Emerging markets put fintech at the service of sustainable development
In Uganda’s farmland, a new project aims to promote sustainable farming practices and protect biodiversity – using fintech.
The program combines remote sensor technology and payment data to make credit decisions that reward the most sustainable farmers. It is led by the Green Digital Finance Alliance, which was launched by Ant Financial Services and the United Nations Environment Program (UNEP) and brings together a range of organizations focused on sustainable finance.
Aiaze Mitha is a FinTech consultant advising the 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 show the intensity of land use and whether it is overexploited, satellite imagery to monitor deforestation and recordings of 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 grant preferential loans to farmers with the most sustainable practices.”
This is just one example of how fintech is helping to support sustainability in emerging markets. In Bangladesh, Mitha is also advising the UN on the development of a sustainable infrastructure finance project powered by FinTech. The initiative – which is currently in its pilot phase – aggregates small amounts of money from millions of digital wallet accounts and aggregates them into a mega-fund that will be used to finance low-carbon infrastructure like bridges. , schools and hospitals.
“It’s a way to tap into a growing pool of domestic savings to funnel money into financing sustainable development at a much lower cost than would otherwise be the case in international capital markets,” says Mitha.
Blockchain technology also has the potential to support conservation efforts in parts of the developing world where biodiversity is threatened.
“You can symbolize 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 this allows investors to contribute to reforestation or conservation efforts through that particular token. huge potential in this space, ”says Mitha.
Some fintech companies are integrating climate-related functionality into third-party applications to support sustainability efforts in emerging markets. Take Moon, for example. It provides software that allows banks to provide customers with information about the estimated carbon footprint of any products or services they purchase. Customers can then choose to neutralize their carbon footprint through carbon offset or elimination programs, such as reforestation projects in South America.
“Forward-thinking and agile fintech companies are incredibly well positioned to take the lead when it comes to delivering climate-friendly services,” said Erik Stadigh, co-founder and CEO of Lune. “This is yet another gap left wide open by traditional banks, which don’t have enough willpower and won’t move fast enough anyway.”
Other fintech companies are supporting sustainability 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.
Emerging market payment service provider PayU, for example, provides online payment technology to help local merchants in high-growth developing countries expand their e-commerce offerings. The company also provides point-of-sale credit using its e-commerce data to help take out BNPL (buy now, pay later) loans to people with little or no credit history, helping to bolster l financial inclusion.
“We operate in countries notoriously data-poor,” says Mario Shiliashki, CEO of PayU. “Because we are dealing with so much payment data, we are actually able to capture some of that data and use it to create better credit scoring engines and make better loan decisions than is possible with data from local credit bureaus. “
The introduction of digital currencies could also help expand financial services to those who have historically been excluded from the system. In September, El Salvador officially made Bitcoin legal tender in the country, while in October, Nigeria launched eNaira – a digital version of its currency – as a way to boost financial inclusion and facilitate payments. social assistance.
“One of the big issues in emerging markets is how much of the population is actually excluded from mainstream financial services,” says Ola Oyetayo, CEO and co-founder of VertoFX, a peer-to-peer currency exchange. peer focused on emerging markets. and payment platform. “In places like Nigeria, there are people who don’t have a bank account or who don’t live near a physical bank branch or an ATM, and so initiatives like eNaira are helping address this problem by providing people with a digital wallet that allows them to spend digitally, ultimately helping to drive financial inclusion. “
While digital currencies like eNaira can potentially encourage unbanked people to enter the financial system, they will only gain traction if the process is frictionless. If local traders don’t accept it, people can just stick with cash.
“The biggest challenge is making sure that the acceptance network is large enough so that as a user you can access it and start making payments through a mobile phone at different points of sale, otherwise you will still need a way to convert that digital money into physical Naira. , says Mitha. “There has to be a whole ecosystem built around it and if that ecosystem isn’t ready it could become a deterrent.”
Deploying fintech products in emerging markets also presents broader challenges, says Mitha.
“First of all, there are the challenges of access – digital connectivity, internet access and access to smartphones just to be able to use fintech services,” he says. “Once you have the basics, you have financial and digital literacy issues, and once you are able to engage in fintech innovations, there is a whole layer of consumer protection and governance aspects. data that is extremely important. “
People in developing economies may also lack confidence in adopting fintech services, as digital banks, for example, typically do not have physical branches.
“There’s no one to hang on to if something goes wrong,” Oyetayo says. “So being able to trust and trust a digital platform is something fintech has to overcome in emerging markets. “
Fintech alone won’t solve sustainability issues in developing countries, but it has the potential to move the needle in the right direction.
“There are a lot of things that need to happen and they need to happen together, but fintech will play a role in both improving payment and banking services to the underserved population, as well as providing access more affordable and better on credit. , says Shiliashki.
Emerging markets are generally unencumbered by legacy technologies, allowing them to harness fintech innovations that can help accelerate access to finance and accelerate sustainable development. For example, Oyetayo stands for M-Pesa in Kenya, which allows users to send money via SMS. It has essentially overtaken the brick-and-mortar banks, he says. “So fintech is disintermediating traditional financial players and contributing to sustainability and financial inclusion in some of these markets. “
FinTech also has the potential to change consumer behavior and the way people engage with sustainability, nature and biodiversity.
“It can dramatically change the game in terms of the types of choices people are going to make. And by doing that, you are redesigning those markets, ”says Mitha.
As fintech companies are at the forefront of this shift, existing financial institutions will need to be part of the journey as well, especially from a funding perspective, he says.
“It’s a whole system change that’s needed,” says Mitha. “It requires the ecosystem from financiers to real businesses and the entire policy and regulatory space to evolve together. It’s not just fintechs alone that can create this massive change.
Reaching the unbanked
In this context, financial technology companies and existing financial institutions are increasingly working together to combine the technological expertise of the former with the reach of the clientele of the latter. This collaboration stems from a realization among established financial institutions, particularly banks, that “there is a void that they must fill but that they do not have the tools or the capacity to do so.” , explains Shiliashki.
However, the size and reputation of traditional banks can give them a competitive edge when building fintech products to attract the roughly 2 billion adults globally who are currently unbanked.
“With digitization and fintech, we are able to reach these customers without a traditional brick and mortar strategy – we can do it digitally with our app,” says Alfonso de la Lastra, head of the strategy team at sustainable development of the Spanish bank BBVA. , which operates in emerging markets in Latin America. “This allows us to reach more customers, and because it’s a lightweight business model, we can offer the same services at a very low cost, which is important from a sustainability perspective and inclusive growth. ”
In other words, fintech is a game-changer in emerging economies, improving access to finance and supporting sustainable development.