Fintech: What the poor can teach everyone else
Developed markets have much to learn from the spread of digital financial services among the poorest in the emerging world.
On the fringes of the Innovate Finance Global Summit in London in April, no one seemed to be paying too much attention to four suppliers of technology to mobile phone companies announcing their collaboration on open application programming interfaces to help competing telco operators deliver interoperable digital financial services to poor people in Africa.
The 2,000 strong crowd of fintech business founders and their financial backers filled London’s Guildhall to overflowing to hang on the words of Tim Berners-Lee, inventor of the World Wide Web; to hear repeat entrepreneur Nick Ogden, former WorldPay founder, outline his hopes for ClearBank, the UK’s first new clearing bank for 250 years; and to learn how the big venture capital investors behind so many fintech firms have grown bored of blockchain – it’s so last year – and are now throwing your money at AI and machine learning.
But those who missed the announcement from Ericsson, Huawei, Telepin and Mahindra Comviva passed up an instructive insight. It showed how philanthropists, technologists and financiers can temporarily set aside the brutal instincts of market competition and collaborate on bringing the world’s poor into the formal financial system, in ways that might both grow the global economy and create new opportunities for profit.
The technology providers have agreed to develop open-source APIs to allow their software to communicate so that, straight out of the box, it allows the telco companies that buy it to deliver financial services jointly both to their own and to other firms’ customers. Kosta Peric, deputy director of the financial services for the poor initiative at the Bill & Melinda Gates Foundation, which works to drive financial inclusion for the world’s 2.5 billion people without bank accounts, hosted the announcement.
Peric explained the Gates Foundation’s conviction that interoperability is crucial to achieving financial inclusion through digital financial services, which, revealingly, are mainly being provided by mobile phone companies in emerging markets and not by banks. Uganda, for example, has more mobile money wallets than bank accounts.
He reminded us that it is not simply unfair that poor people, who may be economically quite active, dealing several times a day in ways that would benefit from a secure, low-cost bank account, are excluded from financial services. Being poor is expensive. At the macro level, exclusion inhibits economic growth. Peric pointed to a McKinsey study last year suggesting that lower income countries such as Ethiopia, India and Uganda could grow their economies by 10% to 12% each simply through financial inclusion. Peric read the study as a guide that financial inclusion, if achieved by 2025, could boost global GDP by the equivalent of adding the whole value of Africa’s economy.
Peric pointed out that in Nigeria, the world’s 20th largest economy with 190 million people, where McKinsey suggests the economy could grow by 12.4% to 2025 just from achieving inclusion, the government is pushing to digitize benefits and subsidy payments to the poor. But wide delivery of digital financial services is being held back by strict regulation preventing phone companies from moving mobile money. There are lessons here for the trade-off between regulation and policy goals that apply beyond west Africa.
The absence of interoperability has bogged down some of the so-called level-one projects the Gates foundation has worked on in other emerging countries. Four mobile phone companies in Tanzania were to the fore in providing low-cost digital financial services there, but only when they deployed software patches, so their competing systems could work together, did this take off rapidly.
The Gates foundation approached the four providers of underlying technology to the mobile phone operators covering 70% of its target market for financial inclusion about easing the path to interoperability. The technology providers responded by asking the foundation itself to convene them as a neutral among fierce competitors.
Peric suggested that the banks can learn something about the provision of digital finance services from the phone companies. M-Pesa, launched 10 years ago in Kenya by Safaricom and Vodacom, is the text book case study in the provision of mobile phone-based money transfers and microfinance to poor people.
No letting go
But the banks in Kenya have in recent months created their own interoperable rules and rails to fight back. They don’t want to just let this market go.
They are wise not to. Peric points out that the obvious benefits to poor people of safety and security in low-cost money transfers and safe keeping can then lead to higher margin banking products. It builds out people’s credit histories. By tracing their payments histories, providers can assess them for credit, and so you see providers like M-Pesa moving into small short-term loans – say $10 or so – which might help poor people to operate micro businesses.
M-Kopa, operating in Tanzania, Kenya and Uganda, is another example. It leases solar powered batteries to customers to charge their phones and light their homes. Those who fail to make regular small payments via mobile phone get switched off. Those that stay connected build a payments history.
Emerging markets have the most to gain from financial inclusion. It seems to Euromoney that developed-market banks, regulators, governments and entrepreneurs have most to learn from what is happening there.