The Transformative Power Of Mobile Banking

By Isobel Coleman

This commentary was published in Council on Foreign Relations Blog on 13/04/2011

A Kenyan farmer sends a text message to inquire about the latest corn prices from her field in Thigio, 22 miles from Nairobi. (Antony Njuguna/Courtesy Reuters)

Sometime during 2010, the 5 billionth person in the world got a cell phone. More than 90 percent of the world’s population now has access to a mobile network. In 2010, people around the world sent more than 6 trillion SMS text messages—a tripling in the past three years. Much of that growth has been in the developing world. In the past five years, developing countries’ share of mobile subscriptions has climbed from a little over half to more than three quarters.

The rapid spread of cell phones in developing countries—even in remote areas—has been astounding, and transformative. Wherever I travel, from remote villages in Afghanistan to rural Rwanda, everyone seems to have a cell phone—something simple, practical, and rugged that can make and receive calls and send texts. While these “unsmart” phones might seem archaic to a “smart phone” user, they are lifelines to the modern world for many in developing countries. And they are being applied in increasingly innovative ways for all sorts of important economic, political, and social activities, from voting to checking which market is offering the highest prices for crops to getting school test scores and health information. 
  
The main reason that mobile phones are being pressed into so many important services is that they provide a cheap and effective work-around to weak or non-existent alternatives. Take mobile banking, which is spreading across Africa, South Asia, and Latin America. Last week at the Council on Foreign Relations, I held a fascinating meeting on mobile banking, also referred to as mobile finance, or even mobile money (m-money for short), with Tamara Cook, program officer for the Financial Services for the Poor initiative at the Bill and Melinda Gates Foundation, and Mary Ellen Iskenderian, president of Women’s World Banking. The meeting was the first in a series on women and technology that I am hosting this spring, sponsored by ExxonMobil.

Mobile banking in the developing world is emerging not as an addition to regular banking as it is in the developed world (allowing customers to use their phones to check balances or pay a bill). Instead it is an alternative to limited or non-existent bricks and mortar banks, which frankly don’t want very poor people as customers anyway. Poor people are supremely innovative, especially when it comes to scarce resources like money. It didn’t take long for them to figure out that they can use airtime loaded on their cell phones through scratch cards as a form of currency. In emerging markets around the world, the “un-banked” began trading minutes or using them to make payments for goods and services and send remittances home from their urban jobs to rural family members. Mobile phone companies recognized the opportunity (after all, there are more than 3 billion people in the world without access to banking services) and a new market was born. For example, M-Pesa, launched by Safaricom in Kenya in 2007, has had tremendous growth as a cash transfer system—quick, simple, and safe. Today, M-Pesa conducts millions of m-money transactions a day in Kenya, and there are five times as many M-Pesa agents (23,000) as there are banks and ATM machines combined in the country. Lack of literacy is not an obstacle, as M-Pesa clients quickly learn to text what they need on their phones.

Services like M-Pesa are driving efficiencies and economic growth by allowing small business owners to focus on selling rather than on collecting payments from hard-to-reach customers. Mobile money is also helping to reduce corruption and graft (although in our meeting last week Tamara Cook relayed how corrupt officials in Kenya now sometimes demand bribes through M-Pesa). Developing country governments are experimenting with using m-money on cell phones to pay public servants like police officers and teachers, with some surprising results. In Afghanistan last year, when the government started paying police officers through M-Paisa, the Afghan version of the service, it discovered that 10 percent of the workforce was phantom employees, their paychecks being pocketed by corrupt managers. In Pakistan, the EasyPaisa mobile banking platform there played a role in helping to distribute money to the unbanked rural poor in the aftermath of last summer’s horrendous floods—a direct and efficient way to reach those most in need while minimizing the likelihood of “leakage.” USAID and the Gates Foundation are encouraging the establishment of a mobile banking system in Haiti. 

One of the interesting things about mobile banking is the opportunity it creates for women, who are less likely to have access to financial services than men. According to a report from the Cherie Blair Foundation last year, 83 percent of women reported that their incomes increased once they owned a cell phone. This is partly because they can do business more efficiently—accessing customers and market information through their cell phones. But it is also due to their increased financial access through mobile banking. Mary Ellen Iskenderian of Women’s World Banking stresses the value of m-banking to increase women’s ability to save money. Poor people are not going to go through the time and expense of traveling to a distant bank to deposit a few dollars, so instead they keep their savings literally under the mattress. M-banking provides a discreet and safe alternative for women, who are particularly vulnerable to theft and violence. The challenge is getting more cell phones into the hands of women since they are still less likely than men to own one. According to the Cherie Blair Foundation report, women in Africa are 23 percent less likely, and in South Asia 37 percent less likely, to own a cell phone than men.

In the coming months, I’m going to be writing more about m-banking and other technologies that are being deployed in developing countries with transformative effects. So stay tuned and add your comments and insights too.