Sandbox

Weekly Inspiration #21: Financial Innovations from the Crowd

January 18th, 2010 by Paul Gleger

In 2009, over-leveraged creativity in global financial markets proved disastrous. At the same time, financial innovations on the micro level have been quite successful: think mobile banking and crowdfunding.  Mobile phone penetrations and manifestation of the social web have been central to micro financial innovations. At Sandbox, we’re fascinated by the collective power of the community and new ideas, so for us, this topic is particularly interesting.

Mobile Banking

(Photo: Swiatoslaw Wojtkowiak on Flickr)

The intersection of cell phones and financial services create an emerging market for mobile banking, especially in the developing world. Microfinance experts at the Consultative Group to Assist the Poor go as far as to predict “branchless banking could be the primary channel for poor people to get basic financial services by the year 2020.” Developed countries are also picking up the trend and applying similar systems in the smart phone market. The best recent example comes from Twitter Founder Jack Dorsey, who aims to revolutionize mobile credit payments with his new startup Square.

Why does it matter?

Mobile banking establishes access to financial services in rural, remote, and impoverished communities written off as inaccessible. It dissolves obstacles of distance, creates ease of use, and reaches everyone. Mobile payments are also handy for government pension payments, savings plans, remittance delivery, and money storage. Smart phones will certainly open even more financial innovations in the coming years.

How does it work?

In one model, customers purchase vouchers from the local store for cash. Using a special code, the funds are transmitted via text to another mobile account. The receiving party ultimately redeems the funds at their own local shop or passes the payment to someone else. In countries where moving cash stuffed envelopes on unpredictable journeys is a normal financial transaction, mobile banking considerably changes the landscape. Kenya is one of the best examples of an accepted national mobile financial network.  More than 2.2 million mobile accounts were created in just one year (averaging less then $20 per transaction)—compared with one million traditional bank accounts created over the past century.  Sure, there are obstacles (mostly from regulatory agencies and traditional banks) but the innovation is empowering billions with a quick and safe way to move financial resources, in the process stimulating an environment healthy for entrepreneurship. Even more interesting, the trend is being picked up in developed economies.

Crowdfunding

(Photo: Kathryn Yu on Flickr)

Raising funds with the help of a community is not revolutionary in itself. However when combined with new communication technologies and vast social networks, the scale and scope of crowdfunding is redefined.

Why does it matter?

It empowers individuals to have immense collective impact. Besides being able to raise large sums of money, crowdfunding provides a sense of ownership and motivation for attracting more participants. For example, Kickstarter (used successfully by Sandboxers Sebastian Lindstorm and Kyra Choucroun), won’t fund the project until a “target” amount is met – motivating all contributors to get the word out for pledges. Take a look at an interview with Kickstarter Founder Yancey Strickler on Gopher Illustrated for more insight (a publication co-founded by Kyra). Crowdfunding has been used to fund everything from record labels to soccer teams. The potential is huge and the concept will surely be central for future business models.

How does it work?

Individuals decide on projects they believe in and put small amounts of money towards the cause. These contributions are amplified with online communities like Facebook, Twitter, and other social platforms. Startups helping organizations leverage online communities for giving campaigns include Washington DC based Giv.to. With small individual contributions, communities raise staggering amounts while retaining a deep sense of involvement in the cause. Since the earthquake tragedy in Haiti, the Red Cross raised more than $22 million through their text message initiative – more contributions than through any single effort in the organizations history. The effort is being handled by mGive and attests to the power of community giving. (To participate, please text the word “Haiti” to 90999, it will donate $10 from your phone bill to the relief efforts).

Overall, at Sandbox, we believe the most efficient and productive forms of crowdfunding come from trusted communities. Close knit organizations create a natural support group critical for getting projects off the ground, thereby boosting chances for success. We think this type of crowdfunding will be incorporated in trusted communities ranging from alumni associations to large companies. Over the next several months, we hope to introduce our own version of crowdfunding within the trusted Sandbox community. Keep an eye out for it

Crowdfunding platforms: Kiva.org, Prosper.com, Kickstarter.com, Zopa.com

What are your thoughts on mobile banking or crowd funding? Have you used any of these services? Let us know what you think!

Paul Gleger is Head of Business Development for Sandbox US. He’s excited about moving to NYC and getting Sandbox projects off the ground in the Big Apple. He’s also thrilled about finding an excellent cafe with free wifi (Max Cafe); it will be his second office.