The subject of mobile banking is not new. There have been pockets of success across the developing world: In India with micro-finance and in Kenya where the economy has expanded thanks to M-PESA, the mobile money platform that has 17 Million users across the country.
However, we have yet to see rapid global adoption due to economic and regulatory challenges. Current solutions involve deep integration with mobile phone operators and banks which increase the complexity and cost of implementation. A recent article discusses this challenge in India, where the government recently celebrated the creation of 120 Million new bank accounts. The milestone is celebrated with cautious optimism, as this is the second time a program like this has been tried (the first resulting in a lot of unused, empty bank accounts).
The issue? Banks can’t make enough money off poor people living in rural areas. Since this isn’t likely to go away until we’ve actually banked those individuals and given them time to prosper, we must seek a different approach.
Productivity is growth
In our current economic system, productivity is the force driving increased living standards and wealth. Simply put, productivity is the ratio of output produced for any given input — produce more per unit effort and there’s more profit to spend on other things .
The current reality is that parts of the world are far more productive than others. Some would claim that this is a natural consequence of the fact that not everyone can have the same level of access to limited resources, however, the reality is that most people simply don’t have access to the same tools that enable productivity.
Only 50% of us have access to banking
Basic financial services are at the heart of productivity yet are unavailable to half of us. In most cases, it simply isn’t economically viable for a legacy financial institution to offer services to a low-income community: many of the basic operations still require bank branches, physical distribution of assets and there are many places in the world that lack either the population density or access that would be required to realise this. This is why much of the developing world domestic economy is based on cash.
Unfortunately, cash comes with many disadvantages:
- It’s hard to store safely (in the sock drawer?)
- Access to debt is informal, expensive, and limited
- It’s hard to transmit over distance (eg. from farm to market)
Mobile banking is the solution
Introducing mobile banking. A digital solution requires far less infrastructure and can expand much more rapidly. Provide the right incentives, and the platform will flourish. M-PESA, a Kenyan-born mobile money platform, went from nothing to 17 Million users in 7 years primarily because it drastically increased the movement of value. Access to a savings accounts and basic lending services dramatically increased wealth, as they provided the mechanisms for reducing financial risk (savings = buffer) and for investing in productivity (debt). All of a sudden, Kenyan’s could operate on a entirely new level of efficient commerce.
Today, more than 43% of Kenya’s GDP flows through M-PESA, with reported incomes increasing between 5–30% in rural Kenyan households. Kenya’s economy grew 5.7% last year to become the 4th largest economy in sub-Saharan Africa.
While the success of M-PESA deserves accolades, the technology is really just an extension of the existing banking system. It requires enormous resources and regulatory compliance to implement. Deposits are backed by fiat in a central bank and fees are upwards of 20% for small transactions. Over 18,000 M-PESA ‘bank branches’ exist to service customers in this traditional financial system, partially because this is how complex, centralized financial systems work, but also because M-PESA must control the flow of e-cash in order to profit. As a result, progress beyond Kenya has been slow.
Consumers may benefit from the use of this e-money but they are limited to the innovation that M-PESA can afford to invest into the technology. Ultimately, they are still at the mercy of the banks.
Cryptocurrency is the future
Decentralized protocols like Bitcoin will soon displace systems like M-PESA because the protocol can easily provide all of the value of a traditional banking system without any of the limitations of a massive, complex, control-seeking entity. With Bitcoin, there is no profit-mechanism to fulfill so costs will be sustainable at a fraction of current prices.
The source of innovation will also shift. Nobody owns the bitcoin network and anyone can contribute to the innovation of services on top of it without permission. This means than Kenyan’s, as an example, will only be limited by their own ingenuity in how they want to use money.
Bitcoin banking is emerging rapidly
The Philippines is having a Goldilocks moment with Bitcoin. High mobile penetration (80%), a lack of non-cash payment methods and a government supportive of digital currencies means the landscape is ripe for Bitcoin to thrive as a platform. And thrive it does, thanks to a growing community of innovative, entrepreneurial Filipinos.
Currently in the Philippines:
- There are multiple domestic exchanges where you can trade Pesos and bitcoin. Deposits can be made to any bank or currency vendor.
- You can pay your bills with bitcoin.
- You can make online purchases.
- International remittance fees have been slashed to 1% (from 6% in Canada, for example).
- Bitcoin is so accessible that you can even travel on it.
In a country where 80% of the population lacks banking this is a positive sign, and as support for the ecosystems grows, undoubtedly we will see more advanced financial services arise from this foundation.
There are challenges ahead
The idea of half the world operating on Bitcoin is terrifying to some, and for good reason. This is a new frontier, not only from a technology perspective, but also because we‘ve never really operated economically without a ‘trusted’ central authority before.
Everyone will have to adjust: consumers, bank and governments. Many, like M-PESA, probably won’t like the transition, and the reality is that we’re going to have to work with them for a while longer. Bitcoin, and decentralized technology in general, can be so beautifully disruptive that we can already transcend the existing system, however, we must work in concert to allow the ecosystem to grow beyond the need for our existing financial institutions.