What If? Mobile Financial Services and Freedom from Cash
Economic development is largely about connecting people to ideas and opportunities around them. We connect rural populations to markets by building roads. We connect people to new employment opportunities by building cities. We connect them to information sources such as radio, TV, mobile phones, the internet, and public libraries. And we connect them to clean water and energy by building pipes and electrical networks. These are all platforms which support people’s socioeconomic development. We need to apply the same platform logic to financial services.
We know that a loan or a savings account, even in isolation, confer sizable benefits on poor households by making it easier for them to self-finance business or farm investments, save-up for larger household expenditures (schooling, housing, wedding), and protect against unexpected shocks. The empirical evidence is still partial, but an increasing number of rigorous field experiments are showing that presenting savings opportunities at the right time (e.g. for farmers, at harvest time) and against a defined purpose (e.g. to buy fertilizer at planting time) are particularly impactful.
Imagine if the funds in these accounts could be transferred instantaneously to or from anyone else in the country. To be more specific: imagine that savings accounts were connected to a ubiquitous electronic payment platform that is accessible with the right keystrokes securely from anyone’s mobile phone. How much would this platform augment the already abundant benefits of a stand-alone account?
Now, when a child falls ill and must access treatment, her parents can receive funds immediately from a network of friends and family, allowing her to see a doctor on the first day of her illness. Now people can use their time more productively because they don’t need to spend hours lining up in front of banks and utility company offices to deposit funds or pay bills – they just move the money with the click of a button. Now, entrepreneurs can hatch a range of new businesses in which they no longer need to trust employees with cash – they make and receive all payments directly from their mobile phones. Now, farmers and vendors can sell their goods further afield and be paid up-front, without incurring credit risk. Now, businesses and households can minimize their cash balance and reduce risk of theft because they can move money around in electronic rather than physical form. And, because all transactions are recorded electronically, people now have a financial history which might help them access credit when they want to supplement their savings to undertake further investments.
Stand-alone savings accounts help households build fiscal buffers and fund investments, but connected savings help maximize the reach and innovative use of those funds. Consider in particular the boon that freedom from physical cash would be to entrepreneurship in developing countries: you are no longer constrained geographically by payments that must made or collected in person, you no longer have to trust your employees and associates with thick wads of cash, every payment anyone makes in your business leaves a record that you can track down.
Modern (“endogenous”) growth theories emphasize barriers to technology adoption as the reason for slow economic growth, and suggest that it is process technologies (new ways of doing things) rather than embodied inventions (new kinds of widgets) that are the key to the growth story. But these process technologies do not flow so easily across countries or within developing countries and are therefore a real roadblock for growth. E-payment platforms may turn out to be a fantastic “widget” type of invention that can unleash all sorts of business process innovation.
This vision of a payment utility reaching the bulk of the population is possible today with the spread of mobile phones. The mobile phone can act as a secure, low-cost device for client authentication, transaction data capture and instantaneous transaction authorization. The commercial success of the M-PESA mobile payment service in Kenya, which has penetrated into almost 70% of the adult population in just four years, has shown that there is pent-up demand for convenient electronic payments even among the poor. This is a technology that can spread, if only providers learn to market it appropriately based on local needs and invest the resources that are required to create the appropriate network effects.
Reader Comments (9)
"Imagine if the funds in these accounts could be transferred instantaneously to or from anyone else in the country." This is a fascinating question posed by an equally interesting article.
I believe the growth in mobile banking and mobile money transfer in Kenya is almost attaining this vision. The PayBill facilities on the leading mobile operators' platforms (Safaricom's M-PESA & Airtel's Zap) have spawned a whole new way for people to settle their utility bills for example, without the traditional queues. Kenyan goods and services are also increasingly being paid for through this method and this may well have far reaching impacts on the way e-commerce is conducted in future.
Fri, July 15, 2011 | Dancan
Indeed, Dancan, M-PESA allows us to imagine things which otherwise would seem like science fiction. But M-PESA is only beginning to scratch the surface of what's possible. Imagine if sending money and paying bills costed a few cents rather than the 40 US cents it costs today. And imagine that M-PESA had application programming interfaces (APIs) so that businesses and supply chains could easily integrate their payment data into their accounting, inventory and workstream software. That would allow M-PESA to go from being used on average twice a month to it being used on a daily basis by millions of people. There is no evidence yet that M-PESA is displacing cash in any significant way. I'm with you: it's fascinating stuff, nonetheless.
Fri, July 15, 2011 | Ignacio Mas
Right! And, imagine in a few years when some sort of iPad like device is affordable to great numbers of people, and the large screen and graphic interface - and, why not, speech capability in Luo, Kikuyu and Kiswahili - make it not only easy to use, but friendly in a way that a small Nokia just can't be. Good-bye bricks and mortar!
Fri, July 15, 2011 | Paul Rippey
I believe this article articulates very clearly the immense potential that the use of this technology can have on development around the world, especially since it is based on actual successful implementation cases. Although the ¨miracle¨of M-PESA has not been able to be replicated yet, it has certainly shown the positive impact that the use of mobile phones as a money transfer and saving devices can have. Furthermore, the use of this technology in these scenarios has proven to have the ability to produce additional positive results, such as increasing literacy among users.
Thu, July 21, 2011 | Marina Mendez
I have to say that the achievements of M-PESA are an eye opener as it has proved that technology can be used to facilitate the way people conduct transactions. I see an even greater potential than has been achieved especially if there are more value added services like bill payment over and above the cash transfer function. I agree with Ignacio that 'price' continues to be a major challenge. If the service cost was reduced to an affordable level as he suggests and the service proposition harnessed, I believe that the service can reach those that are not currently enjoying the M-PESA type services. The economies and business community stand to gain even more if the service is enabled across borders as regional markets become a reality.
Tue, July 26, 2011 | Kuria
I suspect that in a couple of decades, people may be using electronics - gadgets way beyond today's phones - for much of their financial life. However, we are far from being there yet, and I suspect that the media noise around cell phones is louder than justified by any reality. An article in the Guardian two days ago (http://tinyurl.com/3brohrc) was practically beside itself with enthusiasm for mobile phone banking, and pointed out that there are 600,000 people subscribed to Mobile Money in Uganda.
That's remarkable. But it's about the same number as people in savings groups in the same country.
The difference is, folks might use their savings group every week for credit, saving, and insurance (plus moral support and networking), while they use Mobile Money four times a year for transfers. It's not just the number of subscribers that count, it's the quality and intensity of the service.
The future might belong to the gadget, but today belongs to groups of friends and neighbors.
Tue, July 26, 2011 | Paul Rippey
Paul, I agree that there has been over-hyping of the progress of mobile payments/banking across the developing world. But surely you agree that its development and impact in Kenya is beyond what anyone would have imagined only three years ago.
On Uganda, I think that building up in only a couple of years a base of users equal to the entire number of people in savings groups accumulated over a couple of decades is a pretty remarkable feat.
But I agree with the sentiment of your post: let's see what is the range and quality of services that eventually get delivered over mobile money networks.
Mon, August 1, 2011 | Ignacio Mas
Hi Ignacio. I have done some research on M-Pesa by asking cab drivers in Nairobi two questions: "Do you have an M-Pesa account?" and "Do you use it?" The answers tend to be, "Yes" to the first, and "Not much" to the second. Okay, I know that is not a random sample, and it's very small. But still M-Pesa seems to me to be like Twitter - lots of people have accounts, but they are trying to figure out what to do with them. I'm impressed with the spread of M-Pesa, but am unclear on its impact so far.
Anyway, we fundamentally agree on this: silicon always wins, and sooner or later we'll all be doing much of our banking on line. I already am, of course, and I suspect you are, and that will reach the villages. As to whether that will be an unalloyed good, I'm less clear, and I suspect that community based groups will still be there, just a bit more modern.
It's like my bookclub: we still like to meet regularly and discuss the books, whether we read them on Kindles or listen to them on Audible dot com. (There are also a few holdouts for paper, of course).
Similarly, even when branchless banking is everywhere, I think villagers will still like to meet regularly and get reinforcement in their savings discipline and have a social fund and exchange gossip and share the pride of watching their assets grow. That won't change - they might just use less cash and more electrons.
Mon, August 1, 2011 | Paul Rippey
Paul, yes I believe that use of M-PESA for the large part is sporadic, call it monthly. But I don't think it's any less sporadic than the typical usage of a bank account targeting the base of the pyramid. These formal services do not (yet) induce or even aim to induce anything remotely resembling daily usage. They are either not cheap enough (M-PESA) or not convenient enough (most bank accounts) for that. SLGs may indeed be the form of microfinance that induces most regular usage.
The other point is that for M-PESA to have spread the way it did, it must have touched on some very deep unmet customer need. It is no small feat to have educated practically the entire population on what electronic money is and on how to move it usign a mobile phone. No amount of financial literacy programs would have achieved that. You cannot doubt that people have paid attention to M-PESA because it spoke to a real need they had.
Totally agree that electronic convenience will not necessarily trump other benefits that people may infer from financial alternatives, such as indeed supporting social interactions. There's never going to be a single bullet answer to financial inclusion.
And since you mention it, twitter -- I just don't get it.
Mon, August 1, 2011 | Ignacio Mas