Avoiding Financial Exclusion With Inclusive Solutions
Financial exclusion issues rarely occur overnight, but are the result of broken systems both large and small. When financial exclusion is finally recognized, all too often the solution to the problem is one that provides short-term opportunity only for the excluded group. The unfortunate truth, however, is that with every exclusive solution the issue is kicked further down the road. For example, a microloan program dedicated solely to the refugee and immigrant population works well in the near term but does little to solve the core issue. What barriers exist that prevent refugee and immigrant populations from accessing, or qualifying for, pre-existing solutions to begin with?
Short-term solutions often rely on pre-existing tools and methods. These same tools and methods are used by a system that resulted in financial exclusion to begin with. While temporary financial solutions are important, and often just, pressing on toward a solution (or set of solutions) that increases access for all is imperative. The more exclusive the financial solution, the more potential exists for delaying the larger goal of total financial inclusion.
The key to creating more inclusive solutions is for inclusion itself to be the primary constraint.
The key to creating more inclusive financial solutions is for inclusion itself to be the primary constraint. Setting proper constraints to create sustainable financial solutions may seem like an easy task, but warding off influence from existing systems and theories is actually quite challenging. The systemic roots of exclusion make envisioning a solution that’s truly different quite challenging due to pre-existing momentum and norms that can feel awkward to violate. Well constructed constraints for inclusive solutions should inspire new tools while weeding out those that are ineffective. Truly innovative and inclusive financial solutions emerge when the constraints of existing systems and institutions are temporarily ignored.
Three Constraints That May Result in Overly Exclusive Solutions
1. Short-term relief (when long-term goals are forgotten) – While short-term relief and emergency solutions are important, too many short-term efforts are assumed to be long-term solutions. Identifying a short-term solution as such signals to stakeholders that it is still worthwhile to seek out and invest in meaningful long-term solutions. A sudden influx of funding for a solution that includes little to no mechanism for offsetting costs is a hallmark of short-term, or emergency solution. Avoiding complacency among stakeholders and rightly classifying projects as short-term, versus clamoring for panacea themed headlines, creates space for long-term progress while meeting an immediate need.
2. Over-Reliance on Existing Infrastructure – It’s hard to build a new type of electric car when battery technology is outdated, and it’s hard to experiment with solutions like non-collateralized lending when existing lenders are reticent to change their underwriting standards. Inclusion may require new technologies, or for the owner to take on a role that has historically been provided by whatever system is being challenged. In the world of small business lending, for example, you may be forced to implement in-house loan servicing and underwriting activities. Creating long-term solutions will almost always require a few new tools and technologies to circumvent the existing system constraints that birthed the problem to begin with. Scoping out these new tools earlier in the planning process will increase the likelihood of receiving the funding that’s needed to fully implement an innovative solution.
3. Ignoring the Ecosystem – Where are your customers or clients coming from, and where are they going? For example, if a small business owner lacks access to capital, what does it look like to transition from lacking access to accessing any amount they require to grow the business. It typically involves multiple loans from a variety of lenders, typically over the course of several years. Relationship building is a key component in mutual success, and stand-alone short-term solutions require less relationship building. Customers are provided a disservice when a solution is so isolated that it provides no entry into the next solution based on individual or corporate growth.
Three Constraints For Building More Inclusive Financial Solutions
1. Life-Cycle Centric – While all of us may not look the same, we’re all growing. This applies to corporations as well as individuals. Thus, solutions that target various growth zones help to avoid exclusion by allowing potential end users to self-select the solution that makes sense based on their stage of growth. For example, we created the Growth Loan as an early life-cycle option for small business owners to access up to $35,000. The loan amount signals to business owners that the loan is an early growth option, but access is not limited by industry or ethnicity. It’s also non-collateralized to better meet the needs of earlier stage small business owners. As a business continues to grow, a loan of $35,000 becomes less meaningful. It’s also less meaningful for businesses and owners with abundant assets or high incomes who are able to access larger loan amounts from traditional lenders.
2. Human-Centered Design – The most sustainable solutions are mutually beneficial and empowering. Solutions that are not mutually beneficial should eventually die off, in theory at least, but if stakeholders confuse short-term for long-term solutions then innovation will wane and excluded end users will be forced to continue with any solution that meets an immediate need. Human-centered design includes an element of empathy that is easily forgotten when time and financial constraints start pressing in. Right-sizing the balance of power and influence to empower end-users should result in greater respect and performance by both parties involved. For example, as part of the underwriting process for the Growth Loan we invite applicants in to present their business model and answer questions from our loan committee in person. This unique interaction component gives each applicant greater ownership over the final outcome.
3. A Landscape of Financial Solutions – Where does your life-cycle based solution fit among other solutions. Does it come at the beginning, middle, or nearly the end of the life-cycle? If there are no feasible entry points for excluded individuals or organizations, should you be working on 2 solutions? Collaboration with another organization on a preceding or follow-on opportunity strengthens your own solution as well as the success of the end user. The ability to flow smoothly through various solutions that align with end users based on life-cycle stages contributes greatly toward longer-term sustainability.
By implementing these constraints, you will increase your odds of creating an inclusive solution that is truly sustainable. Once an effective strategy is formed, it’s ok to look for existing partners, technology, and tools that are effective within those guardrails. If they do not exist, your plan will help in identifying the tools that might need to be created to move forward.
If you’re part of an organization that is seeking inclusive access to capital solutions for your own community, we’d love to hear from you. And for more updates and information about Access Ventures consider subscribing to our newsletter.