Converged Digital Finance
Converged Digital Finance –The Next Global Infrastructure Build
The Platform for Complete Financial Inclusion and Rapid Economic Growth for the Emerging Markets
The pre-cursor to every great economic expansion is a complete infrastructure build that lays the foundation for new technologies, new services, revenue models. But fundamentally what each new transformative infrastructure build provides is to expand the reach of services to a greater range of the population by moving industry and technology farther from the centralized core in wider and wider concentric circle to include more people, and dramatically reduces the barrier to entry to markets and services. Over the centuries we have seen these ‘step-ups’ in economic growth as we have expanded industrial capacity and economic inclusion through the steam engine and railways, the combustion engine and highways, the jet engine and air transport, communications networks and the digitization of business.
What is interesting is that with each new infrastructure build new market players have been able to ‘leapfrog’ over what were considered to insurmountable barriers to create a new economic opportunity by grabbing these new technology developments and leveraging them to overcome many of the challenges that had been keeping from playing in the global economic community in any kind of significant way. We have seen this most recently with the mobile operators of Africa, Asia and Latin America. In the 90’s the developed countries of the North America and Europe built national fixed-line communications infrastructure networks. These networks laid the foundation for the Internet and subsequent e-Commerce growth of the late 90’s and early 2000, a technology expansion that saw the formation of today’s global leaders Amazon and Google. The Internet and e-Commerce were the beginning of a new Industrial revolution that would lay waste to many economic barriers to entry and restructure industries that had previously been dominated by a few players in a handful of economic centres. However, the emerging market countries of Asia, the Middle East Africa and Latin America were unable to participate in this new economy because they did not have the fixed-line communications networks that were found in the developed countries. These networks were too expensive to build in these countries and were net economically viable outside of the wealthy neighbourhoods of the capital cities.
Enter the mobile network. Mobile networks offered an economic paradigm shift for the deployment of communications services throughout the emerging markets. This was due to two significant factors, one technological and one social, but both economic. By the nature of wireless network deployment mobile operators did not have to physically connect to the end user to provide service. They could provide an umbrella of coverage to large area of users and let them connect to the network with no extra cost. This significantly reduced the cost of network deployment and not only made national communications network buildout economically viable but extremely profitable. Most emerging market mobile operators enjoyed greater profitability than their developed market counterparts.
The social factor was human nature. Regardless of economic status, a human being in a wealthy country and one in the most poverty- stricken had the same basic human need to communicate. Prior to the buildout of mobile networks in Africa the capital markets were entrenched in the concept behind Mazlow’s Hierarchy of Needs. That the people of these countries would not want to pay for a service that was perceived to be a Love and Belonging’ need until they had met their ‘Physiological and ‘Safety’ needs. Simply put, “why would they want a phone when they don’t have running water?’ Everyone was caught off guard by the extraordinary demand for the mobile phone. The consumer demand was so great that Vodafone and Orange were experiencing greater consumer adoption in their African operations than in their European ones.
These new Mobile Network Operator (MNOs) permanently shifted global economic dynamics for the first time, investors were investing in Emerging market businesses for the economic value that they generated from services within their own countries from their own infrastructure. Prior to this economic value was generated either ‘extraction-based’ where a company would extract natural resources from a country and sell them in other markets, or ‘expanded-market based’ where a company would sell its products to a new consumer base to expand its overall market and re-patriating the income back to the parent company. From 1998 when Vodafone won the GSM license in Egypt with ClickGSM to 2013 when Myanmar auctioned one of the last foreign-owned telecommunications licenses was one of the greatest and most financially successful infrastructure builds in modern history (less than 5 percent of foreign-owned licensed operations failed) creating a whole new market of emerging market based global corporations. In 2005 Mo Ibrahim sold Celltel which held 13 licenses across the poorest countries of Africa for $2.84 billion. From 2010 to 2013 Carlos Slim the owner of America Movil, Latin America’s largest MNO was listed by Forbes as the Richest Man in the World.
By 2012 almost all developing and emerging market countries in the world had a mobile penetration that was equivalent or greater than countries in the developed markets. With the technology enabling them to successfully leapfrog the expensive fixed-line infrastructure investments to achieve national connectivity they were able to lay down the foundation for rapid growth of data connectivity and positioning these markets in a better position to take advantage of this new infrastructure creating their own novel technologies and business models completely bypassing the traditional method of waiting for Western countries to deliver new technologies to the emerging markets.
In 2005, as part of this new technology order Kenya’s Safaricom arguably laid the first building block in what we are referring to as the new “Global Digital Financial Infrastructure” build.
“The initial concept of M-Pesa was to create a service which would allow microfinance borrowers to conveniently receive and repay loans using the network of Safaricom airtime resellers. This would enable microfinance institutions (MFIs) to offer more competitive loan rates to their users, as costs are lower than when dealing in cash. The users of the service would gain through being able to track their finances more easily. When the service was piloted, customers adopted the service for a variety of alternative uses and complications arose with Faulu, the partnering MFI. In discussion with other parties, M-Pesa was re-focused and launched with a different value proposition: sending remittances home across the country and making payments”. (Source: www.wikipedia.org)
According to the www.internationalfinance.com the total value of mobile money transactions was approximately US$25 billion in 2019. M-Pesa was the first successful digital money service that facilitated the transfer of funds outside of the national banking system. The success of M-Pesa shone a light on the role that digital and communications technology could play in delivering financial services without having to laying out the prohibitive capital required to build and staff of a bricks and mortar financial network. Much like the fixed-line networks of the 90’s, the cost of expanding a network of physical branches outside of the capital cities economic centre in any developing and emerging market was not viable given the low purchasing power of the suburban and rural communities in these countries.
Building the Foundation
Over the next five years there were a series of technology businesses and developments that would serve to obliterate the traditional economic barrier to entry that has kept over 70 percent of the world’s population from being considered as a viable market for investment
Facebook created new business models and drastically reduced the barriers to entry for businesses in emerging and developing market countries. Although the Internet significantly reduced the barriers to setting up a business, from the cost of storefront with only community-based market reach to a website and a larger audience for most the cost of setting up a website and driving traffic to it was still prohibitive. With Facebook someone could set up a Facebook page and attract a group of customers for almost no cost.
Cloud computing took another big step forward in reducing the cost of scaling up operations and creating new business models. Prior to Cloud Computing it was necessary for an enterprise to invest heavily in datacenters and other network equipment to scale their operation. Cloud Computing created new business Software-as-a-Service business models that enables more new businesses to launch new technologies and services anywhere in the globe at a much lower cost.
The very first iPhone was released in January 2007. Apple have innovated the way touchscreen was used, allowing users to do more with their mobile phones. Apps have turned phones into everything from a a motion-sensitive video game devic to a bank and commerce.
The launch of the iOS and Android operating systems created the SmartPhone a multi-purpose device that was robust as most computers. Both operating systems made it easy for businesses and entrepreneurs to launch ‘apps’ that could immediately be accessible by the global population will little to no investment technology integration on the part of the User. Globally these devices, reduced the cost of a computer to a fraction of the price and over the years to follow would put a computer in everyone’s hand. Furthermore, the smartphone is a personal device that is unique to each individual which opened up new business models and opportunities for marketers and data analyts.
The Satoshi Nakamota whitepaper for the decentralized network based digital currency Bitcoin is a technology development that occurred outside of all of the other developments on this list and is not really integrated or connected to any of them. What makes this such a significant technology development and integral piece of what will be the new Converged Digital Finance Infrastructure is that it introduces the first truly ‘decentralized’ network system that represents the final step in reducing the barriers to entry and democratizes the systems by putting the user as part of the administration and management of the system and removing it from an central authority. The underlying blockchain technology has the capability to solve one of the most mundane but significant limitations of the global technology system. That is, how do I ensure that data integrity is maintained when a piece of information moves from one system to another system. Technically any data loses its data integrity and pedigree anytime it changes jurisdictions’, whether it be from one country to another, or from one database to another. It is this barrier that has kept our global legacy financial system more or less the exact same over the past 40 years.
In 2009 the first Long Term Evolution (LTE) network was launched enabling more bandwidth over the telecommunications network at a fraction of the cost of the previous 3G networks. 3G networks that were initially launched ten years earlier had been a major disappointment. The amount of bandwidth that they delivered to the device really wasn’t enough to spur mainstream adoption and was far too expensive on a per MB basis for the MNOs to come up with a successful business mode. The failure of 3G to gain any real traction led the management of almost all of the MNOs to conclude that there was no real demand for data connectivity in the emerging and developing markets. It was not until the introduction and deployment of LTE networks over the following years that data and smartphone adoption really start to take off.
WhatsApp was a phenomenon almost as soon as it launched achieving 400 million active users by the end of 2013. The Android and iOS application offered a new messaging and communication experience that was much more flexible and lower cost than the traditional SMS messaging system of the MNOs and opened up a whole new world of collaboration.
Square was a phenomenon almost as soon as it launched achieving 400 million active users by the end of 2013. The Android and iOS application offered a new messaging and communication experience that was much more flexible and lower cost than the traditional SMS messaging system of the MNOs and opened up a whole new world of collaboration.
Both Stripe and Square were founded to address the problems that smaller merchants were having in offering payments to their customers. In 2009 Square launched its Square Card reader, a device that could be plugged into the phone jack of an Android or iOS phone to provide smaller merchants with an easy low cost means of accepting credit card payments. In 2010 Stripe was launched to offer e-commerce websites with an easy way to integrate credit card payments into their website. Up until that time accepting any form of payment was a complex and difficult process that was a significant barrier to entry for small businesses.
In 2011 Tencent of China launched WeChat as a multi-purpose messaging and social media app. In 2018 with over 1 billion active Users it became the world’s largest app. In 2013 WeChat launched their digital wallet WeChat Pay where users could make mobile payments and send money between users. By 2018 the total value of mobile payments in China reached US$40 trillion making China the world leader in Digital Payments.
From the introduction of mobile payments by M-Pesa in Kenya in 2005 to the prevalence of mobile payments in China through WeChat and AliPay digital payments have been developed, introduced and adopted by the emerging and developing market economies.
All of these technologies and businesses have played a pivotal role in reducing economic barriers to entry and creating new business models so that everyone on the planet, regardless of income, or location can tap into their economic value. A consumer with $1 to spend is important, even more so, a User who is not spending also has marketing value. Today, in 2021 these businesses and technologies are world leaders and prevalent across almost all corners of the globe and are part of the foundation for the Era of Fintech. The next global infrastructure build.
We are still at the beginning
We are on at the beginning of what many call Industry 4.0 or the next Industrial Revolution. This is a convergence of 5G networks, Artificial Intelligence, Internet of Things, 3D printing and other new industrial technologies which are expected to come together into a single converged digital world where machines and devices will take directly amongst themselves creating great efficiencies in our existing systems. In short, we are entering a time when the digital world will connect itself to the existing industrial and financial legacy systems. Despite the tremendous growth and technology development of the past ten years most of our industries still operate as part of series of technology silos where new systems sit and operate next to old systems but are not integrated as a single system. This ranges from shipping, to manufacturing, but nowhere is it more evident than with financial institutions. E-Commerce still only represents between 2 and 12% of the total market depending on the country, it is still not possible to transfer money easily across borders or in some countries across institutions. Let alone if you add further complexity by using different currencies or multiple payment conditions.
Digital Finance still is still mostly a consumer-based solution and has not really made its way into B2B commerce in a significant way. Today, there are a multitude of different technologies, payment methods, payment types, payment schemes, financial institutions and licensing regimes. And this is in developed countries. For any enterprise or digital business integrating into the financial system in any given country is extremely time consuming and difficult.
In order for the vision of Industry 4.0 to be achieved all of these different technologies that interact together will still need to connect to a financial system that can accept and manage the complex transactions required to support this. Just like the railway, highway, airplane and communications networks it is necessary to build the global financial infrastructure that allows for easy interconnection across jurisdictions and services, that is necessary for this all to operate successfully.