Financial Reality on a Global Scale

We often take financial services for granted, especially when we have ready access to things like credit cards and bank accounts. But there are billions of people who do not have that access, making them susceptible to all kinds of situations that the rest of us never think about. Like, what happens when you are an executive who immigrates to the US, but you leave behind your credit history? Or when you are a subsistence farmer in rural India and you lose your house and crops to a mudslide – but you have no insurance? In this episode, host Eric Hathaway talks with The Finance Frontier Producer, Sara Tatnall, about what financial inclusion means and why it matters to finance professionals.

Sara_Tatnall_producer

Sara Tatnall has a decade of experience in the finance and tech space, including microfinance work in India and Colombia. During her work with global nonprofit Accion International, she worked directly with clients who were gaining access to financial services for the first time. She is the producer of The Finance Frontier.

Sara: 00:01 Imagine that you are a farmer in Northern India, near the Himalayan Mountains. It’s the monsoon season and several consecutive days of heavy rains have triggered massive mudslides. Those mudslides destroy your farm and your livelihood, your home is leveled, your tools are gone, and your crops and livestock are buried by the wet earth. You have lost everything, and because you are one of the billions of unbanked individuals in the world you have no savings account, no insurance policy. Nothing to help you recover and rebuild. You have no second chance.

Sara: 00:45 I’m Sara Tatnall, producer of the Finance Frontier.

Eric: 00:48 And I’m Eric Hathaway, your host. Welcome to the Finance Frontier. This is episode one of our series on financial inclusion. Sara that’s a great example of those that don’t have access to financial services, which are often taken for granted. Particularly by those of us that have the choice. Billions of people don’t fall into that category however, making them susceptible to all kinds of situations that the rest of us never think about. In this episode I’ll be talking to Sara Tatnall about what financial inclusion means and why it matters to finance professionals.

Eric: 01:26 So Sara you’ve spent a lot of your career in the industry, if you want to call it that, of financial inclusion around the world. Why don’t you give us a little bit of a background on what you’ve done, why it’s so important to you and what financial inclusion means globally.

Sara: 01:43 Sure, so I sort of got into the financial inclusion space through the international development route. I had volunteered pretty extensively around the globe and was interested in development, international development and that’s what brought me into micro-finance specifically, which is providing small loans. Mostly in developing countries. When I think of financial inclusion I think about providing financial access to those without those services. As I mentioned, obviously there’s a poverty alleviation side. . For example, my story that I told with the mudslide in India that was a true event, and over 10 thousand farmers were effected in a country that farming makes up over 10% of the GDP of India.1  Many of those are small landholder farmers without access to those financial services, so when you look at something that is happening at this scale now you’re seeing an impact to individuals but then at a country level.

Eric: 02:53 So it’s interesting, globally 1.7 billion people are unbanked or considered unbanked, with no access to financial products.2  The majority of those folks are in emerging markets, Africa, India, and some of these areas where, as you have some great examples, it can be destructive to families and even life itself. The amazing thing is that we sometimes think in the US that issue isn’t a problem, but in the US the under-banked and unbanked population is just under a quarter of the population. Almost 75 million Americans that have no bank services, and are typically using alternative means like payday loans, check cashing services, or other products to manage their entire financial life. In addition to that there’s 10 million immigrants who are very likely to be prime or super-prime, but are captured by US3 credit bureaus as thin files. . So they don’t have access to those financial products. We’re gonna be speaking with one of these individuals, here’s a short clip from Sangram.

Sangram: 03:55 I remember the very first week I was looking for internships, I remember this lady coming up and sharing with me well I’m not the sharpest pencil in the box. I had no idea what she meant and I started looking for pencils and a box, and she’s like no that’s not what I meant, it’s a phrase. I’m like well I don’t know what that means. My friends are like man you are in so deep trouble, so they literally gave me these VHS called Friends and Everybody Loves Raymond and Seinfeld and said watch it. I watched it day and night and I’m like okay I get all these phrase that now most people use very commonly. So that was very interesting and frightening because I couldn’t even communicate much less try to open a credit card account.

Sangram: 04:37 When I talk to students are immigrating and coming in here, I feel like they’re more easily getting access to money and capital. That has changed quite a bit, but there’s still no education around why this is important, or how should they manage their finances. They literally come in, get their credit card, start spending, and feel like they are now reaching their American Dream without really knowing that they’re really building is an American Debt.

Eric: 05:05 So Sara can you give us an idea of the cost of being under-banked, and how folks are managing their finances not having access to those kinds of services?

Sara: 05:17 Yeah, you mentioned these alternative means that people are using when they’re excluded from the system, and most of the time as a rule these alternative financial services have much higher fees. We’re looking at for check cashing, you’re gonna pay a one to five percent fee for that service.4  Payday loans, we see APRs up in the 400% or even higher into 600% APR for these payday loans.5  Money orders, you’re looking at 70 cents to five dollars per transfer, and it’s worth noting that most of these money orders are for very small amounts in the first place.6  So when you’re paying one to five dollars that’s a big sum.

Sara: 06:03 The biggest problem, or one of the biggest problems, is just overall an inability to build credit. So when you’re using these alternative means they’re not being reported to credit bureaus, so you’re not doing yourself a positive service for your credit. For a majority of people who are using these services, 74% of them are using money orders, 34% of them are using check cashing services, 22% of them are using pawnshops, payday lenders, auto title loan services that sort of thing.7  When you look at it altogether we are talking about a pretty significant amount of usage for these alternative means, as well as costs associated. When we look at the kind of flip side, folks using retail cards which we see as a first stepping stone into credit. So these retail cards tend to be easier to get, and tend to be used as a first time credit card. Consumers are spending over 33 billion dollars on retail cards, or they did in 2016.8  There’s a lot of people using these services.

Eric: 07:08 So you mentioned one of the difficulties for a lot of the unbanked using these products, is it’s very difficult to actually build a credit file so they can get back on top. But not only that, the expense of using these services, I mean one to five percent, 400% APR for payday loans. Money orders at 5 dollars, that’s a huge a portion of those checks, and most of these people aren’t high income earners in the first place. So not only is it difficult to build up credit, but it’s actually difficult to build up a savings account or save money to try and build up reserves for emergency times, as we’ve talked about. I think that’s another major risk that a lot of the unbanked and under-banked go through.

Sara: 07:52 Absolutely, we say a lot that the people that spend the most on financial services are those with the least amount of money to spend.

Eric: 08:07 So tell me about the solutions that are starting to come to market, both globally and in the US. We’re seeing funds, we’re seeing a lot of fintechs globally, we’re seeing Fintechs but even some of the larger banks come and address this under-banked and unbanked population of people.

Sara: 08:25 When we think about financial inclusion I think where it started was this microfinance movement, and that kind of came about in the 1970s. It was kind of born in India and Latin America, actually both at the same time. Since then, we’ve seen this rise in technology really giving access to many of these excluded populations. Whether it’s through new mobile services, mobile banking, these digital loan products, really this rise of fintech is able to address financial inclusion in a whole new way. In 2012, I was working at Accion International and they launched their venture lab, which is a fund for early stage fintech companies that are addressing the financial inclusion space. I remember it marked a real shift in the industry because before that everyone that was thinking, not everyone, but most of us thinking about financial inclusion were really thinking about microfinance.

Sara: 09:20 On the US side of things in 2012, Lend Up was also launched. That’s a digital payday alternative, really addressing many of those Americans, actually more than half of Americans have subprime credit scores. fintech coming onto the scenes to assist that population. Six years prior to that Credit Karma was founded, so this fintech surge that we’re seeing is really addressing financial inclusion in a number of ways. Which is great.

Eric: 09:49 It’s interesting, we’re actually going to be speaking with a guest, Maelis Carraro who’s a program manager of the Catalyst Fund, about sort of the global fintech revolution that’s going on to address many of these areas. Here’s a clip from the interview with Maelis.

Maelis: 10:07 The farmers that, for the first time, have access to insurance, for them it’s a transformative service. Right, 90% of the farmers I serve in Ghana have access to insurance for the first time. For them, whether they lose crops to bad weather sometimes determines whether they can feed their families at the end of the month. Here satellite data and mobile phones are enabling access to a product they wouldn’t have necessarily ever have access to.

Eric: 10:41 At the same time as fintechs and banks are starting to address the unbanked, there’s also this massive surge in data, data’s really key. Data’s key in… you’ve heard of the collection of data over the last ten years and these massive data banks of information, but that data has typically been around providing financial services to the currently banked. When you’re trying to provide services to the unbanked there’s not a lot data out there, so there’s a lot of companies that are now trying to bring alternative data to the table. Whether it be mobile data, social data, sometimes publicly available data like even certificates and educations. Companies are starting to offer these types of data sources to the lending institutions to help bring the unbanked into giving them access to financial products.

Eric: 11:32 We’ll be talking with Zach Tondre who works with Lexus Nexus on their alternative data product about the promise of that data in helping the under-banked. Here’s a clip from Zach.

Zach: 11:42 We look at addressing alternatives to payday and short term lenders that are out there. There’s a few things that are really crucial about making that work. Research has been done across industry that price is not the end all be all driver of whether a consumer makes a decision to go to a payday loan shop or some other kind of alternative lender. Really what’s important to them at that point is kind of how quickly and how easily they can get that money, there’s some profitability out there and there’s also just a great story to be told.

Eric: 12:18 So what’s driving all of this innovation in the space?

Sara: 12:22 Well Eric I really think about it as three things, and the first is data which you already mentioned. We know that there is a tremendous amount of data available on all of us and some of these new companies are starting to think about it in a way that’s asking the question how can we leverage this information that’s already there to help some of these populations? The second is I would argue a generational mind shift. In the US we’ve seen millennials kind of come into the work scene and study after study has shown that they have an affinity for social impact. Globally the same trend is being seen as well in terms of these younger generations are just thinking about things in a different way. Back to the US, fewer and fewer millennials and Gen Z-ers are pursuing careers that would be seen as a traditional finance career. Many of them that do go into finance are either starting their own socially accountable business, fintech business, or they’re jumping into one of those businesses.

Eric: 13:32 It’s a great point, but it’s interesting as well now, most recently we’re seeing some of the larger banks get involved in this industry as well. So US Bank has just launched sort of payday competitive product, and what they’re trying to do is drive those APRs down. Instead of the 400% APR, they’re offering the same type of service for around 75%, which still seems high but there’s a higher risk involved which we’ll hear a little bit from Zach as well.9

Sara: 14:03 That mindset is effecting everyone and we’re seeing those ripple effects go sort of far and wide, which is great. The third thing that I think is driving this innovation is the rise of mobile, and of course we all know that the biggest transition that has happened in the last few generations is the fact that we all carry a computer in our pocket now.

Sara: 14:26 Even before the rise of the smartphone I remember when I was living in Tanzania, it was 2006, and I remember being on a public transportation bus and looking out the window. I saw an individual standing on the side of the road and he was a Masai. For those of us that don’t the Masai, we’ve probably all seen pictures of them in National Geographic, they’re a very traditional ethnic group in Kenya and Tanzania. They dress only in traditional garb, heavy ornate beadery, and really shunning of all things Western and all things that are not deeply traditional. I look out this window and I see this Masai and he’s standing and texting on a mobile phone. That became something I started to see more and more and more.

Sara: 15:14 The following year 2007, M-Pesa was launched in Kenya and that’s a very well known mobile money service in partnership with Vodafone, and it has become hugely successful. By 2011 M-Pesa had 17 million subscribers in Kenya alone, and research has been done that shows that M-Pesa helps lift almost 200 thousand people out of extreme poverty, simply by giving them the opportunity to access financial systems through their mobile phone.10  So these emerging economies are moving quickly, they do not have the old infrastructure, the old incumbents they’ve gone straight to the digital economy. Now all of a sudden a housewife in India who has no formal education is able to start a business and make financial transactions via her mobile phone.

Eric: 16:12 So it’s interesting you talk about how fintechs and these new technologies, mobile technologies are really allowing these folks to have access to financial products. There’s some interesting examples though where education is gonna be key as well, because a lot of these folks in these emerging economies have never seen these kinds of products, they may not understand insurance. I think education is also gonna be a big key.

Eric: 16:32 The other thing that’s fascinating to me is all of this is great, it’s wonderful, it’s addressing a huge population of people on the planet and doing some really good things, but there’s some risks. A lot of these financial technology companies, firms are collecting data. They’re collecting a lot of data about individuals, so one of the things that we’re gonna talk about with Patrick Trainer and Pablo Anton-Diaz at the Center for Financial Inclusion is about the security of that data. Making sure that a minimum viable security is there, so that data isn’t taken and used by fraudsters and other individuals that would make it even harder for these folks that already having a difficult time to access financial products. Here’s a short snippet from Patrick.

Patrick: 17:19 One of the things I heard from a lot of the folks we’ve been talking to is, Patrick this isn’t fair. We’re young, we’re agile companies, we’re very, very small, it’s not fair to say that we have to have all of the same security apparatus that say a traditional financial institution would have. If you put that burden on us we simply wouldn’t have the money and we’d fail. I think what the report shows is that we see a pretty widespread set of configurations and security standings, and some of them are actually downright dangerous.

Sara: 17:55 It’s great that more people that do not have the traditional finance background are coming into the fintech space and are really addressing so many needs in a wide variety of really very creative fashions. With that we need to make sure that we are not leaving behind the due diligence and the security that is staple in the financial industry, and making sure that we’re bringing that along as well.

Eric: 18:26 Thanks so much for your time today Sara, and your insight into financial inclusion and we’re really looking forward to this miniseries addressing this huge unbanked and under-banked population of people.

Sara: 18:36 Thank you Eric, this has been a great chat. We’ve got a great line up of guests coming up, all addressing the topic of financial inclusion and we can’t wait for you to hear them.

Eric: 18:48 Thanks for listening to the Finance Frontier, I’m your host Eric Hathaway, and until next subscribe on your favorite podcast app.

[1] Shankar, M. (2013, August 05). India floods: Fears grow for farmland devastated in Uttarakhand. Retrieved August 2, 2018, from https://www.theguardian.com/global-development/2013/aug/05/india-floods-farmland-uttarakhand

[2] The World Bank. (2018, April 19). Financial Inclusion on the Rise, But Gaps Remain, Global Findex Database Shows. Retrieved September 17, 2018, from http://www.worldbank.org/en/news/press-release/2018/04/19/financial-inclusion-on-the-rise-but-gaps-remain-global-findex-database-shows

[3] Wisniewski, M. (2018, February 09). Fintechs Find Another Untapped Market: New Immigrants Needing Credit. American Banker. Retrieved September 12, 2018, from https://www.americanbanker.com/news/fintechs-find-another-untapped-market-new-immigrants-needing-credit

[4] Furman, J. (2016, June 10). Financial Inclusion in the United States [Web blogpost]. Retrieved September 11, 2018, from https://obamawhitehouse.archives.gov/blog/2016/06/10/financial-inclusion-united-states

[5] Consumer Federation of America. (n.d.). How Payday Loans Work. Retrieved September 17, 2018, from https://paydayloaninfo.org/facts

[6] Latham, S. (2018, June 22). Banking Basics: How Do Money Orders Work, Anyway? The Simple Dollar. Retrieved September 17, 2018, from https://www.thesimpledollar.com/howdo-money-orders-work/

[7] DCCA Staff Members. (2018). Report on the Economic Well-Being of U.S. Households in 2017 (p. 26, Rep.). Federal Reserve Board

[8] Wilson, E., & Wolkowitz, E. (2017). 2017 Financially Underserved Market Size Study (p. 23, Rep.). CFSI.

[9] Wisniewski, M. (2018, September 12). US Bank Launches Payday Alternative. Retrieved November 3, 2018, from https://www.bankrate.com/banking/us-bank-new-short-term-loan/

[10] Matheson, R., & MIT News Office. (2016, December 08). Study: Mobile-money services lift Kenyans out of poverty. Retrieved October 22, 2018, from http://news.mit.edu/2016/mobile-money-kenyans-out-poverty-1208

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Love the show? Want to be featured as a guest? We’d love to hear your questions and comments and welcome guest recommendations. Our producer Sara Tatnall can be reached at sara.tatnall [at] zootweb.com.

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