Why the world’s poorest need banks too

For many of us, financial transactions are as easy as one click of the mouse. However, for 2.5 billion of the world’s poorest, that kind of financial flexibility is completely foreign. Transactions are made every day, but predominantly in cash. They have mobile phones, but they can’t easily use them to withdraw and transfer funds, pay bills or monitor an account. To them, the doors to modern financial institutions are generally closed.

With that in mind, the Financial Services for the Poor (FSP) program is excited to embark on a new collaboration with MasterCard, in an effort to extend financial services to billions of people whose economic lives are inhibited and eclipsed by a combination of local factors and institution-wide exclusion. We have awarded MasterCard a grant totaling $11 million to open the “MasterCard Labs for Financial Inclusion,” a new initiative based in East Africa, which we hope will yield innovative strategies and impactful results to drive progress in serving the unbanked poor worldwide.

With this grant, we launch a different approach to the problem of financial exclusion—by which we mean, broader access to and participation in the formal financial system, with the goal of helping the unbanked poor store, transact and weather unexpected financial shocks more effectively. We are not just designing a new financial service or program and delivering it to those living in or near poverty. We are starting with fundamental questions and probing the possibilities: How can we create adjacent revenue streams to allow financial providers to service the poor profitably? How can we reduce customer acquisition and maintenance costs? What features and functionality will invite and drive usage? How can anyone make a frictionless transaction in seconds? How do we make sure these instruments have an impact globally?

In asking these pointed questions, we’re striving to improve on two factors that have delayed past efforts to resolve this problem. One of those is death by design—solutions endlessly planned and insufficiently executed to ensure long-term use and adoption by poor populations. An incredible amount of work and research has been done in the past—and that important research should and will continue—but, beginning with this grant, we want to bring this research to life by prototyping and testing actual products in the field. We want real options in the hands of users, sooner rather than later.

The other factor is scale. Past efforts focused on a particular local institution with a local reach. These efforts are absolutely necessary—and celebrated—but for the complex issues we’re tackling, long-term success isn’t measured in the thousands. We need to reach billions. And that requires working with many partners, including those with a proven record for delivering on that scale.

MasterCard’s lab model promises to extend solutions regionally and possibly globally. The work done at the MasterCard Labs for Financial Inclusion will lead to new products and services for poor people that leverage existing and new infrastructure, including those that are not specific to MasterCard. The lessons from the lab will belong to the public good, and all products and services coming out of the lab will adhere to existing global standards to ensure that local financial service providers are able to incorporate the solutions into their businesses.

The terms of the grant are these:

• The foundation will grant MasterCard $11 million over 3 years, to use for research and development.
• MasterCard is matching that contribution in-kind and will be responsible for funding the lab going forward.
• An investment committee with representatives from FSP, MasterCard, and independent experts will select successful prototypes for an incubation stage. At this point, ideas and business models will be further vetted and potentially fitted for commercialization.

In keeping with our plan for rapid prototyping and testing, incubated ideas will be run as lean startups—nimble, responsive and vigorous. FSP is reserving $8 million for ideas that evolve to this stage, to give each startup the best possible chance of reaching commercialization at scale and becoming a vital part of a new economy. Successful incubations could find a home within MasterCard, be spun out as stand-alone businesses, or be acquired.

All prototypes, incubations and outcomes will be judged according to FSP’s Global Access policy, to ensure that the work stemming from the lab has true benefits for poor people. The lab model appeals to us because of how it supports financial entrepreneurs and local innovation, and spreads that innovation throughout the region and beyond.

With this initiative, our aspirational goal is to directly or indirectly reach 100 million people in five to seven years. But launching the plan is not the end of the road for anyone. It is only the beginning.

We want to hear from everyone who is open to doing things differently than they’ve been done previously. Who is asking new questions, and seeking new answers? This is a problem too large for any one organization. Only the combined effort and mutual investment of players large and small can make the difference for the world’s poor and underserved.

For them, and for us, the work is more than worth it.

Published in collaboration with Impatient Optimists

Author: Janine Firpo is the Deputy Director for the Financial Services for the Poor.

Image: A Zimbabwe Stock Exchange official works on a computer after the close of trade in Harare June 6, 2014. REUTERS.