Reach Out and Enrich Someone
Microfinance goes mobile as cell phone banking revolutionizes financial services for the poor.
July 23, 2007
While electronic gadgets once symbolized the stark difference between the world's haves and have-nots, cell phones are starting to bridge that divide. Banks and cell phone companies are taking advantage of new handset technology and the expansion of cell phone use in developing economies to extend financial services to roughly 2 billion people who use cell phones but lack bank accounts.
Access has traditionally been a problem with financial services in developing countries. The Consultative Group to Assist the Poor estimates that 80 percent of people in least developed countries are unbanked. The term unbanked refers to people who do not use simple banking services that the developed world takes for granted, such as checking and savings. Barriers to conventional methods of banking include lack of education, illiteracy, high fees, and proximity to banking facilities.
Lack of access to banking services hinders economic development. It gives the poor no option other than the informal, cash economy, leaving them vulnerable to risks and without a means to efficiently save or borrow money. Higher savings rates also make more capital available for investment in development.
"What we're finding from the evidence from economists is that actually greater access to financial services improves economic growth," says Jeremy Leach of FinMark Trust, an NGO that promotes financial services for the poor.
Microfinance made headlines as a development success story when Grameen Bank founder Muhammad Yunus won the 2006 Nobel Peace Prize, but extending its reach remains a challenge. The cost of the small transactions involved in microfinance—savings accounts, money transfers, and loans to the poor—has been an obstacle. Cell phones can cut the cost of such transactions, making widespread microfinance more efficient. A CGAP study of financial services for the poor, funded by the Bill and Melinda Gates Foundation, found that cell phone banking was potentially six times cheaper for routine banking transactions.
South Africa is a pioneer in mobile banking. "For many poor South Africans, the system offers a first step into a world that can help them save, send, and receive money. With a few key punches, they can send money to a relative or pay for goods without ever seeing a paper bill—a benefit in a country with a high crime rate," writes Nicole Itano of the Christian Science Monitor.
Wizzit Bank is revolutionizing banking in South Africa by linking both a debit card and a bank account to a cell phone. Users can make a deposit at a bank or any post office, and the deposits are then credited to an account and confirmed via text message. The cell phone handset can be used to check the balance, transfer money, or pay bills. A debit card tied to the phone is used to make purchases or withdraw cash. The ability to transfer money via cell phone is especially beneficial when compared with other services that charge up to 40 percent commission.
Working out kinks in the technology and creating a more favorable regulatory environment in countries that could most benefit from mobile banking is needed before the practice can take off. Lack of telecom system interoperability is a technical obstruction that helps to explain why mobile banking has not yet exploded in Latin America. Given that technological problems tend to work themselves out over time, the bigger challenge may be regulation. In many countries, laws governing financial institutions have not kept pace with technological advancement. Complicated regulation of payment systems, competition, deposit taking, and telecommunications must adjust to the new technology.
Stephen Mwaura Nduati of Kenya's Central Bank believes that fast-tracking legislation concerning payment systems is needed to make mobile banking a reality. Vodafone Strategy Director Alan Harper sounds a similar note. "There is also an increasing need to ensure that current banking regulations do not undermine or limit this growing potential," he says.
CGAP, the United Nations Foundation, and The Vodafone Group Foundation recently released the first public findings on how South Africans use mobile phone banking. The study finds that mobile banking can be up to a third cheaper for customers than conventional banking methods, and that people generally trust its security and convenience. A common misconception is that mobile banking has a prohibitively high cost, and some of those surveyed didn't know much about the service at all.
Cell phones have allowed much of the developing world to forgo building an expensive landline infrastructure in rural areas and could now be used to leapfrog traditional banking services. A study by Vodafone suggests that "in a typical developing country, an increase of 10 mobile phones per 100 people will boost GDP growth by 0.6 percentage points."
Notwithstanding the potential of mobile banking to expand financial services to the poor, the proliferation of cell phones has had a positive impact on development. With greater access, a brighter future is calling.