Financial Inclusion in the Information Age: Udayan Goyal10 min read

Udayan Goyal at TEDx London Business School

Full text of Udayan Goyal’s talk: Financial Inclusion in the Information Age at TEDx London Business School conference.

In this talk, Udayan Goyal, Founder and co-Managing Partner of Apis Partners LLC, talks about importance of financial inclusion, why success lies in cooperation and collaboration, why start-ups should work with incumbents, and what factors make for a successful collaboration.

Listen to Audio:


Udayan Goyal- Founder and co-Managing Partner of Apis Partners LLC

My story begins with water and you probably thinking, what am I talking about?

It starts off in Ted India, where I attended in 2009 and in the bus on my way from Bangalore to Mysore, where the event was being held. I met a very interesting entrepreneur. His name was Anand Shah. And Anand was a Harvard graduate who had come back and dedicated his life to being a social entrepreneur in India. And actually set up something called sarvajal.

Sarvajal is a social enterprise that serves a hundred thousand people daily clean water. And clean water has been shown to be the single determinant of health in rural markets in India and around the world. And he set up something called water ATM, which has a franchise system of getting clean water out to people for a small amount of money to create a sustainable business enterprise. 

But as we sat next to each other on that bus journey, he said to me, “look, you know, I have faced a huge issue while setting up this business. I can’t get the money from the rural communities back to Bangalore where the business is in order to actually create a sustainable business to build more water ATMS.”

And I thought that it was incredible. I’d just come out of a career in finance in major banks had just started up my own business, and I thought it was incredible that an issue so small can create such a major impact on something so important.

And how did he solve it? While he created these prepaid cards that you could go to a single location by the water credits and actually go and buy a water every day. A simple solution using electronic money. And that’s exactly what I’m here to talk about today. 

The collection of low value payments was actually the way to solve this issue. And so what’s the problem.

What’s the problem that we have today in the emerging markets, in the growth markets?

The problem we have is that formal financial services are unavailable to consumers.

And why is that a problem?

That’s a problem because low-income consumers generally don’t know how to manage their cash flows. They don’t have access to savings accounts. They don’t have access to loans. They don’t have access to means of transmitting money from one place to the other.

So one day they can wake up and their children may be ill. They have to go to the doctor and suddenly that’s a big chunk of their cashflow gone. They have to pay for their school fees. And these setbacks, whether you’re a farmer who suddenly has a failed crop without insurance or other setbacks feels like a game of snakes and ladders to them. You go up one day, one setback, and you’re back to square one.

And it’s incumbent on us, all of us to try and solve this problem. It astounds me to think that a 1% increase in financial inclusion in a market can increase real GDP per capita by 3.6%. That multiplier effect is something that is truly amazing.

And even if you look at the commentators and I completely agree with this quote from the president of India:

“Inclusion is not only a key determinant of a sustainable and inclusive growth for society, but also to build an equitable society.”

So this is a really, really important matter. So let’s talk a little bit about what the size of the problem is. Today, there are 2.5 billion people globally who just don’t have access to formal financial services. Some of them have access to informal financial services, but those informal financial services are typically usury and take advantage and exploit consumers. We need to bring formal financial services to these people.

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And why has this happened? 

Firstly, as all of us know, and this is nothing new- there’s a massive income gap between the growth markets and the high-income markets. In fact, that growth; that gap is almost five times. Now, what that means is that the investment in infrastructure to support financial services, and when I talk about that, I talk about traditional infrastructure. So branches, ATMs, others has actually been lagging that’s because the return on investment for low-income consumers does not support that investment.

So there are three times less ATM or bank branches in these markets compared to where we are today. And that historic lack of investment has also meant that transaction costs have been very high because moving cash around and those sorts of infrastructure is extremely expensive.

Consumers, generally, with low balances, aren’t people that banks or insurance companies or others wish to deal with. And of course, we have the rural problem because we have populations that are very spread out, unlike the urban economies that we all live in.

But there’s some good news here. And the good news is that these two situations that we’ve we look at, which is basically the income gap and the infrastructure gap has created an ecosystem and conditions for an amazing amount of innovation that has started to deliver financial services at extremely low prices using new delivery mechanisms.

So these growth markets represent an absolutely fertile soil for this type of business development.  And that leads to the potential widespread distribution of financial services at a very different cost base of what we’re used to.

And I think the one thing that I’d like you to look at here is- Whereas the emerging growth markets are very much lagging behind in terms of infrastructure- traditional infrastructure, the way we think about it, if we look at the likelihood of a mobile phone user in a growth market relative to a develop market, we’re pretty much to parity, which means there’s one thing that we’re on a level playing field there.

And that’s where I think there’s a huge opportunity. And there is being a huge opportunity created to service people using this new distribution channel. 

One point to note in all of that of course is that you need to think about digital financial services as a way of delivering services at very low cost.

Why is that?

The reason behind that is that the cost of a marginal transaction to be done digitally is close to zero. Which means you can really serve consumers at an extremely low-cost space once you create scale in a system.

And I don’t actually believe the way that’s going to get done as the way it’s got done in the West, where we’ve built basically vertically integrated institutions to do that, I believe the way it’s going to get done is through something called COOPERTITIONthe creation of ecosystems, where people not only work with each other to cooperate, but also compete with each other.

And that’s basically the banks, very important the telcos, the regulators, the technology providers, the financial infrastructure providers. Now, all of these people working together to solve this issue. And we’re starting to see this happen in many of the markets that I’m going to talk through you through a couple of those examples. 

I’m not the only one who’s talking about this. Of course, I’ve been talking about it for a long time. But in the recent letter that the Gates Foundation put out and bill Gates put out in the annual letter, one of the four key areas that the Gates foundation is now going to focus on is the issue of financial inclusion.

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And in Bill Gates words:

“In the next 15 years, digital banking is going to bring basic financial services and security to millions of people, and it’ll help those people transform their lives.”

And I completely believe this. So if you think about what we’re witnessing in these growth markets, of course, the thing that most of us and I hope many of you have seen this as being the huge increase in the usage of mobile money.

For those of you who don’t know, and M-Pesa is the main mobile money system that exists in Kenya. Today, 12 million people every day use M-Pesa to move money around that’s over half the adult population in that country. 

This has been transformational. The usage of cash has declined immeasurably and the availability of credit to those consumers through M-Pesa as a delivery mechanism has been phenomenal. This is literally transformed millions of lives.

In addition to that, and I’ve always say it’s important also to celebrate some of the people who’ve been behind this. And I’m very proud to say, AJ Hannah, who’s a good friend of mine, was one of the key people who helped Tigo, which is the mobile money platform of Millicom create interoperability between different mobile money systems in Tanzania.

Now, why is that important? Because it’s not good enough for a mobile Telco to give you mobile money or that you can use. If I can’t use it with somebody who’s on a different network. And Tigo has taken the altruistic view that I need to be connected to everybody to be useful. And so they’ve been one of the first people to do this globally and created a massive network effect.

If you look at alternative distribution and collection networks, I’ve been very proud to work with Paresh, one of the smartest and best entrepreneurs I’ve met in the world. He founded a company called Suvidhaa, which today has 75,000 locations in India where people can go. And these are mom and pop shops that you can go in and do your banking transactions get money into the system. Migrant workers can move money from one part of India to the other in a very cost-effective manner.

He literally built this by camping outside the railway ministry for two years, forcing them to open up his systems and started by providing electronic railway ticketing to his network. Just amazing.

If you look at our friend Arnaud. Arnaud was the founder of a company called Microcred. Microcred is the world’s largest network of microfinance banks and institutions around the world across eight countries, including China and Africa. 

He not only has created the ability to bring mobile banks to you, but he’s also created a network of agents that come directly to people to offer loans and financial services. And it’s changing the lives of millions of people, particularly in West Africa and across Francophone Africa.

If you think about new payment rails, and this is quite important because again, we do not have in many countries where we were used to having infrastructure that allows us to move money around, but of course in many countries it isn’t.

And one of the greatest innovations that has happened over the last 15 years was that the Indian government in India created IMPS, which was the first real-time money transfer system in the world. So it actually literally allowed me to move money from one person to the other, using the mobile phone in real-time, as opposed to waiting for one or two days. 

And actually that was an inspiration that I had when I created something called Zapp, along with my friend, David Yates and others at VocaLink, which you haven’t seen yet in the UK, but we’ll be launching in September this year and will be the new mobile payment system in cooperation with all the banks in the UK.

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And I call that reverse innovation because it’s extremely important that these innovations are happening on the coalface and coming back here, and that’s going to be a consistent theme that we’re going to see, I think, in the next 10 or 15 years.

And indeed again, that was some inspiration for creating something I did with my partner, Mateo Stefano in the UAE, where we created, a new payment scheme to compete with Visa and MasterCard. And we did that because there were a bunch of migrant workers in the UAE, in Dubai and others. These are people who are typically doing construction and others who had no access to financial services.

And the reason they didn’t was the price point to get access to those financial services was too high. So we said, “Let’s kick out the incumbents, we’re charging too much and just create our own scheme.” And

So we created Mercury. And today mercury cards are being handed out to these workers so that they can receive their payments on that and not pay usury rates to move money from themselves to their loved ones at home. 

So, finally BIG DATA:

And big data is a huge thing. And I think is really going to be a game changer for financial services. And Nicole who’s been, again, a fantastic entrepreneur has basically started to use mobile phone data across the world, to really re-think how to do credit scoring.

I won’t go into the details, but suffice to say, if you, you’re only calling people at 4:00 AM, it’s likely you’re a worse risk than if you’re calling people across the day. And that’s the sort of insights that she takes.

So all of that’s great, but how can we accelerate this further? All of us here. People sitting in this room. Across London. London being the financial services center of the world, how can we be relevant here?

With coffee. So I started with water, but I’m going to sort of go towards coffee. And here I am with my partner Matteo. And one day we were sitting and we were saying, “There’s got to be a better way to do this.”

And Matteo turned around and he said, “Actually, there probably is.”, as we were drinking the coffee.

And the reason is in Naples. About a hundred years ago, they created something called Cafe Suspenso, which is suspended coffee. So when you were feeling particularly generous and you bought a coffee, you tell the bartender, but the barista to make another cup of coffee and he’d hold it behind the bar. And then when somebody less fortunate who couldn’t afford coffee come, came in, the coffee was served to him.

And this act of broad blind altruism I thought was amazing. And of course it has inspired a bunch of similar products in retail. And he said, “Why can’t we do that for finance?

Because actually we buy financial services every day here. And I think a scheme for ethical financial services products promoted by the financial services community that can fund, like-for-like products in developing regions can be something that is truly worthwhile. And can truly lift some of the issues that the financial services community has created for themselves over the last 15-20 years. A movement!

So, this is a way of us enabling grassroots, bottom-up inclusive development in growth markets with our help and thereby accelerate financial inclusion in the information age. Thank you very much. 

– Udayan Goyal

Recommendations for Further Reading:

A future imperfect: Why Globalization went Wrong – Adrian Wooldridge 

How JP Morgan Became The Richest Banker In History

Will The Economy Collapse? Impact Of COVID-19 On Global Economy

How To Get Rich During This Recession: Ways that Can Make You Rich In Recession

Udayan Goyal’s talk: Financial Inclusion in the Information Age at TEDx London Business School conference.