“Digital finance is with us and here to stay”

Greta Bull, CEO of CGAP and director at the World Bank Group

Greta Bull is CEO of the Consultative Group to Assist the Poor (CGAP), an independent think tank dedicated to financial inclusion and housed at the World Bank. In her 18 years of experience in development finance, Ms. Bull has worked with banks, microfinance institutions, fintech and other actors in this sector.

"You have to think about digital transformation as being truly transformational"



1. Two years ago, you wrote an open letter mentioning four factors changing the     landscape for financial inclusion: Technology and distribution, Policy and regulation, Open ecosystems and Data. How are these forces coming together and what the microfinance sector needs to do to adapt to these changes?

We are seeing a massive change in the way financial services are being delivered via platforms; they are being bundled with other services. The financial services value chain is being modularized---it's being taken apart and broken into different pieces. Therefore, the microfinance sector is going to have to think carefully about how to adjust to these changes and how to connect with new ways of distributing financial services. The sector will have to adapt to new policies and regulatory changes and think very carefully about how to connect in open ecosystems and how to respond to the proliferation of data in the market. Additionally, the sector needs to become even more client centric and efficiently roll out services to a much broader range of clients. There are many challenges that are coming for the microfinance sector, but the transformation that is going on right now in the delivery of financial services is huge.

2. Looking back to several decades ago, what do you think has been the most overlooked factor we should now address to achieve (responsible) universal access to finance?    

When I started working on financial inclusion, people talked about savings, credit and insurance. No one talked about payments. Nobody thought about payments as a financial service. In my opinion, payments have been the absolute game changer. Payments are basically universal; everybody finds utility in them, but they are also really important and create data trails that make it easier for financial service providers to do a better job of creating services that are relevant for the poor. So to me, the piece that we were missing 30 years ago was payments. Digital connectivity means that payments are much more manageable and traceable than they were 30 years ago.

3. In what ways can Microfinance Institutions adapt to the Digital Age?

I think the first thing that microfinance institutions need to do is to not hide their heads in the sand and hope that it will go away. Digital finance is with us and here to stay. Markets are very heterogeneous and it’s important for microfinance institutions to understand the ecosystem that they are operating in and foresee changes that are coming. Once the institutions develop a realistic plan that speaks to both the strengths and challenges of the microfinance sector, it's imperative that they stick to it. One of the biggest challenges in microfinance is a human one. It’s the transformation that digital implies from the very top to the very bottom of the organization. Many boards aren´t equipped to go through digital transformation, and similarly many staff members in microfinance institutions don’t have the training and the skills to make that transition. You have to think about digital transformation as being truly transformational and not a cute project on the side. It will truly transform the institution and it will require a commitment from the very top of the organization to the bottom.

4. How can regulators and policy-makers navigate the challenges posed by disruptive fintechs to create a favourable environment in harmony with traditional banking models?

Regulators need to be open minded to new providers and let innovation flourish. We see a big difference today between markets where nontraditional providers have been allowed to come in and operate and those where they have not. The shift in access is huge in places where new players are coming in. Yet they also have to be cautious and anticipate and manage the inevitable problems that occur. To do this, they need better data and be proactive. For example, digital credit in Africa has absolutely exploded and with a couple of exceptions, most regulators have no idea how big it is and how much of their market digital consumer credit represents. They require data to be able to manage this since they not only have the traditional financial sector regulatory risks but they also have other important risks to consider, like competition policy--keeping an even playing field between traditional providers and non traditional providers.

While they should be proactive when required, to protect both consumers and the financial sector alike, they must also make sure that they are acting to the benefit of consumers, which will not necessarily benefit providers. This implies being in constant conversation with the industry in order to work together to create financial systems that are inclusive, open and competitive. Though this is not always the case, I have been to markets where regulators and industry don't speak to each other. But most of all, regulators need to innovate. For instance, the changes in India and the EU are largely driven by regulators in response to competition issues. India is creating public goods that allow the private sector to leverage off of a public utility. That is driving a huge amount of change in not just banks but also in big fintechs. There is a lot of dynamism when regulators permit change to happen, but they need to keep an eye on it and make sure that it works for everybody.

5. What have we learned/are we learning from data gathered regarding those who were traditionally excluded from the formal financial system?

First and foremost, and this is largely based on the financial diaries done by a number of researchers, we have learned that the poor have really complex financial lives. They use financial services that meet their needs in a meaningful way. Additionally, being poor is about unpredictability and having to make really difficult choices. Things that might look illogical and not make sense to us, may make perfect sense when you think about the context of the person. Additionally, it’s very precarious and expensive to be poor. One setback can change a family's trajectory entirely. So financial services, at least the way we look at it at CGAP, should do two things; One, help poor people find ways to capture opportunities that come their way, and two, make sure that people are protected and don’t fall back into poverty when they have moved forward. Services like savings and insurance really make a difference in the lives of the poor, nevertheless, they are the hard ones to make work from a financial point of view. Beyond that, and this is quite important, impact pathways are really complex and financial services only play a part in improving people’s lives. I think we have come a long way from the days when we thought microfinance was going to solve poverty. We need to stay humble and be clear about what our impact really is and where we can make a contribution.

6. Based on your experience, could you say that you have witnessed a clear and traceable relationship between financial inclusion and economic growth, albeit at a community level?

Let’s start at the highest level. The relationship between economic growth and financial sector deepening is clear and well established. If we take money off the sidelines, out of cash and put it into the more formal sector, it can be put to efficient use. Simply looking at the size of the mobile money float accounts in Africa shows just how much money is actually sitting on the sidelines and demonstrates how much value these deposits have if you put them all together. But it's a pretty different question if these assets are being put to use in empowering the poor or building economic growth from the bottom up. In a lot of markets, many of the banking systems are basically dedicated to lending money to the government; it isn't really dedicated to growing the private sector. But the impact evidence for services like savings and insurance is clear, they really make a difference to helping people cope. And the growing evidence base on payments is also looking good. The story for credit is more nuanced and it's not surprising because in many ways it’s the most dangerous of the financial services. You can hurt yourself by taking too much credit. But I think there is evidence that credit can have impact, but it varies from household to household and differs by market context.

India gave us a really good insight into that. There was a research done during the Andhra Pradesh crisis when the microfinance sector basically disappeared overnight, there was a huge amount of money withdrawn from the system. Not surprising, researchers found that casual labour dropped, household consumption dropped and there were a lot of indicators showing that a lot of people were worse off because of that withdrawal of liquidity in the market. Indeed there is value in microcredit seen from a general equilibrium perspective but also from an individual household effect. I think the record on credit is relatively positive but the opportunities have to be balanced with the risk.

7. In the past eight years, global financial inclusion has gone from 50% of the adult population, to 70%; still, 1.7 billion people are financially unattended or underserved. What do you think the next eight years will look like?    

I think we will continue to make progress on access but we also have to recognize that the low hanging fruits are, for the most, part gone. We must continue work on access in markets that have not been receptive to innovation. Similarly, focus needs to be placed on the usage of those services. It's not surprising that usage lags behind access. This requires behaviour change and it takes time for people to get comfortable with new financial services.

Additionally, I believe we will continue to see an acceleration of technology into financial services. That will continue to unbundle and rebundle financial services in different ways including with non financial services. So as we are seeing in social commerce and big tech companies, financial services are being embedded into other things that people want and that creates challenges for incumbent providers. I think the banking industry and the microfinance industry will come under pressure and how those industries adapt and cope with those changes is going to be very telling for the future of those industries. I think high tech will be important, but also high touch. A digital bank provider in South Africa told me recently that 85% of its transactions are still done by human interactions at their kiosks in local shops. People want that touch rather than interacting via mobile phones. That probably is good news for the microfinance industry.

I think there will also be challenges around responsible finance because the places where you make money are where the greatest risks for consumers are. Digital credit is testament to that, and regulators have to stay on top of it. Finally, I think we need to really build on what we have achieved by expanding access and deepening usage. But we also need to think carefully about what financial services are here for, what is their impact, and really understand how financial services can give poor people access to essential services, access to livelihoods, tools to manage risks in their lives. We still have a lot of work left to do.