OpenWay Insights.

Fintechs and
financial inclusion: how to avoid
the pitfalls and stimulate growth

A third of the people worldwide are unbanked, according to the Global Findex
Database: a sobering 1,7 billion adults. Those unable or, for various reasons,
unwilling to participate in basic financial products or services are often found in
developing lands — but not all of them. In the US alone, more than 30 million
households are unbanked or underbanked. Worldwide, financial inclusion is a major
goal to promote economic and social well-being, and also to reduce poverty,
exclusion, and discrimination.

Although many financial products focus on financial inclusion, payments specifically

are recently attracting attention. In 2016, a report sponsored by the World Bank stated
a goal for all individuals and businesses to have access to and use at least one
transaction account, operated by a regulated payment service provider. This account
should be able to handle most of their payment needs, to securely store value, and
serve as a gateway to other financial services. For many, the easiest way to meet this
goal is to link accounts to an online solution accessed through a mobile device — the
digital wallet.
How digital wallets support financial
inclusion
When it comes to financial inclusion, benefits to the wallet user are many. Wallets are
designed to deliver an easy, intuitive user experience through a familiar mobile
device. They also lower barriers to entry into an often exclusive financial system, by
using economies of scale to offer a variety of previously cost-prohibitive financial
services at low cost. They can be used wherever there is mobile phone penetration,
bypassing the computer and associated infrastructure — useful for reaching rural and
underserved areas.

The benefits also extend to communities, where the underbanked and unbanked are
used to financial operations within a trusted social circle. The bandwagon effect can
be strong, where if one friend or family member starts using a wallet, it serves as a
strong incentive in the community for more users to open accounts. These users create
an ecosystem where savers are matched to borrowers more efficiently and quickly
than by bank lending officers. And when wallets are combined with card rails,
interoperability with the card environment takes users outside of the wallet ecosystem
to even greater financial possibilities, enabling domestic and international payments.

So financial inclusion solutions have the potential to make a huge impact on people’s
lives and the economy. But why do some payment products for the underbanked and
unbanked succeed, whereas others fail? For example, between 2011 and 2017, for the
first time 1,2 billion adults gained access to formal financial accounts, such as mobile
money accounts. But during the same period, almost no progress was made on access
to savings, credit, and insurance, and a high dormancy rate was noted with these
accounts. Other studies show that low-income users of digital accounts often
withdraw 100% of funds immediately and do not use their account until the next time
they receive funds, ignoring additional financial services that may be available.

Where can financial inclusion wallets fail

their customers?
Adoption of any payment instrument depends first of all on trust in the product.
Several factors are eroding the trust of vulnerable first-time users of financial
products, and causing even long-time users to withdraw all their money as soon as
they can:

1. The wallet cannot cope with unreliable physical infrastructure or with older
versions of mobile phones. According to one study conducted in Nigeria, 18% of all
financial transactions via mobile applications failed. Concerns over the stability and
function of wallets, especially if some transactions take a long time to complete, may
lead to a lack of trust.

2. The wallet has data requirements that spook users. People do not trust unfamiliar
systems and are uneasy with how their data will be used. Another problem in many
countries is lack of formal identification, which means people cannot meet KYC
requirements. Not every wallet platform is capable of processing alternative data for
identification purposes.

3. The wallet is not transparent enough for unbanked people. Customers do not
understand if and when they are being charged fees, for what, and how to make sure
no fraud, over-indebtedness, or discrimination is taking place. A digital solution
doesn’t always mean transparency, and numbers that don’t match up create
uncertainty and unwillingness to use wallets.

Trust is easily lost when digital financial services do not provide information about fees, prices,
and conditions during the transaction.
4. Lack of interoperability with other existing payment methods. Wallets functioning
in a closed-loop environment are limited in usefulness. For low-income users, the cost
of maintaining multiple wallets or using intermediaries may be too high.

5. The wallet fails to meet the needs of the market and does not evolve or offer new
features. Research shows that a large number of people with digital financial accounts
are not able to use them without the help of a family member or an agent. Design
problems plague wallet interfaces that may be from the outset too confusing or
inconsistent. Many providers find that their chosen platforms are not flexible enough
to accommodate major redesign of the solution once launched.

How to create a successful financial inclusion

offering
1. Create a product with true inclusivity through support for various protocols and
standards, and the flexibility to modify the user experience when needed. Digital
wallet creators cannot assume that the most financially disadvantaged population will
always have the latest version of a modern smartphone, or even close to a recently
released version. Many mobile users in developing countries, especially in Asia and
Africa, use older feature phones dependent on the USSD message exchange protocol.
Also, since gaps in user experience are not always apparent at product launch, the
wallet must be flexible enough to further customize interfaces and overall usage
scenarios.

2. Have a strong back-end that can use alternative data for identification and allows
flexible, fast KYC. Processing alternative data requires sophisticated real-time
analytics such as analysis of photo and video, or other measures of creditworthiness
like rental history. This requires a robust back-office system.

3. Invest in a technological platform that can keep prices low and fees completely
transparent. Low fees are one way of removing one of the barriers to financial entry –
cost of services. A major obstacle to launching a financial inclusion product is the low
value of transactions, which is usually not enough to cover the cost of service with a
traditional fee-based model. With an optimised technological platform, fees can be
kept low and transparent for customers, merchants, and partners, and provide cost
efficiency and scalability for complex tasks from automated processes. An example is
SmartPay’s digital wallet, run on the Way4 digital platform. Thanks to Way4, this
financial inclusion fintech achieved an acceptable TCO at launch and was able to
scale up to 1,4 million users. Now SmartPay’s cost of providing service is so low that
it maintains margins even for microtransaction processing.
4. Don’t underestimate the importance of real-time. To gain user trust, all transactions,
available options, user actions, and their consequences should be visible in real-time
and reflect the actual state of the account. For small merchants, real-time payments
allow the liquidity of their business to be visible daily, instead of once at the end of
the month. This helps them avoid cash flow problems. Governments of several
countries have backed digital payment initiatives with real-time infrastructure such as
CoDI in Mexico and PayTM in India.

5. Use the power of the cloud. Although cloud computing is not an option for all
regions, it can address several problems like infrastructure, cost, scalability, and
security. Cloud-based digital wallets can offer 24×7 access to banking services,
improved resiliency and productivity, security through PCI DSS used in the financial
services industry, and scalability, all features that save money for both the providers
and their customers.

6. Quickly launch new services your customers need. Successful wallets like M-PESA
or AliPay are not just about giving people ability to pay. Depending on the market,
they can be combined with deposits, loans, multiple accounts with attractive currency
exchange rates, informational and agent services, and more. OpenWay client
SmartPay has equipped its financial inclusion wallet in Vietnam with convenient job
posting and search features, which successfully expands on the cultural tendency of its
customer base to search for jobs through existing contacts.

Buy Now, Pay Later (BNPL) can also become an anchor service for customers in the
financial inclusion process, since short-term interest-free loans are an attractive option
for those with smaller incomes. These features can be wallet-centric, but can also be
bundled in a card offering. For example, LOTTE Finance, a multi-national business
conglomerate, uses OpenWay’s Way4 to offer BNPL payments in Vietnam.
Customers can pay for goods on services offered by LOTTE Finance’s partner
platforms within a personal credit limit granted by the wallet without incurring any
interest.

However, the most important factor that determines whether a wallet succeeds or fails
is the flexibility to become the player that the market needs. How can a financial
service provider become an agile and robust member of a larger, more inclusive
ecosystem?

Look at the ecosystem, then the wallet

To gain the trust of the unbanked and underbanked, it is essential that financial
inclusion solution providers personalize their interaction with customers. The wallet
users need to feel that the services are selected or designed uniquely with their needs
in mind, and this builds trust. For example, in some regions mobile payments are
more expensive, but QR payments are cheap. M-PESA works in some scenarios but
not in others. Or culturally and socially, people show that they are much more
attached to certain payment methods than companies realize.

This is where wallet providers need to experiment with technological flexibility. For
example, OpenWay client SmartPay uses QR codes to engage hundreds of thousands
of merchants and individuals in the wallet payment ecosystem. They connect both
private and business customers to an entire network of banks, HR agencies and other
partners through their wallet. Another OpenWay client, AzeriCard, decided to launch
a remittance service now known as cash-by-code. When wallet users forgot their
bankcard at home, they would just send the code to themselves. In this way, the
remittance innovation turned into a cash-out innovation. Now, this feature is one of
AzeriCard’s most popular services, and as a processor, they can offer cash-by-code to
the clients of their 16 customer banks.

Banks can lead the way with digital-only

cards
In going digital-only, banks can compete effectively with fintechs in financial
inclusion initiatives if they have invested in the kind of new-generation platforms as
fintechs run on, such as Way4. An example of this is Uzpromstroybank in Uzbekistan,
Central Asia, the country’s largest bank. It selected Way4 in building its processing
centre in-house from scratch for digital card issuing, omnichannel merchant acquiring,
and 3-D Secure processing of e-commerce transactions. With this platform, the bank
is able to issue digital-only cards and deliver them to unbanked users via smartphones.

A proven platform for financial inclusion

solutions
As we have seen in the business cases mentioned above, both tier-1 companies and
startups around the globe have selected the Way4 platform as the core of their
payment solutions, including those focused on financial inclusion. Among them is a
digital wallet that was launched from scratch to become a huge payment ecosystem in
just three years, giving 1,7 million people and 400,000 SME merchants access to
financial and non-financial services.

OpenWay’s experience shows that with a cost-saving, data-driven and innovative

platform, a wallet targeting an undeveloped market can be a commercial success. By
creating a new financial ecosystem, banks, fintechs and other players can generate
increased revenue and benefits for individuals and merchants using the system, as
well as themselves. With the financial and payment landscape shifting dramatically
during the last few years, the success stories of our clients may well be repeated by
those who pioneer new digital solutions, driving investment and economic growth in
an ever-changing market.

About OpenWay

OpenWay provides the Way4 digital payments software platform for tier-1, mid-size
and startup players – including card issuers, acquirers, processors, telcos, payment
switches, fleet companies, and digital wallet providers. Gartner, Omdia and Aite have
ranked OpenWay as the best digital payments software provider and the best payment
solution in the cloud.

Learn more: analytic reports, news and case

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This article was first published by The Paypers, the Netherlands-based independent
source of news and insights for professionals in the global payment and ecommerce
community.