Millions of unbanked people can now sign up for a bank account with little more than a smartphone. It is nothing short of a revolution.

By Xische Editorial, November 11, 2018

In the past decade, millions of people in emerging markets opened bank accounts. Far from a mundane event, opening a simple bank account can change lives. With the recent explosion in smartphones and internet connectivity in the emerging world, financial technology has evolved to a point where millions of unbanked people can sign up for a bank account with little more than a smartphone. It is nothing short of a revolution that has created an entirely new class of customer for the global financial industry.

Why exactly is digital banking a boon for the unbanked? Cash, for one thing, is expensive. Sending fiat money across borders – a standard practice for millions in the emerging markets accustomed to economic migration – is costly. Traditional remittance services levy astronomical fees on cross-border transactions. Once the money has arrived, it is insecure. Digital bank accounts remove these barriers. But sending money is only part of the picture: Once an unbanked person opens a formal bank account, they then have access to a variety of products from savings instruments to insurance cover. The digital ecosystem and hundreds of startups around the world have created ways to make this easier.

One startup in South Africa called Mama Money designed a remittance application that allows Zimbabwean migrant workers to securely send money home for a fraction of the cost of standard remittance services. Kaleidofin, a startup in India with ample seed funding from powerhouse investors such as eBay founder Pierre Omidyar, crafts bespoke financial products solely for low-income customers. Once a customer has a bank account and is thus part of a formal financial service, Kaleidofin creates detailed financial plans that include savings instruments and insurance products.

Indian Prime Minister Narendra Modi kicked the industry into high-gear when his government announced in 2016 that India would undergo a demonetization program aimed at curbing tax evasion and corruption. Common Indian banknotes were rendered obsolete, forcing millions of people into formal financial services (i.e. opening bank accounts) to exchange their fiat savings before they became worthless. The demonetization push is part of a larger plan that includes a national biometric database called Aadhar. Taken together, these steps towards a future digital reality for the world’s largest democracy are having profound effects on the digital banking sector beyond India’s borders because they demonstrate how a country can bring its unbanked population into the formal financial service sector.

The next innovation in the financial services sector lies in artificial intelligence (AI). The technology is having a profound effect on the banking sector, as Xische has already noted. From evaluating home loans to cyber-security efforts, AI has been successfully woven into the fabric of global banking. It is no wonder the technology is being floated as a solution to the many challenges of the unbanked population in emerging markets.

As we’ve written about the finance sector, “traditionally banks have avoided emerging markets due to the high operating costs associated with new markets and rural areas. Mobile banking powered by smart AI could transform the equation and allow banks to offer services to an entirely new class of customer. The effects will be profound”.

Adopting the systems used in the mainstream financial sector such as evaluating customers, AI-assisted technology could transform how digital banking applications are designed from the ground up. Take Kaleidofin’s business model as one example. Focused primarily on low-income customers, Kaleidofin’s could benefit enormously from predictive models that identify untapped customers across India.

Tapping the potential of those who have been left behind is exactly the promise that digital banking holds for the unbanked. The number of potential new customers is breathtaking. Across Africa, millions have no access to formal bank accounts or any associated financial instruments. In order to build out this customer base, nimble startups such as Mama Money must be able to streamline resources to target solutions for small customer groups. AI-enhanced technology can ensure waste is culled to a minimum so companies can focus on building out market share and capital to keep innovating.

While it might sound like another AI panacea for all the world’s problems, the reality is that AI has already positively improved the financial sector. As this sector expands to find new customer bases around the world, AI can help the small startups leading the way to carry out business without excess costs. The core challenge remains infrastructure and the maintenance of internet networks able to collect and share the data AI systems require to function. When dealing with a young customer base that has little experience in the field, continued buy-in to the product is also a barrier requiring attention.

These two interrelated challenges are being addressed in the form of China’s aggressive Belt and Road Initiative. The global trade project designed to reposition trade flows through China has been characterized by massive Chinese infrastructure spending around the world. On the coattails of these infrastructure projects in places like East Africa and Pakistan, Chinese companies have expanded to offer a variety of services including banking. Building on China’s already massive AI databases, Chinese companies are pushing the AI banking sector forward in many emerging markets. Regardless of China’s grand ambitions for AI and the unbanked, small startups around the world can transform the sector using smart AI in their products. All facets of finance stand to transform as a result of innovations in the technology.