FOCUS NOTE Vision of the Future: Financial Inclusion 2025 I t is 2025. Imagine that everyone around the world is using a broad range of affordable financial services that meet their various needs—full financial inclusion. importance of financial services for poor people. As a result, more people are gaining access to financial services. However, relatively few people This has contributed to a new wave of prosperity that in developing countries use these services. This is bringing greater economic and social progress. may reflect the perception that financial services Financial services are central to the lives of everyone, on offer are of limited value for customers. Low allowing people to participate in the economy, access use leads to lower gains for providers, thus putting services, seize opportunities, build resilience, and the sustainability of financial inclusion solutions into pursue their dreams. question. That’s one scenario; here are a few others. Important challenges remain for our industry; financial inclusion is only a means to an end. A In 2025, financial inclusion has become a victim of growing body of evidence shows that people who its own success. Providers are aggressively offering can access and use financial services are better able products and services that are not well suited for to support their livelihoods, improve their well- poor people. These products and services are being, and better deal with risk. It also shows that actually harming them and adversely affecting their financial access can improve the local economy ability to participate in the economy and society— (Cull, Ehrbeck, and Holle 2014). leading to further exclusion. Global development trends indicate that the Or maybe, in response to new risks such as hacking number of people living in extreme poverty is and identity and data theft, governments have likely to continue to decline as incomes continue to implemented policies that drastically dampen rise in many parts of the world. Globally, the well- private-sector innovation and leave most people being of individuals seems to be improving.1 Yet, either excluded from financial services or poorly inequality has become a new challenge. A majority served. of poor people work in the informal sector. This plays a vital role in economic growth, but many of Or maybe, the rise of social networks leads people these workers do not have social protection and job to find new ways to engage with each other and security. Over the next decade several major forces to participate in the economy—all interactions, will fundamentally shape most countries’ economic, including financial ones, are conducted through social, and political conditions, including financial these networks. services for the poor. All of these scenarios are plausible. They could To get a good sense of what the future may hold No. 107 happen. Can we influence the outcomes? for poor people and financial inclusion, CGAP June 2017 organized a scenario thinking exercise that aimed to Today, governments, development organizations, examine plausible, divergent futures (see Figure 1). Estelle Lahaye, and private-sector players worldwide recognize the We conducted four global workshops in Accra, Thomas E. Abell, and James K. Hoover 1 There is no universal definition of well-being. In the past decades, concerns have emerged with the fact that income alone as measured by gross domestic product is not a sufficient measure of well-being. In the 1980s, economist Amartya Sen showed that poverty involved a wider range of deprivations in health, education, and living standards. Therefore, the concept of well-being is multidimensional and ranges from civic engagement to housing, from household income to work-life balance, and from skills to health status. Several initiatives, such as Human Development Index, OECD Better Life Index, Multidimensional Poverty Index, Social Progress Index, etc., attempt to measure well-being. 2 Figure 1. Scenario Process SCENARIO PROCESS: “In what ways will financial services influence inequality A disciplined form of story-telling and economic participation about possible futures for poor people by 2025?” 1. Define the driving question 2. Understanding the current reality (base case) 3. Identifying forces at work 4. Isolating key uncertainties Translate into strategic 5. Creating the scenarios ‘so what’? Bangalore, London, and Washington, D.C., 2014. The number of individuals without an account between October 2016 and February 2017. More dropped 20 percent to 2 billion adults, while the than 100 thought leaders, innovators, development percentage of adults with an account increased actors, and academics participated in these from 51 percent to 62 percent (Findex 2014). workshops. The goal was to generate possible future scenarios—not predictions—for financial Technology and mobile money have contributed inclusion, taking into account driving forces such to the rise in account ownership, particularly in as digital technologies, globalization, migration, sub-Saharan Africa (SSA). In SSA 29 percent of and the changing world of work. In particular, adults owned an account at a financial institution in participants explored the driving question: “In what 2014, but this increases to 34 percent when mobile ways will financial services influence inequality and money accounts are added (Findex 2014). economic participation for poor people by 2025?” Despite the headline gains, data show persistent This Focus Note summarizes the insights gained gaps in key regions and among certain client through this exercise. It also identifies the main segments, such as women, youth, rural poor, and opportunities to ensure financial services better the poor at large. For example, the gender gap in serve the needs of poor people in a rapidly evolving account ownership is not significantly narrowing: context for organizations working to advance in 2014, only 58 percent of women had an account financial inclusion. compared to 65 percent of men (Findex 2014). Similarly, the Middle East and North Africa (MENA) The State of Financial Inclusion had the lowest penetration, with 14 percent of adults with an account, followed by SSA with 34 percent, To explore possible futures, we look first at the and South Asia (SA) with 46 percent (see Figure 2). situation today. Based on extensive reviews of existing research, this section aims to offer a Despite improvements in access, account high-level description of the present landscape in use remains an issue in developing countries. financial inclusion. According to Findex, approximately 30 percent of bank accounts globally are underused or dormant More people are gaining access in countries that are not in the Organisation for to financial services, but low Economic Co-operation and Development (OECD) use remains an issue (see Figure 3). Furthermore, 68 percent of mobile money accounts are inactive on a 90-day basis, According to the World Bank’s Global Financial according to GSMA. Mobile money is still dominated Inclusion (Findex) Database, globally, the number by narrow use cases such as person-to-person (P2P) of accounts grew by 700 million from 2011 and transfers and airtime top-ups (GSMA 2015). 3 Figure 2. Bank Account Penetration, by Region Global Account Penetration: Adults with an account (%), 2014 94 69 51 51 46 34 14 East Asia & Europe & High-income Latin America Middle East South Asia Sub-Saharan Pacific Central Asia OECD & Caribbean Africa economies Source: Findex 2014. In addition, access points for financial services, traditional brick-and-mortar bank branches such as bank branches, automatic teller machines and ATMs is becoming more diverse globally. (ATMs), and agents, are still concentrated in urban Technology and regulation have enabled the use centers, and the number of access points varies of agents to deliver financial services in many parts widely among countries. In Tanzania, for example, of the world. there were more than 900 access points per 100,000 adults in 2015, whereas in Egypt there Despite the momentum of increased access, the were nearly 55 access points per 100,000 adults low use and lack of convenience reflect limited (IMF 2015). The type of access points beyond value for customers, thus representing lower gains Figure 3. Bank Account Activity, by Region Intensity of Use of Account at a Financial Institution Adults with an account by level of account use (as % of all adults) 94 69 51 51 46 34 14 East Asia & Europe & High-income Latin America Middle East South Asia Sub-Saharan Pacific Central Asia OECD & Caribbean Africa economies High use Medium use Low use Dormant Source: Findex 2014. 4 for providers. Diverse population segments also involved along with a surge in FinTechs (Dickerson, remain excluded from access to and use of financial Skan, and Gagliardi 2016). This increased diversity services. The private sector and governments will of providers offers a tremendous opportunity for need to continue to work hand in hand to achieve new partnerships to be formed to explore new and meaningful progress on financial inclusion. innovative solutions to serve the poor. Increased private-sector innovation Important progress achieved in leading to diversification of key markets through targeted providers and business models state-led interventions In recent years, the space of opportunity for In conjunction with the private sector, some policy the private sector has expanded. Digitization makers are creating incentives for broader and lowers transaction costs and creates data trails interconnected market systems to achieve safe and that enable firms to innovate by developing new more efficient product delivery. National policy goals, business models that serve poor consumers. state infrastructure, and competition regulation are a Providers now include entities such as banks, few areas of government involvement where policies microfinance institutions, mobile network operators appear to contribute to broader access to and use (MNOs), payments services providers, merchant of financial services. (Figure 4 depicts governments’ aggregators, retailers, financial technology roles to drive financial inclusion.) Furthermore, companies (FinTechs), energy services providers, many countries are incorporating financial inclusion and social networks. Different players have taken strategies into their regulatory legislation. In India the lead in expanding access to financial services for example, the government-led Aadhaar program across regions. In SSA, for example, MNOs have has provided digital identification to over 1 billion played a significant role in expanding access to citizens and has been a key pillar of the country’s financial services, whereas in East Asia e-commerce inclusive finance infrastructure. In another example, companies and social networks have accelerated Sweden is piloting a cashless economy from which financial inclusion (Faz and Moser 2013). In India, other countries can glean financial inclusion insights the government and state banks have been heavily and incorporate these into their own fiscal policies. Figure 4. Policy Drivers of Financial Inclusion Ecosystem • Capital requirements, industry monitoring • Allowing agents to perform key transactions • Deposit insurance/Consumer protection • eMoney • Competition Financial sector Enabling stability / safety Regulation • Regulations requiring • National ID systems or rewarding financial • Adapting KYC regulations inclusion targets Adapting identity National policy goals requirements Policy Drivers of for the poor Financial Services for the Poor New financial accounts/ Increased volume services for the poor • Digitization of P2G and G2P • “No-frills” accounts with • Incentives for users and low entry requirements providers to participate State Infrastructure and low cost • Physical: Post Offices, • Financial: Credit Registries, State-owned Banks, etc. Clearinghouses, National Switch, etc. 5 Trends Shaping to support growing populations, and might face Emerging Economies new challenges, such as higher unemployment and increasing urban poverty. Financial inclusion can also be a means to an end. To better understand the potential for financial Elderly populations will increase rapidly during inclusion to contribute to poor people’s ability this time, influenced by increasing life expectancy. to participate in the economy and society, it is However, over half of the world’s population will still important to consider broad trends that affect how be under 35 in 2030 (Euromonitor Research 2015). emerging markets develop and are considered Figure 6 illustrates the population distributions by relatively predictable. This section offers a high- age group in select countries. The youth “bulges” level summary of these trends. in Latin America and India, and an even younger population in SSA, pose strikingly different age The world’s population is becoming demographics than in North America, Europe, more urban, with a youthful Japan, and China. This will most likely come with population in the South and an greater risks of youth unemployment, education aging population in the North challenges, and concern for the future workforce of these regions. As shown in Figure 5, the world’s population of over 7 billion people is expected to reach close to Global poverty has declined, well-being 8 billion by 2025 (UNFPA 2013). While more than is improving, but inequality is on the rise half of the world’s population live in cities today, this share is projected to reach close to 60 percent Over the past 40 years, global poverty has in the next decade, with a particular acceleration in decreased:2 today fewer than 1 billion people live Africa and Asia (UNFPA 2013). Urban centers will in poverty compared to nearly 2 billion people in be increasingly challenged to expand infrastructure 1975 (World Bank 2016b). Globally, poor people Figure 5. The World’s Population Trends Population Trends 9 (Projected) 8 7 World Population Population (Billions) 6 Today, 54% of world’s population lives in an urban area 5 4 Urban Population 38% of world’s population lived 3 in an urban area in 1975 2 Youth Population* 1 0 1975 1985 1995 2005 2015 2025 *Youth Population ages 10–24 Source: World Bank and United Nations 2015. 2 The World Bank defines poverty as living on less than US$1.90 per day. 6 Figure 6. The Aging North and the Youthful South North America Europe Japan China Female Male Female Male Female Male Female Male Female Male Female Male Female Male Latin America Sub-Saharan Africa India Source: UN Population Division, World Population Prospects, 2015. are predominantly rural, young, poorly educated, In fact, inequality has become a new challenge— and mostly employed in the agricultural sector; data show that inequality continues to rise in many they live in larger households with more children. 9 countries in terms of both income and assets. This As global poverty has declined, gross domestic lessens the pace at which growth enables poverty product (GDP) per capita has increased from less reduction (Ravallion 2004). Economist Branko than US$2,000 in 1975 to about US$10,000 today Milanovic (2012) published a global analysis of the (World Bank 2015a). changes in real incomes across different population segments between 1988 and 2008 (see Figure 7). However, improvements in global poverty rates His analysis shows that the middle segments and and income levels have not been equal across highest earners saw significant income gains, all regions. China’s economic growth over the while the poorest are only slightly better off than past 40 years has been the largest contributor in the past. It also provides evidence that those to reducing global poverty. In 1990, nearly half earning between the 75th and 90th percentiles of the world’s poor lived in China. Today, just of the global income distribution have seen very 12 percent of the global poor are Chinese. More little increase in income. These earners are the recent progress in Indonesia and India has also global upper-middle class. They include many from contributed to overall poverty reduction. Today, Eastern Europe and Central Asia (ECA) and Latin the concentration of poverty has shifted to SSA, America, as well as from rich countries (e.g., the where half of the world’s poor now reside (World United States and countries in western Europe) Bank 2016a). whose incomes stagnated (Kawa 2016). In addition, comparison of data with and without China shows Globally, well-being of individuals seems to be the large impact that Chinese economic growth has improving. For example, according to the 2015 had in driving these trends. Human Development Report, the world has made major progress with human development over the Poor people continue to work in past two decades. Today people are living longer, the rural and informal economy more children are in school, and more people have access to clean water and basic sanitation. Work is central to many elements of economic More people are connected across local and and social integration in society. At a minimum, global markets because of digital technologies it enables people to earn a livelihood and to gain (UNDP 2015). But much more progress needs to some level of economic security. It also gives be achieved, particularly in SA and SSA, among them a sense of dignity and worth (UNDP 2015). women and young people. Work also strengthens societies: it can build social 7 Figure 7. The Elephant Chart, with and without China, Showing Real Income Gains (in $PPP) at Different Percentile of Global Income Distribution, 1988–2008 90 80 Real PPP income change (in percent) 70 60 50 Without China 40 30 20 10 0 –10 –20 0 10 20 30 40 50 60 70 80 90 100 Percentile of income distribution Source: Milanovic 2012. cohesion and bonds. By working together, people multiple sources. For example, over 20 percent of can accumulate knowledge, which is the basis for Ugandan smallholder farmers derive income from cultures (UNDP 2015).3 remittances, 8 percent from retail/manufacturing, 5 percent from services businesses, and 12 percent Although the importance of agriculture to from other wages.4 economies may be lessening, it remains an important source of work. According to the In addition, most people working in developing Food and Agriculture Organization (FAO) (2016), countries are employed in informal jobs.5 This 1.34 billion people globally are working in or accounts for more than half of nonagricultural seeking work in agriculture, and most of this employment in most regions of the developing world work is on family farms. The International Labour (WIEGO 2014).6 However, regional estimates hide Organization (ILO) estimates that about two-thirds great diversity within a region: informal employment of the poor were employed in the agriculture represents 82 percent of nonagricultural employment sector in 2012 (Figure 8). Most of this work is on in SA, compared to 66 percent in SSA and 45 percent small- and medium-sized family farms, which—as in MENA or 10 percent in ECA. Women are more is often the case in developing countries—have likely to be employed in the informal economy than limited access to resources and lower productivity men (WIEGO 2014). And while new evidence shows (UNDP 2015). Thus, many agriculture workers that the informal economy correlates positively need to supplement their income with off-farm with growth (Loayza 2016), it leaves many workers work. CGAP research on smallholder farmers in without social protection or job security, which poses SSA confirms that these farmers earn income from challenges to combatting inequality and poverty. 3 According to anthropologist E. B. Tylor, culture includes knowledge, belief, art, morals, law, custom, and any other capabilities and habits acquired by man as a member of society (https://en.wikipedia.org/wiki/Culture). 4 See CGAP web page, “Financial Innovation for Smallholder Families” (http://www.cgap.org/topics/financial-innovation-smallholder-families). 5 ILO defines the informal economy as all economic activities by workers and economic units that are—in law or in practice—not covered or insufficiently covered by formal arrangements. 6 For practical data collection reasons, the 15th International Conference of Labor Statisticians has recommended that agricultural and related activities be excluded from the scope of informal sector surveys. 8 Figure 8. Poverty, by Economic Sector increased (Figure 9). Middle-skilled jobs are often near the top of the income distribution in many 100% low-income countries (World Bank 2016e). 18.8 In summary, a lot of progress has been achieved 80% 43 in the lives of poor people over the past decade. 18 Poverty is declining, well-being of individuals is improving, and more poor people are able to work 60% than a decade ago. Many have increased access to financial services. However, a few trends persist or 21.5 are emerging that could negatively affect progress. 40% Most poor people continue to be employed in agriculture, which is often not a sustainable source 65.2 of income in itself. Their employment continues to be informal without offering much security. 20% 35.5 The labor market is also becoming polarized, putting a large part of the workforce at risk. And use of financial services remains low. All of these 0% components risk exacerbating the inequality that Poor Non-poor is already quite visible in many parts of the world. Total Rising inequality may also have implications for Agriculture Industry Services financial inclusion, because the focus on improving access to financial services may not adequately Source: ILO 2016. address it. Labor markets have increased the In light of these concerns, the new development number of low-skilled and high- priorities with the United Nations (UN) Sustainable skilled jobs, leaving the poor with Development Goals (SDGs) have extended the fewer opportunities to move up focus beyond poverty to tackle additional broader development challenges including inequality. These broader priorities underscore the need Poor people tend to hold jobs that require medium to understand how financial services can enable and low skills. According to ILO, in 2012, 53 percent achievement of broader development goals. There of the poor were employed in occupations that is already some evidence that financial services are typically require middle skills7 and 43 percent important enablers for some of the SDGs (Klapper, were employed in low-skilled jobs. 8 However, El-Zoghbi, and Hess 2016). because of advances in technology, globalization, urbanization, and other structural factors like the Forces Shaping the decline of unions (Santos 2016), the labor market Future of Poor People is increasingly polarized, potentially leading to greater inequality. Machines, computers, and the CGAP’s driving question for the scenarios thinking internet are contributing to the decline in the exercise is: “In what ways will financial services number middle-skilled jobs in developing countries, influence inequality and economic participation for while the number of low-skill and high-skill jobs has poor people by 2025?” 7 According to ILO, middle-skilled occupations require post-secondary, nontertiary education, upper secondary level of education, or lower secondary level of education (9 to 12 years). Examples of middle-skilled occupations include clerks, craft and related trades workers, plant and machine operators and assemblers, service workers and shop and market sales workers, and skilled agricultural and fishery workers. 8 According to ILO, low-skilled occupations require a primary level of education (6 years) or less. 9 Figure 9. Annual Average Change in Employment Share, 1995–2012 2.0 1.5 1.0 Percentage points 0.5 0 –0.5 –1.0 –1.5 –2.0 –2.5 C Bh p. ga e M pub s Se d a A s El Bo ia nz iu s lv i a yp Sr ma a t, i L ica R a Ka a an kh ca a n on i a na G olia ki a N ba ru Bo rag s te a Ph Tu ala Ba Pe n ts u a hi a C ia in H ala ca an nd i a au li c kr a So ilip key ai or G an YR nd e a h e ic do U ain ua am U ani i ab nk N sta Pa han a Et an e ic o ys rb Sa liv Ja nd M mib op Th ad R ur ut pin M fri za Ri n os ut hi st Ta rit m la P F g Ar a r w I , a ia r t on ed ac Eg M om D High-skilled occupations (intensive in nonroutine cognitive and interpersonal skills) Middle-skilled occupations (intensive in routine cognitive and manual skills) Low-skilled occupations (intensive in nonroutine manual skills) Source: World Bank 2016e. The goal of the scenarios thinking exercise is to Will the spread of digital technologies and the 1.  determine how poor people participate in society digitization of information flows benefit poor and the economy and how financial services will people? influence their participation over the next 10 years. The internet, mobile phones, and a diversity of tools The exercise considers many forces that already that collect, store, analyze, and share information can be seen today. However, the degree to which digitally have spread quickly. The number of a force will impact the livelihoods and well-being internet users has tripled over the past 10 years— of poor people, and the effect of that disruption at the end of 2015, there were 3.2 billion internet are uncertain. We identified four forces that are users (World Bank 2016e). On average, 8 in 10 likely to have a substantive effect on how we individuals in the developing world own a mobile answer the driving question (see Box 1). The forces phone, including those at the base of the pyramid were distilled from a much longer list arising from (World Bank 2016e). In fact, more households in research and scenarios workshops. developing countries own a mobile phone than have access to electricity or improved sanitation (Figure 10). Box 1. Four Forces Identified for Scenarios Thinking Exercise Digital technologies have dramatically expanded By 2025 . . . the information base, lowered information costs, 1. Will the spread of digital technologies and the and created information goods. They have helped digitization of information flows benefit poor to reduce information asymmetries and increase people? trust and transparency, thereby influencing how 2. Will the globalization of capital, information, firms operate, how people seek opportunities, and and ideas change the way poor people engage how citizens interact with their government (World in society? Bank 2016e). 3. Will poor people continue to move domestically and internationally? 4. Will the changing world of work affect poor The volume of data in the world is increasing people? exponentially. According to the UN (2014a), 90 percent of the data in the world have been 10 Figure 10. Percentage of the Population with Access to Select Basic Services (1990–2015) 100 80 % of the population 60 40 20 0 1990 1995 2000 2005 2010 2015 Improved water Mobile phone Electricity Internet Secondary school Mobile broadband Improved sanitation Source: World Bank 2016e. created in the past two years. New technologies between the elderly and youth. Access costs for have spurred the volume, level of detail, and speed consumers also differ greatly: for example, the cost of making data available. Mobile phones, social of a typical mobile phone service can vary as much media, SMS, emails, internet search data, and as 50 times from one country to another (World financial transactions provide accrued sources of Bank 2016e). Some consumers who do not have a “big data” that reveal new insights that businesses large data footprint might be at risk of exclusion. and governments can use to more accurately market to and serve people. Finally, the growth opportunity that digital services offer comes with risks. For example, as large The potential of data also creates new challenges. companies increasingly own data on customers, For consumers, data present risks around privacy, there is a threat of excessive concentration of market anonymity, consent, security, discrimination, and power and rise of monopolies. A threat of greater so forth. Data are often in the hands of companies inequality also exists as digital technologies automate such as MNOs, internet providers, and digital tasks, which in turn might exacerbate competition platforms that might be reluctant to share data for low-skill jobs and push salaries to lower levels. out of fear of threatening customer privacy or their And, there is a threat to citizens’ engagement and competitive advantage. Companies might also empowerment if governments leverage technology decide to sell data without client consent. to control information (World Bank 2016e). In addition, a large portion of the population In summary, digital technologies offer exciting remains untouched by digital technologies. potential for poor people to be more connected According to the World Bank (2016), nearly 2 billion with markets, services, and information. They also people do not own a mobile phone, and nearly offer the potential to break down geographical, 60 percent of the world’s population does not cultural, and social barriers. However, certain have internet access. Disparities also exist across associated risks, such as the risk of marginalizing income distribution, gender, location, and age. For certain segments, are important to consider, example, in SSA, women are less likely than men to particularly for the poor. While it is clear that the use or own digital technologies. A similar gap exists creation of new technological connections will 11 Figure 11. Data Created Each Minute of Every Day in 2016 150,000,000 emails sent/received 400 hours 4,000,000 of new video Google search uploaded on queries YouTube received Every minute of the day 3,000,000 16,000,000 Facebook posts SMS sent shared 350,000 tweets Source: Adapted from Domo and Radicati 2016. accelerate in the future, there are a few noteworthy The world has never been more connected by unknowns: commerce, communication, and travel than it is today. But, the pattern of globalization is shifting • Will the private sector make the necessary (Manyika et al. 2016). investment to connect people in underserved communities? Will the government provide After 20 years of rapid growth, global traditional incentives for the private sector to do so? flows of goods, services, and finance are slowing • Will connectivity become more affordable for all down. They reached similar levels in terms of dollar segments? value before the 2009 recession but represented • Will interfaces become more adapted to just 39 percent of world GDP in 2014, compared to consumers’ needs, capabilities, and behaviors? 53 percent in 2007 (Figure 12) (Manyika et al. 2016). • Will government regulation promote a competitive environment? Although these traditional flows continue to be • How will governments regulate data privacy and an important part of the global economy, the ownership? volume of data being transmitted across borders • Will firms be able to monetize data, and will has surged. According to Manyika et al. (2016), regulations enable them to do so? use of cross-border bandwidth 9 increased by • Will citizens demand greater control of their 45 times between 2005 and 2014 (Figure 13). Use privacy and data? is projected to increase by an additional nine times over the next five years. Will the globalization of capital, information, 2.  and ideas change the way poor people engage Data flows, in particular through digital platforms in society? (e.g., social networks, e-commerce websites, etc.), 9 Used cross-border bandwidth serves as proxy to measure the volume of data transmitted as it correlates to internet traffic. 12 Figure 12. Flows of Goods, Services, and Finance, 1980–2014 $ trillion, nominal All flows as % of GDP 53 Finance 49 Services 46 –14 p.p. Goods 41 41 41 38 39 37 37 37 35 32 32 32 31 32 29 30 29 28 28 30 29 26 27 24 26 21 22 24 24 24 24 18 23 21 22 22 23 17 12 10 11 13 10 9 10 8 9 5 5 5 6 6 6 3 3 3 3 3 3 3 4 4 1980 1990 2000 2007 2014 Source: Manyika et al. 2016. enable the movement of goods, services, finance, For the past decades, globalization compounded by and people, expanding the realm of opportunities digital technologies has contributed to a shift in the for local economies. Small businesses can leverage authority of states, with a few exceptions. The notion these platforms to connect with customers and of “territory” has, indeed, become less meaningful suppliers around the world. Individuals can and less constraining. People and organizations are learn, find work, and showcase their talent with interacting beyond national borders—sharing ideas these platforms. However, digital globalization and finding solutions to challenges with or without is still a recent phenomenon, and it is currently the involvement of states—and they often are free concentrated in advanced economies. of any kind of control (Coursera 2017). This has Figure 13. Used Cross-Border Bandwidth, 2008–2014 Regions NA EU AS LA ME AF OC United States and Canada Europe Asia Latin America Middle East Africa Oceania Bandwidth Gigabits per second (Gbps) <50 50–100 100–500 500–1,000 1,000–5,000 5,000–20,000 >20,000 2005 2014 45× larger 100% = 4.7 Terabits per second (Tbps) 100% = 211.3 Tbps EU EU NA NA AS AS ME ME AF AF OC OC LA LA Source: Manyika et al. 2016. 13 resulted in the empowerment and engagement of • Will crypto currencies and distributed ledger nonstate actors, such as multinational corporations, technologies enable services that are not tied to nongovernmental organizations (NGOs), regional any country or central authority? bodies, etc., in addressing development challenges and making power more distributed and diffuse. One Will poor people continue to move domestically 3.  key emerging concern in the new global world is the and internationally? dominance of digital platforms and their ability to Better and more global economic opportunities, redefine a wide range of political and societal realities more jobs, and the promise of a better life (Ghez 2016). As U.S. National Security Administration will continue to prompt people to relocate. whistleblower Edward Snowden put it: “When you Forces such as climate change and conflicts will get a Google in place, a Facebook in place, a Twitter accelerate people’s drive to migrate in search in place, they never seem to leave . . . . We should of safer communities, employment, dependable be particularly cautious about embracing this . . . . To income, and access to education. For example, in have one company that has enough power to reshape 2014, close to 20 million people fled their homes the way we think—I don’t think I need to describe because of disasters (IDMC 2015). In 2015, around how dangerous that is” (Conger 2016). 65 million people were forcibly displaced as a result of persecution, conflict, generalized violence, or Overall, the digital era of globalization is expected human rights violations (Edwards 2015). to have an increasing impact on the lives of poor people in the next decades. Consumers will Arguably, the biggest global demographic trend is be able to access global goods, services, and urbanization. In fact, “the world is experiencing the information. Companies will operate in more largest migration from the countryside to the city globalized value chains. However, it raises a in history” (Dobbs, Manyika, and Woetzel 2015). number of uncertainties: Globally, more than half of the population lived in urban areas in 2014 compared to 30 percent in • How will states respond to globalization with 1950. Today, the most urbanized regions include regard to controlling information, capital, and Northern America (82 percent), Latin America ideas? (80 percent), and Europe (73 percent). Africa • How will the rise of nonstate actors influence and Asia remain mostly rural today, with 40 and the power of the state? How will they influence 48 percent of their respective populations living consumers’ decision-making? in urban areas (Figure 14). By 2050, the urban • Will there be a backlash to globalization from population is expected to reach two-thirds of all governments? people on the planet, with the fastest growth in Figure 14. Urban and Rural Population as Proportion of Total Population, by Major Areas, 1950–2050 Latin America and Northern Africa Asia Europe the Carribean America Oceania 100 100 Proportion of total population Proportion of total population 90 90 80 80 81.5 79.5 70 73.4 70 70.8 (per cent) (per cent) 60 60 50 50 40 47.5 40 40.0 30 30 20 20 10 10 0 0 1950 1970 1990 2010 2030 2050 1950 1970 1990 2010 2030 2050 1950 1970 1990 2010 2030 2050 1950 1970 1990 2010 2030 2050 1950 1970 1990 2010 2030 2050 1950 1970 1990 2010 2030 2050 Urban population Rural population Source: UN 2014b. 14 Africa and Asia. Over the next four decades, the to economic growth. In Kenya alone, data show urban population of Africa is likely to triple, and in that Nairobi contributed 20 percent of GDP even Asia it is likely to increase by 61 percent (UN 2014b). though it hosts just 9 percent of the country’s population (Runde 2015). In addition to economic The impact of climate change will also interact with benefits, urbanization offers the opportunity to urbanization and accelerate its growth (UNHCR connect people to basic but essential services 2011). Indeed, it has become widely accepted that such as water, health, electricity, education, and climate change will result in large-scale migration, information. As such, cities can contribute to generally within countries (Brookings Institution improving people’s well-being. 2014). According to the Internal Displacement Monitoring Centre (IDMC), mass displacements are Yet, urbanization has the potential to be frequent in countries most exposed and vulnerable destabilizing and even to amplify existing to natural hazards, which are often developing challenges. It puts pressure on cities’ infrastructure countries. Between 2008 and 2013, more than and resources. According to UNDP (2015), nearly 80 percent of displacement took place in Asia. But, 40 percent of the world’s urban expansion may given Africa’s fast population growth, it is expected be in slums with inadequate sanitation and unsafe that its population will be increasingly exposed drinking water. Urbanization creates disparities to natural hazards and displacements (IDMC and among socioeconomic groups in cities, boosting NRC 2014). Figure 15 shows countries’ vulnerability social tensions. to climate change, including 33 countries facing extreme risks; 27 of them are in Africa. Migration does not stop at cities; it extends across borders. In 2015, the international migrant According to the World Bank (2017b), more population reached 244 million (UN 2016). than 80 percent of global GDP is generated in According to the UN, a majority come from cities, highlighting the potential of urbanization middle-income countries and move to high- to improve economic well-being by contributing income countries. A large number of international Figure 15. Climate Change Vulnerability Index 2017 Source: Maplecroft 2016. Note: Maplecroft’s Climate Change Vulnerability Index evaluates the sensitivity of populations, the physical exposure of countries, and governmental capacity to adapt to climate change over the next 30 years. 15 migrants come from India, Mexico, Russia, China, migration contributed to 42 percent of population and Bangladesh (Connor 2016). Two-thirds live in growth in North America and 32 percent in 20 countries, with the United States, Germany, and Oceania; in Europe, the population would have Russia serving as the top three destinations for declined in the absence of positive net migration migrants (UN 2015). (UN 2016). Because of new and festering conflicts, refugees International migrants also contribute to economic are an increasingly important segment of the development in their home countries, in particular cross-border movement of people. According to with remittances. In 2014, global remittances the UN High Commissioner for Refugees (UNHCR), reached $583 billion, including $436 billion although refugees represented about 8 percent to developing countries, which far exceeded of all international migrants in 2015, their total official development assistance (UNDP 2015). number has increased from 1.7 million refugees According to the UN (2016), remittances are often worldwide in 1960 to close to 16 million in 2015 used to improve the livelihoods of families and (Figure 16). communities through investments in education, health, sanitation, housing, and infrastructure. According to the UN, migrants contribute to the economic growth and income generation However, migrants are among the most vulnerable of destination countries. They often fill labor segments of the population. According to the shortages, create jobs as entrepreneurs, and UN (2016), “they are often the first to lose their pay taxes. They also forge new paths in science, job in the event of an economic downturn, often medicine, and technology and enrich their host working for less pay, for longer hours, and in communities by promoting cultural diversity worse conditions than national workers.” And, (UN 2016). For example, with aging populations they often face abuse, persecution, exploitation, in the North, many advanced economies want to and discrimination. Recently, the effect of promote international migration to slow down globalization and digital technologies on the effect. Between 2000 and 2015, positive net advanced economies and the surge of the number Figure 16. Total Number of Refugees Worldwide Living outside of Their Birth Countries 20 million 16 12 8 4 0 1960 1970 1980 1990 2000 2010 ’15 Sources: UNHCR and Pew Research Center. Note: Does not include Palestinians refugees (Connor 2016). 16 of refugees have garnered mixed responses Digital technologies enable firms and workers to by governments from the North. For example operate, connect, and access more information populist movements in the United States and and services (World Bank 2012). They may also Europe have instigated protectionist policies provide alternatives for organizing the informal that pin joblessness woes on immigrants, while sector, creating some of the same advantages that countries like Canada have welcomed immigrants normally come with formal labor, such as choice of and refugees because, in part, they recognize working times and tracking of hours worked and the potential to integrate society and to reap wages earned. But these changes are also affecting economic gains. the demands for new ways of working and skills. Globalization can put pressures on workers’ wages Given that globalization, climate change, conflicts, and working conditions. Developing countries might changing demographics, and people’s aspirations end up not benefiting from globalization if skill to seek improved livelihoods, urbanization and development and technology are not in step with cross-border migration will become much more technological advances. Technological changes tend important by 2025. These changes will affect poor to favor people with higher skills while hollowing out people’s lives both positively and negatively. many middle-skilled jobs with less specialized skills Migration also raises a number of uncertainties: that can be automated. • How will governments respond to more demand In 2017, the McKinsey Global Institute estimated for infrastructure, public goods, and basic services the number of employees whose work could be in urban centers? affected by automation in developing countries. • Will the power of the state strengthen or diminish For example, 51 percent of employees in China under immigration? Will governments from the are potentially automatable; similar percentages North embrace immigration as part of their own were estimated for counties like Ethiopia, Thailand, growth strategies? Egypt, Peru, Morocco, and many more (see • What will be the impact of migration on the job Figure 17). Sectors that have the largest variation market in countries of origin and destination in potential for automation employ many poor countries? people today. These sectors include agriculture, manufacturing, and trade (Manyika et al. 2017). Will the changing world of work affect poor 4.  Digital technologies are also disrupting work people? patterns with more irregular contracts and short- According to the World Bank, current demographic term work, blurring the lines even further between trends require the creation of 600 million new jobs informal and formal, and limiting job security and globally in the next 15 years to keep the share protection (UNDP 2015). of employment constant. This will be particularly important for SSA and SA, where many young people The future of job creation will depend on making will be entering the labor force (World Bank 2017a). the transition toward more skilled modes of production. In developing countries, workers will The other forces highlighted in this paper continue to be individual microentrepreneurs, are affecting the labor market in developing freelancers, online workers, or small business economies, creating new or additional employment owners as service sectors grow. However, this kind opportunities. As more people are moving to cities, of work is not a good fit for everyone. People have they will be looking for jobs in nonagricultural aspirations related to their work. Evidence suggests types of work. The increased importance of global that many seek more permanent and stable work integrated value chains may provide more work (see Figure 18). opportunities, for example, with the development of service and knowledge industries or the In summary, the world of work is poised to change outsourcing of services and manufacturing to in the next decade, including in developing developing countries. economies. This is partly driven by globalization, 17 Figure 17. Worldwide Potential for Automation: Employees Automatability % Weighted 30% 60% Source: Manyika et al. 2017. digital technologies, and urbanization. The service • How will social protection policies evolve to sector will grow at the expense of the manufacturing address the needs of the workforce that is unable and agricultural sectors. Increasingly, jobs will be to adapt to this new form of work? How will social occasional and short term. Transitions into new skills protections adapt to address the large number of will be key for people to participate in the economy. people in the increasingly digitized and informal However, these changes bring about a few questions: economy? • How will governments regulate and tax the new • Will the education sector and skills development forms of jobs in the digital economy? adapt, and will people be able to use the new skills • How will these changes affect job opportunities for quickly enough to participate in the new economy? poor people? Figure 18. Preferred Jobs among Adults in MENA for Sets of Alternative (% of Respondents) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Public sector Private sector Self-employed N/A No answer Don’t know employee employee Source: World Values Survey Wave 6, 2010–2014. 18 Implications for the Financial force that will continue to pave the way for more Inclusion Industry accessible and affordable services; it is therefore used across all four scenarios. The pace and magnitude of change coming in the next decade can have a profound impact on the lives Financial services as an enabler of poor people. Globalization, digital technologies, to improve poor people’s lives migration, and the changing world of work combined will continue to be central with demographic trends will affect how poor people take part in society, including the economy, and As we are projecting ourselves into the future, it ultimately their well-being. Poor people will continue is obvious that poor people’s lives will continue to move to new cities or countries, transition into to change. Financial services have a clear role in new jobs, and adapt to new realities. The realm of helping poor people adapt through these changes opportunities for the poor will expand, but so will to seize opportunities, protect assets, create the potential for more risks and further exclusion. new livelihoods, cope and mitigate risks, build resilience, and plan for the future. Yet, today there This section synthesizes discussions and takeaways is still a disconnect between the supply of financial from the four workshops. It also builds on four services and poor people’s financial needs. As scenarios that reflect possible futures for financial such, organizations that are focusing on financial inclusion (see Annex). The scenarios are set in inclusion must ensure that financial services enable different contexts and draw on the forces discussed poor people’s inclusion by doing the following. in this paper to illustrate different trajectories and outcomes from the present until 2025. Figure 19 Improving people’s well-being. Education, water, depicts dynamics that can affect the current state sanitation, electricity, healthcare, information, and of play and highlights the forces used in each of the housing are all essential for poor people’s inclusion four scenarios. Across all workshop locations, the and well-being (World Bank 2013). Financial services spread of digital technologies was identified as a can contribute to giving more choices to poor people Figure 19. From Current Reality to Plausible Futures: A Simplified Picture Forces Highlighted in Scenarios Scenario 1: Bharatia • Urbanization • Digital technologies ? Digital Disruption of • Globalization Finance & Employment • Changing world of work Current Reality Scenario 2: Kasania • Urbanization • Digital technologies ? ? Digital Boom/Bust Cycle • Globalization ? Scenario 3: Eurolandia • International migration Integrating Refugees • Digital technologies Trends Dynamics informed by: Scenario 4: Telmar • Urbanization • Trends • Digital technologies Forces Social Credit Score • Forces ? Uncertainties • Uncertainties • Interactions 19 by making those services more available. Innovative (Anderloni and Vandone 2008). Financial services financing schemes and payment mechanisms can support individuals or families throughout this to access those services at scale are key to the journey with solutions ranging from remittances to solution moving forward. While financial services the ability to invest, build assets, and even plan for cannot affect the quality of these basic services, their migration. basic services must be viable: innovative financial solutions will need to be paired with viable services. Social protection is likely to continue to be a key priority in the face of looming inequality and Moving forward, these solutions will need to be vulnerabilities of poor people. Distributing social tailored to meet the needs of groups that face protection through financial services providers barriers to fully participating in the economy and offers potential benefits over traditional cash, society. Understanding the reasons why specific voucher, or in-kind methods, such as more efficient segments are excluded and the interplay between delivery and providing a gateway to financial financial and social inclusion should be integral to inclusion. In recent years, low-income recipients identifying and designing solutions. of cash transfers have increasingly received their payments digitally. 10 However, recent research Better supporting livelihoods. Today, we know suggests that recipients face several risks such that financial services are used for many different as the inability to transact because of unreliable purposes, not just for livelihoods investments as service, insufficient agent liquidity, complex user assumed in early microfinance models. However, interfaces and processes, and fraud (Zimmerman their overall use has not created significant changes and Baur 2016). As such, more work will be needed, at the income or asset level. To see more meaningful both with governments and providers, to ensure changes in people’s lives, better understanding is that the distribution of social protection is reliable, needed on how financial services can be used to convenient, and safe. improve how people make a living and accumulate wealth. This begins by better understanding what Diversification of providers will change the poor do for a living, how financial services the financial services ecosystem can be used to improve these livelihoods, and how these incomes can lead to improved asset In parallel to the emerging changes in poor accumulation (El-Zoghbi 2017). people’s lives, globalization and digital technology will also affect the delivery of financial services. Adapting to changes and building resilience. Large multinational technology companies such Poor people’s lives are poised to change, for as Google, Facebook and others are predominant better or for worse, and for all sorts of reasons. digital platforms that could disrupt the financial We need to better understand these changes so services industry. Poor people trust their existing that financial services are able to help people networks more than organizations for information, to adapt, seize opportunities, and enhance their products, and services. Social networks can amplify resilience, including being able to anticipate and this and might even become trusted financial plan accordingly. For example, as the world of services providers. This is already happening in work evolves, financial services can enable access China—Alipay and WeChat are leveraging Chinese to education and retooling and skills training, people’s strong links between social media and which is key for enabling people to adapt and how they use their money (Shrader 2014). advance. Another example is migration. Migrants are not a monolithic population; they face different Other factors, such as the changing architecture events, such as planning to migrate, initial settling, of innovation and the shift of power away from and transitioning to a more stable settlement MNOs and banks, might converge and will 10 According to CGAP’s research, digital social payments are estimated to have more than tripled in the past few years. 20 further disrupt the financial services value chain. own data by distinguishing themselves from other It is expected that FinTechs will continue to push consumers to reap financial rewards. the boundaries of innovative tools and solutions for poor people. At the same time, many may However, the increased use of data raises important struggle to compete with bigger players. This issues. For customers, on the one hand, data will require either collaboration or consolidation. privacy and protection risks exist when the safety of Additionally, new players entering the space will data is compromised, data privacy is inadequate, or most likely challenge the competitive advantage customers have a poor understanding of the use of of MNOs and traditional financial institutions their personal data. If these risks are not managed in serving poor people. Unless they are able to adequately, they can lead to low customer trust— adapt to these disruptions, they will continue to making customers less likely to use formal financial lose relevance to end customers and become services (Medine 2016). Customers who are still “dumb pipes” that provide mainly the backend excluded from digital technologies will have functions of the communications and financial thin data footprints and will be at risk of further services infrastructure. Banks may evolve into more exclusion. On the other hand, financial services limited services like holding deposits, complying providers’ willingness to invest in data and their with regulations, and moving money between capacity to analyze data are not a given. It is unclear newly trusted financial services providers, such as whether they will develop models to monetize real- social media companies and FinTechs. Similarly, time financial information about clients that other the role of MNOs might evolve to focus more on businesses can use to offer products and services network infrastructure and serving as the “rails” that may benefit poor people. for customers to access financial services. Governments will have an increasingly important The potential “unbundling” of the financial services job of regulating data ownership, use, control, and value chain will bring increased specialization and security. However, they may struggle to handle these efficiency and, therefore, presents a big opportunity regulatory needs in a rapidly changing environment, to better serve poor people. It will also demand especially in light of capacity limitations. further attention because it creates new risks, such as the concentration of power of large nonstate Risk of growing the digital divide actors who “own” the consumer though global technology platforms. Engaging and partnering with Over the past decade, the number of people these new players will be important in the future. who have gained access to financial services through digital channels has grown exponentially, Broad use of data will enable and there is no reason to believe that this trend transformative solutions for poor will stop. However, the lack of connectivity and people, but also create risks infrastructure in certain areas, the high cost of services and devices, and social norms and Data will be distributed across many players: banks, demographic characteristics put certain segments MNOs, social networks, internet operators, and at risk of further exclusion. These segments include more. Financial data will be combined with social women, rural dwellers, the elderly, refugees, and connections and messaging data to build more the poorest. complete digital profiles. Providers will be able to mine these data to create innovative financial More investments are needed to address these services and increase use. The application of gaps and alternative solutions need to be devised. large volumes and multiple sources of data to The cost of serving these segments is high. In fact, financial services has the potential make services the business case for serving them is not always more accessible, better suited, and affordable to clear. Public-private solutions are need to address customers. Customers may become empowered more complex problems, because it is unlikely that if they are able to manage and monetize their commercial approaches will be sufficient. 21 Role of government will remain critical Anderson, J. 2016. “Five Fresh Facts from the Smallholder Diaries.” CGAP blog post. 25 February. There is a strong consensus that governments http://www.cgap.org/blog/five-fresh-facts- will continue to play a key role in driving financial smallholder-diaries inclusion. However, they face capacity and governance challenges. It is particularly important Brookings Institution. 2014. Brookings-LSE to convince poor people to trust the formal financial Project on Internal Displacement. 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Global Financial Inclusion (Global 29 March. http://www.worldbank.org/en/topic/ Findex) Database. Washington, D.C.: World Bank. urbandevelopment/overview http://data.worldbank.org/data-catalog/financial_ inclusion World Values Survey Association. 2014. “World Values Survey Wave 6 2010–2014.” Madrid: ———. 2015a. “GDP per Capita Data.” Washington, World Values Survey Association. http://www D.C.: World Bank. http://data.worldbank.org/ .worldvaluessurvey.org/WVSDocumentationWV6.jsp indicator/NY.GDP.PCAP.CD Zimmerman, Jamie M., and Silvia Baur. 2016. ———. 2015b. “Infographic: Progress on “Understanding How Consumer Risks in Digital Sustainable Energy Goals.” Washington, D.C.: Social Payments Can Erode Their Financial Inclusion World Bank, 18 May. http://www.worldbank.org/ Potential.” Washington, D.C.: CGAP. http://www. en/news/feature/2015/05/18/infographic-progress- cgap.org/publications/understanding-consumer- on-sustainable-energy-goals risks-digital-social-payments 25 Annex. Scenarios open question, especially as they manage more and more of the country’s digital transactions and Scenarios do not predict the future, but rather communications. they illustrate plausible stories arising from the interaction of multiple forces and uncertainties The digital transformation drives a surge of over time. A good scenario usually is one that is economic growth by companies disrupting the plausible and insightful. traditional economy. E-commerce startups grow quickly, following in the footsteps of leading CGAP has developed four scenarios that synthesize players in the United States and China. This the workshops’ discussions. Readers can use the disrupts the livelihoods of small shop owners and scenarios to test the robustness of their own drivers, putting more power into the hands of strategies. the technology companies that are managing the networks. Phone-based ride sharing and digitally Scenario 1. Bharatia: Digital Disruption managed transport services grow quickly and begin of Finance and Employment to disrupt the taxi, bus, and shipping industries. Digital agriculture services transform rural farms Bharatia has previously pushed the roll-out of through improved use of inputs and availability of low-cost bank accounts for the poor, and it has shared equipment services for tractors, harvesters, introduced a leading digital identity system that has and processors. achieved widespread adoption. Poverty remains high, and over 90 percent of workers are employed In parallel, local financial startups disrupt the in informal jobs that offer little protection. The payments and banking sectors by creating new country is undergoing significant rural to urban digital models for credit scoring, leveraging migration as farm families are increasingly sending the increasingly available digital data stream of primarily male family members to cities to find citizens. Bharatians are encouraged to sign up for work, leaving women to raise crops and manage instant-access loans through their mobile accounts, the home. Climate change is also disrupting the which are much more convenient and available agriculture sector with increasing incidences of than traditional lending approaches. These models droughts and flooding. quickly expand into peer-to-peer lending models and new forms of community lending. All of these Bharatia is undergoing a rapid digital services rely heavily on digital data, integrated transformation. While many rural areas remain from across many sources, including mobile use underserved by connectivity networks, the and social networking. Although, citizens are population is rapidly adopting mobile phones and wary of sharing data with so many technology mobile payments. Smartphone adoption is taking companies, they feel they have no choice, because off because they are becoming available for less the new services are viewed as essential, and they than $50. Global internet giants have dominant are driving increased productivity and new sources positions in search, online advertising, social of income. networking, and messaging. Local technology firms are rapidly increasing their footprint in services like The government struggles to keep up with the ecommerce, ride sharing, and mobile payments. rapidly evolving technology landscape. It is Global leaders in these areas are competing with successful, however, in fostering competition by local players and, in some cases, are partnering or preventing the technology giants from gaining too acquiring them. The Bharatian government looks much influence across the economy. to foster innovation to lead the digital economic transformation, while maintaining strong regulatory The ride sharing and ecommerce industries are oversight, especially in financial services and successful in gaining widespread adoption, but telecommunications. The increasingly dominant under the competitive drive to reduce costs, they role of the global internet leaders remains an begin to push down the wages of drivers and 26 delivery people. Seeing that they are not sharing they lack sufficient coordination to make a solid in wealth created by the new services they are impact along any particular value chain. delivering, the employees organize protests that are widely supported by the public. In urban areas, 3G infrastructure is widely available, and low-cost smartphones are taking over from Recognizing this as a leadership opportunity, the basic phones. Most of the nation’s internet users government steps in to allow the informal workers are members of the largest global social networking to organize. The employee groups bargain for provider, which also gives them access to free a fairer distribution of wages and fairer use of text and voice communications services. Internet their data, enabling drivers and delivery people messaging use has become so dominant that to take their digital performance and reputation the local mobile operators are seeing decreases data from one employer to the next. This spurs in revenue from traditional voice and messaging even more competition, as leading networks are services. Mobile operators are under pressure either more effectively able to match up employees to to expand into new service areas like mobile money job openings. Seeing the success of this example or to evolve into “dumb pipes,” providing only leads other informal professions to adopt the same basic infrastructure. Over the top (OTT) services, techniques. This results in rapid economic growth which provide basic communications and digital and advances in livelihoods across the economy. identity services, are increasingly dominating the user experience of the connected population. For Scenario 2. Kasania: Digital the most part, the Kasanian government and local Boom/Bust Cycle industry leaders do not realize the significance of these OTT services. The government is supporting Kasania is a small developing country where the network operators by having them team up with government has struggled to provide leadership in banks so they can jointly provide a wide range of financial inclusion. It has a history of mismanaged mobility and financial services. development programs, and private-sector initiatives are negatively influenced by government Global internet players will eventually help to build corruption. In recent decades, the youth population out the digital economy, starting with agriculture. has continued to grow, with over 50 percent of They invest heavily in digitizing key agriculture value the country currently under age 18. Poverty chains, and gain permission to include financial remains high, but recent economic growth has services. They provide pay-as-you-go financing of created optimism about the future. The country is internet and smartphones. The smartphones come undergoing rapid rural to urban migration, but the equipped with sophisticated agriculture apps that large cities are struggling to support the increased enable significant productivity gains, driving new population, and infrastructure is too weak to keep income streams that Kasanian farmers use to cover up with demand. Most migrants move to the cities the financing cost. These apps have been designed to pursue economic opportunity, because of low via a user-centric approach, including machine productivity in the agriculture sector. learning features and voice translation into local dialects, so they are easily adopted by poor people Mobile phone services and mobile money have who have limited literacy and numeracy. been widely adopted even in rural areas, and remittances from family members in the city is The initial success of this model drives a host of a growing source of income for rural families. imitators, who use venture capital to start up similar The increasing contact between rural and urban ventures in other value chains. These startups are populations is driving youth to migrate to cities. overly optimistic about growth, and they end up Large donors are investing heavily in digital giving credit to too many marginal borrowers. After agriculture programs in the hopes that doing so a year or so, many of these borrowers begin to will improve rural livelihoods. These programs have default on their loans and get shut out of their been hampered by government bureaucracy, and internet access. This cuts off a significant portion of 27 their livelihoods, and they are unable to get further internships, and language lessons focusing on credit because of their digital trail of defaults. industry jargon. The government supported The resulting fall in economic activity threatens these efforts and developed distribution formulas even the most solid customers, whose livelihoods for refugees that enabled smaller cities to take are also severely impacted. The economy falls on more immigrants and companies to address into recession—known as the digital recession— workforce shortages. and widespread protests erupt. The Kasanian government steps in and creates new regulations Another aspect of refugees’ economic integration that cut off all financial services within the digital was access to banking services. While requirements agriculture platforms. This ends up crippling the to open a bank account were eased in 2016, data growth of the platforms, resulting in failure of most collected in 2018 showed that only 30 percent of the technology companies involved. Innovation of adult refugees opened a bank account, and in the digital agriculture sector moves to other that these accounts were opened mostly to countries in the region, and Kasania loses its receive salaries and government benefits and to leadership position. pay rent. Some of the data revealed the need to send money home, save, and access credit to Scenario 3. Eurolandia: start businesses. Although bureaucracy and slow Integrating Refugees integration can explain the low account numbers, financial institutions—besides some savings By 2025 many refugees had entered the workforce banks, which had been more responsive—made of Eurolandia, but the process had been slow, little effort to engage with this new segment. highlighting the limitation of specific integration Most financial institutions continued to perceive policies and the role the private sector can play to refugees as too risky. Also, they had not invested address gaps. Although refugees were required to in developing speaking capacity in the languages attend language classes in their local communities, used by refugees nor had they adapted services, the pool of language teachers was too small to thus making it difficult for refugees to become meet demand, resulting in long waitlists. In 2016, regular customers. This was compounded by a language-learning company stepped in to strict recommendations in 2019 from the Financial offer refugees language courses through mobile Action Task Force on money laundering for app services at no cost. Initially, the service was banks in reaction to increased global terrorist available only to those who knew English, but the threats. language company soon introduced courses in the two main languages spoken by refugees. The While banks were reluctant to engage with this mobile app was updated in 2019, and it remains segment, a global internet giant capitalized on the the main source of affordable basic language 2016 regulatory changes by challenging the status courses for refugees, with 350,000 people taking quo. After obtaining an e-money license, it started these courses by 2020. serving immigrants and expats across Europe. Its customers use a mobile app to access a basic The manufacturing sectors in Eurolandia evolved payment account interface, international money to require higher-skilled labor, and with that, transfers, and debit cards. The app is available in specialized jargon of the industry had become all major languages. The company made account increasingly important to refugees’ economic opening almost instant by using a snapshot of an participation. Initially, a few small- and medium- accepted identification document, a “selfie,” and size enterprises (SMEs) designed and launched other data points from customers’ online social programs to support refugees’ integration and networking and purchasing history. education. After experiencing positive results in 2016–2018, other SMEs incorporated assessments Soon after, the internet giant increased its support into their recruitment processes to understand for refugees by providing international money workers’ qualifications and background, transfers. In partnership with a bank, it launched 28 a social payment app in 2019. Using blockchain Scenario 4. Telmar: Social Credit Score technology, it specialized in international money transfers. Customers could send money in their Telmar is a developing country with an authoritarian own currency instantly and for free to someone government that has recently consolidated power in another country who could then cash out. With after decades of instability. The country is primarily convenient, affordable, and easy-to-use services, agricultural, but Telmar’s three major cities are the refugee population embraced the offering. By growing rapidly as people migrate away from rural 2021, 60 percent of adult refugees had an account. areas as they look for opportunities. Mobile phones The increased volume of remittances to families are used by most of the rural and urban population, back home made significant improvements to their and smartphones are rapidly being adopted in the economic situation. Many refugees even made cities where 3G network coverage is available. The investments in their home countries, anticipating urban economy in Telmar cities is evolving rapidly. their eventual return; this helped to maintain Many migrants live in slums and have difficulty social networks between refugees and their home finding jobs. The government is investing in large communities. infrastructure projects to create jobs to alleviate tensions caused by urban migration. Previous Traditionally, interpretation and enforcement of incidents of urban unrest were put down by force, Eurolandia’s data privacy and protection laws have leaving the government open to unwanted criticism been quite strict. At the time, the internet company by the international community. CEO reported that “unlike most citizens, the refugee population is less concerned about data protection In addition to infrastructure investments, the Telmar issues. All they want is access to affordable credit government is looking to modernize the country’s and no bank is willing to offer this service now. financial system to increase economic activity and Banks are only now waking up to the potential to improve the livelihoods of citizens. Currently, of serving this segment.” The company worked many people are adopting mobile money, but closely with authorities to ease interpretation of bank account use is low and access points are the regulations, while ensuring basic data privacy widely available only in cities. Telmar previously and protection. Since the introduction of the 2018 tried to build a national identity system, but the General Data Protection Regulation, Eurolandia effort never achieved scale and was abandoned. had been keen on promoting big data projects. The government wishes to maintain control of By focusing on a segment that is less concerned basic economic data and infrastructure, so systems about data protection, authorities viewed the like credit bureaus and identity services remain launch of the new product as an opportunity to underdeveloped. The government also censors demonstrate a less strict approach to data privacy online activity and prevents citizens from accessing and protection. various international information sources. The effort was successful. Refugees were able to To further control information, the government access and use credit services to their satisfaction, announced the creation of a new social credit system thus contributing to the deepening of their that applies a social credit score to each citizen. It integration into the economy. More banks are now will include a national database that will capture a exploring opportunities to better serve refugees. wide variety of information on every citizen. The But one of the surprising consequences of this government says it will “forge a public opinion effort is the shift in the local population’s attitudes environment that trust-keeping is glorious.” This toward data privacy. Indeed, citizens are becoming new system will also enable a rapid modernization more open to using big data to access improved of Telmar’s credit and identity systems. services, including financial services. Several consumer associations are currently working with Initially, the system roll-out went smoothly. Urban regulators and the private sector to unleash the citizens were interested in learning about their potential of big data. social credit score, and people with high scores 29 often displayed them prominently as a status Eventually, a group of technology-savvy people symbol. People were able to use the system to in the informal economy started developing an access credit from finance companies, and it alternative system based on a secure, peer-to- became the default digital identity service. It peer technology. This system enabled people to helped to accelerate the growth of Telmar’s manage their own social networks and data and digital economy, as many companies developed allowed them to control who had access to the new services around the system. The system was data. Over time, the system added digital trust used even by online dating sites, whose users networks that could be verified through the peer- were looking for partners with high social scores. to-peer system without a central organization Most of the initial users of the system were people in control. New startups took advantage of with high scores, because the rural and poor the system to provide services to groups that populations remained relatively unconnected. were left out. These startups also developed Few people understood that not everyone had a reward programs to pay people for the use of good score, and that a bad score could hurt them. their personal data, driving increased interest The government did not clearly communicate that and use. the social score could be negatively impacted by posting political speech online or by unsanctioned The new system became more and more popular, activities of someone’s social connections. Also, and eventually, even people with high social scores there was no way for citizens to review, dispute, or within the government system started to join correct data in the system. the peer-to-peer system. The government tried to shut it down, but it had become too popular, Over time, as the migrant and rural populations and massive protests forced the government to started to learn about the system, many of them back down. The government tried reforming its started to turn against it. People felt that the system social credit system by providing relief to low- was rigged in favor of the elites, especially as data score people and by copying some of the features on school performance and social connections were of the peer-to-peer system, but it failed to stop included in the scoring. People who had financial the system’s decline. Eventually the government troubles saw their scores falling and felt that the capitulated and decided to formally recognize the system gave them no opportunities to work their new system. The social credit system was finally shut way out of their problems. People with low scores down, and all the data were deleted in an effort to were effectively shut out of economic activity, and regain the public’s trust. The peer-to-peer system were often rejected in job applications based on remained independent from the government and their scores. Many of these people ended up being engendered a new movement fighting for digital forced into the growing informal economy to survive. rights and privacy. 32 No. 107 June 2017 Please share this Focus Note with your colleagues or request extra copies of this paper or others in this series. CGAP welcomes your comments on this paper. All CGAP publications are available on the CGAP Web site at www.cgap.org. CGAP 1818 H Street, NW MSN P3-300 Washington, DC 20433 USA Tel: 202-473-9594 Fax: 202-522-3744 Email: cgap@worldbank.org The authors of this Focus Note are Estelle Lahaye of CGAP Accenture Development Partnerships led the scenario thinking © CGAP, 2017 and Thomas E. Abell and James K. Hoover of Accenture process. In addition to the many people who participated in the Development Partnerships. The authors wish to thank CGAP workshops in different countries, the team received valuable colleagues Camille Busette, Mayada El-Zoghbi, Xavier Faz, Anna guidance, insights, and contributions from David Porteous of Nunan, and Yanina Seltzer for reviewing this paper. Bankable Frontier Associates and Greta Bull, Greg Chen, Xavier Faz, and Kate McKee of CGAP. Mayada El-Zoghbi, Estelle Lahaye and Yanina Seltzer of CGAP and Thomas E. Abell, James K. Hoover and Finn Erik Kolnes of Suggested citation: Lahaye, Estelle, Thomas E. Abell, and James K. Hoover. 2017. “Vision of the Future: Financial Inclusion 2025.” Focus Note 107. Washington, D.C.: CGAP, May. ISBN 978-1-62696-079-4