The digital revolution can be a boon for emerging markets

The digital revolution, thanks to mobile telephony and digital finance, can be a boon for emerging markets, boosting development in countries that lack the infrastructure that rich economies take for granted.  In addition to payments and loans, cryptocurrencies used as an alternative in international remittances is one of the most interesting and controversial technological developments.

Digital finance, a boon for emerging economies

The world's major economies developed during the twentieth century thanks to vast and expensive electricity and telecommunications networks, but emerging countries are compressing decades into years thanks to relatively cheap mobile telecommunications and sustainable locally generated energy sources at a small scale.  The result is an increasing number of people with access to essential information and services, especially in finance and banking.  Indeed, the digital revolution, thanks to mobile telephony and digital finance, can be a boon to emerging markets, driving the development in countries that lack the infrastructure that rich economies take for granted.

In fact, digital transformation is faster than in the three previous technological revolutions: the printing press, steam engine and electricity generation.  In 1915, 10% of Americans had access to a car and it 90% was not reached until 1989.  Domestic landline telephony took 66 years and electric power 40 years.  But mobile telephony has reached that level in 22 years and only slightly more the personal computer.  In addition, while in 1993 the leading supercomputer could do 123,000 million operations per second in 2021 it reached 442,000 trillion. According to Oxford University's Our World in Data, adoption of fixed telephony is rare in countries with $7,000 to $8,000 per capita income, but not mobile telecommunications. In 2017 there was not a single country in sub-Saharan Africa with more than ten fixed-line subscriptions for every hundred people, but almost every country had more than 25 mobile subscriptions and many more than a hundred.

66% of unbanked people own a mobile phone

The fact is that about 90% of world's population under age of 30 live in emerging countries, but in regions as Latin America between a third and half of population does not have access to a bank account or with limitations.  In India, 80% of adults had an account by 2017, but there is still a heavy reliance on cash, which accounts for 44% of transactions in Middle East and Africa and 36% in Latin America, compared to 11% in North America.  It is expected to be reduced, as around 66% of the unbanked own a mobile phone.  This is the case in Indonesia, where half of the population remains unbanked, but 74% have access to Internet through smartphones and to money accounts.  In addition, Asia is the fastest growing region of e-commerce, with more than three-quarters of such sales through mobile phones. The e-commerce grows at 25 and 23% rates in the Philippines and Malaysia.

Fintech and big tech replace banks in the provision of credit

So far digital financial inclusion has focused on spending, but it expands to digital lenders.  In fact, in emerging economies the decentralized fintech platforms and large technology companies replace banks as intermediaries in provision of credit.  They allow online lenders to interact with borrowers and loans directly or in a marketplace.  For example, the Chinese tech group Tencent has devised an ecosystem with WeChat Pay and Mercado Libre, Latin America's most popular e-commerce site, has a similar approach.  These providers, with advantages of service and efficient back-office, do not have to bear traditional banks not optimal loads or legacy systems.  This access to credit helps smaller businesses increase productivity and competitiveness and fosters entrepreneurship.  In fact, the cost of starting a business in emerging economies has fallen from 66% to 27% of average annual income.  Specifically, alternative forms of credit provided nearly $800 billion in 2019, 94% concentrated in China, the US and Japan.  Alternative credit is growing rapidly and already accounts for 6% of granted in Kenya –where financial inclusion has raised 2% of the population out of poverty-.

Still, bank branches and physical channels remain important, even in South Korea, which has some of the highest broadband and smartphone penetration rates in the world.  This is the case of life insurance , a  complex product that depends on agents and personal contacts.  In South and Southwest Asia, it is about microcredit banking.  In Indonesia, these loans are typically made to women from rural villages, with weekly or biweekly visits from other young women, who live in local branches and travel on scooters, unlikely to go digital anytime soon.

Whatever it is, some emerging governments are well aware of the advantages of banking digitalization.  According to McKinsey, digital finance can boost employment by 95 million and add 6% to emerging countries' GDP by 2025.  For example, regulators in Brazil have made efforts to open their markets to digital alternatives and the number of accounts opened since 2019 is accelerating, in Indonesia authorities have been adapting regulations to spur innovation in digital banking and even Cape Town is now Amazon's hub for cloud computing.  East Asia make for three-quarters of the world's chip capacity and ASEAN governments support investment in the sector, with specialization.  R&D and design are concentrated in Malaysia, Singapore, Vietnam the Philippines and Thailand, wafer production largely in Malaysia and Singapore and manufacturing back-end in most of these countries, plus Indonesia.

International remittances and cryptocurrencies

Another alternative use is international remittances, where demand has grown as costs have fallen, with the use of mobile phones to send and receive domestic remittances doubled in poorer countries in three years to 2017.

In this regard, cryptocurrencies, one of the most interesting and controversial technological developments, can drastically change the financial landscape in emerging economies.  There are already domestic and cross-border payment initiatives for many households that rely on international remittances, with a volume of $551 billion globally in 2019.  Given the average cost of sending this money is 7% there are considerable efficiencies to be achieved and the adoption of cryptocurrencies can reduce them, while giving rural communities easier access to medicines, agricultural markets and more efficient transportation.  In addition, cryptography, with common wallets, where everyone can monitor transactions, allows a self-government free of corruption in small communities.  This already worries some central banks.  In this regard, the International Monetary Fund has pointed out the risks of dollarization of these payment systems, but has also indicated that macroeconomic policies in these countries can be strengthened if their central banks introduce cryptocurrencies linked to their currencies.