For long, we’ve been told how fintech can transform societies. Perhaps its time is now
The world changed for the better with the introduction of the World Wide Web three decades back, and the flow of information across boundaries became easier than ever before in human history. Arguably, the internet held the promise of being free and inclusive. The word ‘digital’ acquired new significance and continues to be used ubiquitously to define the evolution of almost everything around us today.
The same cannot be said about the flow of value, however.
Even to this day, half the world’s population is deprived of formal financial services. ‘Financial inclusion’ has been a utopia, finding a mention in the vision statements of most financial institutions such as banks, insurers and more recently of fintechs.
In 2019, cross-border money flows transferred via SWIFT gpi stood at about $77 trillion, almost double the $40 trillion transferred across borders in 2018. SWIFT, the system of choice for this transfer of value was born back in 1973 with a consortium of 239 banks from 15 countries.
The SWIFT protocol, now universally accepted as a standard for transfer of value or money, followed a different trajectory to that of the flow of information driven by the internet. Money flows are governed by a complex system of rules, driven by central banks, governments and tax policies – the flow of information over the internet, on the other hand, is not.
The coming of fintech
The Global Financial Crisis in 2008 changed that for the better, with the advent of new ventures which came to be known as “fintech” or financial technology companies. The idea was to alter the flow of value, by making it more accessible, inclusive and free. A slew of visionary entrepreneurs was keen on challenging the status quo around the protocol of transfer of value. The birth and rapid uptake of the smartphone became a turning point for the entire financial services industry.
The poster boy for this transformation is a lesser known name in the Western world. M-pesa was born in the most unbanked continent in the world back in 2007, and had over 37 million customers and 400,000 agents across seven countries in 2019, carrying out 11 billion transactions in the year, and averaging more than 500 transactions every second in December 2018.
Importantly, these subscribers had no access to formal banking systems. M-pesa circumvented hurdles like KYC and creditworthiness by making the mobile phone connection—mostly pre-paid—as the basis of authenticating user identities. The underlying system was unsophisticated by today’s standards and relied purely on available balance or charge in a pre-paid mobile account, which could be transferred via a simple SMS.
In Asia, a similar venture called bKash in Bangladesh—where 70% of the population does not have access to banking—has been nothing short of revolutionary. A mobile money system launched in 2011, bKash now has 40 million users and the wallet itself serves as the basis for authenticating users’ identities and their creditworthiness for microfinancing. The company counts the World Bank, the Bill and Melinda Gates Foundation and Alibaba’s Ant Financial Services as investors, and Fortune magazine ranked it among the top 50 companies in its “Change the World” list in 2017.
In the Western world, Nikolay Storonsky—a British-Russian banker at the infamous Lehman Brothers which fell in the aftermath of the Global Financial Crisis—and others like him were growing increasingly disillusioned with the opaqueness and rigidity of the world’s financial systems, which were in part known to be responsible for the crisis.
This is what he had to say in an interview: “Many of Lehman Brothers’ top employees who left in the aftermath of its collapse decided to start their own businesses. A generation of entrepreneurs rose from the ashes, but many were disillusioned with the financial system. At the time, I was working as a derivatives trader at Lehman’s when Nomura bought our division, but I ended up taking an offer from Credit Suisse, where I eventually met Vlad Yatsenko, Revolut’s co-founder and CTO.” He adds they were both “frustrated” with the fees charged to send money overseas – and so they launched Revolut in 2015 “as a way to rebuild the industry from the ground up using technology”.
Today, Revolut is the world’s fastest-growing fintech unicorn, opening 25,000 new accounts every day, and with more than 10 million customers globally, he added.
While solving to provide access to financial services for the unbanked has been a north star for many of these endeavours, more have failed than succeeded. The promise, however, has finally found a time of reckoning in the ongoing pandemic and the resulting quarantine, and the unusual aversion to cash.
Fintechs pride themselves as “technology-first” solution providers that address the problem of transfer of value. Banks on the other hand have had to deal with acquiring technology stacks over decades for various parts of the business that historically have not been entirely compatible with one another. This is because banks by definition were built for the physical world of branches, with tellers, and subsequently, ATMs.
While solving to provide access to financial services for the unbanked has been a north star for many of these endeavours, more have failed than succeeded. The promise, however, has finally found a time of reckoning in the ongoing pandemic and the resulting quarantine, and the unusual aversion to cash.
Cryptocurrency and the promise of distributed ledger
Cryptocurrency, launched in 2008 around the time of the Global Financial Crisis, was hailed as the means to achieving true financial inclusion. But even more than a decade down the line, decentralised ledger-based store of value has struggled with mainstream acceptance, though this is largely on account of the high cost of mining, the underlying infrastructure besides the lack of interoperability with conventional financial instruments, and related governance and regulation.
There has been resurgence of interest in the technology recently, however, with Facebook’s proposed Libra (now Novi) project – a digital wallet with the mission of making money work better for everyone. The project is ambitious for its endeavours to make transfer of value as easy as sending an instant message within Facebook’s family of apps – Facebook Messenger, WhatsApp, and Instagram, while being backed by a secure basket of currencies.
Facebook’s digital currency plans have had a bumpy ride since its announcement, a clear proof of how difficult it is to truly digitise global money flows under current regulations. It announced the project with a host of partners from the worlds of online finance, e-commerce and tech, but some members of the original Libra association have since backed out citing regulatory complexities as the reason. Other companies like Mastercard, PayPal and Venmo are waking up to the potential of crypto too with a slew of recent announcements such as Wirex becoming the first native cryptocurrency platform to be granted a Mastercard principal membership, allowing it to directly issue payment cards.
Named after the Swahili word for “one,” Mojaloop, a not-for-profit backed by Google and the Bill and Melinda Gates Foundation is developing an open-source software for digital payment interfaces, that may allow for better cross-border interoperability for the unbanked populations. Interestingly, the underlying technology protocol was developed by a leading cryptocurrency player – Ripple.
Consolidation at the top
One of the ways trends in digital payments can be observed is to consider the number and nature of acquisitions made by the dominant payment companies – Visa and Mastercard. While Mastercard has doubled down on acquisitions in B2B payments, Visa has spread its portfolio along international B2C payment startups. Visa is targeting acquisitions of or partnerships with the networks, while Mastercard is focused on owning the assets to operate the networks itself.
In 2017, Mastercard closed its $1.15 billion acquisition of London-based VocaLink Holdings, which boasts a software to run on real-time payments networks. In 2019, the card company agreed to acquire the majority of the corporate service businesses of European payments technology company Nets A/S for $3.19 billion. Once complete, Mastercard’s largest-ever deal will add instant payment services to its business lines and cement the card company’s real-time payments strategy.
On the other hand, Visa is placing a much stronger emphasis on its Visa Direct push payment rails, an alternative to fast ACH, with acquisitions such as Earthport in 2018.
A P2P push payment could be one Venmo user sending money to another, while a business-to-consumer transaction could be Uber paying its drivers. In push payments, customers initiate the money movement by instructing their banks to send money to another account. That is the reverse of typical debit and credit electronic transactions, called pull payments, in which the money movement initiates when the merchant’s bank requests to pull money from the customer’s account to add into the merchant’s account.
The COVID-19 kick
Satya Nadella, the CEO of Microsoft, famously remarked on the impact of the ongoing pandemic, “We’ve seen two years’ worth of digital transformation in two months.” The pandemic and resulting quarantine have driven people around the world—irreversibly and increasingly—towards online commerce and digital payments, even though consumer spending itself has fallen dramatically.
Aversion to the use of cash where possible has resulted in a fillip for NFC-driven digital wallets and QR codes in physical retail, while consumers with access to the web pivot towards e-commerce, buying everyday essentials online. Segments like grocery, which had thus far struggled in the online realm, too are witnessing an unprecedented surge in volumes.
The pandemic and resulting quarantine have driven people around the world—irreversibly and increasingly—towards online commerce and digital payments, even though consumer spending itself has fallen dramatically.
“It’s clear that digital payments have evolved from a nice-to-have capability to an essential service,” noted Daniel Schulman, PayPal’s CEO, as the company witnessed its highest-ever number of daily transactions in early May.
Deutsche Bank’s “Future of Payments” report—Cash: the Dinosaur Will Survive for Now—published in June surveyed 3,600 customers across the US, UK, China, Germany, France and Italy. It concluded that the volume of digital payments would grow at “light speed” over the next five years, arguably leading to the extinction of the plastic card, but not cash.
Deutsche Bank also forecast that by 2025, mobile payments will quadruple in volume to comprise two-fifths of in-store purchases in the US with similar growth expected in other developed countries. In developing economies like the Philippines, Vietnam, Thailand and others in Asia where smartphones are already ubiquitous, consumers may leapfrog from cash to mobile payments, without ever owning a plastic card or a formal bank account. Their digital wallets accessible with their smartphones will be the store of value while their mobile phone connections, both post- and pre-paid, linked to their identity such as “Aadhar” in India, will be used to authenticate transactions, both online as well as in physical goods.
For banks, it has led to an accelerated shift to the cloud and adoption of new technologies such as artificial intelligence. It could also portend the beginning of increased consolidation with mainstream banks acquiring fintech players, particularly digital-only banks and payment gateways.
Central banks buy in
Central bank digital currencies have been a key topic for blockchain technology enthusiasts, futurists, governments and policymakers recently. In today’s world, they are evolving from a topic of interest to a high-potential tool for economies around the world to better address the massive economic impact of the COVID-19 pandemic and beyond. The recent need to disburse direct cash transfers and aid to furloughed employees has further exacerbated the need for a viable digital medium.
Governments and central banks in the UK, China, Sweden, Japan and Singapore have begun testing frameworks for the deployment of mainstream digital currencies as a way to find the appropriate model that addresses a trilemma of mutual constraints: Privacy, control and scalability.
Central bank digital currencies, in today’s world, are evolving from a topic of interest to a high-potential tool for economies around the world to better address the massive economic impact of the COVID-19 pandemic and beyond.
Technologies that support and automate while mitigating risk at scale are a vital component in the functioning of central bank digital currencies if they are to offer any help in addressing current economic factors, while maintaining privacy of users by design and not subject to trust.
It will not be surprising to see a mainstream deployment of the likes of a Digital Renminbi in many countries around the world sooner than was envisioned pre-COVID.
The great upheaval underway around the world continues to disrupt every economic activity, in ways that were unfathomable only a few months back. Yet, for the fintech industry, it has presented an opportunity to finally go for the north star. This will mean access to all and the potential transfer of value at the same speed and ease as we have when transferring information, without “breaking the bank”, metaphorically speaking.
The views expressed in this piece are personal and not representative of those of the employer or any other entity.
Rahul Mudgal
Rahul has over eighteen years of experience in B2B marketing, account management and consulting. He currently leads marketing at DOCOMO Digital, the international mobile commerce business of NTT DOCOMO. He is an avid observer of the impact of technology on human behaviour, especially in emerging markets. He serves as an advisory board member at the Asia-leg of the CMO Council.
