Five things we’ve learned about funding flows for digital financial inclusion
By Howard Miller, MIX-
27 November 19 - When the UN launched the Task Force on Digital Financing for Sustainable Development Goals (SDGs) early in 2019, Secretary General António Guterres described the digital technology that is revolutionizing financial markets as a “gamechanger” in achieving the SDGs. Data from Global Findex supports the idea that digitization is changing financial inclusion; the percent of adults in developing economies using digital payments rose from 32 percent in 2014 to 44 percent in 2017.
While we can see how digital financial services (DFS) are creating impact on the ground, we know little about what is behind these changes. For example, we know that public and private investment is flowing into the sector, yet we know surprisingly little about these investments even though there are clear use cases for this type of information. For example, through RELAY, MIX’s fintech data initiative, we’ve seen how funding for fintechs is concentrated in several important ways. This data can help investors and funders determine how and where to deploy their capital. Similar data onto funding flows to digital financial services could provide equally as valuable insights.
With the aim of using data to unlock more and better investment in digital financial inclusion, MIX, with generous support from the Bill & Melinda Gates Foundation, has been working on a tool to help us understand the funding flows into digital financial services. Here are five things we have learned from this process so far:
1. DFS is not just a sub-set of financial inclusion. To understand DFS funding flows, we also need to look outside financial inclusion specific projects. Looking solely through the lens of financial inclusion means we may exclude projects from elsewhere in the development sector that support the digitization of financial services. A good example is the burgeoning digital identification movement, which provides a critical building block for DFS but has numerous use cases outside of the financial sector. So, while most DFS projects come from traditional financial inclusion funders, we must also include adjacent sectors to find these enablers of DFS. And the fact that the contours of DFS funding can look different to those of financial inclusion funding means there is even greater need for reliable and holistic data on the sector.
2. From our pilot data captured so far, funders are concentrating most resources in the enabling infrastructure for DFS. This includes aspects like digital payment systems and also research and DFS/fintech networks. Most of the funding takes the form of grants but significant equity investments are also being made, indicating that some funders see opportunity for financial return outside of traditional investments in financial service providers. Additionally, we have observed large funding flows directly into DFS providers and fintechs, mostly from foundations and DFIs.
3. Funders working in the sector seek guidance. Interviews with a range of bilateral and multilateral funders, development finance institutions (DFIs) and philanthropic investors reveal that they have a limited view on to how and where other actors are committing resources. This can lead to over-concentrations in certain regions or sectors, as well as missed opportunities for collaboration. One DFI with investments in several fintechs told us that, in the current data environment, it can be difficult to know how their portfolio compares with their peers. As DFS investment grows, funders want access to information that will help them manage their portfolio, grow into new areas, and ensure additionality.
4. Data exists on how funding is going into DFS - with limitations. DFS is often interwoven into broader, multi-component projects, and the DFS-specific funding can be difficult to identify. In some cases it is possible to estimate the amount being spent on DFS based on similar projects elsewhere, but occasionally there isn’t enough data. It can be difficult to break out DFS funding at a country level (from our initial sample of funding flows, 72 percent of projects were categorized at the regional level and 57 percent at the country level). Without better data, we will likely underestimate funding to DFS and be unable to provide more targeted insights.
5. We can organize DFS funding flows in a way that allows us to understand the development of the market system. It is generally clear whether funding is going to the core market, support functions or to policies and regulations, or some combination of these. It is also often possible to further segment funding flows one level beyond this. This classification can typically be accomplished based on the type of recipient and using keyword analysis of project descriptions. Breaking the market down in this manner can help funders identify and coordinate specific investment opportunities.
For funders, this initial analysis demonstrates a significant opportunity to use data on DFS funding flows to help increase and improve investments in DFS. We are continuing to refine our methodology; the initial findings are directional, not definitive. Moving forward, we will test this methodology on a broader range of funder data and develop more robust estimates. Still, we can already see the value of this data and analysis, as we are already shedding light on a critical aspect of the digital financial inclusion sector - the investment driving its growth. As more data becomes available, this information can unlock more investment into the multiple dimensions of the DFS ecosystem.