What mobile money can teach us about alternative finance potential


A version of this post was originally published in Capital Business magazine.

In 2007, Safaricom, the leading telecommunications operator in Kenya, launched M-Pesa, a mobile payments service aimed at improving access to financial services for the Kenyan population. Due to Kenya’s geographical vastness, poverty, and underdeveloped banking system, some 80% of Kenyans were excluded from the formal financial sector at the time. This entails a lack of access to modern payment instruments and other banking services, to consumer credit and to insurance.  

Financial exclusion, especially on such a large scale, is socio-economically problematic as it stagnates economic growth, stymies entrepreneurial activity, and cements or exacerbates harmful income gaps. On a granular level, the financially excluded are unable to fully integrate into society and are burdened with time-consuming transactions, such as having to travel 50km to the nearest bank to make a money transfer or receive remittances from relatives working abroad.

M-Pesa changed all of this by allowing users to deposit, withdraw, transfer money, and pay for goods and services from basic cell phones using PIN-secured SMS messages. Money is added to or withdrawn from their cell phone account. Once it is on account, it serves as the currency for mobile money transactions. The logic: cell phone penetration is reasonably high, while banked rates are quite low.

The mobile money industry has since exploded in Africa, spreading from Kenya across the continent. In 2015, an estimated $33 billion exchanged hands through mobile services in sub-Saharan Africa. And while it has gained the most traction in Africa, the mobile money sector can be found in emerging markets the world over.

The mobile money story is still unfolding, but it is already an excellent example of innovative technology being used by a market to greatly accelerate development.

Why wait for an inclusive banking industry, with more brick-and-mortar locations, to emerge when technology can be used to provide huge numbers of people with quick access to financial services using largely pre-existing infrastructure?

Innovative uses of technology are the way forward for all of us. This is particularly true for emerging markets, which can leverage technology to bypass much of the lengthy evolutionary process undertaken by developed markets to build similar, perhaps less efficient systems.

Another technology sector has recently emerged that, if embraced and adopted appropriately, is primed to significantly impact emerging markets and allow them to once again develop at an accelerated pace. That sector is alternative finance.

The disruptive potential of alternative finance

Alternative finance, mainly in the form of marketplace lending (P2P and P2B) and equity crowdfunding, are completely disrupting the way businesses raise capital and how (and which) investors invest in private businesses. Its potential is particularly great in emerging markets, where market gaps are typically more pronounced and funding options more limited than in developed economies.

Why does it wield disruptive potential?

Access to private capital markets has long been limited to the wealthy few. However, alternative finance has democratised the process of investing in early-stage businesses and SMEs, significantly expanding the pool of available investors. Now retail investors can invest in these businesses alongside angel and institutional investors. This means more capital is available to be injected into promising businesses, which can lead to a chain reaction of innovation, job and wealth creation, and economic growth.

Alternative finance enables retail investors, which make up the vast majority of investors, to access certain asset classes for the first time. Equity crowdfunding, for example, provides access to SME private equities, an asset class that has the potential to yield higher returns than more traditional asset classes such as publicly traded stocks and real estate.

For investors, this new-found access to asset classes such as SME private equities is important for reasons beyond returns. It can be leveraged to greatly improve portfolio diversification, which mitigates risk and better insulates them against market shocks.

On the business side, alternative finance solutions improve access to capital, a lack of which is one of the primary reasons businesses fail. Who knows how many good businesses go under because they can’t raise the capital they require? In emerging markets, where the risk appetite of banks is low, and angel investing and venture capital are still nascent, access to capital can be particularly limited.

Given that more capital means more businesses, which means more jobs, more economic growth and more opportunity for innovation, increasing access to finance should be a priority for governments and other relevant stakeholders.

In addition to improving access to capital, equity crowdfunding and marketplace lending help fuel innovation by making the capital-raising process more efficient, thus freeing up the entrepreneur to focus more energy on the business itself. In the equity space, raising offline can be very time consuming, whereas raising online via an equity crowdfunding platform is less time and energy intensive. If raising offline is a full time job, equity crowdfunding makes it a part-time one.

No market can afford stymied innovation and economic growth, especially emerging markets. As such, entrepreneurs should be given every opportunity to succeed and investors should be offered innovative ways to invest and diversify their portfolios. Alternative finance technology makes the capitalization process more accessible and efficient for businesses and opens up a number of exciting asset classes for investors. Just as the mobile money industry has enabled many emerging markets across the globe to jump ahead in the domain of payments, alternative finance can enable these markets to leap to the forefront of SME financing.

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