Anyone in sales who has been through the corporate mill will probably know the shoe salesmen story. You know the one, where two shoe sales people are sent to Africa. One phones his boss and says “I’m coming home, no one wears shoes!”; the second says to her boss send me two container loads – “no one wears shoes!!” The story is designed to re-affirm that it is the state of mind that determines the business opportunity; and the results. And so it is with banking in emerging markets.
Source : Mckinsey study (2009) – half the world is unbanked
When Mckinsey’s published their global report into adult world banking in 2009, they concluded that 2.5 billion adults – 53% the world’s adult population – did not use formal financial services to save or borrow. Now, given 88% of these unbanked adults lived in Africa, Asia, Latin America, and the Middle East, your immediate thought might be the third world has no money ; so how can any dyed-in-the-wool, pinstriped banker make any ROI on any infrastructure required to bank the unbanked when “poverty” is so pervasive?
At first sight your initial instinct might be right. But, in the same report, 800m of the 1.2bn adults in Africa, Asia, and the Middle East that enjoy banking services, were highlighted to earn less than $5 per day. But there is a surprising, subsequent twist.
In their 2015 Policy Research Working Paper , the World Bank concluded that for the year ending 2014, the unbanked had fallen 20% to 2bn. That’s an additional 500m people banked in the space of 5 years – that’s 100m per annum. The most interesting part of this fall, is that the banking infrastructure responsible for the change had not come from the banks – but from the telecommunications companies. In sub-Saharan Africa – this rise in banking has primarily been seen through the development of mobile money, with perhaps the widest known application being M-Pesa.
M-Pesa, (Pesa is the Swahili for money), was launched in 2007 by Vodafone for Safaricom and Vodacom, the largest mobile network operators in Kenya and Tanzania. The service enables those with a mobile phone, but perhaps no access to a bank account, to send and receive money. The diagram below shows m-Pesa works
Image Remzi Tanzania (TSH = Tanzanian shillings)
The power of the m-Pesa technology is that it can be used on a standard, basic cell phone – in other words it does not even need a smartphone to operate. Whilst simple at a top-level, the underlying financial system is also highly regulated and overseen by the central banks in the respective countries with full KYC (Know Your Customer) and AML (antimoney laundering) validation carried out. The effectiveness of the technology has been helped by the convergence of increased mobile coverage – even in rural areas.
Mobile phones in emerging countries are becoming increasingly ubiquitous, as shown from the research contained in the 2015 Pew Center Research Survey. In it, they demonstrate cellphone usage in Africa:
Image Pew Research Center
As can be seen above, the use of cell phones in emerging countries is surprisingly high – with many African countries being on a par with the US. Whilst there is a very clear lag in the adoption of the latest smartphone technology – logically driven by the high relative costs – with the clever use of very simple core technology, payment and banking related applications are being built. Undoubtedly as smartphones become smarter, chips become faster and technology cheaper in the West, smartphones will became more pervasive in emerging countries.
Smartphones will mean day to day life in emerging countries will becomes more sophisticated. There will be access to more sophisticated information; more sophisticated applications; more sophisticated banking; and more sophisticated technology – especially blockchain – and there is one Blockchain related startup that is almost perfectly positioned for this likely growth in smartphone banking in emerging markets – and that is Abra.
Abra , have dubbed themselves the uber of digital cash, and are taking mobile banking to the next level. Their idea is as clever as it is simple, leveraging not only blockchain based technologies but also understanding the local culture of so many emerging markets. They also understand the cultural remit of so many expats from emerging markets who want to be able to send money back home to their families and extended families quickly and cheaply. The way it works is for my mind, brilliant in its simplicity:
- An Abra user deposits local currency into their ABRA account.
- Monies are then sent via the bitcoin network to the ABRA account of their family member in the emerging market (thereby leveraging cheap transfer costs)
- Their family member goes to a local ABRA authorised (and verified) local teller
- The teller then gives the family member the monies in the local currency.
Instead of the high fees associated with traditional international transfers of around 10% – 15% per transfer (plus exchange rate fees) there are teller fees and Abra’s fees which typically stand at about 1% – 1.5% at each end. The money is transferred and available to be picked up from the local teller. There is no branch network and no banking infrastructure – just blockchain, bitcoin, mobile technology and peer to peer bank tellers. Abra have certainly caught financiers imagination and have recently secured $12m in Venture Capital funding.
So the next time you hear about the unbanked in emerging countries and think there is no opportunity because of perceived poverty, just understand that technology is irreverisbly changing the landscape, and that the banking infrastructure is coming more from the mobile space, not the banking space, and that as smartphones become more ubiquitous, more sophisticated technologies will begin to generate great opportunities – just with the application of some lateral thought.
Over the next 5- 10 years, it will be interesting to see how banking in the emerging markets will develop. From 2009 – 2014 there was a 20% reduction in the unbanked – but with the speed of technological development who knows where it will finish up. But don’t ask the shoe salesman – they might send all the shoes back home and jump ship.
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