“The reason why it is so difficult for existing firms to capitalize on disruptive innovations is that their processes and their business model that make them good at the existing business actually make them bad at competing for the disruption.” —Clayton Christensen
Mobile money is a disruptive innovation that traditional banks have struggled to (or, in some cases, refused to) adopt as a tool for reaching the unbanked. However, that hasn’t stopped developers, investors, academics, philanthropists, and others from discussing and moving toward mobile money (defined as performing financial transactions through a mobile phone) for almost a decade now, precisely with that purpose in mind. In that time, the number of mobile money deployments around the world has grown by leaps and bounds in both developed and developing countries.
Given the strength and dominance of legacy payments infrastructure—online banking, debit and credit cards, PayPal, etc.—in developed countries, mobile money in these markets is more a solution in search of a problem than a cure to an ache begging for relief. Moreover, the dominant players don’t see the need to add another payment option to an already crowded field; “If it ain’t broke, don’t fix it” is the unspoken attitude.
By contrast, in developing countries the problem and the pain are evident, the human cost is high, and the need for a cure more acute. Hundreds of millions of people and small informal businesses are either trapped in poverty or teetering between middle class and poverty. Because they conduct business in cash only, they are financially excluded from products and services that many of us take for granted. With a cash-only existence, they cannot create a digital financial footprint that is the key to affordable loans, insurance, savings accounts, and other basic financial products.
Despite this urgent need in developing countries, the solution has proven elusive. Of all the components required for mobile money, the technology is the most straightforward piece of the financial inclusion puzzle to implement.
Far more challenging, and less discussed, are the partnerships that need to be established. As Ezuza’s CEO, I have seen some of the best partnerships come from the most unexpected pairings. At first glance, I wasn’t sure how well some of these companies would work together, but they are persevering and helping make financial inclusion a reality.
Another challenge companies must navigate are the regulations that can either promote or discourage financial inclusion. The regulatory context depends entirely on the strength of the government’s commitment to financial inclusion and, more often than not, its willingness to stand up to the traditional banking establishment to achieve this objective.
Traditional banks have yet to develop a viable business model to serve the billions of people around the world who don’t appear to have sufficient assets to make them valuable customers for these banks. And even if they had the formula, traditional banks could not attract these potential customers alone. A far more important, though less evident force for financial inclusion in developing countries is the Fast Moving Consumer Goods (FMCG) sector.
Why are FMCG companies key to financial inclusion? The nonprofit Center for Financial Inclusion estimates that the spending power of the bottom 40% of the population in low- and middle-income economies will double from $3 trillion to nearly $6 trillion by 2020. These are the exact consumers that FMCG companies target.
However, FMCG companies face many hurdles in getting their goods to market in these segments. Their transactions with small retailers (nearly 1 million in Mexico alone) are predominantly done in cash. As a result, FMCG companies operating in emerging markets waste hundreds of millions of dollars each year because the majority of the small vendors they serve in cities, towns, and rural areas don’t use traditional banks. Instead of settling accounts electronically, FMCG companies and these vendors conduct the bulk of their exchanges in cash. Although cash guarantees payment, the FMCG companies must then transport untold amounts of cash, count it, reconcile the accounts, and then deposit the money into banks. In addition to being inconvenient and costly, this process exposes FMCG companies to numerous risks that adversely impact their bottom line, including theft, leakage, and high insurance costs. They therefore have a very strong incentive to go cashless. Mobile money is ideally suited for this.
This is why I predict that one or more FMCG companies, which are frequently compelled to innovate given the diversity of the markets in which they operate, will be at the forefront of large-scale financial inclusion in emerging markets in the years to come. Ezuza has every intention of making this prediction a reality and being a key part of that change. The question is, what will traditional banks do? Will they sit on the sidelines, or will they be a part of one of the most important and transformative market shifts that the banking industry has seen in centuries: extending financial services to 2 billion consumers for the first time.
In case you missed it, Ezuza released the first in our series of three white papers, “Financial Inclusion: Is It a Basic Human Right?” Financial Inclusion: Is It a Basic Human Right? last week. It is also available in Spanish here.