The Financial Access Initiative (FAI), a consortium of researchers from New York University, Harvard, Yale and Innovators of Poverty Action, published a research paper in 2009 provocatively titled Half the World is Unbanked. Their study however provided an empirical grounding that it is possible to serve low-income communities at scale with financial services, but there are still billions left to reach. According to figures from the World Bank, as of 2015, there are still 2 billion people who do not have access to any formal financial services. While the figures are a relative improvement by more than a billion, nearly six years since the 2009 FAI report, we are now better positioned and capable to address the remaining gap by the end of 2020, if not earlier.
The advent of mobile technology along with increasing smartphone penetration, especially in developing countries, has complemented the efforts, opening up a new portal of possibilities. This new found access in countries including South East Asia and Africa has provided the perfect ecosystem to initiate the necessary access. For example, the demonetisation exercise in India last December, where over 80% of the banking notes were taken out of circulation, the country saw an explosion of digital payment wallets providing the necessary relief to continue transactions. The pace and scale of adoption was truly remarkable, as India is largely a cash society. Vendors from tea shacks to supermarkets immediately started accepting digital transactions from these wallets. Drawing on these countless possibilities, and highlighting the scale of remittance into these developing countries by migrants in the west, there is a serious workable solution that FinTech companies can contribute on.
The very promissory idea of developing digital FX companies was in response to the expensive middle brokering by traditional institutions which handle customer’s money when remitting abroad. In addition to the fluctuating exchange rates, remitters are charged monumental premiums by banks and money transfer organisations, which eat out into the major share of the pie. For instance, students seeking to study abroad more often than not are funded by banking loans, and when transferring their fees through traditional routes, pay an added surcharge apart from the exchange rates. Students are already hard strapped for cash, and the current system amplifies the problems, especially for those moving abroad for accessing universities. This is not a dormant case; in fact, in the data we analysed at Xendpay, student transactions reflect to be a significant chunk of the total volume. 16.5% of these tuition payments were to India, 12.3% to Thailand, 7.3% to the US, and 7.14% to the UK. Of these payments to the UK with ‘tuition’ as the purpose, 57.5% of them were from France, 11.3% from Italy, and 7.7% from Germany. More importantly, our data concurs that a monthly average of over 60% of all remittances were transacted for family support. This corridor is from developed regions in the west to developing countries in Asia and Africa, who are reliant on the income of their expat family members to run their households or educate their children.
FinTech companies are well positioned to challenge the wider foreign exchange market narrative which continues to be dominated by banks and traditional high street exchange providers. With significantly smaller overheads, bulk handling and intelligent transferring, they are capable to offer real time rates, and almost negligible to zero transaction surcharges. I firmly believe challenging this commercially is a matter of social good; for the benefit of consumers and, especially due to the volume of transfers from developed to developing countries. This model can in fact deliver up to 10% savings for every £100 remitted – and this is the current industry trend.
That being said, I also recognise the challenge ahead. While digital FX companies can initiate the liquidity, there is equally the necessity for banking/payment infrastructure to be developed and distributed, along with the growing mobile based internet penetration. We are still in a model of banking which is primarily based on holding physical accounts. Awareness and acceptance of mobile based wallets, which are already in existence, will further amplify the efforts to expedite the penetration of the unbanked. And as one single coherent working system, FinTech can address one of the world’s complex problems – poverty alleviation.
About the author
Paresh Davdra is the CEO & Co-Founder of UK foreign exchange and international payments provider RationalFX and the world’s first “Pay What You Want” money transfer service Xendpay.