LOREM IPSUM DOLOR SIT AMET COMMODO CONSEQUAT

Financial Inclusion 2020:

The Essential Debates

For more, visit www.financialinclusion2020.org

Will microfinance continue to be relevant in2020 and beyond?

Should regulators or the industry lead on clientprotection?

Will data analytics replace traditional credit

reporting systems? August 2015

Take a moment to celebrate the good work being done on financial inclusion around the globe. TheWorld Bank highlighted the work of many key players when it announced commitments to UniversalAccess. The Institute of International Finance (IIF), with nearly 500 members around the globe, hasalso taken on a leadership role in financial inclusion. There are creative partnerships such as mobileoperators providing free insurance as a reward for customer loyalty. Technology continues to expandat a breathtaking pace, with promise for customers at the base of the pyramid. This all adds up to progress and, indeed, the 2014 Global Findex shows some significant gains ininclusion in all regions. And yet, in the midst of so much to celebrate, it is easy to lose sight of thevision of full, meaningful financial inclusion—a vision of quality as well as access. It’s also easy toforget that there is really no such thing as “global” financial inclusion—that, in fact, inclusion is bynature a last mile challenge—or, for digital financial services, a “last tap” challenge. Financial inclusionhappens by the millions when technology solutions come into play, with countless diverse playersmaking up complex ecosystems. But what really counts is how that plays out in one market, oneperson at a time. That’s why we are proud to announce our work with dozens of financial inclusion leaders aroundthe world who together are hosting FI2020 Week later this year. From November 2-6, 2015, FI2020Week Partners have each committed to host one conversation about the most important issuesneeded to address financial inclusion in their own contexts. While there are many partners stillshaping the details of their participation, we are looking forward to learning from conversations heldby Accion, AVAL Consulting in Ecuador, CGAP, Child & Youth Finance International, Fidelity BankGhana Limited, Good Return, Grameen Foundation, the Institute of International Finance, Innovationsin Poverty Action, J.P. Morgan Chase & Co, LeapFrog Investments, Making Cents, MetLife Foundation,the Microcredit Summit Campaign, the Micropension Foundation, the Pakistan Microfinance Network,and the World Bank. These leaders—and many others whose plans are soon to be announced—willfocus on issues they find critical to their own work. Together they will move the world a little closerto the vision of full financial inclusion for all. We hope you will join us. In the meantime, we trust that you will enjoy the responses in this edition to a few fun questionswe think are some of the most compelling right now in the financial inclusion community. We alsolook forward to your participation in a brief survey that you can find on page 10 that attempts toassess progress toward financial inclusion using some of the recommendations from our Roadmapto Financial Inclusion. By adding your opinions, you will help inform our upcoming FI2020 ProgressReport. In all of this, we look forward to your joining the conversation however you can, whereveryou are. Best regards,

1

August 2015

Susy ChestonSenior Advisor, Financial Inclusion 2020

Note: The FI2020 Steering Committee, made up ofglobal leaders in financial inclusion, advises on theFI2020 strategy and particularly its core activities toconvene and engage key stakeholders around thevision of accelerating full financial inclusion. TheCenter is grateful to the members of its SteeringCommittee-- CGAP, Citi, the Bill and Melinda GatesFoundation, MasterCard Worldwide, MetLifeFoundation, and Visa. The Center is also grateful foron-going support from Credit Suisse as its FoundingPartner.

Financial Inclusion 2020: The Essential Debates

Global Findex The World Bank’s Global Findex database is an unparalleled resource tracking howpeople manage their money. Covering 140 countries, the resource includes data fromboth 2011 and 2014—allowing us to see how financial inclusion has changed over time.According to the dataset, the percent of people in the world with an account has grownfrom 51 percent to 62 percent in the last three years. Read the full report here, or for abrief summary of the data in each country visit the Little Data Book on FinancialInclusion.

2

Released in 2015

By the Numbers: BenchmarkingProgress Toward FinancialInclusion In this data-rich report, released in June 2015, wehave let the numbers speak for themselves. CFIhas drawn from the comprehensive Findex data aswell as other sources to create 26 charts thatshow some of the most important aspects ofglobal financial inclusion today. Our analysishighlights a few surprising trends regarding thedisconnect between access and usage andresilience at different income levels. Additionally,you may enjoy the projections we have made thatoffer one scenario of what financial inclusionmight look like in 2020. Download the report here.Download Key Messages from the report here.

Explore the data and check out all 26charts in this slide-deck.

Exploring The Business of DoingGood With Anton Simanowitz Anton Simanowitz, co-author of the newbook The Business of Doing Good andLarry Reed, director of the MicrocreditSummit Campaign, recently sat downwith Susy Cheston, senior advisor toFI2020, to discuss how organizationscan do good work and turn a profit,particularly in the microfinance sector. Listen to their conversation now to hearAnton’s insights from his case study ofAMK, a social enterprise which has hadgreat success in providing financialservices to persons living in poverty inrural Cambodia. Please listen to the podcast here.

Will Microfinance Continue to be Relevant in2020 and Beyond?

63

Microfinance as a development strategy has in the past few years been eclipsed by the excitementaround financial inclusion. This transition reflects the recognition that people need a full range offinancial services (while microfinance has largely been about credit) and that a wider range of actorsare interested in providing those services. The microfinance sector itself has experienced challenges,including crises of overindebtedness in several markets and impact studies that suggest lesstransformational results than had been hoped. Is microfinance a thing of the past? What does thefuture hold for microfinance and the many microfinance institutions (MFIs) around the world? Willtraditional banks and new fintech companies replace them in serving the base of the pyramid?

Financial Inclusion 2020: The Essential Debates

“I certainly think that MFIs will look very different in 2020 relative to what they are today.However, I would not agree with the prediction that their roles will be absorbed by legacyfinancial institutions on one side and by start-up FinTech innovators onthe other. There will surely be a far more diverse ecosystem of financialservice providers than that but there will be a clearer divide/specialisation between the institutions that serve the customers and theinstitutions that own the products.” -Bindu Ananth, Chair, IFMR Trust & IFMR Holdings

“I don't care whether an institution providing financial services to the previously unbanked usedto be an MFI that became formalized or used to be a big bank that went downscale. I just carethat they are providing high quality and affordable services to the poor. Are current MFIs thatprovide services over and beyond financial services going to continue to find synergies withother providers? Yes. At least I see no reason to think that will change.And, yes, fintech companies are going to be huge. Why? Because thereare often low barriers to entry to application-based tech innovations, and because tech innovations likely lower transaction costs radically for providing financial services to the currently under or unbanked.” -Dean Karlan, President, Innovations for Poverty Action

4

“I try to emphasize to MFIs that they need to start re-imagining microfinance and re-inventing theirorganizations. Conventional microfinance as we have known it is going away. In India not too long ago,microfinance was seen as a mono-line activity: tiny, short-term loans of 50,000 rupees, through ajoint liability group model, to poor women, who re-paid weekly. As they grew, MFIs essentiallyattempted to cover all client segments with that old model.Now the world of micro is much bigger. The demand for finance of a “micro” nature is much widerand cuts across an extremely diverse segment, including moving upward to provide access to smalland medium-sized enterprises. MUDRA Bank, where I am a board member, is a new Apex level development finance institution inIndia that will provide loan services to small entrepreneurs outside the service area of regular banks,using last mile agents. You could call it “microfinance plus plus”.. Soon after MUDRA was announced,I just at random began to count small entrepreneurs on the road between where I live and work. Mycommute is only two kilometers through a residential area, yet just on one side of the road I counted38 small entrepreneurs. These citizens are supporting their families and are economically vibrant butnot connected to formal financial system. Don’t they need finance? Of course, they need finance!They need something in the range of 20,000 to 200,000 rupees. The new “micro” serves a differentkind of client, and we need to move out of the traditional framework to encompass diverse segments. Much is changing, as new categories of institutions are starting to force new models. The ReserveBank announced two new specialized classes directed at financial inclusion: small finance banks andpayment banks. Alongside those developments, the Postal Bank of India is likely to get a licensesoon. With an extensive network, their presence on the ground will be huge. As well, the bankingcorrespondent network is starting to stabilize. In the next three years you will see many differentinstitutions that are financial inclusion-focused. To reach more broadly, microfinance institutions in India have tore-invent themselves. And it’s happening. Of 72 applications to become small finance banks, 18 were microfinance institutions, and my hope isthat 5 to 7 of the more mature among them will get a license. Financialinclusion is in large measure about getting the delivery architecture right,and in India I think we are finally getting it right.” -Alok Prasad, Principal Advisor, RBL Bank

“In Latin America, the microfinance industry has focused almost exclusively on credit and hasonly recently begun to expand to a broader product range. The industry is acknowledging theneed to adapt to increased competition from large scale, commercial providers. But to stay relevant, MFIs need to change even more. They need to start working with morecollaboration and synergy, integrating new players that can help them to improve their efficiency,increase distribution channels, and incorporate new services. They have a responsibility torecognize that their clients have different needs, and to improve their portfolio. They need tothink more broadly and understand that clients are changing and becoming more informed, moreselective, and more reliant on technology. And they need to be sustainable for long-term success. However, microfinance is not going to disappear. While the (still slow) entrance of giantcommercial players may mean increased competition, there will always be arole for microfinance. Microfinance will continue to be a tool to help reducepoverty and improve living conditions. It has a strong social foundation—onethat transcends the push for high profits. I see MFIs changing, but they won’tdisappear—they will continue to have relevance for the economic and socialdevelopment of individuals and communities.”-Liza Guzman, Vice President, Accion

Should Regulators or the Industry Lead onClient Protection?

65

Financial Inclusion 2020: The Essential Debates

“Why would a provider get into client protection without an adequate economic driver or directincentive? The construct of expecting providers to bear the cost of client protection isfundamentally unsound and intellectually flawed. Only social businesses designed ad initium woulddo something of this kind, so practically by default, the regulator has to take the lead.I’ve been a regulator and on the commercial side with Citibank, so I have seen both sides. I wouldargue that client protection is a public good. Providers, like all commercial organizations, are focusedon private gain or profit. It’s hard for providers to do something which essentially is a public goodand in some ways is not aligned with their core business drivers. We see experiments with self-regulation, and MFIN became the first self-regulatory organization(SRO) in Indian finance. This is certainly a leap of faith on the part of the Reserve Bank. I’m notsanguine about the success of this experiment, based on our limited pilots. Time and again we haveseen that it is a hard struggle to put into place a framework of self-regulation.It is not yet clear how the Reserve Bank will monitor the SROs. It has put in place certain guidelines,with SROs required to submit a quarterly report, but I suspect that even the regulator is in somefashion trying to figure out how a good SRO should work. The thinking will certainly evolve. My fearis that unless a good constructive dialogue emerges between the industry and the regulator, thismodel won’t go very far. The industry must put its best foot forward and engender heightenedconfidence. Are there good examples of providers taking the lead and embracing client protection? In the limited context of financial services, beyondsymbolism and halfhearted commitments, I can’t think of any greatexamples. Symbolically, yes; in truth, no. Regulation has to carry clientprotection or it won’t be there on a large scale. -Alok Prasad, Principal Advisor, RBL Bank

The ideal balance in client protection is often conceived as a three-legged stool in which regulators,providers, and consumers work at equal levels of responsibility. At this time, this balance remainsunachieved. However, experiences in different markets have shown regulators, providers, and insome cases consumers stepping up. Globally, regulators have often taken the lead, but initiativessuch as the Smart Campaign prove that there is room for providers to move beyond compliance. Is abalanced three-legged stool realistic?

6

“Effective client protection will always requireleadership by regulators. The definition of clientprotection is hazy in many people’s minds, andthe margins between client protection andMFIs’commercial interests can become blurred. Client protection must include: protectionfrom over-indebtedness; fair and respectfultreatment; and responsible pricing. However, thedefinitions of these can be problematic andopen to interpretation. While industryassociations/networks should play a leading rolein defining these, this rarely happens due to theclash of definitions with the short to mediumterm commercial interests of the leading MFIs ineach market. Therefore, regulators in manycountries have stepped in to specify:

1. Limits on the amounts MFIs can lend toindividual clients2. MFI collection conditions and action thatcan be taken in case of default3. Limits on interest rates and other chargesthat MFIs can attach to their loans

This does not necessarily mean providersshould play a lesser role. Their failure to agree toreasonable self-regulation leads to regulatorsstepping in on behalf of clients. As a result, MFIsoften get inappropriate limits – loan amountsthat are low relative to clients' needs,unremunerative interest rates for the MFIs and,as in the case of Andhra Pradesh, India,conditions for collection that are virtuallyimpossible to meet (such as collection only inthe presence of government officers!). Thefailure of the concept of self-regulation leads tothe expectation that providers play a lesser role,but this failure does not make it appropriate thatproviders take a back seat to client protection. Ideally, consumers should also play a role byusing consumer complaint mechanisms of MFIs,networks, and regulators. MFI clients, however,tend not only to have imperfect information onhow to make such complaints but also usuallyfeel that making complaints is wastedeffort . So, again, while it isexpected that consumerswill play a lesser role, it isnot appropriate that theydo so.” - Sanjay Sinha, ManagingDirector, M-CRIL

“Who is best suited to lead on financial clientprotection? The answer should be simple, and itis – the providers of financial servicesthemselves! The ideal provider is one who actsin the interest of its clients, and understandsthat client protection is more than 'checking abox.' For responsible providers, client protectionis a part of its DNA. Its policies and processesaccount for the potential negative consequencesfrom access to financial services and mitigatethem. Harm is minimized, and is promptlyidentified and remedied if it occurs. Clients areheard and they help improve the provider’sproducts and services. Client protection is a continuous journey thatrequires on-going monitoring and pro-activeengagement. The risks of not pursuing clientprotection are high. There are too many storiesof the ripple effects of harm caused by pushingfinancial products that do not meet clients'needs, or by the mistreatment of just onedisgruntled employee. An organization thatadopts voluntary standards is more likely to payattention to and monitor risks and performanceon an on-going basis rather than at intervals. It isalso more likely to understand the mutuallyreinforcing nature of client and institutionalbenefits. When products match client needs andclients and are treated well, institutions benefitfrom increased loyalty and lower losses. Unfortunately, there is no perfect marketwhere every provider recognizes thisresponsibility, which is why regulation isnecessary. While providers can act, regulationmust step in to level the playing field when theydo not. There are also limitations to whatproviders can do in the absence of reliablesources of information. Clients have theresponsibility to disclose correct informationand financial capability is key. Provider-led industry standards are apowerful tool that allows client protection to berealistic and feasible for providers.I look forward to continuingto see how providers offinancial services recognizeand embrace this responsibility.” - Isabelle Barres, Director,The Smart Campaign, Centerfor Financial Inclusion at Accion

In Data analytics using alternative sources of data are generating ways to assess the credit-worthiness of thin-file customers who have been traditionally left behind by standard metrics. Theseinnovations have the potential to replace traditional credit reporting systems for customers at thebase of the pyramid in the near future. While larger firms have begun to incorporate alternativesources into their frameworks, many question if they will be agile and flexible enough to competewith smaller start-ups.

Will Data Analytics Replace Traditional CreditReporting Systems?

67 Financial Inclusion 2020: The Essential Debates

In economic development circles, it has become fashionable to make bold proclamations aboutthe future of credit risk assessment for the financially excluded. These statements usually involvedeclaring victory for a raft of new entrants—typically tech firms such as Alibaba, Google, Facebook,LinkedIn—while sounding the death knell for traditional credit bureaus. Indeed, at the recent WorldConsumer Credit Reporting Conference, one senior IFC officer reprised the speech at the beginning ofthe classic 1970s film The Paper Chase: "Look at the person to your left, now look at the person toyour right. One of these will not make it home." He predicted that, in the not so distant future, sometraditional players would not survive long enough to return to the event. The primary basis for such predictions is the conviction that Big Data will empower a new breedof solutions providers to bring products to the consumer credit market that bypass credit bureaus.The formula is something like this:(Big Data + mobile telephony) x alternative data / (machine learning x artificial intelligence) = BBCB(bye-bye credit bureaus). Certainly there have been some impressive developments. If Alibaba can transform Ant FinancialServices into a fully functioning lender on the basis of Alibaba’s house file data, this would rank inthe impressive feats column.Despite this and other accomplishments, there are good reasons to believe that traditional creditbureaus will continue to play a significant role—possibly even an expanding one—with the provisionof financial services to the base of the pyramid and missing middle borrowers for the foreseeablefuture. Consider:

• Credit bureaus are entrenched in many markets, have existing relationships with lenders,and are continually adding new data assets into their repository to increase coverage.• If a lender uses an alternative data model to extend credit, it will report the loan andrepayment data to a traditional credit bureau, increasing the depth and rigor of the traditionalcredit bureau's database.• Financial services firms are heavily regulated and are mostly unable or unwilling to furnishtheir customer payment data to an alternative data repository.

These facts suggest that future new entrants seeking creative ways to drive financial inclusionusing alternative data or Big Data will act as complements to traditionalcredit bureaus rather than direct competitors. In all likelihood, therelationship that will emerge will be symbiotic and to the benefit oftraditional credit bureaus and borrowers alike. If so, traditional creditbureaus would become more valuable to lenders and their positionfurther entrenched. My organization (PERC) and a growing number of others will continueto promote the use of alternative data as a tool to drive financialinclusion. I fully expect to be seeing familiar faces at the WorldConsumer Credit Reporting Conference well into the future.” -Michael Turner, President & CEO, PERC

8

"Many of the world’s people have limited access to credit, as they have “no file,“ a ”thin file," or an“old file” in traditional credit bureaus – which are, especially in more developed markets, the main (oronly) point of reference for credit underwriting. In the U.S., 45.5 million adults are categorized as“credit invisible” or “unscorable” with traditional credit scoring models. Low-income individuals tendto be most disadvantaged — 45% of low-income Americans are categorized “unscorable.” Solutionsother than those provided by traditional credit bureaus are needed. In many emerging markets creditbureaus do not even exist. The exponential growth of internet and smartphone adoption is creating an explosion of digitaldata, from GPS to social media to online transaction records. These “Big Data” could reveal anindividual’s character, common sense, capacity, and other traits to predict ability and willingness topay – leading to expanded access to finance for those who are creditworthy but currently invisible.Innovative data mining and analytics models provide opportunities for faster, cheaper, and moreaccurate ways to assess creditworthiness, particularly for low-file individuals and businesses. Data analytics could help banks and other financial institutions serve segments that would otherwisebe too costly. FirstAccess, our portfolio company operating in Tanzania and Kenya, leverages cellphone data and other customer behavioral patterns to provide information on consumercreditworthiness to lending institutions. DemystData aggregates and analyzes data such as utilitiespayments, focusing on ways to use public but unstructured data to help financial institutions makebetter credit decisions.` We are also excited about the idea of customer empowerment through the use of alternative datasolutions in which customers can take control of their credit identities and proactively create newinformation. Instead of retrospective data, now customers can actively prove their creditworthiness orrehabilitate past records. RevolutionCredit uses video-based psychometric assessment to identifycreditworthy customers and enable providers to offer lower prices. Along the same lines, theEntrepreneurial Finance Lab (EFL) employs psychometric and non-traditional applicant data to createa credit score — gauging ethics, honesty, intelligence, attitudes, and beliefs — which help measurerisk and potential among loan seekers. In India, CreditMantri helps underbanked, credit negative, ornew-to-credit consumers improve their financial health through a web platform and call center thathelps consumers access their credit reports, understand their credit scores, improve theircreditworthiness, restructure outstanding debt, and access relevant services from financialinstitutions. At Venture Lab, while we believe that traditional credit bureaus will remain relevant, and rightfullyso, we are excited to further harness the potential of next generation data analytics by investing incompanies that offer innovative solutions that couldcomplement the current system. If we ignore theseplayers, we risk continuing to ignore the population thatneeds financial access the most. We are keen to helpdevelop win-win solutions for the “invisible,” the“unscorable,” and the providers who are looking tounlock this next tier of financial services customers. -The Venture Lab Team at Accion

Building a Model Legislation

Financial Inclusion 2020: The Essential Debates7

Just a few months ago, the Microfinance CEO Working Group released its latest publication:Client Protection Principles: Model Law and Commentary. The Model Law creates a legalframework for financial client protection based on the Smart Campaign’s Client ProtectionPrinciples. The model law is intended to be used as a tool for legislation development, as anassessment vehicle for understanding client protection regulation, and to help craft codes ofconduct or guidelines from within the industry. Read the full document here.

"I participated in one of the first reviews of the Model Legal Framework, and I could tell from thediscussion we had that this would be a document of the highest quality, of tremendous use forregulators around the world, regardless of their stage in protecting consumers of financial services intheir countries." -Mariela Zaldivar, Deputy Superintendent of Market Conduct and Financial Inclusion, Superintendenceof Banking, Insurance and Private Pension Funds, Peru

8

“From a macro level point of view and as governor of a central bank I wasused to thinking, 'No country can develop without an efficient financialsystem.' But now, I look at things differently. I think more about people asopposed to systems. And I can confidently say today, 'No person can developwithout having access to financial services.’" - Jean Claude Masangu, Former Governor of the Central Bank of theDemocratic Republic of Congo Read this blog post and more on the CFI blog.

We need your help assessing progress towardfinancial inclusion

On October 1, the Center for Financial Inclusion will launch the FI2020 Progress Report on theState of Financial Inclusion. This interactive web-based report will track industry progress towardachieving full financial inclusion across the five areas outlined in the Roadmap to Inclusion:financial capability, client protection, technology-enabled business models, credit reporting, andaddressing customer need. As a part of this report, we want to share your insights on progresstowards full financial inclusion in the markets in which you work. Please click here to share. Yourscores will be anonymous and will be included in an aggregate “People’s Score” for eachroadmap area on the interactive site. Thank you!

Become a FI2020 Week Partner

FI2020 Week will take place during the week of November 2-6, 2015. Each FI2020 Week Partnerwill host one conversation about the most strategic ways to advance financial inclusion in theirown context. This event is designed to be as flexible as possible in both content and format. Forinstance, one organization is planning an all-day strategic summit with diverse stakeholders,while another is planning a small meeting with close colleagues in the industry. Yet another ishosting an hour-long webinar. This one-pager provides more details on the objectives of theweek and how to get involved. We would be glad to answer any questions that you may have on what is involved in becomingan FI2020 week partner and to discuss your options for participation. We want this to fit in withyour own goals for your own work, so we hope you will consider how this event can further yourown objectives, while at the same time being acknowledged as part of the larger FI2020umbrella. During FI2020 Week, we will capture highlights from each event through videointerviews and notes on key take-aways, which will then inform a video and an e-magazine to bedistributed to thousands of global financial inclusion leaders. If you are interested or have any questions on how to get involved, please contact AllyseMcGrath at amcgrath@accion.org

1101 15th Street NW, Suite 400, Washington DC 20005www.centerforfinancialinclusion.org

Photos Videos #FI2020

Financial Inclusion 2020 is guided by a SteeringCommittee made up of global leaders in financialinclusion: Citi, CGAP, the Bill & Melinda Gates Foundation,MasterCard Worldwide, MetLife Foundation & Visa. We also wish to thank Credit Suisse as the FoundingPartner of the Center for Financial Inclusion.

About FI2020Financial Inclusion 2020 (FI2020) is a global multi-stakeholder movement to achieve full financialinclusion, using the year 2020 as a focal point for action. Private sector players, regulators, industrydevelopers, technology providers, and other actors have come together to focus on reaching new andunderserved markets with a full range of quality services. About CFICFI is an action-oriented think tank working toward full global financial inclusion. Financial inclusion isa state in which everyone who can use them has access to a range of quality financial services ataffordable prices, with convenience, dignity, and consumer protections, delivered by a range ofproviders in a stable, competitive market to financially capable clients.