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It goes without saying that the pandemic has changed our lives in profound ways. Everything from how we work to how we socialize has been altered completely. One of the many noticeable changes centers around how we bank and pay for the goods and services
we utilize. As an example, in Canada, 2020 saw a
62% reduction in the usage of cash and
42% of consumers refusing to shop at businesses that did not offer contactless payments. Such dramatic consumer behavior shifts are almost without precedent and even the most nimble organizations have struggled to adjust to the new circumstances.
In a developed market like Canada where modern payment technologies were in place, this shift was essentially a ramp-up or accelerated deployments of proven technologies. Some people had to change habits or install a new app and those final laggards were
pushed to adopt online banking, but the developed world’s payments ecosystem was able to adjust without much difficulty. The real challenge was elsewhere in the world. In Southeast Asia where the majority of the world’s 1.6 billion unbanked population live,
the usage of cash has remained entrenched because viable alternatives are simply not available. In the Philippines, despite more than
70% of the population having a smartphone in 2020, a number only 0.1% behind the United States, the majority of the population is unbanked and cash is
still the only acceptable payment method by the majority of merchants.
It has long been understood and accepted that the lack of dynamic and reliable financial systems severely limits the economic options for individuals and entire countries, but the pandemic has made this reality undeniably clear. Regions that lack modern
financial solutions cannot adapt as effectively to a changing world. This financial exclusion has a direct negative impact on the lives of individuals and the economic prosperity of nations. To bank the unbanked, technology and finance leaders need to develop
solutions that reduce the barriers of banking and address the specific needs of these underserved regions.
Leapfrogging Technology Hurdles
Recent history has made clear the need for more dynamic financial service platforms around the globe. Merchants need new ways to deliver to their customers and at the same time, consumers demand better ways to manage their finances. This culmination of factors
has already driven rapid growth with the market now expected to reach
$324 billion by 2026.
To understand how we might bank the unbanked, we need to understand how other technology solutions have been successfully deployed in the developing world. It is a mistake to assume that the rollout of a new technology in the developing world should follow
the same roadmap that the technology took in the developed world. You only need to look at the adoption of smartphones to understand that this is not the case. The developed world first installed telegraph lines, then landlines, then a few decades after landlines
had become ubiquitous, migrated to cell phones, then finally about a decade later, to smartphones. In the developing world, you saw very limited landlines followed by a few cell phones then shortly after by rapid adoption of smartphones. At the root of it,
there are two major reasons for this leapfrog approach to technology adoption. First, all things being equal, people would vastly prefer the most modern and capable technology. Secondly, as all things are not equal, leapfrogging is actually easier. A modern
distributed system like a smartphone network is actually easier to build and deploy.
A very similar process is happening with the adoption of Fintech in the developing world. In the developed world banking started with exceedingly high barriers to entry. Establishments followed by the development of a retail branch network supported by massive
conglomerates are only now being disintermediated by much smaller niche players operating on a unified open banking standard. In the developing world they are essentially skipping the warm up period and going directly to the finish line. In these markets ,
the established banking players do not have existing relationships with the general public and they will never get them. Rather, we are seeing a number of smaller, more nimble Fintech startups providing niche services via the aforementioned smartphone network.
Compared to developing a vast and expensive network of branches, we are seeing these Fintechs launching colocated service points in existing businesses or more frequently, eschewing in-person models entirely.
The Lack of Infrastructure as the Roadblock to Innovation
Given that large swaths of the developing world now have near ubiquitous smartphone adoption and there exists a thriving ecosystem of Fintech companies eager to provide services the question remains: ‘Why has cash usage in the Philippines for example stayed
essentially flat through a global pandemic?’A large part of the answer is simply a lack of core infrastructure, just as widely distributed smartphones require the placement of a number of cellphone towers, a functioning Fintech ecosystem requires a considerable
amount of infrastructure. Without components like deposit accounts, payment rails, credit ratings and issuing solutions, developing Fintech solutions is impossible. Recognizing this challenge, Fintech entrants are increasingly focusing on building or partnering
with core infrastructure providers in the country, such as rural banks to develop a regulated framework upon which consumer facing solutions can be built.
Beyond the focus of platforms and partnerships, Fintech providers are becoming more savvy in their engagement, but are also recognizing that they need to interact with economies in the state they currently exist in. A great example of this is the recent
focus on digitizing cash. In a primarily cash economy, in order to facilitate people into a digital ecosystem, you must provide a simple method to exchange between cash and digital wallets to allow users the flexibility they need to engage with, what is at
least for the near term, a cash based economy. By providing this mechanism Fintechs can help bring more people and businesses into the digital economy and facilitate the overall transition away from cash.
Much like the modernization of their telecommunications infrastructure, the modernization of the developing world’s economies will happen rapidly and bring with it profound benefits for the populations of these countries. Getting there will require creative
and adaptable problem solving and a real understanding of the onground problems that people and businesses face. Fintech companies that are part of this transformation will benefit tremendously from being on the ground floor of a massive market with untapped
potential.
Financial Services
