The image that comes to mind when discussing banking and investment institutions is that of a behemoth. Large, enormous and in many cases a little slow on the uptake. Not always transparent and quick to process least of all  for the generation of  Millennials. The financial sector has long been overdue for innovation. More than 2 billion people around the world are still to come under the umbrella of banking services. This is particularly true of developing nations. What has changed? Better internet access and with more and more people of the developing world going the mobile way, new opportunities are presenting themselves to make changes way in the banking industry.

Online Microlending Platforms

Tech start-ups like Konfio, Milaap, Rang de, Kiva and Zidisha are helping micro businesses in Latin America, India and Africa get small business loans. Konfio has a  proprietary algorithm that it uses for its credit appraisal process while Zidisha connects lenders and loan seekers directly.

Forbes reports:

"The average interest rate charged for microfinance loans worldwide is about 40% and even charitable loans funded through Kiva are passed on to the end borrower at an average interest rate of 35%. By eliminating intermediaries, Zidisha has been able to reduce cost to the borrower to just 5% of the loan amount."

Take the case of Faustina Yeboah who has taken a $200 loan from Zidisha to buy frozen fishes and meat for resale. She has taken a $200 with the cost of loan being $10.

This is her story from the Zidisha website:

“I am a cold store operator (sale of frozen fishes and meat) in addition I sell food products like palm oil, frying oil, tin tomatoes fried fishes and fresh vegetables (tomatoes, pepper, onion, and garden eggs). I sell the additional items on table top and in smaller quantities to my customers who buy for food preparations in their households. The business is located in Seikwa, Tain District, Ghana. The patronage of my items is very high and most of the people who buy are women who buy for family food preparation. I operate throughout the day but my busy hours are from 2:00pm (14 hours GMT) to 5:30pm (17:30 GMT) each day. My vision is to raise this business to the level that I can be making wholesaling to those who will like to buy in bulk for resale. Currently unemployment is on the rise in my country and it is worrying trend to every concern citizen. My shop space is very small and I operate from two fridges and again I have no extra power source. So I will be grateful to get Zidisha loans support to enable me employ some of the unemployed boys and girls, make a big cold room to keep my items frozen always and to buy a power generator to power my shop in case of power cut (dumsor, dumsor as in local terms). This in the long run will help me get more profit to support my parents and cater for my children education.”

Usually a bank would never extend a loan to Faustina, but with the help of microfinance Faustina may grow her business to the point where she can avail a larger loan for capital expenditure from a bank.

Cryptocurrency

Banks are looking closely and trying to better understand Blockchain, the underlying technology of Bitcoin. In Blockchain a series of permissionless databases that are tamper and revision resistant collect time stamped transactional data. Batches of time coded transactions get a unique name. These batches are then stored in data nodes and are cryptographically enforced. The nodes behave like independent units and are not connected to one another. It is extremely difficult to alter or revise the data in any way. It’s batches and decentralised structure make blockchains a great tool for online transactions where security is paramount. It helps cryptocurrencies stop double spending as well.

A natural corollary of blockchains are side chains that do not use blockchain but support better workflow and functionality. Sidechains work with blockchains on a need basis with the help of bidirectional transferability. Liquid, ChromaWay and DIONS are some examples. Bitcoin and Namecoin are examples of the blockchain technology.

Credit card companies have noticed that the blockchain technology is more distributed and faster than existing payment and transfer technologies. Bitshare and Ethereum are other names in the arena of using blockchain technology.

Bitshare uses the blockchain technology to improve time to markets like NASDAQ. Their promise is that they offer a decentralised financial platform. Ethereum promises a decentralised platform that enables contracts with low downtime, no censorship or fraud.

The Ubiquitous Mobile Phone

Mobile phones are banks in our pockets. Shopping clothes, furniture, books or transacting has gone the mobile way. The new point of sale is the mobile. PayPal, iZettle, SumUp and PayLeven are some of the intermediaries that enable credit card transactions. Most of them do not have large transaction costs or long contracts.

The biggest users of the ‘mobile bank’ are the millennials. They fall in the age group 18 and 34. They are most comfortable using the mobile phone to make transactions, payments, etc. One such form of mobile payment is the SMS payment. It works just like a regular SMS or short messaging service. Buyers send a text to pay which is sent to a mobile payment provider. The provider works like a conduit who clears the transaction between buyer and provider. The cost of the purchase is either deducted from the pre-paid account of the user or added to the bill of a postpaid user. This format helps mobile phone users make safe payments, purchase and make deposits not unlike a bank.

The advent of technology into the financial services sector is good news. It will lead to getting new customers into the ambit, improved quality of transactions with size or location not being limiting factors. Technology will also help financial players handle larger volumes of data faster, track user patterns and offer better targeted services. It allows smaller players to have a more level playing field and greater access to financial services to all.