Greetings for the holiday season, and apologies for my recent backlog in posting podcasts. The main reason for the latter is that I have been traveling almost constantly. In November and December I was in Singapore, Geneva, San Francisco, London (twice) and Washington multiple times, and of course, back in Boston in between.
Developing countries are the world’s learning laboratory on financial inclusion.
What I learned from these recent travels is that the world is alive with new ideas about both financial products and financial regulation. Fintech and regtech, are everywhere. And both are, surprisingly to some, more advanced in other parts of the world than in the U.S. The reason for that is simple: Other countries, and especially the developing world, have leaped straight to new technologies, and especially mobile financial services, because they never built the complex financial and regulatory infrastructure that predominates in the developed world, such as widespread telephone land lines and personal computers. Those financial systems have flaws, but broadly speaking, they work pretty well for middle and upper income people, getting financial tasks done through banks, bank branches, checks, plastic credit cards, plastic debit cards, cash machines, funds transfers and all the rest.
That means that the impetus to change entrenched infrastructure, not to mention entrenched consumer habits, is weaker in highly developed markets. It also means that investing in such change takes more time to pay off there, and is extra expensive because providers have to maintain all their traditional systems while simultaneously building new ones.
The developing world lacks that problem. For people who have never had access to financial services, for whom no one ever would have built a branch, there’s nothing to replace except cash and barter. Planting new systems in new ground is, generally, easier than growing things amidst a mature forest.
This fact has made developing countries into the world’s learning laboratory on how to build really an innovative financial system -- especially for low-income people. People throughout the world have mobile phones -- as of 2013, more people had access to cellphones than to toilets. Everyone knows how to use them. Increasingly, these are smartphones that can access wifi, which is spreading fast too. While the United States is still focused on the Community Reinvestment Act obligation of banks to maintain branches in lower-income neighborhoods, other countries are bringing whole new affordable financial services to low income people, by the hundreds of millions, through converging new technologies. That’s not just the cell phone, but all the other changes underway in digital identity, voice technology, block chains, big data, and much more.
And regulators, especially in developing countries, are working hard to harness the same technology trends into new “regtech” strategies, to foster this progress and, simultaneously, to prevent new dangers that will grow along with it.
We’ll talk more about this revolution in other episodes -- I recorded several more in Fiji and my other travels -- but for now, let’s focus on this incredible breakthrough -- the affordable phone.
My guest for this episode is Theo Cosmora, co-founder and CEO of Social Eco and the man behind the OneDollarSmartPhone. Theo notes that four billion people can’t afford smartphones; that this is potentially the world’s most valuable market in the world, worth $5 trillion; and that people spend an average of three hours a day using phones if they have them. That means that connecting everyone to smart phones will connect them, both horizontally and vertically, into every dimension of the larger economy and culture.
How to solve the phone affordability gap? Theo has devised a business model in which companies or governments will sponsor pre-set apps on a phone, to subsidize the price enough to reach people who can’t afford the phone, but do have and spend money -- farmers, workers, migrants, others. This is somewhat like the model developed by the internet itself, or by players like Google -- or for that matter, broadcast television -- where a core service is free or nearly free, because it’s creating access to markets for third parties. (As an aside, I’ve been thinking a lot about fintech business models, and the need for transparency and true consumer understanding around them. I’ll be talking more about that in 2017.) I think you’ll be fascinated by Theo’s insights on this market and how serving it can unlock value throughout the global economy, as well as lifting people out of poverty and isolation. If you’re a business, regulator, or central bank, anywhere, with interest in this market, Theo would like to talk with you about sponsoring phones.
You’ll also enjoy his insights about regulators, who he thinks are suddenly seeing the potential and becoming helpful. We recorded our conversation at the annual global forum of AFI, the Alliance for Financial Inclusion, which consists of the financial regulators and central banks of the developing world. The meeting dramatically bore out Theo’s optimism on regulators embracing fintech and regtech, as we’ll discuss in future episodes.
For listeners in the United States, some of this may not seem directly relevant, but I want to encourage you to think about it. Initiatives like this are pointing the way to affordable, inclusive, profitable financial services -- for everyone. U.S. public policy has been striving toward that goal for decades, with results that are limited at best. Suddenly, technology is opening up a whole new way to go at them.
Some say you can’t make money serving people with no money -- at least not without cheating them. I’d love to know if our audience thinks that was ever true, and even if so, will it still be, as technology makes more markets profitable by making it inexpensive to reach and serve them. If you have thoughts, please share them at www.jsbarefoot.com.