Adrienne Klasa looks at how the innovative approach of fintech start-ups is bringing a greater range of services to the financially excluded across the globe.

M-Pesa

When Kenya’s M-Pesa mobile money service became the great financial innovation story of the digital age, it became clear that frontier markets would be at the forefront of the fintech revolution.

The Kenyan mobile money service, developed by telecom company Safaricom, launched in 2007, revolutionising payments in the east African country and beyond. It also changed the way investors, banks and start-ups think about financial innovation for frontier markets and how development economists think about the knotty problem of achieving financial inclusion for the world’s poorest people.

Since 2007, fintech at the frontier has come a long way from M-Pesa’s simple original version, which offered peer-to-peer transfers and a mobile top-up service. New fintech products geared towards frontier market consumers include mobile wallets offering a sophisticated range of services, cheap remittances and innovative crop insurance products using satellite technology.

Growing interest has been mirrored by funding. Globally, fintech funding reached $31bn in 2017, bringing the total over three years to $122bn, according to KPMG.

The frontier challenge

Frontier markets offer fintech companies both a challenge and an opportunity. They are less constrained by legacy financial and mobile infrastructure, incumbent banks, old regulations and set ways of thinking.

“Three years ago you would have heard a lot of fintechs are out to disrupt the banks, and it’s a fight to the death,” says Michael Schlein, president and CEO of global microfinance and impact investing non-profit organisation Accion. “I think people have really moved away from that and they really understand it’s about partnerships.

At the same time, nearly one-quarter of the world’s population – some 1.7 billion adults – remain unbanked, existing in the liminal spaces on the edges of the global economy. Most are among the world’s poorest, concentrated in underdeveloped economies.

Almost by accident, the spread of mobile phones and data services connected to the internet has provided the infrastructure for bringing millions of people into the formal financial sector. According to mobile industry body the GSMA, the number of unique mobile subscribers will reach 71% of the world’s population by 2025, driven by growth in developing countries such as India, China, Pakistan, Indonesia and Bangladesh. Sub-Saharan Africa and Latin America are also growing steadily.

Kenya provided the first trial balloon for the intersection of mobile and new financial technologies. Now, 22.7 million out of the 28 million mobile money subscribers in the country are M-Pesa users. The service’s near-monopoly status prompted Kenyan treasury officials to label it “a plausible fiscal risk” to the economy as a whole in the country’s 2016 annual budget.

But as funding and interest have chased frontier fintech geared towards making financial tools accessible globally, the question a decade on is: how successfully is this being achieved?

A mixed report card

From a development perspective, financial inclusion is key. Having formal financial tools allows people to invest in health, education and growing businesses. Digital payments reduce government corruption in entitlement programmes.

Inclusion also empowers women. World Bank research shows that in Nepal, female-led households spent 15% more on nutritious foods (meat and fish) and 20% more on education after receiving free savings accounts. Female market vendors in Kenya saved at a higher rate and invested 60% more in their enterprises after being given accounts.

According to the World Bank’s 2017 Global Findex, the most comprehensive data set on the state of financial inclusion globally, the share of adults with either a bank or mobile money account rose from 54% to 63% between 2014 and 2017. In sub-Saharan Africa, 21% of adults have a mobile money account, double the proportion in 2014 and the highest in the world.

A total of 515 million new bank and mobile money accounts were opened around the world from 2014 to 2017. However, research by Accion’s Center for Financial Inclusion (CFI) shows that half of those accounts have not been used in at least a year. The number of active new accounts is only about 393 million, indicating a slower pace of growth than in the 2011 to 2014 period.

“Until the Findex came out, I would have told you the trend is with us. Now I’m not so sure that progress is inevitable,” says Mr Schlein.

Resilience – a measure of the ability of a person to access the equivalent of one month’s income in the case of an emergency – has fallen off sharply. “What the data in the Findex is telling us is that the most vulnerable people in the world became more vulnerable [and] that’s very troubling,” says Mr Schlein. “We’re living in a moment of spectacular innovation, but as of today on a grand scale the Findex data is telling us we have a long way to go to get these tools to be useful to people in a meaningful way.”

Sleeping giants

A huge concentration of the dormant bank accounts are in India, which is also the country with the highest concentration of unbanked people globally.

In India, between 40% and 50% of all accounts, some 300 million, are dormant. China is close behind with 100 million. Indeed, across 29 emerging markets surveyed by the CFI, one in five people “have an account but have not used it in the past year”, and this number is growing.

India’s case illustrates that top-down government-led initiatives may not be enough to achieve true inclusion through fintech. Over the past few years, two government programmes contributed to an 80% jump in account openings. The Aadhaar national identification programme was one, which began issuing 12-digit biometric identification numbers to citizens in 2010.

Since then, the Indian government has pushed citizens to link services including mobile SIM cards, bank accounts, pensions and welfare schemes to their Aadhaar IDs. The idea was to reduce corruption and fraud while providing proof of identity, allowing them to access public and financial services.

On the back of this, the Indian government mandated that all banks offer citizens bank accounts. Demonetisation may also have played a role in the surge of account openings. When the government made the surprise announcement in 2016 that 86% of currency in circulation was no longer legal tender, many people quickly moved their wealth into accounts or mobile wallets. 

But rather than laying the foundations for an increasingly digitised financial system, the effects were short lived. Critics argue that more work is needed to achieve true financial inclusion through fintech.

The identity gateway

One of the central challenges to financial inclusion is that 1.1 billion people around the world have no way of proving their identity. This makes opening a bank account, claiming insurance or taking out a loan nearly impossible.

Fintech is innovating on this front. India’s Aadhaar programme is an attempt to tackle this, though it faces criticism on security and privacy grounds. As of April 2018, more than 1 billion Indians had been issued with a 12-digit personal number.

Poor security and the very size and centralisation of the Aaadhaar database has led to several leaks, however. In March, a breach at a state utility revealed the names, ID numbers and bank details of nearly everyone in the state database.  

Other companies are innovating to make identity technology more secure and widely available. AID:Tech is applying blockchain technology to create unique identities for recipients of aid and entitlement programmes. Often, this can take the form of a simple plastic card bearing a QR code, or can be linked to a mobile app.

“If we create an identity platform at the core of what we do, that person’s identity on the blockchain becomes that person’s identity to receive things. So if it’s aid, remittances, welfare, donations, it’s the exact same thing in different flavours,” says AID:Tech co-founder and CEO Joseph Thompson.

The company never manages data centrally, but provides the platform to partners such as the UN Development Programme and the Red Cross.

“From day one, we said the UN Sustainable Development Goals are our business compass. We see that as a trillion-dollar opportunity where all governments have to be transparent, and they have to report on things going forward,” says Mr Thompson.

The company currently has pilot projects running in Tanzania, Lebanon and Syria. In Lebanon, AID:Tech’s technology is being used to distribute benefits vouchers to Syrian refugees. IBM, Microsoft and Amazon are all partners.

State backers

Governments are also keen to get involved with such projects. In June, AID:Tech became the first blockchain company to receive government investment with a total of €1m from the investment arms of the Irish and Singaporean government. “In future we may move into welfare delivery,” says Mr Thompson.

In places such as Kenya, Uganda and Somalia, however, it is not government programmes that are the gateways to identity: it is telecommunications companies.

“We know telcos do far better at know-your-customer than banks, because telcos have massive amounts of data not only through mobile money,” says Ismail Ahmed, founder and CEO of remittance company WorldRemit. “They also know who you’re connected with, where you travel, massive amounts of data. [It’s] incredible for financial crime.”

WorldRemit has seen attempted fraud drop to near zero where customers are transacting directly from their mobile phones, rather than with cash or through bank accounts.

In these mobile-driven economies, if the telco blocks or blacklists a number it is taken very seriously. “Everybody knows you’ve done something very wrong,” says Mr Ahmed.

Mobile portfolio

As a money transfer service, M-Pesa remains the gold standard. Within four years of its founding, it was reaching 80% of households in Kenya.

As mobile money has spread across developing regions, mobile money operators are building out their financial offerings, covering savings accounts, remittances, utility payments, payroll services and small loans.

Globally, the mobile money industry now processes an average of $1bn in transactions every day, in small increments. The average mobile money user moves about $188 per month, according to GSMA.

In Ghana, regulators now allow mobile money users to accrue interest on savings accounts. Because Zimbabwe’s economy crashed in 2017, mobile money revenues grew by 5% between the second and third quarters as people relied more heavily on digital transactions to cope.

Whereas in Africa early mobile money innovation was led by telecoms companies, in Asia mobile money services are led by e-commerce giants. Services such as Ant Financial, an affiliate of e-commerce empire Alibaba, is pushing out Alipay across regional markets, as is Tencent’s WeChat Pay.

WeChat launched in Malaysia in June 2018, while in 2017 Tencent bought and rebranded local Thai company, Sanook.com, as Tencent Thailand. Ant Financial invested $177m in India’s Paytm as well as creating a Thai version of Alipay called Truemoney.

As of May 2018, more than 70% of Asia’s 600 million people did not use banks, a figure higher than the global average of about 30%. At the same time, e-commerce is projected to grow in value to $88bn by 2025, which leaves plenty of runway for mobile payments firms to grow.

However, for mobile financier and banks alike, cross-border payments have yet to catch up with domestic payment options.

Reimagining remittances

Cross-border payments remain cumbersome, slow and expensive in an increasingly digitised world moving towards seamless transactions and settlements.

For remittances – international transfers traditionally sent back by migrants to support family in developing countries – transaction fees usually exceed 5% despite these flows accounting for more than 10% of gross domestic product in places such as Guatemala, Senegal and the Philippines.

Somali expats send home an estimated $1.3bn in remittances every year, a lifeline for the country's troubled economy, far surpassing official aid or government revenues.

In this $430bn global industry, incumbents such as Western Union are still leaders despite being deemed to be slow and expensive by some. In frontier markets, upstarts such as Dahabshil and TransferWise are challenging them.

While in the past the remittance industry has focused on moving money from developed countries to developing, intra-regional transfers look set to be the next area for growth.

In Africa in particular, intra-regional transfers are the most expensive in the world, according to the World Bank. This segment remains dominated by banks using the Swift system or cash settlement companies with weak compliance records that charge customers a premium.

“We’re looking at not only how to do intra-Africa [transfers] but how to help them do trade with the rest of the world,” says Mr Ahmed at TransferWise.

He notes that while about $200m in remittances is sent to Kenya every year, for example, Kenyan individuals and businesses are sending much more out of the country to trade with Asia, Europe and the rest of Africa.

“Historically we did not want to touch cash in order to send money abroad, [but] now with digitisation it’s enabling us to take money from bank accounts, from mobile money – anything that’s not cash,” says Mr Ahmed.

While some would be put off from intra-regional transfers by currency risk, services such as Transferwise already have local market infrastructure in place. “The fact that we’re going to be taking money locally minimises the currency risk for us,” adds Mr Ahmed.

Settlements remain the burden. These payments still need to move through the slower banking system and are often subject to delays. “Since we are offering our customers instant transfers, we are financing those transactions, so that is where blockchain could really help us to transform,” says Mr Ahmed.

Crypto use case

As cryptocurrencies try to gain mainstream adoption, they are finding some of their best use cases in frontier markets. Economic meltdowns and hyperinflation in places such as Venezuela, Zimbabwe and Argentina mean many are willing to move their money into cryptocurrencies, and to transact in them as well.

“The difficult thing about gaining adoption of crypto is that you need density both for users and merchants, so people can really use it on a day-to-day basis,” says Fernando Gutierrez, chief marketing officer for cryptocurrency Dash.

Dash currently has more than 130 different merchant partners in Venezuela. “You’ll see a fruit stand at the side of the road, no electricity, no anything, and there’s an ‘Accepts Dash’ sticker there because all you need is a smartphone and internet,” says Brad Zastrow, the company’s director of global business development.

In economically troubled Zimbabwe, Dash is funding Kuvacash, a service bringing Dash in a mobile wallet format to consumers. Kuvacash, which has received a licence to move money in and out of the country despite Zimbabwe’s strict capital controls, will begin operating in September, allowing customers to make payments, send remittances or cash out.

“This is key for a market such as Zimbabwe, where US dollars are still king,” says Spiro Antonopoulos, Kuvacash’s vice-president for external partnerships.  

The service uses Dash because it is the cryptocurrency “best suited for actual payments in the street because of a function called InstantSend, which confirms pretty much instantly”, says Mr Antonopoulos.

Short leash

Cryptocurrencies face challenges, however. Zimbabwe and South Korea are just two countries whose regulators are looking to gain greater control of digital currencies. “I think 2018 will be the discussions and 2019 will be the implementation,” says Mr Zastrow.

Security breaches are a problem. In March 2018, $530m was stolen from Japan-based exchange Coincheck. Then there is the bubble effect. The boom and bust of Bitcoin at the beginning of 2018 generated a frenzy in the crypto space. New tokens, companies and exchanges mushroomed, many without a solid business model or use case.

“I think we’re going to see a consolidation of the crypto industry,” says Mr Zastrow. “I think a lot of what we saw with [the] dot.com [bubble], we’re going to see with crypto.”

Insuring livelihoods

Traditionally, the insurance industry has shunned frontier markets, and especially the poor. Early attempts yielded few profits and weak demand from consumers not used to the concept.

Big players are now looking to get more involved in microinsurance, targeting those who make less than $1500 per year. Allianz, AIG, Manulife and Prudential are all making plays in this space.

Fintech start-ups are developing creative solutions for insurers in frontier markets. Pula has so far provided crop insurance to 10,000 farmers across east Africa by bundling insurance products with the purchase of higher grade seeds and farm inputs. Monsanto is a partner. Pula then underwrites policies and makes payouts using satellite imagery.

Lumkani, meanwhile, provides fire insurance geared towards the 1.4 billion people worldwide who live in informal settlements. The company equips households with heat sensors connected to the internet. The sensors are there to both prevent fires and provide Lumkani with data to determine insurance payouts in the aftermath of an emergency. So far, the company has distributed 13,000 units.

AllLife is the first life insurance product available in South Africa for people diagnosed with HIV/Aids. South Africa has one of the world’s highest rates of HIV/Aids infection at 27% of the adult population. Policy coverage depends on patients staying up to date on their courses of medication. AllLife does this through daily check-ins on a mobile app.

“Before this company, [HIV patients] couldn’t have insurance, which meant they couldn’t own a home [under South African mortgage laws],” says Mr Schlein at Accion. Major insurance companies have also taken an interest in AllLife’s technology for monitoring and interacting with patients.

There is still a lot of work to be done before financial services will be globally accessible and useful. But the frontier market fintech innovators seem determined to tackle this challenge head-on.

Note: Accion’s Center for Financial Inclusion revised the calculation of the number of new active accounts identified in the Global Findex data to 393m, not 285m, as was previously stated.

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