Editor’s Note: Last week, Aunkumar Krishnakumar (Arun for short) wrote a great post about the effects of Demonetization on Microfinance in India. We liked it so much that we asked for more and this week Arun has found two amazing stories from Africa. Both are practical uses of leading edge technology to change the lives of millions (for example to enable crop insurance for farmers). The technology used forces one to think again about some conventional wisdom. One uses a mix of Internet Of Things (IOT) and Distributed Ledger Technology (DLT), without using any Blockchain. Another uses Blockchain but with M-Pesa (not with Bitcoin or any Altcoin). Following our theme of “first the Rest then the West” we would not be surprised to see innovation like this coming to the West soon.
From next week, Arun will join our other Authors as a regular. Please see our announcement later today.
In the last few years, every time I visited India, I have got excited looking at the number of frictions and inefficiencies in day to day transactions. There were problems that could be solved to create huge impact to large communities of people. Of course, when executed with a good business model, those could be great stories creating social and monetary value. When I was talking about this to my friend from Nigeria a few days back, he mentioned that he had the similar thoughts about Africa, the continent with 54 countries, truly a land of infinite possibilities. Over the last few years, financial services driven by mobile penetration have created a few “leap frog” initiatives in Africa.
M-Pesa completed its 10th anniversary this month. It is the firm that revolutionised financial services by providing a simple way of transferring money, and has crossed 30 Million users across 10 African nations (only 10). But the impact it has created has already highlighted it as a model to be used for the emerging world. In 2016, according to Vodafone, M-Pesa was used in six billion transactions. Research by Digital Frontiers found a 22% drop in female-headed households living in poverty in areas with access to M-Pesa. The same study noted that the source of income for almost 200,000 women in rural areas shifted from the low-income, labour intensive agricultural sector to more prosperous small business creation. However, there is a lot more to be done through financial inclusion and I believe Blockchain will be a key catalyst in unlocking the potential of this great continent.
Micro-Insurance for Farmers:
In my previous post, I discussed the challenges Microfinance had in improving farmers’ lifes in India. While researching for that, I came across instances where farmers who had insured their crops and lost them to drought had serious challenges in claiming money from their insurance providers. This was primarily due to lack of understanding of complexities around what triggered their insurance claims and also due to the bureaucracy and corruption that existed in the system. Crop insurance is one of the most underserved industries in the developing world.
Typically Blockchain firms have two different exploratory routes to address pain points in the Insurance value chain. The first set of firms which are the more common one try to add efficiencies around instant reconciliation using distributed ledgers. The second set of Blockchain firms, re-imagine the whole structure of the business from scratch, and in some cases intend to create a new structure altogether. A Blockchain company Etherisc is working on crop insurance in Africa and across the developing world. They are trying to solve the problem using a methodology called “Parametric Insurance”. In this model, the insurance pay-out is triggered by pre-agreed set of simple triggers, which do not involve any middle men. The data that triggers the pay-out would be sourced automatically by the system which will disburse payments according to pre-programmed rules. The other advantage is that this model offers crop insurance for one or two dollars a month, which is typically not economically viable for a traditional insurance provider.
For instance, a farmer can insure his crops against lack of rainfall for a particular year. Etherisc would have a rule that if the rainfall for that region in Africa doesn’t cross a particular threshold, the pay-out to the farmer would happen automatically. From that point, Etherisc would source rainfall information automatically from the weather data base, and if the threshold is breached, the pay-out happens. There is no need for human intervention to assess claims or damages, there by keeping the process simple, transparent and efficient. More importantly, the farmer receives timely help, without having to go through the trauma of dealing with corrupt bureaucrats to get the payment. Etherisc are also working at integrating their product with M-Pesa to plug into the existing payments infrastructure in Africa.
In most developing nations penetration of mobile phones and internet has been better than penetration of traditional financial services and the underlying infrastructure. The main reason that there is so little private or public effort to extend financial services infrastructure into these remote and often impoverished areas is that the cost and benefits don’t add up positively. This leads to hundreds of millions of people scattered across Africa with almost no infrastructure and thus little opportunity of changing their circumstances. The solution is to take a decentralised approach that the traditional financial services infrastructure hasn’t managed to achieve.
IOTA is a lightweight crypto-token that is designed to facilitate micropayments. IOTA is derived from the acronym IoT which means Internet-of-Things. IOTA could be connected to millions of devices and could facilitate micro transactions between the devices by paying miniscule amounts to each other in a frictionless manner. IOTA is a completely new distributed ledger innovated from scratch. Unlike the Blockchain, it contains no blocks. They instead have developed something called a Tangle, which is a form of directed acyclic graph. Here a user sending a transaction verifies previous transactions through a small amount of proof-of-Work. This means that the verification of the network is not decoupled from the network’s users, as is the case in blockchains. Hence there are no external parties to be compensated, which means that IOTA got absolutely zero fees on transactions. I have painfully resisted the temptation to get too technical about IOTA’s tangle, but for those who like a good technical read, their whitepaper is here.
Due to this architecture, IOTA can be used for most business models that require a scalable ledger with no-fees. And this is especially interesting for micro payments that flow through an ecosystem of connected devices. The IOTA-Tangle infrastructure doesn’t need internet and can operate on Bluetooth as well.
A simple example highlighted by IOTA: Business A set up a solar electricity instalment and sell it per watt in real time to business B, which is a company that saw the potential in selling sensor data to be used to optimize agriculture, so now business B is selling soil and weather data to business C which is an analytics company that turn the data into useful information that it sells to business D which is a farming company that use the info to optimize their crops. Of course, all of these companies buy their bandwidth from business E which saw the need for connectivity between these other businesses. A completely self-sustaining and scaling business ecosystem that might previously have been impossible because the profit margin was non-existent due to fees. A micro insurance model could work like a dream on such an ecosystem, a friction-free economy of things.
Unfortunately, expansion of such business models in Africa, is not going to be as friction free. Between 2010 and 2017 internet penetration in Africa grew from 10% to a mind boggling 27%. And in model countries like Kenya, this has reflected in the GDP growing as a result. However, there are challenges around how security of these Blockchain infrastructures are going to hold and how regulations would evolve around these disruptive initiatives. The other key challenge is awareness, where most people still struggle to understand what the value of a Blockchain based financial eco system is. However all is not doom and gloom, as there are quite a few initiatives across the continent educating people about bitcoin and Blockchain, and the demand for such programmes has never been higher. Onwards and Upwards!!
Arun is a thought-leader specializing in how technology is changing consumer financial services around the world.
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