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In the GSM Association’s ‘State of the Industry Report on Mobile Money’ for 2018, they found there to be 866 million registered mobile money accounts (a 20% increase on 2017), with a staggering $1.3 billion processed daily by the mobile money industry.
By: Ben Mullins, Contributor
If you were asked to come up with a list of the top business buzzwords of the past decade you would be hard-pressed not to mention Fintech. Financial technology or Fintech for short has been a constant fixture in recent years whether it is Mobile Banking, Smart Keys, Contactless Payment, Cryptocurrencies, or Challenger Banks, such as ‘Monzo’ or ‘Revolut’. Aside from speeding up the way we pay, share and move our money, financial technology has opened the door to a whole host of previously financially marginalized people and businesses by vastly increasing economic opportunity and financial freedom, in particular within emerging markets.
The IMF’s 2019 ‘World Economic Outlook‘ paper stated that emerging markets make up almost 86% of the world population whilst only accounting for 40% if the global economic output. Moreover, emerging markets account for nearly 90% of people under the age of 30 (PWC). It is clear then that with the majority of the working-age population residing within these markets there is a clear rift between potential and actual economic growth. The reasons why this gap is so prevalent, and how financial services are helping to bridge the gap and empower people and businesses in emerging markets through technology and innovation will be the subject of this article.
The history of financial services and technology’s relationship traces back to 1866 with the implementation of the first transatlantic cable being laid. By 1918 this progressed into Fedwire (Federal Reserve Wire Network), a real-time gross settlements transfer system that was run by the US Federal Reserve Banks that facilitated the transfer of funds electronically between its participants. From Post-war more recognizable forms of technological financial services began to appear with Diners Club being founded in 1950 and then the invention of Telex in 1966. Professor Douglas Arner of the University of Hong Kong describes these innovations as ‘Fintech 1.0’.
‘Fintech 2.0’ sees the introduction of the first Automatic Teller Machine (ATM) in 1967, the birth of NASDAQ in 1971, and the introduction of online banking in 1983. Despite online banking inception in ’83, it took some time to gather steam as it would appear that breaking customer habits ingrained over so many years was not straightforward and especially when involving nascent technologies. So much so that by 2001 only 8 US banks had over 1 million online customers. Which at the time was a huge milestone and moreover highlights the astronomical growth of online banking and more generally financial services marriage with technology that we would begin to see skyrocket over the next two decades.
‘Fintech 3.0’ is what we have more widely come to understand as the fintech sector today. With the introduction of PayPal and other person-to-person transfer platforms, the launch of iPhone and the introduction of BitCoin, to name just a few. The face of financial services for the average customer has been rapidly evolving. Company after company have begun to implement new forms of fintech applications into their businesses. This in part had much to do with the Global Financial Crisis in 2008, alongside the juggernaut that is Silicon Valley harnessing new technological practices and innovations to create a wealth of tech start-ups that would see the state of consumer banking change rapidly. The need for big banks to lower costs post-crisis and growing customer distrust subsequently left a gap that technology-led firms would come to fill in the form of challenger banks, smart technology, and intelligent point of sales technology.
If you have lived for most of your life in a highly developed economy with widespread access to banks and other more traditional financial institutions, the most noticeable impact the emergence of fintech may have had on your day to day life is convenience. Contactless technology in your smartphones, mobile banking, and so on have all freed up a lot of time and effort that was previously spent queuing in your local branch to cash a cheque or going to the foreign exchange bureau to get currency for a vacation. Nowadays, it is as simple as logging on to your smartphone and moving money around on banking apps or sending money in no time via providers like PayPal or Venmo. With no shortage of competition in the industry, firms have been racing to provide faster and more efficient methods of banking to rise to the top of the pile. As such, over the past years, the number of ways we can pay and the speed at which transitions are processed has been rapidly accelerating.
Although speed and convenience are well and good, the rise of these new remote banking and finance methods have hugely empowered millions of customers across the world who now can pay and be paid for goods and services with consummate ease. In the time before online banking and fintech were prevalent, emerging market’s, particularly those in rural areas found getting to a physical bank to set up an account or conduct any services was hugely inaccessible.
In the GSM Association’s ‘State of the Industry Report on Mobile Money‘ for 2018, they found there to be 866 million registered mobile money accounts (a 20% increase on 2017), with a staggering $1.3 billion processed daily by the mobile money industry. Sub-Saharan Africa and South Asia saw the highest rates of customer growth with 45.6% and 33.2% respectively. This growth of mobile banking isn’t limited to emerging markets, with the UK estimated to have mobile banking overtake branch visits by 2021 (The Guardian). The benefits in developed countries can be felt all over but the gig economy and contractors are harnessing advanced payment technology to achieve greater degrees of flexibility and ultimately economic benefit. This is owed to the worldwide availability and use of smartphones growing, paired with the ease and growing use of financial service technologies they can be paired with, steadily making the need for customers to visit a traditional bank more and more obsolete. From 2016 to 2020 global smartphone users worldwide have grown from 2.5 to 3.5 billion (Statista).
One commonly cited case study that illustrates the power that financial technology can have in economincally empowering people is ‘M-Pesa’ in Kenya. Three years after its inception, which started out as a very basic sim-card money transaction service, M-Pesa was being used by 18 million customers in Kenya. Furthermore, a staggering 43% of Kenya’s GDP was going through the service (University of Hong Kong). Now it has grown to become a totally formed financial service allowing access to loans, the ability for savings, and works in conjunction with local banks and merchant payment services (Reuters).
“The survey by the central bank and FSD Kenya, a campaigner for financial inclusion found that 41% of the population had a bank account, meaning the broader rise in access to financial services had been driven by mobile phone services. Only 14% of the Kenyan population had bank accounts in 2006 when the survey was first carried out. The figure rose to 34.4 percent in 2016”. (Reuters).
More than 60% of the world employed population works within the informal economy (ILO). In the G20 Policy Guide for Digitization and Informality it states that “Digitisation, or the adoption of digital technologies and approaches, offers a transformational solution to financial exclusion driven by informality. Rapid technological innovation is profoundly reshaping the production and consumption of goods and services. One important area where the disruptive impact of new technologies, particularly digital technology, is already visible is financial inclusion. The use of mobile money and digital payments has increased heavily in the past few years, and this might have contributed to the inclusion of more people into the formal financial system”. The opportunity for both consumers and the financial sector financially including those in the informal sector through technology and innovation is vast and can go a long way in advancing those emerging markets. Furthermore, the implementation of these new and easy to use technologies in emerging markets allows the transfer of remittances, loans, and general payments to allow the users to benefit from many of the perks that traditional banking offer and a variety of different ways to channel their earnings and grow.
The introduction and rapid growth of these financial innovations have come at an opportune time. With such a large proportion of the world’s working population residing in these markets and these generations being increasingly more tech-savvy there is huge potential for growth. “Technology has leapfrogged from branch banking to e-banking and now mobile money, which has helped to create pockets of strength even amongst the less financially inclusive countries” (PWC). This has been dubbed by many as “The Fintech Revolution”.
The past few months whilst in the COVID 19 pandemic have shone a light on the vital importance of fintech and financial inclusion in emerging markets. As with a huge proportion of the world countries, COVID regulations on movement and access to workspaces and beyond for workers has hit the countries of emerging markets equally hard. Accessibility has been stripped down to absolute minimums. The opportunity to visit a physical bank is extremely limited, if not entirely impossible for many. In which case the ability for those to manage their money in times of need becomes extremely hard if it were not for the opportunity provided by access to mobile phones, and in turn, financial technology (World Economic Forum). On the other hand, those with access to fintech via their phones, which numbers show are growing year on year, can access financial resources with ease and maintain their business and livelihood.
It is important to note that despite all the progress that has been made in increasing the worldwide number of banked individuals, it is only progress and there is still a very long way to go in spreading financial freedom across developing countries. There are still over 1 billion unbanked people globally and 3 billion are undeserved (MIX Study). Furthermore, a Forbes article cites that, “startups surveyed reported a female customer base of only 36% at the median”. Whilst financial freedom is undoubtedly growing, it is not gender proportionate and men are reaping far greater levels of accessibility and benefits. Not only does this inequality make the day-to-day lives, business, and saving opportunities far harder for women in these markets but it undoubtedly stifles growth and potential. It is no secret that the presence of diversity in companies and workspaces promotes growth and innovation. Furthermore, as addressed in ‘Fintech Futures – Women in Financial Services 2020’ Report, there is a huge gap that has appeared in the unmet opportunity of serving women as customers which amount to at least $700 billion in foregone revenue each year. It should clearly not only be the prerogative of the markets that are growing to be as inclusive as possible in their growth but also that of the companies servicing this huge influx in financial services technology.
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