An Interview with the Chief Payments Officer at BankServAfrica on SA’s National Payment System

With the Fintech world immersed in events at Sibos, we at Daily Fintech had the opportunity to speak to Martin Grunewald, Chief Payments Officer at BankServAfrica. We discussed the future of National Payments System (NPS) with Martin, and he provided key insights on the approach, challenges and the work that remains to be done across Africa, not just South Africa.

mobile-payments-in-africa

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BankServAfrica is the largest automated payments clearing house in Africa. They process payments across 40 banks, about 34000 ATMs, with peak volumes in 2016 reaching R10.5 Trillion (includes electronic, POS and ATMs). The National Payment System is the infrastructure that BankServAfrica have been working on to facilitate interoperability between banks, ensure regulatory compliance and reduce complexity in the industry.

Martin has been at the forefront of the NPS redesign initiative and is hosting a community session with McKinsey at Sibos. The interview we did with him touched upon the following areas,

  • Drivers and Approach to modernising NPS
  • M-Pesa in South Africa
  • Impact on the unbanked
  • Fintech, Blockchain and NPS
  • Interoperability across Africa

What do you see as your role at Sibos this year?

Sibos is the gathering of about 8000 Financial Services and Fintech stakeholders across the globe. I will not only be representing BankServAfrica and South Africa, but also the whole African continent. I am keen to engage with the global community, share ideas and also learn from the rest of the world on how they are solving problems with the digital economy.

I would also be discussing and sharing ideas around addressing the unbanked and improving financial inclusion across the world. We will be flying the African flag and engaging with the globe.

Why do you need NPS to be modernised and what are the drivers?

NPS modernisation is a very interesting space and we are working closely with the Payments association of South Africa to make it happen. SA is a two-economy country where payments infrastructure has mostly served the middle class and the corporates.

Statistics are distorted when they claim that 70% are banked in SA, as they include 12 Million government grant earners who have bank accounts but are mostly unbanked. Without this population, the banked percentage falls to 57%.

We are redesigning the NPS so that it can be used by a wider audience. A redesigned NPS alone will not automatically provide financial inclusion for the unbanked. But we can definitely ensure that the design doesnt inhibit the process. 

For example, SA has had a real time payments system from 2008, for higher value transactions, that are priced that way. Even fraud detection is designed around high value transactions. A motorbike can be bought using real time payments, but not a 2 Rand transaction. NPS redesign problems such as this.

What was the approach to the NPS redesign?

We have taken a three staged approach to the NPS redesign.

First step involved looking at international markets. Countries like US, Canada, EU, UK and Australia act as comparable ecosystems economically, where there have been different approaches taken to address different functionalities. For example, RTGS has been addressed differently across these countries.

We also performed a comparison across developing economies such as Brazil, Mexico, Nigeria and India on how they are achieving modernisation of their payments infrastructure. For example, India is moving towards a pay by proxy style mobile payments infrastructure.

Second Step was to interview about 50 key stakeholders across these economies that included, banks, retailers, regulators, mobile operators and getting their views around the key problems we were trying to solve in SA.

Third Step was to arrive at actionable insights from the data gathering and execution of the actions. We have now kicked off modernisation of the NPS based on the results of the analysis.

What are your thoughts on M-PESA and its role in SA?

M-PESA has done well in West Africa, particularly in Kenya and Tanzania. However it has failed to penetrate SA, twice. From a SA perspective we need to open up the NPS system to other players. SA has an entrenched banking system. Kenya can’t be easily replicated in SA.

West Africa (Tanzania/Kenya) has closed loop systems running their course. Economies cant scale on closed loops systems. Payments for SA and for rest of Africa should be open and cater for other players that scale. 

How will the Fintech, Blockchain and Telecoms revolution influence NPS?

New Fintechs can create leap frog moments using new technologies, but when it comes to NPS the challenge is that there are legacy software and processes involved. They have to be open ecosystems that can interoperate, and not siloed. I see many tech solutions going into environments, without taking a top down approach.

Next generation of payments infrastructure cant ignore mobile. 10 years ago we couldnt have imagined a life without mobile. Its a key channel for transactions going forward. Informal set ups would depend on mobile for connections. Payment systems that do not make mobile friendly customer journeys will fail.

There is a lot of activity happening in the Blockchain space. While across other industries, applications are starting to emerge, within Financial Services it is still a great piece of technology looking for a problem to solve. 

How do you see your role across Africa?

I think Africa needs interoperability with the payments infrastructure. Financial inclusion has vastly improved in some countries, thanks to Fintech. However, they are currently quite closed ecosystems. We are working with the Gates Foundation and the World bank on our vision for Africa. We are working towards an open ecosystem that provides seamless interactions across Africa.

It was a very insightful conversation with Martin, who gave us time at short notice. An open payments ecosystem across Africa would be nirvana state, and if achieved would act as a template for other developing regions of the world to follow.

Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

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保险科技没有用，为什么呢？

What follows is a Chinese translation of today’s InsurTech post on Daily Fintech by Stephen Goldstein, with translation by Zarc from InsurView. This article will also appear in Chinese on the InsurView site. To read more Fintech content in Chinese, you can scan the following QR code by Wechat and subscribe to InsurView’s Wechat account.

InsurView QR code

以下是今日DailyFintech发布的由Stephen Goldstein撰写的InsurTech文章的中文翻译，由InsurView的Zarc进行翻译。 本文也将在InsurView网站上以中文显示。 要阅读更多Fintech的中文内容，您可以扫描以下二维码，并订阅InsurView的微信公众号。

 

好吧，好吧，其实我并不相信这一论断。毕竟，这是我所在的行业，我每周还要为它写一篇文章呢。

我之所以取这个题目，原因有二：

1、我希望让题目更吸引眼球；

2、我希望从我上周提到的话题“保险的基础和原则”开始展开本文。

上周的文章有一点长，我总结了我们在保险业中要做的事，即：

“保险是一门为客户提供安全感的生意，我们要让他们知道，当他们遭受到不幸时，他们可以获得一定的经济补偿。这类不幸可以是身体健康、生命方面的，也可以是财产方面的。这是保险的核心所在。”

同时，这些事又与我前几周提到的保险业三大基石有关：

1、定价

定价是否合理，关系到保险公司的收入是否能够覆盖其日常运营的开支以及是否有着足够的资金储备以保证其偿付能力。

2、资金储备

关系到保险公司的偿付能力。

3、理赔

和大家一样，我也在实时跟踪保险业和保险科技领域的热点新闻。每天，我的Linkedin主页和邮箱都会收到新的保险科技新闻推送，其中包括创业公司获得投资、新的保险科技合作、创业公司拓展业务以及贯穿保险价值链的新型解决方案等。

这些内容我都很喜欢，因为它们展现出了技术解决方案可以如何提升客户体验，以及如何帮助保险公司提升运营效率。我是保险科技未来光景的粉丝。

但是，我对于当今保险世界中可能存在的风险，也保持着谨慎的态度。

我不想太过激进。作为专栏作者，我认为同时谈论保险科技的好与坏是非常重要的。

目前，保险科技解决方案的变化程度和业界对其的接受速度都达到了历史最高水平。而且没有任何慢下来的迹象。但是，任何优秀的计划，都必须要有一个风险缓冲和备用计划。

这也带来了我取这一题目的第三个原因。其实并非保险科技没有用……而是，如果风险未能得到合理地控制，或者应急计划没有到位，那么许多保险科技项目的进程就会受到阻碍，在某些情况下，就会没有用了。

那保险业和保险科技面临的风险有哪些呢？我主要关注三点，这三点在过去几个月内也经常出现在新闻报道里。事实上，不管有没有保险科技，这些风险都存在于保险行业。即：

1、宏观经济环境；

2、天气风险/自然灾害；

3、监管。

宏观经济环境

2008年后，全球股市一路走高。这也难怪现在有大量热钱涌入保险科技领域进行投资。

如果再次出现市场回调，甚至再次世界经济危机的话，会出现怎样的情形？保险科技领域内的投资还会有那么多吗？

我说的还只是股票市场的影响。如果固定收益市场也产生冲击呢？

在这篇8月份的金融时报文章中，丘博的CEO，Evan Greenberg就对人们发出了关于低息环境的警告，以及其可能对保险公司造成的影响。他说道：“很多保险公司没能赚回足够的钱，有些甚至还在亏钱，或者即将在未来亏钱。”这是一个很严重的问题，因为这会在未来影响保险公司的偿付能力。当然，他们首先得满足监管层制定的偿付能力要求，但是如果这一情况持续下去，保险公司势必会大幅提升保费，以及撤销部分险种业务。

除了宏观经济环境，自然灾害对于保险的影响也不容忽视。

天气/自然灾害

过去几个月，厄玛飓风、玛利亚飓风和哈维飓风先后袭击了美国东南部及沿岸小岛。美国加州也在过去几周身陷火海。世界各地的其他国家也经历了大量灾难，相关的文章非常多。文章题目从“遭受灾难后，如何向你的保险公司索赔？”到“天气灾害会对保险公司造成多少经济损失？”都有。随着气候变化的程度加深，未知的天气灾害也越来越多。我必须承认，我不是灾害风险定价方面的专家，但我猜想，气候变化将会使得天气灾害相关保险产品的定价越来越困难。

所以，股票可能会跌，利息可能也涨不上去，天气灾害也可能越来越严重。这些风险很大，但是最后一个风险可能会分到最大的蛋糕，那就是：监管。

监管

上周，美国总统特朗普颁布了两条有关医保的行政命令。一条是允许消费者跨境购买保险，另一条则是限制了奥巴马医保的资金来源。这些安排会对美国的医保市场和保险市场造成怎样的影响，目前我们还无法判断。这个话题足以写一篇独立的文章，我打算未来再写。

监管如果不能客观地看待问题，真的能把事情搞砸。我在前几周写过关于如何与政府合作的文章。有一些政府就更加开放，也更懂得金融科技和保险科技。但是，就我接触过的监管层来说，监管层的态度和观念可能会在朝夕之间改变，迫使从业者被动地改变计划。

不同的险种有着不同的机会和风险

对于有些险种来说，比如财险，保险科技可以发挥重大的作用，可以带来大量颠覆和改变现有保险价值链的机会。如果自动驾驶汽车成为主流，整个车险领域将会彻底改头换面。对于非车财险，用智能家居和智能设备来监控房屋财产，将会更好的为客户改善产品定价和体验。

对于旅游险，保险可以用来保护游客财产（比如手机、电子设备等），以及提供基于时间的保险（比如共享经济下的保险）。颠覆行业，增强客户价值的机会非常多。

对于寿险、健康险以及灾害险，那就是另一番光景了。我们看到了很多在线销售的定期寿险。但是终身寿险、全能险和年金险呢？当我们需要处理更复杂的个人/商业险时，该怎么办？

我最大的担心来源于这些类型的产品。我的保险业经历主要就是寿险和健康险领域的。这些类型产品的定价结构更注重长期，因为是终身产品，而非产险这类按年收费的。健康险可以按年收费，但是随着保健支出的增长，人们看医频率的上升，健康险的定价也将越来越困难。

那我们可以做什么呢？

首先，最重要的是，每一家创业公司和传统保险公司都需要根据自己的保险科技计划准备好一个降低风险计划和一个应急方案。沉浸在行业狂欢之中是简单愉悦的，但是谈论风险的时候大家就没那么开心了。上文提到的一些风险仅仅是最主要最宏观的几个。每一家公司和每一个项目都有着自己特定的风险集合，都需要依据实际情况进行风险评估。

精算师也需要跟上。他们需要用自己的专业技能进行精算建模以及和数据工程师们协同合作，深入理解能获得到的所有数据，并将其用于改善定价模型。

精算定价体系和数据科学的结合，将是推动保险发展的最重要力量。传统保险公司已经花了几百年的时间来管控风险。但风险控制的本质，随着数据大爆炸的出现已经彻底改变了。它已经不再仅仅是研究过去的历史和预测未来的可能了。

我们需要理解整个行业中，哪些环节在发挥作用，哪些环节没有，然后据此进行规划。我们所有人都紧密相连，我们也需要共同建设保险行业。毕竟归根结底，我们对所有客户都有着共同的责任。

Why #Insurtech Doesn’t Matter

manage risk

Last week, I included my summary of what we do in Insurance: 

Insurance is a business where we provide people with peace of mind, allowing them to know that there will be a monetary solution provided when they suffer a major loss/accident (or minor, depending on coverage purchased).  This loss/accident can either in the form of health, death or to some sort of property, and the solution is at a time when a person typically needs it most.  That is the core of our business.  

This also relates to the 3 pillars of Insurance, which I mentioned a few weeks ago too:

1) Pricing – Was the policy I purchased priced properly to take care of the costs of the Insurance company running their business and will they have enough

2) Reserves – to pay my

3) Claims – in a timely manner.

As with many of us, I read and follow a lot of news on Insurance and Insurtech.  Every day, my LinkedIn feed and email inbox is flooded with Insurtech news, including new investments in start-ups, new Insurtech partnerships formed, expansion of start-ups into new markets/states, etc.  

I love reading all of this – as it shows the growing level of awareness of how new technology solutions can enhance the customer experience and also help companies with operational efficiency.   I am a huge fan of what the future entails.  

However, I am also cautious of the risks currently present in the world of Insurance (and the world in general!).  

Currently, the pace of change and adoption of Insurtech solutions is faster than ever before.  It seems there are no signs of slowing down.  However, as with any good plan, it is important to have risk mitigation and contingency plans.  

As mentioned in last weeks’ post, the new technology solutions that we are building for the Insurance industry (i.e.Insurtech), are just an enabler.  It’s not that these solutions don’t matter…But, if the risks are not managed properly and plans are not in place for these solutions, then the progress of the many Insurtech initiatives may slow down, or in some cases, not be around to matter.  

What are some risks as it relates to Insurtech?  I will focus on three, which have been themes in the news for the past couple of months.  In fact, these are risks that exist in our industry regardless of Insurtech.

By no means are these the only risks that need to be mitigated for, yet I do see these as some of the ‘big’ ones:

  1. Macroeconomics
  2. Weather/Natural Disasters
  3. Regulation

Macroeconomics

Since 2008, global stock markets have been on a tear.  It’s no wonder that there is so much money pouring into Insurtech investments.  

What happens if there is a market correction and we go into another global recession? Will we see the same sort of investment in Insurtech solutions as we have been seeing?

And that’s just the equities market.  What about fixed income?

In this FT article from August, Chubb’s CEO Evan Greenberg warns about the low interest rate environment, and its effect on Insurers.  He says, ‘Many companies are not earning their cost of capital — and many are losing money, or will lose money in the future’.  This is a big deal.  This may have an impact on an Insurers ability to pay claims in the future. Obviously they will have to keep their solvency requirements due to regulation, but if this continues, we could see massive premium hikes for customers and/or withdrawal from certain product lines.  

Stock markets and fixed income aside, the next big risk that could impact the progress in Insurance and Insurtech has to do with climate change.

Weather/Natural Disasters

Over the past few months, we have seen Hurricanes Irma, Maria and Harvey ravage much of the Southeastern US and islands nearby.  California has been blazing in fire over the past few weeks. In other parts of the world, there have been many natural disasters too.  I’ve seen a number of articles on this subject.  They range from ‘how to claim from your Insurance company in wake of natural disaster’ to ‘how much insurers will be out of pocket for weather related claims’.  With climate change increasing, the unknowns also grow.  I’ll admit, I’m not an expert in catastrophe pricing, but I would suspect that this increasing factor will make it much more difficult to price products in the future.  

So, equities may fall.  Interest rates may not come up.  And natural disasters could be on the rise.  These risks are big, but the last one could take the cake: regulation.

Regulation

Last week, as it relates to US health care, President Trump signed two executive orders – one which will allow customers to purchase cross state border and one that limits funding for Obamacare (though that seemed to change course yesterday).  

The impact that these have on the US health care and Insurance market is unknown for now.  This is a topic that deserves it’s own write up and I plan to cover this sometime in the near future.  

Regulation can really screw things up; if not looked at properly. I wrote about government collaboration a few weeks ago.  Some governments are more open to collaborating with with incumbents to better understand Fintech and Insurtech. However, for those of us that have worked with regulators, we know that their minds can change quickly and knee jerk reactions can be made, forcing our plans to change.  

Different product lines have different opportunities, and different risks

For some lines of Insurance – mainly P&C, Insurtech has a huge play, and there are many opportunities to disrupt and change the current Insurance value chain.  If autonomous cars come into existence, the whole auto Insurance industry will change.  For property Insurance, smart homes and devices to monitor buildings will help to better optimize pricing and policies for consumers.  

For travel Insurance, Insurance to protect material objects (Mobile phones, electronics, etc), UBI and Insurance for the sharing economy, there will be opportunities to disrupt and enhance the customer proposition too.    

For Life, Health and Catastrophe, it becomes a different story.   We see a lot of term life online, but what about whole life, universal life, annuities etc?  What about other, more complex products for individuals/businesses (Disability, Long Term Care, Commercial)?  

My biggest worry comes from within these types of products.  My years in Insurance have primarily been on the Life, Health and annuities.  The pricing structures of these types of products have a longer tail than P&C.  Health is annual renewable, but the cost of healthcare and frequency of visits to doctors have been increasing, which will make pricing more difficult.

So what can we do about this?

First and foremost, every start-up and incumbent needs to have a risk mitigation strategy and contingency plan as it relates to their Insurtech initiatives.  It is easy to get caught up in the excitement of what we are doing, and talking about risk is not always the most ‘fun’.  The risks above are just a few macro ones.  Each company and each initiative will carry its own set of risks, which need to be assessed accordingly.

Secondly, collaboration continues to be key.  Especially cross-border collaboration.  We need to share best practices globally. Regulators will also need to continue to work with incumbents and start-ups to understand the solutions being put in place and risks to customers.  

Thirdly, actuaries need to get with it – quick.  They need to use their skills of actuarial modeling and work with the data scientists out there to better understand all the data points available to them and how this can be incorporated into pricing models.  

The marrying of actuarial pricing principles and data science will be one of the most powerful forces of change in our industry.  Incumbents have been managing risk for hundreds of years.  The nature of managing risk has changed with the explosion of data. It’s no longer about just looking at what has happened in the past and predicting what will happen in the future.  Let’s also get underwriters in this conversation.  

We need to find opportunities to know what is working where, and what is also not working, so we can plan accordingly.  We are all in this together, and we need to help enhance our industry together.  We all have a collective responsibility, ultimately, for our customers.

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Stephen Goldstein is an experienced Insurance executive and Insurtech dealmaker with a core focus on growing revenue, launching go to market initiatives and advising industry leaders.

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email

Where is all the behavioural thinking in SME fintech?

Behavioural psychology and economics is a huge passion of mine. It combines three of my favourite disciplines – science, finance and psychology – so it’s hard for it not to be exciting. Plus, who doesn’t love understanding why we do the dumb things we do? Awareness then becomes an opportunity to undo them, or at least blame them for our bad money behaviour. Can’t save for the future? It’s hyperbolic discounting’s fault, not yours.

This morning our Chief Behavioural Officer at Zuper, Kris White, ran an amazing workshop on how financial product designers can apply behavioural economics (BE) principles. There are plenty of examples of behavioural economics principles and thinking being used in the consumer fintech world (Lemonade, Qapital, Decision Fish, Acorns etc), but very few (at least to my knowledge), in the small business space. However, that doesn’t mean there isn’t a need for this thinking to be applied here too. A potential opportunity for sure.

During the workshop I also jumped in briefly to talk through how we need to reframe traditional financial challenges and problems using BE, so we can find truly innovative and creative solutions.

Re-framing comes about when you use a tactic called ‘frame-storming’. I first came across this on a Fast Company blog post, and I’ve used it ever since to tackle product and marketing problems.

Let’s consider a typical small business owner challenge where we could apply frame-storming to come up with a route to a financial product – to pay yourself a wage or not. A Commonwealth Bank survey in 2016 suggested 50 per cent of SME owners opted to not pay themselves a wage one or more times over the course of a year due to cash flow issues.

If we took that question at face value, the simple solution would be to fix cash flow issues. But that’s hard, messy and there are many problems that hide within that problem. Plus – it’s where everyone arrives, because the answer is practically baked into the way the problem has been defined.

But if we reframed it, we would more likely than not come up with much more interesting product ideas that still helped to solve the problem. Some reframes will be good, some will be bad. But the point is, one could eventually lead to a breakthrough innovation.

Here is my crack at it below for the problem above:

“Let’s accept cash flow will be bad sometimes. How then can we help business owners prepare in advance for times when it’s tight?”

Jumping to solution stage, then here we could employ something similar to how the Qapital + IFTTT recipes work for rule based saving.

“How can we control personal expenses so that wage stress is less of an issue?”

Here we are thinking deeper into why not having money becomes an issue. Usually it’s because we can’t pay our bills. Well, if our bills are less, wage stress is less of an issue…

“How can we reduce our expenses automatically in the months our personal cash flow is weaker?”

Here we are adjusting our budgeting our outgoings in line with our incoming earnings. Maybe we need to cancel Netflix, Spotify and lock our Uber Eats app for the month, to avoid temptation.

Once you start down this path, it becomes evident there are multiple ways to skin what seemed like an insurmountable original problem. That’s why I love this technique, and why ultimately, many of the solutions can then be unpacked further with BE principles.

Happy frame-storming! And if you want to watch the BE session Kris did today, I’d highly recommend it. It’s available on our Facebook Page.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

“The Roubini ThoughtLab WAM report” and the Pictet case

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The Roubini ThoughtLab report on “Wealth and Asset Management 2022: The Path to Digital Leadership” is a rich source of insights and statistics of the four stages of the digital maturity spectrum, from more than 1500 investment providers and 40+ interviews with senior executives from financial institutions, consultancies, and technology firms.

Screen Shot 2017-10-13 at 7.27.18 AMUndoubtedly, the SMAC stack (social, mobile, analytics and cloud) will be pervasive and the survey shows high double digit adaptation by 2022

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The 9 sectors that are analyzed have naturally very different digital maturity levels but nonetheless, digitalization is unstoppable. Since there is no canned solution on how to use technology to tap into new businesses, new markets, increased profitability, or market share, or productivity; the recipes vary. Financial institutions involved in WAM (mutual funds, private banks, alternative providers, universal banks, brokers etc.) don’t have access to low cost of capital and can’t afford endless experimentation even though the cost of experimentation failure has dropped substantially.

The WAM ecosystem sits well below Amazon which has access to the lowest cost of capital these days and can now borrow money for less than the cost of what China can borrow money. As a result, Amazon can experiment like no other company. Any amount of failure for them is a speed bump and doesn’t even affect their stock price or their customer turnover.

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From the 60 page Roubini ThoughtLab report on Digital WAM, one transformation story captured my interest, that is real and alive: Pictet Asset Management! A traditional brand name that stereotypical thinking could dismiss in terms of their aggressiveness on the digital maturity spectrum.

Pictet is using technology to tap into three new businesses:

  • A geographic expansion into North America to grow their strong global thematic investment offer,
  • A clientele expansion to gain market share in institutions that are underinvested in thematic strategies,
  • A clientele expansion to gain market share with the millennials, who care for socially responsible investing options.

This is no window dressing. Pictet is taking one of its core strengths and leveraging it with technology to improve revenues, profits, productivity, and market share. Pictet has developed 13 thematic strategies:  Biotech, Clean Energy, Digital, Global Environmental Opportunities, Global Megatrend Selection, Global Thematic Opportunities, Health, Nutrition, Premium Brands, Robotics, Security, Timber and Water. They have launched Mega, a Pictet micro-site that aggregates content around megatrends (infographics, videos, blogs etc), uses social media towards increasing Mega-Pictet’s ranking in the megatrends and thematic investing space.  Right now Pictet is reporting 10,000 followers and 8,000 monthly views. They already see that this approach has helped in promoting a new robotics fund and in reaching out to find a partner distributor in the US. Their also adopting elements of the innovative research process that ArkInvest has instituted which includes crowdsourcing intelligence from scientists, and academics as advisors and or theme developers.

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Source Arkinvest

Thanks to Anthony Christodoulou at Robo-Investing, official distributor of the Roubini thought lab report, who brought my attention to the report as soon it was live.

All figures are from the Roubini thought lab report.

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

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The financial inclusion on ramp for the next billion 

GAME - SNAKES AND LADDERS

GAME – SNAKES AND LADDERS

The emergence of billions from subsistence farming into a global middle class is both a) the biggest investment opportunity of the 21st century b) the cause of so much of the trauma (political, social, geopolitical) roiling the world today.

In short, there is a lot at stake in those two words – financial inclusion – and in the technology that is driving financial inclusion today.

Financial inclusion used to mean a) philanthropy b) governments telling banks to serve more poor people. That was analog financial inclusion and it was and still is very helpful. What we are focussed on is digital financial inclusion, which is more to do with mobile and blockchain. Digital financial inclusion is accelerating the way billions move up the ladder of opportunity.

7 billion in 6 tiers playing snakes and ladders

There are about 7 billion people in the world today. We can look at this with a glass half full point of view as a ladder of opportunity. Or we can look at this as a glass half full point of view as snakes that the unfortunate slither down into poverty.

Being an entrepreneur, I tend to have a glass half full point of view. If you are in one of those middle tiers and see how your earning ability is being hurt by billions around the world competing for labor, you can rail against foreigners taking your old job or find a way of trading with those foreigners or working for a firm that trades with those foreigners (or find work that is immune from automation and has to be done locally).

The economy needs growth. That growth will come from billions entering the global middle class as long as global trade remains open. The problem is that the climate needs us to stop driving that growth with C02 emitting fossil fuels. Again we can have a glass half full or empty point of view. Glass half empty = we must stop those billions entering the global middle class because that growth will kill the planet for all of us.  Glass half full = we must find profitable ways for billions entering the global middle class to use clean, renewable energy and that is a huge business opportunity.

Note: many of the examples that follow come from India, mainly because I happen to have lived and worked there so I can speak from experience, but the challenges and opportunities apply to all the Velocity 12 countries (more on them later).

The 6 tiers, starting from the bottom are

Tier 1 = Subsistence. This is the world of philanthropy, such as the amazing Bill & Melinda Gates Foundation. It is ensuring that people are healthier and better fed, with a focus on things like malaria and sanitation. The success of these initiatives puts more people onto the next ladder.

Tier 2 = Unbanked. Bill Gates famously said that “banking is necessary banks are not”. In this tier, banks as they exist today are irrelevant. The classic customer is a day labourer working in a metropolitan area and remitting money back to their home village and buying mobile pre paid services and other low cost services. Those remittances are not always the cross border remittances that Fintech fans like to talk about. These cross border remittances have regulatory hurdles.  In big markets such as India, the domestic remittances market is also big and being within a national border the regulations are easier.  The unbanked use “feature phones” (aka “dumbphones”) and transaction unit sizes are typically too low for bank payments rails (you need to make money on a $1 transaction or less). Visiting a bank branch or ATM is not something this customer tier considers and if they did banks would find them to be unprofitable customers. These customers want basic payment services at very, very low cost. This is the world of services such as M-Pesa and, in India, MoneyOnMobile (Disclosure MoneyOnMobile is a client of Daily Fintech Advisers, our earlier coverage here). The people in this tier who work hard and save diligently may move up to the next tier.

Tier 3 = Underbanked. They need the same ultra low cost basic payment transactions as the Unbanked. They do more volume and slightly higher per unit transactional value, but their needs are fundamentally the same. They are formally in a different tier because they are classified as having a bank account. Although now formally in the tier marked as “banked”, they almost never use an ATM or credit card or other bank service and as far as banks are concerned they are unprofitable customers. In countries such as India that have an active government policy of encouraging financial inclusion, many will be paid via pre-paid debit cards or mobile wallets. They need to use this digital cash to a) pay for for basic goods and services via pre-paid mobile wallets and b) remit money home and c) get physical cash back from retailers (so they can buy the goods that you can only pay for with physical cash (more than 90% of the economy in a country like India). This is the tier where world of services such as M-Pesa and MoneyOnMobile intersects with services based on smartphones and credit cards that come from the West. This tier also applies to the West. There are people in countries such as UK and USA that might have a bank account but almost never use it because they mostly live “hand to mouth” and banks don’t want their business. This is the world of pre-paid services such as Ffrees in UK and GreenDot in USA.

Tier 4 = Banked Middle Class. This is the world of traditional Retail Banking and the more recent Neobank entrants. The supply is obvious. The demand is less obvious. Who woke up this morning in the West and put “change my banking provider” into their top Must Do priority list? In comparison millions of people in tiers 2 and 3 wake up each morning and things like “top up my mobile phone minutes” or “send cash home to my family” are on their top Must Do priority list. Look at the data in India. Tiers 2 and 3 are about 850 million vs about 300 million in tier 4. As people climb the ladder of opportunity, that 300 million Middle Class will grow. However it is unlikely that, having used the services designed for Tiers 2 & 3, they will desert them for traditional banking services.

Tier 5 = Overbanked Wealthy. Not relevant to this analysis,  other than as Impact Investors.

Tier 6 =The Super Rich. Not relevant to this analysis, other than as Impact Investors.

Velocity 12 – the countries formerly known as emerging

The names have changed from third world to developing world to emerging markets to BRICs to high growth markets to The Rest (of the World). The latest is the Velocity 12 designation by Ogilvy.  I like it because a) “the countries formerly known as emerging” is too long and b) it denotes rapid growth opportunity as the most fundamental characteristic. If I had to choose one simple word it would be the Rest (of the World).

These markets are now the driver of change. This is the mega trend that we call “First the Rest then the West”. One simple but powerful innovation that has gone from Rest to West is the dual SIM phone, which started in India.

Quoting from the Ogilvy report:

“The 12 velocity markets identified herald a shift to South Asia as the epicenter of future middle-class growth.  Centered principally in India, but inclusive of Pakistan, Bangladesh, Myanmar, Indonesia, and the Philippines – and extending up to China, and to Egypt, Nigeria, Mexico, and Brazil in the other direction, the Velocity 12 markets represent a vast arc of future growth.   Over the next decade, these 12 markets will be the source of the next billion middle-class consumers, which will create a critical tipping point as the middle-class move from a minority to the majority of the local population in many of these markets.

Miles Young, Ogilvy & Mather Worldwide Chairman said, “The Velocity 12 research shows the world as it will be in the not too distant future. A billion new middle class members will literally change its shape. It will become, for instance, much more orientated to South Asia, especially India. Most Western businesses simply are not used to thinking this way.  This means finding a new lexicon of growth, as the phrase ‘emerging market’ doesn’t now describe the new realities. ‘Velocity’ better describes the real transformation in these markets.”

Tipping point theory

When economies move up this ladder of opportunity it happens very fast and there are behavioural economics feedback loops. For example in Tier 1, all the incentive is to have lots of children who will look after you in old age. Somewhere between Tiers 2 and 4, the motivation changes to having a smaller number of children who are well educated and cost a lot of money to raise. As these well educated grown up with high expectations start producing and spending, it lifts those economies and all who trade with or invest in those economies.

Image Source.

Bernard Lunn is a Fintech deal-maker, author, adviser and thought-leader.

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Blockchain Bitcoin & Crypto Weekly CXO Briefing for week starting 16th October 2017

The Blockchain Bitcoin & Crypto Weekly CXO Briefing is all you need to know, each week, jargon free for CXO level business leaders and investors who will use this technology to change the world. Each week we select the 3 news items that matter and explain why and link to one expert opinion.

For the intro to this weekly series, please go here.

News Item 1: $5,800: Bitcoin Price Hits New Record High

Decrypted: In September China’s announcements to ban token sales and Bitcoin exchanges sent Bitcoin’s price tumbling, but a few days ago the cryptocurrency’s price rallied to a new all-time high, hitting more than $5,200 on Thursday and following up with repeat performance on Friday, to break $5,800.

There’s been a lot of speculation as to the reasons behind Bitcoin’s recent price surge. Some speculate the upcoming Bitcoin Gold and Segwit2x hard forks, reports that Goldman Sachs is considering Bitcoin trading and rumors that China might reverse the bans and ease restrictions.

Our take: Last month China’s government, the People’s Bank of China (PBoC) and local financial regulators, imposed a nationwide ban on cryptocurrency exchanges that caused Bitcoin and the entire cryptocurrency market to drop.

But in the past few days, it would looks like the fears caused by China’s bans have been completely shrugged off by the market.

Yet, there’s been plenty of speculation about a Chinese reversal of the bans, and recently there have been reports in Xinhua, a state-owned news publication of China, suggesting that China’s ban is only temporary, until the Chinese government releases a stricter regulations for KYC and AML  for trading platforms.

CnLedger, a cryptocurrency news outlet in China posted on Twitter about the news in Xinhua:

“Xinhua News, official press agency of CN: Virtual currencies have become the top choices of underground economies. We shall adopt ‘0-tolerance policies’ towards crimes hidden underneath and take measures such as record-keeping, licensing, AML processes, real-name, limiting large transactions.”

With the new price high, Bitcoin’s market cap hit $97 billion, up over 480 percent year-to-date. Bitcoin’s new price level also triggered a positive rally for the entire crypto market. Ethereum was up over 5% over the last 24 hours, while Litecoin went up almost 14%. The combined market cap for all cryptocurrencies once again climbed towards the Sept. 1 high of $172.5 billion,  with Bitcoin being over 55 percent of the total market.

Another reason behind Bitcoin’s price increase could be the upcoming hard forks. We are expecting two hard forks for Bitcoin, that will create two new rival clones of the cryptocurrency. The first is Bitcoin Gold and its expected to happen on October 25, and second is Segwit2x in November, when Bitcoin’s block size will increase from 1Mb to 2Mb.

The last time we had a hard fork for Bitcoin was on August 1, when Bitcoin Cash was born. At the time anyone that had Bitcoin, automatically received and equal amount of Bitcoin Cash. Bitcoin holders received one BCH for each BTC they owned.  The same will happen with these upcoming forks. Holders of Bitcoin (BTC) will automatically receive Bitcoin Gold and this is a likely reason why investors are buying BTC, driving the price up. They want to get some “free money” and flip it when it goes up. When Bitcoin Cash opened in August, it was trading around $200 and in three weeks it almost reached $1,000 and a market cap around $16 billion.

There’s also been talk that Goldman Sachs is considering a trading operation focused on Bitcoin and other digital currencies. Smart and forward thinking financial firms are getting involved with cryptocurrencies. Golman Sachs will be joining the ranks of companies like Fidelity, that has been experimenting with Bitcoin and crypto.

Last but not least are the recent comments by Christine Lagarde, IMF’s Managing Director:

“I think that we are about to see massive disruptions. it’s important to look at the broader implications of technologies like digital currencies. My hope is that we can participate in that process because I see that as a very cross-border process.”

Many argue that Bitcoin could reach $7,500 by the end of the year, but plenty of volatility is still ahead, as regulators will be taking positions to control things. While this creates uncertainty around Bitcoin and other cryptos, investing in new things is not for the faint-hearted.

Everything is about perspective. Brisk fall mornings like today, wake up the senses. So did Bitcoin last week, when it hit its new record price. One more time it reminded us that regardless of naysayers and regulators, the real power lies with the people that believe. The price of Bitcoin isn’t going up, but dollars are getting very cheap, and they’ll get even cheaper.

Anyone getting into the crypto space, investing and trading, should be doing it because they believe in Bitcoin and blockchain: “In the world of business, the people who are most successful are those who are doing what they love.” – Warren Buffet.

News Item 2: Bitcoin Competitors Are Being Built in Ex-Google Coders’ Laptops

Decrypted: Since 2013, we’ve seen more than 1,500 cryptocurrencies, with around 800-900 actively traded today, but for now Bitcoin is the king. Several offer certain technical advantages over Bitcoin,  alternatives to digital cash, software development, social media, and other services powered by blockchain.

The better known ones are Ethereum, Litecoin, Ripple, Dash, Monero but there’s more in the woodwork, hoping one day they to dethrone the leader and become king of the hill.

Basecoin is one of the contenders, a token with a rules-based monetary policy built into its blockchain system. Bascoin is backed by high profile investors, that include 1confirmation, Andreessen Horowitz, Bain Capital Ventures, Digital Currency Group, MetaStable Capital, Pantera Capital, PolyChain Capital and AngelList CEO Naval Ravikant.

Our take: One of the problems that Bitcoin and other cryptocurrencies face today, is price volatility. All of the cryptocurrency transactions are speculative in nature, with traders simply betting on ups and downs, with almost no use as a medium of exchange. Price volatility makes it difficult for people and merchants to use cryptocurrencies for every day transactions or use them to keep all their life savings, because prices can fluctuate hugely, on a daily basis.

Consider issuing a Bitcoin loan. If the price drops significantly at any point before the end of the loan’s term, the lender is left holding a significantly devalued stream of payments.

The lack of price stability hinders mainstream adoption of cryptocurrencies.

Basecoin, a new cryptocurrency that has all the benefits of traditional cryptocurrencies, privacy, anonymity, decentralization, but with a monetary policy built into the blockchain that keeps the price of each token pegged to a stable asset, for example USD or basket of assets, dynamically adjusting its market price through the creative use of a combination of tokens.

As explained in the white paper, the idea is that the protocol would be set up to mirror an asset or an index, say the U.S. dollar or the Consumer Price Index, at which point it would use oracles (links to trusted, external data sources) to monitor exchange rates. The protocol would then automatically expand or contract its supply of tokens to maintain its value. In that sense, it is the world’s first “algorithmic central bank,” operating without need for human discretion.

Even though the development of efficient blockchains has come a long way since 2009, scalability remains to be a major issue for blockchain. Several companies are working various approaches to solve the scaling question, with many implementing side-chain or off-chain solutions.

Cypherium is another contender that is building a blockchain that wants to handle an expanded workload more easily. Cypherium is creating an entirely new blockchain by combining the strengths of Bitcoin’s Proof-of-Work and Byzantine Fault Tolerance consensus mechanisms. This novel consensus mechanism adopts the idea of decoupling key block mining from micro blocks for faster transaction processing, first pioneered in Bitcoin-NG.

Currently, the Bitcoin blockchain supports an average throughput of 7 transactions per second. The Cypherium chain aims to accommodate thousands of transactions per second.

Bitcoin isn’t going away anytime soon and most likely will remain the top global cryptocurrency, because it has by far the biggest network effect and the Bitcoin network continues to grow much faster than other cryptocurrency. Other cryptocurrencies will take over specific niches (Ethereum – Smart contracts) and we can expect newcomers to offer unique twists, creating solutions that will help the entire market evolve and push cryptocurrencies into mainstream adoption.

News Item 3: First 1GB Bitcoin Block Has Been Mined on Testnet

Decrypted: Bitcoin Unlimited developers working together with researchers from the University of British Columbia and from nChain, mined the first ever 1GB block on a Gigablock Testnet.

Gigablock Testnet, also known as BUIP065, has four specific objectives, including the set-up and maintenance of a global test network capable of supporting up to 1GB blocks and sustained Visa-level transaction throughput (3,000 TPS) on the Bitcoin network.

Any successful scaling milestones by the GigaBlock initiative will first be implemented on Bitcoin Cash.

Our take: Scaling has been one of the biggest issues in the recent history of Bitcoin. While a few years ago, only cents were needed to transfer money to another wallet, today fees are high, sometimes above $10, and can take hours to confirm the transaction. Bitcoin transactions are completed when a block is added to the blockchain, but at present Bitcoin’s blocks are limited to 1MB every 10 minutes.

Currently, Bitcoin is able to process about 3-7 transactions per second. Despite the fact Bitcoin (BTC) continues to be the most followed fork, its 1mb block size, limits the number of transactions that can go inside a block, and the time it takes to generate a new block in the blockchain. When you compare this number with Visa’s 24,000 transactions per second, it obvious that Bitcoin desperately needed changes to improve scalability.

The Gigablock Testnet initiative is backed by Bitcoin Unlimited developers, nChain (blockchain technology research and development) and the University of British Columbia. The goals are to determine how large blocks Bitcoin can handle, as well as identify the bottlenecks that may obstruct the network’s scalability, which currently pales in comparison to Visa’s throughput.

Increasing the network’s block size limit from 1MB is needed to reduce fees and make confirmation times reliable again. Bitcoin Cash has already shown that lower fees are acceptable, although confirmation times can still be skewed due to the current network situation.

The research project is setting up a global network of Bitcoin mining nodes configured to accept blocks of up to one thousand times larger than the current block size (1GB). These nodes are connected with transaction generators, each capable of generating and broadcasting up to 200 transactions per second. To identify bottlenecks and measure performance statistics, a series of “ramps” are performed, where the transaction generators are programmed to increase their generation rate following an exponential curve, starting at 1 transaction per second and concluding at 1000 transaction per second.

The Gigablock scaling initiative has been in the pipeline since July 2017, when both nChain and Bitcoin Unlimited convened at a workshop in Vancouver, Canada. Both groups share a common vision of scaling Bitcoin on-chain.

Bitcoin Core’s reluctance to larger on-chain capacity, pushed supporters of bigger blocks to fork Bitcoin in August. Supporters of bigger blocks and on chain scaling have formed an active community, around Bitcoin Cash. Bitcoin Cash was created on August 1, and now is trading around $300 with a market cap of $5 billion. A couple of weeks after it launched Bitcoin Cash made a bold move of increasing capacity to a default 8MB blocks and scraping away Segregated Witness.

Bitcoin Cash wants to empower merchants and users with low fees and reliable confirmations. The goal of Bitcoin Cash is to increase the number of transactions that can be processed, and supporters hope that this change will allow Bitcoin Cash to compete with the volume of transactions that PayPal and Visa can handle by increasing the size of blocks.

Now this latest breakthrough, makes the 1MB blocks look so 1980s. If the Gigablock initiative is able to increase the Bitcoin block size, making it reliable and workable, it could make Bitcoin even more viable for mainstream adoption in the future.

Opinion: Bitcoin’s price bubble will burst under government pressure

Bitcoin is a decentralized, denationalized digital currency operating outside the traditional banking and governmental system.

The biggest advantage that Bitcoin brings to the table is the ability to by-pass the conventional payment models. It connects buyers and sellers across national borders at minimal transaction costs. One doesn’t need to have a bank account to hold Bitcoins, and certainly, payments are a lot faster compared to traditional payment methods.

The price of Bitcoin has soared this year, from $1,000 to over $5,800 a few days ago. And it not only Bitcoin. Ethereum started the year at $8 and has traded as high as $400. In 2017, every week new tokens are issued, and Initial Coin Offerings have raised close to $2 billion in the first two quarters, so far this year.

While there are many other cryptocurrencies available today, Bitcoin has become synonymous with the word “cryptocurrency.” Anyone who has traded Bitcoin has come across the volatility and price fluctuations.

This has kept Bitcoin in the news.

The current price of Bitcoin has a 91% correlation with the volume of Google searches for bitcoin-related terms, according to a study by SEMrush, a search engine marketing agency. Google searches for “Bitcoin” go up and down, with the price of Bitcoin.

It has also made Bitcoin a lot of enemies.

It is no wonder then that both government agencies and financial institutions have remained skeptical of Bitcoin. Regulators are at odds over how to regulate Bitcoin and other cryptocurrencies,. Regulators in the U.S., Singapore, Japan Russia and China are looking at regulatory measures to control the growth of digital tokens and how to tax them.

China recently made it illegal for companies to raise new funds by issuing virtual tokens and shutdown exchanges. Japan is ready to introduce regulatory oversight on cryptocurrency exchanges in October. Meanwhile, the U.S. Securities and Exchange Commission (SEC) provides guidelines on its website for investors to consider before participating in token sales.

One of the reasons that people think Bitcoin is a bubble, is because its just so new for most. Bitcoin has come to the forefront, surpassing the performance of other financial assets. Earlier this year the price of a Bitcoin surpassed that of an ounce of gold for the first time. Currently, all the Bitcoin in the world is worth close to $80 billion.

Blockchain has found its way into financial markets, but for many Bitcoin is the black sheep. Jamie Dimon, JP Morgan’s CEO,  just might be Bitcoin’s biggest hater. A couple of days ago he said “governments around the world will crush Bitcoin,” regulating digital currencies out of existence. He admitted that the Bitcoin could reach $100,000 before it “goes to zero” and pointed that speculators are the biggest driver behind a recent rally.

But some factors have been working to Bitcoin’s advantage: economic and political uncertainty in several countries, increased inflow of institutional money and mainstream momentum by more and more people.

Some of the world’s biggest central banks have been running programs on adopting digital currencies. From the PBoC to the MAS and E-Estonia, many are looking to have their currencies go digital. In Sweden, they have already declared cash dead and India recently had a massive demonetization drive, part of which was driven by the need to make cash transactions digital.

Through a digital currency, central banks can trace funds more easily, hence be able to tax them. It also reduces the costs of printing and maintaining paper currencies, which according to some estimates costs up to 1.5% of GDP. Additionally, the cost of handling physical cash reduces for banks consequently reducing the need to operate physical bank locations.

Are fiat currencies going crypto? Yes, they certainly will be.

Will Bitcoin replace digital fiat currency? Is it a bubble? Will governments “crush” Bitcoin and altcoins? Your guess is as good as mine.

Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.

 

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