FINTECH FOR THE WATER SECTOR: ADVANCING FINANCIAL INCLUSION FOR MORE EQUITABLE ACCESS TO WATER

For many low-income households in the developing world, incomes are highly variable and uncertain—this is often a significant barrier to accessing clean drinking water and safe and convenient sanitary facilities. In rural areas, incomes often vary even more, making it difficult for farmers to invest in irrigation for their fields. High up-front costs combined with irregular incomes result in unequal access to water, sanitation, and irrigation. Households typically can, and should, cover the costs of accessing water resources, but they cannot do this without help. Financial inclusion can help households access water resources. Financial inclusion focuses on ensuring everyone has access to useful and affordable financial products and services, including transactions, payments, savings, credit, and insurance. There are numerous examples of financial inclusion in the water sector. To help make connection fees more affordable, some water utilities offer installment payment plans. Since the late 2000s, microcredit and other financial services have been explored as tools for helping households access water resources by spreading the cost of an expensive purchase, such as a cistern, latrine, or irrigation system, over time. Because of the positive externalities seen in the water sector, there may be limited scope for subsidy and more active engagement in the market by the public sector. However, the emerging field of financial technology (fintech) can help address barriers to financial inclusion in the water sector while potentially reducing or eliminating the need for subsidy. Fintech is the application of new technologies to financial services, often by smaller, nimbler firms that focus on providing simple solutions for specific needs of consumers and businesses. Increased smartphone usage and cheap computing power have enabled fintech businesses to thrive. Generally, customer-facing fintech solutions remove friction and lower costs, often increasing speed and adding value versus traditional financial services. Fintech solutions already address some of the needs of developing-nation households— applications include payments and mobile money, pay-as-you-go (PAYG) models, insurance technology (insurtech), and virtual banks. Solar energy providers have been at the forefront of fintech, integrating a variety of payment plans supported by PAYG shutoff technology into their products. Although marketplace platforms such as Alibaba and Amazon Marketplace were initially developed for urban e-commerce, platforms that serve the distinct needs of smallholder farmers are starting to become a reality. This paper explores how fintech can support expansion of market-based solutions for water, sanitation, and irrigation, identifying several use cases where fintech is already being used to address financial inclusion and access to water. In addition to ways that fintech can help households access water supply and sanitation services, the paper also examines how fintech can help water utilities serve low-income customers more effectively and assist small-scale service providers in growing their businesses. viii Fintech for the Water Sector Water and Sanitation for Urban Households Both households and service providers can benefit from fintech applications in water through more cost-effective access for households and greater efficiencies for utilities. For households, fintech can simplify the task of paying up-front costs such as connection fees or largely eliminate the up-front costs through PAYG models or targeted subsidies. Fintech-enabled commitment savings models offer households another way to manage up-front costs and can be combined with remittance tools to increase households’ saving power. Finally, fintech innovations are creating new efficiencies and easier access for microfinance loans in support of water and sanitation. Large utilities can benefit from fintech by using PAYG to reduce payment risk, enhance billing systems, and link with credit data to reduce risk and boost revenue. PAYG enhancements are particularly promising for prepaid standpipes, which bring access to clean water to the poorest and often replace higher-cost options from informal providers. Small-scale providers face their own challenges in management and access to finance, and they can benefit from PAYG models as well as simplified accounting and billing systems to increase efficiency and transparency, thus improving their creditworthiness. Smallholder Irrigation Although irrigation systems can help smallholder farmers multiply their productivity, the systems are relatively expensive: Farmers incur capital expenses for equipment and operating expenses to fuel pumps, and harvest cycles result in irregular cash flows. Smallholder irrigation technologies such as solar-powered water pumps are rapidly increasing in availability and declining in cost, though cost remains a significant barrier for many farmers. Meanwhile, without effective ground and surface water governance, rapid expansion of smallholder irrigation can lead to water depletion and degradation in water-stressed areas. Smallholder irrigation solutions can be readily standardized and scaled to a large number of customers, creating ideal conditions for fintech applications. By reducing transaction costs and expanding access in rural areas, fintech can support the growth of smallholder irrigation through PAYG business models and savings tools, which some vendors are beginning to explore. Irrigation systems must be considered within the broader context of a farmer’s business; therefore, innovations such as alternative-data credit scoring for farmers and marketplace platforms for agriculture value chains can significantly improve farmers’ opportunities to access irrigation. In addition, fintech may help in managing water resources more effectively. The Way Forward Although global access to water, sanitation, and irrigation is increasing, without increased financial inclusion, many will continue to be left out. Fintech tools can enhance the effectiveness of financial inclusion for water; as costs continue to fall and technologies mature, new use cases are likely to emerge. In particular, the increasing accessibility of smartphones for the poor will continue to open up new possibilities. As new fintech tools are developed, they can readily be adapted to fit the water sector. However, taking advantage of fintech for water requires a coordinated effort between the public and private sectors. Governments can provide a supportive policy environment for fintech, subsidize broadly beneficial tools such as credit bureaus or marketplace platforms, and promote financial literacy. Donor agencies can support policy development and encourage cross-sector collaboration with fintech companies, as well as providing funding for social enterprises combining fintech and water. Utilities have an unprecedented opportunity to take advantage of fintech tools to improve efficiency and lower costs. Finally, fintech companies stand to benefit from the business opportunities associated with resolving current inefficiencies in the water sector and broadening financial inclusion for water.