The pay tech innovations that we have reviewed so far, have mostly be concentrated in more developed markets with well-established financial infrastructure, such as the well-functioning interbank payment network and telecommunication structure for credit card transactions. These enabled innovators to focus on the front end and develop user interface enhancements that make these good infrastructure easier to use. As a result, the barrier of entry is relatively low and the market is quickly becoming crowded. Innovators and venture funding have consequently started to look at other less-developed parts of the world with less competition. In these markets, for instance, developing countries in Africa, a good financial infrastructure backbone is much less developed. This results in a large number of potential customers who lack access to the banking or financial system that could potentially be well-served by new Fintech innovations. So the key question is, can we do that? Can we still deliver good paycheck service in markets without good tech, where people don't have bank accounts and don't even have a smartphone. Turns out that the answer is yes. In fact, Africa has been one of the earliest Fintech innovation hotspots. Think about this, before Venmo and PayPal become widely adopted in the United States, close to 99% of the population in Kenya are already using mobile payments. In the next few videos, we'll see how this is done. Particularly, we'll see how the lack of good tech infrastructure could be compensated with some really clever application of sound business principles. This could provide some good lessons for innovators looking to expand into less developed markets and we'll wrap up this module with some advice from an expert who has been in the field of these markets. The system that I mentioned is called M-pesa and let me give you a brief history of how it came into being. In 2005, Vodafone, which is a British telecommunication company with this African subsidiary safaricom, won a government grant to help the unbanked population in Kenya. Their original idea was sort of like the nobel-winning Grameen Bank extending very small micro loans to the urban workers in the hope of spurring entrepreneurship activity. But soon after, they found a big problem, the recipients were mostly migrant workers in the urban areas are not using the loans. They're sending the money straight home to their families who needed it more. So in many cases, they're taking the loan money, get on a bus, and travel for days and weeks, the hundreds of miles back to their families in faraway rural villages and give the money to their families. And this was quite an expensive and oftentimes, dangerous journey. With this observation, the focus of the original program changed dramatically, from extending the loans to make the money movement process less cumbersome and more efficient for the recipients. And this is indeed a big challenge, don't even think about bank accounts. The migrant workers were purely on a cash-only basis. There are no computers and they didn't have smartphones either, but rather use the basic feature phones that could only do calls and text messages. And most of them were not financially literate enough to understand the intricacies of mobile payment platforms, like PayPal. Given these challenges an innovation that helps them move money more efficiently and not having to physically travel the hundreds of miles is the classic definition of financial inclusion. With a potentially high marginal impact on the financial well-being of this unbanked population. At the same time, this could be good business, because these people represent a large untapped revenue source for both the core and other value-added services once they're included in the financial system. The solution is M-pesa, one of the most influential mobile payment systems in the world. And this is what it looks like, let's see how it works. Without customer accounts and smartphones, the core idea of M-pesa is very different from other mobile platforms like PayPal or WeChat. In fact, it traces back to the old hawala system dating back thousands of years ago. The hawala is kind of like the working men's Bitcoin, a form of underground money transfer service operating on a sort of black-market honor system. And in modern times, it is often used for illegal money laundering purposes. This is how it works, suppose a person may be a criminal located in country A, wants to serve wants to send money to another person in country B, without going through the regular banking channel. To complicate things, suppose he has dollars and the recipient needs euros. To facilitate this transaction, we're going to need two agents called hawaladar a located physically in each of these countries. And each would have a stash of dollars and euros available. So the sender would give the dollar to the agent in country A and call the recipient with a secret codeword. Then the agent in country A will call the agent and country B, telling them to simply give the recipient the equivalent amount of euros if he brings the correct codeword. And the transaction is over for the sender and receiver and that could be done over the phone in a matter of minutes. Settlement between the agents will happen much later, hence the honor system. For example, they could periodically settle by physically moving the dollars and euros across the border by illegal means. As you can see here, although illegal, the hawala system does introduce a convenient way for the end users to quickly move money around. And M-Pesa simply took this old idea of physical agents and customers and replaced the black-market honor system between the agents with a legal and clever solution based on market competition. The solution essentially combines several key concepts, often taught in introductory business courses, such as monopolistic competition, newsvendor models and network effects. Compared to other paytech innovations that we have seen, this innovation is much less in tech, but much more in business. We'll have a non technical overview of this system in the next videos.