Speed and Scale: The End and Beginning of Inclusive Finance

The Private, Public and Impact Sectors Join Forces for AI for Good 

Close to 4,000 people are expected to attend the 2020 United Nations AI for Good Summit in Geneva.  Senior executives from impact organizations and major companies and high-ranking government officials from around the world will gather in May to further the use of artificial intelligence, technology and data to help solve some of the world’s toughest problems as outlined by the UN’s Sustainable Development Goals.

Two things stood out to me when I attended the conference last year. The first was the speed of development and scale of deployment of new data-driven technology applications for public impact. The second, was the absence of financial capability organizations from the US and developed countries at the conference.

Data-driven technology is the most powerful economic force in the world today and thousands of companies and entire industries (e.g. travel agents) that did not adapt in the private sector are gone.  The innovation wave is now breaking over the impact sector and organizations that do not innovate and scale with new technology are beginning to suffer a similar fate.

Like the private sector, only a small percentage of nonprofit executives appreciate the speed at which new technology can make their processes obsolete. Technology innovation and impact isn’t linear. When innovation produces rapid improvement in outcomes, lowers cost and proves scaleable, it spreads exponentially and other organizations must quickly adapt or become obsolete.

While an organization's work may be beneficial and admirable, clients and funders disappear quickly if it can’t keep up.

How Some Climate Change Organizations Became Extinct

Financial impact organizations need only look at areas like health care and climate change to see what’s coming. For example:

Understanding and addressing localized impacts of climate change around the world is more important than ever. Climate impact was studied for decades by nonprofit and public sector entities who sent trained individuals across the globe for field studies - an expensive non-scalable process. 

You would think that previously established organizations are inundated with funding and support, but in the last few years innovative new organizations have begun using geo-spatial imaging and machine learning applications to gather and analyze localized climate data at a scale not previously possible and at a fraction of the cost of flying people around the world. The result is that older organizations that haven’t adapted, now face a difficult time getting funding - even with years of relationships.

Organizations that didn’t adapt and trade their boots and clipboards in for computers and image licenses have gone from successful to extinct in just a few short years. Public sector and nonprofit organizations with financial capability and inclusive finance missions largely remain stuck with “boots and clipboards” processes that will likewise soon be seen as antiquated and obsolete.

The Automation of Consumer Finance Drives Inclusive Finance to Follow

Every aspect of consumer finance is being transformed across the world. Automation is no longer just viewed as a way to scale services and lower costs but a way to provide consumers with a vast array of new services and tools that are available 24 X 7 and customizable to meet individual needs.

Yet, at the same time, innovation and progress in inclusive finance is almost at a standstill. The AFN 2019 Financial Coaching Consensus recently highlighted the enormous gap between the need expressed over the last five years by front-line coaches for better technology and the failure to make any meaningful progress in meeting this need. If individuals and organizations involved in inclusive finance hope to have any role in the future, they must use technology and data to achieve the scale, accessibility and accountability needed to have an impact. 

Corporate and philanthropic funding for financial capability organizations and inclusive finance must step out of the past and focus on supporting organizations that can actually  innovate, scale and reach millions in the near future instead of hundreds or thousands. The tools and technology are available and need to be deployed to help millions of households achieve financial stability.  Families don’t need white papers, they need practical mobile-driven tools that can help them achieve financial stability and economic freedom throughout their lives.

This is not about the future. Here are just a few examples of what is happening in the here and now that show how quickly change is happening.

FinTech Full Stack Banking is Now a Reality in the U.S.

The FDIC last week gave final approval to Varo’s application for federal deposit insurance coverage. With a target market of underserved households, Varo is poised to become the first true mobile-only federally chartered bank in the United States. Varo has persevered in a three-year struggle, breached the wall and many others are going to soon follow.

Varo is built on the Swiss Temenos T24 banking platform - which is essentially a plug and play, cloud-based, full-stack banking software system (that even includes an optional “inclusive finance” module). Think of it as a bank in a box.

The Temenos T24 and similar platforms make it much easier to create and build a new bank or financial service company quickly and at a relatively low initial and ongoing cost (again: speed and scale). 

Banking regulators tend to be skeptical and conservative about shiny new things which makes banks adverse to being first in adopting new technology. The approval of Varos’ application equates to a de facto regulatory endorsement of the bank in a box software concept and significantly lowers the regulatory risk and hurdles for new banks and banks that want to re-invent themselves.

LMI households are going to soon have mobile-based access to banks offering insured checking and savings accounts, payment tools, lending products and online support and services that will be able to scale quickly with technology. Financial capability nonprofits without the technology to connect and interact with clients with the level of automation offered by these new banks are going to have a difficult time remaining relevant.

UBER Money is UBER Scaling With Technology

ess than four months after announcing its financial capability and services division for drivers, Uber Money, has opened a new center with over 100 developers in India to add to teams already in place in Palo Alto, Amsterdam, New York and San Francisco.

Uber is challenged by double digit driver turnover as it attempts to become profitable without significantly raising fares or driver compensation. While keeping compensation low, the company is still spending billions of dollars each year to attract new drivers and lower its turnover rate and the driver benefits offered by Uber Money is a key part of the effort.

What does this all have to do with our “speed and scale” theme? Well, in less than one-year, Uber Money has grown from start-up to arguably the largest non-governmental financial capability organization in the world with a client base of close to four million drivers and a technology team of hundreds of developers working on tools utilizing machine learning and big data.

Many financial capability nonprofits today are attempting to grow their organizations by providing employer sponsored programs for employees. The problem is that private sector companies are soon going to expect that these services be driven by the kind of advanced technology and data the companies themselves use daily in their own work. 

It remains to be seen whether Uber Money will provide real benefits to its drivers. But you can rest assured that as soon as companies like Uber build systems and have processes for their own employee financial capability programs in place, they will start to offer the program to other companies and the public sector as well (imagine an Amazon Web Services for employee financial capability). 

Changes in the Regulatory Framework of the Community Reinvestment Act (CRA) & Inclusive FinTech

Attacks on the Community Reinvestment Act over the years have generally ranged from being without evidence to partisan lunacy. Nevertheless, while the broad goals of the CRA are as important as they were forty years ago, the implementation of those goals needs to be revised to fit today’s world.  

Banking has gone national and whatever portion of consumer finance is not online soon will be. The once dominant banking model of small local and regional bricks and mortar banks serving local communities is becoming obsolete due to technology, data and the fact that households with greater mobility and FaceBook based relationships have far less connection to the areas they live in and local institutions.

After years of discussion, the OCC and FDIC announced in December a new CRA regulatory framework. New mobile banks often have little interaction with the communities where their offices are physically located. The new regulatory framework recognises this  and takes an approach of assessing a bank’s community investing, lending and contributions in areas where banks conduct a substantial volume of retail lending and deposit-taking - even if they have no physical presence in the area.

It remains to be seen exactly what will change with CRA regulations. What’s important is that we are beginning to see significant shifts in policy and regulation to respond to the rapidly changing landscape of inclusive finance and the impact of technology.