Fast Lane to the Future: The Leapfrog Effect is Revolutionizing Finance
The “leapfrog effect” has long been a global development buzzword, and it’s easy to see why. It’s an appealingly optimistic concept: The term refers to the phenomenon, in fast-growing emerging economies, of technological advances permitting shortcuts in infrastructure building. Instead of proceeding through all the previous iterations of a technology when developing their infrastructure, these countries are able to jump to the most current version. This saves them considerable time and money – and can let them achieve quick results that took several decades to attain in more developed countries.
Though the existence of technology in itself doesn’t guarantee that this leap will occur, and successfully executing it requires support from both private and public sector actors, the leapfrog effect is already reshaping several vital elements of emerging economies. Let’s take a look at three.
Communications is the classic example of the leapfrog effect, and it’s the sector through which related opportunities flow. To understand the potential of leapfrogging, consider the massive effort that has gone into the communications infrastructure in the developed world. Since the late 19th century, telephones have been the primary method of long-distance spoken communication there. And setting up a telephone system traditionally involved running countless miles of cables from town to town and house to house, as well as installing wiring within each home. The amount of resources and time needed for a developing country to accomplish this from scratch is mind-boggling.
Fortunately, with the advent of mobile phone technology, there is no longer a need to create an intricate network of wires in order to make a phone call. Instead, developing countries can completely bypass landlines and jump straight into building mobile towers and connecting those to the main network. The resulting access has facilitated not just voice communications, but increasingly – with the emergence of cheap smartphones – access to mobile Internet. For many in developing countries, technologies like dial-up Internet access, floppy disks and even computers themselves are likely to remain relics of the past, as entire countries jump directly to the smartphone era.
The World Bank’s latest statistics put the current global unbanked population at 2 billion. Although that’s an improvement from 2.5 billion in 2011, we still have a long way to go before that number hits zero. And achieving that goal will be unlikely if it depends on the construction of a brick-and-mortar bank branch network.
Meanwhile, advances in mobile connectivity have made bank branches as outdated as rotary-dial telephones. As mobile banking has grown in popularity in industrialized nations, it has been outpaced by parallel innovations like M-PESA and M-Shwari in Kenya, which have revolutionized the way developing countries approach banking. Today, groups like the Better than Cash Alliance are helping governments in emerging countries make the transition to electronic payments rather than relying on cash, as mobile money innovators everywhere vie to be the next M-PESA.
In another intriguing development, there’s increasing talk about the possibility that developing countries – especially in Africa – could ultimately use cryptocurrencies to leapfrog the need for a traditional financial infrastructure. The unbanked in Kenya and Tanzania already have access to bitcoin-based services such as BitPesa that allow them to affordably send and receive funds without the need of a bank account.
Our concept of identity, like that of communications and banking, has been turned on its head in our increasingly digital world. The use of paper documents as proof of identity is becoming obsolete, particularly due to the cost and inefficiency of acquiring, handling and storing these documents, and the ease with which criminals can now create high-quality forgeries. As governments and policymakers around the world uncover reliable new ways to confidently identify people, leveraging advanced technology and data offers robust and unique solutions.
Now that mobile phones, particularly smartphones, are coming into greater use – especially in developing countries – an alternative form of identity is on the rise. As each person uses their mobile phone, whether it’s to make calls, top up minutes, communicate on social networks or send mobile payments, they begin to cultivate a network of electronic records that can be used to uniquely identify them. In effect, they are “triangulating the self” and creating a digital footprint that can be used as proof of identity.
This footprint can be used by financial services providers, not only to comply with “know your customer” requirements, but also to demonstrate creditworthiness. MasterCard Advisors found that alternative sources of data, including mobile prepaid and social activity, could provide a wealth of data that can be effectively used to determine an individual’s ability and willingness to repay loans. Big data analytics companies have developed models that show that a few months of this data can suffice to not only verify individuals’ identity, but to allow financial services companies to quickly assess factors like income level and employment status.
Using these types of data, as well as data from peer-to-peer marketplaces and online commerce, to reach the unbanked is both my personal mission and that of Trulioo, a global ID verification company that I launched in 2011 focused on building trust online, best privacy practices and financial inclusion. That’s why Trulioo is working to harness the power of big data analytics, collectively called cyber ID data (CID), in our identity verification product, GlobalGateway. It is our goal to help remove barriers that are preventing the world’s poor from accessing basic financial services.
When combined, the leapfrog effect that is happening in communications, banking and identity could hold the key to solving the problem of financial exclusion. Developing countries are now free of the burden of having to integrate new technologies into existing, long-established systems, allowing them to make digital financial services widely available while reducing risk for financial institutions.
As technology continues to become more affordable and accessible in developing countries, we will undoubtedly see more of the benefits of leapfrogging. Through the use of CID and other tools, I look forward to the day when everyone will be on a level playing field and have the same opportunity to participate in the global economy, regardless of location, race, creed, circumstance, environment or financial situation.
This article originally appeared in NextBillion Financial Innovation.
NextBillion.net is a website and blog bringing together the community of business leaders, social entrepreneurs, NGOs, policy makers and academics who want to explore the connection between development and enterprise. The site has evolved to become a blog, newsroom, research tool and career center – all dedicated to exploring the “next billion” and the base of the pyramid ideas and highlighting the development and implementation of business strategies that open opportunities and improve the lives of the world’s approximately 4 billion low-income producers and consumers.
Stephen has founded and successfully sold several consumer data focused start-ups over the last decade. As a serial entrepreneur, Stephen likes to challenge the status quo and if it’s broken, he likes to fix it. In 2011, the identity veteran started his most recent startup, Trulioo, to help build a trust layer into the Internet, and fix the problem of broken identity that today affects so many online businesses.