Big Is Beautiful

Poor people borrow and lend to survive — but one of their biggest problems is that no one wants to help them do it. Portfolios of the Poor, a recent book by four finance experts who studied the financial dealings of poor households over the course of a year, concludes that “at almost every turn poor households are frustrated by the poor quality — above all the low reliability — of the instruments that they use to manage their meager incomes.” Some poor households even pay fees in order to save: In West Africa, susus, or roving deposit collectors, will collect money every day for a month and then give back the deposits minus one day’s worth.

The much-ballyhooed microfinance organizations such as Grameen Bank have an important role to play in filling the gap, but it’s not necessarily a huge one. After a decade of extraordinarily rapid growth, there were only about 154 million microfinance clients worldwide at the end of 2008 — around 130 million future customers were born that same year alone. (A spate of recent microfinance-related scandals in India and Bangladesh has also begun to tarnish the industry’s reputation.) There are still 2.5 billion adults with no access to formal financial services, including 80 percent of adults in sub-Saharan Africa.

That means that if we want more access, it has to be delivered by the traditional banking sector. The challenge is that it makes no commercial sense to open a branch in a slum that spends all day trafficking in exchanges measured in cents (which is one reason why microfinance took off in the first place). In India, four people in five who signed up for basic traditional bank accounts aimed especially at the poor said they would need to spend half a day’s wages and an entire day just to reach the nearest bank branch and make a transaction.

That is why technologies that allow banking without the need for a bank branch are so revolutionary. Take Kenya’s M-Pesa, a money-transfer service that works over the mobile-phone network and has turned 16,900 phone vendors into banking agents — this in a country with fewer than 1,500 physical bank branches. M-Pesa currently has 11.9 million customers, equal to about 54 percent of Kenya’s adult population, according to a recent study by Ignacio Mas and Daniel Radcliffe of the Gates Foundation. Not surprisingly, when banks outsource service provision to street vendors, their costs drop dramatically. Pakistan’s Tameer Microfinance Bank found that the capital and operating costs for a vendor/agent were 76 times less than for its microfinance branches in the first year, and 89 times cheaper over five years.

The affordability and reach of electronic systems supported by vendors means it is now plausible to imagine universal access to basic financial services. There are already 20 times as many point-of-sales terminals — phone-connected readers in stores that take a credit card — than banks in the developing world. And Kenya’s experience suggests that in a very short time it should be possible to get to ubiquitous financial access using mobile networks. There were 4 billion mobile subscribers worldwide in 2008. The global population over age 15 is only 4.9 billion.

Governments have played a big part in the rollout of branchless banking because they need cheap and effective ways to deliver cash transfers and pensions to their citizens. Brazil’s Bolsa Familia government welfare program provides financial aid to 12 million poor families on the condition that their children attend school and are vaccinated. Since it switched from handing out cash to an electronic benefits system, Bolsa Familia’s administrative costs have fallen from 15 percent to less than 3 percent of total program costs. An additional benefit: Two million recipients now use conta facil (easy account) banking and access financial services from one of more than 20,000 locations in the country — mostly point-of-sales terminals.

Branchless banking is also being used, with exciting results, in delivering financial aid. Conditional cash transfers based on incentives like school performance and health benchmarks have seen dramatic impacts. Mexico’s 25 million strong Oportunidades (formerly Progresa) program increases the chance that children will complete ninth grade by 23 percent, for example. And finance without conditions attached — just giving money to the poor — also has a positive impact on schooling and health outcomes. Transfer systems could be used to reach a range of other development goals from higher savings rates to spreading resource wealth, as well.

And when e-banking is linked to biometric ID systems like fingerprinting, the impact and efficiency of cash transfer schemes can rise even further. My colleague Alan Gelb at the Center for Global Development estimates that “leakage” rates for financial aid — the percentage of money spent on transfers that doesn’t reach the intended beneficiary — can reach as high as 40 percent as money is lost or stolen in the delivery chain. He suggests that biometric approaches could help significantly reduce that loss. In addition, using fingerprints as unique identifiers means that illiterate people can use smart cards to make transactions and meet ID requirements for banks without extensive documentation.

Government iris or fingerprint record systems already cover more than a million people in South Africa, India, Malaysia, Costa Rica, Bolivia, Zambia, and Jamaica — perhaps more than 150 million in total around the developing world. Such systems can be used to efficiently deliver targeted support at a very rapid pace — which is particularly important after a disaster, when the most efficient and effective thing to do for victims is simply to give them money to help survive and recover. In Pakistan during the 45 days after last summer’s floods, banks backed by the government issued 1 million smart cash cards to victims using biometric identification technology in order to finance reconstruction.

With this convergence of identification and e-banking technologies, the power of financial access to change lives will expand even further. This all depends, of course, on governments putting in place the regulatory levers and transfer systems to help grasp this opportunity. But if they do, we may finally have a way to get financial access to everyone — and today’s partial solutions will be a relic of the past.