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Around the world, there is perhaps no greater good FinTechs can offer the financial community other than access and inclusion in the banking and credit markets. According to the World Bank “broader access to, and participation in, the financial system can boost job creation, increase investments in education, and directly help poor people manage risk and absorb financial shocks.”
As we look at the ways in which we as an industry can boost financial inclusion—[measured by the Global Findex as having an account that allows adults to store money and make and receive electronic payments]—the key to increasing financial inclusion on a global scale is unlocking instant payments across borders.
Let’s ponder the reasons... First, the way in which people work is fundamentally shifting. In the developed world, work is moving toward “gig economies” in which individuals work on a project basis, sometimes for multiple companies at a time. Payment for work is often done instantly and in smaller increments than the traditional 40-hour workweek.
Uber is a well-known example of this. Drivers supply their car and register with the “ride-hailing app”, and are able to work the hours that best fit their lifestyle, whether late at night or during rush hour. In exchange for this service, Uber provides payment weekly, via direct deposit, based on the hours worked.
The gig economy and payment for these gigs is quickly spreading to the developing world. Continuing with the Uber example, the fastest growing markets for ride share operations such as these are in the developing world. In 2016, Latin America was the fastest growing region for the ride-sharing app, according to Bloomberg.
Second, the way people receive compensation has shifted with the work. The days of a traditional paycheck for a solid days work may not be a conducive model for the new workers of the sharing economy. Uber provides one such example, as do online marketplaces like Etsy, where artisans sell their wares online and receive payments from their customers from around the world.
Third, credit scores are changing as payment mechanisms shift. As we see in Uber above, drivers are paid via direct deposit, which requires a bank account. But what about the estimated 2 billion people around the world that do not have access to a bank account? How might they receive compensation in a gig economy world?
Traditional credit scores rely on factors that include payment of credit cards and bank loans. For many in the developed world without access to traditional banking and finance mechanisms, acquiring a solid credit score can be daunting without access to financing tools. However, just as the loan market is being disintermediated with the rise of P2P loans and microfinance, so are credit scoring with the introduction of new methods such as psychometric lending. Providing new methods of evaluating credit worthiness will enable more transactions that flow through traditional banks.
This is where the right cross-border, instant payments model holds the key to greater financial inclusion.
One, if we look back at the Uber example, there are a couple salient points to consider. The first is that Uber is based in the U.S. and its largest growing market in 2016 is the many nations of Latin America. In order for the Uber payment model to work, Uber’s corporate treasurer in San Francisco needs to be able to transmit payment to Uber offices and correspondent banks around the world in real-time to not only facilitate payments for shared rides but also payment for the many independent drivers that power the Uber network.
Two, Uber needs drivers and car owners need a reliable way to receive payments. As we discussed above, over 2 billion people, mostly in developing markets that are targets for expansion from companies such as Uber, are without access to a bank account, due in part to identity, according to the World Bank.
Which leads to the third way in which cross-border payments will drive greater financial inclusion: the way in which we consider identity, and the verification of our personal credentials, is changing and will require a new technology to hold and process this information. In very short order, the idea of linking a credit card to a ride-sharing app will be a thing of the past. For Uber to expand in other developing markets where credit score penetrations are lower, Uber will need to devise ways to accept and disburse payment in real-time and at low-risk to the company.
The key here is banks working together to ensure good funds are available at the point of the payment initiation and the payment disbursement.
As the cross-border payments infrastructure is developed, it will be built using technology that is both state-of-the-art and interoperable. By building a payment model with these two tenants in mind, cross-border payments can work with local faster payment initiatives and global payment message network. The result will be initiation of a payment action in the U.S. to reach the intended recipient in a market such as Mexico in real-time.
Building payments infrastructure along these models will allow companies leading the way in the global gig economy, such as Uber and Etsy, to quickly and easily transmit payment details about their employees to any institution in the world.
I’m excited by the prospect of increasing financial inclusion for everyone, one payment transaction at a time. Working together, we can truly drive financial inclusion for the greater good across borders.