The Innovation Blind Spot and why Fintech startups have a lot to do to push the financial inclusion of the low-income layers

Two billion people do not have access to formal financial services. A transaction account is the entrance for financial inclusion, a term that the World Bank Group (WBG) defines as the access of individuals and business to useful financial products and services such as payments, credit, savings and insurance, delivered in a responsible and sustainable way.

Ross Baird, founder of Village Capital Fund, advocates in his book «The Innovation Blind Spot»: “Many of the world’s poorest communities live in the informal economy. People work and earn money, they make plans to save for their children’s education or just for a rainy day, they occasionally need to borrow quick cash for an emergency root canal or a new business idea. But they don’t have access to a bank, or a debit card, savings account, insurance, or a line of credit. So they rely on informal means of managing their money. That could mean storing cash under the mattress; borrowing from family and friends; or dealing with black market moneylenders when they want to start a business. These informal methods, this shadow economy, can be risky, unpredictable, and outrageously expensive.”

The World Bank proposes three areas to accomplish the Universal Financial Access (UFA) by year 2020: payment systems, credit infrastructure, and small and medium enterprises finance.

Financial inclusion is a key to reducing poverty and increasing prosperity, but the institution reported that more than 200 million formal and informal micro, small and medium-sized enterprises (MSMEs) in emerging economies lack adequate financing because they do not have a credit history, which impedes them to have an account.

Mr Baird proposes impact-investing and investors abandon prejudices to look for local entrepreneurs to discover the forgotten market niche that affects a big number of people, so the solution will worth for them as investors and socially will have an impact too. Low income entrepreneurs do not fit the typical stereotype for VC investors and do not enjoy long-standing connections, and innovation economy is highly relationship-driven. “Many of the winners in Silicon Valley are part of a faux meritocracy: being born into the right city or social network,” he criticizes. He thinks that entrepreneurs of different social backgrounds shall be eligible for funding because they usually see the hole and can suggest the patch to heal the problem: “In the UAE there are hundreds of thousands of migrants workers. But the average investor probably isn’t familiar with the challenges facing these workers, and opportunities for businesses like remittances that involve sending money back home to family. That would make them more likely to invest in something different, like real estate, even though remittance is a huge market.”

 “The innovation blind spot are the ideas that we miss because of the way we invest. It is a shared responsibility. Government can set the tone for investment in a city, state or country, by supporting entrepreneurs and making it easier to invest. Investors make hard decisions every day. It is best when government and investors are working together,” he explains. The best way to positively impact is topophilia, love for the place, so everyone will help keeping the ecosystem: “Any community is the sum of the people living and leading there. Dubai is a unique city, ultimately we’ve seen that there is a thriving community of entrepreneurs, investors and entrepreneur support organizations all dedicated to supporting local entrepreneurs.”

He also recommends that entrepreneurs select the best project among themselves: “Peer-selected investment is one solution to rethink the way we support and invest in companies. It’s produced some pretty great results for us so far.”

Traditionally, two-pocket investments target quick financial returns and make philanthropy contributions separately. Mr Baird found out in 2016 that only 15 percent over 150 unicorn companies solve the top six areas for the world´s population: food, health, energy, agriculture, financial services, and housing.  He proposes to make one-pocket investments that combine social impact and financial returns so that in the long term they create value that lasts. Mr Baird recommends having the feet on the ground and look for the widest social impact instead of favoring the conditions for unicorns, as it will most probably not happen: “There’s nothing wrong with participating in an accelerator, if it’s the right step for a company. The issue is when community government leaders develop strategies to try and replicate Silicon Valley and build just the right conditions for unicorns. In most parts of the world, that’s a recipe for disaster – unicorns are extremely rare, and most cities will have better luck building an ecosystem that supports more realistic businesses, in sectors that the city has a particular expertise in.”

No poverty is the number one of the Sustainable Development Goals.