In the past years mobile phones have enabled a wave of innovation in financial services. What few people realize is that many of these innovations were pioneered in emerging markets, and often by users, before diffusing to industrialized nations.
There is evidence that many of these services were informally pioneered by the users of mobile phones, before the telecommunications companies brought them to market. One such example is the innovation of mobile money transfers, spearheaded in the Philippines.
When mobile phones became available in emerging markets, pre-paid users would recharge their phone using scratch cards. These scratch cards would be distributed by the telecom operator and could be bought at any corner store. When scratched, the card would reveal a unique multi-digit activation code that, when typed into the phone, would credit airtime to that customer’s phone number.
In 1998, customers in the Philippines, an archipelago made up of 7,100 islands with poor access to financial services, realized that they could use this functionality to transfer airtime load between each other. People would buy a scratch card and send the unique activation code by SMS to a relative across the country, who would then use the code to upload the credit onto their own phone number. Users thereby pioneered domestic airtime transfer between two different phone numbers.
Sending airtime across the country was not only an improvised channel for remittances but also became a means to settle debts. Users actually pioneered the use of airtime as a form of currency for merchant payment. This innovative service of sending airtime originated with subscribers who began passing top-up credits among each other in exchange for services.
In December 2003, Smart, the largest telecom company in the Philippines, realized the potential of this service and launched PasaLoad, which allowed electronic airtime transfer between two customers.
The development of these novel services defies the way we typically think about innovation.
Users self-provided the services of domestic airtime transfer and merchant payment before any producer offered them in the market. Not only are these new services reducing the number of unbanked, they are also diffusing to industrialized nations.
Another example is Starbucks which, since last year, accepts mobile payments. Google Wallet is a similar attempt to bring these services to more developed countries.
In a research paper done with Francisco Veloso and Pedro Oliveira we found that 85 percent of the innovations in mobile financial services originated in emerging markets. We also concluded that at least 50 percent of all mobile financial services were pioneered by users, approximately 45 percent by producers, and five percent jointly by users and producers.
Finally, we observed that three-quarters of the innovations that originated in emerging markets have already diffused to OECD countries, and half of those were innovated by users.
Plato said “need is the mother of all invention.” And need is highest for the poor in constrained environments. Now that technology gets to their hands too, it may be time to look for innovation in new places?