New Research Reveals China’s Potential for a Mobile Banking Revolution

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Researcher Patrick Ainslie calls it ‘handshakes over hetongs’ (the Mandarin word for ‘contract’). It’s an opportunity, an open challenge even, to reach 250 million people in China and potentially transform their lives.

Ainslie is part of a team of researchers at New York-based social enterprise Reboot, which recently published a study, based on extensive field interviews, on designing financial services for China’s marginalized groups. The project was commissioned by the Institute of Money, Technology and Financial Inclusion at the University of California in Irvine, and will soon be released as a book titled “Embracing Informality: Designing Financial Services for China’s Marginalized.”

64 percent of China’s rural and migrant population does not have access to formal banking services. Market pressures and risk aversion have driven the country’s “Big Four” banks to close more than 30,000 branches in just the last five years. The researchers at Reboot set out to explore the needs of marginalized groups (migrant workers, rural villagers and ethnic minorities), and to see how enterprises and entrepreneurs could deploy relevant financial services to this potentially gigantic customer base.

The most fascinating part of the report is the hypothetical mobile phone service Ainslie and his team describe – called M-Fu, its a remittance service that draws on the fieldwork to show how their recommendations can be put into practice.

“With this research, we’re looking to curate a conversation among service providers , big donors, and startups,” Ainslie told me over a Skype interview. “Basically to say that if you’re going to build apps and services in China today, pay attention to these special cultural characteristics.” He adds:

“We want to put this out there as a current snapshot of what life is like for rural and disenfranchised – to try to humanize the system by talking about individual stories and the people we met.

Adapting international models

The obvious point of comparison for any form of mobile-based finance is M-PESA, first deployed successfully in Kenya and then imitated across the world with varying levels of success.

“You have to adapt systems to local contexts,” Ainslie says, “ specifically within China, there are current factors that we think make it prime for this market.”

China has high levels of mobile phone use (users can therefore “leapfrog infrastructure such as ATMs”, the report states, while still accessing services), an intensive reliance on informal remittance payments (mirroring success stories such as Tigo Cash in Paraguay and GCash in the Philippines), a more-or-less robust national ID card system (the shenfenzheng) and a government open to innovative private-public partnerships.

“The sheer amount of money moving around the country informally, based both off of data from our respondent pool and other reports on remittances across China,” Ainslie says, is an open invitation to design and provide a safe platform, which the team attempted with their hypothetical M-Fu prototype. “For anyone attempting this, you have to deal with the chicken-and-egg problem of building a user base and building an agent base within your areas of operation. He adds:

Our advice is: start a pilot small, and build your pilot into the current urban-rural remittance corridors, which is a frequently moving target.

What role can startups play?

Even though China’s large telcos are taking an active interest in mobile banking – China Mobile is partnering with China UnionPay to launch NFC-enabled phones – Ainslie still envisions a key role for startups and entrepreneurs.

“There have been some very interesting examples of startups entering this space,” he says, “Some have operated in regulatory loopholes, and tried to fill the gap where a traditional brick-and-mortar bank cannot offer services that people want, or at a price that they can afford.”

He points to the recent explosion of peer-to-peer microlending platforms in China, starting from the popular Qifang (now defunct) to current heavyweights like Pandai. He says:

These are interesting not only because they provide financial access, but also an opportunity to build a credit score, to build a future financial profile.

One drawback, however, is that these web-based platforms inherently cut out a large part of the population which doesn’t have regular access to the Internet or the tech literacy required to use them efficiently. They are, in the report’s words, “good for innovation but not necessarily inclusion.”

“This is where the importance of agent networks and the embrace of informal networks comes in,” Ainslie says. “The trust you would build with a laoban (boss) working for several years over multiple cities supercedes the anonymous relationship you would have with a bank.”

While these informal relationships lack a paper trail, and could put users at risk by hiding structures of coercion and patronage, the laoban’s role as a financial agent is crucial. They have a legitimate financial profile rather than transient workers who may slip in and out of these networks, and could be the linchpins to anchor a sustainable mobile banking system on.

“We have no wish to make or monetize our product idea,” Ainslie concludes. “Our experience is in social research, and understanding local contexts. But we’d be thrilled to see how you can get something like this off the ground.”

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