Dear Technologists.docx

OPEN LETTER TO FINTECH
Suggestions to step in micro finance market

Yesterday we read a contribution on the future of Fintech: "With revolution comes new opportunity, but the path to growth is not clear. Fintech startups and established institutions are exploring new models of partnership, cooperation, and creative competition to shape the future of the finance sector—and beyond". (http://brandchannel.com/2016/11/04/future-of-fintech-110416/).

Here we would like to share the following considerations.

Nowadays FinTech people are living great moments also for the market perspectives, having some $ 3,7 trillion opportunities (https://cfi-blog.org/2016/10/17/digital-financial-inclusion-seizing-a-3-7-trillion-opportunity/ ). We congratulate Technologists for the achievements and add a word of caution, being among the digitalization's supporters we ollow the ongoing movement.
Background
The UN 2030 AGENDA for SDGs has marked a turning point for a re-thinking on economic and social development with its 17 goals and 169 associated targets:(http://www.un.org/ga/search/view_doc.asp?symbol=A/RES/70/1&Lang=E).
Of particular importance are goals 1., 8. and 17, dealing with, respectively, Poverty, Promotion of sustainable inclusive economic growth and Technology & innovation capacity-building mechanism for least developed countries.
Most opportunely, Technologists jumped on the band-wagon playing an unreliable "everybody deserves a connection", which may remind us what happened some time forty years ago when everybody agreed on an unrealistic message telling everybody is entitled for a loan. We know the unfortunate impact and, at last, since end 2015 in a span of few months, the financial establishment phased out microfinance (http://www.cgap.org/publications/new-funder-guidelines-market-systems-approach-financial-inclusion and replaced it with financial inclusion( http://www.bis.org).
The former focused on market approach and the latter updated a previous paper dated 2010 that is a milestone to understand the current trend; incidentally, we extensively commented it in "Suggestions for designing a new credit model" CGAP, rated among the five most read document of the year 2011: http://www.microfinancegateway.org/p/site/m/template.rc/1.9.51017/.
Besides UN Agenda, WB-CGAP and Basel III Committee there are other sources like FSD Africa (http://www.fsdafrica.org/)s stressing the need for a change.

As we pointed out "ROAD MAP FOR TECHNOLOGISTS" (https://www.linkedin.com/groups/4682884/46828846199519739253972995 ), the digitalisation of the financial services isn't an easy task with many interrelated factors. Here we aren't going into a problematic discussion, which we have been having daily in our Professional Group and recently pointed out in an interview recently released on the role of financial inclusion: http://www.emergingmarketsesg.net/esg/2016/08/26/fivequestions-about-financial-inclusion-special-interview-with-dr-ascanio-graziosi-rome-italy-august-26-2016/
We do see unsuccessful parallelisms between the two above-mentioned trends, which may lead to "Hype or Disruption" (https://www.capgemini.com/sites/default/files/en/2016/10/world_fintech_report_2017.pdf ), if both finance and digital providers fail to collaborate.
SUGGESTIONS TO STEP IN MICRO FINANCE MARKET
We would like to suggest to review the approach to digitalisation in a way to shift from product innovation to PROCESS INNOVATION, which is in progress and need to be reinforced because of the risks to having millions people playing with a mobile phone without a real return.
The reasoning behind our suggestion is based on the below listed assumptions (A,B,C) and the following consideration:
Micro finance as we used to know doesn't exist no more and has been replaced with financial inclusion. In this background MFI and other grass root organizations are the vehicle (means) to achieve financial inclusion (goal). However, the micro finance's decision makers rarely updated the way of doing business in line with SDGs (culture legacy). Owing to that they should put FinTech in the picture of their business, their message could mislead Technologists. In this perception both shall work having in mind product innovation when the right answer to the market should be process innovation.
(A) From the above-mentioned sources, we detected a move from credit-based economy to development-based economy. This does mean to mitigate the excess of credit in favour of the real economy by creating opportunities and jobs; the financial leverage will continue to be important, of course, but its use should be more respondent to the following criteria: sustainability, accessibility, affordability and market transparency, which are well known but rarely applied.
(B) Financial and economic inclusion should be understood as a unique approach, the former being linked to the latter and vice-versa, to avoid lenders' disillusion, clients' illusion and likely communities' financial implosion, which we witnessed, by the way.
(C) The real question isn't to have people connected with an account, but having people who could be eligible for an account.
Working on process innovation should mean the capability to add value to whatsoever electronic device by creating opportunity and wide the access to other facilities. The accomplishment of this task is via market segmentation that is the practical step and everybody is aware of it.

We have proposed a market segmentation approach, which takes from the 2030 Agenda, because any projected model can't neglect the fact that for the coming fifteen years above document will be the reference for whatever economic development intervention. (see also our interview FIVE QUESTIONS ABOUT FINANCIAL INCLUSION: http://www.emergingmarketsesg.net/esg/2016/08/26/five-questions-about-financial-inclusion-special-interview-with-dr-ascanio-graziosi-rome-italy-august-26-2016/

Below we have highlighted four big market segments. In the first one, the financial provider is in the presence of poverty tout-court and food aid, while the second comprises income generating activities; in the third and fourth segment the provider is in the presence of enterprise development and, in such a case, there is accumulation, which should be correctly evaluated.
Empowering people in four big market segments:

MARKET SEGMENTATIONPeople in need of basic servicesPeople who aim at improving family budgetPeople who aim at start-up businessPeople aim at growth-up business MARKET SEGMENTATIONPeople in need of basic servicesPeople who aim at improving family budgetPeople who aim at start-up businessPeople aim at growth-up business
MARKET SEGMENTATION
People in need of basic services
People who aim at improving family budget
People who aim at start-up business
People aim at growth-up business
MARKET SEGMENTATION
People in need of basic services
People who aim at improving family budget
People who aim at start-up business
People aim at growth-up business







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Source: A. Graziosi - FINANCIAL INCLUSION, Give people a job not a loan, https://itunes.apple.com/it/book/financialinclusion/id1116912686?l=en&mt=11


Referring to Basel III's terminology we may say that the point a) and b), c), d) indicate, respectively to unserved and underserved customers).
The features of above segments make it the difference among lender, developer and philanthropist. For financial inclusion purpose the segments ought to have an accurate investigation to understand which kind of service may be added to the electronic device.
Back to above mentioned Fintech document, we do recall that the war between the bankers and technologists was a subject discussed by the futurists in the 70s last century. We do think that it should be avoided for many reasons and, above all, because despite, on paper, the client could benefit of the competition, it will drive both providers to make unsustainable offers and likely financial implosions. Moreover, currently the markets have been regulated and the supervision of the central banks and governments monitoring bodies are watchful and ready to stop destructives steps.

The real challenge for the technologists is the ability to provide the electronic device with services/facilities that really empower people, because without economic inclusion there won't be solid financial inclusion and digitalization as well.

We have to say that the proposed segmentation is indicative and needs to be detailed under the circumstances. At this stage, we may say that the interventions for the segment (a) should foresee economic policies at government level and not interventions relying on microfinance activities, as it was assumed last century. An example. In our Country soon after the second world war, to combat poverty, somebody had the idea to build a road that afterward has been named "Bread road", which is still there for those who like to enjoy a seven km. panorama of Adriatic Sea. In this understanding, people should be provided with a job, which salary may allow them to open an account and a possible have access to credit and then to digitalisation. By and large, poverty should be fought with economic policies on not credit interventions.

In a conversation in our Group we learned that currently in Ghana a transfer of fund from one mobile wallet to another cost 1% of the amount transfer while the transferee would also pay a 1% charge on withdrawal. The commentator said that It will be imperative that industry players review the cost component to increase the service usage, an Africa cross boarder mobile money transaction with facilitate the increase in financial inclusion.

Above situation is normal in the Continent and elsewhere; in India, although there isn't a wide consensus on opening credit facilities to everybody via smartphone, currently the prevalent approach to fight poverty seems to be the same experienced in the past, having digital as a red bullet.

A CONCRETE PROPOSAL. Continuing our reasoning and taking the segment (a), we don't say that money transfers and remittances should be free of charge; we do say that the service should be sustainable for the provider, accessible for the potential client and affordable for the user. Technologists and Financiers should find out the way to not overcharge the transfer of small amount of money presumably made by people working away from their own places and sending money to those who are in need. If we don't find out modalities to minimize the commission, we will penalize the poor and mislead the purpose of financial inclusion. This is a technical matter that may be overcome elaborating on the statistical data; it may be assumed, for example, a cheap commission for small amount or linking it to the frequency of the transactions in a given period.

The segment (b) deserve an accurate field investigation like Diaries, which data can help to know better the reality of the family budget.

Regards to segments (c) and (d), the related analysis are more sophisticated ranging from financing an idea like opening up a shop round the corner to more important project financing.

On the matter there are interesting models already implemented in the field, file:///Users/ascaniograziosi/Desktop/How%20FinTech%20Forever%20Changed%20the%20Way%20Financial%20Institutions%20Look%20at%20Customers%20_%20Let's%20Talk%20Payments.htm, but their construction neglected to take more from the SDGs.

Summing up, digital providers may benefit a lot cooperating with financial providers, when it comes to design a model, which asks for expertise and experience on financial services above the ground.

Dr. Ascanio Graziosi
Owner, FIANNCIAL AND ECONOMIC INCLUSION
https://www.linkedin.com/groups/4682884









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