Financial Inclusion Helps Refugees Move From Aid Recipients To Earners, And Tax-Payers

Financial Inclusion Helps Refugees Move From Aid Recipients To Earners, And Tax-Payers

The world’s 25 million refugees, about the population of Australia, can be viewed as a huge problem, a great marketing opportunity, or a wasted resource. See the UN for a breakdown of the states and refugee populations.

Village Capital, named the best-connected impact investing organization in the world, sees refugees as an opportunity for host countries to use financial services apps to convert the involuntary exiles from a problem to a valuable national resources. It does both curation and seed-stage investment in 110 startups through an accelerator program and has released a report that focuses on refugees in Europe and what fintech could do to improve their access to finance.

The report found that since 2014, more than 3.5 million people have submitted applications for asylum in EU countries, and 1.8 million had attained refugee status, which provides legal protection and usually some form of income from the host country or from United Nations agencies. But full financial participation, such as a personal banking account, loans or credit cards, are often difficult to obtain.

Financial services for refugees bumps into banking regulation and right-wing political opposition to refugee assistance. An EU regulation passed in 2015 requires banks to offer basic payment accounts to all customers legally residing in EU countries, including asylum seekers and refugees. So far though, only half of EU bank regulators have have issued formal guidelines on the financial integration of refugees.

Financial service providers have not had the appetite to offer refugees bank accounts, said Ben Younkman, ecosystem development lead at Village Capital. The accounts are not large, but the risk they could bring is significant, especially around regulations like Know Your Customer (KYC). Banks also face language barriers and the need to educate refugees in financial products and terminology.

“Even when refugees have state-issued residency permits, most financial institutions still require a passport, and many do not accept passports from the top refugee-producing countries,” the report says. “This means that refugees cannot pass most banks’ know your customer (KYC) regulations and access financial services.

Fintechs that become successful may outgrow the refugee market. N26 accepted refugees as customers until it registered as a bank. It then came under German banking regulations which require banks to use the Postbank service to check that a potential client meets KYC requirements.

“The Postbank has a list of nationalities from whom it cannot process passports (including Syrians, Afghans, and Pakistanis, among others).”

Refugees often want to send money home, but if they are from a country on sanctions lists, like Syria or Iran, that poses a problem for the individuals and a bank, almost compelling refugees to use informal systems. For host countries, getting refugees into the national financial system means they can more easily qualify for jobs, they are more likely to open a business or they can pursue education or certification to convert their professional qualifications to European requirements.

“If we consider that the majority of refugees arrived in Germany in 2015/16, and need 3-6 years to convert their qualification or start a business, this means that the number of employed refugees will rise considerably over the next few years,” the report says.

Financial inclusion helps more than the refugees, it leads to improved tax collection for the government.

“In 2015, 5% of refugees were paying taxes on wages to the German government; this rose to 29% in 2019.”

The first task in helping refugees settle is establishing their identity. Many have lost their identity papers, or their credentials are not accepted by European countries. The refugees may be on the move across countries, or within camps. Biometrics, including iris scans, are making it easier and also let women verify their identity without taking off their head coverings.

Several startups are developing more detailed information that individuals can control. Village Capital is working with Gravity which lets users develop a digital footprint from data in apps, and data held by suppliers and a credit bureau, stored on a digital wallet. From there, they can share it with service providers, who can use it to serve their customers better. Users can also share their data with organizations, for targeted outreach to individuals based on their profiles, to offer localized training for professionals new to the country, for instance, without the need for a central database.

Arcadia is doing something similar around digital ID but with more peer to peer lending, Younkman said. The company has a blockchain solution that lets refugees transfer money independent of a bank.

“Arcadia’s impact goals are threefold: increase operational efficiency and revenue for NGOs; enable refugees and donors to connect with each other on a peer-to-peer level; and enable refugees to have free agency to start businesses, transfer and receive cash, and administer their money as they see fit,” the paper says.

A third company supported by Village Capital is Wajenzi, a crowd-investing platform that allows refugee and migrant entrepreneurs to submit investment opportunities to sell shares of their companies and access funding.

“A substantial number of refugees were self-employed in their home countries, and many see business creation as a way out of poverty in their host countries,” according to the research paper. Although hopes for fintechs in financial inclusion for refuges were strong a few years ago, few have done well. Village Capital saw an uptick of fintechs working with refugees in 2016, but most of them flamed out.

“We wanted to see why that happened and if we can identify good companies with strong solutions and give them expertise from PayPal and some support,” said Younkman. It is challenging work and many fintechs didn’t want to take on the task of navigating the camps and the bureaucracies.

“They can’t do it alone. They need access to governments, strong corporate partners and enthused investors,” he said. The world of refugee assistance is a small one, he added. Village Capital is working with Amplio Ventures, which provides early stage capital for businesses restoring refugee stability and with the Refugee Investment Network, which describes itself as “The first impact investing and blended finance collaborative dedicated to creating durable solutions to global forced migration.”

While Germany was a great place to launch the program, they see opportunities to expand this type of programs across Europe.

“Many of the challenges refugees are facing in Germany exist all over Europe,” said Younkman. “We’d love to use this program as a launching point to scale this type of exploration around fintech solutions for refugees across the continent and build the ecosystem necessary to support these solutions.”