Financial Services for the Poor: Priorities for 2012

Poor families in the informal economy need access to financial services as much as wealthier households, if not more so. Their income and expense streams are more irregular, and they have less of an economic cushion to begin with. Yet an estimated 2.7 billion working-age adults globally at the base of the economic pyramid have no access to formal financial services and, instead, have to rely on informal financial mechanisms that are typically incomplete, less reliable, and considerably more expensive.

As a global public good with the mission to advance access to financial services for the poor, our role is to push the frontiers of our field. Building on the progress made last year, we believe our field has five important priorities this year.

1. Deepening the understanding of end-user needs
After the initial success of microcredit, the nascent industry largely focused for many years on scaling up the proven model. This was right because it was important to demonstrate that poor families were valuable clients and that there were sustainable ways of serving them in larger numbers. The $80 billion microfinance industry with its estimated 200+ million clients today remains a great success of sustainable non-government and private sector growth catalyzed by targeted, public subsidies.

But in the course of growing the supply side, important demand side dynamics were overlooked. Poor households in the informal economy are producers and consumers. Not every financial intermediation need is for credit, and not all demand for credit is for the type of short-term, working capital loans that started the microcredit revolution. Poor households need access to the full range of financial services to generate income, build assets, smooth consumption, and manage risks.

In 2012, our field needs to continue its investment in better understanding clients and client segments, their differentiated objectives and constraints, and therefore their differentiated underlying financial needs. We need to continue improve our ability to translate this differentiated understanding into better and more targeted service offerings. And, in parallel, we need to build a community that distills and shares what we learn about how, and under which circumstances, financial services improve poor people’s lives.

2. Advancing the imperative of responsible delivery
Our field has embraced the imperative of responsible finance and made good progress last year. The Smart Campaign gained some 2,200 signatories for its Client Protection Principles. The Social Performance Task Force, the industry standard-setter for social performance reporting and management, agreed on a core set of 11 indicators that are now captured by the Microfinance Information Exchange (MIX). Responsible finance has also become a bigger priority for investors. These are industry self-regulation efforts that complement policy and regulatory efforts for consumer protection and financial capability building for consumers. One important priority for 2012 is to see how these efforts can be best implemented and how they complement each other at the relevant market level so as to ensure best-possible outcomes for consumers while minimizing overlap and administrative costs that ultimately will be borne by customers unless permanently subsidized.

3. Capturing the benefits of business model innovation at the market level
Poor families need access to the full range of financial services. One important insight on the supply side is that provider economics are very different across products. For credit, for example, the key economic challenge is to originate and manage credit risk and repayments at the local level; for small denomination savings and remittances the key economic challenge are ultra-low transaction costs; for insurance, risks must be pooled and managed at a national and sometimes even global level – there is no such thing as small and local in insurance. As a result, no one set of providers can deliver all services. What we need instead is an ecosystem made up of a variety of financial services providers that work together.

Our field has made progress learning from business model innovation at the entity-level. This year, we need to accelerate our efforts to figure out how innovative provider partnerships can work best at the relevant market level. Who should specialize in what; what are sustainable incentive mechanisms that creative viable partnerships; how can services be delivered seamlessly to the clients regardless of the division of labor along the provider business system? This is not easy, but without continued innovation and ingenuity we will not reach the unserved with the broader range of services at the lower costs required.

4. Sustaining the momentum from favorable, global policy tailwinds
Globally, our field has benefited from strong political and regulatory interest and support in recent years. The G-20 made financial inclusion one of the key elements in its multi-year development agenda. The global financial services standard-setting bodies that give guidance to national-level policy makers, regulators, and supervisors identified for the first time financial exclusion as a critical risk that could destabilize a country’s economy and started incorporating the principle of proportionately into their work. At the national level, an increasing number of countries adopted national financial inclusion strategies.

In 2012, our field has important opportunities to help the global standard setting bodies build financial inclusion into their thinking and ongoing work, and to support national policy makers and regulators in their efforts to develop pragmatic approaches to the protection of low-income consumers and to the supervision of institutions serving the base-of-the-pyramid market. Under the leadership of Mexico, the G-20 will continue to provide a global umbrella for these efforts in 2012.

5. Focusing the role of public funders in “responsible market development”
Our objective is accelerated “responsible market development” to quickly reach more of the 2.7 billion working-age adults who today remain excluded from formal financial services. At the highest level, the role of public money in this market development effort is two-fold: first, providing true public goods such as infrastructure, data, or knowledge that the private sector can’t coordinate around; and, second, supporting demonstration effects for service delivery at the entity-level to crowd-in the private sector.

One of the priorities for 2012 is to better understand at a more granular level, where public sector funding can have the highest catalytic impact, and to help the global donor community deploys its scarce resources effectively in those areas.

Over the past years, we have sharpened our understanding of the overall impact of our work. A growing body of empirical evidence shows that access to the right financial service at the right time helps households build assets, generate income, smooth consumption, and protect them from risks. An inclusive financial system that reaches all citizens also allows for more effective and efficient execution of other social policies, for example in health and education. And at the macro level, deeper financial intermediation in an economy leads to more growth, and less inequality.

As a result, access to financial services for the poor remains very prominent on the global development agenda. 2012 offers important opportunities to advance our field. Let’s capture them.