While Western banks are struggling with decades-old systems, growth economies and emerging markets are building their future on mobile, says Chris Skinner.
I was reflecting on a question posed to me recently by a Turkish banker. He asked me: “Why is it that the Western banks are always talking about legacy?”
I knew exactly what he was getting at, as the banks I deal with in the US, the UK, France, Germany and other European nations are always fretting over the challenge with their old systems.
It is not surprising when 43% of their bank systems are built in Cobol and other old programming languages – few people have any knowledge of how to program in these languages any more. Most Cobol programmers are in their 50s and their numbers are dwindling.
This is forcing banks to replace systems that have been operating for three decades or more – which is like ripping out the foundations of a building while trying to ensure it doesn’t fall down. It is not easy.
Later but better
For me, it also illustrates another conundrum. While the US and Europe wrestle with legacy systems, I see China, India and other growth economies leapfrogging their counterparts thanks, partly, because their banking systems were implemented much later. Many of the businesses in these economies began architecting infrastructure in the late 1990s and 2000s, and are now reaping the benefits.
For example, China’s use of mobile payment services now outnumbers the volume of cash payments, with $5500bn in payments made through apps in 2016, according to estimates from iResearch. Compare that with the measly $112bn in mobile payments made in the US in 2016, according to Forrester Research, and the difference is clear.
Why is there such a radical divide between the two economies? The main reason is that China did not develop a card-based economy. The issuance of debit and credit cards was limited and, thanks to building infrastructure solely in recent decades, the economy has managed to leapfrog the Western world.
Meanwhile, a third trend is occurring, which is the rise of mobile payment and wallet innovations in developing and emerging economies. These economies stretch across sub-Saharan Africa – Uganda, Ghana, Tanzania, Mali, Kenya and Nigeria, in particular, come to mind – as well as the Philippines, Indonesia and parts of Latin America.
In these economies, large parts of the population are living on less than $1.90 a day, the current measure of the official poverty line. These people have largely been ignored by technology but that is changing. Thanks to mobile networks, a considerable proportion of these populations now have a mobile phone or, if not, access to one if needed. A recent CCS Insight report predicted that close to 2 billion mobile phones will be shipped globally in 2017.
A mobile-first world
In addition to communication, people can also trade and transact with mobile phones. This is illustrated by research from Global Market Insights, who state that inexpensive wireless communication techniques among developing nations has stimulated the mobile point-of-sale market to surpass $20bn by 2020, up from the present $12bn, with an expected compound annual growth rate of 19%.
The thing about this market is that there was nothing there before. It was too expensive for the physical financial network to serve people living on $1.90 a day. The digital network based upon mobile financial exchange is changing the game in these countries.
In particular, because there was nothing there before, they are reinventing the whole structure of how we think about financial systems and markets. These markets are creating disruptive innovations based on mobile networking transactions, which could affect us all.
Ultimately, I see a three-stream world out there: the Western world of legacy economies; the Asian world of growth economies; and the southern hemisphere world of innovation economies. When it comes to looking to the future, I know which one I would watch.
Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.
