Mobile finance options changing lives in developing countries
Some have guessed that 2014 is the year when mobile phones will outnumber people. That means that not only does Aunt Myrtle have one (and maybe two) but so do many people in developing countries.
Why do people amongst the world’s poorest have them?
While the gadgets have become a key part of the western lifestyle, whole industries have been spawned to cater to the more casual aspect of the devices – games, apps and other diversions.
In developing parts of the world however, mobile phones are not about angry creatures or where the best sushi restaurant in Soho is. They are seen as a tool for economic growth and prosperity, and are approached in that way by developers and industry, both local and worldwide.
The foundation for much of this movement lies in the remote areas of the developing world, mostly unbanked areas not feasibly reached by normal methods used by financial services groups.
Thilasoni Benjamin Musuku, the World Bank’s Financial Sector Specialist for Africa, sees mobile phones opening up financial opportunities for the traditionally unbanked.
“From a financial sector perspective, mobile phone technology has the potential of making a significant contribution to overcoming those challenges of delivering financial services in underserved market segments in ways that traditional methods would not be able to,” Musuku said.
Around this time last year Mastercard launched their Mobile Money Partnership Program, a service designed to allow mobile access to such mainstream financial services as payments, deposits and transfers. Participants in the service are able to buy prepaid cards that are accepted at any Mastercard vendor, make online payments, transfer funds between accounts, and, most significantly, exchange funds via mobile phone with their neighbors. All of this can be done far from a bank or even an internet portal.
Sure as paparazzi following The Biebs, Visa soon followed suit, unveiling their creation that was self-billed as “the world’s first bank-grade managed service for mobile money.”
Initially developed by Fundamo, a company purchased by Visa in 2011, the Visa option goes one step further and enables mobile phone companies, micro-lenders and banks to create their own customized mobile financial services with the Visa platform as the hub. Visa provides authorization and processing services while the sponsoring group focuses on their clientele.
To date the Visa system operates in two countries, one large and one small. This provides a clue as to the value of such initiatives to large financial corporations. Not surprisingly, they ventured into India with ICICI Bank. Their second choice is a bit more interesting. Teaming with the Bank of Kigali and the Urwego Opportunity Bank, they have opened a service in Rwanda.
India, with a significant percentage of the world’s population and an emerging middle class, is a no-brainer for a company looking to grow its telecommunications revenue, but why a country like Rwanda?
There are many reasons. One is market saturation in the developed world. Telecommunications companies cannot appreciably grow in North America, Western Europe, Australia, and parts of Asia and South America. In a 2012 Report titled Maximizing Mobile, the World Bank says “no matter the size of a country, its political system, where it is located, or its income, private and foreign companies are willing to invest in mobile communications. The highest increase was among low-income countries,where significant gains in coverage were coupled with falling prices from intensified competition.”
This isn’t just a toe-in-the-water dalliance. That same World Bank report reveals that between 1990 and 2010, some 329 projects in the developing world attracted $441 billion in private sector investment, with a significant chunk of that total coming from foreign companies with most of them being strategic mobile multinational groups.
OK, so they’re taking it seriously, but what about the rural subsistence farmer or poor urban slum dweller? How can they possibly consume such a service? This anti-Maslowian occurrence is frequent and it is real in many parts of the world. One big reason why is many people have no conceivable hope of acquiring many of standards of life that eat up a good chunk of a developed world salary. Home and car ownership, education and retirement savings are not even in the imagination, so many of the world’s poor concentrate on little conveniences that provide an immediate boost to their way of life, such as a mobile phone. A World Bank survey funded by the Bill and Melinda Gates Foundation revealed that in three Chinese provinces with a high rural population people reported spending 13% of their income on mobile devices with a willingness to spend up to 18%.
They say necessity is the mother of invention, and, seeing an opportunity to dramatically improve the lives of many, mobile phones are being used in a host of ways to improve lives. In some parts of rural Africa, a whole village will use one or two phones to bank, contact relatives or to check weather reports. While one person’s expenditures may not amount to much, collectively the village’s use makes it profitable to offer one. Freed from the expense of ownership and maintenance, people often spend longer periods of time per use on the systems, which generates more revenue for the company involved.
These developments are absolutely crucial for financial services companies to comprehend, and the initiatives by Visa and Mastercard may signify the initial drip before the dam soon breaks. Skeptical that mobile banking is the wave of the future in the developing world? Look at the usage of phones versus bank participation there. In Indonesia, Pakistan, Peru, Sudan, Rwanda, Malaysia, Guatemala, Ecuador, Tunisia and Honduras the difference is at least 15%, with a high difference of nearly 50% in Guatemala. Combined, these countries have a population of more than 550,000,000 people. That’s more than 80,000,000 people with a phone but no bank account.
Thilasoni Benjamin Musuku sees the potential for such initiatives to positively impact developing regions.
“In most markets in the region, access to mobile telephony technology far exceeds access to financial services. Mobile phone technology can be leveraged by efforts focused on promoting access to financial services in undeserved segments of the market through a range of connected products such as credit, savings, insurance, and remittances,” Musuku said.
There are many reasons why bank patronage is so much lower than phone usage in these countries. In some cases it is because of the long distance many people in rural communities would have to travel to deposit small amounts of money that they may soon need which would necessitate another long journey into the city. The small amounts generated by those same people probably are of little interest to larger financial entities. In some regions there may be a distrust of formal institutions.
Like any financial system, steps must be taken to ensure fairness and limit monopoly and corruption. Musuku addresses some of the concerns.
“If anything, the lessons of the 2008 global financial and economic crises is that responsible finance must be practiced by all stakeholders – governments need to strengthen the institutional setting that is aimed at protecting clients; service providers need to internalize responsible practices when extending financial services and products, particularly in markets with first time users; and clients need to ensure that they are empowered with financial literacy and education to understand the products they elect to use,” Musuku added.
As people in developing regions get more comfortable with both financial institutions and mobile technology, their financial literacy increases and they are better able to decide how much risk they are willing to tolerate. That is their responsibility. Given the shaky history of government and commercial institutions in some areas, it is especially paramount that regulators effectively monitor and enforce transactions in this sector.
“It is crucial that an institutional framework exist for effective oversight of payment services providers, and offers some protection of clients, particularly in situation when things go wrong,” Musuku said.
What can be done to maximize the effectiveness of mobile money initiatives? Musuku offers some suggestions.
“It is essential that contestable markets and level playing fields are established for payment services in the region. The institutional setting established should encourage innovation, efficiency and new entrants. In addition, the institutional setting should be technology neutral. In this way, those promoters with superior products that better address clients’ needs will have a chance to test their business models in the market place and succeed,” he said.
The use of mobile phones to conduct financial transactions is but one way the devices are being used to improve lives in developing countries, many of whom have large rural populations. In Nigeria, farmers receive vouchers for seed and fertilizer on their phones. The initiative, sponsored by the Nigerian government, uses the phones and biometrics to combat endemic corruption by matching phone coordinates, a national data base of registered farmers and other tools to ensure materials get to actual farmers.
In the Dominican Republic, the United Nations Refugee Agency partnered with Pastoral Haitiana in 2012 to conduct an extensive census documenting the numbers of refugees and asylum seekers in the country. By using mobile phones, organizers were able to incorporate GPS tracking and to take pictures that documented living conditions and other factors. Organizers felt the use of phones allowed them to do a much better job in a fraction of the time. Asylum seekers were hopeful of seeing their status resolved after waiting for more than a decade in many cases.
In Uganda, students with significant hearing disabilities are paired with a “buddy” with normal hearing and together, with a mobile phone, they communicate with classmates in other areas of the school.
The students with disabilities are no longer socially isolated and they have gained confidence and social skills.
It is part of a sea-change revolution that provides critical access to stability for millions who would otherwise go without.