Wealth Management for the Underserved: What Role does Fintech Play?
When one looks at the evolution of Fintech, financial inclusion was a major theme in the early part of the last decade. Fintech was meant to help serve the unserved/underserved and examples like MPesa showcased the potential of how Fintech can influence the lives of millions of people. As Fintech has developed and with much wider adoption across segments, we have seen the focus shift to the mainstream with solutions ranging from payments to wealth management.
With advent of Open Banking and API driven integration, one has also seen the proliferation of Personal Finance Management Fintechs & solutions mushroom globally. Combined with Wealth management solutions, the target segment is usually the upper middle class to creamy layer of the market. With the middle class segment, especially in Asia, expected to grow to significantly in the next decade, in particular in APAC, MENA and LATAM, there is a scope for both Fintechs and incumbents to develop solutions to serve this segment of the market as their affordability increases. This can be beneficial to other categories, such as young millennials who are entering the workforce and starting to earn their first salaries, and also useful for the burgeoning participants in the “gig economy”.
Let us know look at some of the key services needed for this segment to enable their wealth creation and wealth management and the examples of startups who are providing these services:
Financial Literacy: Most people lack the access to and the understanding of basic financial management principles and end up spending money or eating up their savings due to the inability to manage their finances appropriately. The first step towards wealth management is to engrain and enshrine prudent financial literacy for management of personal finance including savings, credit and debt management and alertness towards fraud. These don’t necessarily have to be stand-alone services, but a critical part of any PFM tool to enable the people in this segment to take responsibility and have understanding of their finances. Tools such as budgeting tools, basic cashflow and income projection tools would be important for a strong foundation. In addition, financial literacy is critical to help the segment be aware of and avoid getting duped or becoming a victim of financial fraud.
One example of this is The New Savvy. The New Savvy advocates greater awareness and healthier financial habits to women. Women have different needs from men and can benefit from unique financial advice. 41% of women are intimidated by finance and do not invest. Information available can be complex, technical and often, exasperating. The team at New Savvy simplify the process to save their users time and efforts, by providing dedicated financial insights that are fast, fun and easy to understand.
Another example is Arifu in Kenya, which uses mobile chat-bot messaging to offer topic-based learning to low-income customers. It partners with Financial Service Providers to offer their current and potential customers financial information in a cost-effective way and uses these interactions to direct customers to specific financial services offered by the Financial service provider. Interactions with customers are structured around learning topics such as “setting financial goals” or “expanding your business.” Customers navigate content on their messaging app, which Arifu makes available in simple bits. At the end of an information module, customers take a test that measures and tracks learning progress.
Debt Management: The subprime crisis was a glaring example of debt management gone horribly wrong. Banks and Financial institutions were providing mortgages and credit to sub-prime credit rated individuals with the hope of being able to recover the debt by asset purchase, in case of defaults. However, once the market started to crash the asset values started to fall, and with defaults piling up the entire global economy went into a tailspin. Much print has been focused on the financial institutions’ mismanagement, but not much was focused on providing right tools for the defaulting individuals who took a big hit to their personal standing with many losing their jobs. A similar story can be said of the student loan crisis and rental defaults by young people. Enabling these individuals to better manage their debt and credit worthiness, would ensure that these individuals are able to manage their expenses within their means.
FINCA Impact Finance, a Washington, DC-based company is a good example of achieving this. FINCA provides loans and other services to unbanked and underbanked communities in emerging markets and combines digital technology with on-the-ground agents who can help clients borrow and save. Specifically, the company has thousands of agents, mostly local mom and pop merchants, who interact with clients on the ground and help them appreciate the nuance of financial services and the debt trap. FINCA was launched by microfinance lender FINCA International and they aim to use digital technology to provide loans and credit to marginalized communities, while offering a helping hand to tap those new services.
Another example is Mojo Mortgages’s recently launched MortgageScore™ product. This will combine credit and open banking data to determine if a customer is mortgage ready. It’s an evolution of the typical ‘credit score’ and combines credit and employment history, spending habits, deposit saved and income to provide users with an individual score for them. It will clearly show how the score is calculated, where it’s good and where it’s not, and the MortgageScore™ coaching feature will provide personalised advice on how they could improve their score.
Saving Tools: The bedrock of any solid wealth creation is the prudent management of savings. One can approach savings in two ways, A) By saving a set percentage of income; B) By managing one’s expenses wisely. Using cash flow analysis and income projection, a person can be given a straightforward advice on how much percentage they need to save to reach their wealth goals and manage milestones. On the other hand, it is more complicated to assist the person in managing their expenses wisely. The core to some of the PFM tools leveraging of open baking is to precisely help people manage their expenses better, and then use those savings to invest towards their wealth goals.
Gini and Planto in Hong Kong are examples of PFMs that use open banking to aggregate their customers financial data and then provide them with data analytics of their various expenses and incomes. Such PFMs help users with setting up saving plans and to monitor their goals. In some cases, the Fintechs based on customer’s goals assessment on the app, refer the customer to financial services products that are can help the customer better manage their finances as well as invest where feasible.
We also have a couple of examples in Africa using technology to drive savings. Firstly, is the People’s Pension Trust (PPT), in Ghana, a fully licensed pensions company that offers pensions to informal workers, ranging from urban market vendors to rural cocoa farmer associations. They have launched a mobile pension scheme with Vodafone Ghanas to provide all Ghanaian workers the opportunity to save money towards a secured and more fulfilling future by making voluntary contributions through vodafone cash. Through low cost Mobile nudges via SMS and automated calls, the scheme provides users with incentives to encourage long-term savings.
Secondly is the GoalSave savings tool by South Africa’s digital Bank, Tyme. Customers can create and name up to ten different savings goals and transfer funds from their Everyday account in GoalSave account in seconds. Based on the duration for which they hold the funds in their account, the customers can earn up to 10% interest per year on their savings.
Investment Tools: Once individuals have the habit of saving and maintaining a steady cash flow, they can then be assisted in growing their funds through investment options. This can be achieved through first evaluating the goals of the individual and then matching it with available investment options helping them build their long term wealth.
Kaleidofin utilizes disruptive technology to address the many challenges of serving a mass-market of low-income households at scale. Customers start by defining a goal, such as paying for their child’s education. Kaleidofin then uses artificial intelligence to generate high quality financial plans for each household by mapping customers to pre-defined persona types based on behavioral questions and other publicly-available information such as credit history. An algorithm then takes into consideration the household expenditures, unique vulnerabilities, risk tolerance and persona type to recommend a single, seamless package of insurance and investment solutions to optimize the likelihood of reaching their desired financial goal.
Insurance Tools: Adoption and purchase of insurance in the lower income groups globally has been low historically due to a variety of factors ranging from affordability, lack of understanding of how insurance works and issues with claims and exclusion clauses. Providing low income groups with insurance schemes at the back of financial literacy helps improve participation and retention of the individuals.
A prime example of this is BIMA one of the leading provider of mobile-delivered insurance globally. The company provides insurance and underwriting to millions of low-income people via innovative partnerships with major mobile network operators and financial services businesses. They offer a range of affordable life, personal accident and health micro insurance products. BIMA combines the power of mobile technology with a unique agent-led approach to educate consumers of the benefits of having insurance.
