“The unexpected tragedy of our financial system is that the less money you have, the more expensive it is to send money around.”
Those are the words of Joyce Kim, executive director of the Stellar Development Foundation, a small non-profit with a big goal: to provide a backend infrastructure for the global financial system that literally anyone, anywhere can patch into.
(Stellar also has some pretty big investors, too, including Khosla Ventures Senior Investment Partner Keith Rabois.)
“What we have to create is something that works seamlessly – and just as well in the developing markets as it does in developed markets – not siloed systems that work really well in the U.S. and Europe but have to connect to lots of different systems used in other parts of the world,” Kim told MPD CEO Karen Webster in a recent conversation about Stellar and how it hopes to connect the world’s financial systems.
Stellar is an open source protocol that lets users send and receive money between any pair of currencies - by using its own digital currency (conceptually similar to bitcoin) which happens to be called “stellar.” The use of stellar creates an IP layer between payment systems and currencies that serves as a common financial platform that can be used worldwide.
“What we’re trying to do is create a public protocol,” Kim explained. “The goal of that protocol is to make currencies and payments system with Stellar acting as the exchange medium - what Kim described as “the connective tissue between all these systems.
“[This has the potential] to fundamentally democratize access to these systems so that more people can build to them and more people can connect to them.”
The operative word here is “public.” And while they aren’t the only players with similar ambitions - Ripple and Circle spring to mind - Stellar is the only one doing it as a non-profit, because in their opinion this is not the kind of infrastructure that is the work of a single corporate entity. Kim believes that such a protocol has to be public – not owned by anyone or any entity. Only then, Kim believes, can it become economically efficient to move money around the world and encourage others to build applications on top of it that add additional value and utility – and that can also be monetized. Kim and her team believe that the big reason that the world’s financial systems remain so disconnected is because it is economically impractical for any individual entity to build the financial infrastructure that’s needed. The costs simply outstrip the gains, Kim said, particularly when one is talking about connecting the developing world where banking infrastructure is small to nonexistent there simply is not foundation to build on.
“What Stellar wants to do is to help bring the per transaction infrastructure costs globally down so low that people can create sustainable business models to serve these communicates,” Kim explained. “That means it actually has to be thought of as a public good that I like to say is owned by everyone and owned by nobody. I think of the Internet that way, can you imagine what the world would be like today if it were owned by a company? The way to move this forward can’t be a win lose, it has to be a win-win.”
Kim and the Stellar team believe that the 21st century offers the world a really new opportunity - the ability to render currency as data, and then move that data over the same digital rails that all data over the Web flows across. That is not only efficient, but changes the economics around the developing world and what it will take to give those people access to affordable financial services.
Last week, Stellar took another big step by announcing a partnership with Oradian - a cloud-based core banking software company whose target market is in Nigeria. Oradian will integrate Stellar into their core banking solution for enabling microfinance for people living in that country.
Nigeria is both Africa's largest nation by population (174 million ), and it is also the continent's largest economy. The population is also proportionally rather young and port city Lagos is increasingly becoming a middle class haven. The population however, is largely (80 percent) unbanked. Oradian aims to bridge the gap between Nigeria’s burgeoning economy and its unbanked citizens by enabling efficient and reliable financial transactions. With its new partnership with Stellar, this now connected financial software can link previously siloed or isolated markets, bringing services to people who previously couldn’t access them.
The initial pilot will focus on connecting MFIs in Northern Nigeria, a region where 68 percent of the population is financially excluded. The larger ambition is to bank the bottom billion.
“We’re in this amazing point in history where these microfinance units can be financially sustainable on their own,” noted Kim. Though she didn’t have an exact figure, she noted that around 150 million people worldwide are serviced in the developing world by microfinance schemes - but that minus a financial infrastructure that connects them, they are 150 million tiny units. Networked together it is a very different story.
“If we can actually connect them together, that extends the network to parts of the world that have not been fully serviced by traditional banking but can now be serviced by regulated entities,” she explained to Webster.
As of now, Kim explained to Webster, it takes 12 hours to move funds from one MFI in Lagos to an MFI in north Nigeria. Why does it take so long?
“You put cash in a bag and you put it on a bus. Twelve hours later it gets there.”
This is a first step, noted Kim, and the beginning of how Stellar hopes to connect MFIs worldwide - an idea that is gaining traction. A short time ago, money was moved the same way in Kenya - but now in the post M-Pesa world, that idea sounds as crazy in Kenya as it does in Boston. And this, notes Kim, is one of the true miracles that mobile makes possible - and this kind of influence is what drew her to the space.
“I’m from an immigrant family and grew up in New York,” Kim explained. “So everyone I knew growing up, including my family, had trouble sending money around. It’s really great to build tools to change how money works and to do it using phones. I think those innovations are remarkable. We’ve seen how M-Pesa can move an entire country.”
And moving entire countries is the business Stellar wants to be in. But unlike M-Pesa that started as a scheme to create interoperability in one country - Kenya - Stellar is trying to build and interoperable global solution. But it is a goal it thinks can be managed because they are leaving the local solutions to the local players, and instead are focused on building the digital infrastructure that can tie those solutions together.
“We’re the blank canvas that people can paint on to figure out what the local solution are but we give people that infrastructure head start. Baked into the protocol is the ability to be not only interoperable with folks in their own country, but also interoperable globally with anyone else who is tied into the protocol,” Kim told Webster.
Because anything, no matter how big, is really just a result of combing many smaller pieces.
The developing world is full of such financial units - to small individual to attract much attention, but perhaps, if Stellar succeeds, those small financial units will have the power to capture the interest of the entire world.