Digital Financial Inclusion driving First the Rest then the West trend

By Bernard Lunn

Financial Inclusion 1.0 used to mean banks being told by governments to open branches in remote areas that had a lot of poor people. This did some good, but it was economically unsustainable. If you have ever visited one of these branches, you will have seen a level of paper shuffling bureaucratic inefficiency that was staggering even before the Fintech revolution around mobile money made branches seem so 20th century.

Financial Inclusion 1.0. was push marketing. Financial Inclusion 2.0 is pull marketing driven by consumer adoption of mobile money.

This is where the recent news is significant that the:


India is going through a change that may create the first post-industrial economy out of the developing world and Financial Inclusion 2.0 is a huge part of that transformation.

India looks like it will not follow the path forged by Japan and then Korea and then China. This was the industrial path. Major Western economies such as USA, UK and Switzerland are increasingly post-industrial economies. What is unusual is for a developing economy to leapfrog direct to a post-industrial economy.

India of course has a large population that needs jobs. Manufacturing is the obvious source of jobs. It worked for Japan and then Korea and then China. So India has their “Make in India” strategy. However I suspect that this will play out like the oft-mentioned manufacturing renaissance in America. Manufacturing may return to America and come to India but it won’t be assembly type work that generates lots of low-skilled jobs. This will be a digital story. It is unlikely that India will compete on labor cost for assembly work. The bad infrastructure and restrictive labor laws in India will make other countries more attractive. However India could do well with highly automated factories such as the new one making Royal Enfield motorbikes. This will create a few well paid jobs rather than lots of low paid jobs – what one associates with a post industrial economy. The combination of computer science and design flair will make India a good place to design and make products – but still not a good place for assembly line jobs. A Royal Enfield is a desirable product for motorbike aficionados thanks to some design flair and an interesting history and unique brand. A well-built modern Royal Enfield should sell well (if it uses good design to integrate history and modernity) and robots work the same way wherever they are located, so the new Royal Enfield should be as high quality as a bike from Japan or Germany or America.

Then there is “Digital India”, which is designed to leapfrog from Victorian era bureaucracy to government services delivered as efficiently as a digital startup. This is massively important to stop corruption and generate popular goodwill to move forward with free market reforms.

A few weeks ago we looked at the GIFT plans to Finance it in India.

However all of this (Make in India, Digital India, GIFT) is a pipe-dream if the lives of hundreds of millions still living in poverty are not improved. If that does happen:

  • GDP will go up and investment will flood into India leading to more GDP growth leading to….
  • The Government will get the political mandate to continue with its plans to encourage free enterprise.

This is where Financial Inclusion 2.0 is the key.

Financial Inclusion 2.0 is driven by the big mobile disruption and enabled by digital identity.

The combination and mobile and digital identity is what will stop the petty corruption that has plagued India and that will create the economic growth that will lift hundreds of millions out of poverty. There is a lot of interesting work around digital identity in the West that uses both mobile and Blockchain technology that we cover in other posts. In India, a secure digital identity is a life critical tool that enables you to own assets. This is where the Aadhaar number is ground-breaking. In India, a trustless blockchain based system for recording asset ownership would be totally corruption proof and that would be game-changing.

Mobile money and secure digital identity allows governments and NGOs to send money direct to poor people – cutting out corrupt intermediaries or simply expensive intermediaries. Mobile money and secure digital identity also allows poor people to sell their products and services directly. This “trade not aid” will have the bigger impact long term.

This is one of the big stories of our time – the “first the Rest then the West end of the Great Divergence (when the Western economies rose to dominance).

For most of the 20th century, technology was limited to the West. Countries in the Rest (formerly known as developing, then emerging, then rapid growth economies) were “tech deserts” until those economies started to open up (first China, then India, then Africa). Then technology adoption started to flow from the West to the Rest; the last decade has been a boom time for Western tech firms selling to the Rest.

Now the flow is reversing as technology adoption starts in the Rest and then goes to the West. For example, look at Xiaomi to see the future of mobile phones and Alibaba for the future of e-commerce.

This megatrend is not limited to Fintech, but within Fintech mobile payments and mobile e-commerce is the big disruption and that is happening first in the Rest and then will flow to the West.

Technology adoption flowing from the Rest to the West is one of the big 21st century megatrend stories.

Note that I am referring to technology adoption. Where something is invented matters a lot less than where and how it is adopted, as Steve Jobs taught us after wandering around Xerox Parc and seeing the first graphical user interface. Network effect has replaced patents as the technology moat.

What really matter is innovative customers. Eons ago, in 1997, I wrote this article about Indian entrepreneurs playing against 5 Aces.  Ten years later I wrote on ReadWriteWeb how 4 of these big issues were solved. The last and most intractable one was innovative customers. The Paytm story about turning the mobile payment dream into reality in India, shows that this problem has been solved by the leapfrogging to mobile and to mobile wallets.

The cynical interpretation of governments promoting digital money is that it is all about control. If these were just government initiatives I would share that skepticism. However what we are seeing is consumer adoption driven by mobile technology, with government and NGOs stepping in with a bit of enablement.


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