There is no denying to the fact that there are lot of innovation that is happening in the financial services industry around the world. The industry is transforming through open architecture, digitization, FinTech, electronic payments, Blockchains etc., to improve efficiency and create opportunities in markets of all sizes across the world. But in the markets where the traditional financial system isn’t really reached to many people to begin with, these innovations are more impactful and meaningful. This makes some of the innovations in these emerging markets more easily adapted and helps the traditional financial system reach as many people as possible. In this blog, we will discuss about the recent FinTech trends and opportunities in Asia, Africa and other markets and why is it important for banks across the world.
The emerging markets have huge demographics that rely on a cash economy. Many people do not have access to financial services industry. But times are changing with some innovative fintech developments in these growth markets. As the concept of finance becoming invisible with every passing year, the entry points of the financial services need not to be the traditional touch points, such as bank accounts and loans in these markets. For example, Dopay, a fintech startup in Africa, is offering financial services to people who have jobs but no bank account. They do this through offering a cloud-based payroll management services to employers and providing each employee with a dopay card through which they can access their money everywhere. With innovative ways of financial inclusion catching up the emerging markets, there are lot the world can learn from them.
The first and foremost that is happening here is that fintechs are actually building their infrastructures from ground to serve the underserved people. The infrastructure reflects the modern thinking and gives us an opportunity to look at how the banking system, for example, will look like if it is to be rebuilt today. A blockchain infrastructure is quite possible and had even been tried and succeeded. A fintech start-up Banco Mare in Brazil reached out to largely underserved communities of favelas (slums) where the traditional branches hadn’t set up an office fearing violent crimes. Banco Mare tackled this issue by developing a blockchain infrastructure that allows growth with protection and transparency. Now, their blockchain-based digital platform serves more than 11 million favelas and offers various payments and transfer services through their mobile app, securely in a high-risk environment. Needless to say that fintech startups, like Banco Mare do have a potential to disrupt the traditional big banks. The competitive edge here is that the big banks have to spend a lot of money upgrading their infrastructure to blockchain, whereas Banco Mare is doing it ground up. And there is more; Banco Mare also lets their customers use their own cryptocurrency called ‘Palafita,’ which can be converted to local currency at 1:1 exchange rate. It gives them the kind of scalability to take their operation beyond borders, which the big banks have been fancying for decades!
The next innovation is, offering Microfinancing as a product and pay-as-you-go (PAYGO) model. This product, when it is related to day-to-day events or life events, enhances the customer’s credit repaying ability and reduces the risk of customer’s defaulting. An example would be, off-grid solar product that offers rent to own model. Solar lighting equipment is offered as a well-structured product to consumers who are mostly in the low-income group. They can work toward owning the product by making small payments monthly for 12, 24, or 36 months through PAYGO channel. As this product gives them incentive to pay their dues in the form of uninterrupted power supply, consumers defaulting on their due is greatly reduced. With a great diversity in income levels and energy consumptions, the product is tweaked to cater to a wide spectrum of consumers, all with lower risk and improved cash flow through limited intermediaries. This solution is made possible by mobile fintech payments and solar firms combined, for the development of such creative commercial models. Similar models are being attempted in education loan offerings and insurance products. It also shows the banks how they can tweak their credit-score-based product offerings as the new emerging models, which greatly increases consumer’s ability to pay back by offering incentive to do so. The threat to big banks comes in the form of these small players moving from their microlending space to bigger opportunities in mortgages and insurance space with a similar model.
The final innovation for discussion is fully digitized mobile banking. This innovation alone achieved what all the traditional banks have long been dreaming of doing, over decades of service, i.e., delivery of financial services to customers at affordable cost. In most advanced economies, transferring and handling cash is taken for granted, but in many countries is a transformative way forward. And the mobile banking has made this happen and achieved more by driving financial inclusion to sections of disadvantaged or low-income sections of the society for whom the financial services were either not available or affordable till then. By financial inclusion, it started the journey of reducing the global inequality. While the traditional financial industry should not be held accountable for inequality across the globe, it does need an introspection in this. We can see from the example of m-Pesa in Africa, Alipay in China, and PayTM in India, and how it transformed payments landscapes through mobile platform. The reason why financial inclusion plays an important future role in banking is the fact that banks can address an additional US$380 billion market in annual revenues by targeting micro-enterprises and bringing unbanked and underbanked adults into the formal financial system, per a report from Accenture. This is a challenge that banks should be more than happy to embrace in the coming years.
Large banks have a lot of key takeaways from the lessons of fintechs trends in the emerging markets. Some banks understood this paradigm shift and keep their focus on these trends. For example, Dopay was selected for Barclays accelerator programme, Standard Charted banks joined Equichain – a capital market infrastructure platform using Blockchain. As the financial services business model changes, it is time for banks to embrace the new shift. As in 100 years from now, banking will still be around in some form, but banks may not be.