Over two billion working-age people have no access to ordinary finance services, like bank accounts, payment cards or loans. These people are especially in developing countries and emerging economies. But not only there, for example, in the UK two million people cannot open a bank account. Finance services are key for many other things in life, without them people are outsiders. Fintech and mobile can change all of this.
People don’t need a credit card, they need credit. People don’t need a bank account, they need a safe place to keep their money, an easy way to receive money and make payments. When we think about solutions for financial inclusion, it is not about a focus on old finance services, but how to utilize technology and directly embrace the next generation solutions.
Financial inclusion is not only about tools to handle money. Financial data is a very important part of inclusion. Know-your-customer (KYC), credit ratings, and finance history are crucial elements in most of finance services. Without financial data a person is not able to benefit from most of financial services.
Many companies are now developing services that enable excluded people to receive their salary into an online account, make payments, transfer money to the family, and even apply for loans. Those solutions definitely help these people. It helps also economies, when for example the solutions can help collect tax information and pay taxes.
But they are only the first steps. Especially finance data and creditworthiness needs further solutions. It is also important that people are not tied to one service alone and its own customer history, but people are able to use different services, compare them and prove their history there too.
Traditional credit rating is missing or inadequate in many developing countries. At the same time we see many problems in credit ratings in the most developed countries too. It can be problematic especially for young people and immigrants, who start from scratch. At the same time there are privacy concerns. Circumstances of people nowadays can change rapidly, when there are societal changes in working relationships and even family relationships compared to earlier.
All this means we need new solutions for financial data and ‘finance-ability’. The need exists in the developing and developed countries. Actually, it is not only for people, but SMEs too. SMEs encounter the same problem, and sometimes it’s even worse. It is difficult to open a bank account with all regulatory requirements for banks, and acquiring debt capital for an SME is particularly cumbersome.
We need totally new angles to solve this problem. The relevant data is not necessarily only data from finance services, but many other data points to help address requirements around knowing the customer and also considering his or her creditworthiness. This is a significant opportunity for fintech companies, but also for other parties, for example, mobile carriers can have a role in this. Most probably it doesn’t make sense for carriers themselves to enter the finance data business, but opportunities for partnerships are emerging in these services.
Financial inclusion is one of the biggest fintech business opportunities. But it is not only a business opportunity; it enables a normal life and equal opportunities for now excluded people. It is also important for countries and economies, when all residents are included properly in the economy and also pay taxes. Financial data and finance-ability is an important part of this and it requires cooperation of many parties that offer data and develop data solutions. In practice, it means, for example, cooperation of fintech companies, mobile carriers, retail companies and governments.
The article was first published in Telecom Asia.
Nationalism and protectionism are rising in some countries, and we see speculation about global trade wars. National governments naturally want to control things as much as they can, especially when it comes to online businesses and services, particularly finance services. But as more and more people and businesses get connected to the internet, the way they interact with each other both inside and outside country borders is evolving fast. From a services standpoint, we are moving from a decentralized world to a distributed world for many services. Finance services are slowly but surely heading in the same globalized direction, and while government regulators may not like that, there’s little they can do to stop it.
E-commerce, social media and low-cost communications services have changed our lives significantly during the last ten to 20 years, but money and finance services have developed slowly in comparison. It’s an area that’s not only heavily regulated but also dominated by old banks that have wanted to protect their positions, as well as expensive services for transferring money or keeping an account. Governments are also very interested in maintaining the status quo for such services when they want to follow the money (e.g. to prevent money laundering or terrorist financing) and collect taxes.
Despite that, however, finance services clearly are evolving. Today, we can send money via international money transfer services, and even some chat, social media and email services. (We’re actually seeing speculation that Apple, Google and Facebook could become banks if they so desired.) We also have neo-banks, like N26, that are only in your mobile and bank’s servers. You can open a bank account from many countries without visiting a branch. And then there are p2p and crowd-financing and lending services that enable people to get loans and raise capital from other people and institutions directly.
All of this heralds a push towards more decentralized finance services, although most of these services are local (on the national level) rather than global.
However we’re already starting to move beyond this decentralization model. Bitcoin and blockchain have been important buzz words in FinTech for a couple of years – more generally, we talk about digital currencies and distributed ledgers. Some people say distributed ledger technology (such as blockchain, which is just one model) will do for finance what TCP/IP did for the Internet – it could change the whole finance world, just as the Internet has changed many businesses and operations since the 1990s.
When this starts to happen, we’re no longer looking at decentralized finance services, but distributed finance services. (See this article for a good visual illustration of the difference between decentralized vs distributed.) Distributed finance services enable real p2p, bypassing some parties (like banks) to authorize and control your monetary transactions. It is more like having digital tokens – a huge distributed network can identify your tokens, confirm they are real, and allow you to send and receive them.
As one FinTech expert said: you don’t need a credit card, you need credit, and you don’t need a bank account, you need a place to keep your money. What we’re really talking about here is re-inventing finance solutions, whether for investments, loans, investment vehicles, or many other instruments that enable individuals, companies and governments to finance their needs. We still need finance services, back office functions and applications, but they don’t need to be as old as our finance institutions.
Blockchain is admittedly a somewhat overhyped term. Banks use it for their internal database solutions – but that is not really what “distributed” means. We already have a lot of open API solutions, p2p services and cloud-based finance back-office services – very concrete components to build new solutions for distributed finance. But we still need to see some development with distributed ledgers to make it real.
But this brings us back to the earlier point about protectionism and border control. How can we see a more distributed finance world if governments that want to regulate finance services want to take more control?
Well, we know from our experience with the internet (which, again, is based on TCP/IP, an open standard) that it’s not easy to control things when people have easy low-cost access to them. Of course, some countries respond with national firewalls, and they can slow down development – but they cannot stop it, whether because of political pressure on finance institutions or younger digital-savvy generations who have no patience for old-fashioned solutions and will seek out services that make sense to them. At the very least we will see distributed finance solutions appear within country borders. This will be a huge challenge for national finance regulators, but perhaps it’s the incentive they need to think of new ways to collect taxes and manage fiscal policy.
Despite all the idealism about bitcoin and blockchain, the finance sector will probably still develop more slowly compared to other areas, and there will always be some form of regulation in the future. But we have enough evidence to conclude that nothing will stop this development. It is just a matter of time before distributed finance services hit the mainstream and replace old services. Those old services won’t completely disappear – we’ll still have them just as we still have circuit-switched phone calls today. But when finance services become globally distributed, then we can talk about real globalization.
This article was first published on Disruptive.Asia.
The emergence of startup hubs and FinTech trends like digital currencies and distributed ledger technology are changing the balance of the world’s finance hubs towards more democratic finance services that represent everyone – and that’s a good thing
We are witnessing the shift in the geopolitical environment and how machines can change institutional structures. At the same time, we see a lot of development on a local level that is partly linked to the global development yet partly independent. For example, we see new emerging startup hubs, while FinTech and political decisions like Brexit are changing the balance of the world’s finance hubs.
Startup companies are seen as a driver of economic growth in the midst of these paradigm shifts. Nearly every country wants to have more innovative companies, and Silicon Valley in the US is seen as an example of how companies worth billions can emerge from seemingly nothing. Silicon Valley is still considered to have the most dynamic startup ecosystem, but we’re already seeing examples of some dramatic successes emerge from outside the valley.
In China, for instance, companies such as Alibaba, Huawei, Xiaomi and WeChat have emerged in recent years and can be considered enormous successes. For example, Alibaba’s payment arm Alipay processes over 100,000 transactions a second during a busy peak, while Visa typically processes under 10,000 transactions a second. Alipay will process 10 times more transactions a second from a handheld than a traditional leading credit card company.
A key paradigm shift here is how we’re already moving beyond the decentralization model. Bitcoin and blockchain have been important buzz words in FinTech for a couple of years – more generally, we talk about digital currencies and distributed ledger technology. Some people say distributed ledger technology (of which blockchain is just one model) will do for finance what TCP/IP did for the Internet – it could change the whole finance world, just as the Internet has changed many businesses and operations since the 1990s. When this starts to happen, we’re no longer looking at decentralizedfinance services, but distributed financial services that enable real p2p, bypassing some parties (like banks) to authorize and control monetary transactions.
With Asia emerging as a leading economy in the world, several countries and cities in Asia are building their future positions. For example, Singapore and Hong Kong must be active in FinTech to guarantee their positions in global finance in the future. Other counties like Vietnam and Malaysia are doing very active and systematic work to develop their own startup and entrepreneurship ecosystems. It is no longer about trying to emulate Silicon Valley, but developing a comprehensive digital ecosystem with services to facilitate and develop startup services, funding and support for growth companies.
We see financial services playing a fundamental role in enabling this development, but they can also help bring benefits to all people. Currently, banks and other finance institutions are seen as representing an arrogant establishment that exists to make the rich richer. More democratic finance services should represent everyone, enable operation of business and their capitalization from anywhere in the world, while also enabling fairer systems for tax collection and wealth distribution.
Emerging economies, intelligent machines, and the rise of the middle class in emerging markets are shaping the global economy, as well as all local economies. This has also influenced most companies in the world in terms of how they develop future offerings, make their products and reach their target audiences. It is a challenge for politicians to manage this development in a peaceful way, but an important part of the solution must be the promotion of changes that bring benefits to all parties, not only a few. At the same time, the solution is not to stop development, but drive development and wealth distribution.
This article is based on the Grow VC Group Research Report, “Machines, Asia And Fintech – Rise of Globalization and Protectionism as a Consequence.” The article was first published on Disruptive.Asia. The report is available here.
Prifina launches its products in 2017. The products will change, how data, profiling and artificial intelligence are used in the finance services. We utilize the latest fintech solutions, like distributed ledgers, digital identifications and moderns server solutions, but our aim is to change the customer experience. Before the launch it works with some selected finance and technology sector partners and test customers. If you are interested to find out more or be a partner or test user, please contacts us.