselves.
This traces back to 1992, a watershed moment in financial inclusion, when Accion first introduced the for-profit, commercial microfinance model. That implied access to the debt, capital and equity markets, taking deposits, as well as hiring talent in a different way. The whole movement around social entrepreneurship, impact investing, and leveraging on businesses to have greater social impact partly rests on the model introduced in 1992.
Accion has since expanded into fintech; the digital transformation has allowed the organization to rethink every aspect of financial services delivery for those who have been left out of the system. With the digital revolution, no distance is insurmountable, and all transaction sizes are commercially viable. But more than that, data analytics is allowing Accion and its partners to know their customers better and address their needs. Accion invests its own capital – and leverages third party funds – to invest in the most promising emerging fintech companies. Accion is also providing advisory services to its partners, including established institutions that are attempting to transition to leverage digital technologies to better help the underserved. Lastly, through the Center for Financial Inclusion, the independent think-tank of Accion, high quality research and advocacy helps organizations strategize and create a more inclusive global financial system.
While distressing in overall impact, there have been a few silver linings that this pandemic has brought for the financial space. Many of the traditional institutions have understood the need for increased investment in greater digitalization in order to better communicate with their clients. Additionally, many of the world’s poor have grown comfortable with digital transactions as opposed to cash dealings. These are crucial breakthroughs and obstacles that are going to accelerate financial inclusion through this golden age of technology.
After the talk, Mr. Schlein sat down with SAIS Perspectives to continue the discussion on financial inclusion, the implications of the pandemic, and the role of digitalization. The interview has been edited for clarity and length.
Perspectives: Financial inclusion is key to eradicate poverty and spur prosperity for all. In what ways have the COVID-19 pandemic and its ripple effects impacted financial services? What are the emerging markets which have been hit the hardest?
Mr. Schlein: The effect of the pandemic has been devastating globally, but it is not surprising that those hit the hardest have been emerging markets such as Mexico, Nigeria, Brazil and India. In many places where Accion works, there is no such thing as social distancing. All the efforts to flatten the curve have been unsuccessful, as the public health systems of these countries are still struggling. And financial inclusion is not the silver bullet to eradicate poverty. You also want to take into consideration education, healthcare, access to clean water, and rule of law. But I would put financial inclusion up there with those other instruments, since bringing people into the financial system and giving access to tools that we take for granted is among one of the most important interventions to help people thrive and prosper.
Perspectives: How can digital financial services be utilized to respond to the COVID-19 crisis? And more specifically, in what ways is Accion helping financial service providers to adapt to this new normal?
Mr. Schlein: We are living in a spectacular period of innovation. There are extraordinary innovations that are not changing our financial lives by much but have enormous repercussions for how we can meet the needs for 3 billion people who we have never served well at all. All of a sudden, we have some new tools that through the digital revolution will allow us to find ways to reach people that we have never done before. Through data and data analytics, we can now figure out what are the best ways to meet the needs of our clients. These basics financial tools are the tools of resilience. To get through this crisis, you need fast and efficient payments, you want to reach your network and access remittances, you want to get insurance if you fall sick or lose your job, and you want to have savings on rainy days when you have a crisis, and you want to have credit to build and expand your business.
Perspectives: Many low-income countries still struggle to digitize government-to-person (G2P) payments. What are the key areas of action needed to solve the problem? And what the benefits of digital social protection for both governments and households?
Mr. Schlein: I would say that G2P are actually one of the areas where the world has made enormous progress on over the last decade. Governments are realizing that they need to build those routes so that they can distribute benefits and subsidies through digital means. It cuts down on corruption, it is highly efficient, and it is the right way to be able to reach people. Many governments have invested in this technology significantly. In fact, I would say that many are far ahead of the United States on this front. And you actually see that in the pandemic many governments decided to have direct subsidies, particularly in West Africa but even much of Asia, through G2P payments. It is the rail on which many of the other products and services will ride.
Perspectives: How do you work to ensure that the progress that has been made over the past decade in poverty eradication, and specifically in access to financial tools, is not lost due to the pandemic?
Mr. Schlein: That is our mission, literally. We are desperately trying to make sure that the progress we have made is not lost in this pandemic. The world was making significant progress on financial inclusion, specifically around access. We have a long way to go around usage and making sure that tools are actually beneficial to people. But now for the first time in history, poverty is on the rise and exclusion is on the rise. Our work is more urgent than ever to help minimize the effect of the pandemic. It is really about providing tools to help people cope with this extraordinary crisis.
Perspectives: Do you see the COVID-19 pandemic as perhaps spurring any new innovations within the digital technology space? Have you seen any new actors enter the market because of COVID?
Mr. Schlein: Because of the way COVID is transmitted, it puts a premium on digital transactions. It used to be, in many parts of the world like India and Bangladesh, that people at the base of the pyramid have had cellphones and the ability to transact on those devices but many of them preferred to walk into a store and deal with cash. Now, that cultural barrier has been overcome, as no one wants to be face-to-face if they can transact digitally. Although the technology has existed, the usage has expanded only now. Another area with changed perception is insurance. If you are poor, the notion of paying for something you will never get anything back if it works well is problematic. But now, I really think that people understand the power and importance of insurance. And we are seeing innovation in providing that kind of insurance, as well as digital payments, as well as neo-banks, as well as insur-tech. We are seeing tremendous innovation, and much of this has been accelerated by the pandemic.
Perspectives: How does a nonprofit such as Accion analyze risk to determine which markets are best suited to meet the needs of small businesses and the most vulnerable?
Mr. Schlein: Before we go and invest in a country, we do a rigorous analysis of the regulatory environment. And it is challenging. It would be nice if we could go only into countries that have very progressive and enabling legislation but of course, we have to go where our clients are. Some of those countries have great regulatory systems, and it is terrific. But other countries do not, and we are working to try to change that.
Perspectives: In your talk, you mentioned the work of Muhammad Yunus, who has run a non-profit microfinance model. What are instead the benefits of for-profit microfinance? Why is it a better approach to achieve financial inclusion?
Mr. Schlein: Great question. Muhammad Yunus has truly been a pioneer and has inspired almost everyone who is coming into the field of financial inclusion. First and foremost, I think he helped create this field of financial inclusion. I do think Bangladesh and the Grameen model have some unique pieces that are still organized as non-profit. But if you are really trying to effect change for 3 billion people that have currently been left out by the financial system, you cannot do it with a philanthropic approach. If you are trying to tackle a problem so big as global poverty and global financial exclusion, all the charity in the world would not be enough to end poverty and global financial exclusion. The only way to do it is to harness the capital market.
Perspectives: Data and data analytics are crucial tools that are at the core of digitalization, but they can also become a dangerous instrument. How can you ensure that data are used in an ethical and correct way?
Mr. Schlein: This is one of the most important public policy questions we as a society need to grapple with. I think there are enormous benefits to harnessing data and data analytics to allow us to see people, understand their needs, and meet those needs that we could never do before. On the other side, I think there is great potential for significant misuse of data privacy and security. Europe is probably the leader in adopting GDPR (General Data Protection Regulation) and privacy standards on what can be used. While the Chinese model – a Big Brother system – has many trade-offs. Our Center for Financial Inclusion is a leader in trying to figure out how we can get the good from data, as well as establish the right rules. And I think that GDPR is the right step in terms of policy and the right direction. You should be able to control your own data, you should have access to that, you should understand how decisions are made with algorithms, there is value in your data, and you should be in some ways be rewarded for that. These are the right principles, but I think we still have a long way to go.
Perspectives: Thank you so much for sharing your thoughts with us.
Watch the full talk here.
PHOTO CREDIT: Navaneeth K N licensed under CC BY 2.0