It is very widely accepted that Kenya’s iconic mobile money transfer platform, M-Pesa, has spearheaded what has been called the ‘Fintech Revolution‘. Defined as ‘[c]omputer programs and other technology used to support or enable banking and financial services’, in its very simplest form fintech involves a greatly enhanced ability to transact financial services via a mobile phone or smart device, making it easier, cheaper and quicker, for instance, to (1) obtain a loan; (2) make a savings deposit; (3) transfer and receive money; and (4) pay for and be paid for goods and services. Such is the excitement created by M-Pesa, especially in Africa, that many regard fintech as having the potential to re-engineer capitalism towards “sustainability, equality and the advancement of humanity as a whole”, and thus make it capable of ushering in a new ‘golden age’ of abundance and prosperity.
Since the development of M-Pesa was initiated and funded by the UK’s then aid agency, the Department for International Development (DFID), the largest international development organisations soon heard about M-Pesa, and they were transfixed by it. Above all M-Pesa attracted the attention of the World Bank. Among other things, it saw this radical new fintech application as providing a way to rescue the brick-and-mortar microfinance model that was now seen as having failed in its objective to address global poverty.
After very aggressively promoting the Nobel-award-winning microfinance model from the 1990s onwards, the World Bank inevitably found itself in a very awkward position in the early 2010s when many one-time leading microfinance advocates began to concede that the microfinance model had in fact had no real effect on global poverty. Even worse, as some heterodox economists had long argued, the microfinance model appeared to be guilty of seriously setting back the effort to address global poverty, especially in Africa. The World Bank’s first reaction to these important reassessments was not to consider abandoning the microfinance model – for neoliberal ideological and corporate profit-making reasons the microfinance model was far too important to simply cut loose – but to mount a rescue attempt. This involved simply rebadging the microfinance model as the ‘financial inclusion model‘, the hope being that a changed name and a somewhat wider explanatory narrative would give it a new lease of life.
The importance of this rebadging was that at almost the exact same time as it was initiated, the fintech model was bursting on to the global development scene. It was quickly realised that the fintech model would greatly assist in turbo-charging the revised financial inclusion narrative, and would thus make it possible to very rapidly achieve ‘full’ financial inclusion almost everywhere. With every single individual and household in Africa soon having access to a range of basic fintech services, including digital microcredit, it was possible to state once more, this time with even more confidence, that virtually all of its poor were now on the way towards escaping their poverty by establishing or expanding their own microenterprise. The extended argument began to take shape that the old brick-and-mortar microfinance model had perhaps failed because it had been unable to achieve ‘full’ financial inclusion – essentially not enough microcredit was made available to every individual that wished to set up a microenterprise – but the new fintech-driven financial inclusion model would ‘go the last mile’ and brilliantly finish the job.
When it became clear that the fintech model was also capable of generating huge profits for investors, its upward trajectory became unstoppable. This profitability factor was first amply demonstrated when Safaricom, the corporate entity that owns and operates the M-Pesa platform, quickly emerged to become one of Africa’s most profitable corporations (see below). Many other investors soon joined the party in an attempt to get their own share of the spoils. Thanks to a wave of foreign investors that began to arrive in Africa in the mid-to-late 2010s a large number of new fintech financial platforms were established. In addition, many of Africa’s existing brick-and-mortar financial institutions joined them by quickly migrating their financial services over to new or bought-in fintech platforms. Requiring far fewer employees and much less expensive business space, this was the key to raising their own profits significantly. Like previous natural resource discoveries (gold, platinum, diamonds, cocoa, spices, etc), Africa’s fintech sector was soon being held up as one of the world’s most attractive investment destinations. What we might call the ‘investor-driven’ fintech model had started a new ‘gold rush’ in Africa, and then everywhere else.
The possibility that the investor-driven fintech model might be able to combine investor and corporate enrichment with seemingly demonstrable progress in addressing Africa’s poverty was clearly an extremely seductive narrative. It looked as though capitalism might finally be working in Africa for everyone, and not just for a tiny elite. However, in a discussion paper produced for the Amsterdam-based Transnational Institute, Fernando Amorim Teixeira and I argue that this uplifting narrative represents a fundamentally flawed and inaccurate portrayal of the emerging global reality, especially in Africa. While it is quite clear that fintech has delivered many initial benefits for Africa’s poor, including reduced costs of, and greater access to, many important financial services, its full long-term impact is very likely to be far less rosy given the way that it has begun to evolve.
Like many financial innovations that elite groups wish to sell to the wider public in order to make a financial killing at their expense (think sub-prime mortgages), we contend that, for the very same reasons, almost all of the early hugely uplifting analysis of the impact of the investor-driven fintech model was seriously flawed. Largely commissioned, funded, published and promoted by those financial institutions linked to the fintech sector, this was perhaps only to be expected. Notably this problem began with the assessment of the impact of M-Pesa itself. Bringing M-Pesa to the world’s attention were publications produced by staff at the Bill and Melinda Gates Foundation. not coincidentally one of the world’s most aggressive advocates for all manner of technological innovations in the financial sphere. These early outputs all celebrated M-Pesa, while conspicuously failing to mention any of its downsides. Nor did they even mention the fact that M-Pesa was able to secure by dubious means a crucial near-monopoly for its services that enabled it to succeed very quickly thanks to having almost the entire market to itself.
The UK government that was otherwise advising African governments to accept free markets and competition was silent about this anti-competitive tactic. UK government and Bill and Melinda Gates Foundation funding then helped the US-based economists, William Jack and Tavneet Suri, to produce several influential early research papers promoting M-Pesa. Latterly this included by far the most influential output of all on the subject of M-Pesa – a 2016 article they published in the prestigious, peer-reviewed journal Science that concluded, “[A]ccess to the Kenyan mobile money system M-PESA increased per capita consumption levels and lifted 194,000 households, or 2% of Kenyan households, out of poverty”.This claim created a sensation among the international development community and, even though the article was based on numerous flaws, logical inconsistencies and obvious biases, it was cited in almost every major official publication promoting the investor-driven fintech model.
In fact, the investor-driven fintech model that dominates in Africa today is, we believe, shaping up to be not just deeply damaging to the lives of Africa’s poor majority, but also represents a major lost opportunity to deploy a radical financial innovation to create far more productive, inclusive, equitable, dignified and socially just African economies and societies. We outline six of the main problem areas that have arisen with regard to the investor-driven fintech model. These include: extending the failed brick-and-mortar microfinance model’s support for the ‘wrong‘ type of unproductive ‘no-growth’ ‘here today and gone tomorrow‘ microenterprises and SMEs; increasing financial fraud and thievery; undermining the ability of important social solidarity networks to support the poor into the longer-term; and, plunging Africa’s poor (especially in Kenya itself) into even more individual debt than even the brick-and-mortar microfinance model managed to do in previous years.
The final over-arching problem we highlighted is also one of the most far-reaching: the investor-driven fintech model is nothing less than a ‘digitalised’ extension of the earlier colonial-Imperialist ‘extractivist’ models that enabled the western nations to appropriate Africa’s natural resource wealth in order to fund their own economic development trajectory at the expense of ‘under-developing’ the African nations. Nowhere is this conclusion more in evidence than with regard to the example of Kenya’s Safaricom within which M-Pesa is a key constituent. It first helped that its founding shareholder, the giant UK telecom corporation Vodafone PLC, was able to engineer a near-monopoly for M-Pesa’s services right from the start thanks to a secretive ‘shares for lobbying’ arrangement concluded with key local business and political elites. With this market unfriendly structure neatly in place, Safaricom was then able to go on to ‘mine’ and appropriate considerable value from the tiny digital transactions of Kenya’s poor. Safaricom was soon earning quite spectacular Wall Street-style profits. Crucially, rather than reinvest these profits in the development of the Kenyan economy, the bulk of Safaricom’s profits have been sent abroad to reward its foreign shareholders, starting with its still 40% majority shareholder, Vodafone, which is garnering a huge long-term financial reward for its early support for a UK government initiative. Furthermore, such is Safaricom’s strong commitment to Vodafone (rather than, say, the Kenyan economy and to its poorest citizens) that during the COVID-19 crisis, when its revenues were falling thanks to a lower fee structure imposed on it by the Kenyan government to help the population better cope, Safaricom was willing to take a nearly $US200 million loan on to its books in order to help pay Vodafone its usual high dividend (just short of $US200 million). Equally revealing from another angle is the fact that Vodafone has quite openly admitted that it uses its large foreign dividend flow, including that amount generated from its ownership stake in Safaricom, to fund its vital infrastructure spending in the UK, which is clearly good for the UK economy. But then Vodafone uses this fact as the justification for why it manages its global financial structure in such a way as to pay almost no corporate tax in the UK.
We thus conclude that the initial and not inconsequential benefits arising from the introduction of many new investor-driven fintech platforms are now in real danger of being swamped entirely by the downsides that have begun to emerge. So does this not mean that an alternative fintech model would make more sense? It probably does. However, replacing the current investor-driven fintech model is right now simply not on the agenda of the global investment community or the major international development organisations.
But if we assume that change is still possible in some locations with relatively independent national and sub-national governments, then what might be the alternative to the investor-driven fintech model? We end our TNI discussion paper by briefly discussing this issue using the experience of a fintech’ model that has been deployed since the mid-2010s in the city of Maricá in south-eastern Brazil. While still in its early stage and clearly still subject to modification, this ‘people-centered’ fintech model has nevertheless already demonstrated that it is perfectly possible for basic fintech applications to be directly used to promote the common good. Piloted by the city government, the emerging ‘Maricá Model’ is based around a community digital currency, the Mumbuca, that is managed by the city-owned community development bank, the Mumbuca Bank. One of its centre-piece policies is a generous Basic Income program that is paid out in Mumbuca and which provides demand for many other local enterprises. Other initiatives include financing local enterprise development with no to low cost loans that allow sustainable local SMEs to emerge, as well as for existing informal microenterprises to expand, diversify and otherwise try to increase their level of productivity in order to make a more substantive contribution to the local economy. Crucially, the not inconsiderable financial savings enjoyed by the Mumbuca Bank using fintech applications to manage the Basic Income program and other services are all retained and then directed into expanding the benefits it can offer to the local population as a whole, not to reward a narrow elite of investors.
Even a cursory comparison of the various inter-locking aspects of the ‘Maricá Model’ in action reveals that it is already generating significant value for Maricá’s citizens, and especially for those living in poverty. Pointedly, the ‘Maricá Model’ was able to fashion probably the best response to the COVID-19 crisis that emerged anywhere in Brazil, if not the world. We believe African countries urgently need to learn from and begin to adapt such community-driven fintech models to their own requirements if they genuinely want the global fintech revolution to sustainably benefit all of their citizens into the future, and not just a lucky few.
This article was first published by ROAPE.