New Frontiers in Microfinance: Mobile Banking

May 1, 2010 Posted by Update

Devin Erhardt (Manager, Global Programs) focuses on relationship management and consulting for Unitus. In recent months, she has been exploring new strategies for reaching poor, rural populations in the developing world who cannot access formal financial services.

So, what is “mobile banking”?
Mobile banking can describe many things, but primarily it means financial services—deposits, withdrawals, payments, transfers, etc.—that are delivered through a cell phone. So, instead of going to a bank branch to do a transaction, people can use their mobile phone to move and manage their money. This works using simple interactive menus on the handset.

If I’m using my phone to access my account, where do I get my cash?
This usually happens at small roadside shops or boutiques, sort of the equivalent of our corner stores or bodegas. To get the money in or out of their account, a client goes to one of these retail outlets [referred to as “agents”] who provide cash-in and cash-out services. This is a critical link, because bank branches or ATMs are practically nonexistent in very poor and rural areas. Beyond cash-in and cash-out, clients can transfer money to other people with accounts via their phone without ever having to visit a branch or even a retail outlet. This has the opportunity to revolutionize how people conduct financial transactions and dramatically lower costs for microfinance institutions (MFIs) and banks.

In what way do you see this technology impacting the poor?
All kinds of things contribute to making remote and rural areas really difficult to serve with even basic financial services: poor infrastructure, low population density, agriculture-related risks, etc. This all increases the cost of serving rural areas. But cell phones help us leapfrog over many of these challenges.

We’re seeing millions of people throughout the developing world who use cell phones but do not have access to financial services—and that trend is continuing to grow as cell phones get cheaper and adoption rates keep climbing. The technology is already in their hands; we just have to figure out how to develop and roll out the products and services poor people want and need.

How can that happen?
First, by cutting out the need for a traditional bank branch, mobile banking dramatically lowers the cost of service. That allows us to reach further down the rung to lower-income clients. And beyond that, mobile banking circumvents the long trip that rural folks have to take to visit a bank—and also a reluctance many poor people have to even open an account.

It’s amazing to think about the tangible, practical changes we can make by leveraging existing technology. For example, we’ve heard about farmers in far-flung areas buying basic crop insurance via their phone. Savings accounts are incredibly valuable to poor rural families—much safer than hiding their money under their bed [which can get stolen or destroyed] and more convenient than purchasing an asset like a goat [which might die]. In urban areas like Nairobi, we see young men using a mobile banking service to send money electronically to their mothers living in rural areas, which was previously hard, expensive, and risky to do. She can visit an agent nearby to withdraw money from her account. All of this can happen at a fraction of the cost and speed of the options currently available.

Does this relate to microfinance? Can MFIs use mobile money?
Absolutely. Mobile banking directly relates to microfinance because it is a great way to deliver “micro” financial services at a low cost. MFIs can use mobile banking as another channel to deliver products and transact with their clients or expand to new areas too isolated to get to with their current models. Mobile transactions can either complement or take the place of in-person meetings and visits to the branch.

For example, loans can be disbursed electronically into a client’s mobile wallet [a mobile-based account on which clients can carry a balance] and clients can make payments via their mobile phones. Mobile banking can save clients time and save MFIs cash-handling costs. But while mobile banking is relevant to microfinance, the players involved in mobile banking go beyond MFIs, and often include larger commercial banks, mobile network operators [cell phone companies], and other specialized providers.

What kind of traction is mobile banking seeing in the developing world?
There have been pilots and products launched in a number of countries, but unfortunately we haven’t seen very much in the way of large-scale adoption. The biggest success story is M-PESA in Kenya, which was launched in 2007 by the mobile phone operator Vodafone through its Kenyan affiliate Safaricom. By 2010, it had reached 9 million clients with a network of 17,000 agents! Other successful or promising examples can be found in Brazil, India, the Philippines, and elsewhere, though each uses slightly different models.

What are the challenges to scaling this model?
Scaling mobile banking requires rapidly acquiring both clients and agents, often leading to a “chicken and egg” problem where clients don’t want to sign up if there aren’t agents, and agents don’t want to join if there aren’t large numbers of clients. This means that it is important to develop significant momentum and move quickly on many fronts in order to reach scale.

Other major challenges include building client trust; getting different types of players to work together—banks, mobile phone companies, etc.; building out an efficient agent network, especially in rural areas; and ensuring various technology systems and platforms communicate well with each other. In addition, another huge gap in the market is product development: developing a variety of innovative, client-centric products that actually meet relevant client needs.

What do you find most exciting about mobile banking?
The chance to impact the lives of people in rural areas is extremely exciting for me. At the moment, bank branches and even MFIs rarely reach remote rural areas. I truly believe we have the potential to change the way billions of people around the world access their finances and to improve the quality of their lives.