There are 2.5 billion people in the world who don’t have access to any kind of financial account, says Kosta Peric, who until recently was the Head of Innovation at SWIFT, an international banking cooperative that runs what is still the only international settlement network for payments in the world.
It’s not hard to see why that’s a serious issue—when our current system excludes 40 percent of human beings. This lack of access to basic financial services is one of the primary drivers that perpetuate cycles of poverty.
A technologist at heart and by training, Peric has long contemplated how innovation can begin to address these fundamental flaws—itself a monumental challenge given the historically uneasy relationship between finance and technology. If finance is the art of managing risk, new technologies are the embodiment of risk itself. This inherent conflict may be one reason why consumer finance always seems to lag other industries when it comes to innovation and change.
The outcome of his deep thinking manifested in Innotribe, an initiative Peric co-founded at SWIFT to foster new approaches at the convergence of tech and finance—or “FinTech”—which, at the time, was still an unheard of term. His philosophy for reconciling these two dissonant forces is outlined in his recent book, The Castle and the Sandbox. Half a decade later, fintech is the hot new buzzword, and Innotribe has inspired countless imitations in what is a rapidly expanding space.
Such is the breadth of Peric’s influence—ranked 33 in Institutional Investors’s Tech Top 50 for 2013—I recently found myself at an Innotribe event by sheer coincidence, the Startup Challenge in New York—where three of the startups competing happened to be building on the Ripple protocol. We’re living in a Brave New World, one in which a long dormant industry is finally embracing the need to evolve. And leading this movement is a man with an adorable and refreshing tendency to illustrate his abstractions through cartoons (a few of which are included throughout this post)—but more on that later.
The revitalization of money and finance is an exhilarating moment for people like you and me, having witnessed first-hand the early days of the ‘net and the subsequent transformation of the world around us. This process is only just beginning and will likely oblige us to reimagine our understanding of value itself—as we have for music, books, and just about everything else.
The key beneficiaries, however, will be those who never had a taste to begin with, the billions of unbanked, 70 million of which reside in the US.
Today, Peric forges forward with that very mission, now a deputy director for the Financial Services for the Poor at the Bill & Melinda Gates Foundation, a role that takes him to underserved regions around the world like Africa and Southeast Asia where his expertise and experience is most urgently needed.
Upon returning from a recent trip to Africa, Peric was generous enough to provide his extensive insights about his vision, the impact of new technologies, and how we might address some of society’s grandest problems in an illuminating discussion—one that we hope to be the first of many.
Tell us about your time at SWIFT.
I’m a technologist by training and by interest. I was with SWIFT for about 24 years, quite a long time and always on the innovation research and developer side—essentially what I call FinTech.
There’s two key things I will tell you about my time there. I was the chief architect for SWIFTnet, the current SWIFT platform connecting 10,000 banks, processing 20 million transactions a day. It’s very secure and reliable.
The second thing I’ll highlight from my SWIFT experience is on the innovation management side, which was the development of Innotribe. It was about fostering innovation in the financial industry and essentially it was kind of like an incubator for ideas.
Interestingly, today you have lots of incubators in FinTech, but when we started in 2009, I think it was the only one. I’m not sure if it was the precursor or all these things just happened. The method I use is the castle and the sandbox. If you consider big corporations like banks, they tend to be very risk averse so I call them castles—like European medieval castles that acted as strongholds and were very protected, but the mindset is more about incremental improvement and cost management rather than actual innovation. But they do need to innovate so the concept was to create this sandbox, a place where experimentation could be done for the banks to try new things. That was the essence of Innotribe.
How did you end up at the Gates Foundation?
During the end of my tenure at SWIFT, the subject of financial inclusion sort of became very much on the radar screen of innovation. Financial inclusion is about the 2.5 billion people today that essentially have no access to any financial services and so that subject came about as one potential area for innovation and experimentation.
SWIFT is a banking cooperative in a good spot to foster some collaborative thinking on issues. That’s what we did with Innotribe and financial inclusion. And what happened eventually, the Gates Foundation spotted me and reached out because they have a program focused on financial services for the poor. After 24 years at SWIFT, it was perhaps time to move on and it was a great opportunity. I joined the Gates Foundation in September last year. Since then, I’ve focused on financial inclusion.
“The next billion connected people. They will have a voice they don’t have now.”—Kosta Peric
How does financial inclusion work?
It’s all really about platforms, creating platforms for serving people who are essentially poor. The reason for that—and we know this from many documented studies—is because they are dealing only with cash, which is not a good way for people to be able to save and put money aside. It’s very difficult to manage cash on a longer term basis. So the idea is to reach out to these people even though they are poor with a safe and reliable and of course low cost or free platform for them to have financial accounts—and therefore savings accounts and and credit and all sorts of services they might benefit from along the way.
Of course, their needs are very different than in developed countries. But at the end of the day, the platform is really kind of the same. Right now, I’m focusing on 5 countries: Nigeria, India, Pakistan, Bangladesh, and Indonesia. The idea is to focus on smaller, very populous countries where there is not much progress—with the exception of Bangladesh, which is moving nicely on financial inclusion. The technology model we use is mobile money. MPesa has sparked the use of mobile money so we are trying to help other countries to achieve the same results.
There are some aspects of MPesa we would like to avoid since it is very much dominated by a single player. While I’m profoundly convinced that financial inclusion is about building highways, it’s really about public goods. There should be some space for collaborative building of platforms that in turn allow for competitive environments. I’m not saying that the platform should be run by the government, but it needs a more collaborative approach—in fact, very much like how SWIFT is a banking cooperative where there’s shared utility. A basic platform needs to be established. After that, you can run, for instance, something like an app store on top of it where competition thrives. This is the approach that we take.
As a matter of fact, if you look at some country’s origins like in Europe—you know there is in the Eurozone, the cross-border arrangement of very low cost payments. That’s something that exists already. There is Interac in Canada. There are a number of examples of very low-cost real-time infrastructures and platforms that exist. It’s not that what we are trying to do needs some sort of technological breakthrough, the issue is really how to roll it out.
In a nutshell the difficulty—in fact, the difference is that the traditional banking system as we know it in developed countries is very cumbersome and it puts up a lot of barriers. If you look at it from the perspective of the populations we are looking at, the most important aspect is Know Your Customer (KYC). If you consider Kenya, the northern parts of Kenya, we are talking about people who don’t have a stable address because they move. They are pastoral communities that move with cattle. So they don’t have a street address. They don’t have a form of identity. The only way to vouch for someone is to ask the chief or the tribe. So how do you deal with that to onboard these people?
Financial Services in the Information Age
Right, how can you have KYC procedures if you don’t know anything about your customer?
If you take the traditional system, it’s totally impossible. But it doesn’t have to be. It’s impossible in this frame of mind—so we need to change this frame of mind to admit these people and there are many, many creative ways to do that. In one of my blog posts, I mention these financial institutions in Germany like Fidor Bank that onboards people on the basis of their Facebook profile. I’m using this example to show that creativity is quite important, the key concept in terms of the solution.
One path to a solution is something that I call tiered KYC. You need to lower the barrier of entry and provide meaningful services, and the more you know about the person, eventually you get to the point where they will know you enough so that if you ask for credit, they can give it to you. There are a couple of other countries where there is some form of tiered KYC. I know of Mexico where a system exists to onboard people in a very easy way. Ideally, what I would like to have is for people to be able to create financial accounts as easily as you and I can create an email account on Google.
The other thing is cash in-cash out points. In the traditional world, you and I can go to a bank, ATM, or merchant and essentially get cash in and out of the system. I was just looking at some data that I have from Kenya, but it’s even worse in Nigeria where people have to walk more than 5 km before they actually get anywhere close to a financial point and that’s the best case scenario. Sometimes, we’re talking about 15, 20, or 25 km. On the other hand, it’s necessary because you need to have points where you transform physical cash into digital money and vice versa.
The bottleneck is still cash…
Yes, but I’m not a believer in the notion that we will eliminate cash, I think it’s here to stay. So it’s not the goal to eliminate cash. If we want mobile money to work, you need to have points where these transformations between physical cash and digital money happens. That’s certainly not the bank branches—as you know, banks are actually shrinking rather than expanding—and certainly not in the countries we’re looking at. So we need to do something different there, using some other nontraditional financial point, like Western Union, telco companies, or mobile phone airtime top-up agents—of which there are a lot. So that’s creative thinking as well.
It’s a big logistical exercise. I live in Seattle where Starbucks has its headquarters. How do you cover the world in Starbucks in the most efficient way? How do you optimize the process of getting agents out in a way that they cover as much territory as possible? And it has to make sense for the agents. We’re not asking them to do this for charity. They need to make money. So ultimately, why can’t anyone be a cash in-cash out provider?
Then there’s the whole fraud management aspect. That needs to develop perhaps even more in the context of mobile money systems. There needs to be real-time AML scanning, monitoring, and screening—all the things we already know from traditional banking. That needs to happen in digital financial services as well, but we need to adapt these so that it makes sense, so that it’s affordable, and so that they can be efficiently deployed.
The Future of Money
What do you think of bitcoin?
The nice thing is that technology keeps moving forward and indeed, we are in a position where we can sort of harvest what is happening out there and put it to use for disadvantaged people. One thing that I’ve been looking at since my time at SWIFT is bitcoin. I look at bitcoin with a lowercase ‘b,’ as opposed to Bitcoin with a capital ‘B.’
The capital B would be the currency. And Bitcoin the currency, that’s fine. We can debate a lot about whether it’s good or bad or useful or not useful. I have opinions about it, but they are not really relevant to the work I’m doing.
What I’m really interested immediately is the actual tech behind bitcoin, the very clever system that was invented called the blockchain. The way I look at it—and remember I’m a technologist and computer scientist—is that it’s the ultimate distributed system for the internet, where we are able to say that the best way to make this system reliable and secure is to actually distribute as much as you can. It’s impossible to fake and impossible to have it physically stolen from you.
The other nice consequence of this is the low cost. We don’t talk anymore about a big, iron, and centralized infrastructure. We talk about a massive amount of small processing power massively distributed. Therefore, the actual costs of transactions on such a system is a lot less. So whatever happens with Bitcoin the currency, I believe bitcoin the technology is here to stay. It’s just too good and too appealing to be ignored. I see this as a highway on which people can build competitive systems.
And unlike MPesa, it’s not controlled by a single entity.
The highway indeed has to be managed by the community. The distributed system lends itself quite well to that type of governance.
It’s also open source.
One way to look at it is to make it open; that’s more of a speculation. Open source, in my mind, is really about commoditization. In the case of Linux, it came from the observation that operating systems are really better off in the community rather than being managed by any single entity. The more eyes you have on a particular problem, the better off you are.
Over time, we start moving along the value chain, first it’s programming languages and operating systems and databases. Now we are getting to applications. In terms of finance, you can say—well hey, every single bank has to do basic account management. So what’s the point of running this and spending a lot of money doing that? Why not just making it open source?
There’s this one company started by a couple of Romanian guys. They were actually in the business of providing banking systems for years until they realized that their product was becoming a commodity that no one wants to pay a lot of money for. Now they’ve made it open source and they are making money by providing technical support. I’m sure one day, it will percolate even higher in the value chain.
You may think about the massive amounts of money in home banking systems. Every single one is different and each bank spends massive amounts of money on their proprietary systems. One day, there will be an open source version of that. It’s kind of inevitable.
It’s always the same equation as to how long you can sustain a particular business model before it crumbles. In this hyperconnected world, people will see where there is friction. If you have to always go through three particular steps to do something and then one day people notice you can do it one, things change. Especially in the financial world, people vote with their feet and usually they walk the shortest distance.
One of those shortcuts is APIs, which you’ve written about.
APIs (application program interfaces) are coming out of that. From a pure business perspective, do you know what is the normally accepted way of thinking, that they still actually teach in school in marketing class? You will hear that you need to basically capture the customer and force them to stay with you. But you can’t keep customers captive anymore. You have to attract them. You used to put them in a cage but now you can escape.
The Future of Identity
One of the biggest challenges you talk about is identity.
Everything that relates to physical identity is an issue. You hear everyday about data feeds and breaches in systems and identities and credit card information being compromised. So that’s one problem.
The second problem is data silos, identity silos that are being established—where my reputation on Ebay is only valued on Ebay and my Twitter followers are only relevant on Twitter. I have invested a lot of time and effort and money to build this up and now let’s say one of these companies goes away or is acquired or changes. All of that data—which I don’t call physical identity, I call it digital assets—how do I manage that for myself? Instead of it being managed by other people who may or may not make money from my data, who may or may not be well-intentioned. That is the biggest problem and it will really influence the way the internet moves forward.
Right now, the internet is hitting this problem of identity. Identity is not being managed by people, and it has to be changed.
It’s similar to the situation with our credit scores. If I go to Europe, I can’t bring my credit score with me.
Moving to Seattle has been terrible. My wife isn’t working and she has no credit so she’s nobody. She can’t open a bank account. And if we are like that, how does it translate to people in these countries that I mentioned? It’s not working. So solving that problem, interestingly, could come from solving the problem from the lens of financial services for the poor. I personally think the initiator is the right lens. I don’t think it’s a good idea to solve the identity problem from the lens of developed countries. You run immediately into established castles and barriers. If you look at emerging economies in a way that makes sense, it will generalize itself.
Of course, when I moved to the foundation, the primary motivation was to help. I have been getting a lot in my 30-year career and it was time to give. But the other motivation was because I think there is an opportunity to solve these big, big issues in another way that will then percolate in other areas.
What do you think of Ripple?
Well, I mentioned Ripple in my blog, Ripple as a movement and Ripple Labs as a company, as one example. I don’t want to endorse any particular company, but I think it’s a clever use of the bitcoin technology to solve a particular problem, the problem of money transfer. With the money transfer business, there are lots of clever solutions to it. During the many startup challenges at Innotribe, we saw a lot of really clever solutions in international money transfer. What I find nice with Ripple is this use of novel tech to solve the problem in a different way.
What sort of role do you see SWIFT playing going forward?
Where I think SWIFT has really innovated is on the governance side as a shared utility. It existed for 40 years and it just proves the point that very competitive players in very competitive industries can actually sit down and collaborate on certain things. That’s the SWIFT model. There are other examples of collaborative and shared utilities that work as well. I do think it’s the right model regarding financial services for the poor. I think part of that model has proven to work.
In some ways, the SWIFT model sounds like open source.
The one difference between shared utility and total open source is on the governance side. There’s got to be some standards and I’m talking about standards not in a heavy ISO (International Organization for Standardization) way but in a lighter way. How do we work together? And in fact with Ripple, there is a standard regarding how a transaction happens and I think that’s one of the key components of a shared utility. The rules of the game are known
Could you see SWIFT, in the future, working with open source projects in the realm of payments like bitcoin and Ripple with guidance for international standards?
SWIFT is in the right place to do so. Whether or not they do is another thing.
It seems that, especially in the finance industry, innovation tends to take its time. What sort of timeframes do you operate in? Should we be thinking in terms of five-year windows rather than the short term?
One of my big mantras with respect to innovation is that you have to show results quickly. I don’t believe in big projects where you deliver something after five years—and there are so many. Five years, when you look at a technology timeline is like the next century. I think the challenge we all have when it comes to innovation is to show results in six to nine months, to cut the problem in pieces and show results—even for really complex projects like digital identity.
So I wouldn’t say that we embark on something in five years. Forget it, it just won’t happen. Things will change so drastically at some point so this is where an approximation is better than the perfect result.
Since I joined the foundation, I’ve been pushing for that. Even for the big endeavors we are facing like connecting 2.5 billion people, you have to start cutting this in pieces to show results. Six to nine months, in my experience, seems to be some kind of magical number where you can do something useful and make an impact without getting bogged down with a big project.
One last thing before I let you go. Tell me about your cartoons because they’re really excellent.
It’s really a hobby I guess that came to me in the course of the Innotribe projects I had with SWIFT. We dealt with facilitation, how people interact, meetings and workshops, and so on. And on one particular occasion, they came with a person called a scribe who in real-time was capturing in a graphic way what we were saying. I was really blown away with that. I figured, wow, this would be really great.
I remember when I was a kid, I was born in Belgrade, Serbia. There was kind of an urban landscape where people would tag their graffiti so I did some of that on my own. In a way, the cartoons are a continuation of that.
For more from Kosta Peric, be sure to check out:
- The Problem With Global Payments in One Chart
- Fidor: Building the Bank of Tomorrow With Ripple
- What the Fed Wants, the Fed Can’t Have
- Why Payments Matter
- 5 Questions For St. Louis Fed Economist David Andolfatto
- An Interview with Economist Susan Athey