Technology for Impact: Enabling scalable and investable social innovations
March 8, 2022
Author: Dr. Brian Carriere
On January 19, 2022, the Canadian Forum for Impact Investment and Development (CAFIID) hosted a webinar titled Technology for Impact: Enabling scalable and investable social innovations. The event focused on the potential of technological innovation for promoting financial inclusion, gender equality and poverty alleviation in emerging and frontier markets[1]. Thought leaders and experts including Ethel Cofie, founder and CEO of Women in Tech Africa, Andrée Simon, CEO of FINCA Impact Finance and Roger Vandomme, Chief Data Scientist at Plendify Inc shared their experiences and perspectives. Fatuma Muzungu, an expert in strategy and innovation at FinDev Canada, acted as the moderator. Key ideas and takeaways from the event are shared and expanded upon in this article.
Technological Innovation is transforming industries, institutions, and individuals. Digitally enabled business models provide an opportunity for developing countries to achieve leapfrog[2] development and gain access to high quality financial services, clean energy and improved health and sanitation by removing historical constraints and making new technologies affordable and accessible. However, challenges still exist for realizing the full potential of technological innovation in accelerating equitable and sustainable development.
What do we mean by technological innovation?
Technology, in the context of this webinar, focused on the role of data science or data related technologies in providing financial services to unserved or underserved clients in emerging and frontier markets. Financial technology, also referred to colloquially as FinTech, is key to providing cost-effective and personalized essential goods and services to individuals more quickly. It is also presenting new opportunities for young entrepreneurs to launch or scale businesses. In Africa, FinTech firms have proven quite successful. They are expanding across the continent and attracting significant foreign investment.
Opportunities
Given the limited physical infrastructure and the spread of mobile phones in low- and middle-income countries, FinTech presents tremendous opportunities for improving access to financial services for unbanked and underserved populations. Over the past decade, 1.2 billion unbanked individuals gained access to financial services through mobile money accounts.[3] FinTech has also:
lowered the cost and increased the speed of access to financial services. In some cases, the time for accessing financial services has been cut from weeks to minutes. For example, someone in Africa can use the FinTech app Wave to instantly and securely pay bills or transfer money to anyone with a mobile phone.
been used to teach responsible financial behavior. Individuals have been successfully encouraged to save money with text messages as reminders to save.
improved access to loans for borrowers. mobile phone data has been used to act as credit history, allowing borrowers to demonstrate their credit worthiness.
The opportunities for FinTech reach beyond improving client access to financial services. Pay-as-you-go solar is bringing affordable electricity to communities not connected to electricity grids. As of 2019,over 1.7 million households had gained access to electricity through pay-as-you-go solar products[4].FinTech is also being used to help farmers improve their value chains and maximize profits through mobile money accounts as well as access to financing and insurance.
The COVID-19 pandemic has accelerated the adoption of digital services including FinTech. In some ways, the pandemic has shown the benefits of transitioning to digital technologies. However, there are challenges to realizing the full potential of FinTech in emerging markets.
Challenges
Access and accessibility are the main challenges to realizing the full potential of FinTech. Low internet penetration in rural and remote communities and low digital literacy among populations is a reality in developing countries. Although mobile penetration rates are increasing, data availability is uneven across countries. When digital technology is accessible, gender inequality is an issue needing to be addressed. As well, the speed at which technological change is occurring may be privileging some groups over others. Finally, regulatory agencies are often playing catch up, which creates issues for both clients in terms of privacy rights and FinTech companies who must deal with uncertainty when trying to remain compliant with the rules. These issues are expended upon below.
Lack of access: 800 million people live in areas with no internet coverage[5]. Most individuals facing financial exclusion cannot effectively use mobile financial services because they lack reliable connectivity, lack trust in technology or the cost of usage is too high.
Gender inequality: Many women in Africa have either no or limited access to a mobile phone. In households with only one mobile phone, the husband often maintains control over the mobile phone and limits women to occasional usage. In a business environment, women face significant barriers to accessing capital for starting a business. In Africa, women run 40% of small and medium sized enterprises, but only receive 1% of venture capital investment.[6]
Algorithm bias and accuracy: The rapid development of FinTech has led to issues of bias within data sets. For example, data bias can result in higher interest rates automatically being calculated for specific groups of borrowers compared to others. As well, the large volume of data being produced with increased reliance on digital technology raises concerns for data quality and accuracy.
Regulatory issues: Government departments and agencies responsible for regulating FinTech companies are often behind the curve. FinTech companies are constantly trying to anticipate what type of regulation will be advanced by regulators to remain compliant once the rules are set.
One final note, donor funding is increasingly being redirected from human centered interventions towards FinTech start-ups with the objective of stimulating economic development in emerging markets. However, this is being done without a full understanding of the impact on development outcomes.
Addressing the challenges
To fully realize the potential of FinTech in achieving sustainable economic development in emergingand frontier markets, the following three areas need to be addressed:
Ecosystem development: Improved connectivity especially in rural and remote areas is a must for increasing access to FinTech. Impact investors should consider investing not only in FinTech companies, but also in the infrastructure needed to enable FinTech companies to thrive.
Institutional readiness: Preparing financial institutions to embrace technology will be necessary for expanding FinTech. Financial institutions can automate their back-office functions to improve the offering of digital financial services to clients. For example, technology enabled loan processing, credit underwriting and call centers can lead to better digital financial service offerings to clients.
Education: Education is especially critical for realizing the potential of FinTech. From a gender equality perspective, educating venture capitalists on their gender bias and on the value of investing in women owned or led FinTech firms is needed. Client education is equally important. Interventions that help clients with their financial literacy and with learning how to use financial technologies have been shown to be effective.
What does the future look like?
Technology and data have changed the financial services industry. Investment is pouring into FinTech companies the world over. As we have seen, this presents both opportunities and challenges. But what does the future look like? Our thought leaders identified four trends:
AfCFTA: The African Continental Free Trade Area (AfCFTA)created a continent-wide free market for goods and services. AfCFTA will offer exciting opportunities for African FinTech companies to grow and expand their products and services beyond national borders.
Big data: With the exponential increase of processing speed, computing power and storage capacity, big data will continue to play an important role in the growing digital financial services sector.
Blockchain/cryptocurrency: Blockchain and cryptocurrencies have many applications in contributing to sustainable development and their adoption continues to be fast-growing in emerging and frontier markets.
Privacy: Data privacy and consumer protection will need to be addressed by governments and regulatory agencies. Regulations that project the most vulnerable will be required to prevent fraud and the misuse of personal data.
As FinTech continues to grow globally, it will be important for donors, regulators, international non-governmental organisations, and others to pay attention to not only the opportunities, but also the challenges highlighted above. Addressing the challenges will be important for realizing the full potential of FinTech in achieving sustainable economic development.
References:
[1]The World Bank Group looks at financial inclusion across three dimensions including access, usage and quality of financial services. See Appaya, S. (2021) On fintech and financial inclusion. World Bank Blogs.
[2] Leapfrog is the concept of bypassing intermediate stages of technology through which countries have historically passed ring development process. See UNCTAD. (2018) Leapfrogging: Look before you leap.
[3]Appaya, S. (2021) On fintech and financial inclusion. World Bank Blogs.
[4]Adegoke, Yinka. (2019). Africa is facing an electricity crisis – a pay-as-you-go model could solve the problem. World Economic Forum
[5] Richard, S. (2019). 3 reasons why most Africans aren’t on the internet – and how to connect them. World Economic Forum.
[6]Wittenburg-Cox, A. (2021). Investing In Africa? Invest In Women. Forbes
Author: Dr. Brian Carriere is the Chair of the CAFIID Thought Leadership Committee and a Senior Program Officer, Social Innovation and Impact Investing at Colleges and Institutes Canada.