The Greatest Unmanaged Risk in Fintech

We often think about the ‘upside’ of social impact data—how it can show that an investment is doing more than a typical investment, because it generates both financial and social return.

But what about social impact data as a way to protect financial value?

This is the unique opportunity that presents itself today in fintech, an industry that is growing exponentially and that has huge potential for creating social value, but also potential to make things worse for vulnerable populations.

I wrote a piece for the Fintech Times on just this topic. Here’s the opening, click here to see the whole thing.

The global fintech market was described in a recent HBR article as investors’ “Goldilocks dream”. This is thanks to its promise of big investor returns and positive social impact. In 2021 a total of 113 new fintech “unicorns” were created. They had the potential of bringing the world’s 1.4 billion unbanked customers into the financial mainstream.

However, while financial access is increasing at a blistering pace worldwide – in Kenya 82.9 per cent of the population had access to high-quality financial services in 2019, up from 26.7 per cent in 2006 – access to digital financial products is neutral from a social impact perspective. Some products have a significant positive impact on customers’ lives. Others though, simply meet an immediate need (to make a purchase or pay off a debt). This results in people being left worse off.

(Keep reading)


The Stories We Can Tell Without Data

A few weeks ago, Bloomberg published two scathing articles about the microfinance industry. The articles asserted that major investors—both public and private—are making massive profits through their investments in microfinance, while the industry systematically hurts borrowers. The article begins:

Suicides, debtors’ prisons and delinquent borrowers forced to sell their land—the grim social costs linked to microfinance a decade ago were supposed to be a relic of the past. But efforts to clean up the industry lost momentum, and today billions of dollars are flooding into a system that promises the world’s poor a better life while often compounding their misery.

As I shared in an article I posted on LinkedIn yesterday, the claims in this article are not supported by the data.

Most Impact Reports Are Nothing More Than Stories

How could this be?

It’s because this article falls into an all-too-common trap: relying on robust, objective data sets to profile the financial returns to microfinance investors; and resorting to a handful of interviews and case studies of borrowers, plus a number of expert interviews, to paint the story of social impact.

The question we must ask is: how can it possibly be that, in 2022, the social impact of an industry that reaches more than 140 million clients can credibly be assessed from a few dozen client interviews?

And the answer is: because this is common, accepted practice for assessing most social impact.

For most investors, even those who have a stated intention to create social impact, the “assessment” of this impact is a storytelling exercise. These stories are often based on a handful of anecdotes or case studies, which might include conversations with a small number of customers.

Indeed, if you pick up an annual social impact report from most investors or companies, what you’ll have in your hands is, most likely, a narrative exercise devoid of first-hand data.

So, it is no great surprise that microfinance—a well-established, well-respected sector in social investment—has fallen victim to this same sort of storytelling exercise…only this time, the individual case studies paint a particularly troubling picture of the industry.

Better Social Data is Available in Microfinance

My response to the Bloomberg article points out that there is, in fact, a massive dataset that captures the lived experience of nearly 18,000 microfinance clients who represent 25 million microfinance customers.

This dataset, gathered by the company I run, 60 Decibels, shows that microfinance is creating positive outcomes for the vast majority of borrowers:

Nearly three in four of the clients we spoke to said that their loan repayments are “not a problem”…. Seven in 10 of these clients credit their microfinance institution with helping them strengthen their financial resilience, meaning that they are better able to face a major expense. Four in five clients told us their lives are improved thanks to access to microfinance, with a subset of these, one in three, saying their lives are ’very much improved.’ Similarly, four in five clients say they are better able to reach their financial goals thanks to microfinance.

The dataset also shows that, for a small subset of microfinance customers, their microfinance loans are indeed a burden, that their repayments are causing major strain on their well-being, and that their lives are worse, not better, because of their microfinance loans.

The point is: like most financial products, microfinance has the potential to create both benefit and harm. How the service is delivered, and, in particular, product design and client protection practices, play major roles in determining the impact of this product on the lives of millions of customers.

Of course, this more nuanced version of the story doesn’t make for flashy headlines. Then again, we shouldn’t be surprised that the microfinance industry, or any industry that aims to create social impact, would be vulnerable to such a story being written.

Until we set a new standard, one in which regularly collected, objective, comparable, quantifiable social impact data is expected for anyone claiming to create social impact, we will remain an industry that relies on storytelling.

You can read my full article here.

Why We Need Impact Performance Data

Last week, I published an article in Stanford Social Innovation Review (SSIR) together with Tom, Lindsay and Devin from the 60 Decibels team.

Here it is: This is Not an Impact Performance Report.

The article explains why we think it’s so important to listen to customers, beneficiaries and producers if we aim to create and understand social impact. And it argues that we must have a performance mindset when it comes to social impact – differentiating between best and worst performers, and always looking to learn and improve.

It’s hard to overstate the accelerated focus and energy around social impact and ESG investing these days. A investor friend of mine just sent me the special report that Pensions and Investments Magazine did on impact investing. This report profiles everything from what “impact investing” means to how to measure impact. This work is going mainstream in a big way.

While the issue of what and how to measure might seem esoteric or even complex, it needn’t be. Indeed, what we argue for is blindingly simple: if the well-being of human beings is part of your social impact thesis, you can’t know if you’re having social impact without hearing directly from those human beings.

That may seem obvious, but it is far from standard practice.

In fact, most impact investors rely on “triangulation” of their social impact: find a study of a business or intervention that looks similar to your business / investment. Then assume that its impact can be applied to your business / investment. This approach often misstates the impact created and it, by definition, makes it impossible to distinguish impact performance of different businesses.

Here’s the opening of our SSIR article. I hope you jump over to their site and read the whole thing.

In a world of increasing transparency, we expect that what’s on the label will reflect what’s inside the package. This is as true for an “organic, cage-free” label on a carton of eggs as it is for a B Corporation Certification or a fund categorized as “ESG.” These terms communicate something specific to the buyer. Their credibility rests on whether what’s on the label is consistent with the product itself.

(Keep reading)

Looking for a U.S. sales lead for 60 Decibels

Hello blog readers, I’d like to ask for your help.

I’m looking to hire someone to work directly with me to lead up U.S. sales for 60 Decibels.

As a regular reader of this blog, you’ll know that 60 Decibels is the company Tom Adams and I co-founded last year to make social impact measurement fast, nimble and useful to the people working to create social change. Our goal is to put the voice of the customer back where it belongs: at the heart of social impact measurement.

We’ve had a great first year. We are working with some of the most dynamic, forward-thinking investors, companies and nonprofits around the world. In 2019 we spoke to more than 50,000 customers in more than 30 countries, delivering more than 200 Lean Data projects. We have a 30+ person team based in four countries. We work hard and we believe in what we’re doing.

The real secret to our success is a handful of loyal customers who show up as true partners. They push us to do our best work. They have high standards and ask us to keep raising the bar. And, quietly but consistently, they support our success by spreading the word to others about the good work that we do.

The salesperson I’d like to work with understands that this is the only approach to build something that lasts: client by client, day by day, doing work worth talking about.

The person we’re looking for has personal experience with social impact measurement. She might have gained this experience working as an impact investor, a philanthropic funder, or a social entrepreneur; or maybe she’s worked to provide impact measurement solutions to those sorts of organizations. Regardless of her specific path, she has significant first-hand experience with the problem we’re trying to solve. She’ll also understand that great selling starts with passionately believing in an idea. She’ll be an effective storyteller, always be looking to learn, and demonstrates all the hustle, resilience, and sense of humor that are the hallmarks of any great professional.

As a regular reader of this blog, I’m guessing you have a sense of the kind of person I’m looking for. Above all, I hope it’s clear how personally I take my work, the values I try to bring to it every day (reflected in our 60 Decibels values), and my willingness to share when I’ve gotten things right and when I’ve fallen short.

I believe that this sort of grounded authenticity is what ultimately empowers us to enlist others in our shared mission of making the world a better place.

The full job spec is here, and people can apply directly for the job here.

Applications close on February 15th, but I’ll start reviewing applications immediately, so don’t delay.

How Much Impact Measurement is Enough?

Recently I was speaking with a sophisticated, experienced impact investor. She’s been investing impact capital for more than a decade. Her fund has a well-developed investment thesis and a clear impact measurement system.

This system, as I understood it, thoughtfully looks at preexisting research on social impact: things like whether a particular type of software improves learning outcomes for kids; or whether a given healthcare app results in better patient outcomes. In addition, post-investment, the companies she invests in study the efficacy of their offerings—it’s part of what is required by their (mostly) public sector customers. These studies test whether each company is replicating the results expected from the research.

However, in a few sectors, she’s not easily able to get this deeper data.  In that context, she asked me, “What’s your view? Do we really need more impact data?”

Meaning: in these sectors, they have good background research along with a general indication that the products being sold have a net positive impact on their customers. They just don’t know how those positive impacts translate into changes in customers’ lives. Isn’t that enough?

Why Are We Gathering Impact Data?

It depends, I replied, on why we’re gathering impact data.

If we’re doing it to gather evidence—to prove something—then by all means let’s gather only the data needed to cross the threshold of proof. After that, we should stop.

But what if that is not the right objective for impact measurement? The phrasing, “Do we really need more impact data?” assumes that gathering this data is at best a neutral activity for the business, and at worst it’s burdensome, a diversion of resources, and a distraction.

If this is the case, then managing it down to a minimum is the right thing to do.

Flipping the Question

My view, however, is that it’s high time we flipped her question from, “Do we really need more impact data?” to “Do I know all I need to know?”

“Do I know all I need to know?” about my customers, my beneficiaries, and how they experience my service?

“Do I know all I need to know?” to serve them better?

“Do I know all I need to know?” to create a deeper change in their lives, one that will both improve their well being and make them more likely to be loyal and to recommend my service to others?

We perpetually ask the wrong question because we’ve been trained to assume that social impact measurement will forever be a ponderous beast: large-scale, expensive studies that take years to deliver results. That heavyweight approach, the standard in our sector, is extremely useful in a very narrow set of cases. It’s also almost never the answer for growing, dynamic organizations that are still evolving how their solution can best serve customers.

Stop Taxing Social Businesses

For these sorts of social businesses, social impact measurement must be optimized for learning and improvement cycles. It must move as fast as these nimble, dynamic social businesses. It must feel like customer insights, and not like academic research.

If we fail to make this shift, impact measurement will forever be what it feels like today:  a compliance exercise that is a tax on social business, rather than a way to increase knowledge and insight. (More on this risk from my recent panel at the SOCAP conference)

Because, let’s be real: it’s hard enough to build a business that solves a social problem AND is financially viable. Adding a measurement tax onto that business makes no sense.

Conversely, if social impact measurement can help that business grow, improve, and better serve its customers (and yes, at any point feel free to substitute “nonprofit” or “community organization” for “social business”)…well then we’re really on to something.

A Real Example from Nigeria

Imagine, for example, that your social impact report helped you do real things, immediately. For Psaltry, a Nigerian company that helps smallholder cassava farmers, impact data gathered by our team at 60 Decibels helped Psaltry decide to open three new processing plants closer to customers (they discovered that customers’ earnings were taking a hit due to high transportation costs).  This same impact report uncovered that farmers had cashflow issues. Psaltry is using this data to help them get a loan from a local bank: the data helped them convince the bank of the need for this loan and how it would be used to help farmers. You can read their whole story here.

It’s Time to Stop Minimizing a Core Activity

The point, though, is not about this particular impact study—though the results, and the company’s responsiveness to them, are all outstanding.

The point is to ask ourselves: how have we allowed the data we gather about mission achievement to become peripheral to how we run mission-focused organizations? How have we created an approach to understanding our impact that should be minimized so we can “get on with our actual work?”

To the question, “How much social impact measurement is enough?” I’d give two answers:

One: if you’re doing it to prove something to someone, then gather the least data you can to demonstrate that proof, and then stop.

Two: if you’re doing it to learn, if you’re doing it to serve better, if you’re doing it to listen better, so that you can accelerate achievement of your mission, then I’d be really careful about marginalizing or minimizing it.

Instead, I’d bake it in right at the core.

Live Fireside Chat on Tuesday

I will be doing a live, virtual fireside chat tomorrow, Tuesday September 17th at 2pm Eastern Time (New York), part of a series hosted by Making Money More.

If you’d like to listen, you can register here to receive the dial in details for tomorrow’s chat.

They’ve got a great lineup in the next few weeks, you also might want to tune in for:

Hope to see you there.