So in Doing Good is Good Business, which is a class at ITP in collaboration with UNICEF, I am part of a team that is looking at the domain of finance and is trying to come up with a “provocation” for the industry. I guess what that means is that we have to come up with a proposal for a business in finance sector. There are no real rules around it, just come up with something viable (viable?).
- Problem statement should be (well) defined and there should be some data/research to prove (on paper at least) that the problem is real.
- The solution should, more or less, adhere to the nine principles of innovation by UNICEF.
Ok so what kind of business can we build in finance sector?
Research, part 1
What services do Banks provide:
- Store of value
- Transferring value
- Currency Exchange
What is the focus of big FinTech startups:
- Digital wallets (Online payments and money transfer)
- World Remit
- Currency Cloud
- Transfer Wise
- Investment solutions
- Funding Circle
- Money Managers
- Crowd Funding
Technologies that are disrupting Finance sector:
- Digitization (digital currencies, currencies in digital form)
- Internet + Mobile
- AI + Big Data
- Cloud Computing
Research, part 2
- Financial inclusion is vital for poverty alleviation. Financial exclusion means no bank account to save for the cost of schooling or putting away money for a rainy day. No way to get a mortgage or a loan. No way to get a credit card or anything to get through a difficult month. No insurance when your health fails or your house burns down.
- 2 Billion adults are financially excluded. This is half of the world’s adult population.
- Every year 10-30% of world’s poorest households manage to escape poverty either by finding steady employment or through entrepreneurial activities. During the same period roughly an equal number of households slip below the poverty line because of some financial shock such as health related emergencies, crop failures, livestock deaths, farming equipment breakdowns, wedding expenses etc.
- Why aren’t traditional banks able to serve everyone? In economic terms, the market is failing and reasons need to be studied. Some of them are:
- Lack of information. Banks don’t have enough information to assess risks for customers from poorer sections. Even from customer’s side there is a failure to understand the products being offered causing them to make poor decisions.
- One of the angle is that of “transaction costs”. People living in poor areas deal mostly with cash and rely on visiting the bank branch for most of their needs. It takes approximately $2 or more per transaction if you run a brick and mortar operation. ATMs can get that down to 10-20 cents per transaction. Mobile phones can lower it further to 5 cents. Hence banks prefer customers that can be taken care of using mobile.
Specific to Bill and Malinda Gates Foundation:
- What are solutions have the foundation applied to increase financial inclusion?
- Commitment savings accounts in Malawi
- bKash (get the payrolls paid electronically rather than in cash)
- Key problem areas that they see:
- How can we bring down the time to open a bank account from almost a month in worst cases to 30 seconds?
- How can be device new sources of distribution of financial services so that reliance on brick and mortar stores is reduced.
- What could be a profitable business model to provide digital payments facilities to poor populations?
- Currently the payment systems rely on making money off of float in the account or lending to the customer through intermediation. Both the models are unsustainable for the poor population.
- One idea is cross selling insurance or non-financial services, such as reducing customer churn for a mobile operator. This is basically the driving force behind m-Pesa and other mobile money in Africa.
Mobile money, things like m-Pesa, is the only alternative payment system that uses no banking what so ever (apart from bitcoin). Following are the key takeaways:
- It is huge. It is available in 93 countries and support 33 million transactions per day.
- At least 19 markets have more mobile money accounts than bank accounts. There could be several factors to it:
- Opening an m-Pesa account is much easier, faster than opening a bank account
- Over the years m-Pesa has built a lot of trust in poorer communities. Something that banks have not, probably because they don’t care about poorer customers
- It works on the cheapest of feature phones
- It is available everywhere. 37 markets have more registered agents than bank branches. A typical registered agent is operating m-Pesa service as a side business
- Its operation layer comprises of a huge network of agents, real people. This is costly and difficult to manage
- The technology layer is also ripe for a change. By the year 2020 most people while move from feature phones to smart phones with data. The technology currently relies on USSD, it will change to internet. There are certain security risks to it though
- Other services such as remittance, micro lending, business transactions, savings account, loans, insurance etc have come to mobile money which makes it a powerful alternative to traditional banking
- India does not have a huge mobile banking network because of regulations that mandate mobile money to be linked with a bank account
Access to credit is one of the key service that people who are financially excluded miss out on. This limits their ability to absorb financial shocks with dignity or lift themselves out of poverty by investing in their small business. Micro finance is a great non-bank linked solution to the funding problem. Some key points:
- 95% of loans go to women (I think this is Bangladesh specific datapoint)
- The repay rate is very good, 97%
- In some areas it has been exploited. Poor people have become poorer and in debt. Micro finance companies have earned huge profits off of poor people.
- It has neither reached the poorest of the poor nor increased the average income of those it has reached.
- Micro finance is not a silver bullet for all kinds of financial problems. It is a way to provide small credit to poor people. Not everyone needs credit, sometimes they need a way to save their own money or insurance in case something happens, or a way for them to get money from their remote connections.
Future of Banking
This one is a wormhole because there is a lot about finance that I don’t understand. The focus of my research was this assertion by David Yermack in a class previously that banks will seize to exist in the future. I wanted to know more about this, what did he mean and how will banking look like in future. I found that a lot of people are speculating on this topic. Some people agree with David and say that tech companies like apple and google will be the banks of the future. There are some people who say that banks will exist but the nature of services that they provide will change. They will become the backend of banking while tech companies will control the consumer facing part. And then there are some who say that there are some services that banks provide that tech companied will never get into, like mortgages etc.
Apart from banks and tech companies there are other players that will influence the future of banking. Players like visa and mastercard, what role will they play in the future? They exist to mediate transactions between banks. If banks won’t exist in a traditional sense, why would these companies exist? Google does not need a mediator to send an email kind of file to, say Paypal.
And finally there is the biggest disruptor of all, the blockchain. This might change the very nature of money and identity, two things core to banking as we know it.
This is a picture that I have in mind. I am pretty sure this is a grossly incomplete picture since finance is so new to me that I don’t know what I don’t know. But here it goes:
- All money will be digital. This is quite certain. Whether it will be a decentralized global currency or a national currency like dollar, we don’t know.
- People will not have bank accounts they will have digital wallets.
- There may be many players in this space like there are many banks to choose from now. This will include tech companies, visa, mastercard and even some traditional banks.
- People will get their salaries etc directly in their wallets. All forms of online and offline transactions will happen through these wallets.
- Products like savings accounts, short term credit, exchange etc will exist in some digital form inside these wallets.
- Internet of things will make the whole situation a little more interesting as they become smarter and start participating in commerce.
- Banks or bank like organizations will be needed to provide more complex services like loans, investments, insurance etc. Maybe?
- I am mostly unaware of the needs of businesses when it comes to banking. I think insurance and credit are very important. I don’t know how those needs will be fulfilled. I am not sure if a business wallet would suffice?
Clearly a very fuzzy picture at the moment.
Universal financial inclusion is clearly a very very important problem to solve. It essentially means that every adult in the world should have access to the following:
- Credit & Loan
Bank or not, these services should be available through formal channels to every adult. The first step to do this is universal access to digital currency. There are several advantages to it that would start a virtuous cycle, for example:
- It will make it much cheaper for all financial organizations to serve these people
- Their credit profile could be created giving them access to loans and credit
- They will be able to take part in e-commerce
The mobile money phenomenon in African countries has shown how people are ready to switch to new forms of transaction if the system is designed correctly. So the challenge is:
Problem statement v1
“How can we transition everyone to digital currency?”
How do we create products that more effectively help people save? Saving products with commitment features and other decision aids can significantly improve client welfare.
Is there a viable model for insurance? Government delivery of insurance is often ineffective and inefficient and no real for-profit model for insurance delivery has shown success. Informal insurance patterns through better P2P transfers has produced benefits. Automated weather index models and satellite data show promise.
How can we provide credit for the poor? Traditional microcredit has been ineffective in increasing the average income or consumption of households. Digital credit products that use calling and handset data to automate the delivery of digital credit show some promise. But the market is still not aligned to client welfare and reaching to the poorest. How can we scale safe digital credit?
What kind of products can be designed especially for women and the poorest. How can companies be incentivized to cater to these groups.
How can we make sure that financial empowerment of the poor sections leads to productive trends increased girl school enrollment, better agriculture practices, better maternal health and so on.