Emerging markets: Fintech for the unbanked
If digital payment providers share the cost of building new networks, they might profit handsomely from high volumes of low-value payments between two billion people unserved today by the world’s conventional banks, and become a new testing ground for fintech.
From Silicon Valley to Scandinavia, from London to Singapore, the fintech revolution gathers pace as venture capitalists throw money at what they expect will be a big growth sector, even while mainstream equity investors withdraw capital from conventional banks.
At the Innovate Finance Global Summit in London in April, entrepreneurs shared with Euromoney their plans to disrupt institutional asset management, wholesale payments, SME and mortgage lending, and debt and equity capital markets.
However, the incumbent banks have spread their nets skilfully in the moats around these businesses to scoop up the most threatening innovations in their own accelerators and venture funds. And the so-called disruptors threatening to attack are mostly hoping to be caught in the nets and bought out.
The real proving ground for fintech, the cauldron of innovation for financial services outside the established banking industry and the biggest financial opportunity might lie a world away from Silicon Valley and Silicon Roundabout. It might be in the impoverished rural communities of Bangladesh, Tanzania, Uganda, India and Nigeria.
There it is becoming apparent that embracing secure, low-cost, large-scale digital financial services has clear economic benefits. A growing body of evidence suggests a correlation between the spread of mobile money, financial inclusion and GDP growth. Governments, more anxious to promote economic development first and inclined to worry about know your customer and anti-money laundering second, balance regulation accordingly.
In those countries, building digital highways to transfer small amounts of money offers the best way to fold unbanked people, whose days might consist of multiple time-consuming, high-cost and insecure cash transactions, into the formal economy and at least help lift them out of poverty and cushion a collapse back into debt.
Digital providers, not conventional banks, are best set to do this and the lessons from these countries might point to the future of fintech.
Kosta Peric, deputy director, financial services for the poor, at the Bill & Melinda Gates Foundation – and previously chief architect of SwiftNet, Swift’s global secure network connecting 10,000 financial institutions and corporates – brought this message to the summit: providing services to these populations is not a philanthropic act; it is a big business opportunity.
Peric points out there are two billion of these people and that many are economically quite active – in fact, often having three or four sources of revenue and transacting multiple times a day.
M-Pesa and bKash
The obvious examples of businesses that have grown fast by serving them are M-Pesa, launched by Safaricom and Vodafone in Kenya in 2007, and bKash, an autonomous subsidiary of BRAC bank in Bangladesh.
In their first three years in operation, these two companies attracted 10 million customers – bKash now has 17 million and turned a profit in 2015, just four years after starting up. M-Pesa used to be how poor people paid a motorbike taxi to take them to work. Now it’s how middle-class families pay the school fees.
Other providers are copying them. In Uganda, more people have mobile money accounts than have conventional bank accounts.
Mobile phone companies are playing the lead in bringing digital financial services to these populations and taking advantage of low costs to derive profits from large volumes of low value transactions that would be far costlier to process in cash through conventional branches and ATMs.
They are also learning a valuable lesson, Peric tells Euromoney, in the need to collaborate on building new, shared financial infrastructure that is secure, resilient and scalable, on which they can each then deliver their competing services.
In Tanzania, providers of digital financial services led by the three leading telcos have embraced an interoperable payment architecture across which customers of different providers can transact with each other. The proportion of the adult population with a financial account grew from 12% in 2009 to 50% by 2014.
In its mission to catalyze financial inclusion as a step to reducing poverty, the Gates Foundation is encouraging governments to add their hefty volumes to these payment networks by directly paying salaries, benefits and pensions to populations across them. The next step is to add merchants, so recipients can pay for goods easily with their digital cash.
In the developed world, banks remain supremely confident that whatever innovations the fintech newcomers devise, most will be transacted across the established payment rails the banks built and still control.
In the emerging world, development banks and philanthropic bodies such as the Gates Foundation are providing political risk cover to foster the building of new payments infrastructure. Only a few incumbent banks are taking much interest. They might be well advised to become more involved. Who knows were all this leads?