How banking on a mobile phone can help the poor

What’s the most revolutionary cell phone in the world today? Hint: it’s not Apple’s new iPhone. It may not run iTunes or switch seamlessly to Wifi, but an ordinary, hand-me-down phone can be revolutionary (pdf) when used as a virtual bank. “Yawn,” the gadget geeks will say—mobile payment options are old hat in places like ...

604771_Mpesa_menu_2_05.jpg
604771_Mpesa_menu_2_05.jpg

What's the most revolutionary cell phone in the world today? Hint: it's not Apple's new iPhone. It may not run iTunes or switch seamlessly to Wifi, but an ordinary, hand-me-down phone can be revolutionary (pdf) when used as a virtual bank. "Yawn," the gadget geeks will say—mobile payment options are old hat in places like Japan, where mobile phones linked to credit/debit cards have become as much a part of the culture as sushi. But mobile banking, or m-banking for short, is about more than just added convenience; it's about giving millions of poor people in developing countries access to financial services for the first time. And that could change the world.

The World Bank estimates that in many countries, over half the population—"the unbanked"—has never had a bank account. The poor tend to be terrified of banks, since they're often humiliated or ignored when they try to enter them. That means they can't leave their savings anywhere safe, pay a bill without walking the cash to the office, or prove that they're credit-worthy. Meanwhile, mobile phone penetration is through the roof, especially in Africa. In 2000, fewer than 8 million Africans had a mobile phone - now over 100 million do. That's one in nine. Now, anyone with access to a cell phone has a place to keep his or her savings without needing a traditional bank account. We won't see millionaires suddenly emerging from the shantytowns just because they're "banked," but even a small nest egg needs a safe resting place.

At the moment, enthusiasm for m-banking has outrun its implementation. For one thing, regulators break out in a cold sweat at the thought of all the overlapping issues involved. But there are success stories. Leading the way is the Philippines, with over 3.5 million users split between G-cash and competitor SMARTmoney. South Africa is the other heavyweight, with MTN Mobile Banking and Wizzit both entering their second year of operations. In Brazil, m-banking may even surpass Internet banking in just five years. And on January 22, SafariCom, partly owned by Vodafone, is set to expand its M-Pesa pilot to all of Kenya.

What’s the most revolutionary cell phone in the world today? Hint: it’s not Apple’s new iPhone. It may not run iTunes or switch seamlessly to Wifi, but an ordinary, hand-me-down phone can be revolutionary (pdf) when used as a virtual bank. “Yawn,” the gadget geeks will say—mobile payment options are old hat in places like Japan, where mobile phones linked to credit/debit cards have become as much a part of the culture as sushi. But mobile banking, or m-banking for short, is about more than just added convenience; it’s about giving millions of poor people in developing countries access to financial services for the first time. And that could change the world.

The World Bank estimates that in many countries, over half the population—”the unbanked”—has never had a bank account. The poor tend to be terrified of banks, since they’re often humiliated or ignored when they try to enter them. That means they can’t leave their savings anywhere safe, pay a bill without walking the cash to the office, or prove that they’re credit-worthy. Meanwhile, mobile phone penetration is through the roof, especially in Africa. In 2000, fewer than 8 million Africans had a mobile phone – now over 100 million do. That’s one in nine. Now, anyone with access to a cell phone has a place to keep his or her savings without needing a traditional bank account. We won’t see millionaires suddenly emerging from the shantytowns just because they’re “banked,” but even a small nest egg needs a safe resting place.

At the moment, enthusiasm for m-banking has outrun its implementation. For one thing, regulators break out in a cold sweat at the thought of all the overlapping issues involved. But there are success stories. Leading the way is the Philippines, with over 3.5 million users split between G-cash and competitor SMARTmoney. South Africa is the other heavyweight, with MTN Mobile Banking and Wizzit both entering their second year of operations. In Brazil, m-banking may even surpass Internet banking in just five years. And on January 22, SafariCom, partly owned by Vodafone, is set to expand its M-Pesa pilot to all of Kenya.

These telecom companies aren’t offering m-banking out of the kindness of their hearts. They like m-banking because it’s a way for them to attract new customers by doing what they already do well—processing millions of tiny transactions. Banks aren’t as interested, because they don’t expect to profit from poor clients who won’t be taking out a mortgage anytime soon. But the telecoms could start siphoning away bank customers who don’t need all the bells and whistles.

Remittances is where m-banking will really be world-changing. In Latin America, for instance, fewer than 10 percent of remittance recipients have bank accounts. That means they’re hiking to Western Union to pick up their money, which cost somebody a 15 percent commission to send. In the Philippines, SMART’s customers are already sending an estimated $50 million in remittances each month via their mobile phones, and that’s only the tip of the iceberg. In most of the world, remittances account for more financial flows than foreign direct investment or foreign aid combined. Lowering transaction costs even one percent would mean over one billion extra dollars would directly reach the poor each year, and that’s not chump change.

Christine Bowers is a consultant at the World Bank Group and the godmother of the Private Sector Development Blog. Writers from the PSDBlog will be contributing a regular series of posts for Passport entitled “Fighting Poverty With Markets.”

For more information about m-banking, see:

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