Democratising finance: Technology improves access for the masses

FT series examines the impact of new banking competition

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There are two popular perceptions of Nigeria. To many, it is the beating heart of Africa’s growth story, with GDP expanding by about 7 per cent a year. To others, it is a country in turmoil, with a fragile democratic government desperate to shrug off the mounting atrocities of Boko Haram terrorists.

The rollout of a national ID scheme by President Goodluck Jonathan captures this ambiguity. Electronic chips on the new ID cards store details of the holder’s iris and fingerprints, boosting security. But with the backing of MasterCard, these are also payment cards — and a potential harbinger of access to finance for the masses.

“This is digitalisation, democratisation and financial inclusion all rolled into one,” says Ann Cairns, who heads international operations for MasterCard.

Once it is fully implemented, the project will allow 100m Nigerians to access financial services. It is just one of countless initiatives around the world being touted as proof that digitalising finance can empower people.

Over the next week, the Financial Times in its series “Democratising Finance” will examine the initiatives that are bringing new sources of finance, new forms of currency and new methods of payment to new customers — and ask the question: is the world genuinely being “democratised”, as many of those behind such innovations insist?

Nigeria’s ID scheme is a case in point. To its fans, the project is a slick way to modernise the country, leapfrogging some of the west’s traditional ways of doing things in the process. But it has been criticised by human rights and protest groups. Privacy International, the data protection charity, has raised concerns about the potential abuse of biometric data. And local protest groups have complained about the involvement of a western financial company, the MasterCard branding on the back of the ID card was akin to the branding of people in the 19th century slave trade, they said.

Finance companies, from MasterCard to the biggest banks, dispute suggestions of exploitation. But there is no denying that access to digital technology is helping financiers tap lucrative new markets.

“Making access to finance more democratic is not only about social responsibility, it’s a business model,” says Carlos Lopez-Moctezuma, the Mexico-based head of financial inclusion at BBVA.

The Spanish bank operates in Mexico through a network of 30,000 agents — local shops, pharmacies and post offices. Now in an effort to reach a broader spread of customers improve efficiency and reduce risk, the bank is trying to shift agents away from traditional cash transactions by encouraging them to turn their smartphones into point of sale devices.

In another initiative, 2.5m customers now have an integrated mobile phone number and bank account number. “It is about using technology to reach more people but also making life easier by understanding what they want,” says Mr Lopez-Moctezuma.

Only a few banks are thinking radically about technology and finance, using big data to analyse customer behaviour, for example, or partnering with peer-to-peer lenders. Many of the biggest advances in bringing financial services to the masses have come from mobile operators and technology companies.

Vodafone’s M-Pesa service, a relatively low-tech money-transfer scheme launched in 2007 using mobile phones and on-the-ground agents, dominates in Kenya, Tanzania and beyond. Similar schemes have spread across Latin America.

Vikram Pandit, the former chief executive of Citigroup and now a financial technology investor in a range of whizz-bang start-ups, is full of admiration. He says that M-Pesa might be simple in comparison with cutting-edge “fintech”, but it is fulfilling a gaping need. “The most fundamental needs of the poor are not ‘which stock can I buy?’ It’s just matching inflows and outflows of their lives and almost all of them come down to payment systems.”

Not everyone is so upbeat. Arjan Schutte, another fintech investor and founder of Core Innovation Capital, says: “I’m a bear on the mobile phone. It should be the great democratiser. [But] how old a story is M-Pesa? Come on! In 10 years no one else has been able to leapfrog over the consumer finance infrastructure. There’s nothing even close. There’s no story to tell at scale other than M-Pesa.”

Series instalments
1. Peer-to-peer lending
2. Mobile payments
3. Personal investment
4. Big data
5. Digital currencies
6. Traditional banks

In the west a different form of “democratisation” is taking place, whereby ordinary people who would once have had no access to key parts of the financial-services market can suddenly find themselves enfranchised. Online platforms that use “big data” analysis to judge credit risk are widening the pool of people who can borrow money (though it may also allow risk to be so finely assessed that some people will become unfinanceable or uninsurable).

New psychometric testing is doing the same in emerging and developed markets alike.

Mr Pandit believes in the need to “democratise the disparity” between US billionaires who can earn 20 per cent on a big M&A deal and the 2 per cent return available to most Americans. And sure enough, online platforms that give access to “crowdfunded” equity investments are rocketing in popularity.

But it is the broadening and deepening of the crowdfunded debt market that has been one of the most striking trends of recent years. From Shanghai to London to New York peer-to-peer lenders, online platforms that match people looking to invest money with individuals and companies that want to borrow it, are doubling or tripling in size every few months.

In a sign of the excitement around the industry, one of the world’s biggest, Lending Club, floated with a valuation of more than $5bn.

Samir Desai, chief executive of British P2P lender Funding Circle, says that there are clear benefits for borrowers who might otherwise be unable to find the money they need but also for lenders looking for worthwhile investment opportunities. “In the past it wasn’t really possible for individuals to lend to businesses unless they had £100,000 or more available. Now they’re on an equal footing with big institutions. That is true democratisation.”

Others are less sure. Marshall Wace, a hedge fund group that is backing a P2P venture, thinks the “peer” funding element that has underpinned the sector to date will steadily institutionalise so that big asset managers and banks become the main funders of lending on these platforms. “There’s a romantic idea about peer-to-peer,” says Simon Champ, who heads the company’s P2P operation. “But it is not only about democratisation. It’s also about the replacement of an outdated, 300-year-old business model, with a new, more efficient one.”

As one user of Lending Club commented: “Success drew in institutional players, with high-speed computer programmes to buy loans in seconds. So, a good deal for borrowers and institutions, not so sure about retail investors.”

Some regulators and commentators are also concerned that the P2P market has been tested only in a low interest rate environment. When rates rise, defaults increase and investors get burnt, there could be a popular backlash.

Few would dispute that technological innovation is benefiting the masses in much of the world, aiding financial inclusion from the most basic payment services to the most sophisticated investment strategies. But if this is democratisation, it is unlikely to be a painless process.

As Abraham Lincoln said of the impending US election in 1864: “It’s the people’s business . . . If they turn their backs to the fire and get scorched in the rear, they’ll find they have got to sit on the blister.”

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