Disruption. I was recently catching up on some economic history in a great new book Grand Pursuit: The Story of Economic Genius and was particular motivated by Schumpter’s theories on economic development. In his book Theory of Economic Development, Schumpeter states that the three elements of local and industrial life that drive development are innovation, entrepreneurs, and credit. Development is a “dramatic, chaotic and disruptive process,” and the best thing that we can do to move it along is to provide space for entrepreneurs to operate through an enabling regulatory environment and easy access to credit. Why entrepreneurs? Because through their ideas and willingness to take risk, they contribute the process of “creative destruction” which drives economic growth.
Disruption is a large driver behind the excitement and buzz created by mobile financial services or mobile money in the developing world. The real innovation in mobile financial services is not the phone. In fact, many transactions that are now occurring under the mobile finance umbrella are taking place at an agent location, with the customer and the agent face-to-face and with no mobile phone involved.
Many mobile finance providers operating in countries with low literacy and/or low cell phone penetration are unable to reach certain targeted customers through phone and text-based systems and are therefore abandoning (or possibly postponing) the idea of the mobile wallet altogether, recognizing that this is not the best tool at this moment in time for that demographic. Instead of cell phones, operators are reaching customers in these countries through paper vouchers, debit cards, and human interactions. So why are will still excited about mobile money?
We’re excited about mobile financial services because it disrupted both the commercial banking and microfinance sectors in a way that is now driving everyone to provide lower-cost services targeted at those previously unserved by any type of formal financial services provider. Commercial banks are clearly threatened by mobile banking. In Kenya, banks are fighting regulators to slow the growth of M-Pesa, a financial product that is targeting customers that these same banks never gave a second thought to until M-Pesa starting making money off of it. The Bank of Nova Scotia (BNS), based in Toronto, has operated in Haiti for 37 years without expanding beyond 4 bank branches, all in relatively wealthy areas of the urban capital of Port-au-Prince. After M-Pesa’s success in Kenya, BNS for the first time sees a reason to expand in the poorest country in the Western Hemisphere, and is devoting time, money, and human capital to do so.
So the secret is out – mobile is not the key to mobile financial services. The key is providing poor people with the same type of convenient, safe, and practical electronic alternatives that wealthier people have been enjoying for years now. The challenge now is to recognize this and make room for to entrepreneurs to take advantage of the space that has been cleared via this disruption. If we don’t ask for immediate success from all implementers, but rather allow for thousands of start-ups and pilots and accept that many of these will fail, we will in fact be supporting the type of creative destruction that has helped economies grow throughout the history of modern economics. Providing safeguards and consumer protection are vital to this process, of course. However, while protecting the consumer, we should recognize that it is only through experimentation that mobile finance will achieve its potential…whether or not that potential is through mobile phones.