With global financial markets wavering, Fed interest rates fluctuating, and the subprime mortgage fallout continuing, the health of the world's banks and financial markets dominated discussions at the World Economic Forum's annual meeting in Davos, Switzerland. This year's meeting focused on the concept of "collaborative innovation" and how it may be harnessed to better the everyday lives of people around the world.
From my conversations at the forum, two technology-enabled business models surfaced as promising platforms for helping millions of individuals in emerging markets access financial services, ultimately promoting growth and stabilizing economies.
In the past, firms may have considered marketing services to the unbanked but were often turned back by the lack of infrastructure and sense of overwhelming risk. However, those concerns are blunted with the rise of collaborative models such as mobile banking and peer-to-peer lending.
The explosion of mobile phones and proliferation of cellular service providers in emerging markets are unmatched by any other two-way communication medium. A growing number of low- and middle-income countries are achieving mobile penetration levels in excess of 60% (including Algeria, Colombia, South Africa), 80% (including Chile, Jamaica, Poland), and even 100% (Lithuania, Russia, Ukraine). Today there are more than 3 billion mobile subscriptions worldwide, and that will grow to 5 billion by 2015, when two-thirds of the global population will have phones, according to Nokia Corp.
Banking transactions in emerging countries are increasingly being executed on mobile phones via short message service , wireless access protocol, and wireless Internet. M-PESA, an innovative mobile banking service offered by Vodafone through a local partner in Kenya, was already serving more than half a million customers as of October and was expected to have more than a million customers by February.
The major benefit of mobile banking is that it gives users easy and instant access to financial transactions without the costs or risks associated with the use of cash. For banks, this is an opportunity to enhance their customer reach by migrating unbanked customers upward in the use of banking services.
Another promising collaborative model is peer-to-peer lending. Currently used mostly by the Internet-savvy, it is another example of an emerging, innovative business model that if applied correctly, may help banks reach the unbanked market. These companies — currently led by start-ups like Zopa, Prosper, and Virgin Money — are starting to gain traction in large pockets of communities. Virgin Money has facilitated $200 million in loans and mortgages, and Lending Club predicts it will facilitate $1 billion by the end of 2009.
Peer-to-peer lending provides individuals with questionable or unestablished credit access to loans. Potential borrowers are encouraged to provide additional information about why the money is needed and how it will be repaid.
As peer lenders provide loans to peer borrowers, alternative credit scores may be generated to illustrate the creditworthiness of the borrower in the peer-to-peer lending system. Borrowers are also encouraged to form groups. The idea of borrower groups is that they are under additional pressure to repay their loans if the reputation of the group is at stake. If members of a group manage their debts responsibly, they qualify for favorable rates and can be considered more creditworthy than other groups.
Currently, most peer-to-peer lending is being facilitated by the small start-up companies. However, as this collaborative technology continues to gain momentum, larger financial institutions will look at this market as a risk-free way to reach unbanked populations and another possible revenue source.
Banks may take the credit established by a user in a peer-to-peer service and use that as the basis for offering them full access to the gamut of banking services. Similarly, banks may also start acting as intermediaries by packaging and reselling loans made in peer-to-peer lending networks.
Financial institutions have the rare opportunity to speed emerging markets economic development and help unbanked populations access affordable banking services — while opening up new revenue channels.
However, they must break away from their traditional services approach and embrace collaborative innovation such as mobile banking or peer-to-peer lending. Innovation in technology alone will not be sufficient.
It will have to be accompanied by innovations in product development, business processes, delivery channels, and customer service and education.
Innovation, as always, will be accompanied by regulatory challenges in the form of fraud, identity theft, money laundering, and security concerns. In turn, these will necessitate an innovative regulatory response that will require collaboration between the banking and telecommunication regulatory bodies.
Adopting a holistic view of markets and revenue development is the key to helping create a stable, prosperous global economy. I am personally excited to see what progress we may accomplish in 2008.
