Cell phones connect an increasing number of Kenyans with digitally-based financial tools and services.
our goal:
Our Financial Services for the Poor (FSP) program supports government and private-sector partners in a shared effort to establish financial services for the world’s poorest to use to build more prosperous and secure lives for themselves, their families,
and their communities.
The Challenge
At A Glance
In just the past six years, 1.2 billion people worldwide have gained access to bank and mobile-money accounts.(1) This revolution in financial inclusion has the potential to offer a pathway out of poverty for hundreds of millions of people, and to spur broad economic growth.
Our Financial Services for the Poor strategy aims to expand the availability of affordable and reliable financial services that serve the needs of all, including the poorest.
Digital technology and changes in national policy are clearing away obstacles that once kept these services out of reach for many, but tough challenges remain.
We are working with our partners to support public and private investment in digital payment infrastructure, new regulatory standards, and gender equality initiatives such as digitized government benefit payments, to ensure continued progress toward the promise of financial inclusion.
Our team is led by Michael Wiegand and is part of the foundation’s Global Growth and Opportunity Division.
(1) World Bank, “Global Findex 2017”
Every year, millions of people around the world transition out of poverty. Regional growth and economic opportunities like new jobs, technologies, and business opportunities, help people build more stable economic lives. At the same time, millions of people remain trapped in a cycle of poverty that is very difficult to escape. We believe financial exclusion is a significant driver of this cycle.
About 1.7 billion people worldwide are excluded from formal financial services, such as savings, payments, insurance, and credit. In developing economies, only 63 percent of adults have an account. Women are excluded from these beneficial financial systems more often. Nearly one billion are still left out of the formal financial system, and there is a 9 percent persistent gender gap in financial inclusion in developing economies.
Most poor households instead, operate almost entirely through a cash economy. This means they have to save in physical assets, such as livestock or jewelry. Cash gets spent, animals die, and jewelry can be lost or stolen. What’s more, these forms of savings earn no interest and can actually lose value over time. To send money to family, those without a bank account have to rely on couriers or friends who carry cash by bus, which is expensive, insecure, and slow. To borrow money in an emergency, they must turn to moneylenders who charge notoriously high interest rates.
Without formal financial histories, people are also cut off from potentially stabilizing and uplifting opportunities like building credit or getting a loan to start a business. And it’s harder to weather common financial setbacks, such as serious illness, a poor harvest, or an economic downturn. All too often, financial exclusion makes the expenses of poverty difficult to overcome.
Our Strategy
The Bill & Melinda Gates Foundation’s Financial Services for the Poor program works to broaden the reach of low-cost digital financial services for the poor. Our strategy is aimed at supporting what we and our partners believe are the most catalytic approaches to financial inclusion: helping to drive the development of digital payment systems that can help spread use of digital financial services quickly, advancing gender equality to ensure women share in the benefits of financial inclusion, and supporting the development of national and regional strategies that accelerate progress for the poor and provide exemplar models. To achieve these objectives, we work with partners around the world to align on common principles for digital financial inclusion and support policymakers as they work to develop policies and regulations that facilitate growth in digital financial services and provide oversight and accountability. We also invest in national financial inclusion initiatives where the largest number of people living in poverty stand to benefit from digital financial services, including: Bangladesh, India, Nigeria, Pakistan, Indonesia, and East Africa.
We are not focused on establishing a particular product or distribution channel, but rather on finding innovative ways to expand access and encourage markets to determine which products and channels are most effective. We support approaches that can provide financial services to the broadest number of people, but we also recognize that countries are at different stages of developing inclusive digital financial systems, and their approaches must reflect the distinct needs of their economies and citizens.
Areas of Focus
Digital technology and changes in national policy are clearing away obstacles that once kept digital financial services out of reach for many, but tough challenges remain. For DFS to realize its full potential, policymakers and business leaders will need to invest in the right payment infrastructure, regulatory standards, and customer activation strategies to ensure continued progress toward the promise of financial inclusion.
Payments Infrastructure
One of our most important priorities is the development of pro-poor, digital payment systems – the mechanisms by which individuals and businesses actually buy and sell. These systems can foster competition, drive innovation, and accelerate the development of digital financial products and services customized for the needs of low-income communities. To be genuinely inclusive, these payment systems need to have five key traits:
- Accessible: They need to reach into the poorest neighborhoods and smallest villages, and they need to be easy to acquire and understand.
- Reliable: Users’ money and information need to be readily available and highly secure, protected against cybertheft, money laundering, and other breaches.
- Valuable: There must be a clear advantage for people to use digital payments instead of cash.
- Affordable: To deliver on their potential, digital payment systems must be free of cost for all or most people.
- Profitable: The emergence of global digital financial services will depend on the full involvement of the private sector which must be able to develop sustainable business models to support their service offerings.
Perhaps the most important condition for the development of new, pro-poor payment systems is interoperability – the ability of customers to transact with any other customer, whether they use the same service provider or not. This kind of open-loop system substantially lowers the costs and complexity of digital financial services and payment platforms. Opening up payment infrastructure to new kinds of companies outside of traditional banking organizations can help accelerate the development of these systems.
Increasing use of digital financial services
Our team is also actively exploring ways to accelerate use of digital financial services. One priority is exploring new ways to better facilitate services that help consumers convert digital money to cash, when needed. These “cash in, cash out” services must be easily accessible, trusted, and available at low-cost for consumers in order to work well and enable digital financial service use by more people. But they are the highest-cost component of a digital payment ecosystem and the biggest challenge for private sector players wanting to provide innovative payments solutions. We also are working to promote the development of effective identification systems in priority geographies. ID platforms such as the Aadhaar system pioneered in India is a promising model for providing safe, efficient, and widely beneficial identification services that support financial inclusion, across a country.
Regulation and risk management
Governments can accelerate financial inclusion by establishing regulatory frameworks, policies, and incentives to help a wider variety of digital financial service providers compete on a level playing field while protecting consumers and the financial system. Open and fair competition will spur innovation and drive down costs to enable DFS to flourish nationally. Required rules include licensing requirements, know-your-customer policies, and agent regulations which encourage DFS innovation and competition. But financial inclusion is not just about opening systems and lowering barriers. While some risks diminish, new risks and challenges emerge. Supervising a wider range of market participants and protecting millions of new consumers is no small task, and this is an important element of our work.
Driving women’s financial inclusion and economic empowerment
An important component of our foundation’s initiatives to increase financial inclusion and gender equality, is our work to ensure more women benefit from empowering financial tools and services—such as bank accounts, mobile money and credit. One way we are working to drive progress is by supporting the digitization of social protection programs, which can help improve the speed, efficiency, security, and accuracy of these programs and provide incentives for women to use digital accounts more broadly. Estimates show that digitizing government payments could help bring formal financial services to up to 60 million women in the poorest households in emerging economies. There is strong evidence that this access is broadly beneficial to women, and their families. For example, a randomized experiment in India found that when government payments to women were delivered directly into women-held accounts, this triggered a 25 percent increase in earnings among women, boosted women’s bank balances by 60 percent, and caused an 11 percent increase in women’s participation in the labor force. When women can fully participate in the economy, they become engines of opportunity for their communities and their countries, and can be powerful drivers of global growth.
