M-banking: extending financial services to poor people

For many people across the developing world, storing or sending small sums of money is economically impractical. This is due to the high cost and inaccessibility of banks and formal financial services. Recently, however, telecommunications providers, banks, and other companies have begun offering a variety of financial services via a basic mobile phone handset. Many are optimistic that these mobile banking or ‘m-banking’ systems will lower the cost of financial services to millions of poor mobile phone users.

M-banking systems offer three general capabilities. Users can:

• convert cash in and out of ‘stored value’ accountslinked to their mobile phone
• use this stored value to pay for goods and services
• transfer stored value between their account and other people’saccounts.

Unlike simple airtime transfer features, m-banking systems supporttransfers of actual currencies.

This means a person can walk into an m-banking location, ‘cash in’ as ifshe were buying airtime for a pre-paid mobile account, and then transfer thatmoney anytime – often via text message – to merchants, utility providers, orother individuals. M-banking reduces the need to carry cash, or to travel orwait in line to pay bills. It can guard against theft, replace costly bankcheques and increase the speed and reliability oftransactions. In addition, people use m-banking services to send remittanceshome, quickly and inexpensively.

Some of the more successful m-banking initiatives in developingcountries are in South Africa(WIZZIT), the Philippines (Globe), and Kenya (M-PESA). Each has a different setof actors and services. For example, some countries’ laws require stored valueaccounts to be managed by a registered bank, which requires a bank partner. Inother cases, no bank is involved.

The systems are not yet found in all countries. But their take-up wherethey are available has been impressive. Some ongoing issues will impact how theservices evolve:

• Providers generally must offer physical presence. Thesystems require points of access throughout the country with cash-in andcash-out facilities, and merchants need to be motivated to accept m-payments.
• The regulatory environment is complex and varies fromcountry to country. For example, important money-laundering and anti-terrorismlaws constrain what services can be offered.
• Most systems currently offer only stored value; creditfeatures are rare. However, microcredit institutionsmay be able to utilise m-banking systems to improve their operations.
• Literacy and language barriers may prevent some peoplefrom using m-banking systems.
• Shared handsets complicate issues of security andaccount ownership.

The elegance of transactions via handsets and text messages hides theservices’ complex organisational and technical capabilities. However, it isthis simplicity and affordability that will likely make m-banking a valuableservice for poor people. There are many more mobile phone users than bankaccount holders in the world. If m-banking can continue to bring financialservices to people who currently do not use them (the ’unbanked’),it will be more than a convenience – it will be an important new way for poorpeople to control their finances and their livelihoods.