This post has been corrected.
In recent years, the banking and finance industries have not done a lot to earn the trust of consumers in the West. But in poor countries, basic financial services can be transformative.
Even in today’s wired world, many people still stash cash under the mattress, where inflation erodes it away. When they want to send money, they have to find a way to physically transport it. Loans are doled out in bundles or envelopes from moneylenders, at exorbitant rates. Emergencies or unforeseen circumstances can drive a family into penury.
Mobile money from one provider can rarely be transferred to another network, let alone to another country in a different currency. The financial services these people need may come via mobile banking, as Bill and Melinda Gates wrote recently in their annual letter. Basic banking services—from simple payments and transfers to insurance, savings, and loans—are now possible on the simplest of mobile phones, as Quartz has reported.
But most of these systems are hobbled by a lack of interoperability. Mobile money from one provider can rarely be transferred to another network, let alone to another country in a different currency.
A new wave of financial services are focusing on overcoming these obstacles. They are setting themselves up as platforms, rather than individual products.
The perils of a paperless society
For many in the West, the idea that tech companies and financial firms are mining their internet activity to create an online “identity” for profit is seen as an invasion of privacy (paywall). It is a different story on the other side of the planet, argues Joyce Kim, who runs Stellar, a non-profit financial platform. “What we’re hearing from folks in the developing world is that identity is a privilege,” she says.
Lenddo uses social media—chiefly Facebook—to assess the creditworthiness of any individual. Many who lack a paper trail of birth certificates, driving licenses, and passports also have no online financial presence—which means means no credit history. But the growing ubiquity of mobile phones offers something tangible to tie to their identities. And what people do with their mobile phones can help financial providers get a sense of their financial acumen.
The wizard of ID
One example of this new kind of financial services platform is Lenddo, a company that uses social media—chiefly Facebook—to assess the creditworthiness of any individual.
In the West, where advanced credit rating systems already crawl every financial transaction, this would seem a needless intrusion. But Lenddo operates in countries where only a small proportion of the population spends money in ways that are visible to credit ratings agencies, says Arjuna Costa of the Omidyar Network, a venture capital firm focused on social enterprise and which funds Lenddo. For the rest, their social media activity, combined with other sources signals such as financial performance over time, can make for a pretty good proxy.
These are people who live well above the poverty line, but who nonetheless have precarious financial lives. Lenddo has made some 10,000 loans in the past three years as it tested its risk algorithms. Finally satisfied that the system works, Lenddo announced last month that it would open up its platform for other financial firms and startups to use. In the long term, the firm will stop making loans on its own and only license its technology to others.
Lenddo targets the so-called “emerging class”—people who work at call centers in Asia, for instance. These are people who live well above the poverty line, but who nonetheless have precarious financial lives. They tend to have little in the way of savings and are unlikely to get loans, says Costa. Many supplement their incomes with remittances from relatives abroad.
Costa says he hopes Lenddo will make loans cheaper as more institutions use the platform. “If you think about general interest rates, there is bank overhead, underwriting costs, and default rates you’re trying to add a cushion for,” he says. “If we can drive underwriting costs down and default rates down, that should drive the cost of borrowing down.” But until (or unless) there is a critical mass of competitors using the system, it might simply pad early adopters’ profits by lowering costs that they don’t pass on to borrowers.
Another company that aims to provide a platform for financial services is Stellar. A non-profit, Stellar has created an open-source protocol for financial transactions, as well as a currency, dubbed the stellar. The initial batch of stellars—backed by $3 million in funds from payment provider Stripe—will be distributed in limited quantities to worthy causes, with another 1% created every year. Stellars are used as the intermediary currency for transactions that use the system.
The idea is to create what Joyce Kim, Stellar’s executive director, calls a “giant translation layer” for money, allowing easy and cheap transfers between any pair of currencies, whether fiat (such as the dollar), digital (such as bitcoin) or notional (such as cellphone talk time) that any financial provider can plug into. But instead of using existing systems such as wire transfers or banks to move money around—which rely on legacy software, and have slow verification procedures and built-in costs—it will use its own low-cost, open-source protocol. The stellar currency acts as a safeguard—if the system believes it is under attack or being used for fraud, it boosts the number of stellar required to complete the transactions.
One example of how Stellar can work is a new mobile savings account launched this week as a pilot in South Africa. Called Vumi, it seeks to empower young girls, who its proponents believe are the key to reducing intergenerational poverty, to save money directly from their mobile phones. Unlike M-Pesa, it works no matter what network they are on or which mobile-money provider they use, using the stellar protocol (but not its currency). Based on the results, Vumi could expand to Nigeria and Kenya. It uses cellphone talk time as its currency, which can later be withdrawn as cash.
Vumi is itself is another good example of a finance platform. It started life as a communications suite that allows third parties to use text messages, a text-only data protocol called USSD, and voice calls, to contact and interact with mobile phone users across Africa. Vumi has been used by survey companies to reach respondents, aid agencies to spread health information, and governments to encourage voter registration. Having gained its users trust, it is now being used as a way to encourage saving.
Correction: This post mischaracterised Omidyar Network as a non-profit. It is a venture capital firm. We also said that Lenddo would immediately stop making loans. Lenddo will continue to loan money for now but intends to stop in the long run. The errors are regretted.