M-BANKING NEEDS TO E-MERGE

Jul 21, 2011 at 11:03 pm Leave a comment

This article originally appeared on PDT’s Building Markets blog on June 9, 2011.

Google is introducing a mobile payment system that will allow customers to pay retailers with their Google phone. All they have to do is wave their phone over any MasterCard PayPass terminal, and it will act as their Mastercard.

Glad you could make it Google, we’ve been waiting for you. The developing world has been working with mobile banking technology for years. Called M-banking, this comprehensive payment method has taken off in emerging markets where most people don’t have access to formal banking services.

M-banking is no antidote to poverty. Having the ability to save money doesn’t help if you don’t have any. But increasing access to the tools that help and encourage saving provides a much-needed financial framework for citizens of the developing world. Keeping the money flowing in an emerging economy is key to its growth. According to the World Bank, an increase of ten phones per 100 people in a developing country leads to a rise in GDP of .8 percent.

To better understand why traditional banking services don’t help the world’s poor, let’s imagine a common scenario:

You are a poor day laborer in a slum in India. You barely scrape by, let alone have money to save. But when you do occasionally have an extra 50 cents, you tuck it away in a wooden box. You try to bury it in the yard before your children see you and beg for sweets.

But having fiscal discipline is difficult when your money is so easy to access. You know you need to put it somewhere else. You could ask your brother to keep it until you need it. But there’s no promise that he won’t end up spending it himself. You could buy jewelry or an animal and sell it when you need the money. But what if it sells for less than you bought it? The village might catch on that you need money and barter the price down. These are reasonable concerns considering that people who employ informal methods of saving lose an average of 20 percent a year.

What about a bank? Simply put: it’s not an option. You have to spend an entire day and most of a day’s wages to journey to the nearest one. The bank isn’t thrilled to have you and your meager savings there either. It costs them .80 to $1 per transaction. They are eager to maximize profits through loans and mortgages, both of which you can’t afford. It’s no wonder why almost half of the world’s population is without a bank account.

Enter cell phone companies and M-banking. Users can now save, pay bills, receive loans and remittances and eventually become credit-worthy. The ability for you, and others like you, to plan your spending increases your economic power, expands your choices and may result in a better livelihood.

Why cellphones and not banks? Over the past five years, the number of mobile phone users in developing countries has skyrocketed, with use in Africa growing by 550 percent. Telecom companies targeted their products directly to the poor by offering small, affordable amounts of pay-as-you-go minutes and developing a vast network of external vendors. Companies saw M-banking as a way to expand their customer base.

M-Pesa in Kenya, launched in 2007 by Susie Lonie and Nick Hughes of Safaricom, may be the most well-known mobile banking service for the poor. More than 14 million Kenyans use this service while three in four adults use some mobile banking service. In December 2010 alone, M-Pesa users transferred over $1 billion.

But Kenya isn’t alone. In the Philippines G-cash and SMARTmoney have 3.5 million users combined. Two companies in South Africa, MTN Mobile Banking and Wizzit, began last year. In Brazil M-banking is expected to overtake Internet banking in five years. These numbers are a testament to how easy it is to bank with a mobile phone.

Traditional banks need to get in on the M-banking game and develop bank-less branches to cater to the poor. Outsourcing services to a vendor significantly reduces administrative costs and would tap into a huge market of 2.5 billion “unbanked” adults worldwide.

No company will be able to replicate the success of M-Pesa in Kenya everywhere. But this shouldn’t be the intent. Groups like the World Bank should bring telecom companies and regional banks together and commit to a coordinated expansion of financial services to emerging economies. This will keep money circulating in poor communities while empowering individuals to make better choices for their future.

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