Fintechs and financial inclusion: how to avoid the pitfalls and stimulate growth

A third of the people worldwide are unbanked, according to the Global Findex Database: a sobering 1,7 billion adults. Those unable or, for various reasons, unwilling to participate in basic financial products or services are often found in developing lands — but not all of them. In the US alone, more than 30 million households are unbanked or underbanked. Worldwide, financial inclusion is a major goal to promote economic and social well-being, and also to reduce poverty, exclusion, and discrimination.

Although many financial products focus on financial inclusion, payments specifically are recently attracting attention. In 2016, a report sponsored by the World Bank stated a goal for all individuals and businesses to have access to and use at least one transaction account, operated by a regulated payment service provider. This account should be able to handle most of their payment needs, to securely store value, and serve as a gateway to other financial services. For many, the easiest way to meet this goal is to link accounts to an online solution accessed through a mobile device — the digital wallet.

How digital wallets support financial inclusion

When it comes to financial inclusion, benefits to the wallet user are many. Wallets are designed to deliver an easy, intuitive user experience through a familiar mobile device. They also lower barriers to entry into an often exclusive financial system, by using economies of scale to offer a variety of previously cost-prohibitive financial services at low cost. They can be used wherever there is mobile phone penetration, bypassing the computer and associated infrastructure — useful for reaching rural and underserved areas.

The benefits also extend to communities, where the underbanked and unbanked are used to financial operations within a trusted social circle. The bandwagon effect can be strong, where if one friend or family member starts using a wallet, it serves as a strong incentive in the community for more users to open accounts. These users create an ecosystem where savers are matched to borrowers more efficiently and quickly than by bank lending officers. And when wallets are combined with card rails, interoperability with the card environment takes users outside of the wallet ecosystem to even greater financial possibilities, enabling domestic and international payments.

So financial inclusion solutions have the potential to make a huge impact on people’s lives and the economy. But why do some payment products for the underbanked and unbanked succeed, whereas others fail? For example, between 2011 and 2017, for the first time 1,2 billion adults gained access to formal financial accounts, such as mobile money accounts. But during the same period, almost no progress was made on access to savings, credit, and insurance, and a high dormancy rate was noted with these accounts. Other studies show that low-income users of digital accounts often withdraw 100% of funds immediately and do not use their account until the next time they receive funds, ignoring additional financial services that may be available.

Where can financial inclusion wallets fail their customers?

Adoption of any payment instrument depends first of all on trust in the product. Several factors are eroding the trust of vulnerable first-time users of financial products, and causing even long-time users to withdraw all their money as soon as they can:

1. The wallet cannot cope with unreliable physical infrastructure or with older versions of mobile phones

According to one study conducted in Nigeria, 18% of all financial transactions via mobile applications failed. Concerns over the stability and function of wallets, especially if some transactions take a long time to complete, may lead to a lack of trust.

2. The wallet has data requirements that spook users

People do not trust unfamiliar systems and are uneasy with how their data will be used. Another problem in many countries is lack of formal identification, which means people cannot meet KYC requirements. Not every wallet platform is capable of processing alternative data for identification purposes.

3. The wallet is not transparent enough for unbanked people

Customers do not understand if and when they are being charged fees, for what, and how to make sure no fraud, over-indebtedness, or discrimination is taking place. A digital solution doesn’t always mean transparency, and numbers that don’t match up create uncertainty and unwillingness to use wallets.

Trust is easily lost when digital financial services do not provide information
about fees, prices, and conditions during the transaction.

4. Lack of interoperability with other existing payment methods

Wallets functioning in a closed-loop environment are limited in usefulness. For low-income users, the cost of maintaining multiple wallets or using intermediaries may be too high.

5. The wallet fails to meet the needs of the market and does not evolve or offer new features

Research shows that a large number of people with digital financial accounts are not able to use them without the help of a family member or an agent. Design problems plague wallet interfaces that may be from the outset too confusing or inconsistent. Many providers find that their chosen platforms are not flexible enough to accommodate major redesign of the solution once launched.

How to create a successful financial inclusion offering

1. Create a product with true inclusivity through support for various protocols and standards, and the flexibility to modify the user experience when needed

Digital wallet creators cannot assume that the most financially disadvantaged population will always have the latest version of a modern smartphone, or even close to a recently released version. Many mobile users in developing countries, especially in Asia and Africa, use older feature phones dependent on the USSD message exchange protocol. Also, since gaps in user experience are not always apparent at product launch, the wallet must be flexible enough to further customize interfaces and overall usage scenarios.

2. Have a strong back-end that can use alternative data for identification and allows flexible, fast KYC

Processing alternative data requires sophisticated real-time analytics such as analysis of photo and video, or other measures of creditworthiness like rental history. This requires a robust back-office system.

3. Invest in a technological platform that can keep prices low and fees completely transparent

Low fees are one way of removing one of the barriers to financial entry – cost of services. A major obstacle to launching a financial inclusion product is the low value of transactions, which is usually not enough to cover the cost of service with a traditional fee-based model. With an optimised technological platform, fees can be kept low and transparent for customers, merchants, and partners, and provide cost efficiency and scalability for complex tasks from automated processes. An example is SmartPay’s digital wallet, run on the Way4 digital platform. Thanks to Way4, this financial inclusion fintech achieved an acceptable TCO at launch and was able to scale up to 1,4 million users. Now SmartPay’s cost of providing service is so low that it maintains margins even for microtransaction processing.

4. Don’t underestimate the importance of real-time

To gain user trust, all transactions, available options, user actions, and their consequences should be visible in real-time and reflect the actual state of the account. For small merchants, real-time payments allow the liquidity of their business to be visible daily, instead of once at the end of the month. This helps them avoid cash flow problems. Governments of several countries have backed digital payment initiatives with real-time infrastructure such as CoDI in Mexico and PayTM in India.

5. Use the power of the cloud

Although cloud computing is not an option for all regions, it can address several problems like infrastructure, cost, scalability, and security. Cloud-based digital wallets can offer 24×7 access to banking services, improved resiliency and productivity, security through PCI DSS used in the financial services industry, and scalability, all features that save money for both the providers and their customers.

6. Quickly launch new services your customers need

Successful wallets like M-PESA or AliPay are not just about giving people ability to pay. Depending on the market, they can be combined with deposits, loans, multiple accounts with attractive currency exchange rates, informational and agent services, and more. OpenWay client SmartPay has equipped its financial inclusion wallet in Vietnam with convenient job posting and search features, which successfully expands on the cultural tendency of its customer base to search for jobs through existing contacts.

Buy Now, Pay Later (BNPL) can also become an anchor service for customers in the financial inclusion process, since short-term interest-free loans are an attractive option for those with smaller incomes. These features can be wallet-centric, but can also be bundled in a card offering. For example, LOTTE Finance, a multi-national business conglomerate, uses OpenWay’s Way4 to offer BNPL payments in Vietnam. Customers can pay for goods on services offered by LOTTE Finance’s partner platforms within a personal credit limit granted by the wallet without incurring any interest.

However, the most important factor that determines whether a wallet succeeds or fails is the flexibility to become the player that the market needs. How can a financial service provider become an agile and robust member of a larger, more inclusive ecosystem?

Look at the ecosystem, then the wallet

To gain the trust of the unbanked and underbanked, it is essential that financial inclusion solution providers personalize their interaction with customers. The wallet users need to feel that the services are selected or designed uniquely with their needs in mind, and this builds trust. For example, in some regions mobile payments are more expensive, but QR payments are cheap. M-PESA works in some scenarios but not in others. Or culturally and socially, people show that they are much more attached to certain payment methods than companies realise.

This is where wallet providers need to experiment with technological flexibility. For example, OpenWay client SmartPay uses QR codes to engage hundreds of thousands of merchants and individuals in the wallet payment ecosystem. They connect both private and business customers to an entire network of banks, HR agencies and other partners through their wallet. Another OpenWay client, AzeriCard, decided to launch a remittance service now known as cash-by-code. When wallet users forgot their bankcard at home, they would just send the code to themselves. In this way, the remittance innovation turned into a cash-out innovation. Now, this feature is one of AzeriCard’s most popular services, and as a processor, they can offer cash-by-code to the clients of their 16 customer banks.

Banks can lead the way with digital-only cards

In going digital-only, banks can compete effectively with fintechs in financial inclusion initiatives if they have invested in the kind of new-generation platforms as fintechs run on, such as Way4. An example of this is Uzpromstroybank in Uzbekistan, Central Asia, the country’s largest bank. It selected Way4 in building its processing centre in-house from scratch for digital card issuing, omnichannel merchant acquiring, and 3-D Secure processing of ecommerce transactions. With this platform, the bank is able to issue digital-only cards and deliver them to unbanked users via smartphones.

A proven platform for financial inclusion solutions

As we have seen in the business cases mentioned above, both tier-1 companies and startups around the globe have selected the Way4 platform as the core of their payment solutions, including those focused on financial inclusion. Among them is a digital wallet that was launched from scratch to become a huge payment ecosystem in just three years, giving 1,7 million people and 400,000 SME merchants access to financial and non-financial services.

OpenWay’s experience shows that with a cost-saving, data-driven and innovative platform, a wallet targeting an undeveloped market can be a commercial success. By creating a new financial ecosystem, banks, fintechs and other players can generate increased revenue and benefits for individuals and merchants using the system, as well as themselves. With the financial and payment landscape shifting dramatically during the last few years, the success stories of our clients may well be repeated by those who pioneer new digital solutions, driving investment and economic growth in an ever-changing market.

About Maria Vinogradova

Maria Vinogradova is the Head of Strategy and Market Intelligence at OpenWay. Maria started her career as an IT product manager and then as a digital transformation manager. At OpenWay she pioneered a role as concept designer and ambassador for one of the first white-label digital wallet platforms on the market. She has also participated in developing one of the first omnichannel payment platforms in the industry. In her current leadership role at OpenWay, she and her team consolidate insights on payment technologies and business cases to identify important business and technological trends and cases relevant to banks, processors, fintech start-ups, telcos, and PSPs all over the world. This results in the product and brand strategies that help OpenWay clients to achieve their goals in the ever-competitive payments market.

About OpenWay

OpenWay provides the Way4 digital payments software platform for tier-1, mid-size and startup players – including card issuers, acquirers, processors, telcos, payment switches, fleet companies, and digital wallet providers. Gartner, Omdia and Aite have ranked OpenWay as the best digital payments software provider and the best payment solution in the cloud.