Solving the complex problem of financial inclusion

Konstantin “Kosta” Peric has experienced an incredibly rich career and life. Born in Belgrade, he moved to Burundi with his parents as a teenager, studied computer science in Belgium, lived there for 45 years until he finally moved to Seattle where he still lives now. After a few starter jobs, he worked for about 23 years at SWIFT, where he co-founded Innotribe in 2007. It was there where he became deeply passionate about financial inclusion, which eventually lead him to the Bill and Melinda Gates Foundation where he works as a Deputy Director for the Financial Services for the Poor since 2013.

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I’ve known him for many years - first through Innotribe and recently through an executive learning experience that my company nexxworks organized for Kosta’s team – and I wanted to include him in this newsletter because of his brilliant insights about financial inclusion and the future of banking. What I perhaps most love about him is his grit and creativity when it comes to solving huge societal problems like financial inequality. And that’s what he does today: together with the Bill and Melinda Gates Foundation, Kosta’s mission is to help bank the 1.7 billion people - from a total population of 7.9 billion - that are still unbanked today.

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Though a truly noble cause, “there are still many issues to be tackled before everyone in the world has access to financial services”, explained Kosta. And he went on to list a few of the most important ones:

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Still many issues

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To open a bank account, you need some documentation like a national ID, an address or a birth certificate. But many countries still lack ID systems. And most of these 1.7 billion unbanked do not have a formal address. Some don’t even know their exact date of birth. And so access to any type of financial service is obviously still one of the biggest problems. This is where the concept of a ‘digital identity’ might come in extremely handy.

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The second problem is also related to access, but location-based. There are often no ATMs or bank branches where these people live. The great news is that the mobile phone penetration in underserved regions like Africa has been exponentially growing. These ubiquitous devices can be a great solution for this challenge.

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The third issue concerns the business model of many players in the banking system which is simply not adapted to serving the poor. In the US, for example, if a bank account is empty, the user needs to pay a fee. It goes without saying that this is untenable for people who earn on average 2 US dollars per day. That is where nonbanks - financial companies that provide bank-like financial services but don't hold a banking license and are unregulated - can come in handy, like telcos offering mobile money services.

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Another obstacle are the very strict regulations to which the financial industry is subject and which tend to stifle innovation. According to Kosta, serving the poor is something that the regulatory bodies urgently need to learn about, and indeed they are. They realize that it's totally different than serving the richer populations.

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He also explained that he’s not sure that all things crypto, like bitcoin, could solve the financial inclusion problem on their own, though many seem to hope they will. The fact that they are global currencies and that - theoretically (there are many requirements for smartphones to be able to process crypto and some basic knowledge is needed) - anyone can have a wallet, is indeed truly interesting. But - knowing that cash in cash out is another important factor in financial inclusion - where would one cash out a bitcoin?

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“Helping the unbanked is like a complex puzzle where you need to decompose the Big problem into many subproblems and solve those bit by bit in a harmonious and coordinated way”, explained Kosta. He nor I believe that just one Big solution, like cryptocurrency, will get us there. But we both are convinced that technology - distributed ledgers or others - will play a very big part in achieving that dream.

Open software and open minds

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Kosta believes that banking 1.7 billion people may actually never happen if you decide to wait for the private sector or the government to solve this individually.

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The fastest way to tackle these issues, he feels, is through the basic but effective innovation of mobile money: a concept that was actually launched through mPesa in Kenya and resulted in about 300 more mobile money operations (a number that’s still growing) only in Africa. The big challenge here is that of interoperability: how do you interconnect all of these mobile money providers in order to scale this market exponentially in the same way that mobile phones expanded. I loved how he compared that conundrum to the early email technology which was deeply siloed at first: people could send mails to colleagues inside the company, but not to people outside. That tech only became really useful when the internet and SMTP came about.

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One way to achieve this interoperability between these mobile payment platforms is through the use of open source software, called Mojaloop, which the Bill and Melinda Gates Foundation helped develop. But on top of technology, it is also highly crucial that governments, central banks, private sector entities and other stakeholders work together to change the system. And not just on a country basis but on a regional level and ultimately a continental one, if we take the example of Africa.

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Nonbanks to the rescue

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To me, it’s incredibly fascinating to see that financial inclusion is currently not being solved by traditional banks. Instead it’s banks working together with central banks, new players, telcos and start-ups. And this incredibly diverse collaboration will allow us to fundamentally rethink the system. The challenge will be to let go of our classical developed world idea of “this is how finance works” and be open minded enough to unlearn that and change our mindset.

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One would presume that financial inclusion issues would be an excellent opportunity for traditional financial players to transform themselves int highly relevant phoenixes. Kosta agreed but also pointed out the unfortunate reality that many traditional banks are moving in the opposite direction. “HSBC in the United States, for instance, is now mostly focusing on customers who have more than $100,000 on their account. It seems like the traditional banking sector is currently concluding something along the lines of “payments are becoming a commodity so let's move on to more lucrative activities and leave that space to others””.

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Serving the poor would force them to fundamentally rethink their business models and few traditional banks seem prepared to do that. And so we see mostly nonbanks like telcos or Big tech platforms like Google with Google Pay seeking valuable business models behind these societal challenges.

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A different perspective

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Working with Kosta really opened my eyes to how different the financial lives of the underprivileged are, far beyond the obvious ways. An example is that they perform many more, but really small transactions like one cigarette (rather than a package) or one glass of milk (rather than a carton). Because that is simply what they have money for at that moment.

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Kosta pointed out that only people who have lived through that can really understand this type of financial behavior and create applications and services catering to that. That is why for instance, when it comes to Africa, he really believes in local start-ups making these types of relevant solutions happen.

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Not just in the payment space, but in insurance too, he added, which is totally not adapted for let’s say the context in which a Nigerian farmer operates. Even if you provide access to payments and identity so that he can participate in the economy, you still need an innovative company that will provide him with the insurance that he needs and can afford. This type of insurance should be organized on a case by case basis, said Kosta, which is completely impossible if you want to serve 1.7 billion people. Unless you automate it. He sees a very interesting use case for decentralized finance and automated smart contracts here. For instance, if satellite data show that the crops have failed, the farmer could get an automatic pay-out from his insurance.

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“This is the next frontier”, he added, “where other industries beyond payments and finance will also have to become phoenixes and totally rethink their approach. All sorts of incredible things are possible here - like tracking down locust clouds devastating crops - and that's where I hope that innovation will happen.”

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If you are curious about the radically inspiring learning expedition with exceptional non-conformist thinkers that my company nexxworks organized for the Bill and Melinda Gates Foundation executives, you can find more information here, or you can contact nexxworks' CEO Julie Vens - De Vos at julie@nexxworks.com.