MobileActive.org

This article, in a slightly revised version, was published by Orascom's TALK Magazine, Fall 2008.
 
There has been much talk of late about mobile financial services as a way to lift millions of people worldwide out of poverty. A recent article in The Guardian called mobile banking in developing countries “potentially revolutionary.” The advent of mobile financial services promises to bring many more poor people into an economic mainstream where safer and less costly financial services (such as person-to-person payments and remittances) are delivered over the cell phone. But is this promise anywhere near reality?
 
Transferring money via mobile phones can save days of travel for workers in cities who send money home to families in rural villages. Mobile payments are also often cheaper and more secure than relying on informal brokers or carrying cash personally, and they have the potential to change markets by making small business-to-business transactions immediate and more reliable.
 
Today there are an estimated 3.5 billion mobile phone customers worldwide, with the fastest growth in developing countries, particularly in Africa. Only a fraction of these customers in developing countries also have bank accounts, promising an enormous market for financial services delivered over the tool already in people’s hands—the mobile phone.
 
While there is no exact data on the numbers of the unbanked globally or even continent-wide, household surveys in South Africa and Kenya from 2006 indicate that only about 40% of the adult population in South Africa, and as low as 10% in Kenya, have formal bank accounts. Compare that to mobile phone penetration of 70% for Kenya and 96% for South Africa respectively. The research firm Gartner estimates that 41.5 billion mobile financial transactions will be made by the end of 2011. A recent Gartner report notes that “the key drivers for these transactions will be the high speed of adoption by consumers of new mobile finance facilities–particularly those currently without access to any form of banking. Bespoke payment applications for remittance purposes will also be popular.”

Poor people, who by definition lack monetary resources, do nonetheless take part in informal cash economies. These constitute a large part of many countries’ GDPs where up to 60% of the workforce (and as much as 40% of GDP) is estimated to be outside of the formal economy. Remittances alone—payments from migrant workers back home—amount to over US$300 billion annually according to some experts.
 
Development professionals also hope that moving the ‘frontier of access’, as it has become known, to more formal banking will increase poor people’s access to credit, increase family savings and hence assets, and decrease loss of money because of theft—all critical aspects of people moving out of poverty and into less precarious financial situations.
 
Ancillary effects of mobile banking also include an increase in money brought into the formal banking system that would improve taxation and reinvestment of money, and the introduction of new players into the financial field—the telcos—that have different target markets and often much wider distribution networks.
 
Financial transactions of unbanked individuals possible on mobile phones today include long-distance remittances, micropayments to merchants, bill payments to utilities, and airtime transfers from person to person. These services are available now in countries such as the Philippines, Kenya, South Africa, Nigeria and Brazil.
 
Yet, despite all the excitement, is the promise of m-banking as a tool to alleviate poverty for the unbanked just that—a promise?
 
While the future looks promising for unbanked people with the mobile revolution, the reality is not quite there. We are in the early stages of a market that is expansionist but not yet mature—and it is not reaching the poorest of the poor.
 
Mobile financial transactions do reach the poorest of the poor in two areas right now: 1. Micro-finance, where mobile financial services are being explored as a way to facilitate instant transfer of loans and repayments via mobile, and 2. Cash aid by donor countries and humanitarian organizations who provide relief in famine or post-conflict areas.
 
Care UK and the World Food Programme, both relief organizations, are experimenting with providing cash payments to eligible beneficiaries via mobile phone rather than food aid. Mobile cash payments are not only more reliable, secure, and instantaneous but they also increase local economic activity.
 
The future is indeed bright for moving money on mobiles in many developing and middle-income countries but extending the benefits to the poorest of the poor are still elusive. Recent studies, most notably from the World Bank’s InfoDev and the British development agency DFID, indicate that there is little evidence that m-banking services as they exist today have been “transformational.”  Transformational services is a term applied to targeting low-income people who are currently unbanked, as opposed to ‘additive’ services provided to existing bank customers who simply enhance their already existing account services with mobile transactions.
 
The lack of transformation is partially due to the fact that these systems are still so new and relatively small in scale. David Porteous, a noted expert in the field, found that in some countries, customers that use mobile banking are wealthier and better educated—the classic profile of an ‘early adopter.’
 
Other research shows that unbanked people require not only knowledge about the services on offer, but also have to trust in the safety and reliability of the services, understand that they have the ability to easily cash in and out at convenient locations in addition to transferring money, and of course, feel that they have enough money to make these transactions worthwhile.
 
Other major barriers, in addition to uncertainties over customer adoption, include regulatory issues that are far from being resolved in this early stage of the m-payment and m-banking market. M-banking sits on top of a number of regulatory issues: banking and financial transactions, telecommunications, and anti-money laundering are just a few of these complex domains.
 
Currently, legislation and regulations in most of these areas are inconsistent or even contradict each other. Industry experts are increasingly calling for a risk-based and coordinated approach that does not prejudice unduly against small customers. Likewise, customers need to be better protected against fraud. In short, questions around consumer adoption and the illdefined and complex regulations hinder this market and the potentially transformational idea of m-banking to date, requiring thoughtful approaches on both fronts and enabling environment where mobile banking can thrive.
 
David Porteous puts it best: “Enablement [of m-banking] is about managing the delicate balance between sufficient openness and sufficient certainty, not least in the minds of customers who must entrust money to the bank or telco.”
 
Katrin Verclas is the co-founder and editor of MobileActive.org.
Photo courtesy TALK Magazine, Orascom