80% of the world is not banked

The Silicon Valley Microfinance Network (SVMN) hosted an event Monday night featuring Janine Firpo, a technologist with direct experience in implementing a technological approach to microfinancing.  Her talk focused on a series of market trials in Uganda for a system called Remote Transaction System, orignally developed at HP, which enabled an agent and borrower to administer a small loan remote from the bank.  The market being explored by HP, and a central interest of SVMN, is the 80% of working people in the world who do not put their money in banks.  One of Janine's goals is to reach these workers - 1.7 billion of them - with technology, and enable them to participate directly in the world of commerce, extending their means and influence beyond their village to a sphere bounded only by the reach of the technological infrastructure.

Here's my arm chair (google-charged) view of the challenge facing this goal:

Enabling commerce for the other side of the digital divide requires a new architecture.  The architecture for microfinance must scale - to 1.7 billion borrowers; and be secure - minimal risk of identity theft, where transactions are non-repudiable.  This much about the architecture is understood by those in the microfinance community, and is reflected in the emerging models for microfinance.

But there are two factors apparently missing from the current architectural considerations that I believe are critical to a successful long term adoption of technology based microfinance: (1)disintermediation - so that the lender/borrower relationship is optimized for value creation over the investment's lifecycle, and (2)participation - so that the parties in these transactions are also actively engaged in moving microfinance services forward.

Does disintermediation mean no banks between borrower and lender?  Maybe.  The lender/borrower relationship in microfinance often involves a different definition of value creation than a traditional bank's definition.  If the lender derives value from the reduction of cholera cases through investment in water purification systems, then the borrower with a goal of deploying water purification systems ought to be able to obtain funds (or water purification systems directly,) from this lender as long as she can demonstrate reduction of cholera cases in line with the lender's value creation goals.  To a large extent, a loan in this context is more like a grant - in the social venture sense - than a promise to pay.  Assuming that the typical borrower in a microfinance system does not have the means to collateralize or otherwise mitigate a lender's financial risk, and the microfinance lender does not typically have the expectation to secure the loan by these means, then the bank's value in intermediating these transactions is reduced to functions that can be replicated in other ways.

The need for participation also suggests a departure from traditional institution based financing toward a community administered process that relies on feedback similar to eBay's buyer and seller ratings system, and a service feedback loop that efficiently tends to the needs of the market.

The various forms taken by current and future efforts to finance the entreprenuers of the developing world is less important than the convergence of these efforts toward a networked community of participants who contribute and create value together. 

It is very difficult, if not impossible, to identify new patterns for how this will happen, but examining them in the context of well understood models helps us recognize the direction they're moving.  We have fairly well understood models for participation and disintermediation on the web today.   We also have very well understood models for banking.

If, using these models for examination, we find that participation and disintermediation are critical to the wide scale adoption of a microfinance platform that straddles the digital divide, then what does the new, bankless architecture look like?   If microfinance can flourish without banks, what does that say for commerce in general?  Through their early adoption of bankless commerce what advantage would the developing world gain in the next economic transformation?