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.
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.
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.”
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.”
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.”
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.