Emerging markets tap fintech to drive sustainable development

In the farm­lands of Ugan­da, a new project aims to dri­ve sus­tain­able agri­cul­ture prac­tices and pro­tect bio­di­ver­si­ty – using fin­tech. 

The scheme com­bines remote sen­sor tech­nol­o­gy and pay­ments data to make cred­it deci­sions that reward the most sus­tain­able farm­ers. It’s led by Green Dig­i­tal Finance Alliance, which was launched by Ant Finan­cial Ser­vices and the UN Envi­ron­ment Pro­gramme (UNEP) and brings togeth­er a range of organ­i­sa­tions focused on sus­tain­able finance. 

Aiaze Mitha is a fin­tech con­sul­tant who’s advis­ing Green Dig­i­tal Finance Alliance on the project in the East African coun­try. The effort com­bines a range of data sources, he notes, includ­ing soil scan­ners that indi­cate the inten­si­ty of soil use and whether it’s being over­ex­ploit­ed, satel­lite imagery to mon­i­tor for defor­esta­tion, and record­ings of the sound pro­duced by human activ­i­ty, nat­ur­al ele­ments and bio­di­ver­si­ty. 

“By com­bin­ing all of these dif­fer­ent data sources into your algo­rith­mic process­es, you can make a lend­ing deci­sion that will give pref­er­en­tial loans to the farm­ers who have the most sus­tain­able prac­tices.”

This is just one exam­ple of how fin­tech is help­ing sup­port sus­tain­able devel­op­ment in emerg­ing mar­kets. In Bangladesh, Mitha is also advis­ing the UN on the devel­op­ment of a fin­tech-pow­ered sus­tain­able infra­struc­ture financ­ing project. The ini­tia­tive – which is cur­rent­ly in its pilot phase –aggre­gates small amounts of cash from mil­lions of dig­i­tal wal­let accounts and bun­dles them into a mega-fund that will be used to finance low-car­bon infra­struc­ture like bridges, schools and hos­pi­tals.

“This is a way to tap into a grow­ing pool of domes­tic sav­ings to chan­nel mon­ey towards financ­ing sus­tain­able devel­op­ments at a much low­er cost than would oth­er­wise be the case in the inter­na­tion­al cap­i­tal mar­kets,” says Mitha.

Blockchain tech­nol­o­gy also has the poten­tial to sup­port con­ser­va­tion efforts in parts of the devel­op­ing world where bio­di­ver­si­ty is under threat.

“You can tokenise the amount of car­bon sequestered by an ele­phant or the amount of car­bon sequestered by a whale or the amount of oxy­gen pro­duced by a tree, and that allows investors to con­tribute to refor­esta­tion or con­ser­va­tion efforts through that par­tic­u­lar token, so there is huge poten­tial in that space,” says Mitha.

Climate-friendly services

Some fin­tech com­pa­nies are embed­ding cli­mate-relat­ed fea­tures into third-par­ty apps to sup­port sus­tain­abil­i­ty efforts in emerg­ing mar­kets. Take Lune, for instance. It pro­vides soft­ware that allows banks to give cus­tomers infor­ma­tion on the esti­mat­ed car­bon foot­print of any prod­ucts or ser­vices they buy. Cus­tomers can then opt to neu­tralise their car­bon foot­print through car­bon off­set­ting or car­bon removal pro­grammes, such as refor­esta­tion projects in South Amer­i­ca. 

“For­ward-think­ing and agile fin­tech com­pa­nies are incred­i­bly well-posi­tioned to be tak­ing the lead when it comes to offer­ing cli­mate-friend­ly ser­vices,” says Erik Stadigh, co-founder and CEO of Lune. “It’s yet anoth­er gap left wide open by the lega­cy banks, who don’t have enough willpow­er and won’t move fast enough any­way.”

Oth­er fin­tech firms are sup­port­ing sus­tain­able devel­op­ment on the ground in emerg­ing mar­kets by pro­vid­ing finan­cial ser­vices to small and medi­um-sized busi­ness­es, an area that tra­di­tion­al finan­cial insti­tu­tions have strug­gled to reach. 

It’s yet anoth­er gap left wide open by the lega­cy banks, who don’t have enough willpow­er and won’t move fast enough

Emerg­ing mar­kets pay­ments ser­vice provider PayU, for exam­ple, pro­vides online pay­ment tech to help local mer­chants in devel­op­ing, high-growth coun­tries expand their e‑commerce offer­ings. The firm also pro­vides cred­it at the point-of-sale by using its e‑commerce data to help under­write buy now, pay lat­er (BNPL) loans to peo­ple with lit­tle or no cred­it his­to­ry, help­ing boost finan­cial inclu­sion.

“We oper­ate in coun­tries that are noto­ri­ous­ly poor on data,” says Mario Shil­iash­ki, CEO of PayU. “Because we process so much pay­ment data, we’re actu­al­ly able to cap­ture some of that data and use it to cre­ate bet­ter cred­it scor­ing engines and make bet­ter lend­ing deci­sions than is pos­si­ble through local cred­it bureau data.”

Digital support

The intro­duc­tion of dig­i­tal cur­ren­cies could also help extend finan­cial ser­vices to those who have his­tor­i­cal­ly been exclud­ed from the sys­tem. Back in Sep­tem­ber, El Sal­vador offi­cial­ly made Bit­coin legal ten­der in the coun­try, while in Octo­ber, Nige­ria launched the eNaira – a dig­i­tal ver­sion of its cur­ren­cy – as a way to boost finan­cial inclu­sion and make wel­fare pay­ments eas­i­er.

“One of the big issues in emerg­ing mar­kets is how a large part of the pop­u­la­tion are actu­al­ly exclud­ed from main­stream finan­cial ser­vices,” says Ola Oyetayo, CEO and co-founder of VertoFX, an emerg­ing mar­kets-focused peer-to-peer cur­ren­cy exchange and pay­ments plat­form. “In places such as Nige­ria, you have peo­ple who don’t have bank accounts or don’t live near a phys­i­cal bank branch or an ATM, and so ini­tia­tives like the eNaira help resolve that by giv­ing peo­ple a dig­i­tal wal­let that allows them to spend in a dig­i­tal fash­ion, ulti­mate­ly help­ing dri­ve finan­cial inclu­sion.”

While dig­i­tal cur­ren­cies like the eNaira can poten­tial­ly encour­age the unbanked to enter the finan­cial sys­tem, they’ll only gain trac­tion if the process is fric­tion­less. If local mer­chants don’t accept it, peo­ple may just stick with cash.

“The biggest chal­lenge is ensur­ing that the accep­tance net­work is wide enough so that as a user you can access it and start mak­ing pay­ments through a mobile phone in dif­fer­ent retail loca­tions, oth­er­wise you will still need a way to con­vert that dig­i­tal mon­ey into phys­i­cal Naira,” says Mitha. “There needs to be a whole ecosys­tem built around it and if that ecosys­tem is not ready then it could become a deter­rent.”

Rolling out fin­tech prod­ucts in emerg­ing mar­kets also has broad­er chal­lenges, says Mitha.

“First of all are the chal­lenges around access – dig­i­tal con­nec­tiv­i­ty, access to the inter­net and access to smart­phones just to be able to use fin­tech ser­vices,” he says. “Once you have the basics, then you have issues around finan­cial and dig­i­tal lit­er­a­cy, and once you are able to engage with fin­tech inno­va­tions, then there is a whole lay­er of con­sumer pro­tec­tion and data gov­er­nance aspects that are extreme­ly impor­tant.”

Peo­ple in devel­op­ing economies may also lack con­fi­dence to adopt fin­tech ser­vices because dig­i­tal banks, for instance, don’t typ­i­cal­ly have phys­i­cal branch­es.

“There is no one to hold onto if some­thing goes awry,” says Oyetayo. “So being able to trust and put your faith in a dig­i­tal plat­form is some­thing that fin­tech needs to sur­mount in emerg­ing mar­kets.”

Promoting sustainability 

Fin­tech alone won’t solve sus­tain­abil­i­ty prob­lems in the devel­op­ing world, but it does have the poten­tial to shift the nee­dle in the right direc­tion.

“There are many things that need to hap­pen and they need to hap­pen in con­junc­tion with each oth­er, but fin­tech will play a part both in bring­ing bet­ter pay­ment and bank­ing ser­vices to the under­served pop­u­la­tion, as well as bring­ing more afford­able and bet­ter access to cred­it,” says Shil­iash­ki. 

Emerg­ing mar­kets are typ­i­cal­ly unen­cum­bered by lega­cy tech­nol­o­gy, enabling them to tap into fin­tech inno­va­tions that can help accel­er­ate access to finance and fast-track sus­tain­able devel­op­ment. For exam­ple, Oyetayo points to Kenya’s M‑Pesa, which allows users to send mon­ey through text mes­sages. This has essen­tial­ly leapfrogged brick-and-mor­tar bank­ing, he says. “So fin­tech is dis­in­ter­me­di­at­ing lega­cy finan­cial play­ers and help­ing dri­ve sus­tain­abil­i­ty and finan­cial inclu­sion in some of these mar­kets.”

It’s a whole sys­tem shift that is need­ed … it’s not just fin­techs alone

Fin­tech also has the poten­tial to change con­sumer behav­iour and how peo­ple engage with sus­tain­abil­i­ty, nature and bio­di­ver­si­ty.

“It can sig­nif­i­cant­ly change the game in terms of the kind of choic­es peo­ple are going to make. And by doing that, you redesign those mar­kets,” says Mitha.

While fin­tech firms are spear­head­ing that change, exist­ing finan­cial insti­tu­tions will also need to be part of the jour­ney, par­tic­u­lar­ly from a fund­ing per­spec­tive, he says.

“It’s a whole sys­tem shift that is need­ed,” Mitha says. “It requires the ecosys­tem from the financiers to the actu­al busi­ness­es and the entire pol­i­cy and reg­u­la­to­ry space to shift togeth­er. It’s not just fin­techs alone that can cre­ate this mas­sive change.”

Reaching the unbanked

Against that back­drop, fin­tech com­pa­nies and exist­ing finan­cial insti­tu­tions are increas­ing­ly work­ing togeth­er to com­bine the former’s tech exper­tise with the latter’s cus­tomer reach. This col­lab­o­ra­tion stems from a real­i­sa­tion among estab­lished finan­cial insti­tu­tions, espe­cial­ly banks, that “there is a gap that they need to fill but they lack either the tools or capa­bil­i­ties to do that,” says Shil­iash­ki. 

How­ev­er, the scale and rep­u­ta­tion of tra­di­tion­al banks can give them a com­pet­i­tive advan­tage when build­ing fin­tech prod­ucts to attract the rough­ly 2 bil­lion or so adults world­wide that are cur­rent­ly unbanked. 

“With digi­ti­sa­tion and fin­tech, we’re able to reach those clients with­out a tra­di­tion­al brick-and-mor­tar strat­e­gy – we can do it dig­i­tal­ly with our app,” says Alfon­so de la Las­tra, head of the sus­tain­abil­i­ty strat­e­gy team at Span­ish bank BBVA, which oper­ates across emerg­ing mar­kets in Latin Amer­i­ca. “That enables us to reach more cus­tomers, and because it is an asset-light busi­ness mod­el, we can offer the same ser­vices at a very low cost, which is impor­tant from a sus­tain­abil­i­ty and inclu­sive growth point of view.” 

In oth­er words, fin­tech is a game chang­er in emerg­ing economies, improv­ing access to finance and under­pin­ning sus­tain­able devel­op­ment.

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