October 11, 2019
The transformation of consumer banking is a result of the convergence of banking and telecommunications players. After 20 years of change, and many predictions of their demise, banks are bigger and more profitable than ever. Today, banks are at another competitive crossroads, and this time the disruption in finance is coming from mobile operators.
However, it's not surprising that this is happening, banks and mobile operators have a lot more in common than you might think. They both have global distribution networks and a system of financial clearing houses that settle charges between the individual companies on the network. It means people can use their credit cards globally just as meaninglessly as they can use their phone. And, in both cases, they can settle their bill when they get back home.
Financial and mobile networks operate in the same vein across the globe and aim to serve "everybody." In reality, there is an entire tier of customers that banks are not reaching. To be precise, four billion of the world's adult population have no access to traditional financial services, and this number is concentrated in the developing market economies.
Within these underserved markets, the majority of users are prepaid subscribers, which means mobile operators have had success in reaching this tier of customers. There is an underlying strength in those mobile consumers that could help bridge the financial market divide. Crucially, the mobile operators have a stable relationship with this prepaid customer base.
These are people who typically top-up their balance at least once a week, and the operators have the same visibility of a phone's usage in terms of data consumption and spending patterns. In turn, this determines the financial capability for these prepaid customers enabling them to start building a payment history for the specific mobile number.
Bringing this underserved population into the formal financial economy creates billions of dollars in potential revenue and drive significant economic growth. Banks, financial technology companies, and investors alike are beginning to realize the enormous opportunity that could be created by 'including' the underbanked within the global economic network.
As a result, this has led to countless industry players beginning to tussle for market share across the world's emerging markets. For example, in June, the African Development Bank (ADB) launched a fund focused exclusively on providing access to digital financial services for at least 320 million more Africans. Meanwhile, in the Philippines, the country's seventh-largest bank has partnered with Temenos to help rural banks offer digital banking to the underbanked in remote communities. While over in Brazil, the credit bureau Quod is looking to leverage both positive and negative consumer credit information to assess consumer creditworthiness.
A significant issue remains for financial institutions: large segments of the population that want to target Asia, Latin America, and Africa are still mostly invisible to their systems. Without knowing enough about the individual, the risks are too high to provide them with a bank account or a loan. And the individuals themselves are unable to prove to wary providers that they are trustworthy. To top it all off, institutions don't even know where to find these customers in the first place.
Some emerging FinTech providers are attempting to create new credit scoring systems based on alternative data sources ranging from social media profiles to payment histories with utility providers or e-commerce platforms. These alternative data streams are fragmented, and as a result, seem unreliable, limiting the opportunities to make regular payments or establish creditworthiness and financial trust. By themselves, none of these alternative sources have the depth, scale, or rigor to eliminate risk and deliver enough impact to make financial inclusion a profitable business strategy.
Hugh McColl, the former CEO & Chairman of Bank of America, once said, "As every schoolchild knows, the dinosaur didn't survive the Ice Age. It's not that he lacked the capacity to evolve. He just didn't have the time. Unlike the dinosaur, bankers can see the changes ahead. We have a choice in the matter. The dinosaur never did."
What many are coming to realize is that patterns of behavior can be associated with a mobile phone number, even in the prepaid market. This analysis can go a long way towards building financial identities that can unlock the market. Extracting that data, however, requires both mobile and financial market expertise and understanding. To access an alternative source of financial information, and subsequently build new services, FinTech providers need to learn that it's the mobile operators that have the information they need.
Collectively, the operators and their shared network represent the largest distributor of consumer services in the world. The global mobile network can provide alternative data that will fuel the future of FinTech services. It's a great source outside of traditional banking. Why? Because of the scale, depth, and quality of data that can enable financial institutions to expand their customer base and include underserved populations into the formal financial economy for the first time.
Collecting, understanding, and analyzing highly valuable data and then turning it into actionable information and insight represents enormous opportunities for the operators and their FinTech partners. There are real strength and value in the numbers, and in particular, in the data within the numbers. The operators and their partners that best learn how to extract and use that information will be the ones that fuel a FinTech future for hundreds of millions of customers.