Smartphones: the bank in your pocket

By putting the customer first, start-ups are able to build a product that aligns with their needs, and thus achieve greater take-up. Illustrations: Eirian Chapman.

The appetite for small smartphone person-to-person payments has proven insignificant in Australia, but for the "unbanked" in developing nations, these innovations are helping people access money in a life-changing way.

After developing a peer-to-peer payment system around a decade ago that relied exclusively on mobile phone technology, entrepreneur Harold Dimpel had grand goals. He wanted his business, mHITs Limited (pronounced Em-HITS), to become the next PayPal. But where PayPal relied on email addresses as account identifiers, his would make payments even simpler by using mobile phone numbers.

The system would make bill splitting at restaurants simple – one person pays and others make an immediate transfer to that person. Small debts would no longer be an issue and the cost of using the system would be minimal. However, he found that the appetite for small, person-to-person payments was low. In Australia, the culture was such that people tended to be relaxed about small IOUs. There just wasn’t a big enough problem to solve.

Dimpel pivoted to focus on merchant payments at cafes, building the first SMS ordering and payment service in Australia. People could order and pay for a coffee by SMS as they walked to the cafe and pick it up from the counter on arrival – solving the problem of queues which, unfortunately, persist today. That did well, until the GFC hit and Australian venues were suddenly no longer interested in experimenting with new, innovative forms of payment.

This prompted another pivot for Dimpel, this time into emerging markets and the 2.5 billion “unbanked” (people without a bank account), where credit cards and other bank offerings are less common, not available or not trusted. mHITs’ technology began to find its groove, combining with telcos to provide people with a mobile-based payment method for electricity.

In its final rebrand, mHITs became Rocket Remit, focusing on growing its rapidly expanding international mobile remittance business. Rocket Remit is the fastest and simplest service in the world to offer international money transfer to emerging markets exclusively via mobile money. It allows people in Australia to instantly send money to friends and family overseas, requiring only a mobile number to address the payment.

The bank in your pocket

“In many developing countries, most of the population have no bank account,” Dimpel says. “Many people do not have a formal job or regular income and there is no pension, no free medical system and no social security. When you get older and get sick, the state does not look after you – if you can’t pay for help you really suffer. In a lot of cultures, it’s normal for children to support their parents financially. Electronic money systems, including the mobile money systems that we see in Kenya, Ghana, Tanzania and other countries, are executed well in those markets and are very suited to their purpose.

One of the key issues with major banks and insurers attempting to move into developing nations is that they have traditionally not tailored their products or distribution to align with the way those markets work. Nor have they aligned with consumers, says Insurtech Australia co-founder and COO Simon O’Dell.

“The start-up ecosystems that are popping up around the world often surprise us.” Simon O’Dell, Insurtech Australia

When markets underserviced by banking and insurance were recognised by traditional incumbents, the multinationals simply made the same or similar offerings that succeeded in more advanced markets, O’Dell says. As a result, markets remained underserviced. However, when well-funded start-ups identified the same need, the story was very different. Those emerging markets, in partnerships with start-ups, are now beginning to teach advanced nations powerful lessons in innovation.

That’s evident in the findings of the 2017 CPA Australia Asia-Pacific Small Business Survey. Australian small and medium enterprises (SMEs) are the least likely in the region to accept payment on digital, online or mobile technologies, at only 23 per cent. Compare this with mainland China, where a whopping 65.5 per cent of SMEs do so. Chinese consumers and businesses have essentially bypassed traditional bank-supplied credit cards and debit cards, moving directly to highly accessible mobile payment methods such as Alipay and WeChat Pay.

“If you go somewhere like Haiti, or various countries in Africa, or emerging countries in South-East Asia, it sometimes seems that having a smartphone is more important than having clean water,” O’Dell says. “The start-up community, which is backed by around US$2 billion annually in funding, recognised that. Traditional incumbents have taken longer to adjust. One of the principles to which start-ups subscribe is customer-centricity. By putting the customer first, start-ups are able to build a product that aligns with their needs, and thus achieve greater take-up.”

Innovation is customer-centric

Developing nations may have missed the boat on copper-wired telecommunications, but years later that meant they could leapfrog what is now antiquated technology and move directly into mobile communication. From an environment in which only a tiny percentage of people had computers or internet connections, suddenly entire populations were exposed to the internet, via the screens of their smartphones.

Since then, O’Dell says there has been enormous take-up of insurance and banking products, as well as less traditional products such as mobile money. “In the insurance market, the ‘insurtech’ [insurance technology start-up] that develops the new products designs its offerings to align to the specific needs of these markets.”

To understand the importance of a customer-centric approach, Professor Ross Buckley, King & Wood Mallesons chair in International Finance Law at UNSW, says it’s important to first recognise the problems people have when they don’t have a bank account, or a reliable and interconnected banking or finance system.

“Technology such as e-money [mobile money] is really quite transforming for people in particular countries,” Buckley says. “We take certain things for granted, like the ability to pay an electricity bill without taking a day off work. But in some developing countries, it’s not unusual for somebody to have to travel a long distance, then spend five hours in a queue to pay an electricity bill.”

There’s also the problem of a lack of credit ratings. When people don’t have loans or credit cards, and when identities and financial records are not known to governments or organisations, a financial system like the ones that operate in advanced nations simply cannot exist.

Professional Development: CPA Q&A. Access a handpicked selection of resources each month and complete a short monthly assessment to earn CPD hours. Exclusively available to CPA Australia members.

Start-ups that are now developing products for these territories are not only based in traditional locales like Silicon Valley, Sydney, Shanghai or Tel Aviv, they’re also in Nigeria, India, Brazil and other emerging tech hotspots.

“The start-up ecosystems that are popping up around the world often surprise us,” O’Dell says. “They’re coming up with solutions that are very customer-centric and they respect the values of today’s consumers, which are around trust and transparency, shared economies and peer-to-peer reviews and so on.”

One such start-up is M-Pesa, a mobile phone-based microfinancing and money transfer service that operated originally in Kenya and Tanzania and which has since expanded into Afghanistan, South Africa, India, Romania and Albania. Being without physical branches, M-Pesa turns mobile phones into savings accounts and allows easy deposits, withdrawals, transfers and goods payments.

Another is Moeda, a microfinance platform linking investors in developed markets with cooperative businesses in rural Brazil. Moeda utilises blockchain technology to allow investors to buy the platform’s cryptocurrency, then allocate that currency to specific businesses through an app. Banks in Brazil exchange the cryptocurrency for local tender, meaning exchange rate fees and other middleman costs are avoided, as is regulation. The blockchain, or “distributed ledger” nature of the financing process, creates great trust and transparency.

Who owns the payment process?

Start-ups on their own, in developing nations, would likely go nowhere. They need a platform, a network through which they can offer their wares. That network, of course, is the mobile network.

“Start-ups might come up with a microinsurance product, and they will sell that in to the telcos,” Buckley explains. “It is vital to understand that banks are not good at dealing with poor people. When governments in poor countries have tried to get financial inclusion for their people through banks, it simply hasn’t worked. Telcos are very good at dealing with poor folk in developing countries because they’ve got the right low-cost structures.”

The framework is owned by telcos, and the driver of the process is financial inclusion. Futurist and Advanced Human Technologies chairman, Ross Dawson, says financial inclusion is also an issue in developed countries such as Australia.

“Wherever there are people who don’t use the full suite of financial services that could be valuable to them, financial inclusion is an important consideration,” Dawson maintains. “It’s important to be able to frame this discussion around how we make sure everyone has access not just to things like savings and deposits, but also to simple forms of insurance and so on, which enable them to participate in the economy well.

“In India, there is a massive push for financial inclusion. Last time I was there at a conference on the topic of financial inclusion, in Mumbai, it was said that there were 900 million people in the country who didn’t have a bank account.” When a feature phone or smartphone can be used to accept deposits and purchase forms of insurance, the financial wellbeing of people in developing nations can be truly transformed.

“It’s not just about health insurance and life insurance,” Dawson says. “In terms of poor people’s livelihoods, if you think about agriculture there might be a case where they want to invest in a particular line of crop, but there is a risk of weather damage or other reasons the crop might fail. This holds the farmer back from making the investment. The ability to access simple forms of insurance for the work on which their livelihood depends becomes a critical enabler of social development.”

The same goes for access to growth funding for businesses. According to the 2017 CPA Australia Asia-Pacific Small Business Survey, while SMEs remain most likely to nominate banks as their main source of finance, in mainland China over a quarter of respondents said their main source of finance in 2017 was peer-to-peer lending and crowd-sourced funding.

While a system such as M-Pesa might be fairly unsophisticated in terms of what it offers, Dawson says the concept and implementation of immediate peer-to-peer payments is beyond anything that people are using in Australia. It is simple, tested, proven and would only require a critical mass of users for individuals in Australia to be able to make payments from mobile to mobile, rather than relying on more complex and less convenient bank transfer systems.

“Along these lines, we’re actually quite likely to end up with something that is essentially driven by major banks instead of a stand-alone system,” Dawson says. “It means we won’t have as good or useful a system as the ones that are now being used in less developed economies.”

What role does blockchain play?

Like many new technologies when they are first introduced into a market, blockchain has sometimes been overexposed, says Steven Tuften, Australia and New Zealand representative for ACORD, the global standards-setting body for insurance and related financial industries.

The challenge for those in the insurance industry has been choosing the right problem that blockchain will help to solve, rather than attempting to apply it to every problem.

“Blockchain is about sharing information with parties you’re doing business with, in a form that is incorruptible,” Tuften says. “It’s secure and much harder to hack and, most importantly, it’s all about trust. But if we take the example of a broker and an insurer, they’re exchanging a contract, a policy, or a claim, and they trust that information will be stored accurately. Trust already exists, so blockchain doesn’t really solve a problem in this instance.”

However, in other applications it does solve problems. Tuften describes some work his organisation has been doing on a marine insurance blockchain solution with EY (Ernst & Young) for Maersk Line, the world’s largest container shipping company. In the marine value chain, there are many participants and every time a cargo container moves off a port onto a ship, or from a truck into a warehouse, a contract known as a bill of lading is exchanged.

“In Africa, or emerging countries in South-East Asia, it sometimes seems that having a smartphone is more important than having clean water.” Simon O’Dell, Insurtech Australia

However, cargo could be damaged along the way, or one of the participants in the process could change their business name, making the contract invalid. A blockchain-based system means all relevant information is updated in real time and visible to everyone involved.

“This is a perfect use case for blockchain, because it enables us to share lots of risk information among many participants,” Tuften says. “There’s security in place, so only the people who are authorised to update those records can update them, and in real time.”

Blockchain is also being used in a global digital vault system known as Everledger, set up to reduce the risk of fraud for banks, insurers and open marketplaces, including a platform that makes the history of individual diamonds fully traceable, from origin to end customer.

Apart from outlier examples such as the Moeda microfinance platform, Buckley says blockchain hasn’t yet made much of a difference in advancing the financial inclusion interests of developing nations. Much of the reason for this has to do with what Tuften has identified as a great deal of trust already existing within current systems.

“While blockchain will not always be the answer, it will often kickstart a discussion around older, legacy software systems and that discussion might be the reason a major software investment is authorised,” Buckley says. “That’s a very good result, as such investments are often long overdue. It’s easy for start-ups, building systems from the ground up, to work with blockchain, but it’s very difficult to build blockchain into bigger, legacy systems.”

Whether it’s with mobile-friendly applications, the early adoption of blockchain technology or various other technological innovations, the developing world is partnering with customer-focused start-ups to create its own, unique solutions to its own, special challenges. Along the way, advanced nations are learning lessons in how technology can be better used to serve the needs of specific market segments, and that’s good for everybody.   

Read next: Next-generation banking: No time to waste

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June 2018
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