NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, April 7, 2015

Base-of-the-pyramid financial services providers in emerging markets are increasingly using data analytics to pioneer new products for reaching the unbanked. Alifinance in China is using the underlying transaction data of vendors on the giant online platform Alibaba to underwrite small business loans. M-Shwari in Kenya leverages M-Pesa’s mobile money data for short-term, unsecured credit. Cignifi analyzes cell phone usage to provide credit as well as savings propensity scores. Lenddo uses online social network data for credit risk assessment. Similarly, a number of companies including Tiaxa and MODE use cell phone data to extend immediate nano-credits to prepaid customers who run out of airtime balances.

All these digital data applications to financial services innovation center on the extension of credit. That is not a coincidence. Traditionally, people and paper-based credit underwriting is cumbersome and costly. The application of sophisticated analytics to new sources of data, including mobile call histories and social networks, promises better results at far lower costs than traditional models.

However, the digitization of the consumer front-end, and therefore the availability of new, massive, and instant data streams, has broader potential that just better credit underwriting. This is particularly true with the rise of smartphone penetration in emerging markets, fueled by rapidily decreasing hardware and data prices. Microsoftand Mozilla have unveiled smartphones that cost as little as $25. According to industry analysts, broadband data charges in Latin America have dropped by more than half over the last three years. As a result, industry obervers report 50% year-on-year growth of smartphone sales in emerging markets. In Myanmar, which only opened up mobile telephony recently, network operators report that a majority of consumers go straight for the low-cost smartphones that have become available, skipping the first-generation feature phones.

Smartphones change the game for the provision of financial services from a technology and business perspective. On the technology side, they provide a far more user-friendly interface and can more easily be connected to other devices around them, for example via Near Field Communication (NFC). On the business side, they can communicate over open data channels with any node in the internet, thus reducing the dependency on the mobile phone operator’s Unstructured Supplementary Service Data (USSD) channel and lowering interaction costs. With increased smartphone penetration in emerging markets, we will likely see a proliferation of what Silicon Valley calls “over-the-top” services — software applications that easily ride on the powerful rails of Internet-connected smartphones already in the consumer’s pocket.

The rapid rise of smart phones helps create new sources of true consumer value that financial services innovators around the world are starting to unlock. These “second-generation” digital service innovations have the potential to meaningfully improve people’s financial lives. And, by definition, these models have the potential to scale rapidly because their delivery model is entirely virtual, riding on the infrastructure that mobile telephony is already providing.

The GSMA and CGAP have recently suggested several sources of such value that mobile phones in general, but smartphones in particular, are creating: