[BLOG] Barry Coetzee Column: A Formula for Financial Technology Efficiency using Demographics
According to the World Bank, most areas of the planet are highly urbanised with urbanisation rates generally close to 90%. There are two exceptions - Sub-Saharan Africa (SSA) and Asia. They have less than 50% of their populations in urban areas. The effects of this difference in the financial technology arena are quite profound.
Urban areas have high concentrations of people which make the provisions of infrastructure (electricity, sewage, water, etc) feasible. Technology thrives in areas like this because technology generally needs infrastructure – especially power and communication networks.
Co-incidentally, in SSA, financial technology also thrives in urban areas firstly because of the infrastructure, but as importantly, technology imported from highly urbanised areas also works here.
Let’s look at this for a second. Developed countries all have high (90% plus) urbanisation. These countries are also the primary developers and customers for financial technology. It therefore makes sense that, in general, the products that they produce are designed and created by people who themselves exist in a high infrastructure environment. It also makes sense then that these products are really effective when deployed at customers which are also in high infrastructure environments.
However, when a financial institution in a less urbanised/high infrastructure environment deploys this same technology then it stands to reason that its efficacy will be automatically reduced by the decrease in the optimum environment. An ATM is designed to work using a lot of infrastructure. In the UK (90% plus urbanisation) for instance, ATMs will be able to reach 95% of the population within their optimum design environment. The identical ATM deployed in Tanzania which has an urban population of 27 % (2010 UNData) will obviously be significantly less efficient. As a matter of fact, Tanzania has less than 20% formally banked population (FinScope 2007).
I have looked at this correlation between urban population and Banked population and have found that the relationship is very strong. Countries with higher urbanisation have higher banked populations. This directly has to do with the fact that banks are using technology that is infrastructure intensive, mainly because it is imported and designed to be infrastructure intensive. It only really works in urban areas.
However, my cosy formula is being challenged. More and more people are being financially included (as opposed to formally banked) by the mobile money services of predominantly mobile phone operators. However, the logic is solid. The technology being deployed in this case is designed to operate in a “low infrastructure” environment which automatically includes the rural population. This makes this technology very efficient in low infrastructure SSA.
So why do most financial technology creators not take this demographic difference into account when creating products. As I said at the beginning of this article, Africa and Asia are the exceptions to the Urbanisation/infrastructure rule. Most financial technology providers create products for the majority of markets, not the exceptions.
I do find it interesting to see that in SSA many financial institutions are moving away from developed world technology suppliers and are being much happier with products sourced from Asia. Although they are not getting the safety of a developed world brand, they are getting a much higher return on investment ... which is probably more important and the source of much comfort.
Barry Coetzee is a regular columnist on Africa Business Communities