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New fintech in the Web3 space must be sustainable. Paul Nelson shares how USAID promotes financial well-being through sustainable, inclusive, and secure digital ecosystems.
Fintech has the power to build a more inclusive world. Fintech for the People is about the innovators who are developing fintech solutions that reach the people who’ve been left behind. In each episode, we’ll hear from innovators who are creating financial solutions that bring every person the financial tools they need to grow their business, support their family, and build their community. Together, we’ll learn how fintech looks different in spaces and places where basic financial services are a luxury — and how solutions to address these challenges require a different level of creativity, empathy, and execution.
Fintech for the People is an Accion podcast hosted by Amee Parbhoo, Managing Partner of Accion Venture Lab – an early-stage investor in inclusive fintech startups. Learn more about Accion Venture Lab here. Episodes will be released in seasons, on a weekly schedule.
Matt Schaar (00:12):
Hi everyone, and welcome back to Fintech for the People. I'm Matt Schaar, operating partner here at Venture Lab, and we're continuing our series on the topics of Web3, blockchain, and crypto, and their potential impacts on financial inclusion.
(00:27):
Today, I'm pleased to be joined by Paul Nelson from the US Agency for International Development, or USAID. Paul is a senior advisor and the acting team lead for the digital finance team at the agency. In this episode, we'll talk a bit more on how USAID looks more broadly at technology as an enabler to promote financial access. Later on in the show, we dive a bit more into some of the challenges that Web3 must address in order to prove itself as an accessible, compliant, and safe solution to help advance greater financial inclusion. It's a really great lens into how a larger aid organization like USAID views emerging technologies, and it's very timely given the latest movements in the crypto space, in particular. Paul, welcome to the show. It's great to have you.
Paul Nelson (01:16):
Thanks, glad to be here.
Matt Schaar (01:18):
Just to kick things off, it would just be great to hear your role within the agency and how it relates to financial inclusion since we are a podcast talking about technology innovation in the financial inclusion space. Tell me a bit more around where all that work fits into USAID'S mandate.
Paul Nelson (01:35):
Sure. Well, we sit in the ITR Hub in our bureau, and one primary responsibility that our division has is coordinating the agencies. First, all of agency digital strategy, and through that process we've got this mandate to strengthen and promote the development of open, inclusive, and secure digital ecosystems. That's kind of on the technology side, and we help our colleagues in the building and in the field and our partners that we work with, we help them think through different interventions or approaches to advancing those objectives on the technology side.
(02:12):
But as I mentioned earlier, we're the digital finance team, so we also have this legacy of focusing on financial inclusion, so using tech as a way to ideally promote financial wellbeing and resilience and empowerment for communities that we work with. Of course, because we think about this from a technology lens, we think through, all right, how can technology help? How could it expand access to different types of services, ideally more useful services, more cost effective services, but then also thinking in terms of outcomes, what are some dependencies or issues that we need to look out for, potential risks that might be introduced as technology becomes more evident across the financial sector?
Matt Schaar (02:53):
What are some of the things that you as a team have provided some guidance or advice on when it comes to technology enabling financial inclusion, either from promoting financial inclusion or even identifying some of the risks that have been involved with how technology can be used to serve that purpose?
Paul Nelson (03:09):
At an agency level, we've engaged in a range of areas, and some of it is at a country-specific level, and in other cases it's focused on broader themes or issues that are relevant across markets. In a couple countries, we've provided market facilitation support to local stakeholders that are thinking through the adoption of a real-time payments environment, thinking through interoperability challenges or aspirations at a country level. We've also, at a global level, supported large partnerships and alliances focused on addressing the gender divides specifically and promoting women's economic empowerment and looking at how technology can help.
(03:49):
But also to my earlier point, looking at ways in which we can actively get in front of potential amplification of inequalities. Just one example of that has been some work that some colleagues of mine have supported through the Equitable AI Challenge, which has looked at this through the prism of artificial intelligence, which of course is being used in a lot of different FinTech verticals. But then also, we've got a partnership with MasterCard that has looked at empowering women entrepreneurs in the FinTech space so that they can play a more dominant or prominent role in developing inclusive financial services.
Matt Schaar (04:26):
I'd be curious, when you think about working with potential partners, whether it's Venture Lab as a small fund or even something like MasterCard from a technology perspective and overall just impact, I think in the financial inclusion space, what are some characteristics or factors that are really central to building the right kinds of partnerships in that regard? What is it you look for? What are the things that ultimately you're looking for in terms of key outcomes and how you maintain that relationship throughout the engagement you've built with them?
Paul Nelson (04:58):
Luckily, at USAID, we have for the last couple decades prioritized private sector engagement, which sometimes is taken to mean working with corporate firms, for-profit commercial firms, but actually captures any non-governmental stakeholders. It could be an NGO that works with women entrepreneurs, like I was just mentioning earlier, or it could be a tech firm doing something, or it could be a university that supports R&D in the FinTech landscape or actually invests resources in measuring outcomes from a financial wellbeing or financial inclusion perspective.
(05:33):
Given that longstanding focus on private sector engagement, there's kind of a set of issues that we would look out for for any particular partnership or engagement. One obvious one, but important one, is just clarifying where there is alignment and objectives. Many organizations have a mission orientation to them, and so it's very clear where USAID and those entities might align. For example, promoting gender equality and equity or women's economic empowerment is something that sometimes is left by the wayside in the for-profit world, even though it shouldn't be. Sometimes there needs to be a little bit more proactive engagement to make clear that that's a shared priority. In addition to that, there's relevant expertise in comparative advantages. USAID, we have large networks of partners that we've worked with for years in dozens of countries. We tend to have a fairly good insight into the needs or challenges or aspirations of communities that we've supported over the years.
(06:40):
On the other hand, on the private sector side, a lot of times there's capital on offer or there's really deep in-depth technological expertise or expertise when it comes to financial services development. Not only that, when it comes to the sustainability issue, it's those private sector actors that are planning on being in that community or working with that community, for that community that will have primary say in whether we actually will achieve sustained outcomes, whether it's to again, improve someone's income, help them secure employment, improve their livelihood, access to credit, all those different aspirations.
Matt Schaar (07:20):
I want to come back to this point you mentioned around particularly working with private sector organizations in that there could be varying interests, but also the way that a solution is marketed to talk about financial inclusion. Even as I think about the waves in Web3, that there's much discussion around financial inclusion, and I think whether or not it is truly inclusive I think is always an open question, and it depends on a case-by-case basis.
(07:45):
I feel like that's actually a good segue into the conversation around these emerging technologies in blockchain and Web3, and would be curious to hear your lens on when the agency started noticing this technology as a method of trying to introduce financial inclusion and access to capital, and maybe just talking a bit about the journey and how that's evolved and how you as an agency have started to look at it.
Paul Nelson (08:11):
Well, number one, I should say this isn't new to us. I know it's been in the headlines a lot lately, but we've followed this space for a number of years, as early as I think 2014. I know this was on our radar at that time, for people that are aware of CGAP, Consultative Group to Assist the Poor, which is an organization that we, along with many other actors fund. At that time, there had been some confusion or discussions regarding whether Bitcoin is mobile money and basically some concerns among certain policy makers regarding mobile money, given what they were observing in the Bitcoin space at that time. We started looking at it, I started paying attention to it at that point to better understand how does this environment work? Where did this innovation come from? What is its aspirations? What are the risks going to what initially prompted the inquiry?
(09:07):
Through that, we've done a number of things. We've organized staff training and webinars. We've done some external-facing initiatives just to better understand how people are interacting with the technology, with the services associated with the technology. We funded targeted research and assessments in, I think 2019 or 2018, we released the blockchain primer, and that was intended to equip our colleagues and stakeholders with some questions to ask just as they themselves got more exposure to this space, not with the intent of encouraging people to do more, but rather to just better understand the relevance potentially of this technology as service providers in this space. Based on a greater understanding of relevance, then they might be able to better understand whether it would be appropriate to whatever problem they might have been facing. Then we've also a limited way on technical assistance, as well, to a couple groups in this space.
(10:08):
As of now, I could bucket our general approach or frame of reference in this space in three buckets. Number one, thinking about how we can address safeguards and risks that are specific to crypto. I'll just use crypto as shorthand for Web3 in this general space.
(10:28):
Number two, just redoubling efforts to address core economic or governance challenges that for years we've supported programming on. If people have a limited trust in the formal financial system, what are some of the root causes that result in that lack of trust and what can we do to address that?
(10:46):
Then third, and this is actually more of an area for other colleagues in USAID, but I'll just note it. In humanitarian contexts, we always talk about continuing to support modality neutral approaches. The reason why I mention that is because sometimes crypto has come up in the context of cash transfer programs for people that are in very difficult circumstances, and USAID supports cash transfer programs that have relied on vouchers, paper vouchers, e-vouchers, but also digital payment channels, and physical cash. You might not be surprised that over the last few years, many organizations have looked to crypto as a potential additional modality to rely on.
Matt Schaar (11:30):
You've mentioned as part of USAID'S mandate that your focus is on financial inclusion. In that case, you said that you are generally agnostic to the type of technology that's used to deliver those solutions. But you mentioned also that the crypto is in particular a bit concerning to you all. I thought it'd be good to elucidate a bit more on why. When you think of all the dimensions of technologies and innovations that have tried to deliver financial inclusion, you mentioned crypto as one that's bringing some pause, so maybe speak a bit more to what concerns you're seeing with the adoption of crypto and crypto-centric technologies and delivering these types of solutions.
Paul Nelson (12:14):
I would say areas that we are paying particular attention to in countries where we work include the following. Number one, immature technology and governance models or models that are used for managing these distributed systems upon which crypto services are offered that may not be as stable or as resilient as they theoretically are presented or described in white papers that you see. Likewise, in a number of countries where we work, there are unresolved regulatory issues. Some of the regulatory frameworks, whether from a financial stability perspective or a consumer protection perspective or from an illicit finance perspective, are weak, nonexistent, or incomplete as it relates to crypto, which means that you may have some firms that are offering crypto services in countries where we work that do not offer the end users the benefit of safeguards that we all rely on. Those safeguards protect the financial system from being used to facilitate illicit finance flows, but they also can protect consumers from being exposed to fraud or the collapse of a financial service provider they're relying on.
(13:26):
Then that's another area, this issue of the crypto space being subject to a number of different types of fraud and abuse, partly due to these, at times, nascent regulatory and oversight frameworks. I had seen the FTC, the Federal Trade Commission, they put out a data spotlight in June of this year, said that since 2021, they had received reports from over 46,000 people of crypto scams that had resulted in losses of upward of a billion dollars. Those were just reported losses, so you could expect the actual number to be larger, particularly for countries where we work or globally at least.
(14:08):
Then the other issue is kind of, again, I mentioned illicit finance. That is a concern here in countries where we work, there can be concerns regarding illicit finance, money laundering, terrorist finance. One issue that has come up is whether countries in which we work have in place regulatory frameworks to help prevent that. Then also whether service providers in those countries are in compliance with any applicable rules that apply to that space. Those are just a few that we highlighted and pay attention to.
Matt Schaar (14:40):
Got it. Certainly, it's concerning when there is especially tools and solutions that are reported to provide financial inclusion or enhance someone's ability to get connected to the global financial system is actually being defrauded by it. It's really creating the exact opposite of what you'd hope for. I suppose the follow up to that is you mentioned a lot around regulation, and it's not as if people... A lot of people that are in the crypto space, they've come from FinTech or they have a financial services background, and so they have to be keenly aware of what's necessary from a regulatory perspective to have a healthy and functioning financial system that can hopefully be at its core, inclusive.
(15:30):
Do you think that there's some deliberate ignorance here, that there's greed? We can't ever, I think, speculate on the motivations of people, but what is it that you're seeing in all of this that you think that the maximalists or the people that are promoting this are not seeing or sharing that would actually move this whole system toward the proper regulatory frameworks to enable inclusion in a more effective way?
Paul Nelson (15:56):
It's a good question. I think as a development agency, we're focused on outcomes and we're focused on market systems, which means we may have a broader aperture than folks that are in the industry or focused on a particular service or a particular business model in the industry in the crypto space. Because we're focused on outcomes and systemic dynamics and how the private sector interacts and how the oversight and governance framework applies to particular area, we're maybe a little more cognizant of some of the risks or safeguards that need to be addressed or in place or cognizant that there may be a complex set of issues that are contributing to development challenges that we face that are maybe not as amenable to tidy simple solutions.
(16:52):
We, for example, work in countries where communities have long struggled with deep rooted corruption, limited capacity within public sector institutions at a governance level, long standing financial exclusion, mobile access issues where people simply don't have access to a baseline level of technology that would enable them to engage in a more data intensive digital economy, which certainly applies to the crypto context. The question that would apply to any innovation, crypto included, is whether that innovation is capable of operating in those environments in a manner that still allows it to function and make people's lives better.
(17:38):
If crypto, for example, purports to be a potential way to expand access to just a transaction account of some form or a payments mechanism, or if it purports to be a way to access new types of lending, since we all know that there's a significant access to finance gap for small businesses in countries where we work, then the question is, can the crypto-based models that address those or hope to address those issues, not introduce risks or function despite the more difficult operating environment they might find themselves in? Perhaps let's think through what are the things that need to be in place for it to work as it's sold to.
Matt Schaar (18:19):
And we'll be right back.
(18:31):
And welcome back to the show.
(18:34):
Yeah, what I'm hearing from you is there needs to be a balance there of private sector investment in these technologies in some way, an agreement amongst industry participants, responsible parties to identify the types of regulatory frameworks that need to be put in place, but also it sounds like a system of checks and balances to make sure that those technologies are actually achieving what they've set out to do. I suppose, is that a fair ideal world that we would want to create in order for these technologies to actually achieve their goals?
Paul Nelson (19:13):
I think that loosely captures it. Ideally, you have a financial sector or a digital economy in which the market incentives are aligned with policy goals that we would all share or hope to promote, whether it's financial stability, protecting consumers, protecting investors, providing access to safe and affordable services. All those things matter, and the private sector has a role to play. I think over the last decade in the financial inclusion space, a lot of central banks have learned how they can create more space for responsible innovation. There's been a lot of discussion about the effective use of tools like regulatory sandboxes or innovation hubs or regulator office hours, all of which in one form or another, are intended to either increase the capacity of the oversight bodies to grapple with and understand the implications of these different types of innovations or to make it a little bit easier for the innovations that actually do have real promise to enter the market and grow and introduce new forms of competition.
(20:24):
I think the insights from that have reflected this recognition that I mentioned earlier, that we operate in invariably complex systems and having a process or a framework that allows issues to be systematically understood is ultimately to everyone's benefit. That means being able to really critically understand not just opportunities, but also the risks or limitations or the dependencies involved with any particular innovation.
Matt Schaar (20:56):
I tend to be on that same side and maybe just not to be a devil's advocate, but to offer maybe a counterpoint or at least what we hear in the crypto space is one of the things that many advocates in the space claim is that regulatory frameworks simply don't keep up with innovation. I think we've seen examples, though, where central banks and centralized institutions have been able to really advance innovation. If you look at the example for UPI in India, or you look at M-Pesa, which in many instances, has been effective in expanding financial services to many, many people in India and various countries in Africa, respectively. It almost feels like there's this tension between is the governing body ready for innovation and are they proactively seeking it out?
Paul Nelson (21:54):
Well, I would say one place to start is just on evidence gathering and being really critical and analytical in understanding the impacts. Like I was saying earlier, the risks and opportunities of any business model. I think as people first start to peel back the layers of any particular innovation, this could apply to crypto, but it could also apply equally to mobile money back in 2007 and 2008 in Kenya, it can take a little bit of time for either the market participants to understand the business model and how to make that work, or for consumers to understand the utility and then potentially test and adopt, or for the regulatory bodies to understand how they have to approach it, how they can enable it, how they can appropriately mitigate risks that might arise from it.
(22:44):
In this space, I think we're still in the process of uncovering that evidence base. There certainly are many white papers, of course. There are certainly a lot of studies that are speaking to the potentials or to the aspirations that the industry says it has. There are maybe fewer that can point to clear links to positive financial wellbeing outcomes, for example, or evidence that really unwraps the risks or issues in the space that need to be accounted for in order in us to actually be confident that we would be improving people's lives through the use of crypto.
(23:26):
You mentioned earlier, or just a bit ago, this idea of moving to a post-regulatory world. I don't know how feasible or likely that would be or whether that would be in of the interest of people where we work. As you know, the White House recently issued an executive order on promoting the responsible development of digital assets earlier this year. They're speaking to the importance of safeguards, which also includes having sound oversight that's consistent with international standards and is also necessary to ensure that people are protected from harm. Some of the analysis, like what I mentioned from the FTC earlier, suggests that moving to a post-regulatory state is maybe not the way to improve outcomes.
Matt Schaar (24:19):
I think maybe one thing, Paul, I'd like to... Just zooming out from this conversation around these new adoptive technologies, there might be listeners to this who are thinking of building something within, utilizing these technologies, are interested in financial inclusion. More broadly, when you think about the marks or the characteristics of a financial inclusive world from USAID's perspective, what are the dimensions you look for? If someone is looking to build solutions in the space, what are some of the ways that they can measure their own idea or solution's progress toward that effort?
Paul Nelson (24:58):
Let's start at the macro and then move backwards. Ultimately, when we talk about digital finance specifically, or digital financial inclusion, we're talking ultimately about trying to promote at the outcomes level, empowerment, resilience, and wellbeing. Those three words, empowerment, resilience, and wellbeing have many dimensions to them, but in the financial services context, it means having some measure of agency or control or a sense of security and a sense of optimism and opportunity in pursuing economic opportunities and covering your day-to-day expenses and in achieving some level of financial health.
(25:42):
In order to get there, we are always reliant on evidence-driven efforts that learn what works, learn what doesn't work, whether from a policy level or an innovation level or from an end user level perspective, and then developing interventions or programs or partnerships to move forward. If you break that down at an ecosystem level, what we often emphasize through our programs at least is on the innovation front, what is responsible innovation or investment or market conduct?
(26:17):
When we're working with innovators as a grant maker or partnering with financial service providers on loan guarantees, for example, that keyword there is responsible. We don't just want innovation. We want innovation that can demonstrably improve people's lives that takes due account of the environments in which that innovation occurs and is also sustainable. Likewise, we encourage folks to take a more intentional approach to reduce gender divides and promoting women's economic empowerment and equality and gender equality and gender equity. There's a strong gendered dimension to a lot of the issues that we face, and I think that has to be part of this as well.
(27:04):
At the enabling environment level, sound enabling environments, robust safeguards. A sound enabling environment can be one that creates space for responsible innovation. But it's also one that has safeguards, whether from a consumer protection standpoint or an illicit finance standpoint or a financial stability standpoint.
(27:24):
At the end user level, customer-centric services, so are we addressing real needs with a particular service or do we still have work to do on that front? Do we know enough about what a particular market segment needs or wants or are we just kind of speculating and hoping that they'll like it?
(27:41):
Then lastly, and this is maybe a comment more for other actors, other development agencies for example, that support broader development programs and our partners, but being more systems-oriented so that even if we are working on a particular issue within an economy or sector, we are cognizant that there might be other dynamics or forces at play that will influence our ability to promote outcomes in any particular area because we want to ultimately address root causes of financial inclusion or exclusion, or root causes of financial fragility. We also want to identify and mitigate risks. One innovation might be very appealing and it might even seem like a responsible, well informed one, but for example, in the digital context, we recognize there's also cyber security concerns that you might need to think about or at least inquire about with an innovator in the private sector to make sure that they have addressed those concerns. Because if you don't, then you might inadvertently introduce risk when you didn't intend to do that.
(28:51):
Then lastly, and again, this is kind of tied more to what we do as a development agency, but we try to focus on outcomes ultimately, not just outputs. We may be mobilizing capital today or providing a grant to an innovator tomorrow. Our interest is not simply that particular relationship. Our interest is what that relationship can help us advance or move toward. This podcast episode, we're talking about crypto innovations specifically and how in the world of FinTech, they may help or hurt the cause of financial inclusion. One thing that we've come to repeatedly is this issue of risks. Do we understand them? Can they be mitigated? How well does industry understand them? What about the oversight authorities in countries where we work? I think it's healthy to talk about risks, it's healthy to talk about limitations. We have the same conversations in other areas of the financial inclusion community. In that sense, it should not be a surprise that we ask those questions in the crypto context.
(29:54):
When it comes to digital credit, for example, there are decades-long efforts to extend access to finance for people that don't have collateral, that have lower incomes, that are more difficult to serve in more sparsely populated communities. Digital credit products were understood as a potential means to address that through novel uses of data, through the reach of mobile phones and so forth, so kind of riding on the coattails of the mobile revolution, but we also understood that there could be risks in that space. It's a great world of opportunity, but it also presents risks that we need to think about in terms of overindebtedness, appropriate use of data that is used for credit scoring purposes.
(30:36):
To the extent that artificial intelligence is used for some of these types of products, there's the question of algorithmic bias risks and whether we are inadvertently creating conditions to magnify preexisting divides, particularly from a gender perspective. It's really helpful for the financial and community to talk about those issues, to determine whether we have a clear sense of how to avoid or address them once they come up, whether from a market conduct perspective or from a consumer advocacy perspective or from an enabling environment perspective. I would just say that the conversations that we have in the crypto space are just a natural extension of conversations in other parts of the financial inclusion arena.
Matt Schaar (31:24):
One last question, Paul, in about five years from now in terms of where you'd hope to see some of these crypto-enabled technologies, but where you see some evolution and how they're being adopted from a policy perspective, with your lens on the policy and the regulatory side of things, plus this technology, where would you like to see the space evolve? In particular, when you think about how it can be used to advance financial inclusion to the bank underserved, where would you like to see the approach mature a bit if you had your choice in the next few years?
Paul Nelson (31:58):
I think the first thing that I would raise is something that I've mentioned a little bit already during the discussion, which is a stronger evidence base in terms of the risks, in terms of the opportunities, in terms of the limitations, and in terms of the actual impacts of this space with respect to specific issues that we care about. We're talking right now about financial inclusion, but you could also have the same discussion about financial stability or about consumer financial protection or about illicit finance or issues like that. I would hope over time, and this is something that we've talked about in other publications that we've put out, hopefully there's a greater evidence base of those issues as they play out or might play out in particular countries because every country, every community is different. Having a credible evidence base backed by independent and objective evidence allows for better decision making, whether it's by the policy makers in the country or by impact investors like Accion or by service providers that are thinking about their digital transformation, so that's one.
(33:08):
Number two, we've talked about the need to improve safeguards and to address risks. That's something that the president's executive order from March 22 also addresses. In particular, many countries where USAID operates do not yet have in place fully legal regulatory and supervisory frameworks that capture the issues consistent with global practices and international standards that capture or address the issues presented by the crypto space. Until those frameworks are adopted and implemented by partner country stakeholders, the people that do want to experiment or innovate or use services in this space won't benefit from safeguards that might be necessary. A bank in a particular country where there is a deposit insurance scheme offers its customers the safeguards that having a depository insurance scheme provides. A crypto wallet that doesn't have any of that, offers a different service perhaps, but people may not be aware that it's also potentially less safe, and so that's one area for sure. It'll take a long time, I think for those frameworks we developed, but that's something that hopefully occurs sooner rather than later.
(34:31):
Those two things combined with just having different stakeholders kind of consult with each other to better understand how communities are interacting with the service or what are the continued unmet needs within those communities from a financial inclusion perspective, hopefully would lead to the development of services that on their merits can demonstrably address issues that we are talking about. If over time you don't see very many crypto-based services addressing those needs, then maybe that means that there was maybe just less potential to do so in the first place, or who knows, maybe the space will mature enough in a manner that actually manifests on the merits of the crypto space's ability to do so.
Matt Schaar (35:22):
That's it for this week's episode, and thanks for listening. You can learn more about USAID at USAID.gov or on Twitter at USAID. As another quick reminder, don't forget to follow Accion Venture Lab on Twitter at AccionVLab or on our LinkedIn page. Finally, our upcoming Fintech for Inclusion Summit is coming up in early November and registration closes soon. More details on speakers, panels, and registration is available at fintechforinclusionsummit.com. We'll be back with another episode in two weeks when we'll be joined by Mercedez Bidar, the founder of Keebu. We'll see you then.
Mercedez Bidar (36:07):
I've seen that gap between what policy makers were thinking and doing regarding the informal economy and formality in cities, and on the other side actually what was going on on the ground and what these families were facing, and what these women were facing. I said, "Okay, there might be another thing we could do."