Two and a half billion people live in poverty and lack access to the financial tools that can improve their lives significantly. The global financial system – as impressive as it is – fails them. Yet, for the first time in history, three major developments make it realistic to imagine a world where we can change that: technology (especially digital and mobile communications), big data (with its capacity to better understand individual behavior), and microfinance (which brings affordable financial tools to the poor) make a vision of a financially inclusive world a real possibility.
In the past, the poor have simply been excluded from the mainstream financial system. Their transactions were too small, the distances were too long, and, generally, it was just too costly to reach them. In the last few years, however, the digital revolution has changed the cost calculation radically, to the point where we are starting to rethink all our presumptions. Mobile phones have become ubiquitous, even among those living on less than $2 a day – today, 85% of the world’s population has access to one. For the first time, transaction costs are being cut dramatically, and distances are no longer insurmountable. We can envision providing for the financial needs of the poor in a scalable, sustainable, and even profitable way.
At the same time, the global microfinance industry has grown to serve hundreds of millions of the world’s poor and their families. We’ve learned a great deal about the products and services that the most vulnerable people in the world need to manage their lives and now appreciate that, in many ways, those living in poverty have more complex financial needs than those with wealth. For example, many of us take for granted that our income and our expenses come at roughly the same time on a monthly basis so that we can pay our bills regularly. For a poor farmer who only gets paid at the time of the harvest, an unpredictable, one-time income has to stretch to cover all business and household needs until the next harvest. So, a safe, affordable place to save is vital, and access to appropriate credit, insurance, and payment mechanisms are arguably more critical for this class of client than any other.
This drive to meet the needs of the poor, combined with new technologies, reveals some very exciting innovations. For example, Tiaxa in Latin America and Asia uses prepaid cell phone history to assess an individual’s likelihood of repayment. The company has developed a proprietary scoring algorithm which then facilitates a seamless advance to complete calls, send SMS messages, download services, or navigate the internet. Tiaxa asks questions such as how regularly a person prepays phone bills and by how much at one time. Based on the answers, Tiaxa can offer the most appropriate “nano loan” for that individual, and is working on using the same system to make small working capital loans to airtime resellers – thus helping to make the mobile phone a more powerful tool for the unbanked. Today, Tiaxa facilitates over one million transactions per day – a success unrivaled by any other big data company serving the unbanked.