According to the World Bank, 1.2 billion adults have obtained bank accounts since 2011, yet change hasn’t been as swift in all regions and in all segments of society – until now. Stefano Stoppani, CEO of Creditinfo Group, explores how technological advancements in fintech are creating new opportunities for women in regions such as the Middle East and Africa.
Wealth in the MENA region is something of a paradox. While immensely rich in resources and home to some of the world’s most affluent individuals, the Middle East has one of the largest income gaps the in world; between 1990 and 2016, 66% of the wealth in the region was shared by just 10% of the population. It’s unsurprising, therefore, that the Middle East also has one of the lowest rates of financial inclusion, and one of the highest of financial poverty.
Mind the gap
According to findings from the World Bank, 52% of men and only 35% of women in the Middle East and North Africa have an account with a bank or mobile money provider. This gender gap is the largest of any other region and can have a significant impact on women’s employment prospects and financial independence.
A lack of access to formal financial services means unbanked populations have little or no credit history (‘thin file’ customers), and therefore have no way of proving that they are creditworthy. Without a credit history, individuals cannot get a foot on the first rung of the financial ladder. And, without access to credit, buying a home, expanding a business, or simply purchasing everyday products and services becomes a challenge. As such, the impact of un(der)banked populations extends far beyond the individual, widening the poverty gap and hampering the growth of the banking and financial services sectors in these regions.
When it comes to financial inclusion – and more specifically the gender gap – in MENA countries, only around two in five women participate in the region’s labour market, and women still have fewer inheritance rights than their male counterparts. The lack of a formal banking infrastructure, and the difficulty for those living in rural areas to access physical branches of financial services, compound the issue.
However, the Middle East is developing at a dizzying rate, presenting opportunities to increase financial inclusion, lift individuals out of poverty, and nurture a thriving fintech sector.
Fast growth and fast finance
Over the last 50 years, the Middle East has witnessed the fastest urban population growth in the world, with 70% of people now living in urban areas – putting the region a par with Europe. It is also seeing the emergence of a number of initiatives aimed at increasing financial inclusion rates among women. The World Bank, for example, used International Women’s Day earlier this year as a platform to launch the MENA Gender Innovation Lab (MNAGIL). Using research-backed and evidence-based practices, the MNAGIL intends to design and implement policies to help close the gender gap and empower women.
These are positive moves and signify optimism for the region. However, the ease of visiting a bank in an urban area or the intention to change policy does little to address the issue at the heart of financial inclusion. Most financial institutions will not lend to individuals with little or no information on how risk-tolerant or risk-averse they are, closing the door on any chance of this sector formally entering the regional economy.
A new approach is needed. This must combine the robust, comprehensive approach to data analysis employed by traditional credit bureaus, with a new, innovative means of credit scoring.
Mixing old and new
Psychometric scoring for risk evaluation is being employed by a growing number of financial institutions globally. These solutions allow parties to assess an individual’s personality type and behaviour, and determine their level of risk. Requiring no information on historic behaviours and using image-based questions, psychometric scoring provides a means of evaluating an individual’s likely behaviour with a credit or insurance product, regardless of their financial status or literacy level. This psychometric data can be blended with non-traditional data mined from new data sources, such as social media, mobile transactions and trade data, to help the risk assessment process of unbanked individuals.
The financial provider is then able to unlock a whole new segment of potential customers, while these individuals get an invaluable opportunity to access financial products – be it a small business loan or a mobile banking account. Approaches such as these will benefit the wider economy, and, in the MENA region, women in particular. The area currently has the world’s second-highest female micro-enterprise financing gap, with $16 billion between the credit female entrepreneurs need and the financing they receive.
Ruby, an entrepreneur and mother of two from Kenya, is just one recent success story from this approach. Kenya, like the MENA region, has a higher proportion of unbanked women than men: a fifth of the adult population is unbanked, of which women make up about two thirds. After losing her main source of income, Ruby looked to where her passion and skills lie: the retail industry. Needing initial capital to launch her clothing business but unable to access a bank loan, Ruby instead turned to mobile loans. This allowed her to access small amounts of capital using straightforward psychometric scoring, and then to build and monitor her credit information.
Improvements in network infrastructure and the falling price of handsets have opened similar opportunities in the Middle East, where 86% of men and 75% of women who make up the region’s unbanked population, have a mobile phone.
The value of economic empowerment
The benefits and success of this innovative approach to finance are not just about delivering quick-fix money solutions. Instead, it is about empowering individuals; Ruby, for example is now in a position where she feels confident in approaching a bank for a loan, armed with data and proof of her creditworthiness, which she can access and manage independently.
Finally, an estimated $1 trillion could have been generated in additional economic output if MENA governments had narrowed the gender gap between 2000 and 2011. But there’s no value in looking back. According to a McKinsey Global Institute report, supporting women’s economic advancement going forward could add $12 trillion to global GDP by 2025. So, old, outdated approaches to finance must be reconsidered and renewed, empowering women and strengthening economies in MENA and beyond.
‘MOVE FAST BUT DON’T BREAK THINGS’ – WHY FINTECHS WILL COME TO LOVE REGULATION
Alex Johnson, Director of Portfolio Marketing, FICO
The guiding ethos of fintech is move fast and break things. It’s the fundamental advantage that disruptors have over the incumbents they’re disrupting — the ability to move quickly and make mistakes, learn from them and deliver innovative services to customers. Generally, this ethos is presented as a virtue. Banking is ‘broken’ so any investments in improving it are both notable and noble – even if there are bumps along the way.
Conversely, anything that stands in the way of this ‘march of progress’ is generally cast as a villain.
The most prominent villain for fintech companies is regulation. From their perspective, it’s a competitive moat, based on rules written for a different century, that protects banks’ ability to make money without needing to innovate and offer more or improved services to their customers.
So, it’s easy to see why a fintech company — believing fully in the virtue of its mission and faced with a litany of illogical and intractable regulations — might just say ‘we’re doing it anyway.’ That’s what Robinhood co-founder Baiju Bhatt reportedly did when his company tried to roll out a checking and savings product that it claimed was insured without confirming that with regulators first.
The problem is that while we may mythologise the ‘move fast and break things’ ethos in the abstract, consumers don’t love it when their stuff breaks in the real world.
And when fintechs and challenger banks aren’t constrained by regulation (as they mostly are in the U.S and Europe) the harm caused by this ‘move fast and break things’ approach can be much more severe than a service outage or a false claim of deposit insurance.
Stories from overseas
In China, online P2P lending exploded in popularity, with the number of P2P lenders growing from 50 in 2011 to 3,500 in 2015. Then the whole industry imploded when it was revealed that 40% of P2P lending platforms were Ponzi schemes.
In India, online lending companies raised a record $909 million in venture capital last year (the third-biggest market behind the U.S. and China). And those lenders are now using personal data from borrowers’ mobile phones to make lending decisions – which although illegal, is reportedly ignored by Indian regulators.
In the Philippines (another emerging market where venture capital dollars for online lending are pouring in), the National Privacy Commission is investigating hundreds of complaints from consumers about lending apps leveraging their personal data to shame them into making their payments.
A prediction for the decade to come
In the 2020s, I believe fintech companies will come to love – or at least quietly appreciate – regulation for two primary reasons:
Fintechs and challenger banks understand that brand recognition and affinity is key to their long-term success. Building their brands will be a challenge. A recent survey of 2,000 Brits found 40% don’t trust challenger banks at all and 67% said they are more likely to do business with banks that have branches on the high street. As Zach Bruhnke, co-founder and CEO of U.S. challenger bank HMBradley recently said, ‘We’re going to have to grow by word-of-mouth and doing the right things for our customers.’
Fintechs and challenger banks focused on the long-term task of building brand affinity and trust will, over the next decade, come to despise bad actors that skirt the rules and dress up get-rich-quick schemes in the same language they use to describe their own firms. Regulations that constrain and/or shut down these bad actors will be increasingly appreciated by legitimate market participants.
In the 2010s, we saw the beginning of a trend that will strengthen in the 2020s — regulations designed to foster competition between incumbents and new market entrants. To date, such regulatory action has run the gamut, from vague (innovation sandboxes and special-use charters) to hyper-specific (U.S. regulators’ cautiously approving the use of alternative data, or the Bank of England considering giving non-banks access to its 500-billion-pound balance sheet). Perhaps, most promising, has been the work done by the Competition and Markets Authority (CMA), which has been proactively driving the adoption of rules and standards around Open Banking for past couple of years. O
ver the next decade, through careful management of public perception and increased investment in lobbying, fintechs and challenger banks will further reshape the regulatory environment from a competitive moat to a more level playing field.
Reaching fintech maturity
’As a licensed broker-dealer, we’re highly regulated and take clear communication very seriously. We plan to work closely with regulators as we prepare to launch our cash management program’.
This was the statement issued by the chastened co-founders of Robinhood shortly after they backed away from their plan to launch a checking and savings product without government insurance. And here’s the crazy part — that’s exactly what happened! Less than a year later the company announced a new deposit product, this time insured by the Federal Deposit Insurance Corporation (FDIC).
As fintech companies mature in the 2020s and the focus of their strategic objectives shifts from growth to profitability, regulation will play a vital role in transforming the ethos of those companies into something a bit more sustainable. Call it ‘Move fast, but don’t break things’.
HOW TO MERGE YOUR FINANCES AS A COUPLE?
By Nelisiwe Ndlovu, Certified Financial Planner at Alexander Forbes
There is never a good time to discuss finances with your partner, married or unmarried, and one key issue that needs to be discussed is whether you should merge your finances.
Joining all your money matters can seem overwhelming at first, so you don’t have to combine every bank account and credit card from the get-go.
Start by having an honest discussion with regards to your individual money management and financial commitments before deciding to merge or co-manage your household finances while deciding if you want to fully merge all your finances. Detail all individual income, expenses, and all your financial commitments. The best way to achieve this would be to first take your individual budgets and combine them. This will tell you what you can and cannot afford as a couple. If one partner does not usually budget, this is a chance to start doing so as this will ensure that your household finances are under control.
Before you think about merging your finances, be open and honest about:
- How much you earn – what is the income that you will bring home? What is the frequency of your income? Are you permanently employed or a contractor?
- What are your current individual expenses and financial commitments? List your assets and your current debt.
- Your individual financial goals and money management techniques – don’t worry if you might have not figured this out at the time of merging your finances – the important thing to do is to be open and honest so that you both build a stronger money foundation
- Disclose your financial obligations, this becomes very tricky if left until too late and may cause unnecessary tension in the relationship
- What are your goals as a couple – what is the purpose for merging your finances?
Married couples can formally or informally merge their finances as detailed above where household expenses are split between the couple (the split could be 50/50 or any fair split agreed upon by the couple, which could be based percentage-wise depending on one’s income). Some couples tackle finances by adopting the ‘pick a bill’ approach, where one couple pays the water and electricity while the other covers the food.
Being married does not mean necessarily that you need to have one joint account. You may also just want to open one joint account where you each deposit money to pay just your monthly household expenses.
The top five things to remember when merging finances as a couple:
- Have the ability to manage your own finances before expecting another person to merge their finances with you.
- Be mindful of your potential spouse/life partner’s money management behaviour and skills so that there are certain things you can address together before considering merging your finances
- Always keep an open line of communication – honesty is the best policy
- Set a money limit which you can each spend without having to consult each other
- Don’t forget to change your wills and beneficiaries on pension or provident funds as required.
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