A new paper on financial access from researchers at the Bill and Melinda Gates Foundation details the regulatory challenge of new banking models. Every new model to broaden access to financial services is a new challenge for regulatory reform. Taking on that challenge goes beyond helping finance serve the poor; it also reduces the possibility of another financial crisis like the world has seen over the past few years.
In their landmark 2008 story, “The Giant Pool of Money,” journalists Alex Blumberg and Adam Davidson began by noting how the global pool of investments, which took centuries to grow to $35 trillion, had between 2000 and 2006 doubled in size to $70 trillion. It was the challenge of what to do with all the new capital, their story went, which led to a whirlwind of new derivatives and other clandestine investment vehicles that later collapsed under their own weight.
What if those investors had more places to go—if they could have found opportunities to invest among the roughly two and a half billion people in the world who do not currently have access to the formal financial sector?
There certainly isn’t a lack of ideas for making that possible. Thanks in large part to mobile money, the practice of using cellular phone networks to mediate financial transactions, the gaping chasm between capital and those in need seems a bit less menacing. SafariCom’s M-pesa service has taken Kenya by storm, and is spreading to neighboring countries such as Uganda. The chief obstacle to closing that chasm isn’t that new models are hard to find; if you want broad access to that $70 trillion, you need legal and regulatory structures that give a world of strangers the confidence to invest in new models.
Many of these new models incorporate “banking beyond branches” – while maintaining a main branch in a city or region, using mobile money techniques to outsource specific banking functions such as cash deposit or withdrawal to existing small retailers or merchants. It’s similar to banks in wealthier countries setting up automated teller machines in convenience stores or shopping malls, only without the prohibitive investment in machinery.
Now imagine investors presented with an opportunity to invest in a business model that incorporates a network of unlicensed banking agents working with a small central branch that has no defined legal requirements for reporting and reconciling with its field agents on a regular basis. Consider that the vast army charged with finding opportunities for the $70 trillion are largely institutional investors, which means they are choosing and making investments on behalf of others–retirement accounts, mutual funds, hedge funds, sovereign wealth funds, and many more. How responsible is it to invest other people’s money in an unlicensed, unregulated financial service network?
While there are a few investors out there (Acumen, Grassroots Business Fund, ANDE) with a thirst for new models and the fiduciary freedom to invest in them, the entire investor army watching over that $70 trillion is always on the prowl for responsible and attractive opportunities to leverage other people’s capital.
Regulations for new banking models are only the beginning of this story; property markets and corporate governance among other areas also affect where that $70 trillion ends up. Organizing to advocate for needed regulatory reforms and enforcement would help provide broader opportunities to investors in financial sectors and beyond. New investment into developing countries doesn’t just create profits, it also creates jobs and tax revenues to pay for vital public needs. Through new opportunities in developing countries, the giant pool of money could become a force for social progress rather than the nexus of another crisis.