Mobile Phone Banking in Developing Countries to Leapfrog Old Banks
Money makes the world go round. The more money, the faster we spin. In America each of us spends, on average about $50,000 per year. That works out to be $136 per day. Imagine if the only way to spend my daily $136 was to hand over cash. Not only does this mean carrying around $136 in my pocket every day, but it also means carrying my cash to the person that I am buying stuff from. Buying a sandwich - no big deal there. Paying bills sucks. You have to go the electric company, the phone company, the water company. How about going to the Amazon.com office in Washington DC with cash in hand to pay for the headphones I want them to send me. That would be lame. All of those businesses that you are buying from - they also have to deal in cash. Before you bought your sandwich, the sandwich shop owner had to carry cash to the flour seller. But where did she get the cash to buy the flour? She has to save it from the day before. To make sure no one stole yesterday's profits, she carried it home and hid it under the mattress at home.
Sounds crazy, but this is the reality in many developing countries. Introducing banks helps a lot, but only for people who have bank accounts. I have seen business owners carrying boxes and dufflebags full of cash to the bank in Malawi. I used to spend half a day locked in a storage closet every month counting out stacks of 500 kwacha notes (about $3) so that I could pay 25 Baobab Health employees. Walking out of the bank and then driving home with all of that cash stuffed in my bag was rather thrilling.
When everyone has a bank account and a credit card, this problem pretty much goes away. Instead of having to carry around money everywhere we have about a month's worth of available spending on our credit cards ($4000). This means that over the course of a month, my money can bounce around from employer to me to baker to flour grinder to farmer, before anyone really needs to settle up. This is such a monumental step forward in efficiency, yet so commonplace, that we take it for granted.
Why are some countries without banks and credit cards? Well bank accounts depend on reliably identifying who people are, which is hard if government documents like drivers licenses and passports are out of reach for most. And credit cards depend on banks, credit scoring and a communications infrastructure that is pretty much a non-starter in many places. (2% of all consumer spending in the US is spent on proprietary credit card infrastructure, which is ridiculous now that everyone is connectable via the internet and that credit cards depend on 40 year old technology to read a 16 digit number off a card)
Developing countries, are therefore left to plod along until that tipping point hits when enough people are rich enough to get bank accounts to get credit cards to build their national network and start scoring credit. Up until that point, people are carting around cash. After that point, money stops getting buried and starts flowing. Money jumps from person to person, with each person holding it just long enough to make more money. And if they decide to hold onto it, then the bank will figure out how to make more money with it.
In Malawi I plodded along with cash, as did everyone else. But mobile phone banking promises a leapfrog over both traditional banks and credit cards. And developing countries don't need to wait - they can get started now. Here's why:
Mobile phones can identify people even more reliably than a passport. Phone number (something you have) plus pin (something you know) is enough to securely setup a bank account. But mobile phones also come with a built-in communications network. This means that there is no need to visit a bank to do banking. Deposits and withdrawals can be performed by anyone with cash and a sufficient balance in their account. In these, the early stages of mobile phone banking, these activities are facilitated by agents who are trained and supplied by the mobile phone banking provider. This ensures a good experience for the customer, who might not understand how banking, let alone mobile phone banking works. Agents can accept cash and then transfer funds from the agent's own mobile phone banking account into the client's. They can also accept a funds transfer from a client and then pay them out in cash. Deposits and withdrawals sorted, although the agents and the mobile phone banking provider will charge for the transactions.
From here things get very fun. People can safely store money in their phones, so money is no longer stagnating under mattresses or buried in a field. When it is stored on a phone, it isn't just sitting there doing nothing. Banks will let other people use it, by investing with it. Practically this means that interest can be earned and more money is generally available to everyone the economy. Win! But it is more than just a savings device. Funds can be transferred securely between accounts, which means that any payment that used to happen in cash can now be done as a funds transfer between phones. I can now pay for my sandwich with a funds transfer to the sandwich shop, which is convenient. But now the sandwich maker doesn't have to carry the cash I paid him with to the flour seller. He can just transfer the funds and during the flour seller's next delivery it will be efficiently delivered to my sandwich maker. Money flows, economy grows.
Eventually the need to use cash at all pretty much disappears and a cashless ecosystem emerges, but that is years, perhaps decades away. Yet each step taken towards that eventual goal affords many opportunities for individuals and businesses to increase efficiency, save money and in many cases start entirely new businesses. I am particularly interested in looking at the edge cases, watching how people use mobile phone banking to do things that no one every thought of before.
One of the most obvious things that will happen will be replacing some formal mobile phone banking agents with informal cash in and cash out facilities. Many businesses take on a lot of cash during their daily operations. If the business could deposit this cash into their account by providing cash out services to individuals or other local businesses (people withdrawal from their accounts by transferring funds to someone that gives them cash) then neither group has to visit the bank or an ATM machine. Vice versa for businesses that need a lot of cash on hand, or who routinely make trips to the bank. Businesses can accept deposits by transferring funds to people giving them cash. The efficiencies gained from avoiding standing in line at the bank alone, are important, let alone the expense of travel, or for the banks, the expense of maintaining high capacity facilities and staff.
Other businesses are sure to emerge as well. Sending money to rural villages was the big surprise business in Kenya when m-pesa (the biggest mobile phone banking success story so far) was first launched. I expect online purchasing, discounts for electronic payments, loyalty schemes, real-time credit scoring, microfinance, credit card services, outsourced micro jobs and all sorts of other things will emerge that we can't even think of. These killer apps, will be the surprises that drive adoption.
Wow! Sounds great - why isn't this already happening? A number of reasons I think. Firstly, it takes a significant amount of time and resources to write the software and forge the required partnerships between banks, mobile phone operators and regulators. Massive marketing campaigns and having formal banking agents available throughout the target market are necessary to get to scale, and without scale mobile phone banking is virtually pointless. Marketing is critical financial education. I still know many Americans who don't use ATMs because they think see ATMs as a banking scam to extort fees. Malawian preachers warned congregations against fingerprint based ATM machines which "scanned your soul"! These sorts of barriers are not insignificant.
Finally, banking regulators are responsible for making sure that we have safe mechanisms for saving and investing money. Without financial regulation (think FDIC insurance), banks can close and people's money can disappear. It only takes one time for your money to disappear for you to never trust a bank again. Unfortunately, this happens a lot in developing countries and money gets stuck back under the mattress (literally) and a generation of financial progress is lost. These financial regulators are doing the important work in figuring out how to save people from getting burned by mobile phone banking. But like everyone else, they are moving slowly! But it will eventually happen, and it will be a great ride. I can't wait!
(thanks to Claudia for letting me read the cool stuff she comes across in her job researching this stuff at CGAP)
Sounds crazy, but this is the reality in many developing countries. Introducing banks helps a lot, but only for people who have bank accounts. I have seen business owners carrying boxes and dufflebags full of cash to the bank in Malawi. I used to spend half a day locked in a storage closet every month counting out stacks of 500 kwacha notes (about $3) so that I could pay 25 Baobab Health employees. Walking out of the bank and then driving home with all of that cash stuffed in my bag was rather thrilling.
When everyone has a bank account and a credit card, this problem pretty much goes away. Instead of having to carry around money everywhere we have about a month's worth of available spending on our credit cards ($4000). This means that over the course of a month, my money can bounce around from employer to me to baker to flour grinder to farmer, before anyone really needs to settle up. This is such a monumental step forward in efficiency, yet so commonplace, that we take it for granted.
Why are some countries without banks and credit cards? Well bank accounts depend on reliably identifying who people are, which is hard if government documents like drivers licenses and passports are out of reach for most. And credit cards depend on banks, credit scoring and a communications infrastructure that is pretty much a non-starter in many places. (2% of all consumer spending in the US is spent on proprietary credit card infrastructure, which is ridiculous now that everyone is connectable via the internet and that credit cards depend on 40 year old technology to read a 16 digit number off a card)
Developing countries, are therefore left to plod along until that tipping point hits when enough people are rich enough to get bank accounts to get credit cards to build their national network and start scoring credit. Up until that point, people are carting around cash. After that point, money stops getting buried and starts flowing. Money jumps from person to person, with each person holding it just long enough to make more money. And if they decide to hold onto it, then the bank will figure out how to make more money with it.
In Malawi I plodded along with cash, as did everyone else. But mobile phone banking promises a leapfrog over both traditional banks and credit cards. And developing countries don't need to wait - they can get started now. Here's why:
Mobile phones can identify people even more reliably than a passport. Phone number (something you have) plus pin (something you know) is enough to securely setup a bank account. But mobile phones also come with a built-in communications network. This means that there is no need to visit a bank to do banking. Deposits and withdrawals can be performed by anyone with cash and a sufficient balance in their account. In these, the early stages of mobile phone banking, these activities are facilitated by agents who are trained and supplied by the mobile phone banking provider. This ensures a good experience for the customer, who might not understand how banking, let alone mobile phone banking works. Agents can accept cash and then transfer funds from the agent's own mobile phone banking account into the client's. They can also accept a funds transfer from a client and then pay them out in cash. Deposits and withdrawals sorted, although the agents and the mobile phone banking provider will charge for the transactions.
From here things get very fun. People can safely store money in their phones, so money is no longer stagnating under mattresses or buried in a field. When it is stored on a phone, it isn't just sitting there doing nothing. Banks will let other people use it, by investing with it. Practically this means that interest can be earned and more money is generally available to everyone the economy. Win! But it is more than just a savings device. Funds can be transferred securely between accounts, which means that any payment that used to happen in cash can now be done as a funds transfer between phones. I can now pay for my sandwich with a funds transfer to the sandwich shop, which is convenient. But now the sandwich maker doesn't have to carry the cash I paid him with to the flour seller. He can just transfer the funds and during the flour seller's next delivery it will be efficiently delivered to my sandwich maker. Money flows, economy grows.
Eventually the need to use cash at all pretty much disappears and a cashless ecosystem emerges, but that is years, perhaps decades away. Yet each step taken towards that eventual goal affords many opportunities for individuals and businesses to increase efficiency, save money and in many cases start entirely new businesses. I am particularly interested in looking at the edge cases, watching how people use mobile phone banking to do things that no one every thought of before.
One of the most obvious things that will happen will be replacing some formal mobile phone banking agents with informal cash in and cash out facilities. Many businesses take on a lot of cash during their daily operations. If the business could deposit this cash into their account by providing cash out services to individuals or other local businesses (people withdrawal from their accounts by transferring funds to someone that gives them cash) then neither group has to visit the bank or an ATM machine. Vice versa for businesses that need a lot of cash on hand, or who routinely make trips to the bank. Businesses can accept deposits by transferring funds to people giving them cash. The efficiencies gained from avoiding standing in line at the bank alone, are important, let alone the expense of travel, or for the banks, the expense of maintaining high capacity facilities and staff.
Wow! Sounds great - why isn't this already happening? A number of reasons I think. Firstly, it takes a significant amount of time and resources to write the software and forge the required partnerships between banks, mobile phone operators and regulators. Massive marketing campaigns and having formal banking agents available throughout the target market are necessary to get to scale, and without scale mobile phone banking is virtually pointless. Marketing is critical financial education. I still know many Americans who don't use ATMs because they think see ATMs as a banking scam to extort fees. Malawian preachers warned congregations against fingerprint based ATM machines which "scanned your soul"! These sorts of barriers are not insignificant.
Finally, banking regulators are responsible for making sure that we have safe mechanisms for saving and investing money. Without financial regulation (think FDIC insurance), banks can close and people's money can disappear. It only takes one time for your money to disappear for you to never trust a bank again. Unfortunately, this happens a lot in developing countries and money gets stuck back under the mattress (literally) and a generation of financial progress is lost. These financial regulators are doing the important work in figuring out how to save people from getting burned by mobile phone banking. But like everyone else, they are moving slowly! But it will eventually happen, and it will be a great ride. I can't wait!
(thanks to Claudia for letting me read the cool stuff she comes across in her job researching this stuff at CGAP)
