By Stephen Ufford
When businesses are looking for opportunities to expand into new markets, they may not immediately think of Africa, Asia, India or Latin America. But they should.
Although globalization took a toll on the middle class in developed nations, it also helped push huge numbers of people in developing nations into the middle class. Deloitte estimates there will be 3.2 billion middle class consumers worldwide by 2020, and calls this emerging group “the next billion” in its Business Trends 2014 report. These consumers will provide one of the biggest growth opportunities for global businesses. In fact, the United Nations predicts that by 2020 — just five years from now — the combined GDP of Brazil, China and India will exceed the entire output of Canada, France, Germany, Italy, Great Britain and the U.S. combined.
The New Middle Class: Un-bankable?
But for this new middle class, managing and spending money presents challenges. Although they have been lifted out of poverty, they still live in a world with a weak financial infrastructure and primarily use cash, not credit or debit cards. This is a middle class that often operates outside mainstream financial institutions, because they have no credit history or credit identity.
In fact, a recent McKinsey report estimates that 2.5 billion of the world’s adult population is unbanked and one of the biggest barriers to financial inclusion is the inability for consumers to have their credit worthiness validated and identity verified. A report from FICO says the unbanked are often mislabeled as “un-bankable” because they are seen as being a high credit risk, even though their actual credit risk is rarely assessed. That FICO report says this population segment overall may be higher risk than the rest of the population, but there are generally more good customers than bad. We need both new tools to help assess that risk, as well as a change in the way we approach consumers from emerging nations. The lack of both are hampering growth and opportunity in this market.
The world of online commerce tends to assume consumers, especially those from emerging markets, are bad actors. It’s the presumption of guilt before innocence, similar to shopping at a mall and being asked for a photo I.D. every time you walk into a store. If you’re from an emerging market, it’s unlikely you entered the middle class with a bank account or an easy-to-verify credit history. Very likely, most of your transactions involve cash.
Tech Innovation: The First Step to Success
There are, however, products and services being introduced to help. The widespread ownership of mobile phones -- more than 78 percent of adults in Nigeria, 59 percent in Uganda and 79 percent in Ghana -- means consumers can use mobile-phone-based banking systems. That has enormous potential for expanding financial inclusion. Today, more than 75 percent of the Kenyan population has access to financial services, the highest percentage in Sub-Saharan Africa, according to the International Monetary Fund (IMF).
Though challenges persist, many of them are rooted in the difficulties inherent in reliably identifying consumers and assessing their creditworthiness. Technological innovation is one of the most promising ways to tackle this, and it’s happening all around us.
The South African Social Security Agency, for example, delivers social welfare benefit payments using biometric-enabled debit cards from MasterCard. In Chile, supermarket chains are slowly building credit histories for their unbanked customers by extending them small store credit and then expanding that credit based on repayment record. Millions of financial accounts have been opened in India thanks to new, government-issued, biometric-linked identity cards.
As the founder and CEO of Trulioo, a global identity verification provider, I know the challenges inherent in trying to determine the identity of online consumers firsthand. Yet that verification provides a layer of trust that enables online commerce. Consumers feel safer dealing with companies that have taken steps to remedy bad online behavior and businesses sleep better knowing their customers are authentic users and not fraudsters. We've worked hard to develop a technology that serves businesses worldwide, and especially in developing countries, where access to identity data is more limited and less reliable. To do so, we verify identity based on a person’s cyber profile, aggregating information taken from their activity on the Internet (think ad networks, e-commerce websites, social networks and mobile apps) and utilizing that digital footprint to verify their identity.
Finding a Solution
Trust continues to be the number one problem when it comes to fostering increased trade between first world and emerging markets in today’s online world. Companies are struggling to find solutions that address the constantly evolving and challenging needs of the international marketplace.
Governments need to help as well, by strengthening financial infrastructures and creating policies that facilitate banks’ access to borrower information. IMF managing director Christine Legarde gave a speech last June to the International Forum for Financial Inclusion, where she simply said, “A key requirement for greater financial inclusion is appropriate information.”
As the middle class in Asia, Africa and Latin America continues its meteoric rise out of poverty, both the private sector and governments must continue to create tools that allow people to trust one another, and presume innocence before guilt. Businesses should look at the emerging middle class as valuable and potentially long-term customers and leave it to technology to find the bad actors.
Stephen Ufford, Founder & CEO of Trulioo, has founded and successfully sold several consumer data focused startups over the last decade.
