March 30, 2011

Designing Financial Inclusion in Pakistan

This is the first post in a series on Reboot’s ongoing work in Pakistan in the areas of branchless banking and financial inclusion.

Those that follow this publication know that Reboot is passionate about improving the nature of transactions between citizens and the institutions meant to serve them. From Egypt to the United States to China, we are looking at how these interactions are changing, and how to design that change in a way that leads to improved outcomes.

This focus has led us to Pakistan, a country roughly the size of Chile that generates a disproportionate share of the world’s grim headlines. While we’ve only been here for under a week, our time thus far — spent between Karachi and Islamabad — belies the negative narrative dominating global consciousness. Pakistan certainly has a history of painful strife, yet there are countless reasons to be optimistic about its future. For one, the Pakistani government is serious about expanding access to basic services for a population that has been battered by conflict, natural disaster, and economic despair. For another, there is an able and sizable middle class eager to help steer their country towards positive growth.

One area where Pakistan is making progress is in financial inclusion. In a country where nearly 90 percent of people lack access to basic financial services, recent public, private, and non-profit collaborations are working to change this reality for its most marginalized citizens. We are now here, working with an international NGO and a leading local financial institution, to understand how new technologies, combined with innovative business models and progressive public policy, can be used to empower market segments that are often left at the economic sidelines.

The Pakistani people are skilled at creating opportunity out of adversity. One example emerged in the aftermath of last summer’s devastating floods that affected nearly 20 million people. In the midst of tragedy, Pakistani institutions and the international community swiftly mobilized and worked together to support afflicted populations. Building upon years of innovation in branchless banking, the bank with whom Reboot has partnered quickly joined forces with the Pakistani government and international donors to deliver emergency cash transfers to more than a million flood victims. Preloaded debit cards allowed beneficiaries to securely manage their relief funds. Utilizing a vast network of cash-in cash-out agents, aid recipients could collect their relief assistance easily and at no cost to themselves.

In addition to being a mechanism for secure, speedy relief assistance, the cards also represented de facto bank accounts — and the related services and benefits — for a market segment that has traditionally been excluded from formal financial services. As a majority of aid recipients were previously ‘unbanked’, newly possible access to secure savings, cash transfers, bill payments, and opportunities to establish a credit history represent critical steps towards financial inclusion.

However, as often the case, particularly in disaster situations, optimal outcomes weren’t realized. While the aid relief payments were a broad success, recipients are not using the secondary financial services newly available to them. Having no experience with banks, the value proposition isn’t clear to them. Why hand precious cash to a faceless institution when the concept of ‘banking’ is still fuzzy? How to guarantee the cash put into a mysterious digital machine would actually reappear whenever you wanted it again?

Their hesitation at adopting these services is understandable. All of us know the anxiety that comes from dealing with a large, important institution for the first time. From earning your first driver’s license, to obtaining a foreign travel visa, interacting with unknown bureaucracies can be scary and confusing. This is particularly true when the services these organizations offer haven’t been designed with the end user in mind.

Given these challenges, our goal is to understand how to better design banking products, delivery mechanisms, and business models to meet the needs of a new, previously unbanked market segment. Instead of asking, ‘Why won’t they use the great products on offer?’, we and our partners are asking ‘How can we better design products that meet this market segment’s specific needs?

To answer this question, we’ll be exploring the lives of low-income and rural Pakistanis who stand to gain from access to financial services. Multiple trips to Pakistan across several months will see our team traveling through many regions of this stunning country, with a focus on Punjab Province. We’ll also be critically examining the operations of the facilitating bank to understand how to connect the dots between user needs and organizational capacity. Our ultimate goal is to bridge the gap between customers and the financial services that offer them greater economic security and opportunities.

Our work will take us to disparate contexts, from embeds at the bank’s headquarters in Karachi to visits to flood refugee camps. We’ll join communities as diverse as tech entrepreneur meetups, to government representatives and civil society groups. We’ll seek answers to important questions such as: How can we break out the unique market segments that are too often lumped into one, woolly, ‘bottom of the pyramid’ designation? How can we better understand the low-income and rural market segments to develop tailored products for their specific needs, just as is done for segments traditionally attractive to commercial banks? How does illiteracy — textual, numerical, financial, and technological — impact access to and use of financial services? And how can the formal financial sector be opened to allow a new class of entrepreneur to create greater social value through its supply chains? We’ll place a specific emphasis on women and how to better serve them as customers and as potential agents in the financial ecosystem.

Rapidly rising mobile penetration in Pakistan and new P2P payment systems, combined with government foresight and innovative business models, offer the opportunity to bring economic hope to millions of Pakistanis. Willingness from all stakeholders — government, private sector, NGOs, and the people they all serve — to try new approaches gives cause for optimism. We’re grateful to be part of this period of experimentation, because Pakistan is so much more than dour headlines. It is a hotbed of social innovation that is redefining the relationship between citizens and those institutions meant to serve them.

Image: Save the Children

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