In the wake of the global Covid-19 pandemic, impact investing has emerged as a new approach to international development, offering the promise of long-term sustainability.
Impact investing has the potential to transform philanthropy, as investors are looking to invest in impactful investments, which promote social good in addition to generating revenue.
Investing in companies that provide for the social good allows impact investing to assist in bettering the livelihoods of members in a community, and facilitate self-sufficiency independent of aid.
An increasingly important facet of impact investing is a focus on empowering people across all walks of life with financial services in a fair and equitable manner in line with the UNSDGs. This is where the principles of Fair Finance come into play.
Organisations like ourselves, Flourish Ventures, rely on a set of fair finance principles that function as our compass, providing guidance for decision-making in a wide range of circumstances.
This however also bears in mind the fact that market conditions differ across geographies and the needs of a farmer in Kenya may differ from those of a small kiosk owner in Cairo or Lagos.
As investors, we apply our best judgment to support ventures that are consistent with our view of a fair financial system and positively influence the system’s evolution. We believe that fair finance is important for a variety of reasons.
First and foremost, fair financial services empower people to achieve their life goals. People need financial services to achieve their goals such as attaining education and healthcare. While these services should be empowering, they are often complex, hard to understand and difficult to use.
By contrast, when people receive financial services designed to improve their unique circumstances, their economic prospects improve. Thus, emphasis must be placed on the creation of financial services that are easy to understand, and designed for laypeople.
Additionally, the said services must be connected to people’s real-world needs and built into people’s daily activities such as payments, savings, credit, and insurance.
Secondly, in this day and age, business models are built on trustworthiness. To trust financial providers, people need to believe that these firms are on their side and serve their interests. Yet, traditional financial providers are often not transparent.
As a result, making business models that are clearly aligned with customers’ interest are key to gaining and maintaining trust.
Key elements to consider when looking to build trust include providers delivering “value clarity” to customers, with no hidden fees or undisclosed third-party payments as well as creating businesses incentives that are designed to help customers succeed.
A third key reason why fair finance is important is that users and customers will have meaningful control over how their financial data is collected and used. Financial services and products increasingly rely on individual financial and non-financial data, creating new opportunities, and new concerns about privacy, security, and trust.
A fair financial system will give people control over their data, increasing their level of trust. Properly designed, this can be achieved while also allowing businesses to use the data necessary to tailor their services.
A fourth key reason why fair finance is important is that it encourages the development of open infrastructure that is low-cost and drives competitive markets. This is key because, in order for people to participate in the modern, digital economy, they need access to financial infrastructure.
Expensive, hard-to-use infrastructure discourages innovation and competition, and transfers cost to customers while open infrastructure makes new solutions more readily available to a greater number of people at a quicker speed and lower costs.
Modern financial infrastructure is characterised by a set of open API tools and protocols that reduces entry barriers and foster competition. It also strikes the right balance between public and private ownership to maximize innovation and accountability.
Last but not least, fair finance will encourage the formulation of digitally-native regulation that protects consumers and promotes innovation.
This is important because regulation and policies are hard to update as technology changes, and regulators are less likely to respond in consumers’ best interests when they don’t understand the risks and benefits of new technologies and data-driven services.
As a result, regulators may not be timely in responding to market failure and abusive practices, or in enabling customer-friendly innovation.
Regulation and supervision will need to evolve in parallel with financial services as these services become digitally native.